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Home My WebLink AboutStaff Report - Re: Policy on Prevailing Wage Rates Public Wo Ali _ �- wi�m "l IPM1P/ STY OF HUNTINGTON BEAR li - F, limit UM1d� MEETING DATE: April 15, 2002 DEPARTMENT ID MBER: Council/Agency Meeting Held: Deferred/Continued to.- 0 Approved © Conditio Ily Approved ❑ Denied City Clerk's natur ro April 15, 2002 Department ID Number: CITY OF HUNTINGTON BEACH REQUEST FOR COUNCIL ACTION SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS SUBMITTED BY: RAY SILVER, CITY ADM I N I STRATO R OW& PREPARED BY: WILLIAM P. WORKMAN, ASSISTANT CITY ADMINISTRATOR PETER GRANT, PRINCIPAL ADMINISTRATIVE ANALY�%4 9"SUBJECT: Prevailing Wage Statement of Issue,Funding source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachments) Statement of Issue: At its March 4, 2002, meeting, the City Council approved an H-Item submitted by Mayor Pro Tern Bauer directing staff to: "Present information with regard to the necessity, or lack thereof, to pay prevailing wages. Such information should be designed to enable the City Council to adopt a policy concerning this matter." Funding Source: NIA. - Recommended Action: Motion to: _ 1 . Review the report and provide staff with appropriate direction. , - Analysis This report represents the results of staffs research into prevailing wage. It contains: • A brief history of prevailing wage; • Explains its method of calculation; • Examines its applicability to the city; • Provides summaries of research into prevailing wage and its impact on construction projects and maintenance and service contracts; • Briefly details arguments typically made for and against prevailing wage; RCA 041502 = 4M200210:59 AM AVEST FOR COUNCIL ACTOI MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: Examines how other California charter cities have dealt with the issue; Examines prevailing wage impacts/requirements relating to the city's street sweeping and refuse collection contracts; and * Presents information regarding living wage requirements. What is prevailing wage?: In California, a prevailing wage is the rate paid to a majority of workers engaged in a particular craft, classification, or type of work within a locality. History of prevailing wage: In 1931, the federal government enacted the Davis-Bacon Act, requiring that workers on government sponsored construction projects be paid prevailing wages. The intent of the law was to protect local wage rates in the construction industry that, in the 1930s, were being eroded by itinerant contractors using lower wage labor. In addition to the federal law, 41 states (including California) have, at one time or another, enacted prevailing wage laws. States with prevailing wage laws Enacted Enacted Alaska 1931 Nebraska 1923 Arkansas 1955 Nevada 1937 California 1931 New Jersey 1913 Connecticut 1935 New Mexico 1937 Delaware 1962 New York 1894 Hawaii 1955 Ohio 1931 Illinois 1931 Oregon 1959 Indiana 1935 Pennsylvania 1961 Kentucky 1940 Rhode island 1935 Maine 1933 Tennessee 1953 Maryland 1945 Texas 1933 Massachusetts 1914 Washington 1945 Michigan 1965 West Virginia 1933 Minnesota 1973 Wisconsin 1931 Missouri 1957 Wyoming 1967 Montana 1934 States that have repealed States that have never enacted prevailing wage laws prevailing wage eq laws Enacted Repealed Georgia Alabama 1941 1980 Iowa Arizona 1912 1984 Mississippi Colorado 1933 1985 North Carolina Florida 1933 1979 North Dakota Idaho 1911 1985 South Carolina Kansas 1891 1987 South Dakota Louisiana 1968 1988 Vermont New Hampshire 1941 1985 Virginia Oklahoma 1909 1996 Utah 1933 1981 RCA 041502 -21- 4/8/2002 3:40 PM 02. &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: How are the prevailing wage rates calculated?. In California, the state's Director of Industrial Relations determines prevailing wage for a given trade by surveying wage rates established by collective bargaining agreements and rates that may have been determined for federal public works projects within the locality and nearest labor market area. The Director may also consider additional data from labor organizations, employers, and employer associations to assist in setting the prevailing wage rate. The prevailing wage rate is then set equal to the rate paid to the majority of the workers surveyed. Prevailing wage rates in California range from $5.97 for a landscape maintenance laborer (which is currently superseded by the state minimum wage requirements of $6.75) to $67.19 for underwater construction workers. The wage calculation does not include any adjustments of any kind, it is simply set equal to the rate earned by the majority of workers engaged in a particular trade in a geographic region. Is the city required to pay a prevailing wage rate?: Yes and no. The California Labor Code requires the payment of prevailing wages on public works projects for $1,000 or more, and the state Department of Industrial Relations (DIR) has made prevailing wage rate determinations for approximately 100 job/trade classifications. Vial v. City of San Diego (1981) established that charter cities can exempt themselves from state prevailing wage requirements except when the contract is for projects funded by state moneys or projects otherwise of statewide concern. The city is also required to pay prevailing wage whenever it expends federal moneys on a public works project. The city is under no obligation to pay prevailing wage on city funded service contracts. This chart provides an overview of Huntington Beach's requirement to pay prevailing wage rates: Type of Money Type of Project Are Prevailing Wage Rates Required? Federal All public works projects Yes—as determined by the federal government State All public works projects Yes—as determined by the state government City unrestricted Public works projects Yes—subject to state requirements, unless the city actively exempts itself from the state's requirements City unrestricted Service contracts No— however, the city's practice is to pay prevailing wage rates for these services RCA 041502 -- 4/9/2002 10:02 AM 3 ^UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: Do prevailing_wage laws apply to city employees?: No, prevailing wage requirements are applicable only to work performed under contract and are not applicable to work carried out by a public agency with its own forces. Would exempting itself from prevailing wage requirements adversely_ impact the city's ability to compete„for, and receive, federal and state grants?: No. State and federal grants for public works projects typically include any number of requirements recipient agencies must meet, including prevailing wage. Were the city to exempt itself from prevailing wage requirements when expending its unrestricted funds, it would still be eligible for federal and state grants. Do prevailing wane rates increase public works construction costs?: Staff conducted a review of current available academic analyses and studies conducted by and for other public agencies on the impact of prevailing wage. Summaries of that review are provided below. The nationally conducted studies generally agree that prevailing wage rate requirements increase construction costs. Unfortunately, there is no generally accepted approach for determining if there is a cost impact and, if so, for estimating its magnitude. Staff did not find any studies that examined the impact of prevailing wage laws in California. Who studied? Date of study? What was studied? Prevailing wage im act Various academic Late 1990s and Impact of prevailing wage on Costs increased 0-3%, studies (Phillips, Prus, others in progress school construction* authors hold this is not a Penn State) statistically significant impact Prince George County, January 1999 Impact of prevailing wage on Costs increased 1.9%, Maryland school construction* author holds this is not a statisitically significant impact Prince George County, Late 1990s Impact of prevailing wage on Costs increased 3.8%, Maryland school construction in author holds this is not a Delaware, Pennsylvania, statisitically significant West Virginia, Maryland, impact North Carolina, &Virginia* State of Kentucky Late 1990s Impact of prevailing wage on Failed to identify a definitive all types of construction impact on construction costs from prevailing wage RCA 041502 -5. 