Eye on the States

By Thomas R. DaviesThe long-term impact of the year 2000 software problem on state information technology plans is of great concern to many company executives. They want to know whether Y2K will cause a major disruption to state IT spending.While no time is good for something like Y2K to happen, it could not have come at a better time. With the robust economy, states are on the receiving end of two very powerful and favorable forces. First, the demand in both state social services and criminal justice program areas tends to decline. Second, states are able to increase revenue without raising taxes. The combination of lower demand for services and revenue in excess of forecasts often produces a cash surplus. That is exactly what is happening in the states. So financing Y2K has not been nearly as painful as it might have been in different economic circumstances. Y2K is one of the new needs the states have been funding with the budget surpluses. The states are expected to spend over $3.3 billion on Y2K. Much of this spending is coming from newly appropriated dollars, not solely from the base budgets. It is true many states have begun to delay some new IT projects. Colorado, Connecticut, Florida, Kentucky, Missouri, New York and Ohio have announced delays in project plans because of Y2K. They included projects for mug shot imaging systems, intelligent transportation systems, finance and accounting systems and crime reporting systems.Does this mean the states will experience a slowdown in IT spending? If they do, there is very little evidence of it so far.The states are expected to spend an estimated $51 billion on IT in fiscal 1999, growing to $56 billion in 2000. The double-digit growth rate is being fueled by a record-level economic expansion. All sectors and regions of the economy continue to pull their own weight. Therefore, most states have the cash needed to fund their continuing IT budgets as well as new needs.Who are the beneficiaries of Y2K-related spending? Most obvious are the professional services and integration companies, including Keane, which are under contract for Y2K support. Most states have in place statewide, multiple-award contracts and schedules for Y2K services.Other winners include application solution providers, such as American Management Systems, PeopleSoft and SAP. For the last 12 to 24 months, these companies have experienced strong growth as their customer base replaces, rather than fixes, older systems. Other winners are manufacturers, distributors and resellers. The combination of surpluses and Y2K is driving the states to accelerate replacing their IT infrastructures. This is evident by unprecedented levels of spending on desktop and client-server systems. For example, in the first half of fiscal 1999, the state of Florida recorded $87 million in spending for client-server systems off its statewide contract. And these spending levels do not include any end-of-year spending by state agencies.All indications are that the fiscal 2000 state budgets are likely to continue funding for Y2K-related work, especially for tackling non-mission critical needs that did not get addressed earlier. In some cases, the states will make funding available to local governments that have not been the beneficiary of surpluses and have critical Y2K needs. Most states also are expected to continue their Y2K oversight and project offices.What will become of the backlog in projects that were put on hold because of Y2K? As long as the economy stays healthy, these projects will be placed back on the front burner. While some states may be more cautious than others in how fast they ramp up their spending, state leaders know they cannot afford to postpone critical needs.What about the unintended consequences of Y2K? It may be too early to make this call, but some state leaders are convinced Y2K is a watershed event. It has elevated IT to the highest levels of state government policy-making. Out of necessity, the states are beginning to turn to commercial off-the-shelf solutions. And the relationship, and interdependency, between the states and the private sector has never been closer.Growing in significance far beyond the management and technical challenges of remediation and testing, it is now clear that Y2K will go down as a turning point for state government. It will become an important milestone not only for state systems, but also for the evolution of state IT policy, leadership, relations with private industry and spending.Thomas Davies is senior vice president of Federal Sources Inc. in McLean, Va.