Economic Low Tide
- Published: Wednesday, 01 September 2010 08:00
California plays by its own rules. As a result, it often emerges as a national leader in many areas. This is especially true when it comes to regulating industry. In the Golden State, permitting an aggregate operation is more difficult, environmental regulations are even stricter and the operating costs are higher. Now, California is taking a leadership role in another aspect ó our economic malaise.
The aggregate industry in California has become the poster child for hard times. According to the U.S. Geological Survey, the nation is experiencing an 11% to 12% decline in aggregate produced for sale, whereas industry professionals in California estimate a 50% decline compared with July 2009 ó also far from a good year. California Construction and Industrial Materials Association President Gary Hambly says business is down on all three construction fronts: private, commercial and public.
Residential home construction continues to suffer as a result of high unemployment and excessive foreclosures. Like many parts of the country, a surplus of vacant homes must be filled before any real growth can occur.
GRANITEROCK CEO BRUCE Woolpert says that housing has suffered most in the Central Valley, while the coastal areas have fared better. He says some houses that were once appraised for $600,000 now sell for $200,000, and mortgage rates are around 4.7%. Sounds like a bargain, but would-be consumers are finding it increasingly difficult to buy because banks have tightened lending practices. Add to that the federal home-buyer tax credit expired earlier this year.
Woolpert, however, remains optimistic. He is confident that this free-fall has finally hit bottom and hears speculation that home builders are looking again. There are still more people living and working in California than there are available homes, he says.
In the meantime, Woolpert was taken aback to discover in the UCLA economic forecast for California that only 3,000 construction permits were purchased in the entire state during May. This includes remodeling. Commercial development also is down, and there is no sign of immediate recovery. Hambly says it just has been overdeveloped. Adding to the letdown, this is the summer that economists predicted for the turnaround period, but private and commercial construction probably will remain flat.
When these two sectors fail, public infrastructure often comes to the rescue. In 2009, the federal government launched the American Recovery and Reinvestment Act, a nearly $800 billion investment plan designed to pull states out of the slump. In the Central Valley, the hardest hit by the housing downfall, this included the launch of a $28.5 million project to build a federal courthouse in Bakersfield. It is one of the largest projects to be funded with ARRA money.
ìThe Bakersfield courthouse represents the best of the Recovery Act because it marries infrastructure projects with GSA's design and sustainability expertise,î General Services Administration Administrator Martha Johnson says in a press release. ìTo date, we have invested $4.1 billion in building modernization and construction projects, and as of [July] GSA has put 545 companies to work on green building projects, more than double the number of a year ago.î
Despite this, Hambly says that ARRA was a big disappointment. CalCIMA was expecting more to be spent on infrastructure. Instead, too much of the money was spent adding bureaucrats to the California Air Resources Board and installing solar panels. Spending tax dollars to create government jobs or the low-paying solar-panel installation jobs is counterintuitive, because the state continues to lose higher-paying manufacturing and construction jobs, Hambly says.
Instead of pulling the state's construction industry out of the hole, it has barely kept the market flat. Woolpert says that lost construction jobs are the biggest contributing factor to the unemployment rate month after month. The state average is about 12%, but some areas reach 25%, he says. This is true, even as California spends the final dollars of a $19 billion bond that was secured for roadway construction. Half went into major highways. The other half went to cities and counties for maintenance and improvements to alleviate gridlock. These projects will be completed in 2012. Thereafter, Woolpert says, the state will again be operating on a normal budget with around $5.5 billion dedicated to highways.
However, the state is addressing yet another $20 billion budget shortfall. The Associated Press reports that Gov. Arnold Schwarzenegger ordered 200,000 state workers to be paid minimum wage and later paid retroactively. Democrat Controller John Chiang, who is appealing the ruling, said he would pay full wages until the appeal process is done. As the state fails to make ends meet, construction projects are coming to a halt.
DOING BUSINESS IN California is, to say the least, complicated. It has perhaps the longest permitting time in the nation for opening new mining operations. Hambly says businesses would rather move across the state line when possible, driving the unemployment rate even higher. The state also has stricter environmental regulations than the federal government, which contribute to costs and operating burdens.
Not only are the environmental regulations stricter, they are confusing and have created a lawyers' paradise. The most current controversy is Assembly Bill 32. The California Air Resources Board is calling it a ìcomprehensive program of regulatory and market mechanisms to achieve Ö cost-effective reductions of greenhouse gases.î The goal is to reduce greenhouse gases to 1990 levels by 2020, a reduction of 30%.
ìWe basically adopted the Copenhagen Protocol when not even our own country would,î Hambly says. ìThe state has taken a leadership role in some of these air-quality and global-warming issues that are hard for businesses to adjust to.î
Reaching the 1990 emission levels, however, is a goal that may be realized sooner than anticipated, so long as the economy remains at a standstill. With less construction and aggregate production, there also is much less pollution.
When the bill passed in 2006 and business was good, industry responded quickly to maintain emissions because they were still making money. Many businesses bought new fleets of trucks or retrofitted them for more than $59,000 a unit. The bad economic climate this year keeps businesses from making these investments, Hambly says.
NOW, REGULATORS ARE reconsidering and doing so in the form of a jobs initiative, which will be on the November ballot. If passed, AB32 would be suspended until the unemployment rate reaches 5.5%.
Both Hambly and Woolpert are confident that it will pass, and it will allow for a substantial amount of breathing room. Gov. Schwarzenegger, however, has vowed to defend AB32 and has the support of the emerging clean-tech industry. Both sides are alleging that jobs will be lost if AB32 goes the other way.
Clearly everyone has something at stake during this recession. Woolpert says Californians are responding now that their backs are against the wall. The industry is responding by creatively conforming to regulations and conserving every dime.
Teichert Aggregates installed a 1.5-megawatt wind turbine generator to deliver electricity on site at its sand and gravel operation in western San Joaquin County, located just south of Tracy, Calif. The 390-foot-tall General Electric wind turbine will supply up to 20% of the electricity the operation consumes.
Consequently, Teichert will be removing the equivalent of 1,300 metric tons of carbon dioxide from the environment annually. The approximately $4 million project was financed and developed by Foundation Windpower of San Francisco.
Graniterock and several other California institutions have been embracing solar energy. Woolpert says it still is experimental and doesn't translate into cost savings. However, the company could not pass up the 35% tax credit for installing the technology. It won't yet generate enough power to run an operation, but they are still learning, Woolpert says.
THERE ALSO IS a renewed competitive spirit within the construction industry throughout the state. Woolpert says that big companies like Graniterock are now bidding low and for much smaller projects just to keep people working. The cost of construction projects is being driven down because more people are fighting for fewer projects.
This is not a good sign for the aggregate industry, and Woolpert fears a double-dip recession. It looks like the one thing that can maintain current levels will be even more federal money, but the federal government has budget problems of its own.
Until private and commercial construction rebounds, the passing of the next highway bill may be all that is available to maintain business. When that will pass and how it will be paid for is anyone's guess. The last transportation bill, which was funded at $286.4 billion, seems like a drop in the well when it stands next to the $800 billion stimulus package that did little more than stabilize California.
California may be famous for its sunny weather and laid-back disposition, but it is facing a raging financial storm. Its residents and leaders will be forced to make some very difficult decisions on how to align the state's spending needs with its revenue shortfalls. And in that regard, it too may be leading the nation.
Adam Madison is a freelance writer with nearly 10 years of experience writing about the aggregate industry.