While Federal government funding streams to state and local governments for a variety of purposes have been flowing for many decades – and have shot up to as high as $300-$400 billion throughout the coronavirus pandemic – it still remains anyone’s guess how much of that recent bounty has been earmarked for state and local government IT modernization.

With state and local governments hungry to use Federal funding for a host of non-IT purposes, it’s a good bet that funding to properly modernize critical state legacy IT systems remains relatively low – and that debacles like the ones we saw with poorly performing state unemployment insurance (UI) systems during the pandemic may remain enduring problems.

With the need clear for further investment in state systems, where can these additional dollars for state technology modernization funds come from?

State IT bonds could be one answer.

Competition for Funding

Currently, state IT managers looking to modernize will have to slug it out in budget competitions for these Federal dollars with some heavyweight contenders – including everything from depleted unemployment insurance trust funds to woeful state pension shortfalls, from Medicaid for undocumented people (California), to bridge and road infrastructure, from K-12 to small business assistance, and even further rounds of stimulus checks for individuals.

Currently identifiable streams of targeted assistance to state and local governments include money for broadband service expansions, cybersecurity, and about $2 billion for helping to shore up state UI systems that buckled during the pandemic. But even that funding stream can start to look small when major UI system modernization can easily run to nine figures for these large system integration projects.

And while many states’ deplorable UI systems became the front-page IT failure stories during the pandemic and resulting unemployment surge, many other similarly mission critical legacy systems – particularly in state government – continue to slog along with similar inadequacies but much less publicity and urgency to fix.

In recognition of this IT funding dilemma, several states have taken action to set up modest modernization funds to address their plethora of legacy applications. By all accounts, however, the state TMFs financed through regular, annual general fund dollars are by definition one-shot, pay as you go investments. In addition, like with the Federal funds, these state IT dollars are again in competition with scores of other spending demands. As a result, modernization targets have been limited in scope, and even if determined to be worthwhile for one year, will face similar rounds of competition in subsequent annual budget negotiations.

Federal TMF Program

When thinking about state-level IT funding, it’s worthwhile to consider the Federal government’s own technology modernization funding experience.

Authorized by the Modernizing Government Technology Act of 2017, the Federal-level Technology Modernization Fund (TMF) provides funding and technical expertise for agency IT modernization projects. To date, the TMF has received $175 million through the annual budget process and $1 billion through the American Rescue Plan to fund modernization projects.

Earlier this month, the House Committee on Oversight and Reform voted to adopt an amendment as part of the FY 2022 budget reconciliation process that could provide an extra $3 billion for Federal IT modernization, including another $1 billion for the TMF.

While I don’t want to wander into the specifics about what constitutes “modernization,” by all accounts I’ve seen, the Federal-level TMF program has received high marks. The only real complaints have been the rather minor scale of overall TMF investments and the slow rollout since the fund’s inception. That is due to change imminently, as the TMF Board is expected to announce in short order initial projects for the $1 billion the fund received earlier this year.

Demand for High-Dollar Projects

Even a billion dollars doesn’t seem to go as far as it used to, at least when it comes to the sprawling Federal IT enterprise.

For instance, Federal Computer Week reported earlier this month that IRS Commissioner Charles Rettig is lamenting “the dire status of the tax agency’s IT modernization efforts.” In a letter to senators, Rettig wrote “Each year, the IRS must take extraordinary measures to fund IT. In fiscal year 2021, $600 million of the agency’s $2.6 billion technology budget was funded through transfers from non-IT accounts, including $200 million from enforcement and $400 million in user fees.”

Apparently, the IRS could eat up a good portion of the current Federal TMF in one swallow. And that’s been the rub, of course, not only with the TMF, but also the one-off nature of new state tech modernization funding efforts. Can they be funded adequately and properly sustained to address the huge backlog of legacy systems facing obsolescence?

State IT Bond Funding

So let’s take a closer look at the bond-funding alternative.

When I was state CIO for the Commonwealth of Massachusetts, we adopted a unique funding mechanism for major IT investments. After much weeping and gnashing of teeth, the legislature finally passed and the governor signed the first IT bond issue in the country intended to fund over $300 million in state IT projects – totaling five or six times the state’s annual IT project investment. Being a new idea in government, there was much angst during this process, but the success of the IT bond, which first began some 30 years ago, has been vindicated by the fact that Massachusetts last year adopted its fifth generation of the IT bond.

Since that time in the early 1990s, Massachusetts has financed most major IT projects through revenue bonds administered by the state CIO’s office. It’s a model that attracted significant interest across the country at that time and occasionally over the ensuing years, but unfortunately, other states have not followed on.

However, in Massachusetts, the IT bond is alive and well. Last year, my friend and successor several times removed, Massachusetts CIO Curt Wood explained, “We’ve had multiple variations of the IT capital bond program. We’re just finishing a program with five years of funding, and about $600 million that was invested into the Commonwealth. We’re about to file another bond bill for about the same amount, in the near future.”

And so they did, and then some.

Just one year ago my old boss, Governor Charlie Baker, signed “An Act Financing the General Governmental Infrastructure of the Commonwealth” authorizing $1.8 billion in capital funding for key investments in public safety, food security, AND information technology. This includes $660 million to support IT infrastructure needs throughout the Commonwealth, strengthening cybersecurity, and improving how state agencies serve their constituents.

If building computer applications 30, 40, or 50 years ago – which are still functioning today to an uncertain degree – has taught us anything, it’s that these systems are capital assets. So let’s treat them as such from a financial perspective. Whether funding takes the form of general obligation or lease-revenue bonds, we’ll let the Wall Street folks figure that out.

Now let’s not pretend that the IT Bond money is free. It will indeed have to be paid back in fact with interest, raising the total debt 10-20 percent over the length of the bond period of probably 5-7 years. But as we know, interest rates are still quite low. And while the Biden stimulus funding may put significant pressure on these rates, this payback period will fit nicely into a broad, workable, multi-systems legacy modernization plan over than same period. No need to go back hat-in-hand to the legislature each year to keep these major projects funded.

The important thing is that IT bonds represent a new approach – and a successfully proven approach to a problem that has become worse and worse in state government – to crumbling mission critical IT systems.

Whether it’s case management systems for benefit eligibility like unemployment, welfare or Medicaid, or child support and child welfare systems, plus enterprise financial and payroll systems, one thing is clear: their useful life cycles are dwindling. And that foreshadows continuing and future debacles like many states have seen during the pandemic, particularly with UI systems.

States’ annual general fund budgets can never hope to adequately address – both from a financial and a political perspective – the huge financial challenge represented by failing legacy IT systems. However, a multi-year IT bond with a comprehensive plan to fund these systems’ modernization could be a viable option for many states.

As U.S. Supreme Court Justice Louis Brandeis said many years ago, states are “laboratories of democracy.” Certainly, the Massachusetts’ experiment has been successful, and would be a valuable model for states across the country.

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John Thomas Flynn
John Thomas Flynn
John Thomas Flynn serves as a senior advisor for government programs at MeriTalk. He was the first CIO for the both the State of California and the Commonwealth of Massachusetts, and was president of NASCIO.