Construction feels squeeze of state budget cuts

Throughout the recession, government-funded projects kept a lot of construction companies working. The recession has significantly reduced tax revenues, though,...

Part 3 of 3: This story is part of a three-part series by reporter Ryan Wynne. The series explores the way state budget cuts are affecting our schools, health care and local infrastructure projects.

By Ryan Wynne

In 2003, Ram Construction General Contractors was busy — the company had to turn away potential clients.

“We couldn’t do the work that was out there,” said Mike Hammes, owner and president of the business.

That abundance of work translated into healthy profits for contractors. Seven years ago, Ram Construction had profit margins of 12 to 15 percent, Hammes said.

Today the market is much different. Private construction projects have dried up. This construction drought has led to increased competition between contractors struggling to stay afloat. Profit margins of the past are pipe dreams for most contractors today.

Over the years, Ram’s 12 percent margin turned to 10, 10 dropped to eight, and it kept falling.

“A 0 percent margin at the end of the year is a home run for a lot of companies,” Hammes said. “A lot of companies today are working for nothing.”

Ram Construction may not make as much on projects, but unlike contractors who have had to call it quits, Ram has maintained a solid workload by doing more public projects, Hammes said.

“The private side has pretty much dried up,” he said. “Right now, if not for public work, we wouldn’t have a lot going on. So how do (public projects) affect my business? They keep the lights on, I guess.”

But now tax-based government revenues are drying up and public projects that a lot of contractors rely on are growing scarcer.

Public funds on decline

In the past year, the state has held two special sessions dealing with revenue shortfalls in the current budget. The new budget could be worse. Gov. Chris Gregoire’s preliminary 2011-2013 budget slashes so much funding to so many programs that she actually said she hates it.

“In any other time I would not sign this budget. It’s difficult to support something that goes against all we have accomplished over the past six years. But these are the circumstances we find ourselves in, and we have been left with few choices. Forty-eight states faced large shortfalls for their 2009-11 budgets, shortfalls that were caused by the largest decline in state tax revenue on record. Washington was not immune from these national trends,” Gregoire said in a message when she released the preliminary 2011-2013 budget.

Like the general fund, capital budgets have also been affected by falling state revenues.

The state’s current capital facilities budget is about $3.3 billion — that’s $1 billion less than the pervious budget. It looks like the next one will be reduced even further: Gregoire’s proposal brings the state’s capital budget down to $2.1 billion, the smallest allotment in more than a decade.

The capital facilities budget is getting smaller because funds in it are borrowed and the state can’t borrow as much as it once could. The reason? The amount of debt the state can take on is determined by its revenues, and those revenues are declining because of the recession.

Fortunately the transportation budget, which is currently $4.8 billion, may get a bit of a boost. The proposed budget would take it up to $5.4 billion. That’s not necessarily a sign of increased revenues, though — the transportation budget is based on sales and fuel taxes, which are also declining. Some revenue for the new budget would be carried over from the current one.

Federal dollars are also beginning to run dry. Washington has received more than $7.6 billion from federal Recovery Act grants, contracts and loans, much of which has been pumped into the state’s infrastructure.

But Hammes said it looks like those funds are starting to dry up. He has heard bad news from local planners regarding future public projects, he said.

“I think 2011 is going to be an interesting year. The reality is sinking in,” Hammes said.

Infrastructure projects are scarcer than they used to be, and Hammes said further reductions could hurt the local economy because there are a lot people in the community who rely on construction for work. Hammes receives about five resumes per day from people looking for work, but he can’t hire them.

Feeding Bellingham’s economy

Statewide, contractors have been cutting back expenses to compensate for lagging profits, said Rick Slunaker, government affairs director for the Associated General Contractors.

“I know a number of our members have had to make a lot of painful decisions,” Slunaker said. “The membership has been affected pretty much across the board.”

Some will try to hibernate through the recession, he said, and others are scraping by every day to try to keep their doors open.

