Friday, February 17, 2006

NJ Schools Construction Corporation Annual Report

[Welcome, Carnival riders! If you find this post enlightening, there's more here and here].

The New Jersey Schools Construction Corporation has published its annual report to the governor and legislature. Paul Nelson of NJ Fiscal Folly provides a nice, simple summary of the document: We're All Doomed, Doomed I Tell You!

Painfully, I've read the whole thing. It's not pretty, but the $12.8 billion cost widely quoted in the press is nothing more than a fantasy. The details of this fantasy start on page 77 of the report, but here's the game they are playing:
Step 1: Take the January 2005 construction cost estimates (CCEs) from the project management firms (PMFs) and add 7.5% escalation for the age of the estimates
Step 2: Add a further 15% "contingency"
Step 3: Add 2% to the design fees to account for restarting the work that was stopped
Step 4: Add 1-1.5% for permit fees, plus 0.25% for "other miscellaneous fees"
Step 5: Add 0.5% for temporary space.
Step 6: Add 2% for Schools Construction Corporation overhead.
Here's a real killer: "PMFs are compensated based on a percentage of the CCE of projects that they are managing." In other words, the PMFs are incentivized to generate construction cost estimates that are as high as possible.
So, in summary, an artificially inflated construction cost estimate is then further inflated by nearly 30%.
After establishing a nice, high baseline, SCC then moves to scare us into buying in now rather than later. They take the baseline, and further inflate it for two ridiculous cases -- waiting five or ten years to start the same projects. They apply an annual 7.5% inflator to the construction costs, and 15% inflation to the land acquisition costs. From page 81:

The proposed 15% adjustment is largely due to the anticipated increased value of real estate (primarily residential) and also takes into account anticipated increased cost for services (outside legal counsel, appraisal, review appraisal, title, relocation and property maintenance). The adjustment for anticipated market conditions is based on the SCC’s experience in all Abbott District market areas except Phillipsburg, Vineland and Millville over the past 5 years. All market segments, as seen in the Market Studies (Residential, Industrial and Commercial), have advanced significantly (largely 15 - 20%) each year since 2001. These studies are based on unaltered sales data from the Multiple Listing Service.
Apparently, they haven't been reading Grim over at the Northern New Jersey Real Estate Bubble. There's always the possibility that Grim is wrong, but no market can go up forever. Take a look at the Camden area, for example, since Camden is an Abbott District. Recently, the market's been climbing at a pretty good clip, based on the Office of Federal Housing Enterprise Oversight's quarterly home price index (last updated for 3rd quarter 2005).

Note: In each of the following charts, the blue line represents the home price index (left scale), while the red line indicates rate of change (right scale). I know the clarity isn't very good, but I will try to clean it up later.

There was a similar growth trend in the Camden market back in the 80s, as you can see here:

But what happened in between? Nothing! The market was essentially flat for about six years, as you can see in the next chart.

My point here is simple: previous year market trends cannot be used to reliably predict future movement! The Schools Construction Corporation wants us to believe that it can accurately estimate the cost of a construction project five-to-ten years from now, when it cannot even get a handle on current year spending. I think we ought to give them five-to-ten years, but in a Federal prison rather than in our wallets.

Governor Corzine, do not spend another dime of my money on this fiasco. Cut our losses, ignore the arrogant Supreme Court, and stop feeding cash into the gaping maw of the Abbott Districts.

Tags: Jersey, Taxes, Education, NJSCC