4i9l200210:02 AM &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: Who studied? Date of study? What was studied? Prevailing wage impact Keystone Research July 1999 Impact of a change in Concluded prevailing wage Center prevailing wage calculation had no measurable impact methodology in on construction costs Pennsylvania* State of Ohio Legislative On-going Impact of prevailing wage on Preliminary conclusion found Budget Office school construction costs increased 10.5% United States Senate 1999 Repeals of prevailing wage Costs increased 9.4% Committee considering a laws in Florida, Iowa, bill to repeal the Davis- Kentucky, Louisiana, Bacon Act Maryland, Minnesota, & New Hampshire State of Michigan 1994-97 Four year suspension of the Costs increased 10-16% state's prevailing wage laws General Accounting Late 1970s Impact of federal prevailing Costs increased 3-7% Office wage laws on construction projects State of Florida 1978 Four year exemption from Costs increased 15% prevailing wage requirements for school construction Fraundorf, et. al. 1978 & 1983 Effect of the federal Costs increased 23-26% prevailing wage in rural areas *All the academic studies based on linear regression models(all those noted with an asterisk)conclude that there is no statistically significant impact on construction costs from prevailing wage. How much of an impact does prevailing wa a have on the cit 's construction row.. acts?; Without putting construction projects out to bid absent prevailing wage requirements, staff is unable to estimate the impact of prevailing wage on city construction costs. Factors likely to affect prevailing wage's impact include: • The bidding climate; • Type and scope of work; • Availability of labor; and • Sophistication of contractor RCA 041502 -9- 4/8/2002 11:56 AM &UEST FOR COUNCIL ACTOI MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: What impact does prevailing wage have on the cost to construct Overmyer Reservoir Phase II?: The Public Works department contacted the design consultant for the project to help answer this question. The consultant's opinion appears below: For the Overmyer Phase !1 project, the possibility of saving money with a non-prevailing wage contract is significantly diminished by the fact that the project is heavy on materials and light on labor. Out of the approximate $6 million estimated construction cost, we have approximately $5 million of installed work (concrete, masonry, roof decking, piping, valves, etc.). Assuming approximately 20 percent for labor, and of this 20 percent, say 25 percent is assigned to unskilled trades, and assuming a 10 percent savings by utilizing a non- prevailing wage contract: Installed work value: $5 million Labor cost: $1 million Unskilled trades (25% of labor): $250,000 10% savings: $25,000 The savings identified by the design consultant represent 0.42 percent of the project cost and 2.5 percent of the project's labor cost. The design consultant also provided information about two other projects: As an example, the city of San Diego recently bid the 35 million gallon Earl Thomas Reservoir contract with a non prevailing wage provision. The responsive low bidder was C.E. Wylie at $25 million. 1 spoke with C.E. Wylie regarding the prevailing wage issue. They explained that in the current construction climate, there is virtually no difference in cost between two (the prevailing wage rates and the market rate). When they prepared their bid, they concluded there were no savings available by going the non prevailing wage route. The available work force pool is small and the key trades demand top dollar regardless. They explained that with little to no unskilled labor involved, there really is no room to shave labor costs. 1 also spoke with another San Diego County engineering contractor, J.R. Filanc. They just recently completed a $36 million water treatment plant expansion for Helix Water District. They confirmed C.E. Wylie's statements that there currently is no competitive advantage available using a non prevailing wage labor pay scale. Labor is too scarce, and top wages need to be paid to the qualified tradesmen. How much unrestricted money does the city spend on construction projects?: The city's adopted FY 2001-02 thru 2002-03 budget includes $42.5 million of construction projects funded by city moneys (a number of these projects have already been bid and/or are under construction). The capital improvement budget contains another $12.3 million for projects that are at least partially funded by county, state, or federal moneys and require the payment of prevailing wages. RCA 041502 y7'- 418i200211:56 AM &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: Do prevailing wage rates increase maintenance and service contract costs?: Staff has been unable to locate thorough studies by any agency, university, or association that attempt to identify the impact of prevailing wage rates on maintenance service contracts. In 1999, the City of Sunnyvale estimated that extending prevailing wage requirements to maintenance and service contracts would increase the cost for that work by 25 percent. However, without actually soliciting bids for maintenance and services currently performed by city employees or by a contract that requires prevailing wage, staff is unable to estimate the impact of prevailing wage rate requirements. How much of an impact does prevailing wage have on the city's maintenance and service contracts?: The city currently requires payment of prevailing wage in contracts for maintenance and service contracts including: • Tree trimming • Landscape maintenance • Park maintenance • Janitorial services Without bidding maintenance and service contracts absent prevailing wage requirements, staff is unable to determine if prevailing wage requirements increase the city's cost to perform these functions. How much unrestricted money does the city spend on maintenance and service contracts?: Approximately $15.5 million annually. About $2.5 million of these expenditures are for contracts on which the city could stop paying prevailing wage. The remainder of the costs are city employee labor costs and materials. How much of the $15.5 million is the cost of labor?: Labor costs constitute about 60 percent ($9 million) of the city's maintenance and services budget. The city's maintenance and service budget breaks down as: City labor costs $9 million Contracts subject to prevailing wage $2.5 million Materials &contracts not subject to prevailing wage $4 million RCA 041502 A- 4/8/2002 11:56 AM 7 &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: What arguments are typically made in favor of paying_prevailing_wage?: Prevailing wage laws protect local workers and wages. This is the stated intent of the Davis-Bacon law. Prevailing wage laws protect the local wage scale from the consequences of competitive pressures on contractors to submit the low bid. Prevailing wage laws reduce total construction costs by encouraging the use of more qualified and productive workers. Workers may be more expensive on a per hour basis, but their greater productivity results in a lower total cost. Prevailing wages laws assure quality construction and reduce delays and overruns. Because of their greater skill, workers are able to complete projects in less time and with fewer change orders. Higher quality workmanship also results in lower future maintenance and repair costs. Prevailing wage laws provide stability in the construction industry. Prevailing wage laws take wage competition out of the contract bidding process so that competition is focused on management, quality, timeliness, and productivity. Prevailing wage laws also promote stability by supporting union training programs. Attachment A includes information on this issue presented to staff by the Municipal Employees Association. What arguments are typically made against paying prevailing wage?: Prevailing wage laws increase project costs. The studies staff reviewed regarding the impact of prevailing wage on construction costs since 1990 place potential savings between zero and 16 percent depending on the type of construction project. Prevailing wage laws impose unnecessary regulatory burdens. A prevailing wage law may raise costs through its affect on how workers are utilized, and the laws are often troublesome for non-union companies that do not follow traditional union craft lines in assigning work. Some contractors may not bid on a project subject to prevailing wage requirements because winning the contract would disrupt their normal practices and wage scales. The decreased competition in bidding may also result in higher construction costs. Prevailing wage laws subsidize unions by reducing competition. By requiring that contractors pay union wages and follow union work rules, union contractors are given an advantage in project bidding. Non-union contractors may choose to not bid on a project that is subject to prevailing wage requirements. Prevailing wage laws discriminate against minority and small contractors. The administrative burdens created by prevailing wage laws may keep smaller contractors from bidding on a project. Larger contractors can better absorb the higher administrative costs. RCA 041502 -'- 4/812002 11:56 AM &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: Prevailing wage laws reduce training opportunities and entry-level jobs. Analysis of federal legislative efforts to repeal the Davis-Bacon act concluded that requiring the payment of prevailing wage rates creates a disincentive to hire entry-level workers and train them on the job. Prevailing wage laws do not guarantee quality or productivity. Prevailing wage opponents argue that quality construction is not guaranteed by high quality workers, but rather by the standards and inspections required on government construction projects. They also argue that productivity gains attributed to higher quality workers are offset because contractors may use less labor or substitute lower quality materials to contain costs. How do other California charter cities deal with prevailing wage requirements?: There are 105 charter cities in California. Staff made inquiries of all the charter cities in Orange County and cities known to have taken some action on prevailing wage. The table listed below provides a summary of the research results. Is prevailing wage is prevailing wage required for required for construction maintenance & Cft projects? services? Anaheim No Yes Alameda Yes Yes Cypress Yes No Irvine No No Huntington Beach Yes Yes Long Beach Yes Yes Modesto No No Newport Beach No No San Bernardino Yes No San Diego No No Santa Ana No No Santa Monica Yes& No No Santa Cruz Yes No—living wage Seal Beach Yes Yes Sunnyvale Yes No Have other government agencies replaced their prevailing wage with a living wage?: Living wage laws, which require employers to pay wages that are above federal or state minimum