Small Contractors Suffer from State Budget Gaps

Most states have deficits, forcing some vendors to wait nearly a year to collect on bills, becoming unwilling lenders in the process

By John Tozzi

Illinois owes Thompson $470,000

Craig Thompson has seen his share of deadbeat buyers of the audio, video, and security systems he installs and maintains. He never expected his state government would be the worst offender. Illinois owes $470,000 to Thompson Electronics, some of it billed almost a year ago. This float to the state equals about 7 percent of Thompson's $7 million in annual revenues and has depleted nearly a quarter of his company's $2 million line of credit. "We might reach a point where we just can't do any more business [with Illinois] because we can't afford it," says Thompson (above).

As states struggle with shrinking tax revenues, they're squeezing contractors to bridge budget gaps. "The practical impact of a state's declining or delaying payments is to make its vendors unwilling lenders to the state," says Robert Metzger, a partner in Los Angeles with law firm Pillsbury. His clients received some of the $2.6 billion in IOUs that California handed out last summer. That money has since been paid off.

Illinois has $5 billion in unpaid bills to vendors and institutions such as school districts, the state comptroller reports. It's a spreading problem: State tax revenues are forecast to drop 2.3 percent this year, according to the National Governors Assn. For the budget year that begins July 1 in most of the country, 46 states face deficits—a combined shortfall of $112 billion, according to the Center on Budget & Policy Priorities. "You could see additional states having to do things like delay payments," says Nicholas Johnson, a director at the center.

The New York State legislature failed to pass a budget for the fiscal year that started Apr. 1, so lawmakers began passing weekly spending bills to keep the state operating. For eight weeks these "extenders" didn't include money owed to many contractors, though by early June, payments for work billed in April were going out. "If [contractors] are used to being paid in two or three weeks, it's probably six or seven weeks now," says Steve Stallmer, vice-president of government affairs of the Associated General Contractors of New York State, a trade group.

Painful as waiting for payments may be, tight budgets likely portend an even bigger problem for small companies working in the public sector: a dearth of new contracts. In New York, nearly $1.2 billion in public construction jobs that contractors have bid on since January have not been awarded because of the budget impasse, Stallmer says.

Back in Illinois, Thompson spends hours every week calling the comptroller's office, state agencies, and lawmakers. "Last week, after lots and lots of phone calls, we did get $20,000 from them," he says. "They just say, 'We'll put you on a list, and if we have money we'll pay you.' "

The bottom line: Some states don't have enough cash to pay bills on time, and floating loans to the government can wreck small businesses' cash flow.

Tozzi covers small business for Businessweek.com.

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