State grapples with increasing building costs, outlay backlog

Analyst: A busy construction market, tight labor pool driving prices spike as outstanding funds estimated at $5.2B

A steep increase in construction costs is threatening to exacerbate an already massive backlog of unspent state capital outlay — a long-running problem the New Mexico Legislature has been unable to get under control.

Cally Carswell, a capital outlay analyst for the Legislative Finance Committee, told lawmakers Thursday outstanding capital funds are estimated at about $5.2 billion, including $2.9 billion in projects authorized by the Legislature and $1.3 billion in a fund for public schools.

“These are staggering figures that we have never seen before,” she said.

“It makes it more important than ever, we think, that we try to take steps to address some of the chronic problems we have with capital funding in New Mexico, including things like piecemeal funding and ineffective leveraging of other funding sources with capital appropriations,” she said.

Carswell advised lawmakers to take advantage of the state’s “historic revenues” and translate them into “meaningful investments” in communities across New Mexico.

“On the one hand, you could say, ‘Well sure, construction costs are increasing, but we’ve got all this money to pay for it,’ ” she said, referring to record-breaking revenues in recent years.

The Legislative Finance Committee heard Wednesday from state officials about unprecedented projections of $13.05 billion in recurring revenues for fiscal year 2025, with $3.48 billion in so-called new money, largely due to increases in the oil and gas industry. That compares with a revenue forecast of about $8 billion in August 2019, months ahead of the coronavirus pandemic and a steep drop in oil prices that led to plummeting projections for fiscal year 2021.

“We would want to be able to accomplish more for the state with all this money we have rather than be in the position of being able to accomplish the same amount we were able to five to 10 years ago when we had far less resources,” Carswell said.

Lawmakers took no action Thursday, but Carswell issued a series of recommendations, including:

♦ Prioritize or restrict 2024 capital appropriations to complete existing projects.

♦ Prioritize emergency or critical infrastructure projects.

♦ Develop cost indices for different types of projects to guide how much the state will contribute.

♦ Adopt an earlier deadline for local capital outlay requests to start vetting projects sooner.

♦ Consider long-term strategies, such as a permanent fund, to make the amount of money available for capital projects more predictable every year.

A busy construction market and a tight labor pool appear to be driving the latest spike in construction costs, Carswell told lawmakers. Spikes in material costs and supply chain disruptions, which increased construction costs during the coronavirus pandemic, have started to level off and stabilize, she said.

“What’s going on now appears to really be more of a function of just an extraordinarily busy construction market,” she said. “There’s a lot of activity in both the public and private sector and a limited labor pool to be able to meet that level of demand, and we think that’s really sort of starting to push costs up.”

While the flurry of construction is a good economic sign, it also presents “significant challenges” for lawmakers to meet the state’s infrastructure needs, Carswell said.

“Some of the things we’re seeing are fewer bidders on projects, and that’s one of the things that’s translating into higher prices,” she said.

Increased capital appropriations from the state are also contributing to the construction demand.

“When we’re thinking about construction costs, there are both things that are totally outside of the Legislature’s control, and there are things that we have an opportunity to affect,” Carswell said. “How much and when we appropriate funding for projects is one of the big things that we have an impact on.”

Recent projects the Public School Capital Outlay Council has considered have come in double the cost estimated only a year ago, Carswell said.

“This has put the council in the unusual position of having to consider waivers for a local match to districts like Los Alamos, one of the best-funded districts in the state, as well as seeing projects coming before them with just sort of eye-popping costs like a million dollars per 1,000-square-foot classroom,” she said.

Cost increases for public school and higher education projects in New Mexico are significantly higher than other markets.

The cost of public school construction in New Mexico closely followed the Coldwell Banker Richard Ellis Construction Cost Index until this year, she said.

“Had it continued to follow this national index, we’d expect to be seeing new public school costs of around … $400 a square foot this year,” Carswell said. “Instead … projects that have come before the council for construction funding this year have averaged close to $800 per square foot.”