IT Spending Recovers For State, Local Governments

State and local government IT spending is nearing 30-year average growth rate after a prolonged slump.
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As the federal government gets slammed by sequestration, the shutdown and unremitting budget brawls, state and local governments -- and their IT departments -- are seeing a resurgence in spending, according to an industry research analyst.

"The state and local market is in a growth phase and it's definitely on the road to recovery from the recession of 2008," said Schalene Dagutis, VP of research, analysis and consulting for Deltek, a provider of enterprise software, IT tools and consulting services for government contractors.

"It's clear from the last two years of governors' state-of-the-state addresses that they have pivoted to a growth agenda and are no longer slashing and burning expenses but they still care very much about government performance," said Dagutis, speaking at a webinar sponsored by Deltek on Tuesday.

That's why contractors who largely support federal agencies are eyeing the state and local IT markets to compensate for lagging budgets and fiscal uncertainty on the federal level, she said. From an industry perspective, the state and local market has become "a lot more interesting" for IT vendors, with state and local spending now growing faster than federal spending.

[ If there's a bright side to the shutdown, it's that it might teach us to appreciate our federal data services. Read Federal Shutdown: We Miss Our Data. ]

"For a while, the state and local market was very stagnant," she said. "It's been in recovery for about the last two to two-and-a-half years. The historical annual 30-year growth rate for the state and local market is about 6.5%. It's not quite there yet but it is on the way back. This is one of the reasons why the market is beginning to look attractive to companies that have historically not played in it before."

Because the state and local IT market is so fragmented and diverse -- it comprises nearly 90,000 thousand governments, including those at the county and city level -- it tends to look a lot more like a commercial market than it does the federal market, according to Dagutis. "It's kind of a hybrid of the two," she said.

Among other differences, state and local governments operate under varying procurement rules and a multiplicity of IT governance structures, she said.

The federal government is also more program-centered, while state and local governments have to be more directly responsive to citizen needs. For example, growth in the college-age populations creates demands for higher-education services that require IT support, such as distance learning programs or improved campus networking, Dagutis said.

Although federal money constitutes about 26% of the overall funding provided to state and local governments, most of those dollars are highly concentrated in specific areas, such as healthcare, education and welfare programs, she said.

As a result, the impact of sequestration cuts on state and local spending has been limited.

"When sequestration was the word of the day earlier this year, the impact on the federal government was fairly broad and across the board," Dagutis said. "In state and local, based on what type of federal assistance flowed down to the state and local governments, the areas that were affected were very [limited] because they were a minor percentage of the total that the state and local government spend on [those areas]."

Dagutis contends that the current federal government shutdown won't have a significant effect on state and local governments, at least for the near term.

"While the federal government can influence what state and local governments spend money on, just because the federal government is shut down and in disarray right now doesn't mean that's true in state and local government," she said. "If the shutdown goes on for a really long time, it will start to affect [state and local government] in some ways. A lot of that will be when they get the money, but right now there isn't really a lot of impact on the [state and local] space."

Meanwhile, state and local IT decision makers are looking at priority areas that include system optimization and consolidation, cloud computing and security, mobile technologies, healthcare support services, and legacy systems modernization, Dagutis said.

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