The Long Range Transportation Plan (LRTP) for the Billings MPO (Metropolitan Planning Organization) is going through the final steps of being fully approved by the City of Billings, Yellowstone County, the Planning Board and the PCC (Policy Planning Committee which serves as the local MPO). The LRTP lays out the immediate and long term – –  20 years —  transportation projects that are considered important by the community, and prioritizes them.

The estimated cost of the proposed and recommended projects for the Billings MPO total, from 2024-33, $443,062,726. From 2034-45 they total $491,140,675. The estimated available revenue ($1.251 billion) is greater than the estimated total costs ($934.2 million) to implement the committed and recommended projects for the 2023 LRTP, which means the plan is fiscally responsible.

The Draft 2023 LRTP, which was presented to, and approved by Yellowstone County Commissioners, last week, includes  updates  to current transportation conditions, forecasts future population impact on the transportation system, models future traffic volumes through to 2045, and includes transportation project priorities. It was prepared for the City of Billings by Kittelson & Assoc. and DOWL.

The lion’s share of the 416 projects included in the 20-year Billings MPO plan are for multi-use trails and bicycle trails with 86 multi-use trails  and 124 bicycle trails. The next largest category is 81 roadway projects, which includes widening, reconstruction, space allocation, pavement preservation, signage, bridge rehabilitation, railroad crossings, pavement of gravel roads, etc.;  followed by 56 intersection projects, which includes safety studies, new stop signs new traffic signals, new roundabout, turn lanes, ADA upgrades and interchange layouts. Fifteen Congestion Management projects are included, which involve signal timing signal equipment, signs and warning systems. There are 22 Safe Route to School projects which involve projects identified in the 2022 school plan update; followed by 18 transit projects with include transit facilities, improvement, bus replacements, electric vehicle charging stations, and other upgrades.

Of the 416 projects in the plan, 63 are committed projects which are already included as existing projects in the Montana STIP, the MPO TIP, or the City of Billings CIP. Projects prioritized as “recommended” are those expected to be fully funded by year 2045. Illustrative projects are not expected to be funded by 2045 due to fiscal constraint but could be included in the adopted Long Range Transportation Plan if additional resources become available.

Funding comes from a combination of sources including federal, state and local revenues. The report explains “As transportation technologies continue to evolve, funding sources that were once lucrative, such as gas taxes, may become less relevant. To supplement and eventually replace obsolete funding sources, there are several funding sources that are emerging, including congestion pricing, mileage-based fees, variable parking fees, and electric vehicle charging taxes.”

Charging tolls is an option for heavily used roadways to reduce demand and to raise revenue.

Another future source for more funding is Mileage-Based Fees — also known as “Vehicle Miles Traveled” (VMT) fees. This funding source charges drivers directly for each mile traveled, either through odometer readings at annual vehicle registrations or GPS-based systems. Oregon and California have piloted mileage-based systems since the 2000’s, and other states are considering them.

Variable Parking Fees are similar to congestion pricing, charging fees for vehicular parking based on location, availability, and the time of day.

Electric Vehicle Charging Tax is emerging as a funding source. It levies a tax on electricity delivered to public electric vehicle charging stations. The Montana State Legislature passed a kilowatt hours tax in 2023. The state is researching replacements for the gas tax. At present, the gas tax is the primary source of non-federal funding for roads.

The current annual allocation for the Billings#-Yellowstone County MPO is $65,587,858. The 22-year revenue projection is $1,251,530,000. Using the 22-year revenue projection, the average annual allocation is estimated at $56,880,000. The report stated that the average annual revenue projection is anticipated to increase due to changes in federal funding programs. “However, it is important to note that federal earmarks, which were a previous revenue source, are no longer expected.”

