Education to drive state, local IT spending in ’07

Fallout from the Jack Abramoff lobbying scandal, particularly the increased scrutiny of federal contractors, could lead to restrictions that will hamper information technology providers seeking to do business with state and local governments, according to a new Federal Sources Inc. report.

“You might not have as freewheeling an environment as you might have enjoyed in the past,” said Ray Bjorklund, senior vice president and chief knowledge officer at FSI, a Washington, D.C., consulting firm that provides government market intelligence.

Surveying the IT landscape recently during the firm’s annual State of the States Briefing, Bjorklund said the unpredictability of this fall’s elections presents another challenge for technology vendors operating in state and local IT markets. “If there are programs tied to a particular administration, those are the ones you want to be careful about,” he said. FSI also delivered some good news during the briefing.

Several factors, including the pent-up demand for technology, will determine the overall health of state and local IT spending in the next 18 months, Bjorklund told attendees. State budget surpluses, population growth and urbanization are likely accelerators of state and local IT spending, he said. Those factors correlate to a strengthening demand for government services, pressure to modernize service delivery, IT consolidation and a need for more efficient health care delivery.

Factors that could slow IT spending include rising unemployment, stagnant business growth, fewer federal dollars for state and local initiatives, rising energy costs, governmental entitlement programs and inflation, he said.

Other signs indicate an impending precipitous drop in homeland security funding, which could signal the beginning of a slide for that market because homeland security would move from a national priority to an unfunded mandate, he said.

State IT spending in fiscal 2007 will total $23.7 billion, about 1.6 percent of states’ overall spending, FSI predicts. In sum, states will spend an estimated $1.48 trillion. Almost one-third of state spending supports education, which is an important part of the IT market. States will spend 21.9 percent of the total on K-12 education and 10.8 percent on higher education, the firm predicts.

Local IT spending is a $27.2 billion market — about 60 percent of which is tied to K-12 education — that has grown more quickly than state IT spending in recent years. That trend is expected to continue.

State and local IT spending relies heavily on grants for federally mandated programs, a source of revenue that drives approximately 25 percent of state and local IT spending, according to the FSI briefing. Among state and local IT markets, opportunities are expected to emerge in the next two years in disease control, juvenile justice, and state and local preparedness programs. Projected areas of contraction include public communications/IT infrastructure and distance learning.

FSI also projects growth in state and local governments’ consolidation of business activities — in areas such as enterprise single sign-on and identity authentication management — and more cooperative purchasing. However, consolidation will “leave some vendors out in the cold,” Bjorklund said.

Bjorklund expressed cautious optimism for near-term, nonfederal IT spending. “Things have gotten a lot better in the state and local market,” he said, but there are “dark and looming clouds in the economy.”

Pulley is a freelance writer based in Arlington, Va.