Budget worries prevent more IT modernization, survey says
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By
Chris Teale
State and local leaders want to modernize their legacy systems, but uncertainty over federal funding is stymieing their progress, an EY survey shared exclusively with Route Fifty found.
The U.S. Department of Labor’s cancellation of grants to help states modernize their unemployment systems stands as an indicator for many of those governments of how federal funds for state technology projects will likely dry up. And based on a recent survey, budget worries are weighing heavily on state IT leaders.
A survey by EY shared exclusively with Route Fifty before release found that 56% of tech leaders said reducing costs is a top priority, while 54% said cybersecurity is their top goal for the next fiscal year. Modernization came in as a lower priority, as 47% said it was their most important goal for the year.
Meanwhile, the survey also found that the use of artificial intelligence among state and local agencies has roughly tripled from 13% five years ago to 45% now, while generative AI’s use has grown to 39%. Respondents said some of their biggest priorities for the technology this year include employee training and upskilling; comprehensive strategies on implementation and usage; and building public trust in government use of AI.
But 78% of the 300 state and local IT leaders surveyed said they are concerned about the lack of clear government regulations or standards around AI development, while 82% said they are concerned that AI will make cyberattacks more sophisticated.
The findings come amid uncertainty about the future of federal funding, which often helps states and localities pay to upgrade their legacy technology. And while AI adoption continues to surge, it appears to be doing little to temper the wider concerns about whether federal cutbacks and the end of various programs’ funding — like the infrastructure law — will impact governments’ ability to modernize.
“States are having to self-fund more projects going forward,” Chris Estes, U.S. state, local and education market, finance, operations and technology leader at EY, told Route Fifty in an interview. “The whole spirit of modernization is important, and agencies need to do it, but the cost and how they fund it is going to be something they're going to have to contemplate in the coming years.”
Instead, Estes said the modernization push, which includes upgrading legacy systems, moving to the cloud, rethinking how to use data centers and updating public-facing websites, might look more like what he called “currentization,” where states aim to make their legacy technology last longer. That way, he said, they can push off upgrades as long as possible until the federal funding situation becomes clearer. Tough choices are ahead, however.
“There's never enough money in the state to fund everything that needs to happen,” Estes said. “States are different than the federal government in that almost every state has a balanced budget amendment, so they have to balance their budget. If they don't have the funding in that funding year, then they can't do the program. There's always hundreds of things that states want to do, and they only have funding to do 20, hypothetically. They have to make tough choices.”
AI adoption will play a role in the coming year, based on the survey’s findings, but states are clearly concerned about the data privacy and cybersecurity risks. Investing in AI now could help states, Estes said, as it could help speed up and automate many of their back-office processes. State leaders already see plenty of opportunities to streamline many things using AI, including drafting communications, analyzing grant applications, conducting procurement and other “low-hanging fruit,” Estes said.
“Most states are running a deficit in state employees, they don't have enough, and so they can use AI to close that gap on some of the areas where state employees can't perform the functions,” he said. “It frees up the state employees that are there to do the more high value, human assisted work, and let the AI do the more repetitive tasks that it's actually good at.”
Estes said he expects federal funding to become much more certain in the coming weeks and months, and that states won’t be stuck in this financial “holding pattern” for the entirety of President Donald Trump’s term. If Congress manages to pass Trump’s “One Big, Beautiful Bill,” which contains many of Republicans’ priorities, that will provide more clarity, he said.
“I don't think it'll be this undoubted uncertainty for four years,” Estes said. “I think it's uncertain until this large bill either passes or doesn't pass through Congress. If it does pass, states will be able to manage their budgets around that certainty that will come. It's just a matter of, what does Congress do with the bill?”