Among some of the significant projects likely to emerge in the nxt few years:

Roadway Projects:

—Downtown 2 Way Conversion of 2 way streets. The one way to two?way conversion moves toward a consistent network of two?way streets within downtown Billings. 2028, $7,400,000

— 21st Street Underpass Improvements. The 21st Street Underpass has a low clearance of only 8.5 feet, limiting the vehicles that can pass through this route. With the congestion of 27th nearby, the City will increase the clearance to standard minimum of 14 feet to provide a route for emergency vehicles or larger commercial vehicles, especially during train crossings on 27th. 2028, $11,850

—90 Incident Management will install variable message signs and road closure gates on Interstate 90 from Billings to Three Forks – will aid in communicating road conditions, accidents, or other important information about the roadway ahead. 2028, $5,600,000

— Wicks Lane – Main to Bitteroot design for the reconstruction of Wicks Lane and construction of sidewalks. Wicks Lane is an arterial that carries a volume of traffic that would be more efficient and safe if the road was reconstructed as a three lane section with multimodal facilities. 2028, $2,200,000

— Billings Bypass – Five Mile Road to US87 Construction of connection from Five Mile Road to US87, 2028, $16,207,400

— Inner Belt Loop Road Construction, 2028, $14,620,400

— 1st Avenue N – 9th to RR Crossing Major Reconstruction, 2028, $15,209,100

—Billings Bypass – Johnson Lane Interchange to RR Overpass Construction of connection from interchange to railroad overpass, 2028,$9,252,800

— Billings Bypass – Railroad Overpass Construction of new bridge over railroad, 2028, $5,301,800

Intersection Projects:

—Billings Bypass – Johnson Lane Interchange Reconstruction of existing interchange, 2028, $45,204,600

— Exposition Drive and 1st Avenue N. Intersection improvements, 2028, $10,221,500

— Zoo Drive Improvements – Safety improvements, 2028, $5,238,300

— Airport Road and Main Street – Billings Intersection improvements, 2028, $10,968,100

— Rimrock & 62nd St W Intersection Improvements – Roundabout, 2028, $7,545,300

— Lockwood Interchange – Billings Reconstruction of existing interchange to a diverging diamond design, 2045, $45,000,000

— West Billings Interchange Construct additional EB and WB mainline lanes through interchange, modify vertical curve, reconstruct bridge segments (Laurel Rd and Mullowney) and restripe WB off-ramp at West Billings Interchange, 2045, $26 million.

Congestion Management

—27th Street RRXing ITS Signage and Advanced Warning System, Implement a signage and advanced warning system on 27th Street to inform transportation users of crossing delays due to incoming and stopped trains, 2033, $671,958

Pedestrian:

—a pedestrian grade separated crossing across Exposition Drive between 1st Avenue North and 6th Avenue North in 2028, $4 million.

— Sidewalk on Old Hardin Rd between Becraft Ln and Dickie Rd, 2033, $1.9 million

— Highway 3 Pedestrian/ Bicycle Underpasses as needed for multi-use trail connection across Zimmerman Trail, and north-south connections across Highway 3 for future development. 2045, $2.2 million

Bicycle Trails:

— Terry Ave/ Howard Ave/ 24th St W. neighborhood bikeway, 2028, $240,000

— 1st Avenue N. Bicycle Lane from N 13th St. to N. 36th St, 2033, $111,229

— Minnesota/ 1st Ave S Bicycle Lane from N 13th St to State Ave., 2033, $198,127

— Montana Ave. Bicycle Lane from N 18th St to Division St., 2033, $115,574

— Jellison Rd Bicycle Lane from Blue Creek Rd to Aldona Rd, 2033, $68,649

Trail Projects:

—Skyline Trail Multi Use Path, 2028, $4,121,400

—Stagecoach Trail is an 8?foot wide shared use pathway approximately 5,300 lineal feet that will run on the east side of Zimmerman Trail from Rimrock Road to Highway 3. This trail is an essential part of the Marathon Loop and will provide a connection from the top of the Rimrocks to the valley. 2028, $3,500,000

—6th Ave N Multiuse Trail will add a trail on 6th Ave North from Exposition Drive to N 13th. 2028, $500,000

— 25th Street Pedestrian Bridge over the Railroad Tracks at 25th Street between Montana and Minnesota Avenues. 2028, $1,250,000