The construction industry has been one of the hardest hit by the recession. In the fourth quarter of 2006, construction employment in Whatcom County averaged 7,376. That number has continued to fall, though, and in the same quarter in 2009 had declined by 26 percent. The average drop for all sectors combined was much less — under 5 percent.

Lost construction jobs are a loss of relatively high-paying jobs. In Whatcom County in 2009, the average weekly construction wage was $1,016 in the fourth quarter — that’s about $282 more per week than that average wage for all industries combined.

Construction workers aren’t the only ones who benefit from construction investments. Every $1 invested in construction projects generates an additional $1.97 in economic activity, Slunaker said.

Not only that, infrastructure can attract large, growth-oriented businesses, said Hart Hodges, director of Western Washington University’s Center for Economic and Business Research.

“A lot of businesses will say, ‘There has got to be a base level of infrastructure and telecommunication,’” Hodges said. “Those things are vitally important to businesses that hire more workers and pay higher wages.”

In fact, he said, some companies have left Bellingham because the city doesn’t have enough infrastructure. The Center for Economic and Business Research is currently researching the role infrastructure plays for businesses, and while most large businesses see infrastructure as vital, smaller businesses tend to find it less important, Hodges said.

Loss of local projects

City of Bellingham staff wants to make sure Bellingham has the infrastructure needed to accommodate projected growth, said Ted Carlson, public works director for the city.

“We are doing okay,” he said. “It’s just getting more and more difficult.”

The city is receiving less state and federal funding for infrastructure than it used to, and fewer funds equates to fewer local projects, Carlson said. There aren’t as many grant funds out there, he said, but the city has been very successful in securing those that are.

“But it is just very competitive and there is just less money available,” Carlson said. “Without that grant money, it just means we get less projects done.”

The city’s street fund, which relies heavily on sales tax and fuel tax revenues to fund transportation projects, has been most affected — it’s estimated that 2011 revenues will be at 2004 levels, Carlson said.

What that means locally, he said, is programs and jobs will be cut and there will be less money to fund transportation projects and it will take longer to complete projects.

Bellingham is a bit better off than many other communities, though, and local transportation projects won’t be as affected. That’s because Bellingham voters approved funding for the transportation benefit district (TBD), which raises sales tax rates in the city to fund certain transportation projects.

“It really is going to help the city continue to move forward with transportation projects,” Carlson said.

It’s impressive voters chose to tax themselves in this economic climate, he said.

“I think people understand the state of the economy,” Carlson said. “I think that’s why voters passed the TBD.”

TBD funding will improve and maintain local transportation; it will also provide contractors with more work, Carlson said. That funding won’t completely make up the loss of outside funds, though.

Hanging on

Meanwhile, Hammes has watched as more out-of-county contractors have entered the local market.

“Locally we’re getting pressure from outside contractors that normally we wouldn’t see up here,” Hammes said.

At the same time, contractors that once dealt exclusively in the private sector have entered the public market, he said. Hammes used to see an average of four to seven bidders on projects, but today it’s not uncommon to see twice that, he said.

With more contractors bidding on public projects, companies are making a lot less on those jobs.

“People have been bidding just ridiculously low, sometimes below cost,” Hammes said.

Some of those contractors end up going out of business, he said. Their bids have already diluted the market, though. That makes competition more difficult for employers who provide family wages and benefits, Hammes said.

Hammes has laid off five to six employees for short periods of time, but said the business hasn’t had any major reductions. Ram Construction employs an average of 40 to 45 employees year round.

“Our employees are the most important part of our organization,” Hammes said. “We’re all kind of shoulder to shoulder. We’re not autocratic.”

To survive, Ram Construction has diversified. Instead of sticking with utility jobs, Hammes said he takes on environmental and small building projects, too. He is also doing more projects out of county, keeping overtime to a minimum and encouraging carpooling, he said. He has kept employees busy by giving them jobs outside their normal scopes of work.

He is also starting to encourage investment in local companies.

“In these critical times, it’s critical that we support our community,” Hammes said. “I hope that the local (construction) companies that are deeply rooted and provide family-wage jobs are successful and survive this downturn.”

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