Severe drops in tax revenue have I.T. chiefs in all but a half-dozen states facing dismal budget prospects. That means state CIOs across the country must cut spending for new projects, limp along on outdated and costly legacy systems, and convince tight-fisted lawmakers that some IT investments really will pay off.

"The choices available to us are limited and uniformly unpleasant," says Clark Kelso, CIO of California, where the deficit could reach $26 billion for fiscal 2004. "Whether we cut state services and adopt revenue enhancements, virtually everybody will hate it. Any plausible scenario will involve deep cuts in state programs and services."

States started to feel the impact of the economic slowdown in 2001, and it hit in full force by 2002, when 37 had to prune nearly $13 billion from existing budgets, according to the National Association of State Budget Officers. Most states are revising current budgets, and CIOs won't know for months exactly how much they'll have to spend in the coming budget year, since most of their fiscal years begin July 1 and final spending decisions aren't made until close to--and in some cases well beyond--that deadline.

"I'll find out when everyone else finds out," says Carolyn Purcell, executive director for information resources in Texas, which is grappling with a $1.8 billion budget shortfall for its current fiscal year and is nearly $10 billion short in a two-year budget that will take it into June 2005.

State governments, on average, allocate 4% of their budgets to IT. Unlike the federal government, which can dole out more money than it collects, most states require balanced budgets. Even when budgets are finalized, it's not always clear what the impact on IT is because many IT expenditures are tied to specific programs or projects that the IT organization doesn't control.

Whatever happens, state IT managers expect to go forward with less money and fewer workers. Many states are likely to follow the example of Connecticut, which recently laid off 120 IT workers, 8% of its IT workforce, and Ohio, which has let go 92 tech people, 22% of its central IT group. An InformationWeek Research survey last month of 200 IT managers found that nearly a third of state government IT managers say they expect job reductions this year, and only 4% will do any hiring.

Even states that aren't laying off workers have looming problems. California CIO Kelso says his main challenge is a 9-month-old hiring freeze that could cause problems if it continues, since nearly a third of his IT workforce becomes eligible to retire during the next five years.