— Coburn Rd Multi-use Trail from Old Hardin Rd to South extent of Coburn Rd; spot improvement at Old Hardin Rd and at Rosebud Lane, 2045, $3,816,648

Transit Projects

—Metroplex expansion/ interior remodel, 2028, $1,600,000

— MET Transit Rollingstock/ Buses Replacement Vehicles, 2028, $4,045,600

— Fixed Route Redesign to provide a better rider experience across the service area without requiring more funding. The redesigned network would achieve this by revising parts of the current route network so that buses spend more time on corridors with high demand, by reducing or eliminating loops, and by providing improved connectivity between transit-oriented land uses

During a three-day swing through eastern Montana on his 56 County Tour, Governor Greg Gianforte visited new and expanding small businesses in Custer, Rosebud, and Treasure counties.

“Thanks to hardworking Montanans, we’ve seen a record number of new businesses created in our state in the last two years,” Gov. Gianforte said. “We’ll continue to foster a climate where businesses can thrive and create greater prosperity for more Montanans.”

In Rosebud County, the governor visited Wandering Acres, a farm and floral business growing flowers for weddings, special events, and floral subscription services.

This spring, owner Tamara Robertson partnered with a local business to open The Flower Bar in Forsyth, offering fresh flowers on-the-go for customers. Robertson also hosts groups to the farm to build their own bouquets.

“On their fourth-generation ranch, Tamara combined her love for flowers and her knack for customer service to create Wandering Acres,” Gov. Gianforte said. “Now, she’s expanding her young business to town, adding vibrancy to Forsyth.”

In Miles City, Gov. Gianforte visited Troggy’s Trailer Repair, owned by U.S. Navy veteran Tyler Trogden. Trogden secured a loan to purchase the trailer repair shop last year.

“The thing I love about entrepreneurs like Tyler is that they’re willing to take a risk,” Gov. Gianforte said. “He’s already paying down his debt and hired two employees to work in his shop.”

Troggy’s Trailer Repair is one of 53,000 new businesses created in Montana in 2022, a record for the state. In the governor’s first year in office, Montanans created 51,500 new businesses, eclipsing previous records by more than 12,000 businesses.

In Treasure County, the governor visited the Ogren Ranch, owned and operated by the Ogren family. Partnering with a local meat processor, the fourth-generation ranchers bring hormone-free beef to market on their online storefront, launched this spring.

“It’s no secret – Montana beef is the best beef in the world,” Gov. Gianforte said. “It’s great to see ranchers like the Ogrens bring pasture to plate right here in Treasure County, supporting jobs and strengthening our economy.”

To help small businesses, farms, and ranches, the state legislature increased the business equipment tax exemption from $100,000 in 2021 to $1 million, eliminating the tax burden for 5,000 Montana businesses.

Creating a better climate for business development and job creation, including cutting taxes, overhauling regulations, and encouraging entrepreneurship, is a central element of Governor Gianforte’s Montana Comeback Plan.

The budget for Yellowstone County is plagued with inflation woes, which is compounded by needs for additional staffing as well as the increased costs of obtaining and retaining staff.

The overall estimate for taxes levied for the new fiscal year budget is $62.5 million, an increase over last year’s $60 million budget.

“While Yellowstone County is in sound financial position, our preliminary fiscal year budget comes with some continued challenges, Jennifer Jones, County Director of Finance and Budget, explained to County Commissioners, last week, as they reviewed, with each county department head, their proposed budgets and needs for the coming year.

Yellowstone County is not predicting an increase to actual mills levied in FY 2024. “We have no new voter approved mills, however, property taxes will increase slightly by the statutorily allowed inflationary factor and estimated new growth rate,” said Jones.

The county’s annual review gives a broad picture of the operations of county government, as well as establishing a budget for fiscal year 2023-24, which determines the mills the county assesses. With taxpayers having recently received new property tax assessments, which were considerably higher than in years past, there has generally been great angst among taxpayers about what their tax bill will look like.  

