Exactly 12 months ago, California Builder & Engineer had predicted the possibility of "the perfect storm" arising in 2008 in California's heavy construction industry — if not the perfect one, then at least bad storms on three economic fronts: The Housing Slump; New CARB Regulations and High Fuel Prices; plus, the big State Budget Deficit.
In years past, we could be more confident in predicting where and when sectors were going to bottom-out. But things are much more variable and volatile, now. Much depends on whether the new President and Congress make a big commitment to infrastructure and public construction nationwide.
It is rare to find a pundit who sees an economic slowdown lasting less than 24 months. And there is no solid plan yet to steer us out of the situation we are in.
To revisit the major problem areas in 2009:
Big State Budget Deficit
California isn't the only state that is in trouble with money shortages to keep itself up and running. But it is the leader of the pack of 41 states seeking funds from the Federal Government. Governor Schwarzenegger acknowledges that California will be $40 billion in the red over the next 20 months, and can count on yearly budget deficits of $22 billion for years following.
As of this writing, no Federal help has been offered, and Governor Schwarzenegger had this to say about the California legislature that has yet to come to grips with the perennial budget problems: "Kindergartners." Californians hope they grow up soon and graduate with honors, so to speak.
At least a bright spot now is this: Five major bond issues concerning the construction industry in California were passed in 2006. Fortunately, money is now being allocated to State public construction contracts from the following:
Proposition 1A — Closed the loophole in Proposition 42, ensuring that gas tax revenues are used to pay only for transportation projects, not other programs.
Proposition 1B — The Highway Safety, Traffic Reduction, Air Quality and Port Security Bond Act. Provides $19.9 billion to make safety improvement on highways, widen roads, reduce congestion, improve public transit and improve anti-terrorism security at California ports.
Proposition 1C — The Housing and Emergency Shelter Trust Fund Act. Provides $2.9 billion for shelters for battered women, safe housing for low-income senior citizens.
Proposition 1D — The Kindergarten-University Public Education Facilities Bond Act. Provides $10.4 billion to build and modernize K-12 classrooms and expand the state's universities and community colleges.
Proposition 1E — The Disaster Preparedness and Flood Prevention Bond Act. Earmarks $4.1 billion to repair levees and improve flood protection throughout the state.
Shift To Public Works
All this has caused a rush by contractors to the public works bids. Caltrans, now gets up to 20-plus bidders on projects, where a year ago, the state would be hard pressed to find enough qualified bidders at all.
In addition, interest rates, construction materials, and labor costs have fallen sharply in recent weeks.
The Housing Slump
The trickle-down effect of foreclosed mortgages, slowdown of new housing construction, and lost construction jobs has hit California hard.
Last year, Michael Bobeczko, of Sukut Construction, one of California's largest grading contractors said, "The downturn in the residential market is going to affect the construction industry hard in 2008, especially the dirt-moving contractors. I think it is going to stay down for another year or two. A lot of people have a lot of equipment parked right now. It's tough to finance engine re-builds or buy new equipment if your equipment is parked; that's probably the biggest problem facing the industry right now."
That statement will remain unchanged for 2009.
New CARB Regulations and Fuel Prices
An interesting thing happened on the way to implementing California Air Resources Board (CARB) regulations: because of the downturn in the economy, lots of heavy off-road diesel equipment got sold out of state or got parked when new housing tracts halted.
Interestingly, this reduction of use and selling of old equipment has caused the construction industry to actually exceed CARB expectations for emissions reductions for 2009–2010, according to Bill Davis, Southern California Contractors Association's executive vice president.
Finally, fuel prices dropped dramatically. This is good for the short term but not for the long term, since state fuel taxes fill Prop 42 infrastructure coffers. If this keeps up, that well will be drying up fast.
Bottom line: These are lean times for California contractors. As of this writing, even public works projects were being threatened to be halted beacuse of an acute lack of cash flow in the current budget.
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