wage levels, have been enacted by 51 agencies across the country. In California, the cities of Hayward, Los Angeles, Oakland, Pasadena, San Fernando, San Francisco, San Jose, Santa Cruz, and West Hollywood have enacted living wage laws that apply to city contracts. Other California agencies with living wage laws include Los Angeles County, the San Diego Metropolitan Transit Development Board, and Santa Clara Cou nty. A living wage ordinance is likely to have no impact on construction wages were the city to exempt itself from prevailing wage requirements, as the market wages for construction RCA 041502 _ 4/8/2002 11:56 AM &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: trades are significantly higher than the average living wage requirement. Living wage requirements are usually in the $8 - $12 range. Without bidding maintenance and service contracts absent prevailing wage requirements, staff is unable to determine if market rates for service contracts in Orange County would be above or below the $8 - $12 living wage range. Included with this report, as Attachment 2, is a research paper on living wages by the Economic Policy Institute. The paper provides more detail about living wage and a table that provides summary details of the living wage laws enacted throughout the country. What is the state's prevailing wage requirement for a street sweeper operator?: The state of California requires that street sweeper operators be paid $39.06 an hour, which includes a basic pay rate; health and welfare; pension; vacation; travel; subsistence; and apprenticeship or other training programs. Effective June 30, 2002, the state has determined that the prevailing wage paid to street sweeper operators will increase 3.7 percent to $40.51. Annualized to a 2,080-hour work year, a $39.06 hourly wage is about $80,000 a year (a $40.51 hourly wage is approximately $84,250). However, most operators work less than forty hours a week — they are typically dismissed for the day when they have swept their routes and returned to their base of operations. Prevailing wages are also designed with the expectation that the employee funds their insurance, vacation, and retirement needs from their base salary. They are not provided with paid time-off, any health or life insurances, retirement pensions, or deferred compensation systems. What is the average hourly rate the city pays its street sweeper operators?: The city's street sweeper operators earn approximately $32.70, including benefits. At its April 1 , 2002 meeting, the City Council approved a labor agreement with the Municipal Employee's Association, the bargaining group that represents the city's street sweeper operators. As part of that agreement, the street sweeper operators received a six percent salary increase (three percent from a classification and compensation study and a three percent cost of living adjustment). The agreement also includes an increase in the amount of city paid medical insurance premiums. Staff estimates that the agreement increased the street sweeper operators' weighted hourly wage to approximately $36.00 (annualized this is almost $75,000). Because the labor agreement was approved at the last City Council meeting, staff has not had the opportunity to examine actual payroll history. RCA 041502 - - 4181200211:56 AM f� &UEST FOR COUNCIL ACT& MEETING DATE: April 15, 2002 DEPARTMENT ID NUMBER: What is the average hourly rate Nationwide Environmental Services pAys its street sweeper operators when prevailing wage is not required on a contract?: In January 2002, Nationwide informed staff that it pays approximately $12 - $15 hour ($25,000 - $30,000 annualized) to street sweeper operators on non-prevailing wage contracts. Nationwide also informed staff that the labor cost passed on to a client is closer to $20 (additional costs for employer tax costs and payroll administration). When the city returned to twice-a-month street sweeping, did it solicit, or receive, a proposal to provide service without paying prevailingwage?: In 1999, the city issued a request for proposal for street sweeping services that required the proposing firms to pay prevailing wage. One firm, Universal Street Sweeping, submitted a proposal in which its street sweeper operators were "owner-operators" and, Universal argued, therefore not subject to the city's prevailing wage requirements. The bid was rejected by the city as non-responsive because it did not pay prevailing wage. Universal bid $255,000 for the contract. Nationwide Environmental Services, who was awarded the street sweeping contract, did not submit a bid to provide services at a non-prevailing wage rate. Nationwide's winning bid paid prevailing wage and was for $294,821. Is the city's contract with Rainbow Disposal subject to prevailing wage requirements?: No. Prevailing wages are only required for public works projects which roughly include agreements for the erection, construction, alteration, repair, maintenance, or improvement of any public structure, building, road, or other public improvement of any kind. Refuse collection falls outside this definition. How would the City Council exempt the city from the state's prevailing wage requirements when spending unrestricted city moneys?: The City Attorney's office recommends that the City Council adopt an ordinance to formalize the exemption. Attachments City Clerk's Page Number No. Description 1 Communication from MEA Regarding Prevailing Wage 2 EPI Issue Guide - Living Wage RCA 041502 -12L 4/8/2002 11:56 AM ATTACHMENT # 1 April 4, 2002 Honorable Members of the Huntington Beach City Council Dear Council Members: The Huntington Beach Municipal Employees Association wishes to convey its strong support for the continued application of prevailing wage standards in the City of Huntington Beach. Adherence to prevailing wage standards helps to ensure that: • The City engages only responsible, lawful private contractors who meet high standards of quality, trustworthiness and experience. • Performance,bidding, and other comparative studies between private contractors and the City's own employees are conducted fairly and equitably. • The City does not provide unwitting support to rogue private employers operating in an illegal, underground economy that deprives state and local government of billions of dollars of tax revenues annually. • Private employers properly pay required employment-related taxes and insurance premiums. Arguments in favor of disregarding prevailing wage standards often focus on perceived cost savings. However, study after study has shown that the real east of municipal contracts actually increases in the absence of these standards. Similar studies have also shown that business investment increases in localities that impose prevailing wage standards. On behalf of your employees, HBMEA encourages you to ensure that the City of Huntington Beach continues its commitment to quality by supporting prevailing wage standards. Sincerely, HUNTINGTON BEACH MUNICIPAL EMPLOYEES ASSOCIATION Art Jensen President ATTACHMENT #2 EPI Issue Guides EPI , I E GUIDE wal k' , .,�1V ............... EPI Issue Guides are published by: ECONOMIC POLICY INSTITUTE 1660 L Street, NW Suite 1200 Washington, DC 20036 (202) 775-8810 http://www.epinet.org The mission of the Economic Policy Institute is to provide high-quality research and education in order to promote a prosperous,fair, and sustainable economy.The Institute stresses real world analysis and a concern for the living standards of working people,and it makes its findings accessible to the general public,the media,and policy makers- Inquiries about the Issue Guide on the Living Wage should be directed to Chauna Brocht cbrocht epinet.org]. Economic Policy Institute--http://www.epinet.org/ Living wage LIVING WAG �acts at. a G I'ance . Living wage ordinances have been enacted in over 40 localities. • A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels. Only a specific set of workers are covered by living wage ordinances, usually those employed by businesses that have a contract with a city or county government or those who receive economic development subsidies from the locality. The rationale behind the ordinances is that city and county governments should not contract with or subsidize employers who pay poverty-level wages. • The living wage level is usually the wage a full-time worker would need to earn to support a family above federal poverty line, ranging from 100% to 130% of the poverty measurement. The wage rates specified by living wage ordinances range from a low of$6.25 in Milwaukee to a high of$10.75 in San Jose. • In addition to setting wage levels, many ordinances also have provisions regarding benefits (such as health insurance and paid vacation), labor relations, and hiring practices. Living wage ordinances provide much needed raises for low-income workers. • Wages for the bottom 10% of wage earners fell by 9.3% between 1979 and 1999. • The number of jobs where wages were below what a worker would need to support a family of four above the poverty line also grew between 1979 and 1999. In 1999, 26.8% of the workforce earned poverty-level wages, an increase from 23.7% in 1979. Living wage ordinances can ensure that pay for contractual workers does not fail behind the pay of city workers. • The trend toward privatization of services formerly provided by public sector workers is well documented. • These privatization efforts have often resulted in decreases in wages for the private sector workers in the same job categories. A study by the Chicago Institute on Urban Poverty, which compared the wages