Jones said that over 90 percent of requests for additional staff came from legal, law enforcement and detention center needs.

The budget continues to focus on long-term capital needs, including MetraPark, the Miller Building, the Detention Facility and eventually the extensive remodeling of the courthouse to accommodate court-related new growth including the possibility of new judges.

Whether Yellowstone County needs to expand its jail has been an issue of considerable interest by citizens. In looking at the costs and future revenue projections, Jones explained the realities that must be faced by the county in making that decision.

“Our recently expanded detention facility is potentially scheduled for additional review as to capacity. We continue to maintain that our issues are not solely related to our detention facility being too small, but rather to some issues outside Yellowstone County’s control. Some of those issues to consider before pursuing an expansion would be the pace of the judicial system, mental health programs available in the community, and most of all the failure to address the lack of detention space at the state level which adds to our facility’s numbers. If the eventual decision is made to expand the facility again, it will be nothing like our previous expansion completed in 2020. Both a material increase in the County’s mill levy and a significant debt obligation will need approval by our voters.”

Remodeling will also be necessary for the Miller Building, which the county purchased to accommodate the county’s need for administration space. Work will begin on the Miller Building when its tenant leases expire and the county ends its lease for space in the Stillwater Building. “Currently, we are slated to begin the transition …to the newly remodeled Miller Building by the end of Fiscal Year 2025,” said Jones. “This will free up space in the Courthouse for our district and justice courts, county attorney offices and the possibility of another justice court judge. We project to be able to remodel the Miller space and remodel the courthouse with neither, any need for additional debt nor any need for a tax increase, thanks to reserves in our Capital Improvement Fund.”

COVID funds from the federal government – -The American Rescue Plan Act – has allowed the county to address infrastructure needs at MetraPark – “for which funding options were few.” Jones said, “Not only will these improvements provide the campus flexibility and responsiveness in times of community need, but it improves the campus with overall safety and functionality.” The upgrades are projected to be completed by the end of FY 2024.

In addition to the infrastructure work at Metra, the county has begun the process of bringing other improvements to Metra operations. The County has retained an industry consulting group to assist in finalizing Metra management staff, then to conduct a review and assist in the implementation of industry “best practices”, improving internal processes to increase efficiencies in operations, grow revenue streams, and reduce the County’s dependence upon mill levy support.

Jones explained that her tax revenue projections for 2024 are based upon an estimated growth factor of 2.2 percent and the State allowed increase for the rate of inflation rate of 2.46 percent.

Entitlement funds from the State, and the addition of new property tax revenue from new construction over the past year, help reduce the mills assessed to each taxpayer. Increased interest rates earned on county funds will also be higher than the “record lows” of past years, which will ease the burden. (The Entitlement fund was created by the state legislature in 2001 to compensate counties for revenues lost when the State assumed responsibility of collecting vehicle taxes. Yellowstone County’s share in FY2024 is $5,471,792.67)

Given the higher property valuations this year, the proposed county budget estimates an increase in the amount that will be protested— any revenues from which are not released to the county until the protest case is settled.

Tax revenue that comes of new growth or construction is projected to increase 2.2 percent for 2024.

The county is also allowed by the State to increase revenue 2.46 percent to accommodate for inflation.

Also included in tax revenues for 2024 is estimated marijuana tax revenue of $750,000.

Big Sky Economic Development (BSED), although a county entity, functions under a separate fund and generates separate revenues. The tax levy for BSED is estimated to generate $1,431,441 before protests. BSED will also receive about $268,665 from the State Entitlement Fund.

County Commissioners are reviewing much of the county’s salary structure “with the twin goal of attracting and retaining personnel in order to reduce overtime related to vacancies.” Salary and benefit costs included in the budget reflect estimates for union contracts currently in negotiations.

While the rise in inflation was felt last fiscal year, as well, this year many of the county’s contracted services are tied to the inflation factor resulting in significant increases to those contracts. Compounding high inflation is the rise of utilities and price increases mainly in the IT, public safety and construction related portions of the budget.

