State and Local Market to Outpace Federal Spending, Research Says

State and local government spending on information technology products and services will continue to grow moderately during the next four years, despite stock market woes and state budget crunches, according to market research firm Federal Sources Inc.

The McLean, Va., firm also predicts that state and local IT spending will grow slightly faster than federal spending over this same period.

State and local governments will spend $38.8 billion on IT in 2001, a 5.4 percent increase over spending in 2000. In contrast, federal spending on IT will increase 4.5 percent to $41.9 billion.

"The state and local market is becoming increasingly attractive. If we were a brokerage, FSI would be rating state and local as a buy right now," said Jim Kane, Federal Sources' president and chief executive officer, at the company's seventh annual State of the States briefing March 19 in Falls Church, Va.

"There's no doubt in my mind that the business of IT is the business of state government these days," said Wendy Rayner, chief information officer for New Jersey.

Federal Sources predicts the state and local market will grow to $45.3 billion by 2004, a 5.3 percent compound annual growth rate. If growth slows appreciably and pressures on state budgets increase, the worst-case scenario would be 4.2 percent compound annual growth for a total of $44 billion, Kane said.

About half the states have budget problems because of slowing revenue and increasing Medicaid spending, said Aldona Valicenti, chief information officer for Kentucky and president of the National Association of State Information Resource Executives.

Michael Fenton saw his budget slashed by 25 percent as North Carolina's money went toward repairing damage from two hurricanes last year. Nonetheless, Fenton, the state's chief technology officer, is optimistic about IT projects in North Carolina.

"We don't have money now, but we will later," said Fenton, who noted that his vendors have stuck by the state in this difficult time.

Other state technology officials said their IT budgets would not suffer much, because electronic government has become a chief goal of governors and state legislators as they seek to improve business processes and provide services constituents want.

Rich Iovino, executive director of Delaware's Office of Information Services, saw his budget cut by 4 percent, but notes that under Gov. Ruth Ann Minner, IT has become a top priority in the state for the first time. He expects IT expenditures to continue at their current level.

"The genie is out of the bottle," Kane said. "Two or three years ago, we might be having more of a debate ... but the types of productivity gains through IT mean an effective argument with state legislators" for continued funding, he said.

Stuart Rabinowitz encouraged companies searching for state and local opportunities to look beyond contracts earmarked specifically for IT.

"There are other avenues to take a look at," particularly federal grants to the states, said Rabinowitz, president of Fiscal Planning Services Inc., a Bethesda, Md., firm that tracks federal funds.

For example, three Education Department programs specifically for IT amount to $61.3 million this year, but the department has also spent more than $1 billion on 53 grants, each of which has an IT component, Rabinowitz said.

E-government, the process of putting government information and services online, is the driving force behind state and local IT initiatives, state technology officials said. It can significantly reduce administrative costs associated with paper filing and staffing, saving money while satisfying citizens and legislators who demand better and faster government service.

Maryland state law, for example, requires agencies to put 50 percent of their services on the Web by 2002, 65 percent by 2003 and 80 percent by 2004.

"That's extremely aggressive. I don't know whether it's attainable or not, but we're going to strive to get there," said Preston Dillard, Maryland's deputy chief information officer.

States are rising to this citizen-centered challenge by providing more and better forms of e-gov access, said Bob Glasser, president of the State Information Technology Consortium in Herndon, Va., a nonprofit group that represents about 30 states.

For example, North Carolina's Web portal guides citizens to services they need without requiring them to know which agencies they're contacting. The point is, Fenton said, "If you don't have to go to the DMV [Department of Motor Vehicles], you don't particularly care that there is one."

North Carolina's portal was created through a partnership with IT consulting firm Accenture of Chicago and top portal company Yahoo! Inc. of Santa Clara, Calif.

Arizona is embarking on a similar initiative with IBM Corp. of Armonk, N.Y., to create a one-stop shop for state services. IBM was selected March 15 to develop the state's new Web site, called Arizona @Your Service. IBM will consolidate many state Web sites and move more services online.

The project requires no initial capital from the state. IBM has committed up to $1.5 million for the initial hardware and software infrastructure, the portal itself and the initial set of applications.

"Government in the past has felt like we were the only ones with the experience to build the applications, but now we need help to react more quickly. We can't ask for any additional capital" from the state, said Susan Patrick, strategic communications manager for Arizona's Government Information Technology Agency.

State officials, whether they're suffering budget constraints or not, said that partnerships with private-sector companies, such as IBM and Accenture, and partnerships among the states and between state agencies are increasingly essential to meet the e-gov demands of lawmakers and citizens.

"I can't do this alone. I need you," Rayner told industry representatives. "I need to maintain legacy systems, and I have 700 I want to upgrade to the Internet age. Millions of lines of code need to be converted."

"This is a billion-dollar job for New Jersey, many times bigger than Y2K," she said. "I don't want your B team. I want your A team. If you bring your best team, you'll have a long history of partnerships with the state."