Waiting for the aftershock
In an era of instant news distribution, it is virtually impossible to avoid the topic of the rapid downward spiraling of the U.S. economy in what some experts are calling the nation’s worst recession since the Great Depression. During the past several months, headlines have screamed of the stock market losing about half its value, November job cuts being the largest since 1974, and myriad government bailout proposals.
While the financial, automotive and housing markets have been the focus of media attention, the public-safety communications market generally has not been hit nearly as hard — at least in the short term. Just as it took some time before the influx of post-9/11 funding made a tangible difference in the public-safety communications industry, the reality of the sector’s lengthy buying cycles means that large projects already under way should continue to progress, as the supporting funds typically were secured long ago.
“Whatever business we’re getting right now is predicated on decisions that were made last year or the year before that,” said Phil Burks, CEO of Genesis. “For right now, we’re still a good 100 to 150% ahead of where we were last year, and I think we’re going to be good next year, as well. I can’t see the year after that.”
While Burks said he believes his company is in a good position to survive the recession — in large part because of its recent entrance into the global marketplace — others in the industry are expressing concern about the long-term impact the recession could have on the sector.
Such concern is warranted because public-safety communications typically are supported almost entirely by government entities funded by income taxes, sales taxes or property taxes. In the current economy, all three of these sources are being hit substantially, creating funding shortfalls at the federal, state and local levels that must be addressed, as they could jeopardize large public-safety communications expenditures, among other projects.
“You see a lot of states across the country kind of retrenching and carefully examining projects that they have,” said John Facella, director of public-safety markets for Tyco Electronics Wireless Systems, formerly known as M/A-COM. “So it will not surprise me if some communications [projects] are delayed or rethought. We don’t see a lot of evidence of that so far, but I think that’s because the states are just discovering the issues for themselves.”
How bad is it?
Reasons for the shortfalls are fairly apparent, although the abrupt nature of the economic downturn may have caught some government entities by surprise. Job cuts and salary freezes mean income taxes will generate less revenue, while the plummeting stock markets make capital-gains taxes virtually irrelevant. With less discretionary income, consumers are less likely to purchase retail goods, which negatively affects sales-tax revenue. And the well-chronicled problems in the housing market do not bode well for entities depending on property-tax revenue.
As a result, for the first time since the relatively short-lived 2002 recession, the tax revenues collected in 42 states during the third quarter were flat when compared to the previous year, according to preliminary data reported by the Rockefeller Institute of Government in November 2008. But when considered against the backdrop of a 2.7% increase in inflation during the past year, the tax revenue collected during the third quarter effectively represented a 2.6% decrease.
In New York state, where the financial-market slump was felt most strongly, a mid-year update identified a $1.5 billion gap in the current year’s budget and projected a $12.5 billion revenue shortfall in the 2009-2010 budget.
“By mid-October, credit market conditions were at their tightest since the Great Depression, signaling a much longer downturn in the real economy than anticipated in July and longer than the last two relatively short-lived recessions,” the New York report states. “Real GDP is now projected to decline for three consecutive quarters, starting in 2008 Q3, unseen since the recession of the mid-1970s.”
And the economic problems are not limited to states. Charles Werner, fire chief for the city of Charlottesville, Va., said his city has seen five years of 10% or greater revenue growth dwindle to a 1% increase this year, causing the municipality “to look at everything,” including a policy change concerning response procedures to alarms in an effort to save money.
And Charlottesville is relatively lucky compared to other local entities across the country, where revenues have decreased by as much as 25% this year, forcing the entities to make “Draconian cuts,” Werner said.
“It’s to the point where people aren’t buying anything that they do not absolutely have to do, and it’s going to affect what we do in every market,” he said. “There’s basically no new money, so if you can buy it out of your existing budget, then you’re lucky — and you’ll be lucky if your budget is not cut.”
Capital Damage
Most sources interviewed for this story agreed that public-safety entities would not feel the negative impact that has hit other sectors of the economy in the short term because public safety is a core priority for government entities, particularly in the wake of the Mumbai terrorist attacks, and because many significant public-safety communications projects are funded by federal grants that already have been committed.
But John Powell, chairman of the National Public Safety Telecommunications Council (NPSTC), said the matter is not that simple, citing the $1 billion being made available through the Public Safety Interoperable Communications (PSIC) grant program as a prime example.
“The PSIC grants have a 20% match for equipment,” Powell said. “A lot of agencies now are having problems coming up with the match, so that’s going to be an issue.”
With this in mind, Powell said he believes public-safety organizations may lobby Congress to waive the matching requirements for the grants and extend the deadline for using the funds, the disbursement of which has been delayed as the federal government approves states’ investment justifications. If Congress decides to extend the 2010 PSIC implementation deadline, then aligning it with the Jan. 1, 2013, deadline for narrowbanding UHF and VHF systems to 12.5 KHz channels would be helpful because some PSIC grant money could be used to pay for narrowbanding, he said.
For those entities that are not planning to use PSIC grants to help pay for narrowbanding, the economic downturn could make the task significantly more challenging. With the 2013 FCC deadline looming, many public-safety entities had hoped to offer municipal bonds to generate the revenue needed to pay for the transition to 12.5 kHz networks.
While this appeared to be a reasonable strategy six months ago, the rapidly deteriorating economy has called the approach into question. As is the case with other capital markets, financing through municipal bonds is much more difficult now.
