Economic downturn imperils IT funding

| GCN STAFFAs the nation's nine-year economic surge slows, it appears that state information technology managers will face tight budgets in the coming months.The scale of the slowdown is unclear and depends on unpredictable factors, but smaller-than-expected tax revenues and increases in Medicaid prescription costs are whipsawing state budgets, according to the National Governors Association.As some state chief information officers prepared for reduced funding next year, others expressed confidence that their governors and legislatures would continue to support increased IT spending. Tighter budgets could force CIOs to set stricter priorities for or delay capital projects, find ways for agencies to use IT resources more efficiently, shed consultants or rely more on outsourcing.'In a recession, taxes don't necessarily decline, but if they stop growing and your expenses grow, you have a problem,' said Donald Boyd, director of the Fiscal Studies Program at the Rockefeller Institute of Government in Albany, N.Y.The slowdown is only beginning to affect state revenues, Boyd said. The revenue crunch likely will intensify when individuals file state income tax returns in the spring, he added.During the last nine years, state income tax revenues have boomed, Boyd said, letting states cut taxes, increase spending and create reserve funds. State revenues from taxes on capital gains also have increased by more than 33 percent annually over the past four years, but Wall Street's troubles could reduce that revenue source as well, he said.'There's a potential for real problems on the revenue side of budgets,' Boyd said.State budget officials likely will take a hard look at IT spending, Boyd said.'I think it is more likely that states will slow spending in areas where it can be delayed,' he said. 'You might not view IT as a luxury, but compared to K-12 education and health care for the poor and elderly, states may view it as a luxury.'As for the possibility that interest rate cuts by the Federal Reserve could head off an economic slowdown, Boyd said, it would take nine to 12 months for any such cuts to bring about increased economic growth.Economist Raymond Scheppach, the governors association's executive director, said that over each of the past eight years, state revenues have come in 3 percent to 4 percent above revenue projections.'Now we see revenues coming in below projections by one-half of a percent or 1 percent or more,' he said.Meanwhile, health care costs, and especially Medicaid, 'are coming in 10 percent to 12 percent more than projected,' Scheppach said. Those costs account for about 20 percent of state budgets, he said.'States are caught in the middle,' Scheppach said. 'They want to put money into education and technology, but they will be squeezed.'Raising taxes is not an option, he said. 'We are already seeing eight to 10 states that are cutting back, in some by across-the-board budget cuts and in others by holding back capital expenditures. IT will get hit in some states.'Scheppach predicted that the budget pressure would prompt states to defer IT capital projects for up to six months. 'It may also add to the pressure to outsource and contract out more technology,' he said.Thom Rubel, director of the association's State Information Technology Program, said the fiscal squeeze 'will make states make smarter investments in IT, and it will encourage partnerships with the private sector. Some states [now] feel they just have to do it themselves. When resources are scarce, it forces innovative approaches. They'll want to leverage what they have left.'When budgets contract, 'you delay projects, you cut back on consultants,' said Kentucky CIO Aldona K. Valicente, president of the National Association of State Information Resource Executives. 'It's not unusual to delay projects for a quarter or two. I also see cases where it might be logical to outsource projects to save money.'Technology can help state governments during times of tight budgets by making administrative processes cheaper and more efficient, Valicente said.'But if there is a feeling that the economy is softening, as has been the discussion at the federal level, the states will be very vulnerable,' she said. 'The states will be very vigilant, and that makes the CIOs vigilant, to look at the things they need to continue and things they need to delay or cut out.'Connecticut CIO Rock Regan said that increases in state Medicaid expenses and the cost of pharmaceuticals for the Corrections Department had prompted budget officials to mandate a 10 percent across-the-board cut in his state last fall.Regan's agency receives revenue from other state departments. He and his staff recently have focused more on ways to economize with IT resources. Their cost-cutting measures include running processing jobs less often, scheduling processing for lower cost times, running jobs in batch mode and conserving storage costs by archiving files.On the hardware side, Connecticut is 'trying to be smarter in how capital projects are designed,' Regan said. For example, agencies buying servers can reduce costs by consolidating them, he said.The cautious outlook isn't shared universally. North Dakota CIO Curtis Wolfe expressed confidence that scheduled increases in his state's IT budget would be approved by the Legislature.'We have huge IT initiatives in the governor's budget. It's recognition of the importance of IT,' Wolfe said. About 26 percent to 27 percent of new projected state revenues will be devoted to IT initiatives, he said.The North Dakota Legislature reconvened early this month and will meet for 80 days to adopt a two-year budget. Legislators strongly support the proposed IT spending increase, Wolfe said, which will double the state's expenditures on technology, to $50 million.'It's recognized that IT is critical to the future and as such has to be funded,' he said.Like many other states, North Dakota is required to balance its budget. State officials are very conservative in their revenue estimates, Wolfe said.Michael Clark, spokesman for Georgia CIO Larry Singer, said, 'We are not anticipating any significant effects on IT budgets in Georgia because Georgia's economy is continuing to grow.'