IT vendors look for silver lining in state market

Every state budget officer has a story about a $30 million system 'they should have burned in the wastebasket.'

'NASBO's Scott Pattison

Olivier Douliery

To roughly paraphrase the Weather Girls' 1980s hit, it's raining everything but money for state governments.

Cloudy days still loom for the state IT market, according to speakers at last month's FSI State of the States conference, 'Finding the IT Silver Lining.'

Scott Pattison, executive director of the National Association of State Budget Officers, called the last three years 'horrible' for the states.

Almost every state has suffered dramatically, Pattison said. In terms of percentage of revenue drop, it's been the worst time since World War II. In spite of some improvement, states are still facing budget limitations.

'You can't get $30 million from the state's general fund anymore,' Pattison said. 'Those days are gone.'

Pattison compared state economies to a two-income couple. One spouse, laid off three years ago, just got a job. 'But think of all the shortfalls that still have to be made up and areas that need to be replenished'savings, retirement and college funds,' Pattison said.

States borrowed a lot over the past three years when interest rates were low. 'States had a great time in the late 1990s,' he said. But the party appears to be over for the foreseeable future.

One of the biggest drains on state resources is Medicaid, Pattison said. 'The first thing budget officers say to me is, 'Medicaid is eating me alive.' '

That is a relatively new development. In 1987, education drove state budgets. In 2002, Medicaid was the fastest-growing slice of the budget pie. Discretionary funds are shrinking. Added to that is a slow decline in federal grants to states, with the notable exception of Homeland Security Department grants.

States are wary of large IT projects, Pattison said. Every state budget officer has a story about a $30 million system 'they should have burned in the wastebasket.'

Ray Bjorklund, senior vice president of FSI of McLean, Va., was a shade more optimistic than Pattison. Bjorklund said that despite a couple of bad years, the state IT market is starting to grow again.

Although conditions are expected to be tough, he said that according to the governors, states 'have turned a corner.' Bjorklund said state officials are talking about 'spend management,' which he defined as spending a little to save a lot. Some examples are systems that can recognize fraud and abuse, such as Medicaid management information systems, or systems that consolidate or integrate existing resources, such as financial integration systems.

Another example of spend management is finding new uses for existing infrastructure, for example, telecommunications providers' use of existing fiber.

Although homeland security was at first blush perceived as a possible new growth area for IT projects, domestic defense issues are actually sapping some operational funds from states, Bjorklund said. Many states are still waiting for homeland security funds from the federal government, he added.

One of the reasons these funds are trickling in to states so slowly is that 'the bureaucracies needed to move this money are immature,' Bjorklund said.

And the money allocated for IT is a small subset of 20 DHS grants programs including such obscure projects as research on karnal bunt, a fungus that attacks wheat.

The Homeland Security Department 'is not a very effective organization right now,' Bjorklund said. 'They're not able to get their act together in terms of homeland security grants programs.'

In 2003, 76 percent of all state procurements were on hold, according to FSI. In 2004, 53 percent were on hold. Although the situation is turning, there isn't a lot of new money, Bjorklund said.

About the Author

Trudy Walsh is a senior writer for GCN.

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