State and local: Housing slump hurts IT makeovers

Local governments must defer IT upgrades or seek innovative sources of revenue

Ripple effects

A tax shortfall caused by a slumping housing market isn’t the only worrisome revenue trend. A Government Accountability Office report, released in January, predicts that the state and local governments will face a growing gap between receipts and expenditures because of rising health-related expenses.

Two types of state and local expenditures will rise quickly, the report states: “The first is Medicaid expenditures, and the second is expenditures by these governments for health insurance for state and local employees and retirees.”

GAO auditors said revenue from taxes will show modest growth relative to gross domestic product. One source of revenue — sales tax receipts — might show a modest decline, according to GAO’s forecast.

— John Moore

The housing slump and struggling economy could create a tough financing environment for information technology initiatives because they are often tied to revenue windfalls from local real estate taxes, according to state and local funding forecasts.

A challenge for IT managers will be to demonstrate the tangible and intangible benefits of IT initiatives and stretch their dollars by pursuing innovative acquisition models that require lower upfront costs, market analysts say.

Plunging home prices in Arizona, California, Florida, Nevada and other states are beginning to affect tax revenues as new assessments kick in. Meanwhile, declining home sales diminish the real estate transaction and recording fees jurisdictions can collect.

Market watcher Input projects that about two-dozen states will experience revenue shortfalls in the coming fiscal year. Chris Dixon, manager of state and local industry analysis at Input, said that even states and localities not facing immediate budget deficiencies will likely cut back spending. IT will be among the areas affected, he said. “Everybody will tighten their belts in this coming fiscal year just to be safe.”  

State and local governments will be challenged to justify new IT projects or find innovating sources of funding. “In the ’90s — big years for revenue — it was an easier time to make a case for technology,” said Phil Bertolini, deputy county executive and chief information officer of Oakland County, Mich. “As revenue becomes restricted, the cases that have to be made are much more difficult.”

The current revenue pinch stems from multiple causes. In California, sales taxes are having the most immediate effect, said Michael Coleman, fiscal policy adviser to the League of California Cities, an association of municipal officials based in Sacramento. Taxable sales have declined primarily because of fewer construction-related purchases and reduced spending on cars, appliances and other big-ticket consumer items, he said.

Revenue takes a hit
Property tax revenues are beginning to take a hit, Coleman said. Those revenues typically have  a delayed reaction to economic downturns, partly because it takes time to reassess homes, he said. Also, reductions in property tax assessments are granted only in situations in which a home’s taxable value dips below its market value.

The property tax effect “is just now showing up in the revenue side, but it’s starting to get pretty severe for different cities,” Coleman said. The effects vary by region. Sacramento and the Central Valley, for example, are faring worse than Santa Clara, in the heart of Silicon Valley.

However, California cities aren’t alone in the housing doldrums. A 20-city composite of major housing markets shows a collective price decline of 12.5 percent since June 2006, according to Standard and Poor’s Case-Shiller Home Price index. The biggest declines were in Detroit, Las Vegas, Miami, Phoenix and San Diego, which all posted home price declines of about 20 percent.  

In some markets, a decline in home sales contributes to declining tax revenues.

Slower turnover reduces the fees governments make on property transfers, Dixon said. A slump also lowers construction fees and taxes. However, those sources of revenue are relatively small compared with sales and property taxes.

In response,  budget analysts say IT projects might be deferred as governments try to direct funding to police, fire and other public safety services. Technology initiatives unrelated to public safety could be candidates for cutbacks and delays.

“The first priority of a municipality is public safety,” Coleman said. “When it comes down to IT upgrades and maintenance…you’re going to see more and more city councils deferring those kinds of expenditures un til later on.”

Some state and local policy experts said they expect the effects of current housing and general economic patterns to linger for a couple of years. Doug Robinson, executive director of the National Association of State Chief Information Officers (NASCIO), recalled that states felt the brunt of the 2001 recession in 2002 and 2003.
 
Making the IT case
In the current environment, major projects such as new data centers and enterprise resource planning implementations “may be put on the back burner…until things turnaround,” Robinson said.

However, difficult financial times could inspire creativity and more thorough business case analyses, market watchers say.

In Oakland County, the board of commissioners recently approved a $6.5 million outlay for an asset management system that could help officials manage the county’s water and sewer infrastructure. Bertolini said a strong return-on-investment analysis helped the project move along. 

That project — the Collaborative Asset Management System — could save the county $15 million during the next four-and-a-half years, Bertolini said. The system will let the county adopt predictive maintenance, which will lower the cost of maintaining its infrastructure.

As budgets tighten, “governments are going to have to make a policy decision whether to continue to invest in their future or cut back on capital technology projects,” Bertolini said. Oakland County chose  to continue investment in projects that promise long-term benefits.

State and local agencies are giving software as a service (SaaS) and public/private partnerships a closer look as they seek lower-cost approaches to acquiring IT capacity.

With SaaS, a customer pays a monthly fee to gain online access to software capability rather than install the software on site. This method eliminates the upfront capital costs of traditional software deployments. 

City officials in Stratford, Conn., opted for the SaaS approach rather than spending money to upgrade an e-mail server. The city’s IT shop is coping with flat IT budgets. Under those conditions, obtaining funding for an e-mail infrastructure upgrade would have been impossible, said David Wright, Stratford’s IT manager.

The estimated cost of replacing the town’s aging Microsoft Exchange 5.5 server with Exchange 2003 was $250,000.

“We needed something we could implement much more cost effectively that didn’t require a huge capital expenditure that never will get approved,” Wright said.

The city pays about $1,000 a month for InfoStreet’s hosted e-mail service.

Dixon said he has seen a surge of interest in innovative funding strategies such as SaaS. Public/private partnerships are another example.

Oakland County’s wireless initiative follows the public/private partnership model. The network build-out will be privately funded, and residents, businesses and visitors will be offered free wireless Internet access and additional fee-based services. The first phase of the program was completed last year. The county and its primary industry partner, MichTel Communications, are now seeking additional funding from private investors to continue the deployment.

Meanwhile, NASCIO is updating a 2003 report on innovating funding. The report examined measures such as performance-based contracting, leasing, outsourcing, managed services and sharing services.
“We are revisiting that,” Robinson said. NASCIO’s Innovative Funding Working Group has been given the job.

Cross-boundary collaboration is one approach that governments might use. Robinson said a number of states already cross jurisdictional boundaries by providing services to counties.

Collaboration might also occur among states. Robinson described a scen rio in which one or more states could sign a memorandum of understanding to use another state’s business continuity center during a disaster.

“When the heat is on from fiscal stress, you see a lot more innovation in some cases because the easy path isn’t always there,” Robinson said.

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