and benefits of Chicago city employees to contractual employees for low-skill jobs, found that privatization led to compensation losses for entry level workers ranging from 25% to 46%. • Since government agencies disproportionately hire (and advance) female and minority workers, these changes have meant the loss of relatively high-quality jobs for these workers. Living wage ordinances promote responsible economic development policies. • Living wage ordinances have the potential to counteract the destructive race to the bottom wherein cities and counties try to attract businesses by offering larger subsidies than their neighbors. The more prevalent living wage ordinances are, the less firms will be able to shop around for the cheapest locality on the basis of cutting wages. • Recent research focusing on the number and quality (in terms of wages and benefits) of jobs created by tax incentives has found that many economic Economic Policy Institute--htlp://www.epinet.org/lssueguides/Iivingwage/Iivingwagefacts.htmI Living Wage development subsidies aTe not tied to job quality. A study of tax centives in Minnesota by Good Jobs First found that 72% of subsidized jobs paid below the average for their corresponding industry. • Some detractors argue that the living wage will create a "hostile business climate." But most living wage ordinances cover too small a proportion of the labor force to have such a profound effect. Most living wage ordinances cover less than 1% of the local workforce. In addition, for most firms, the increase in labor costs is expected to be less than 2% of total production costs. Living wage ordinances have no negative effects on a locality's contracting process. • An EPI evaluation of a living wage ordinance in Baltimore found no significant cost increase to the city. The 1.2% cost increase for the contracts examined was less than the rate of inflation for the same period. • An evaluation of the Baltimore ordinance by the Preamble Center also found that the ordinance did not reduce the competitiveness of the contract process. The small decrease in the number of bids per contract wasn't high enough to lower competitiveness or raise contract costs. • Even if the costs to contractors do increase, it is still profitable for these firms to do business with the city. Most firms will choose to sacrifice some of their profit margins, which are estimated to range from 10%6 to 20% of production, since wage increases from the ordinance only amount to an estimated 2% of production costs. There is no evidence of job losses as a result of living wage ordinances. • The EPI evaluation of Baltimore's living wage ordinance found no job loss as a result of the ordinance. The workers interviewed for the study reported no changes in the number of hours they worked after the ordinance went into effect. • Employers interviewed for the study reported that although wages increased, these costs were absorbed by improvements in efficiency. By raising wages, they decreased employee turnover rates, which decreased recruitment and training costs. Sources: Chicago Institute on Urban Poverty. 1997.Does Privatization Pay?Chicago: Chicago Institute on Urban Poverty. LeRoy,Greg, and Tyson Slocum. 1999.Economic Development in Minnesota:Nigh Subsidies, Low Wages,Absent Standards.Washington, D.C.: Good Jobs First. Mishel,Lawrence,Jared Bernstein,and John Schmitt. 1999. The State,of Working America 1998-99, Ithaca: Cornell University Press. Niedt,Christopher, et al. 1999. The Effects_ofthe Living Wage in Baltimore.Working Paper No. 119.Washington, D.C.: Economic Policy Institute. Pollin, Robert,and Stephanie Luce. 1998. The Living Wage:Building a Fair Economy. New York:The New Press. Weisbrot, Mark,and Michelle Sforza-Roderick. 1998. Baltimore's Living Wage Law.Washington, D.C.: Preamble Center, Economic Policy Institute--http://www.epinet.org/Issueguides/livingwage/livingwagefacts.html Living Wage LIVINGWAGE Frequently Asked Question! What is a living wage ordinance? A living wage ordinance requires employers to pay wages that are above federal or state minimum wage levels. Only a specific set of workers are covered by living wage ordinances, usually workers employed by businesses that have a contract with a city or county government or those who receive economic development subsidies from the locality. The rationale behind the ordinance is that city and county governments should not contract with or subsidize employers who pay poverty-level wages. How are living wage levels determined? The level of the living wage is usually determined by consulting the federal poverty guidelines for a specific family size. Often, living wage levels are equal to what a full-year, full-time worker would need to earn to support a family of four at the poverty line ($17,690 a year, or$8.20 an hour, in 2000). Some living wage rates are set equal to 130% of the poverty line, which is the maximum income a family can have and still be eligible for food stamps. The rationale behind some living wage proposals is that these jobs should pay enough so that these families do not need government assistance. (The poverty guidelines are available from the U.S. Department of Health and Human Services. Note that poverty guidelines are different from the poverty thresholds; one main difference is that the poverty guidelines are more current.) Cities and counties with a higher cost of living tend to have higher living wage levels. The wage rates specified by living wage ordinances range from a low of$6.25 in Milwaukee to a high of$10.75 in San Jose. Furthermore, some advocates have attempted to calculate a living wage based on an income that would provide for a family's basic needs (see EPI's How Much is Enough for a discussion of"basic family budget" measures). The living wage levels based on these self-sufficiency income measures are generally much higher than the poverty guidelines. How is the minimum wage different from a living wage? The federal minimum wage is the minimum amount that a worker can be paid an hour (currently $5.15) and applies to almost all workers. States may also set a minimum wage that is higher than the federal minimum. Living wages commonly refer to wages set by local ordinances that cover a specific set of workers, usually government workers or workers hired by businesses that have received a government contract or subsidy. A "living wage" is a also term often used by advocates to point out that the federal minimum wage is not high enough to support a family. What is the difference between a living wage and a "prevailing wage"? Prevailing wage laws require firms working under a government contract to pay the "prevailing" wage for each job, that is, the wage where half of all workers in the community in the particular job earn more and half earn less. The prevailing wage is different for each occupation and each city or county. Prevailing wage laws ensure that low-wage firms cannot unfairly underbid higher-wage firms when competing for federal or state government contracts. The prevailing wage is generally higher than the minimum wage, but can be lower than a living wage. Thus, prevailing wage laws do not prevent workers from being paid a poverty-level wage. Why do we need living wage ordinances? The main reason for enacting a living wage ordinance is to reverse the downward trend in wages for low-wage earners. Wages for the lowest-paid 10% of workers fell 9.3% Economic Policy Institute--http://www.epinet_org/issueguides/tivingwage/livingwagefaq.htmi Living Wage between 1979 and 1999. TheOnber of jobs in which wages were betwhat a worker would need to support a family of four above the poverty line also grew between 1979 and 1999. In 1999, 26.8% of the workforce earned poverty-level wages, an increase from 23.7% in 1979. Living wage ordinances are necessary to prevent city and county governments from encouraging the creation of jobs that pay wages so low that workers live in poverty. Without living wage laws, governments could contribute to the creation of poverty-level jobs by hiring low-paying sub-contractors or giving businesses tax breaks or subsidies to create jobs without any guarantee that the new jobs will pay a decent wage. Who pays the cost of the living wage increase? The evidence from living wage evaluations indicates that the costs of living wage ordinances are primarily absorbed by businesses through reduced training and recruitment costs or reduced profits. The evaluations found no evidence of job loss, and the contract costs increased by an insignificant amount. However, in addition to the cost of wage increases for workers, there are also administrative costs associated with living wage ordinances. One evaluation of the Baltimore living wage ordinance found that that administrative costs amounted to $0.17 per taxpayer per year. Even if some costs from a living wage ordinance are passed on to the taxpayers, it is a value judgement on the part of the community as to whether reducing poverty through a living wage ordinance is worth the added expense. While the living wage might increase the amount of money the locality spends on contracts, local governments might also experience savings as families become less reliant on income supports and social services. Do living wage ordinances cause job loss? EPI's evaluation of Baltimore's living wage ordinance found no job loss as a result of the ordinance (Niedt et al. 1999). The majority of workers interviewed for the study reported no changes in the number of hours they worked after the ordinance went into effect. Employers interviewed for another study