Q. Our state government is facing a multi-billion dollar budget shortfall this year. I understand that if we stop paying all of our bills (e.g., suppliers, government employees, etc.) right now for 90 days and move everyone to 90 day terms instead of the current 0-60 day terms, we can push most of the shortfall into next year, push some of next year’s expenses into the following year, etc. What do you think?
A. While a unilateral approach of this nature may very well push much of this year’s budget shortfall into next year, the near term economic and political disruption could be big:
* Many government employees may not have the financial cushion to go 90 days without pay while this new payables system is implemented
* Some vendors to the government may not have the financial cushion to have their receivables expand from 45 to 90 days
* Government funded 3rd party programs for the disadvantaged will probably suffer if they go 90 days without funding
* Near term, the implementation of this approach will likely result in layoffs and other issues that negatively impact unemployment benefit and Medicaid budgets
* Long term, vendors who can will price 90 day receivables into their bids for government contracts; they might even price in 120 day receivables if they think the government will arbitrarily extend payment terms further during the next budget crisis
* The people negatively impacted by this approach are voters, they may not react kindly
More palatable alternatives to extending payables might include across-the-board wage cuts to government employees, offering vendors the choice of discounting their bills for on time payment or extending payables to 90 days, and selected program cuts with associated layoffs. Cutting programs is hard to achieve politically – but delaying this month’s payroll by 90 days while a new payables system is set up seems hard too.
