Jun 8 2007 5:59AM | Permalink | Email this | Comments (1) |
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The remarkable turnabout in California state finances in the last three years has not led to the increase in public construction spending in California that was included in our forecast, forcing us to repeatedly trim our national forecast for public construction. Separately, we have had to frequently edge up the forecast for private construction spending, initially for housing and more recently for commercial buildings. Offsetting errors are always comforting to forecasters because casual forecast readers never notice them.

What did we do wrong? The budget status improvement in California came primarily from spending cuts rather than the more usual rise in tax revenues from tax rate increases or a stronger local economy. The former restraints public spending while the later provides a major boost to spending. California is a big enough state to matter in calculating the national average.

The forecasting model for public spending relies heavily on changes in government budget balances. Public building managers spend money when they have it and wait when they do not have it. By contrast, commercial developers will borrow money when they have a profitable opportunity and sit on their cash when they do not have a profitable opportunity.

After a several year spending binge, California faced a $16.5 billion current fiscal year deficit late in 2003 on top of $6.9 billion previously borrowed to balance the general fund. The problem was critical enough to result in recalling the Governor, only the second time this has happened in the US. Three years later the new Governor proposed a balanced budget for 2007-08 that maintained a $2.1 billion budget reserve and brought the payback of the $24.1 billion general fund deficit to over one-third. This was accomplished largely with spending cuts. The proposed budget calls for a 7.2% increase in tax receipts and only a 0.9% rise in spending.

Ahead, the Reed Construction Data starts forecast does not foresee a significant pickup in California public construction, except for highways. The cash generated from spending cuts is being used to repay debt used for past spending. Highways are an exception because about half of the funding is from federal grants, private road-building is increasing and many new projects will be financed by bond issues approved late last year.

Applying this lesson to the rest of the country, the southern and mountain states that have improved their state budget balances are generally creating cash available for new projects. The Great Lakes states that have recently fallen into serious budget problems are solving them California style and will not be generating cash for new projects in the next few years.