Funding: Bonds and Investment Funds Help Agencies Modernize

In these final days of the fiscal year, there is a rush in some quarters to spend down fund balances. In some IT shops, this process is as close to a technology refresh cycle as there is.

More importantly, the new fiscal year - beginning on July 1 in most political subdivisions - reflects the realities of widening public-sector revenue recession. The first decade of the new century is limping out as it limped in: beset by budget woes. And it may be a better result than we have any right to expect - especially given local governments' nontrivial exposure to the subprime mortgage mess and their disproportionate reliance on once obscure auction-rate securities for supposedly inexpensive long-term financing.

They turned out to be anything but.

We've become accustomed to IT funding strategies that focus on institutionalizing an IT value chain in justifying new investments. This approach is necessary, but not sufficient in the current environment. In an earlier day, British Lord Rutherford famously quipped, "We have no money so we must think."

At the Center for Digital Government, we have been thinking about how to modernize without money. A new white paper called Be IT Resolved (available as a free download from the Center Web site) explores a handful of hybrid approaches to moving forward.

On the threshold of the new fiscal year, it seems appropriate to dedicate this back-page column to the proposition of public agencies using funds at hand to be their own venture capitalist.

Initial capitalization is a hard nut to crack. Without it, even the best ideas - complete with compelling business cases, feasibility studies and return on investment (ROI) projections - languish. Ironically the harder the times are fiscally, the more governments could use the next great idea. Of course, public agencies will never realize the operational and efficiency gains from systems they cannot afford to build. To avoid this dilemma, a dozen states have used bonding to raise capital funds for technology projects, while nine have created a technology investment fund.

Through its Office of Enterprise Technology, Minnesota is the most recent state to advocate "enterprise venture capital seed money" for system replacement and the attendant "business process re-engineering [and] technological innovation" through "loans to agencies for planning and predesign projects, or for development or modification efforts in emergency situations."

On this last point, "loan" is the operative word. Without the expectation of repayment to the fund, a couple of bad things will likely happen. First, the financial disciplines to deliver the project's hard-dollar benefits and the ROI are undermined, and the promised public value is not realized. Second, except those chosen for the initial round of funding, agencies that agreed in good faith to participate in the investment pools find themselves at the wrong end of a pyramid scheme, where they are left with no prospect of using the investment fund and diminished prospects the next time around in front of more skeptical legislators who also got burned by the process.

The current crisis is changing the conversation with funding authorities in unexpected ways, as in: If you cannot give us the money, can you make it a loan? Because we cannot make it alone.

Editor's note: This column appears as Make it Alone ... or a Loan in the May 2008 print edition of Government Technology.