State Suppliers Go Unpaid in Budget Crisis

SACRAMENTO â€”  For 30 years Harold Epstein’s company has had a contract with the state to provide food to prisons, youth authorities and mental institutions, but in mid-July Epstein did something he had never done before.

He stopped delivering his products to the state.

“With me it’s the same as with the people I buy from,� said Epstein. “You don’t pay me, you don’t get it.�

Epstein’s company, San Jose-based Bernard Fine Foods, is one of more than 95,000 businesses, corporations and nonprofit organizations that provide goods and services to the state but have not been paid since July 1.

While the state’s use of IOUs has commanded attention during the 37 days Gov. Pete Wilson and the Legislature have failed to reach agreement on a budget, it is the thousands who have gone unpaid who are hurting most.

From the family-operated auto parts store in Amador County to the utility giant, Southern California Edison, nearly every enterprise that does business with the state has been forced to pay a stiff economic price for the political indecision.

Under California law, vendors are not eligible for the IOUs the state has been issuing since July 1 to pay employee salaries and meet other obligations until a budget is approved. Controller Gray Davis said he can write IOUs only for those bills that courts order paid or that state law or the Constitution require him to pay. There is no legal authority, he said, to pay vendors when there is no state budget.

Few providers have followed Epstein’s lead and cut the state off, but as California enters its second month without a budget, Davis questions how long they can continue to hold out. “Vendors understand that the state of California will eventually pay its bills but many small vendors simply don’t have the staying power to extend us unlimited credit,� he said.

Indeed, small businesses across California report having to lay off employees, borrow heavily from banks and forgo paying their own suppliers while the state puts off its obligations.

In Chinese Camp, Richard Ficker, president of Sierra Foothills Provision Co., a firm that provides processed meats to state prisons, hospitals and youth authorities, stopped buying raw materials about two weeks ago and cut his 30 employees’ workweek from five days to three. Ficker, whose company is owed $500,000, said so much of his capital is tied up in the state account that he doesn’t have enough to buy materials to service other customers.

“If I don’t see a budget forthcoming in the next week we’ll have to make a decision whether to begin to lay off people full time,� he said.

At Santa Cruz Poultry, which also supplies state institutions with meat products, owner Richard Johnson said he was forced to stop paying his suppliers when his “credit line maxed out.�

Davis said such stories indicate the domino effect of the crisis. As companies fail to get their checks from the state, they in turn have not been able to pay their suppliers and the economic pain spreads down the distribution line.

“We’re in an awful fix,� said Elizabeth Fallquist, owner of Leader Steak and Provision Co., a Los Angeles business that supplies several other companies that have direct contracts with the state. To make matters worse, Fallquist said, businesses are absorbing losses at a time when they are already struggling to keep afloat in a weak economy.

Even more severe than the impact on businesses is the impact the crisis is having on some nonprofit organizations that provide services for the state’s sick and needy. California’s 26 independent living centers, which help elderly and disabled clients live in their own homes rather than in nursing facilities, have not received any state reimbursement since July 1.

Norma Vescovo, president of the California Foundation for Independent Living Centers, said most of the facilities have cut back to skeleton staffs or are planning to after Aug. 15. She said two or three are “talking about closing their doors.�

“This budget has just turned people’s lives around,� she said.

As the budget stalemate continues day after day, the anger in the business community deepens. Business people are divided on whether to blame Wilson or the Legislature for their predicament. But they are unanimous in one belief--the wrong people are being forced to suffer.

George Gamar, whose Orange County Cold Storage in Orange is owed more than $400,000 and has already laid off four employees, said he saw a newscast that showed Senate President Pro Tem David A. Roberti, Assembly Speaker Willie Brown and Wilson emerge smiling from a budget negotiating session.

“I almost threw up,� he said. “They are smiling and laughing just when I’m trying to see how I can manage another day.�

One contractor, Margaret Swift of Amador County, became so annoyed over the state’s failure to pay bills owed her auto parts store that she has refused to pay sales tax. If the state cannot pay her what she is owed, she said, she won’t pay the state what she owes it.

Wilson said the woman would be penalized for not paying her taxes. “A taxpayer cannot choose to not pay taxes any more than I can choose not to obey laws,� he said.

Epstein said he reluctantly made his decision to stop delivering to the state but considered it a matter of principle. He did not understand why he and other small-business owners should pay for what he calls the “childish� behavior of the governor and the Legislature.

“Why should I put myself out, they don’t care,� he said, noting that the state never notified vendors they would not get paid until a budget was approved.

Both Gamar and Davis said the impact of the budget crisis will be felt long after a final spending plan is approved.

Davis said the state will have to pay millions of dollars in penalties to contractors under California’s prompt payment law when it begins paying its bills.