Across the Digital Nation: The changing colors of state and local government

In 2004, the presidential election brought us a color-coded map of the nation showing red states vs. blue states. What this categorization didn't show you is a more important "color reality" amongst most state and local governments: the growing transition from budgets in the red to budgets in the black.

The greening of state government budgets has been multifaceted, involving a reduction of previously enacted budgets, increasing tax collections, raising fees and storing year-end reserves.

For example, 15 states cut fiscal 2004 budgets by $2.2 billion, and 40 states cut fiscal 2003 budgets by $11.8 billion. Similarly, 24 states have imposed new tax and fee changes that resulted in a net increase of $3.5 billion.

This brightening revenue picture is reinforced by the fact that 35 states have reported higher than budgeted revenue allocations in fiscal 2004. Year-end balances across the nation grew from $16 billion in fiscal 2003 to $25 billion in fiscal 2004.

All these measures have created a new fiscal picture with every passing year and herald the ability to grow operational spending over the next three years.

The result of these actions creates a positive long-term picture for IT vendors. Over the next five years, state and local government IT spending is expected to rebound, and pent-up demand is expected to drive growth above typical levels. Gartner Inc. forecasts total IT spending will be $46.5 billion in 2005 and will reach $50 billion by 2006.

In particular, vendors must examine several areas that will contribute to this rise in technology spending.

From an agency perspective, health, human services and transportation agencies will be important areas of large-scale modernization projects. Key solutions across those agency lines include extending Medicaid contracts, new unified case management projects and greater intelligent transportation initiatives.

Structural issues such as an aging workforce, retaining new skills and changing technologies will continue to drive reliance on external service providers. These issues will prompt innovative states to adopt larger managed services initiatives and push the expansion of business process outsourcing services across the usual lines.

Lastly, emerging technologies such as open source, radio frequency identification and wireless are key areas that will be tied to more technology initiatives.

Despite the positive changes to the fiscal climate, there are still potential obstacles to a full recovery among state and local governments.

First, the growing federal budget deficit ups the pressure to limit federal fund transfers and reduce support to state and local governments.

Second, although the economy appears to be on the rebound, the continued uncertainty with respect to geopolitical events is a drag on long-term growth.

Finally, several major state and local governments remain in tough fiscal situations and will need more time to correct structural imbalances.

The long-term forecast for the state and local government marketplace is positive. However, vendors must acknowledge that this is a sector in transition. Consequently, vendors must still provide credible messaging over the short term around developing IT solutions that let government entities avoid and contain costs or maximize and generate revenues.

As the recovery firms up, public-sector organizations will have greater flexibility to broaden IT activities and focus on technology refresh in a wider set of agency and technology areas.

Rishi Sood is research vice president with Gartner Dataquest in Mountain View, Calif. His e-mail address is rishi.sood@gartner.com.