Staff increases are projected for: 6 new patrol deputies; 2 in the County Attorney’s office; 2 in Youth Service Center; 1 in Public Works; and 1 in elections.

Montana Attorney General Austin Knudsen and 14 other state attorneys general are demanding answers from Blackrock-linked mutual fund directors as to potential conflicts of interest between the mutual funds they are managing. They are questioning whether BlackRock should continue as an investment adviser to the mutual funds in a letter sent last week. The attorneys general also raised concerns over the company’s Environmental, Social, and Governance (“ESG”) investments.

“Six of the nine Mutual Fund directors have a relationship with BlackRock as either a BlackRock employee or a board member of a company where BlackRock owns more than 5% and in many cases is the first or second largest shareholder,” Attorney General Knudsen wrote. “That financial entanglement between the Mutual Fund directors and BlackRock undermines the principles of independence undergirding the Investment Company Act of 1940, as well as state law principles of independence.”

The letter raises a number of concerns including financial relationships that could undermine director independence and over-boarding; whether there has been sufficient disclosure, oversight, and investigation into potential conflicts of interest by BlackRock as investment adviser to the mutual funds; and the actions of the directors related to BlackRock’s public commitments to use client assets for the purpose of advancing ESG goals rather than for the sole purpose of maximizing shareholder value.

BlackRock’s ESG commitments to push the political goals of programs like Climate Action 100+ and the Net Zero Asset Managers raise serious concerns over BlackRock’s duty to act exclusively for the financial benefit of its shareholders and may have cost mutual funds returns. For example, Attorney General Knudsen questions about BlackRock’s decision to divest from coal when the seven largest coal companies in the United States have averaged a share price increase of 981 percent since July 2020.

“BlackRock’s activist commitment to divest from coal may have adversely affected these funds and others like them. At the very least, BlackRock’s failure to increase its investments in coal may have caused these funds to forgo substantial growth. We seek to understand whether BlackRock disclosed material information and whether you analyzed that information,” Attorney General Knudsen wrote.

In addition to the concerns raised in the letter, Attorney General Knudsen is requesting written responses to seven questions listed in the letter to use to determine “the future course of our actions”:

1. What percentage of your annual income comes from serving as a director of the boards of BlackRock Mutual Funds? Related to this, what percentage of your professional time do you presently devote to serving on the boards of these mutual funds?

2. If you are a director of a public company in which BlackRock owns more than 5% of the shares, please describe your interactions with BlackRock in your role at these other companies, including whether BlackRock Investment Stewardship has had any engagement with you and specifically what issues they have brought up in those engagements?

3. What has BlackRock disclosed to you regarding any potential conflict of interest stemming from the ESG preferences of its large institutional investors? What systems have you established, information have you considered, and actions have you taken to ensure that BlackRock is not favoring the ESG preferences of these investors at the expense of its smaller retail investors who do not support ESG investing and who simply want the best return on their investments?

4. Has BlackRock disclosed to you what it is doing to overcome the “constraints” that hinder its ability to advance its NZAM climate commitment? What have you done to ensure that BlackRock’s ESG commitments (such as its NZAM and CA100+ commitments) are not adversely affecting assets belonging to the many clients who do not support those commitments and who simply want the best return on their investments?

5. In light of BlackRock’s statements regarding the use of client funds to advance the ESG agenda, have you considered whether BlackRock should be your funds’ investment adviser moving forward? What actions have you taken to warn investors about these potential misrepresentations?

6. Did BlackRock disclose to you its 2020 pledge to divest from coal and all other material information regarding its coal policies and actions? Did you analyze this pledge’s financial implications on your respective funds? To the best of your knowledge, has there been any analysis and has anyone been held accountable for the substantial loss of profits that may have resulted from the decision to divest from coal, or at least to refrain from increasing investments in coal? Were these decisions disclosed to the many investors who have placed their money into your funds for the sole purpose of maximizing their financial returns?