reported that although wages increased, these costs were absorbed by improvements in efficiency; raising wages decreased employee turnover, which decreased recruitment and training costs. The evidence from minimum wage increases also suggests that there should be little or no job loss as a result of living wage ordinances. A recent EPi study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase (Bernstein and Schmitt 1998). Do living wage ordinances have a negative impact on the business climate? Some living wage detractors argue that the living wage will create a "hostile business climate." But most living wage ordinances cover too small a portion of the labor force to have such a profound effect; most living wage ordinances cover less than 1% of the local workforce. Wages are only one factor in a business' decision to move to a location, and there is no evidence that an existing living wage ordinance has discouraged firms from locating in a city. In addition, the costs of the living wage ordinance will have a very small impact on the profits of the small number of firms affected by the law. The profit margins for firms effected by the living wage are estimated to range from 10-20% of production costs. In comparison, the wage increases from living wage ordinances are estimated to be 2% of production costs. Economic Policy Institute--http:/Avww.spinet.org/Issueguidestlivingwage/livingwagefaq.html Living wage What effect do living wage otnances have on the contracting pr ss? There is no evidence that living wage ordinances have significantly increased contracting costs for cities and counties. An EPI evaluation of a living wage ordinance in Baltimore found no significant cost increase for contracts in the city (Niedt et. al. 1999). The 1.2% cost increase for the contracts examined was less than the rate of inflation for the same period. An evaluation of the Baltimore ordinance by the Preamble Center (Weisbrot and Sforza-Roderick 1998) also found that the ordinance did not reduce the competitiveness of the contract process. The small decrease in the number of bids per contract wasn't high enough to lower competitiveness or raise contract costs. The evidence suggests that most firms absorb the wage increases through reduced training and recruitment costs. Even if the costs to contractors do increase, it is still profitable for these firms to do business with the city. Most firms will choose to sacrifice some of their profit margins, which are estimated to range from 10% to 20% of production, since wage increases from the ordinance only amount to an estimated 2% of production costs. What effect do living wage ordinances have on economic development? Living wage ordinances have the potential to counteract the destructive race to the bottom wherein cities and counties try to attract businesses by offering larger subsidies than their neighbors. The more prevalent living wage ordinances are, the less firms will be able to shop around for the cheapest locality on the basis of cutting wages. Recent research focusing on the number and quality (in terms of wages and benefits) of jobs created by tax incentives has found that many economic development subsidies are not tied to job quality. A study of tax incentives in Minnesota by the Good .lobs First project found that 72% of subsidized jobs paid below the average for their corresponding industry. Living wage ordinances are one tool to ensure that economic development policies create good paying jobs. Are there problems with enforcing living wage ordinances? In many cities, the local government is slow to develop procedures for monitoring contractors' compliance with living wage ordinances. Ordinances can be enforced more effectively if there are some guidelines for enforcement written into the ordinance. Living wage ordinances are also more effectively implemented if the community groups that campaigned for the ordinance communicate with local governments about their plans for enforcement after the law is passed. Will living wage ordinances reduce poverty? Some critics argue that living wage ordinances will not reduce poverty because most living wage workers do not live in poor households. Evidence from EPI's evaluation of the Balttmore living wage ordinance shows that this claim is not true. Interviews with a small sample of workers covered by the living wage reveal that the average household income for covered workers was $13,632. The interviews also show how important a living wage worker's wages are to their family's well-being: an overwhelming majority of the workers interviewed were the primary wage earner in their household, bringing home an average of 68% of their family's income. Another frequent claim is that most living wage workers are teenagers. However, studies of the minimum wage show that 70% of minimum wage workers are adults. The proportion of adults is probably higher among living wage workers, since living wage ordinances cover jobs typically held by adults, like janitors and bus aids. Local governments often have many effective initiatives to address working poverty, while at the same time they create poverty-wage jobs through their contracting policies. Economic Policy Institute--http.fftiwrw_spinet.orgfissueguidesfiivingwage}livingwagefag_html Living wage Living wage ordinances are de ned to make sure governments are 101creating poverty through their employment practices. However, it is also important to keep in mind that while the living wage is a crucial tool in the effort to end poverty, it is only one part of a larger anti-poverty strategy. How do living wage ordinances affect non-profits? Some people have raised concerns that living wage ordinances will cause job foss for non-profits and therefore reduce the level of services non-profits are able to provide. The reason for this concern is that unlike private firms, non-profits are unable to absorb the cost of a living wage ordinance through a reduction in their profits. However, like private businesses, non-profits can absorb some of the costs from a living wage ordinance through a reduction in recruitment and training costs. And in many cases, non-profits can request a larger budget from the city or county in order to cover the costs associated with the wage increases. As a result of these concerns, many living wage ordinances exempt non-profit organizations. Other ordinances include non-profits, arguing that city and county governments should increase funds to non-profits to cover the wage increases. During living wage campaigns, non-profit managers have expressed widely differing views on the effect the living wage will have on their organizations. One study--an evaluation of the Detroit living wage ordinance--looked systematically at the effects of living wage ordinance on non-profits (Reynolds, 2000). Of the 64 non-profit organizations effected by the ordinance, there were lay-offs in one organization, where two part-time workers were laid off. Of the organizations who stated that the ordinance had a "significant" impact on their organization, nearly all would prefer to receive additional funds from the city to cover the cost of the wage increase rather than be exempt from the law. Will employers replace less-skilled workers with higher-skilled workers if they are forced to raise wages? Research on the minimum wage suggests that living wage ordinances will not cause job loss among less-skilled workers. A recent EPI study of the effects of the 1996-97 minimum wage increase, for example, found no evidence of job loss among teenagers and adult workers with less than a high-school education (two groups of workers that typically have lower skill levels) (Bernstein and Schmitt 1998). In the absence of living and minimum wage laws, firms can choose either the "low road" (low pay, low training, low motivation, high turnover, and high vacancies) or the "high road" (higher pay, more training, greater motivation, lower turnover, and fewer vacancies). Almost every industry includes profitable businesses that follow both paths. High-road employers, who would rather have a stable workforce and produce a high-duality product, have to compete for contracts with low-road employers, who provide a poorer-quality product at a lower cost. Living wage ordinances encourage businesses to take the high road, leading to higher quality services for the public and a more highly trained workforce. Opponents of living wages have provided no evidence that the transition from low-road to high-road employment will lower employment opportunities for less-skilled workers. The evidence suggests that employers typically make the transition by retaining, training, and motivating their existing workforces. What is the government's role in setting job quality standards? Critics of living wage ordinances assert that the government should not intervene in the marketplace. This argument ignores the many ways in which governments intervene in the market to help businesses through subsidies, tax breaks, and other assistance. Economic Policy Institute--http://www.epinat.org/issueguides/livingwaga/livingwagefaq.html Living wage Living wage laws typically onlAver businesses that receive this typassistance or have contracts with the government. In addition, employers indirectly benefit from government programs to help the poor. They are able to pay low wages because some government programs exist to help low-income families meet their needs. This means that the burden of providing income supports and services to low-wage workers is passed on to the public, because these programs are paid for through taxes and charitable contributions. Many critics of the living wage argue that setting wage levels should be the responsibility of businesses alone. But in the United States, the government has long had a role in setting job quality standards that protect workers. Beginning in the 1930s, activists struggled to get federal and state governments to establish job quality standards to prevent abuses of workers. Many of these provisions are still in effect today, including minimum wage laws, overtime requirements, and prohibitions against child labor. More recently, activists advocated for laws such as occupational safety and health standards, family and medical leave, and living wage ordinances. Sources: Bernstein,Jared, Chauna Brocht,and Maggie Spade-Aguilar.2000.How Much is Enough?Basic Family Budgets for Working Families. Washington, D.C.: Economic Policy Institute. Bernstein,Jared,and John Schmitt. 