Rising construction costs raise concerns about capital outlay system

Jan. 23—As state lawmakers face potentially billions of dollars in new capital outlay requests from local governments — while $5 billion they allocated in previous years remains unspent — construction costs continue to skyrocket.

Price tags for infrastructure projects in New Mexico are rising at a significantly higher rate than those nationwide.

A report recently released by the Legislative Finance Committee says the costs of nonresidential construction in New Mexico increased 50% between 2019 and 2023, compared to 34% on the national level.

That bodes poorly for projects that haven't yet gotten off the ground and could spur lawmakers to try to overhaul the capital outlay system.

"Escalating costs raise concerns about the state's ability to meet future capital project needs and escalate problems of unspent capital funds across the state," Kathleen Gygi, a program evaluator for the Legislative Finance Committee, told lawmakers last week.

Democratic Sen. George Muñoz of Gallup, who chairs the committee, and a Republican Sen. Pat Woods of Broadview, a committee members both suggested in interviews the state could respond to the problem by halting approval of new funds for local governments that have outstanding projects.

"We need to stop funding capital construction for a year or two and let these projects catch up, let those contractors finish up projects," Woods said.

Muñoz said he would like to see an updated analysis of pending projects to determine what is holding them up.

Senate Majority Leader Peter Wirth, a Santa Fe Democrat, said Tuesday he would support legislation imposing time frames for completing state-funded projects.

He also would support a clawback of unspent funds.

"Five billion dollars is a lot of money to be sitting on the sidelines," Wirth said.

However, he said it's unlikely such capital outlay reforms would occur during the current session because it will take time to notify lawmakers and local governments of changes.

"It's probably something that needs to be worked on in the interim," between legislative sessions, he said.

Republican Rep. Gail Armstrong of Magdalena, also a member of the Legislative Finance Committee, said Tuesday she wouldn't support halting capital outlay projects to address the backlog. "It just puts New Mexico back," she said.

Several factors are contributing to the rising costs of construction, the LFC report says. Among them are growing demand for more projects, a shortage of labor and materials, and supply chain issues that stem from the coronavirus pandemic.

Sam Lesemann, another program evaluator with the Legislative Finance Committee, said New Mexico needs an estimated 55,400 construction workers to meet labor needs but had only 53,400 in November — a gap of 2,000 workers.

"This figure likely underestimates the number of workers the state actually needs," he added.

Muñoz, who runs a construction company, said the lack of skilled workers means those working in the field can demand higher wages, which also drives up costs.

"Labor is going to say, 'You're going to pay me what I want, otherwise I am going to quit and go somewhere else,' " he said.

Another problem, the report says, is state funds for capital projects are appropriated and administered by "multiple agencies with different jurisdictions, resources and processes."

While some of those agencies have adopted "best practices" in construction management, others lack oversight and coordination. The report suggests the various agencies monitor the construction market and share information on costs, procurement procedures and scheduling of large projects.

While the report primarily focuses on nonresidential building projects, the problem also is affecting homebuilding, said Jack Milarch, executive director and CEO of the New Mexico Homebuilders Association.

He said builders are telling him the average time spent to build a typical house, 120 days, has doubled, which adds to the cost of the project.

"It's a little bit of everything from supply to demand to a worker shortage," he said.

Nicole Johnson, co-owner of Hansen Lumber Co. in Santa Fe, said even the cost of logs is going up.

The report recommends a number of proposals to alleviate the problem. Gygi noted during the hearing a recommendation to create a central reporting hub, "perhaps in the form of an annual common construction report card," she said.

This could help the state navigate a "volatile construction market," she added.