State and local a 'tough market'

Federal Sources Inc.

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In the next two years, state and local governments will increase spending on information technology by 1.8 percent, but few new projects will be in the pipeline. And IT companies expecting homeland security to be a "bonanza" will be disappointed, according to forecasts by a market intelligence firm specializing in the public sector.

"It's going to be a tough market," said Jim Kane, president and chief executive officer of Federal Sources Inc., during the firm's annual State of the States briefing March 4 in Washington, D.C. He added that most governments will focus on enhancements and modernization efforts for productivity gains and improved efficiency.

The company is forecasting that IT spending will increase from $40 billion this fiscal year to $40.7 billion in 2004. Projected spending in fiscal 2005 is $41.5 billion.

That growth is "significantly lower" than what FSI projected last year, due in large part to massive state budget deficits that may total nearly $70 billion next year, procurement trends, and shifting policy and spending priorities, Kane said.

As evidence, he said his company tracked about 500 state projects that hadn't been released for competitive bidding yet and found two-thirds were put on hold. Also, 18 of the 37 states that have submitted budgets so far have deficits of 10 percent or greater. This time last year, he said only six states out of 42 were in the same boat.

Having already dipped into rainy day funds and instituted across-the-board cuts, states are now facing more difficult choices, such as reducing local aid, furloughing employees, increasing fees, enacting early retirement programs and privatization, he said.

Gubernatorial state of the state speeches have been showing more focus on fiscal stability, becoming operationally efficient and stimulating state economies, Kane said, so states will be using technology investments to streamline government operations and achieve greater efficiency.

For fiscal 2004, state funding priorities include health and human services, finance and administration, and education. However, Kane said although there is high public demand and a lot of attention paid to the justice and public safety sector, funding for that market is uncertain. However, he said that might be just an anomaly.

There will be homeland security IT spending, but the market is fragmented, he said. By 2005, such spending will represent almost 5 percent of total state and local IT spending. Homeland priorities may center on secure integrated communications systems, bioterrorism preparedness and criminal justice integration systems.

"This is not the panacea," Kane said, adding that vendors should keep the homeland security market in perspective. "It's good solid business. We just don't see the funding there."

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