March 20, 2022
Lowell High Project Cost Increase
Tuesday’s city council meeting was dominated by the increased cost of the Lowell High construction project which has gone from $270 million to $305 million. The evening began with a presentation from Suffolk Construction and others on how we have reached this point. The presentation and related discussion included timelines and statistics and seemed to have the objective of convincing everyone that the increased cost was due exclusively to Covid-19 and its consequences.
While there are some who will use any excuse to criticize this project, most councilors (and most reasonable people) seem to accept Covid as the cause of the spike in price. After all, Phase1 (the new gym) is nearly complete and is “on time and on budget” according to the Suffolk presentation give five weeks ago. Phase 1 was built during Covid but was bid before Covid which shows that the original estimates were accurate. But the pandemic brought factory closures, shipping bottlenecks, and pent-up demand which have combined to greatly increase the cost of construction materials.
In the two-plus hours devoted to this matter, councilors asked many questions. Here are some of the things I learned from listening to the responses:
Two recent high school construction projects in Massachusetts that stayed within budget were discussed (Arlington was one; I forget the other). One had bid before Covid, so the “successful” bidders were already locked into pre-Covid prices when the pandemic struck. The other was not estimated until after Covid, so the cost projections and subsequent budget reflected the increased costs that were brought by the pandemic.
Lowell, unfortunately, estimated the cost of the project before Covid but solicited bids after Covid. Unlike the other two high school construction experiences, the Lowell project was unique in straddling the global cataclysm of Covid.
Because of the complexity of the Lowell project, the detailed design drawings that were essential to soliciting bids and which were several thousand pages in length took months to finalize. Towards the end of 2020 when the bid documents were substantially completed and ready to be sent to subcontractors for responses, the cost of building materials had gone up considerably. At Tuesday’s presentation, Suffolk said that they consulted with multiple entities in the construction field and all predicted that prices were just hitting their peak but should decrease in the coming months. Based on that projection, Suffolk went ahead and solicited bids on other parts of the project but delayed soliciting bids for the high-cost items like steel, lumber, sheetrock, and aluminum. By May 2021, Suffolk had executed contracts with the other bidders but continued to hold off on requesting the major bids since prices had remained high.
By the fall of 2021, the “window of flexibility” for soliciting bids on steel, etc., was closing. To wait any longer risked incurring penalties with the other subcontractors who had already committed to a set time frame for construction. Additionally, lead times for ordering materials continued to go up so to wait longer would jeopardize the project timeline.
But the prediction that prices would decline in late 2021 was wrong. Some did drop but others, steel especially, soared even higher. With no more time for delay, Suffolk and the city seem locked into these latest bid responses. That’s why the estimated cost is now $38 million higher than the original estimate.
Councilors mostly seemed angry that the price of the project has gone up so much. For the most part, they grudgingly accept that the increase was beyond anyone’s control.
The primary criticism councilors did lodge was that they (more accurately, the previous councilors) were not informed much earlier of the likelihood that the price of the project would be considerably higher. Informing councilors earlier would not have changed the result but at least the councilors, the people on the hook for paying for the project, would have had a better idea of what to expect.
Councilors also closely questioned Suffolk on the cost of the remaining project. They fear that this increase will be the first of others and made it clear that no more city funds would be forthcoming for this project.
The council voted to send the amended loan order for the increased amount to a public hearing at the March 29, 2022, meeting. It will need 8 of 11 councilors voting yes for it to pass. Both Suffolk and Manager Donoghue advised against further delay of that vote on the grounds that it would jeopardize the availability of the needed building materials.
Manager Donoghue also emphasized that just because the council votes to increase the bond does not mean that the full amount will be immediately raised. She likened it to a line of credit that you can draw on when needed. Consequently, if other funds become available to close the gap, the full amount of the bond will not have to be borrowed.
Regarding funds from other sources, the council also unanimously supported a resolution calling on the governor and the state legislature to allocate Covid relief funds to the Massachusetts School Building Authority that can then be directed to the Lowell project. Donoghue said she has already had discussions about this with people on Beacon Hill. She did not use the word “optimistic” but she sounded that way.
Other Council Business
Although the council meeting lasted nearly 3.5 hours, most of it was about the high school. In other business, the council congratulated Lowell Police Superintendent Kelly Richardson on his coming retirement on March 17, 2022.
The council also voted to authorize the Superintendent of Schools to submit statements of interest for renovations to eleven other Lowell school buildings.
Fiscal Year 2023 Budget
The agenda for the upcoming March 22, 2022, council meeting is filled with budget-related items.
The council will be asked to certify “free cash” for Fiscal Year 2021 (the budget year that ended on June 30, 2021). There is a helpful definition of free cash in the council packet. Here’s what it says:
Free cash is a revenue source that results from the calculation, as of July 1, of a community's remaining, unrestricted funds from its operations of the previous fiscal year based on the balance sheet as of June 30. It typically includes actual receipts in excess of revenue estimates and unspent amounts in departmental budget line items for the year just ending, plus unexpended free cash from the previous year. Free cash is offset by property tax receivables and certain deficits, and as a result, can be a negative number.
The amount of free cash from FY21 is $17 million which is the largest amount in 20 years. Over the past eleven fiscal years, free cash has averaged $2.5 million per year. The administration has a proposal for how to spend that $17 million but the council will likely refer the matter to a subcommittee or a public hearing or both.
There will also be a presentation on the FY2023 budget process. A large part of Lowell’s annual revenue comes from state aid which accounts for 46% of Lowell’s budget (the median for all communities is just 11%).
Since Lowell is so dependent on state funding, here is an explanation of the state budget process as I understand it:
Both the city and the state run on a July 1 to June 30 fiscal year. Work on both budgets begins in January but neither budget is finalized for several months, usually until sometime in June or even later for the state budget. (In FY2002 for instance, the legislature did not finalize the state budget until late November which was 5 months into the fiscal year).
Because the state and city budget processes run parallel and because Lowell is so dependent on state funding, the city budget-creation team must operate on some assumptions rather than on facts. The biggest assumption is that the amount of state aid the city will receive will be the amount recommended in the Governor’s budget proposal which is released in January. However, both the State Senate and the House of Representatives will issue their own budget recommendations at some point. (And both largely ignore the Governor’s recommendations).
The legislature then compares the House and the Senate budgets. Items that match usually go into the final state budget as is but items that don’t match go to a Conference Committee which consists of representatives of both the Senate and the House. That committee meets in secret and negotiates compromises of the disputed items. Once the differences are resolved, the Conference Committee issues its report which essentially becomes the final state budget.
So the legislature might provide more state aid than recommended by the Governor, or it might provide less.
According to the CFO’s memo, the target for submitting the proposed FY23 city budget to the council is May 24, 2022. The budget and related matters must all be referred to a public hearing two weeks later (June 7, 2022).