By Roland Murphy for AZBEX
As Arizona gets ready for what is certain to be another protracted fight between the State Legislature and Gov. Katie Hobbs to set the next budget, Hobbs’ proposed Executive Budget for Fiscal Year 2025 has some interesting information on the construction industry’s possible immediate outlook.
The Arizona Joint Legislative Budget Committee expects a budget shortfall of $1.7B after reviewing projected deficits from fiscal years 2024 and 2025. Given the contentious relationship between Democrat Hobbs and the Legislature’s Republican majority, this year’s budget process may be even more acrimonious than last, which was one of the most drawn-out back and forth exchanges Arizona has seen to date.
In her Budget Summary, Hobbs notes construction is doing well in the state but that 2023 saw a slowing in the sector, primarily due to a slowdown in homebuilding fueled by federal interest rate increases and their resulting housing market impacts.
The summary says, “The future for construction in Arizona will likely hinge on how the overall housing sector continues to respond to the Fed’s interest rate policies. Further increases, or even a hold on current rates, will continue to strain housing demand, likely putting downward pressure on construction employment. Additional headwinds in the form of inflation-driven labor costs may further constrain growth.
“At the same time, the continued movement of businesses to Arizona, including manufacturing firms that require the construction of new billion-dollar facilities, will help to bolster the state’s construction employment.”
While both of these points are accurate, it should be noted that Arizona’s in-migration has slowed over the last year, as have state-to-state relocations nationwide. Despite the slowing, however, Arizona remains a leader for new arrivals.
Industrial construction, while still considered thriving, has also experienced challenges. While there are several massive projects still under development, particularly in the advanced manufacturing sector, many large-footprint projects in the warehousing/logistics/industrial park space are being broken into phases or put on hold due to rising construction costs, interest rate increases and labor availability. (AZBEX, Nov. 10, 2023)
Transportation Cuts and Preservation
One item that has generated curiosity in the construction sector is the governor’s proposal to “roll back” or “recover” $418.6M in funds allocated to 24 transportation projects between 2021 and 2024.
Because the governor’s proposal came out late last week and many of our standard sources are unavailable because of the holiday weekend, we have not yet tracked down and reviewed the list of those specific projects.
On the other hand, the budget has listed some projects as priorities for funding preservation, including the I-10 expansion between Phoenix and Casa Grande and the I-17 expansion between Anthem and Sunset Point, along with the overall statewide pavement rehabilitation and preservation efforts.
Other items of interest in the budget’s transportation notes include $1.9M for the next phase of replacing the state’s construction management IT system, which is more than 30 years old, and $1.5M for 15 new positions geared toward “maximizing the additional funding provided in the federal Investment in Infrastructure and Jobs Act.”
A bit of incongruity arises over that last point. Nationally, much of the ongoing strength of the construction sector in the face of housing and commercial real estate development slowdowns has stemmed from the Biden administration’s infusion of capital for infrastructure projects under IIJA and other pandemic and post-pandemic spending programs.
Critics of the programs said at the time of their passage that they were largely hollow efforts that would trigger inflation without delivering much in the way of completed projects, since the ongoing construction labor shortage meant there would not be enough workers to execute the planned projects.
A Jan. 12 report from KJZZ noted the disparity and said the proposal to recover the $418.6M “aligns with previous comments by some Republican leaders, who said some funded road projects can’t break ground now anyway.”
KJZZ quoted Senate Appropriations Chairman John Kavanagh (R-Fountain Hills) who said last month, “There are many road projects that, even though we allocated money for them, they can’t be done right now, because we just can’t get workers to build those roads, and those projects can be pushed out a couple of years,”
School Construction
Most of the recent reports on state politics have focused on covering the ongoing battles between Hobbs and legislators over reforming the state’s Empowerment Scholarship Accounts program that lets parents remove their children from the public or charter school system and use part of their per-student public funding for other educational uses like private school tuition, online education or other programs.
The ESA program saw far more use than expected and exceeded its initial allocation by more than $40M before the midpoint of the budget year. The governor’s budget details extensive plans to overhaul the program that can be found in detail through several other outlets.
Of particular interest to the construction industry, however, are Hobb’s plans for new and ongoing school construction. The executive budget will provide one-time funding for seven new schools with projects already in development totaling $77.9M.
Another $70.1M is included for year-one construction costs at five schools, as well as land acquisition and site condition projects that were approved by the School Facilities Oversight Board last month.
The Landscape
This year’s budget battle promises to be harder fought by both the governor and the legislature than last year’s, and, as we said, last year’s was considered by political observers to be one of the most bitter in Arizona history. The fight lasted well into the month of May and was seen as a hard pill to swallow for both sides, but more so for Hobbs.
Given the tolls exacted from that battle, and the increased stakes created by a significant budget shortfall in a state that had gotten used to surpluses in recent years, the only thing that can be predicted with any certainty at this point is that every point of the budget will be lobbied for and against repeatedly both in public and behind closed doors before any conclusion is reached.