Governments eye slight spending increases

State and local government spending on information technology is finally starting to rebound, according to a new report.Spending will increase from $40.7 billion in 2004 to $43 billion in 2006, a modest annual growth rate of slightly more than 2 percent, according to market research firm Federal Sources Inc. This doubles the growth rate of the state and local market in 2002 and 2003, when governments spent $39.9 billion and $40.4 billion on IT.[IMGCAP(2)]One clear sign that states are recovering from three years of debilitating budget shortfalls: Officials are putting fewer projects on hold, according to FSI of McLean, Va. About half the pre-request for proposals opportunities are on hold this year. More than three-quarters were held last year."It's been a couple of bad years, but things are gradually improving," said Ray Bjorklund, FSI's senior vice president for consulting and chief knowledge officer said at the firm's June 8 State of the States briefing in Washington. Still, states are keeping a sharp eye on their bottom lines. Unnerved by recent budget shortfalls, state officials are eager to implement IT practices and solutions that produce tangible savings. Medicaid, education and homeland security programs are driving much of the states' spending, FSI said. The health and human services sector continues to yield the largest opportunities for the private sector.FSI estimated that states will spend more than $650 million on technology refreshment for Medicaid management information systems this year. Some companies that hold long-term contracts for Medicaid fiscal agent services could be unseated when the contracts are recompeted, Bjorklund said. The functional areas that will receive substantial IT funding include health and human services, integrated communications and homeland security solutions for first responders and public health, FSI said.States this year will focus heavily on gaining efficiencies by centralizing IT resources, and will favor gradual over outright replacement of large technology systems, said Scott Pattison, executive director of the Washington-based National Association of State Budget Officers.Companies should not expect to land large IT projects for new systems in the current cost-cutting environment, Pattison said. "You can't get a $30 million appropriation from the general fund" anymore for an IT project, he said. For this reason, state and local customers are likely to find the gradual phasing in of new systems more palatable than flat-out system replacement, Pattison said.The companies that will fare best are those that can offer innovative funding mechanisms, such as leasing and financing, performance-based contracting and benefits funding, he said. States also will be looking for ways to improve how they manage and purchase IT as well as how to make enterprisewide or governmentwide acquisitions and leverage cooperative purchasing.FSI reported that cooperative purchasing for state and local governments has been sluggish since it began two years ago. So far, state and local government has purchased $73.6 million -- merely one quarter of 1 percent of the market's annual spending -- through the General Services Administration's Schedule 70 program. But Rep. Tom Davis (R-Va.) said he predicts that state and local use of Schedule 70 will reach $500 million by 2006. Davis, who co-sponsored the E-Government Act of 2002 allowing state and local use of Schedule 70, said that by the end of the decade, most state and local governments will be using Schedule 70 as a routine part of their IT purchasing."It's the wave of the future. ... All states eventually will embrace it," he said.So far, federal funding for homeland security has provided scant dollars for information technology. Of about 20 programs that are funded through homeland security grants, only a small set receives any IT funding, Bjorklund said. In fact, homeland security expenses are sapping state and local operational funds that might be used for IT spending.Although federal funding has not yet produced the hoped-for market boon, it eventually will have a positive influence on the market, Bjorklund said. This will happen when the federal government eases restrictions on how the funds can be spent and customers become more skillful at mixing grants from different sources to meet their homeland security IT needs, he said. Until then, companies should pursue opportunities with those state and local entities that are investing their own money in homeland security, he said.[IMGCAP(3)]Eighty percent of homeland security grants are targeted for first responders at the local government level. The chief information officers of New Orleans and Virginia Beach, Va., who spoke at the conference said they are struggling to apply some of those funds toward IT initiatives. David Sullivan, Virginia Beach's CIO, said the city has received three $1 million grants so far, but they are primarily directed toward first-responder equipment and personnel needs, not IT. By mixing funds from several sources, New Orleans has established a sophisticated network of surveillance cameras to protect people and property in the Big Easy, said Greg Meffert, the city's chief technology officer. The project illustrates the kind of creative approaches that will be necessary to IT-related homeland security initiatives, he said. The cameras stationed around the port city not only improve surveillance but also serve as wireless-fidelity hot spots, Meffert said. The network was deployed using a mix of federal funds, general funds from the city government and donations from more than 200 local organizations that wanted surveillance cameras to protect their property, he said. Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.