Eye on the States

Naysayers don't have last word on business in 2002

Tom Davies

Based on the headlines, 2002 may be a year of doom and gloom for companies doing business with state and local governments. Even long-term survivors are disturbed by what they see and read. It's still too early to tell how bad it will be, but it's worth looking at what is unfolding to assess whether there is another side to the story.

Perhaps the most important card to be played is the 2003 federal budget. Always important to the states, the federal government accounts for more than 25 percent of their funding. This year, it's even more important.

Areas in which states are spending more money, such as Medicaid and homeland security, are ones where the federal government assumes a great deal of financial responsibility. How much money is provided to the states, and who gets it, will make a huge difference.

The state legislatures are just now working on budgets for next year. Without a doubt, the states' fiscal circumstances are serious. However, the underlying strength of the state economies seems to be holding up.

The states are, in many ways, suffering from fiscal situations of their own making. Therefore, it is really up to each state to figure a way out. Look to the leadership in each state for clues as to what the state will do, especially whether it chooses to spend cash reserves or save them for even rainier days.

A third card is that 36 governors are up for re-election this year. When the dust settles in November, almost half of those states could have a new governor.

How much progress states actually make on any front involving IT in an election year is an open question. History would suggest not much. But then again, most states cannot wait until after November to take meaningful action.

These circumstances and others are creating uncertainty and doubt among many IT companies. But by no means is everyone panicking or putting all their eggs in the homeland security basket. And here are a few reasons why.

Back in the limelight is health care, especially Medicaid fiscal agent and managed care contracts, where companies are paid to administer the medical claims and care for the poor, elderly and disabled. These contracts are the heart of the health care business process outsourcing market.

Up for re-bids this year are projects in Texas, North Carolina, California, Tennessee, Alaska and Louisiana. These easily represent more than $1 billion in total value. They are the core of state business for the likes of Electronic Data Systems Corp. and Unisys Corp. And aggressive newcomer Affiliated Computer Services Inc. is marching through health care in the states like Patton going through Europe in World War II.

And don't underestimate the value of sharing risk with government customers. Accenture and American Management Systems Inc. have demonstrated the value of shared-benefits contracts in finance and tax. Others are using this model in the areas of fraud and abuse, traffic management and child-support collections. Creating win-win outcomes for state government customers is one secret to success in years such as this one.

Finally, local governments, especially counties outside the major metropolitan areas, are navigating the budget shortfalls amazingly well. Their tax bases appear to be on much firmer ground than the states, and they managed not to rely as much on scenarios that assumed the good times would continue indefinitely.

So whether or not 2002 is full of doom and gloom perhaps depends on whether you know where to look ... and what to look for.

Thomas Davies is senior vice president at
Current Analysis Inc. in Sterling, Va. He can be reached at tdavies@currentanalysis.com.

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