Is Public Sector IT Spending In For Tough Sledding?

That sums up the outlook for state, local and education (SLED) public-sector IT spending as many states struggle with falling tax revenues and growing budget deficits. But the spending patterns are definitely mixed. States riding high on record energy and natural resource prices have largely escaped the growing economic malaise that has hammered regions hit hardest by the housing and credit crises.

In July, for example, the National Conference of State Legislatures (NCSL) issued its State Budget Update and reported that state budget shortfalls more than tripled this fiscal year compared with last year's gap. The report, based on data collected from state legislative fiscal directors in June and early July, showed that state budget gaps for fiscal 2009 are projected to grow to more than $40 billion compared with about $13 billion for fiscal year 2008.

The report includes information on budget gaps for fiscal year 2008, revenue performance through May and budget gap projections for fiscal year 2009.

California, for example, faces a $15.2 billion deficit for its current fiscal year, which began July 1. Not only has California been hard hit by declining tax revenues tied to the mortgage crisis, but also an unprecedented number of wildfires has overwhelmed the state budget for emergency services.

The deficit prompted Gov. Arnold Schwarzenegger late last month to eliminate 22,000 part-time and temporary state positions and ordered 200,000 state workers to be paid only the federal minimum wage.

Kevin McDonald, executive vice president of Alvaka Networks Inc., an advanced network services solution provider in Irvine, Calif., said solution providers selling IT products to the state should proceed with caution.

"You may not get paid," he warned. "Or you may get paid, but you are not going to get paid on time. If you look at the margins for many companies that are carrying a line of credit to support your sale, then a 60-, 90- or 120-day delay could put people out of business. You certainly will lose your margins."

McDonald said that because of difficulties small businesses have dealing with the state, Alvaka chooses to do no business with California. Rather, it concentrates on offering advanced network managed services to municipalities, a business that continues to be robust.

"Cities aren't adding anything new, but because we are a managed service maintaining their status quo, cities have to run," McDonald said. "We are a better return on investment than having internal staff. For the City of Industry and Huntington Park, we run those cities entirely. We are not going to see new hardware acquisitions and I think there will be substantial cutbacks for anybody that is selling stuff. We don't and we are doing just fine."

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