7. In assessing the compensation that you pay BlackRock for its advisory services, have you considered the value that BlackRock receives, including fall-out benefits in addition to direct financial benefits, from promoting its use of all assets under management to achieve ESG policy goals such as net zero? Have you investigated the financial impact that these practices have on BlackRock’s non-ESG funds?

States joining Attorney General Knudsen were Alabama, Arkansas, Georgia, Iowa, Indiana, Kansas, Louisiana, Missouri, Mississippi, New Hampshire, South Carolina, South Dakota, Utah, and Virginia.

In March, Attorney General Knudsen wrote a letter with 20 other attorneys general warning asset managers about ESG investments being made with Americans’ hard-earned money. In October 2022, he joined 18 other attorneys general in launching an investigation into six major banks over potentially deceptive trade practices tied to ESG-related actions.

About 21.4 percent of the cigarettes consumed in Montana are smuggled in from states that tax their cigarettes lower than Montana, where a pack is taxes $1.70. The tax on a pack of cigarettes in North Dakota is 44 cents; in South Dakota $1.53; in Wyoming its 60 cents; and 57 cents in Idaho.

The Tax Foundation estimates that Montana experiences $17.6 million in “foregone” revenue  due to smuggling. An estimated 10.3 million packs are smuggled into the state annually.

Tobacco is the most highly taxed consumer product in the United States.

Cigarettes are taxed at the federal, state, and sometimes even local levels. These layers of taxes often result in very high levels of taxation. Taxes make up nearly half of the retail price of cigarettes nationwide. In New York and Washington, D.C., more than 60 percent of the price paid by consumers comes from taxes.

Taxation varies greatly from state to state, and large differences in prices drive smuggling. Low-taxed products commonly find their way into high-tax states. For instance, in 2020, New York was the highest net importer of smuggled cigarettes. 53.5 percent of cigarettes consumed in New York were purchased illicitly or from other states. New York also has one of the highest state cigarette taxes at $4.35 per pack, and New York City levies an additional $1.50 cigarette tax per pack.

Layers of taxation force state and federal governments to consider each other’s tax policies. Because consumption is impacted by price, a federal tax hike, which would increase retail prices and shrink consumption, would impact revenue generated by state governments. In other words, federal tobacco tax increases decrease state tax revenue by driving down legal consumption.

More recently, the U.S. Food and Drug Administration (FDA) proposed product standards that would further restrict the kind of tobacco products that can be legally sold. In 2022, the FDA proposed a ban on menthol cigarettes and flavored cigars. In 2020, menthol cigarettes accounted for 37 percent of the cigarette market. A menthol ban would decrease tax collections by more than $6 billion per year.

Even more impactful would be a very low nicotine (VLN) product standard. The FDA could propose a product standard that would limit the (naturally grown) nicotine levels in tobacco. The result could be a de facto prohibition on cigarettes. The consequences of such a ban would be greater in magnitude than any tobacco regulation or tax implemented to date.

Finally, excise taxes on tobacco are highly regressive. This means that low-income Americans pay a greater share of their income in tobacco excise taxes than higher-income groups. Consumption taxes are almost always regressive, but cigarette taxes tend to be the most heavily burdensome on low-income households.

The negative impact to Montana from the $1 federal excise tax is $3.3 million. Negative impact due to the federal flavor ban is $8.6 million. Negative impact of a VLN product ruling would be $79.3 million for Montana.

Given the past few years of escalating property values it probably won’t be a surprise for most people when they get their Real Estate Assessment Notices and see an increase in their property values  – but then again – it may be quite a shock for some and alarming to many people as to what it means regarding their property tax bill.

At the very least, the Montana Department of Revenue (DOR) anticipates that there will be a lot of questions about what the increased values for both commercial and residential properties will mean.

The Montana DOR is mailing property classification and appraisal notices to all owners of residential, commercial, industrial, and agricultural land properties on June 30. These notices are not tax bills. They include the department’s determination of market or productivity value and the taxable value for property that will be used by your county treasurer to determine the property taxes owed for tax year 2023 and 2024.