1998.Making„Work Pay:.The„impact of the 1996-97 Minimum Wage Increase. Washington, D.C.: Economic Policy Institute. Chicago Institute on Urban Poverty. 1997. Does Privatization Pay?Chicago: Chicago Institute on Urban Poverty. Kraut,Karen, at al.2000. Choosing the High Road:Businesses That Pay a Living Wage and Prosper. Washington, D.C.: United for a Fair Economy. LeRoy,Greg and Tyson Slocum. 1999.Economic Development in Minnesota:High Subsidies, Low Wages,Absent Standards.Washington,DC:Good Jobs First. Mishel, Lawrence,Jared Bernstein,and John Schmitt. 1999. The State of Working America 1998-99. Ithaca, N.Y.: Cornell University Press. Niedt,Christopher, at al. 1999."The Effects_af the Living Wage in Baltimore."Working Paper 119.Washington, D.C.: Economic Policy Institute. Pollin, Robert,and Stephanie Luce. 1998. The Living Wage:Building a Fair Economy. New York:The New Press, Reynolds,David,with Jean Vortkamp. 2000. Impact of Detroit's Living Wage Law on Non-Profit Organizations. Wayne State University. Weisbrot,Mark,and Michelle Sforza-Roderick. 1998.Baltimore's Living Wage Law.Washington, D.C.:Preamble Center. For a Closer look at the research on the living wage, see EPI's publication, "The Effects of the Living Wage in Baitimolre." Economic Policy Institute--http:llwww.epinet.org/issueguides/livingwage/livingwagefaq.html Living Wage Table: Living Wage Ordi nces that Cover Contractors I Subsidy Recipients, 1991-2000 Compiled by the Political Economy Research Institute, University of Massachusetts. This is a catalog of the living wage proposals that have been passed throughout the United States between 1991 and July 2000. We have sought to be comprehensive, but may have left out some ordinances. Nevertheless, the information here should provide a good sense of the range of recent living wage proposals that have passed into law, both in terms of geographic diversity and the variety of provisions they provide. Note that the wage levels presented here are those in place when the law was enacted. Most wages have subsequently been indexed upward with inflation. .... . .. -- Place Outcome Coverage Main provisions [All dollar amounts are per hour] .... ..... .... . . ... City contracts over7benefirts, with 1 Alexandria, VA Passed 2000 or $30,000 ithout. ............. . . ._. 6.10 in fiscal year 1996, $6.60' in fiscal year 1997, $7.10 in 2 Baltimore, MD Passed 1994 Service contracts over fiscal year 1998, $5,000 and $7.70 in fiscal year 1999,', subject to Board'. of Estimates approval. $8.23, indexed d annually on July 1 to whichever is Passed 1997, Service contracts of at higher of the 3 Boston, MA amended least $100,000 or adjusted poverty 1998 subcontracts of at least guidelines or $25,000 110% of the state minimum ..... ... . .... ...... wage. 6.22 in 2000, $7.15 in 2001, Service contracts and ' and $8.08 in 4 Buffalo, NY Passed 1999 subcontracts over 2002, with health $50,000 and firms with benefits; or at least 10 employees $7.22, $8.15, and $9.08 ... . without benefits. City employees, service _10 indexe 5 Cambridge, MA Passed 1999 contracts, subcontracts, annually with the and subsidies of more Consumer Price than $10,000. Index. Economic Policy Institute--hftp://www.epinet.org/ Living Wage Contracts or subcontractors covering First proposal home and healthcare failed proposal workers, security 6 Chicago, IL second guards, parking attendants, 60 passed in attendants, day laborers,! 1 sed cashiers, elevator operators, custodial workers, and clerical workers 8.20 per hour, going to $8.70 an hour on Oct. 1, 2001, to $9.20 7 Cleveland, OH Passed 2000 Service contractors on Oct. 1, 2002, and will be adjusted according to inflation after Oct. 1, 2003. Cook County, IL Passed 1998 ervice contracts and $7.60 subcontracts Wage and benefit package Service contracts over must equal at 9 Corvallis, OR Passed 1999 least $9.00 per $5,000 hour, adjusted annually with CPI. County employees and 110 percent of F Dane County, WI Passed 1999 service contracts poverty level for a family of three. ervlce contracts or subcontracts over $2,000, for covered categories: parking lot Poverty level for 11 Denver, CO Passed 2000 attendants, security guards, clerical support ' a family of four. workers, and child care torkers on city owned or leased property Passed , ' minimum, 12 Des Moines, IA amended Subsidy recipients 7itha goal of 1996 9.00. Indexed to Service contracts, poverty rate for a subcontracts, and family of 4 with 13 Detroit, MI Passed 1998 subsidies over $50,000 health benefits, per year or 125% of poverty level without benefits. Economic Policy Institute--http:l/www.epinot.org/ Living Wage % of employees must be paid $6.50 14 Duluth, MN Passed 1997 Subsidies over$25,000 with health benefits, or $7.25 without, indexed to inflation. Ity employees an F Durham, NC Passed 1998 F $7 55 service contracts . .... . .. ... Tax abatement F61 Gary, IN Passed 1991 recipients Prevailing wage. Service contracts over 17 Hartford, CT Passed 1999 $50,000 and subsidies $8.81 over $100,000 ............ . . ....... . ........ 8 with health City employees and benefits, or $9.25 without, 18 Hayward, CA Passed 1999 service contracts over $25,000 adjusted yearly with regional cost of living. Hudson County, 15 0 o the - 19 NJ Passed 1999 Service contracts federal minimum ...........wage...................... . Selected service F Jersey City, NJ Passed 1996 $7.50 cont .. Kankakee County, Firms getting local 11.4 or a 21 IL Passed 1999 Enterprise Zone tax of the federal breaks poverty level. ...... .. .. ....... ......... ...... . Service contracts and subcontracts over $7 25 with health Los Angeles City, $25,000, 22, CA Passed 1997 concessionaires, and benefits, or subsidies over $100,000 $8.50 without. per year Los Angeles County employees and $ 2 with ealt 3 County, CA Passed 1999 service contracts benefits, or $9.46 without. o Opoverty: Subsidies over level for a family. 4 Madison, WI Passed 1999 $100,000, and service of in 1999, 105% contracts over $5,000 in 2000, and 110% in 2001. Contract for cleaning 6.60 in 1996, F Maryland State Passed 1996 : state-owned World $7.10 in 1997, or Trade Center $7.70 in 1998 . . ..... ... .. .. County employees, $8 56 with health 26 Miami-Dade passed 1999 contractors, benefits, or County, FL subcontractors, and $g 81 without. airport employees Economic Policy Institute--http:/Iwww.epinet.org/ Living wage Service contracts and Milwaukee City, ' Poverty level for 7 WI Passed 1995 subcontracts over$5,000 family of three. Milwaukee 6. 6, in exed 8 County, WI Passed 1997 Select service contracts to prevailing wage. Milwaukee School Public School System F Board, WI Passed 1996 employees, and service $7.70 contracts TTO-755f poverty Subsidies over$100,000 level for a family 30 Minneapolis, MN Passed 1996 of four with per year health benefits, or 110% without.'. Multnomah Passe 1996, Janitorial, security and ended in 1998, or'. 31 County, OR amended in foodservice contracts $8.00 in 1999. F 1998 Poverty level for 32 New Haven, CT Passed 1997 Service contracts a family four, a revised every five years Security, temporary 33 New York, NY Passed 1996 office, cleaning and food Prevailing wage,'. service contracts . ............. Service contracts over w� 34 Oakland, CA (city) Passed 1998 $25,000, and subsidies benefits, or over $100,000 $9.25 without (indexed) Service contracts over $g 19 with $75,000; firms with benefits, or receiving more than $g 01 without, 35 Omaha, NE Passed 2000 $75,000 in financial adjusted assistance. Exempts annually with non-profits and firms federal poverty with fewer than 10 guidelines. employees Service contracts over 7.25 with health: 6 Pasadena, CA Passed 1998 benefits, or $25,000 $8.50 without. Passed 1996, Janitorial, security, $7 50 in 1998, 37 Portland, OR amended parking and temporary 1998 clerical service contracts' and $8 in 1999. 