Firms feel the pinch when state puts major projects on hold

Treasurer’s office shifting toward more direct bond funds rather than pooling funds for hundreds of projects

Sacramento Business Journal – by Michael Shaw Staff writer

Tom Blackburn sounds remarkably patient for someone who’s been waiting for more than a year for payment from one of his largest clients.

Blackburn Consulting, a relatively small firm of 40 people with offices in Auburn and West Sacramento, performs soil engineering services mainly on public projects, such as levee work for the state of California. The state’s budget crisis has had a major impact on Blackburn’s company and those like it.
“We have some projects funded by the state that have gone over a year without being paid,” he said. “Typically, we’re paid within 60 to 90 days. This stuff really impacts our firm and I’m sure many others.”
The lack of payments is a direct result of the California’s weakened financial condition, brought on by falling tax revenue, a series of budget crises and unfavorable grades from credit-rating agencies. It has led to the state Treasurer’s Office looking for new ways to fund projects, and to some fighting among union and non-union engineering firms over scarce jobs.
“It’s a big deal for us,” said Blackburn, the newly installed president of the American Council of Engineering Companies’ California chapter, of the impact on engineering firms. “We don’t have furloughs. We have layoffs and real jobs that are gone.”
When the state Legislature adopted a budget in July that closed a $26 billion gap, it didn’t resolve the state’s financial crisis. Many capital projects that were put on hold back in December — when the state’s Pooled Money Investment Account was unable to fund all its obligations for things such as school construction — are still on hold.
That has caused problems for architecture and engineering firms in Sacramento and beyond.
“We have a big project that’s on hold,” said Chuck Hack, business development director at Lionakis, Sacramento’s largest architecture firm. “We get updates, but nothing specific, so we’re in a wait-and-see mode.” The $45 million project is supposed to replace the Department of Forestry camp in Growlersburg with 72,000 square feet of new administration and other buildings and ultimately improve firefighting efforts there. The preliminary plans were 65 percent complete when the project was put on hold, deemed “nonessential” by the state.
But the economy has led to significant savings for projects that have been allowed to move forward. Lionakis is the architect on one such project that will remove asbestos, add seismic support and put a new exterior on the six-story Department of Motor Vehicles building at Broadway and 24th Street. Competition among contractors for this kind of work has significantly reduced costs. The budget for the DMV project was $67 million and the winning bid came in at $44 million.
In Sacramento, budget problems have delayed millions of dollars of work on office building renovati ons. Funding for new school construction this year is also on hold. So unless school districts can raise their own money through voter-approved bond sales, most projects are going onto an “approved but unfunded” list. Local districts with projects on that waiting list include Placer Union High, Davis Joint Unified and Folsom-Cordova Unified.
However, California’s financial officials have been able to find money for some projects that were significantly under way when the crisis struck, such as the Central Plant at Q and 7th streets, which will heat and cool about 20 state buildings downtown. Construction is largely complete.
Officials at state agencies that oversee capital projects, such as the Department of General Services and the Division of State Architects, say their hands are tied until the state’s financial officials can supply the money to move forward.
“Our projects were all the result of PMIB action,” said Eric Lamoureux, spokesman for General Services, speaking of the Pooled Money Investment Board that oversees the fund that supplies hundreds of state projects.
How long will the cash crunch last? The state plans to test investors’ appetite for California bonds by late fall.
“We’re not exactly in a position cash flow-wise where we can resume making hundreds of millions of dollars in loans from the account,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. Dresslar expects the state to get back to the business of selling bonds around Thanksgiving. That would give projects much-needed cash. The state also is changing how it goes about funding, shifting away from the idea of pooling funds for hundreds of projects toward more direct bond sales. If the plan works, proceeds would go straight to projects.
“We’d rather not be in the same position again,” Dresslar said.
In the meantime, firms are waiting to see if the plan will work.
Engineer Blackburn notes that some firms that relied on work from private developers and the sweeping master plans that proliferated during the real estate boom are worse off than those who largely do work on public projects.
“I know a firm that went from $16 million in revenue down to $3 million,” he said. “Most of the firms I’m talking to would put it in these terms — it’s a struggle to survive.”
A few large companies are still reeling in government contracts for big projects such as high-speed rail, he said. But those are exceptions.
Blackburn claims that the state’s financial crisis has disproportionately hit private firms represented through the American Council of Engineering Companies. That’s because much of the engineering work on Caltrans projects goes to union engineers represented by the Professional Engineers in California Government.
The state’s financial crisis has exacerbated the disagreements between the two organizations. When times were good, there were more projects to go around. But the economic climate has led to quarrels between the groups over whether private or union engineers are more costly to the state.
Blackburn sees lawmakers’ attitudes about their role as part of the problem.
“The government — their position is that they’re here to provide jobs,” he said. “In my view, we need to figure out how to have a more nimble government than that.”

mshaw@bizjournals.com | 916-558-7861

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