Apparently one way the Daugaard Administration hopes to save money is by making it cheaper to pay its bills late.
House Bill 1050, requested by the Bureau of Administration, amends provisions of Chapter 5-26, the “Prompt Payment Act.” Under current law, if a state agency takes longer than 45 days to pay contractors, then, absent other contractual provisions, the contractor gets 1.5% interest per month, starting on the 30th day after the contractors delivered their goods and/or services. Unpaid interest is compounded every 60 days. HB 1050 changes that plan three ways:
- The default interest rate on late payments become 4% per year.
- The interest does not compound.
- The interest tolls (I think it stops adding up) the moment someone files an action disputing the amount due or alleging breach of contract.
Now the third change may not be a big deal, since SDCL 5-26-5 already says the Prompt Payments Act doesn’t apply if there’s a dispute. But HB 1050 also extends the time state agencies have to initiate disputes from 10 to 30 days after receipt of contracted goods and/or services and invoice.
HB 1050 has the greatest impact in the numbers. Without messing with compounding, the current 1.5% monthly interest rate on late payments is an 18% annual rate. The state is cutting its default interest rate on late payments by more than three fourths. Add compounding, and let’s consider the foot-dragging savings if the state hires a contractor to do $1 million worth of work:
| status quo | HB 1050 | ||
| Amount due | $1,000,000 | $1,000,000 | |
| Monthly interest rate | 1.50% | 0.33% | |
| Yearly interest rate | 18.00% | 4.00% | |
| Compounding interest | every 60 days | none | |
| Interest due if late by… | HB 1050 saves… | ||
| 1 month | $15,000 | $3,333 | $11,667 |
| 2 | $30,000 | $6,667 | $23,333 |
| 3 | $45,450 | $10,000 | $35,450 |
| 4 | $60,900 | $13,333 | $47,567 |
| 5 | $76,814 | $16,667 | $60,147 |
| 6 | $92,727 | $20,000 | $72,727 |
| 7 | $109,118 | $23,333 | $85,785 |
| 8 | $125,509 | $26,667 | $98,842 |
| 9 | $142,391 | $30,000 | $112,391 |
| 10 | $159,274 | $33,333 | $125,941 |
| 11 | $176,663 | $36,667 | $139,997 |
| 12 | $194,052 | $40,000 | $154,052 |
On a bill paid just one month late on a million-dollar contract, HB 1050 would save the state $11,667 on the late interest it would accrue under current law. Dilly-dally for a year, and HB 1050 would save the state over $154,000 in late fees, more than 79%.
HB 1050 makes similar changes to the default interest payments imposed on state contractors in paying their subcontractors. So some slowpoke businesses could also save some money. But in today’s economy—heck, in any economy—are agencies and businesses who don’t pay their bills on time the first outfits who need a break?
I have no idea how often the state is late on its contracts or how many contractors got how much in interest from delinquent state agencies. I would hope the answers are never, zero, and zero (and as your next Governor, I promise that will be the case! says everyone running for Governor). But in principle, HB 1050 appears to be saying that our state budget is so tight that state government needs to stiff the businesses it’s already stiffing.
You should find out how often our government is slothish in paying its bills. Deadbeats need to pay their bills, and our government is given money to pay theirs so if they are late it is because of laziness or general meanness. Find out for us, Mr. H. How much sloth is there?
Ripping a page out of businessman Donald Trump’s paybook: over 3,500 lawsuits against him over the past three decades — most of whom are contractors who say Trump or his companies refused to pay them. “The actions in total paint a portrait of Trump’s sprawling organization frequently failing to pay small businesses and individuals, then sometimes tying them up in court and other negotiations for years. In some cases, the Trump teams financially overpower and outlast much smaller opponents, draining their resources. Some just give up the fight, or settle for less; some have ended up in bankruptcy or out of business altogether.” Real classy. https://www.usatoday.com/story/news/politics/elections/2016/06/09/donald-trump-unpaid-bills-republican-president-laswuits/85297274/
South Dakota has always been notorious for not paying their bills on time. That is a cold hard fact. So much so that smart contractors raise the cost of what they produce to offset the sloth (great word Mr. grudznick). All that means is that the cost of doing business with the state makes for an even higher bid. Roypublicans like to think they are getting the most bang for the taxpayer buck, not hardly.
I’ll keep an eye out for a list of late fees in past fiscal years.
I learned from an eager reader that the feds have their own Prompt Payment Act, passed in 1982 (I knew this sounded like a Reagan idea!). It authorizes the Secretary of the Treasury to set an interest rate each fiscal year based on the average rate during the preceding fiscal year. This year, that federal late-payment penalty rate is 1%. Our 18% rate appears to have been enacted in 1984, when interest rates were much higher. So it is possible we will hear state bean-counters argue that dropping the rate to 4% simply brings the interest down to current market rates.
But if that’s the justification, I would still ask why the state deserves any break for late payment? The fact that interest rates are low for regular investments and loans doesn’t change the fact that we as a state should always pay our bills on time. We’re not just paying businesses back for the money they lost by not being able to put their payment in the bank or the stock market; we’re paying them for failure to live up to our promise to pay on time.