Already, the state has asked Washington for TARP funds, loan guarantees and advance payment of its general purpose economic stimulus funds. Congress and President Obama will provide some help but not enough. There are 49 other states facing a combined deficit of over $100 billion in FY 10. The President and congressional leaders know that they do not have the support to enact another spending program that adds heavily to the federal deficit – already up four-fold from a year ago. Spending cuts are inevitable in California sometime this summer. Public employees and social programs clearly have top priority with the California legislature so capital spending will take a relatively large hit. School renovation and expansion will be cut to keep most of the teachers.

California has failed to learn that raising taxes to support public jobs and social programs only gives the illusion of redistributing income for a few years. What it does is redistribute people. 144,000 (net) people moved from California to other states in the year ending June 2008. 1,378,000 have left since 2000.  The exodus probably increased from 2008 to 2009 and will get even bigger next year. Some of the public construction work that had been expected in California will now be done in nearby states.

Where is the tax revolt likely to appear next? The top candidates are clearly New York, New Jersey, Maryland and Illinois which are all experiencing rapid out-migration, huge budget deficits and a California style preference for public employees and social programs financed with high taxes on high income residents.

What happened recently in Michigan illustrates how deeply public construction can be cut when spending cuts are the only available option to balance the budget.  The demise of the auto industry forced the state to repeatedly cut public capital spending over many years.  From 2003 to 2008, the value of Michigan construction starts for civil construction, public buildings and education dropped 60% compared to a 23% increase for the national total.

While the California economy is now stronger than the Michigan economy, California’s budget deficit is much worse than Michigan experienced. California may be forced for several years to make public capital spending cuts as deep as Michigan has made in recent years.

Michigan also illustrates how public spending cuts spill over into private construction.  While budget constraints forced a 60% drop in the value of Michigan construction starts for civil, education and government building projects from 2003 to 2008, the value of starts for the balance of construction fell 55% compared to a 23% drop in the national total.

Reed Construction Data’s construction spending forecast for the next few years is modest compared to previous recovery periods because California and few other large states may join Michigan on the disabled list.

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11/06 - Contractors cut 62,000 more jobs in October, mostly for nonresidential building work

11/03 - Federal highway funding still “temporary”

11/02 - Housing gets another boost from Washington

10/30 - Initial jump in GDP growth will ebb

10/29 - Two cities illustrate divergence in regional economic growth

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