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Construction Watch

Dec 1, 2003 12:00 PM, By EC&M Staff

The federal government shifted from a surplus of $127 billion in fiscal 2001 to a deficit of $374 billion by fiscal 2003, according to McGraw-Hill Construction. Many of the federal government's financial problems trickled down to the state level, and 45 states now face major budget deficits (click here to see chart). Ed Sullivan, chief economist for the Portland Cement Association, says the states may be facing a fiscal crisis, but money will still be set aside for construction.

“Some people immediately look at the magnitude of the deficits, which are estimated at $60 billion this year, and they automatically say there will be huge cutbacks in capital expenditures,” Sullivan says. “That's not really true because a lot of that funding is earmarked for construction projects.”

A portion of the tax money goes into protected funds for transportation and construction activity, regardless of whether or not a state has a budget deficit. The Portland Cement Association, which represents North American cement producers, performed a risk analysis of which states may cut back highway or building capital expenditure programs. Since cement use is an indicator of construction growth, the association was able to forecast the amount of public spending next year. According to its research, public spending will only decline 1% to a maximum of 1.5% in 2004, compared to predictions from other associations, which forecast a 5% to 6% drop.

“We know it's a problem, but when you dig into the numbers, it's not quite as bad as it looks from the surface,” Sullivan says.

In the down economy, many states made cutbacks and eliminated programs to balance the budget. According to a report titled “The Fiscal Survey of States” by the National Association of State Budget Officers, 37 states reduced 2003 budgets by a total of $14.5 billion, the largest cut since 1979. Three states — California, New York, and Texas — face the largest state deficits in the country (Map above). While surpluses might return for many of the states in 2004 and 2005, these three states will take a longer period of time to recover. When the economy was booming, California's state government added 55,000 state workers because they thought the revenue stream was permanent. After the dot-com bust, however, the state realized the influx of funds was only temporary, and as a result, budgets nearly disappeared overnight.

The problems facing Texas, New York, and California aside, the fiscal outlook for many of the other states is improving dramatically, Sullivan says. By the end of fiscal 2004, the combined state budget deficits could drop 50% from $60 billion down to about $30 billion. In the meantime, construction firms will be able to work off of a backlog of construction projects, Sullivan says.

“Budgets often get set well in advance of the actual construction taking place, so firms have plenty of work to do, even in down times,” Sullivan says.

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