Jan 12 2007

Opinion: Revenue

Now that the dog days of reduced revenues and intense budget cutting are over, things are looking up for state IT budgets.

Revenue Rebound

Most states are now seeing fairly strong growth in revenue year over year — sometimes even beating projections.

The mood among state budget officers today is largely positive, although most are adopting a cautious stance for the long term.

A year after the Sept. 11, 2001, terrorist attacks, for example, revenue dipped an average of 22 percent, only to rebound back to roughly normal the next year and rise 15 percent or more by 2004, according to the Rockefeller Institute of Government. Our research shows that on average, rainy day funds were about 10 percent of the aggregate of state and general funds in fiscal 2000, but had dropped two or three years later to about 3 percent.

The revenue rebound, however, has been significant, with most states now seeing fairly strong growth in revenue year over year — sometimes even beating projections. Although there is pent-up demand in many areas, most new revenue is being spent on programs for education, transportation and health care. But after the aggressive systems replacement in the late 1990s prior to the Year 2000 rollover, many states also are funding new IT projects and systems replacements. But compared to past flush years, things are a bit different.

Today, budget allocations are much more likely to be based on performance. If, for example, state law enforcement officials request $50 million for a new communications system, a budget director is more likely to provide seed money — say, $10 million — and require proof of performance before providing another $20 million, followed by the final $20 million a year or two later.

Consolidation Upswing

Many states also are looking to centralize IT governance, either to avoid costs or enjoy outright cost savings. If, for example, the Department of Corrections buys computers, followed by the Department of Historic Resources, each department could be paying a different price. By consolidating IT governance, states can use their market power to increase savings. Quite a few states have taken positive steps in this direction, including Delaware, Michigan and Virginia.

But change can be hard, and agencies often aren’t happy about the centralization trend. To make it work, it often makes sense to take a hard line, simply requiring agencies to follow the new rules. As to whether it will be effective, it’s probably too early to tell. Centralized IT governance is a fairly new phenomenon, and it will be a few years before we’ll be able to see what’s working and what isn’t.

As part of the move toward centralization, states also are being aggressive in ensuring that there are benchmarks indicating progress toward successful implementation of IT projects. State finance officials want to see strong oversight of IT projects and systems replacements. Every state seems to have at least one horror story of spending millions on a project that did not deliver as promised.

In addition, state officials are pushing for more user training to ensure that the expected benefits of a new system are felt throughout state government. In some states, the move toward centralization is an effort to ensure proper oversight of IT procurement and implementation, as well as reduce costs and increased market power.

State officials know they will experience some difficult fiscal pressures over the next five to 10 years, as baby boomers begin to retire and health care and associated costs rise — in some cases dramatically. Medicaid spending accounted for 8 percent of state budgets in 1985, represents 23 percent today and is expected to rise to 27 percent by 2010. These pressures underscore the importance of careful oversight of all IT decisions. By doing so, states will enjoy myriad benefits: avoidance of duplication, assurance that systems are working and performing as needed and, most important, good financial management and efficiency.