As California Delays Payments, A VAR Feels The Pain

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

The state controller's office has no idea how many IT companies will be affected by the move to delay payments, said Garin Casaleggio, deputy communications director for the office.

"We don't maintain an inventory, we just make sure the bills get paid," Casaleggio said. "But I can say it's far too many, without a doubt. We got into a situation where the controller has been warning the governor that the cash problem is coming. Now we're here. It's a totally regrettable decision."

The controller is interested in righting the situation, Casaleggio said. "But at a time when everyone is talking economic stimulus, this is an anti-economic stimulus," he said.

The state's budget situation is falling hard on small businesses, Casaleggio said. "A lot of these small businesses will have to survive by tapping into their reserves, if they have them, or tap lines of credit," he said. "A lot will have to take drastic measures. The hands of the controller are tied. A lot of people will be hurt."

The state's delay of payments is different from issuing IOUs, which would be even more harmful to California's economy, Casaleggio said.

"We're trying to avoid IOUs as much as possible," he said. "Delays still maintain the payments for education and to Wall Street. But if they became IOUs, it puts a number on them. Putting IOUs on paper means they will get paid before education and Wall Street. The delays cause a lot of hardships. But it saves a lot of trouble compared to IOUs."

For Sacramento Technology Group, the move by California was the second hit its business took this year from the economic downturn.

The company also received notice that its supplier of financial credit, the financial credit arm of Textron, was closed by its parent company due to the economic downturn. The company has since signed with two other financial companies, and is working on identifying others with which it can work, Usi said.

For other solution providers facing this situation, it is important to get on the phone as quickly as possible and work with suppliers, Usi said.

"I got on the phone with all my partners and distributors and told them the situation," he said. "Most responded with help. Especially Juniper. No wonder they get all those awards. The only problems I had were mainly with vendors who don't go through distribution, and half of them helped us out."