In order to meet those questions head-on the agency is planning to hold two informational meetings in Yellowstone County in July.

Paula Gilbert, DOR’s Appraisal Manager for Yellowstone Count said, “People are going to see large changes in their values. Because the market in Montana has been so strong these past several years, most values have gone up dramatically. Some people will look at those assessments and panic.”

It is hoped that the informational meetings will help to “relieve some of that panic.” Ideally, if property values go up, mill levies go down. What mill levies will be won’t, of course, be known until the fall when property tax statements are issued.

The first meeting will be at the Billings Library on Thursday, July 6, 4-7 pm.

A second one will be held on Tuesday, July 11, 9:30 am in conjunction with the country commissioners regular weekly meeting, 3rd Floor of the Stillwater Building. Gilbert said that at that meeting there will be knowledgeable experts on hand to answer questions of taxpayers.

DOR wants people to understand that if they believe their property valuation is incorrect or if they want to file a protest, they must do so within 30 days of receiving their Real Estate Assessment Notices. Waiting until the tax bill comes is too late.

 “It’s important that Montana property owners review this information,” said Brendan Beatty, Director of the Montana DOR. “If property owners wait until property tax bills are sent in November, it will be too late for the department to correct property characteristics and make adjustments that may impact the value of the property for Tax Year 2023.

Recipients are urged to review the notice as soon as possible and contact the DOR, if they have questions. If property owners disagree with the department’s determination of value for their property, they may submit a Request for Informal Classification and Appraisal Review (called Form AB-26) within 30 days of the date on their notice.

Owners can electronically submit the form, download it, and find more information on the informal review process at MTRevenue.gov. In July, public meetings in cities and towns across the state will be held to help taxpayers understand the property valuation process and how the department determined the new values on their appraisal notices.

By Tu-Uyen Tran,Federal Reserve Bank of Minnesota

This year’s construction season is expected to be leaner for a significant number of construction firms in the Ninth District compared with last year’s, according to a recent Minneapolis Fed survey.

About half of homebuilders and a third of firms in other sectors of the industry said they think profits over the next six months will be lower than in the same period a year ago

“Interest rates have taken a large portion of our buyers out of the market,” said the owner of a Wisconsin home construction firm. “Only higher end cash buyers don’t seem to be fazed.”

Nearly half of construction firms reported fewer new projects out for bid—known in the industry as requests for proposals (RFPs)—in what is normally a very busy season for them. Some respondents said more projects were delayed or canceled than normal.

The CEO of a Twin Cities architecture firm that works primarily in the commercial sector estimated that a third of the firm’s projects have been paused “based on lack of financing and financial stress of owners and developers.” The number of paused projects is still growing, she said.

Despite the gloomy forecast, however, many said they are optimistic about the future as they adapt to new conditions and seek out new markets.

The survey, conducted throughout April, included 254 respondents.

The construction industry has struggled with customer demand in the past year. A growing number of respondents have reported lower gross revenue since April 2022. In November, more than half of respondents reported lower RFP activity from private-sector customers in recent months compared with the same time period in 2021.

The hardest hit sector then was residential construction.

Up to that point, the industry had coped for several years with a tight labor market and supply chain disruptions resulting in higher project costs. 2022 added a new challenge with a sharp increase in interest rates. Benchmark prime loan rates exceeded pre-pandemic levels about midyear and kept rising. That made it harder for customers to afford the higher costs, especially homebuyers.

2023 could be déjà vu all over again for the industry with nearly half of respondents reporting lower RFP activity from private-sector customers in April. Residential construction was again the hardest hit.

“We simply are not getting the same amount of work we did three years ago,” said a Wisconsin homebuilder. “We have to bid more for the same amount of work.”

Outside of the residential sector, would-be customers are also trying to make sense of a changing economy . . . developers are trying to figure out what the market needs…

There’s also uncertainty about the direction the economy is going with so much speculation about a possible downturn and its timing.

