Small contractors suffer from state budget gaps

PEORIA, Ill. – 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.

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 Association. 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 and 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.

Read the rest of this story at Bloomberg Businessweek.