Businesses that contract with the state have already suffered because of delayed payments and cancellation of contracts. Now they’re bracing for more pain.
Gov. Arnold Schwarzenegger last week issued an executive order that retroactively canceled contracts and made deep cuts to contracts for the coming fiscal year. As a result, companies that do business with the state are getting whacked exceptionally hard.
One victim is Caro Minas, who owns an engineering and geotechnical consulting company in Burbank named Applied Earth Sciences. He hasn’t been paid in nearly six months for work his company has done on two state-funded groundwater refilling projects in Los Angeles County and it doesn’t look as if he’ll get his money any time soon.
“This is the first time in our 25-year history that we haven’t gotten paid by the state, and it really hurts,” Minas said.
State contracts make up about 10 percent of his company’s revenue. But in this recession, with private-sector work drying up, the situation is more of a hardship than it would’ve been in the past. What’s more, Minas has no immediate hope of getting more contracts from the state due to the failure of last month’s ballot measures.
He is on the leading edge of private contractors feeling the squeeze from the state as it grapples with a massive $24 billion budget deficit. That group is about to get much bigger because of the governor’s order canceling all state vendor contracts retroactively to March 1 and ordering each state department to chop 15 percent of their contracts for the upcoming fiscal year starting July 1.
The retroactive cancellation was issued to deal with a cash flow crisis. At some point in the next four weeks, the state is expected to run out of cash unless a budget is passed. In that case, the state would be forced to issue IOUs to employees and contractors for the first time since 1992.
The cancellation will hurt an estimated 12,000 vendor contracts, ranging from companies that supply office products to state agencies to engineering firms with multimillion-dollar contracts, according to State and Consumer Services Agency spokeswoman Amanda Fulkerson.
The state spends an estimated $9 billion a year on so-called vendor contracts that supply goods and services to state agencies, so a 15 percent cut for the 2009-10 fiscal year translates into about $1.3 billion in dollars that won’t flow to private suppliers and contractors.
This is especially worrisome for contractors because right now, “public sector work is the only game in town,” according to Tom Holsman, chief executive of Associated General Contractors of California, a group representing construction contractors. Homebuilding construction work tanked two years ago, while commercial construction projects slowed after last September’s market meltdown.
With so many contractors pursuing state projects, bids are coming in below estimated costs, Holsman said. Companies are bidding below cost in part to try to keep their work forces intact in anticipation of an uptick as federal stimulus dollars flow.
However, the magnitude of the impending state cuts will likely swamp any gains from stimulus dollars. “Companies are making some hard decisions right now about demobilizing their work forces,” Holsman said.
State contractors had a major scare in January and February as lack of progress on California budget talks threatened to cut off funding for hundreds of projects. The passage of a budget in mid-February resulted in a brief reprieve.
But it soon became apparent that much deeper budget cuts lay ahead as state revenues came in far below even the most pessimistic estimates. The failure of the slate of budget reform measures on the May ballot only compounded the financial problems, depriving the state of up to $6 billion in cash it could use for the 2009-10 fiscal year.
More layoffs
“With the defeat of the initiatives, we’re back to being very concerned about whether we’ll get any more state contracts,” said Mark Thurman, president of ARB Structures Inc. of Lake Forest.
ARB has built parking garages at both California State University Long Beach and California State University Northridge and had hoped to get more state university work. The collapse of private sector work has already forced ARB Structures to lay off about 300 of its 1,100 employees over the past year; if the company can’t get more public sector work, Thurman said he may have to cut more workers.
The pain is spreading beyond engineering and construction contractors. Rick Norris, owner of Ready2Protect Inc., a Lancaster supplier of ultraviolet detection equipment, said he has lost out on bids for state contracts because of intense competition.
“With this budget situation, I expect even fewer contracts to be available for companies like ours going forward, even if they are for essential law enforcement services,” Norris said.
The crisis has indirect effects as well, as companies that contract with local agencies lose work as the state withdraws money. Those effects could take on a much larger scale if the state diverts tax dollars for local governments to help close its own budget deficit.
In his latest budget proposal, Schwarzenegger has proposed borrowing $2 billion in property tax revenues and $745 million in gasoline tax money originally destined for local governments. If these diversions are approved, social programs and local road projects are expected to take some of the biggest hits.
Last week, a group of mayors headed by Los Angeles Mayor Antonio Villaraigosa descended on the state capital to try to minimize the diversion of local tax dollars.
At Charlie Chan Printing in Hollywood, Chief Executive Hamilton Chan said he recently had a contract to print manuals for the Los Angeles County Department of Health Services yanked away.
“I called up DHS and asked them if they had any problems with our work. They said no, our work was fine,” Chan said. “The problem was that the state had cut off funding for the program we were supplying materials for.”