All of which seems to have resulted in more hesitation among developers.

“There are projects being bid but not a whole lot of movement on them,” said a respondent from a Greater Minnesota subcontractor in the commercial sector. “Owners seem to want to ‘wait the storm out’ on a lot of projects.”

Projects that do get the greenlight, the respondent said, are mostly from large corporations, such as fast-food chains and big-box retailers.

Respondents are reporting elevated levels of project cancellations and delays. Thirty-nine percent of respondents said they had seen more cancellations recently compared with three months ago; respondents in the industrial and residential sectors were more likely to report cancellations. More than half of respondents said they had seen more delays, again, with higher rates in the industrial and residential sectors. In the past, delays have often been associated with late delivery of construction materials. But responses in the April survey suggest that many customers are changing their minds.

While interest rates are a top concern for many firms, especially those in the residential sector, for the rest of the construction industry, this concern pales in comparison to labor availability and price increases for construction materials and other inputs. These emerged as the top two concerns for the industry as a whole outside of customer demand, according to respondents.

Even in the residential sector, interest rates were less commonly cited compared with input costs.

A Greater Minnesota architect in the residential sector said none of her clients understand how much higher prices are. “Disbelief causes numerous restarts on projects that come in significantly over budget [compared with] when preliminary cost-per-square-foot estimations come in from contractors. We advise but are not always believed.”

She said the average cost of a home has gone up from $350 per square foot to $500 or even $550. “It is shocking to all of us.”

About a third of respondents said they had experienced price increases of 5 percent or more just in the past three months, and another third said their prices increased between 1 and 5 percent.

These rapid price increases have led to changes in how builders do business.

The Greater Minnesota residential architect said she has to constantly request new bids from suppliers to find the best prices because those prices seem to change every week to two weeks. “This is exhausting.”

A Twin Cities subcontractor in the commercial sector said the firm focuses more on projects that can start immediately because material costs in the near future are easier to estimate. For projects that are further out, the subcontractor said, the firm errs on the side of caution and submits bids that assume high increases in material cost even if it means the bids aren’t competitive. “We’re unwilling to hold the bag on far out contracts that include materials. If we’re bidding work that’s out six months, we are severely marking up our bids to reflect past material uncertainties that cost us millions of dollars.”

Hiring remains a challenge for many firms. Of those that have hired or planned to hire, 57 percent described the labor market as very tight with most of the rest saying it was slightly or moderately tight. Only 3 percent said it wasn’t tight.

That’s put more pressure on wages. About a third of firms said they had increased wages by more than 5 percent in the past 12 months. About a fifth said they planned to increase wages by more than 5 percent in the next 12 months.

“It seems most employees are fishing for other jobs to get more money causing us to pay more to keep them,” said a respondent from a Twin Cities subcontractor involved in the residential and commercial sectors. “New applications are asking for $25 to $30 an hour with little experience.”

With higher costs and more competition for fewer projects, some respondents said they’ve had to absorb the higher costs themselves.

“We’ve had to reduce our profits and margins in order to secure jobs,” a Wisconsin homebuilder reported. “This is not a sustainable practice as the cost of doing business keeps increasing and our gross proceeds are decreasing.”

Despite the many challenges respondents reported, a majority of respondents reported a positive to neutral outlook with 48 percent saying they are optimistic about the next six months and 29 percent saying they are neutral.

Even in the residential sector, 41 percent are optimistic and 28 percent neutral.

One reason respondents are more positive than their financial situation might suggest is they’re looking for opportunities in different markets and are feeling good about their chances of success. The owner of a Twin Cities residential subcontracting firm, for example, said that as fewer people look to build new homes, he’s focusing more on remodeling projects, where he believes he’ll have a better chance of winning contracts.

Most firms, including this subcontractor, are still hiring. Nearly two-thirds of respondents said they had hired in the past three months, and three-quarters said they plan to hire in the next six months. Those figures are only slightly lower than a year ago but double what they were two years ago, when the industry was on the upswing and interest rates were much lower.