“The municipal bond market is a pretty stable market, but what kind of interest rate are you going to get?” Powell said. “From a buyer’s perspective of muni bonds, it’s a pretty good market right now. If you’re trying to sell bonds, it’s the flip side of the coin. So, if they’re looking at long-term indebtedness and they’re looking at [municipal bonds] for doing that, it’s not a good time.”
Moreover, most local government entities must get voter approval to issue bonds, which may prove to be a challenging task. In one Missouri county, voters recently nixed a proposal that would have taxed goods manufactured in the county that were being shipped elsewhere, said Steve Devine, interoperability program manager for the Missouri Department of Public Safety.
“If that doesn’t pass, what do you think will happen when it comes directly out of the pocket of Joe Citizen?” he said.
And vendors may not be able to help, as even Motorola — the largest and most influential public-safety communications company in the U.S. — is facing difficult times. Last month, the industry behemoth’s credit rating was downgraded to “junk” status by Standard & Poor’s, primarily because of problems in the company’s cellular-handset division. Motorola officials issued a press release stating their belief that the “junk” rating belied a healthy balance sheet, but the idea that the strongest company in public-safety communications finds itself in such a position could be a wake-up call for the industry.
Between Motorola’s poor credit rating and Tyco Electronics’ struggles to retain its $2 billion contract to build a statewide LMR network in New York — a project fully financed by the company — vendor financing of radio systems could be limited in the near future, according to mobile wireless industry consultant Andrew Seybold.
“I’ve always objected to radio companies funding systems. … If you look at M/A-COM in New York, that’s one of the problems — New York has nothing to lose, because all of the financing and all of the equipment and everything else is on M/A-COM,” Seybold said. “Having said that, a lot of these systems wouldn’t get built if they weren’t funded [by vendors].”
Challenges or Opportunities?
During difficult economic times, many companies reassess their operations and decide to scrap endeavors that do not contribute directly to the bottom line, putting resources associated with research and development and participation on standards bodies in jeopardy. Facella said Tyco Electronics has made no cuts in R&D, but Motorola announced some R&D cuts early this year, and Powell said he fears the industry will see more of these cuts in the future.
“Companies have got to be realistic, so I could absolutely see something like that happening,” Powell said. “I hope that it doesn’t because we’ve made a lot of progress, but it takes companies putting in a significant amount of funds and staff support [for] these standards efforts and technology-development efforts to be successful.”
Another matter that could be affected by the economic downturn is the proposed nationwide wireless broadband network that would operate in the 700 MHz band. The FCC has tried to auction the 10 MHz D Block in the band to a commercial operator that would team with public safety to forge a public/private partnership to build and maintain the shared network.
Although the FCC’s proposed rules are designed to attract bidders — much to the dismay of many public-safety entities, which would like to see greater reliability and coverage requirements — commercial operators have been outspoken in stating that such an auction needs to be delayed, because accessing the capital markets at the moment is impractical for most companies.
While some argue that the carriers’ position is evidence that public safety would be better served by building a broadband network with government funds, Werner said the economic downturn should remind officials about the fragility of such financing sources.
“This again reinvigorates the whole point that this needs to be a public/private partnership to build the network because government’s not going to have [the necessary funding],” he said. “I think it just goes to show that we’re not going to be able to afford these expensive infrastructures as local governments. It’s not going to happen.”
What is happening is that public-safety entities are rethinking the way they operate in an attempt to save money while still delivering the service level that their constituents expect. In some cases, greater investment in technology may provide the solution — although sometimes more expensive upfront, governments do not have to pay costly benefits to equipment and software.
With this in mind, at least one entity is examining the possibility of expanding its use of video-surveillance systems to help offset inevitable shortfalls in law-enforcement personnel when hiring freezes and overtime limits become commonplace, Tyco’s Facella said.
“The idea would be that they would talk about that with the population that they serve and their elected leaders and say, ‘Look, we’re going to put these cameras up. It’s actually going to be better, in some ways, than putting tons of officers on the street, because the camera’s always there,’” Facella said. “You can actually get arguably better surveillance with fewer people by using these techniques.”
Facella said the economics associated with video surveillance has made the notion much more compelling in recent years. Not only have equipment prices dropped dramatically, advances in compression and backhaul technology — particularly over wireless links that utilize public safety’s 4.9 GHz spectrum — have made surveillance of even remote sites possible.
Of course, at some point, a human needs to see the video output to interpret it and determine whether action is necessary. In the past, this often meant moving an officer off the street to put him in front of a video monitor, which did not provide the head-count savings many government entities are seeking today. However, advances in video-analytics software allow a single person to monitor several video outputs simultaneously and more effectively, Facella said.
“I used to design some of the early CCTV systems, and I remember thinking, ‘Who is going to sit here and watch the screen flip every 30 seconds to the next view and be looking for movement?’” Facella said. “You might do that for an hour, like an Army sentry would do, but after that, your brain is just going to go to sleep. You might be looking at it, but you’re not going to be responding, because it’s just mindless.
“The video-analytic software that is now available is just fantastic. It breaks the screen down into little pixels and, if there’s certain movement, it triggers an alarm, so it is infinitely more useful to law enforcement.”
However, Werner said manufacturers should consult with public-safety users on ideas such as this before developing products to ensure that their efforts are wanted in a more selective marketplace.
“Don’t bring me a solution looking for a problem,” he said. “Bring me a solution that solves a problem that makes me more efficient and saves me money.”