States can secure millions of dollars to replace aging IT systems but often can't fund the few thousand needed to understand why those systems no longer work, according to a new report from the Niskanen Center published this month. The report, based on a review of all 50 states and interviews with 20 state technology and budget leaders, identifies a fundamental mismatch between how governments finance temporary modernization projects and how they sustain the digital services those projects create. Without a way to keep improving services after initial funding ends, states risk repeating costly cycles of system replacement.
The research identified 22 states with dedicated modernization funds or formal IT modernization programs, including competitive grants, revolving investment funds, and capital accounts created specifically to support technology upgrades. The remaining 28 states rely on agency operating budgets, capital appropriations, internal service funds, federal funds, or project-specific appropriations. Among the 22 states with modernization mechanisms, most finance defined investments through project-based allocation and oversight rather than ongoing service improvement. Colorado requires further legislative approval to use unexpended project funds for work beyond the original scope, Georgia accounts for each funded project in a discrete account, and Maryland permits operations and maintenance costs only during the first 12 months after implementation. Several states explicitly limit how modernization funds can support ongoing operations: Texas prohibits using its fund to replace appropriations for operating and maintaining state technology, Louisiana limits spending to direct project costs, and Minnesota discourages using its statewide fund for maintenance and support.
The report describes a senior official in a state without a modernization fund whose program areas could justify major system replacements but couldn't secure modest funding to understand problems first. In one case, an agency responded by including more than 200 requirements in a procurement for a fairly typical commercial product, relying on detailed specifications because it lacked the time, capability, and funding to test assumptions first. The authors argue that sustaining digital services after initial investments requires four dimensions of institutional capacity: authority, meaning some institution has enough formal standing to set direction and commit resources; capability, meaning government retains enough internal expertise to direct the work; money, meaning the service has a recurring source of funding beyond the initial investment; and trust, meaning ongoing service improvement remains legible to the institutions responsible for funding and oversight.
The report explains that digital services don't fit neatly into how states typically divide technology spending between building systems and operating them. Capital appropriations, bonds, and federal matching funds can finance new systems or major replacements, while operating budgets pay to run and maintain them after launch. But work such as discovery, prototyping, and iterative development can be too small to qualify as a project yet still not treated as an operating expense, according to a senior California product official quoted in the report. States can finance a major build and keep the system running, but often lack a reliable way to keep improving it over time. Even when money is available, annual appropriations, staffing limits, and other constraints make it difficult to shift resources as needs change. The result is what the authors call the "Legacy IT trap": governments defer improvements because aging systems are difficult and expensive to change, and the longer they wait, the harder change becomes.
The report concludes that modernization funds can help states make better investments by funding discovery, making smaller investments as evidence develops, and releasing funding in stages rather than requiring agencies to define and finance entire efforts upfront. But they can't by themselves sustain the services those investments support. There's no single institutional model for sustaining digital services—responsibility may sit with a central digital organization, an agency team, or some combination. What matters is that someone has both responsibility for the service and the means to improve it. The next challenge, the authors write, is building institutions that allow better ways of working to survive changes in leadership and political priorities.