7to7 oo service Tax abatement employees in 38 San Antonio, TX Passed 1998 new jobs, and recipients $10.13 to 70% of'. durable goods employees. Contractors ith tie7benefits, 3-with 39 San Diego, CA Passed 2000 Metropolitan Transit or Development Board without. Economic Policy Institute--http://www.epinet.org/ Living Wage Service contractors G. $7.25 with 0 San Fernando, CA Passed 2000 (including employees of benefits, or temporary agencies), $gene without. .. city employees A minimum o per hour, rising Service contracts of to $10 by 2001, with 2.5% cost of more than $25,000, living increases leases at the San in each of the 1 San Francisco, CA Passed 2000 Francisco International following three Airport, In Home Support, years. Health Service Public Authority care benefits (homecare workers) provided through a separate ordinance. .. . ... ......................... . . . .... ............... Passed 1991, Service contracts over 9.50 with 2 San Jose, CA amended $20,000, and some city benefits, or 1997 employees $10.75 witho ut. ..... ......... Santa Clara wit health 3 Passed 199n Subsidy recipients County, CA benefits. City employees, service Somerville, MA Passed 1999 contracts and $8.35. subcontracts Defeated in 100% of poverty 1995 then Subsidies over$100,000` level for family of 5 St. Paul, MN four plus passed in per year benefits, or 1997 110% benefits. Service contracts over 8.58 with ealth $10,000 (for firms with benefits (indexed'. more the 25 employees) at 110% of the and subsidies more than federal poverty 6 Toledo, OH Passed 2000 $100,000 (for firms with level for a family more than 50 of four), or employees). Covers $10.14 without tenants in developments' health coverage receiving subsidies (130/° of the poverty level). 8. 0 with health' 7 Tucson, AZ Passed 1999 Service contracts benefits, or $9.00 without. Poverty level Tor' Service contractors, family of four 8 Warren, MI Passed 2000 . firms receiving financial with benefits, or assistance over $50,000 125/° of poverty: level without benefits. Service contracts over 7.25 with health: 9 West Hollywood,I8� Passed 1997 $25,000 benefits, or $8.50 without. Economic Policy Institute--httpJ/www.epinet.org/ Living Wage Service contracts or 8.50 with health FO Ypsilanti City, MI Passed 1999 financial assistance over' benefits, or $10 $20,000 in a year without. Ypsilanti $.50 with 1 Township, MI Passed 1999 Contracts over$10,000 benefits, or $10 without. Last updated&112000. Source:"Living Wage Successes."Association of Community Organizations for Reform Now,www.acorn.orp; interviews with city staff;"Enacted Initiatives,"Employment Policies Institute,www.epionline g. 11"Vi wage Economic Policy Institute--http:Hwww.epinet,org/ RCA AOUTING AIEET INITIATING DEPARTMENT: CIty Administrator's Office SUBJECT: Prevailing Wage COUNCIL MEETING DATE: April 15, 2002 RCA ATTACHMENTS STATUS' Ordinance (w/exhibits & legislative draft if applicable) Not Applicable Resolution (wlexhibits & legislative draft if applicable) Not Applicable Tract Map, Location Map and/or other Exhibits Not Applicable Contract/Agreement (wlexhibits if applicable) (Signed in full by the City Attome ) Not Applicable Subleases, Third Party Agreements, etc. (Approved as to foma PX City Attome ) Not Applicable Certificates of Insurance (Approved by the CifK Attomey) Not Applicable Financial Impact Statement (Unbudget, over $5,000) Not Applicable Bonds (If applicable) Not Applicable Staff Report (If applicable) Not Applicable Commission, Board or Committee Report (If applicable) Not Applicable Findings/Conditions for Approval and/or Denial Not Appllicablle�J EXPLANATION FOR MISSING ATTACHMENTS REVIEWED RETURNED . FORWARDED Administrative Staff Assistant City Administrator Initial City Administrator (initial) ( ) { City Clerk EXPLANATION FOR RETURN OF ITEM: r ;t Only)(Below Space For City Clerk's Use RCA Author: r rt Report on Prevailing Wage E s E Y' ra =i Presented to the Huntington Beach City Council April 15, 2002 ' 2 What is prevailing wage? • The rate paid to a majority of workers engaged in a particular craft, classification, or type of work within a locality • Determined by the state Director of Industrial Relations • Prevailing wage rates in California range from minimum wage ($6.75) to $67.19 z 1 3 Is the city required to pay prevailing wage? Prevailing Wage Type of Money Type of Project Required? Federal Public works projects Yes State Public works projects Yes City unrestricted Public works projects Yes City unrestricted Service contracts Noy' "The city, while not legally required to do so, currently pays prevailing wage on service contracts 3 4 Does prevailing wage increase the cost of doing business? • Staff reviewed 10 studies on the impact of prevailing wage on construction projects conducted since 1990 - prevailing wage's impact ranged from statistically insignificant to 10-16% cost increase • There is no agreement among either academic or government studies regarding prevailing wage's impact on costs a 2 5 Does prevailing wage increase the cost of doing business? • Staff is not aware of any studies of prevailing wage's impact on maintenance and service contracts • Without bidding projects/contracts absent prevailing wage requirements, staff cannot judge its impact on the city's costs 6 Prevailing Wage Policy Options • Maintain the present policy of requiring prevailing wage on construction, maintenance, and service agreements or • Direct the City Attorney to prepare an ordinance exempting the city from prevailing wage requirements on construction, maintenance, and/or service agreements April 15, '2002. b202• Moon fie1d Dry '¢f✓ t 7 r p A1"? L o H t B '1.l SJJ. Li �sCSr i ;3`LY'• a' i DOL.s. pr �� wI a 46 .g } r,• 5 e 4 x.t OFF `" 34 b 9 A 5343C 4 r `a1 t19� k , a o s d :be s *01C,ad, Ac rdin y.�_ 1 ,e s - While, : ' to � Q! tt t 1e Pr.PW Wye a � ;��" leTO l, 'epeC. 11 `w}�en 11t is ` re�ttaliy . te . r. Q sar : � a.�ring ► „it o ` re fiat ' dix':ect; staff. ttiac3, .meaort}:tirauie µ' r a ,1 , ,i ra a. ` �h� ,rxlt at co b ective. woult b1 t # k yvage replace thO prevailing +�:a��..: �� r�i�� t }.� 4hx without e ;living wag#, j 9c � . € v r vf� e�,i,�iti.` t r. 's .14, rg IF-1*2.. chart . .'t 10,., .ow b �a .a trend to'.v i"= rvaA t terms t3he..wai eao ►' x+ a .lti.dr s:ti�►t :: ac °-its, r ,s e e a*: ark►` t o A StAt". W'r the pr4vai itta e c x 3 ,•fit. a e, g a t* ito 6bun t A r t s 1, 3 rye b,�:s e d on a,' � a -=�. ' car rates jkg i ? s �, r - tiS s "'�•ps� 17r $ feAj1, `a ` r t 3 Y s aT df3 tt4 i'ffi .1 h6w t r Urv.&— �.` � .� ►gas : � ,b ' i s �r 4 Y -• 'b`Ai yn } i , . wage on , " Co race vn i�ered a �r� �� , y `,�� '�� ...-, �. y '� %r 4. ♦ �Sy,`Y •s�' 'Y T YJ- - ,til =e�1 1 q- � rt a t I e► c+ s `.� � ,fix * "gyp�.• �,.; r 1- p to- the Ip � - ffi j yy= �• �yy •�h0. 0A two ia b the atu y du�•f 40 +* i " ' . �' Y6 • - IP1Ai � _' i3 ` 'ylFF V J1.P -t - F .$ Arta a; ii ,• ' }7F1f 9. o a 46 .i�a rnt of e _. ► t s :Qne t�j,t- JS ]..�. ae p a p ► t it o ai:iv, a t. a 1 ' +€ } 'and°3 Jb a Aaar l� f461t . PCt t*5411 t the. sav3.�ga, co d, hPgL' �rr. ; r pWa uaiag a. nc��s-:�'��a�.� � 'wee ]:ab6r ,pay: a �.�y: if 1; � �s T.truo;;i it ispops' b; b Pale. W at lit Imo" t think knew ,��,�s,�� f �� ► �� ast, rim` P #3a anal Yg a } writ l .i1i$'�.' B C ,Si iFW$111� 31. P,$F7-1 t4Liu 4 Is.. ;;hea r402tec 'd.r�:v contract VgA_ not Include 12..,. pg `-?. : fi t A .b10 eat obtwi a. ch i : 4i list .ncluding catrid : ki ' sA . iate : h tery ce' p ont rar;ta f l r sapp"U Ati with the � . �r t)� .•, m. , 1 r r. .F p� � $ ti ., t` 11s Pg !'sOI]tr ' tC'+t,QI`$ 1 W3� .. 77. e , J images . . " 6, ..are.. r s woes : � ux� ri xag a? 1 .Pg.fi+-1.. pars at b' r axp :1 '14 listed? t • Page From P4iss6ga ; to Got4ldzl,`, � . 4-y'15/02-s 'Prev�a i liu i _ +�yf� - R{ 1y y/f�y :e1 t I„€3ugg!}�51�8►t $h� sty: ii �. ® x'eF� t Out :to bid.. 16. '.Fg F-1 �.l •l . tb,# lnt.oG ' 6t A i t. d r�4l .: 3' n ; funded servio4 cb9#aoV3, Tf yos; w r '. h a � ex cl ude',,prevailin , , roar : h t c i t t 1#°-'incCity Uf7a Thank yousrr.ll as�is � c� `a PU "r. - - ,.ski , _ - •. .- j PUBLIC COMM ENTS�"'�."�"E1V��o� rr� AND MADE A PART OF THE RECORD 7 THE 15 April City Council Meeting COUNCIL MEVING of �?' OFFICE OF THE CITY CLERK Agenda Item F-1 CONNIE BROCKWAY,CRY C RK 7 Good evening. My name is Chuck Scheid. I am a resident of Huntington Beach. f{ Agenda Item F-1 is a report on Prevailing Wage recently completed by Staff. The report basically concludes that: • Based on ten studies the impact of prevailing wages ranges from essentially zero to a 10-16 percent cost increase. • No agreement between academic and government studies regarding cost impact. • Staff not aware of prevailing wage's impact on maintenance and service contracts. • Staff cannot judge impact on costs without getting specific quotes absent prevailing wage requirements It is clear to me after reviewing several hundreds of studies that more positive conclusions can be reached. Just a couple of examples_ • Last year the contractors for the City of Irvine estimated that the cost of slurry sealing could be reduced by up to 30% if prevailing wages were not required. • Also, in Irvine, the City Attorney concluded that Traffic Signal Maintenance would have to pay prevailing wages. The city now pays an hourly rate of $28.65 for efforts which previously had cost about $15.00 per hour; nearly a factor of two higher. • Our City pays $39.00 per hour for street-sweeping effort the contractor would do for less than $20.00 per hour, if not forced to pay prevailing wages. • Last year in Kentucky the State Legislature found that prevailing wages increase costs of public buildings by 24 percent. (Cincinnati Enquirer article). • Business Council of New York State news release 29 November 1999 "The village of Johnson City, Broome County, saw the cost of a new library roof rise from $9800 to more than $20,000 because of prevailing wages." Just a few of the many studies I could report on given longer than 3 minutes. am leaving with you a study by the City of Sunnyvale dated 4 April 2000 relative to "Prevailing Wages and City Contracts." It is one of the most comprehensive studies that I have seen. I would urge Council to read it very carefully before reaching any conclusions. Thank you for the time, Madame Mayor. 