The measure, passed by Congress in early July, cuts about $1 trillion in federal funding to state and local governments over the next 10 years, primarily through Medicaid program changes. It also implements new mandates for enhanced eligibility verification, recipient work requirements and state matching funds.
The analysis, prepared by e.Republic President Dustin Haisler and Chief Innovation Officer Joe Morris, says complying with these mandates will likely force states to invest in new technology to automate processes, detect fraud, improve data integration, track compliance and more.
“It will take a lot of work to make sure safety net programs are supported in this new era,” Morris said in a July 30 webinar explaining the federal policy changes. “Tens of millions of dollars of compliance-level work needs to occur by 2026.”
The e.Republic analysis identifies multiple ways H.R. 1 impacts states and localities:
- Although some of the legislation’s biggest changes target health and human services programs, it will also affect other key areas, such as administration and finance, justice and public safety, environment and housing, and education.
- Many of the bill’s new mandates are unfunded, which will force states and localities to alter spending priorities. In some cases, governments will need to shift from discretionary modernization projects to meeting mandatory compliance requirements. Technology investments will emphasize operational efficiency and cost reduction.
- States and localities will need to rapidly figure out how to comply and how to reconcile existing budgets with these new realities. Financial constraints could drive renewed interest in multijurisdictional shared services, as well as greater demand for AI and automation, data integration platforms, cloud-based solutions, and advanced identity verification and management tools.
In addition, the new requirements clash with budget cycles for most states, which typically operate on fiscal years running from July 1 to June 30. “Most states have already passed their budgets, so there will need to be some reconciliation,” Haisler said.
However, H.R.1 did preserve several key tools used by local governments to finance IT projects and other initiatives. The measure maintained tax-exempt status for municipal bonds, a commonly used financing tool for city governments, and it raised the cap on state and local tax deductions, which improves local government access to capital for IT and facilities projects.
Meeting H.R. 1’s new mandates with constrained resources could also drive innovation around how states and localities procure and deploy technology.
Haisler and Morris predicted that states and localities will make greater use of shared services and public-private partnerships to get what they need. They also expect agencies to focus on total cost of ownership and cost predictability as they evaluate new technologies.
“Lots of innovation and resilience will come from these constraints,” Haisler said. “You’ll need to be creative and flexible.”
*e.Republic is Government Technology's parent company.
