California Signs Budget Bills, But Channel Uncertainty Lingers

The state of California on Tuesday resolved its budget crisis with a package of bills to balance the budget, signaling an imminent end to the use of IOUs for payment and a return to normalcy, but doing little to quell VARs' uncertainty about the immediate and long-term future.

California Governor Arnold Schwarzenegger signed the bills after weeks of negotiations aimed at closing a massive budget deficit of more than $24 billion.

While the bills make it possible for the state government to operate during the current fiscal year, it spares few of California's citizens, as it includes massive cuts in many areas, including $9.3 billion in cuts to education, $3 billion in cuts for health and human services and cuts in general government spending of $1.7 billion.

Those cuts, plus a wide range of unknowns about when the state will release funds for existing and new projects or for paying back IOUs, have solution providers still concerned about prospects for business.

John Riley, co-owner of Sacramento Technology Group, a Folsom, Calif.-based solution provider that does a significant amount of business with the state, said he has already received one IOU from the state, and it was rejected as payment by his bank.

Fortunately, Riley said, that IOU was not big enough to impact business. However, he said his company will pick up a second IOU, this time for $400,000, sometime on Wednesday.

"We'll try to deposit it," he said. "We'll see what happens."

While the state's IOUs come with an interest rate of 3.75 percent and a promise to redeem them in cash on October 2, whether that will happen depends on when the California Controller's Office actually gets the money, Riley said.

"The next trick is, does the budget include paying off the IOUs?" he said. "We'll have to see."

Western Blue received IOUs and had no trouble depositing them, said Terry Joslin, president of the Sacramento, Calif.-based solution provider that gets between 60 percent and 70 percent of its business from the state of California.

However, no one is sure when the state will start paying its suppliers with cash or when an IOU will be redeemed, Joslin said.

Joslin pointed to a June 12 budget letter from the California Department of Finance that states that all government departments must show the Department of Finance plans for a 15 percent cut in new purchases before they can enter into any new contracts, amend existing contracts or conduct specified procurement activities.

"In the old days, departments could handle this by themselves," he said. "They might have had to submit a plan for financing. But now, they have to submit a plan for the IT projects."

A spokesperson for the California Controller's Office wrote in an e-mailed response to questions from Channelweb.com that from July 2 through July 28, it issued 221,908 registered warrants for $1.13 billion.

"IOUs will continue to go out until the controller determines enough cash is available to cover all the state's payments. We do not expect to receive cash flows from the Department of Finance until next week. Once received, this office will work around the clock to crunch the numbers and determine when IOUs can stop," the spokesperson wrote.

Solution providers also are concerned about how the state's budget crisis impacts business with private companies and public entities that depend on state money for part or all of their budgets.

These include hospitals and other health-care facilities, prisons, educational institutions, county and local governments, and so on.

"Those organizations are still trying to figure it out," Riley said. "And when they figure it out, we'll figure it out."

Joslin said he is seeing sporadic cuts from his education and health-care customers.

"Some of the cutbacks are getting canceled by the federal stimulus money," he said. "Everybody is starting to determine what they'll be getting. And, believe it or not, some of the poorest schools are getting the most funds."