As California Delays Payments, A VAR Feels The Pain

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The State of California's budget crisis has forced the state to start delaying payments, a situation that could become critical if a resolution is not found quickly, says a solution provider directly impacted by the move.

George Usi, president of Sacramento Technology Group, said the state has notified him that it is delaying payment on $240,000 for computer and database services.

"As far as the state controller is concerned, it has made a decision to implement what I call a '30-extra-days-to-pay' policy for vendors," Usi said. "So Net/30 terms become Net/60."

The move stems from a budget gridlock in California that could put the state $346 million in the red by the end of this month and as much as $5.2 billion in the red in April, according to the state controller's office.

As a result, State Controller John Chiang two weeks ago said that his office may have to delay some critical payments starting in February to preserve the state's cash flow and protect payments in certain areas such as education and debt repayments.

Those delays, which Chiang said in a statement might become IOUs, are affecting businesses, assistance to the needy, state services and tax refunds.

The move puts businesses, including IT solution providers, in a tight position now, but the impact will only grow the longer the delay, said Usi, whose company is based in Folsom, Calif., a suburb of the state capital of Sacramento, and whose business depends in large part on state contracts.

In the long term, the inability of the state to make timely payments will have a blossoming affect on businesses such as Sacramento Technology Group, Usi said.

"If you are in a government town, the government is not the only company you are dealing with," he said. "We also deal with private companies that deal with the state. So my business is impacted. Also, the state may delay payments to counties, and since we do business with counties, that's another indirect impact on us."

Sacramento Technology Group is more fortunate than many solution providers that do business with the State of California in that it has over the last year made a push to focus on services, Usi said.

"A lot of resellers come from the hardware side," he said. "Not me. I came from NTT Verio, and had experience in building a services business. We have an established base for getting paid in advance, and even taking credit cards. These are the types of things most resellers are not familiar with, but need to be."

For solution providers depending on hardware sales to the state, the situation is much more difficult, Usi said.

"We have a lot of companies supplying the State of California with renewable commodities, such as components," he said. "They're not going to get paid on time, they'll call their distributors and ask for help, their distributors will say no and they'll go out of business."

The situation may be even more dire for solution providers that get state contracts through certain special programs, Usi said.

"We're a certified small business, and so we get an advantage," he said. "Other firms have an even better advantage if they are owned by disabled veterans. But those firms do more on the low-margin commodity side and their margins are tiny. I don't know if they can survive delayed payments."

Sacramento Technology Group so far this year has only had to lay off one of its people, an administrator, because of the economic downturn, giving it a head count of 18 people. However, Usi said, unless a long-term fix to the state's budget woes is found, the situation will only get worse.

"If it lasts more than a few weeks, we anticipate a ripple effect that could impact us more," he said. "If it goes on for two months, it would be a severe impact. In six months, we may need more workforce reductions."

Next: The Tip Of The Iceberg For California

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