Construction Industry Forecasts

State law requires state budgets to be balanced so the currently projected deficits will be eliminated in the next few months.  This ugly process will result in large tax increases, massive spending cuts, including layoffs and pay cuts, and tens of billions of dollars in temporary accounting tricks which will have to be reversed the following year. As the economist in the Michigan budget office in the early 1970 during the first oil embargo recession I can assure you that the bag of tricks is not yet completely empty.

Four states account for nearly a third of the budget deficit for all states in the next fiscal year. Currently the projected deficit for FY 2010-11 is about $13 billion in California and Illinois, $11 billion in New Jersey and $9 Billion in New York State. The words “bond default” and “bankruptcy” are now being widely heard in these states. One way or another, the deficits will be closed.  But the cost will be lower bond ratings and higher borrowing cost, which will spill over in local government borrowing cost, and large construction funding cutbacks. The on going exodus from these states will accelerate reducing the need for private building space and facility capacity.

Each of these states has the same unsustainable governing model. They hire too many people. They pay far higher than private sector wages.  They let employees retire too soon and they pay too large a share of employees’ lifetime medical expenses. They also excuse too many people from paying taxes, tuition, rent and healthcare expenses. Earmarks, or special legislative favors to political supporters, are frequent in these states than in others. If these problems are not substantially dealt with in the next few months, economic recovery will be much delayed in each of these states.

What are the prospects for this happening? Each of these states has an accidental governor who replaced a governor drummed out for ethical or financial abuses.  The state legislatures are the barrier to financial reform.  The prospects for fixing the financial management problems soon are slim.  New York State is still planning a 4% raise for state employees on April 1st. The California budget plan includes the fantasy of getting an $8 Billion gift from Washington. Illinois and New Jersey are still planning to fix their problems with borrowing and expense deferrals which only postpone the problem.

Almost all states have to make painful cuts or tax increases in the next few months. The other 46 states are managing their problems better. For all 50 states, interim budget adjustments this year were 7% of expenditures. The adjustments included spending cuts and tax increases. Ten states manage their finances very well and made interim adjustments of less than 2.5%.  They are facing their problems and will solve them quicker. According to the Center for Budget and Policy Priorities, this includes: Florida, Indiana, Louisiana, Massachusetts, Minnesota, Ohio, Pennsylvania, South Carolina, Tennessee and Wyoming.