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Could government IT be the silver lining to GAO's grey cloud forecast for state and local finances?

In recent years the federal Government Accountability Office (GAO) has released an annual report, State and Local Governments’ Fiscal Outlook. The most recent April 2012 update declares that “base case simulations show that the fiscal position of the sector will steadily decline through 2060 absent any policy changes.” Of course, we all know when we drive our cars that we are destined to crash absent any use of the steering wheel. Unfortunately, this 60 year projection leads to many breathless headlines in the major media, such as this one from Reuters: “Outlook still grim for US state, local budgets-GAO
 
That’s not to say the GAO report is not of value. However, it must be understood within its context. It is a long-range planning document based on the Congressional Budget Office’s (CBO) projections. The GAO report justifies its projection as follows:
 
We calculated that closing the fiscal gap (2013 to 2062) would require action to be taken today and maintained for each year equivalent to a 12.7 percent reduction in state and local government current expenditures.Closing the fiscal gap through revenue increases would require action on that side of a similar magnitude.
 
Such adjustments are not out of the realm of possibility. Significant economic growth, a war, or the implementation of value-added taxation (VAT)—to name just a few examples—could spur dramatic changes in state and local fiscal conditions over the next 50 years.
 
The report points to health care costs as the primary driver of its baseline scenario:
 
The model’s simulations show that the sector’s health-related costs will be about 3.9 percent of GDP in 2012 and 7.1 percent of GDP in 2060. In contrast, our model shows that other types of state and local government expenditures—such as wages and salaries of state and local workers—are expected to decline as a percentage of GDP. The model projects that the sector’s non-health-related costs will be about 10.4 percent of GDP in 2012 and 7.8 percent of GDP in 2060. (emphasis added)
 
The good news for government IT vendors here is that GAO's projected 25% decline in non-health-related costs (e.g., wages and salaries of state and local workers), considering continued population growth and service demand, would have to be due in large part to the implementation of technological automation.  Moreover, regardless of the fate of the Obama administration’s health care reforms, that legislation is only the beginning of a major national effort to reign in GAO's projected 82% increase in health-related costs through public and private action in coming decades. Government IT will have a growing role in that effort as well via health insurance exchanges, health IT, and MMIS modernization.
 
Analysts Take:
  • Long-term projections are good food for thought; however, long-term projections about government and policy are pinned to human nature, which can vary widely over the long run. Deltek will continue to monitor state and local fiscal conditions. You can find our free 2011 white paper on the subject here.
  • State and local spending on government IT could benefit within such a dire fiscal environment. While I don’t believe the state and local fiscal situation will be as bad as the GAO’s forecast, Deltek is confident that technology goods and services will increasingly be a contributor to solving long-term fiscal problems.
  • State and local policy leaders are not unaware of the challenges they face. Deltek research has found many governors and some local leaders beginning to focus on a wide range of government streamlining and performance-based management initiatives. This is only the tip of the iceberg. Fundamental reengineering of state and local government will be incremental and ongoing over the next decade or two.

 

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