State and local government IT spending in the United States is projected to total near $120 billion in 2021 – up about 10 percent on a year-over-year basis – and rising to $122 billion in 2022, according to figures published by Government Technology earlier this month.

With 46 states having released budget data in July, plus a clearer view developing for allocations of Federal stimulus funds for state and local governments, the SLG spending trends are coming into greater focus.

During an August 11 briefing on the data, eRepublic’s chief innovation officer, Dustin Haisler, and his deputy, Joe Morris, voiced optimism about the data. “You can see that that market growth we’re flirting with is $119 billion, but it’s actually possible we can exceed that,” said Haisler.

While the state budgets are fairly solid indicators, a moving target has emerged reflecting Federal stimulus funds and COVID-19 impact. It remains unclear where the Federal infrastructure bill – approved by the Senate but still awaiting debate in the House – will finally land, and the recent COVID surge has clouded the picture as well.

“But now we’re starting to see all of that will have an impact, so it’s very possible we can hit that top ceiling where we see a 10 percent growth rate in our tech number, pushing that to run over $122 billion,” said Morris.

Federal Stimulus Impact

There’s a lot of excitement about the Federal stimulus funds coming to states. “It’s a blessing, but it’s not a blessing without strings attached to it, and there’s a bunch of reporting requirements that come along with these Federal funds that you all should be paying attention to,” said Morris. Not to mention the conflicting agendas either at the legislative or gubernatorial levels.

One of the biggest challenges is internal competing priorities for these funds. “When you look at a funding stream that can be flexible – which means it can be used for technology or can be used for public health – it can be used for infrastructure, you got a lot of parties in that mix, trying to get the maximum out of those funds,” he said.

Regarding the new state budgets, most have enacted increases, both in their spending and revenue, and obviously what’s pushing them is the Federal funds. “We’ve got funds that came at the end of December of last year, they’re still having an impact, and of course we’re just getting started with the American Rescue Plan Act,” said Morris.

States are pursuing the largest increases in education – one of the major benefactors of Federal funds over the last year – specifically in the K-12 category. “If you look at the Federal funds, we’re talking about hundreds of billions of dollars of Federal funding, and we’re seeing increases at the state budget general fund level as well.”

There are also increases in Medicaid, reflecting a substantial increase in Federal funding as well from state funds, and slight increases in corrections that also reflect general fund budget allocations. If the Federal funding side is added, the biggest benefactors affect health and human services, K-12 education, plus anything to do with broadband, and then transportation infrastructure.

State-Specific Increases

Plus, there are state-specific initiatives including a $28 million tax modernization effort in Colorado, and public safety developments out of the state of Washington. California alone has dozens of new IT projects in its budget.

“These are a couple snapshots of projects but you can find similar projects in many states, plus there are strategic transportation plans you will see as these agencies begin to plan a ramp up for this infrastructure bill that’s coming. They know there’s going to be this wave of projects coming into water and wastewater, transit and transportation agencies, so you’re starting to see the intention and focus shift there as well,” said Morris.

Of course, there’s also the continuing 800-pound gorilla in the room. “We still find ourselves in the middle of the pandemic, so a lot of funding is in there for health care transformation. Nonetheless, the budgets are healthier than anything we’ve seen in a number of years in terms of the volume of modernization projects that are out there,” said Haisler.

The key takeaway from the market update is there are widespread tax revenue gains creating a rosy picture when it comes to where we find ourselves today, and that outlook is boosted up further by the American Rescue Plan and the other stimulus packages that came before it. And in addition, there’s more to come with the infrastructure bill when and if that clears Congress. A veritable glut of riches, so to speak.

Lessons of the Past

What could go wrong? Morris and Haisler mentioned one scenario – what will happen when the Federal largesse ends. That’s a valid question, especially as capital investment will require future maintenance and operations costs that are easy to overlook in the glow of initial funding. State and local governments will have to take this into consideration during the fat year or two ahead.

Another issue going unmentioned, however, and one I’ve always been wary of since my CIO days, especially in California, involves vendor support. I’ve written about it before. Back in the 1990s, the Feds were providing billions for states to create new case management systems for child support enforcement – a good thing on the surface.

As was expected, there was keen participation as states sought to take advantage of the Federal monies before it was all spoken for, and the push gave a jump-start to dozens of statewide automated child support systems or SACSS projects, as there were known.

This scenario fostered a series of unforeseen consequences whereby so many new SACSS projects were in development at the same time that the then-limited and esoteric industry experience and capabilities in this subject area were soon exhausted. In addition, in a well-intentioned effort to keep costs down with a systems replication scheme, the Feds required states to utilize systems already financed in other states as a “transferred” application engine for their own jurisdictions.

The results were predictable, as they usually are in hindsight. Vendor SACSS project teams looked very good on paper and particularly on proposals. However, the often-applied tendency of industry firms to include their best qualified and most experienced teams as key personnel on multiple and concurrent proposals meant that many state projects were shortchanged.

As for the systems replication scheme, in California’s case, our SACSS project was required to be a transferred system used in New Hampshire. The Granite State’s system serving a state with just three percent of California’s population proved fundamentally unscalable.

These two factors – a rush by states to begin their SACSS projects and claim their share of Federal funding – plus a bizarre Federal technology transfer system stipulation proved the downfall for many state projects, and thus a lesson.

Modernization of all these legacy systems – including ones with specific Federal funding incentives – is in everyone’s best interests especially to avoid the tragedy surrounding the failures of state unemployment insurance systems or other mission critical benefit applications.

However, to avoid the failures of the past, big modernization efforts must be undertaken with careful consideration, and close collaboration among the Biden administration, Congress and especially the states.

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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.