State of the states: Rough times ahead

Even the most starry-eyed optimist couldn't put a happy spin on Federal Sources Inc.'s 9th annual State of the States conference yesterday in Washington, which focused on homeland security issues and funding.

Two years ago, Federal Sources president Jim Kane characterized the state and local IT market as a "buy." Last year, he called the market a "hold" but still attractive.

At this year's conference, the words Kane used most frequently to describe the state and local market in 2003 were "fragmented," "budget deficits" and "faltering economy."

"It was a rough year last year, and it's going to be a rough year this year," he said.

Kane and his team at FSI analyzed 43 governors' state of the state speeches this year. "They were talking about restoring stability and responsibility. That's a significant shift from last year, when they were saying, 'Let's soften the impact,' " he said.

The economic downturn has walloped states with the worst budget crisis since World War II. Eighteen of the 37 states that have deficits face budget shortfalls of greater than 10 percent, Kane said. Last year, it was six out of 42.

States have already have dipped into their rainy-day funds and reorganized departments, Kane said. Now they are going to have to do the really hard things, such as reduce local aid, furlough employees and institute early retirement programs.

Kane still found a few bright spots penetrating the gloom. "I think this provides the IT industry with some opportunities. State and local governments can leverage IT to get productivity gains in the face of these strong fiscal pressures," he said.

But homeland security IT is not the mother lode in the state and local hills, according to FSI. Kane and his team found that the bulk of the homeland security IT budget will fund federal activities, not state and local. Homeland security IT works out to about 5 percent of the overall IT market, Kane said.

"It's good solid business, but it's not billions and billions of dollars. Go ahead and pursue homeland security business, but it's not a bonanza," he said.

Keynoter Gerry Wethington, CIO of Missouri and president of the National Association of State Chief Information Officers, talked about how states are struggling to fortify homeland security at a time of huge budget cuts. Wethington stressed the need for states to share information and develop common standards. "But there's no indication we'll get out of silo-based funding anytime soon," he said.

"This is definitely not the time to be reaching for shiny objects in IT. And we can't wait until the economy turns around and go back to the way we did it before. That bridge has been burned," he said.