0wo Chuck Scheid rds (714) 536-7077 XTC 400-115 � � Page 1 of 12 ono azrn Previous Council Item Next Council Item Corresponding Agenda c o o n 9n� List of Council Meetings List of Reports to Council Sunnyvale 1'lome Page a or v fin VE�rn>-n : ''� 'ED FROM C m5m_am i s;;-ADE A PART OF THE RECORD AT THE Q m z D L rtitETItVG of d-n "FFICE OF THE CITY CLERK —i o ,!NIE BROCKWAY,CITY CLERK • AQril 4, 2Q00 M SUBJECT: Prevailing Wages and City Contracts — Study issue rm t � REPORT IN BRIEF z �m This report reviews the City's prevailing wage practice as it pertains to both contracts for public works projects and contracts for maintenance and repair of public works. For the reasons outlined below and addressed in detail in the discussion section, staff recommends that the City Council require state-defined prevailing wages only on those contracts where it is mandated by law. Generally speaking, mandated contracts would be those that are funded by state and/or federal dollars. Under this policy, City-funded contracts generally would contain no requirement to pay the "prevailing wages" as defined by the state. Staff believes this change would result in a policy that is clear and specific while fairly balancing the needs of contractors, laborers and taxpayers. As subsequent information in this report will make clear, the absence of a state-defined prevailing wages requirement would not cause contracted workers to be paid low wages. Ceasing to require contractors to pay state-defined prevailing wages except as required by law would yield the following additional benefits: . The City would save money. . More and/or new bidders would likely enter competition for contracts. . Tax dollars would be used more efficiently and fairly as the City encouraged more contractors to respond to market-based - as opposed to statute-based - economic forces. Staff has conducted research on the effects of a such a policy in other Charter cities. Of those Charter cities that do not require prevailing wages on locally funded contracts, none report adverse consequences. In particular, those cities have not seen declines in work quality, nor have they experienced increased accidents. BACKGROUND In April 1998, Council awarded a three-year contract for traffic signal maintenance (estimated at $372,252) that did not include a requirement that the contractor pay prevailing wages. At the meeting, Council Member Valerio requested a study issue regarding payment of state-defined prevailing wages on maintenance and repair contracts. http://www.ei.sunnyvale.ca.us/200004/rtcs/00-115.asp 4/10/02 LTG #00-115 � � Page 2 of 12 Defining "Prevailing" Wages in California The California State Department of Industrial Relations (DIR) calculates wages that are then defined as "prevailing" for certain job classifications (e.g. "roofers") in construction trades. The wages are calculated on a county-by-county basis. Since the method of calculation can and does dramatically change the value of these wages, there is a history of intense debate, litigation, lobbying and legislative activity surrounding the methodology. Two methods are described in detail below. Method 1: Average wages The method used by the federal government and most states that have prevailing wage laws defines prevailing wage as the "weighted average" of hourly pay in a classification. In practice, the weighted-average wage is the same as would be calculated in a simple average. That is, it is the sum of wages divided by the number of wages summed. According to DIR, under this method, federal prevailing wages reflect the union scale (usually top dollar) about 30% of the time. Method 2• Modal California does not set prevailing wages at the average of wage in a classification. Instead, the state calculates the "mode" in a group of wages in a given county and that wage is defined as prevailing. The mode is the single most frequently occurring value in a group of numbers. In {1, 1, 2, 3, 4, 5, 5, 5, 61 "five" is the modal number. Even when workers who earn the single most frequently occurring wage represent just a handful of the workers in the wage survey, the single most frequently occurring wage is still "prevailing." In theory, a "modally" defined prevailing wage could be anywhere in the range of actual wages. But the method is heavily influenced by the wages contained in union contracts. Such contracts tend to create blocks of employees paid at a single rate. As a result, California's prevailing wages are usually considerably higher than market wages paid to workers in the same classification in the same county. The DIR says that under this method, prevailing wages adhere to the union scale more than 90% of the time. California's "prevailing wages" are not reflective of the state's "typical" or "average" pay scales. For example, in Shasta County in 1995, 18 workers were surveyed in the sheet metal classification. Wages ranged from $7.25 to $23.52. Five workers (27.7% of those surveyed) earned the top rate. Although the average method (federal method) would have produced a prevailing rate of $15.43, the modal method (California method) created a prevailing wage of$23.52. During the 1990's, the DIR had unsuccessfully attempted to change its "modal" methodology - which its own research shows greatly inflates wages - to the average methodology. Its efforts invoked intense and sustained disputes, prompting litigation, extensive lobbying activity and, finally, enactment earlier this year of hup://www.ci,sunnyvale,ca.us/200004/rtcs/00-115.asp 4/10/02 ..RTC 900-115 Page 3 of 12 legislation codifying the "modal" methodology. (See Appendix A for a more detailed history.) Below is a visual illustration of a prevailing wage calculation based on 20 hypothetical workers' salaries. p t, sib se^£r:'%' a1D < #:<: X. 0 D lam olds aid 1m1 g!a repose I tmlwa¢a Ir a cam pie. Tie cNele isllealefagp oYtie swages tle01pRIBIIR . Tle a trDlgk wages are tie mowwage 01af:penalbgi. In addition to history, Appendix A provides actual state-defined "prevailing" wages for some classifications in Santa Clara County. State-Defined Prevailing Wa es and Charter Cities Vial v. San -Dieu (1981) established that charter cities are exempt from state prevailing wages requirements except when they contract for projects funded by state or federal monies or projects otherwise of "statewide" concern (as opposed to "municipal affairs.") The courts have acknowledged the lack of a simple definition of "municipal affairs" (Bisha _v. City of San Jose and have indicated that it is a matter for courts to determine case by case. Thus, on its own "municipal" contracts, the City of Sunnyvale could create its owe. "prevailing' salary scale, or the City could cease to require any certain wages. Prevailing wages practices vary from municipality to municipality. Some charter cities, including Palo Alto, Mountain View, Irvine and Modesto, do not require payment of prevailing wages on public works construction or maintenance contracts unless mandated by the utilization of state or federal dollars. Copies of the Palo Alto, Irvine and Modesto policies are provided in Appendix B. EXISTING POLICY There is no requirement in City Resolutions, Ordinances or the Charter mandating that City contractors pay prevailing wages. However, the City's longstanding practice has been to require payment of state-defined prevailing wages on contracts for public works projects, regardless of the source of funds for the project. In 1996, in an effort to support a specific piece of legislation, Council approved a resolution expressing the City's "...desire to uphold prevailing wage http://www.ci.sunnyvale.ca.us/200004/rtcs/00-115-asp 4/10/02 `RTC #00-115 Page 4 of 12 requirements on city public works projects..." That phrase is the only official expression, albeit indirect, on the subject of prevailing wages. Section 1309 of the Charter deals with contracts on public works and expressly excludes "maintenance and repair"from the definition of"public works": Every project involving an expenditure of more than an amount to be determined from time to time by ordinance of the City Council, for the construction or improvement (excluding maintenance and repair) of public buildings, works, streets, drains, sewers, utilities, parks and playgrounds, shall be let to the lowest responsible bidder .... Appendix D contains the 1996 resolution and the pertinent portion of the Charter. DISCUSSION There are at least three main alternatives. The City could: 1. Cease to require state-defined prevailing wages on City contracts except where required by law. 2. Retain the status quo, that is, require state-defined pr"public works" projects and not on maintenance and repair contracts.evailing wages on 3. Extend state-defined prevailing wages requirements to public works maintenance and repair contracts. Alternative 1: Cease to require state-defined revailin w es on Cit contracts except where required by law. Some charter cities have opted to require state-defined prevailing wages only where mandated by statute and case law. That is, no type of contract requires state- defined prevailing wages unless the project involves state or federal dollars or is otherwise "of statewide concern." Examples of such policies are in Appendix B. Staff recommends this alternative for the reasons discussed below. 1. The City would save money. As previously discussed, the method of calculating "prevailing' wages inflates pay rates to levels above what would be paid in a market-based contracting environment. The extent of City savings in the event of market-based contracting where possible (that is, where statutorily defined wages are not required by law) is uncertain. The volume of savings would depend on: . The number and size of locally funded contracts (this is discussed in the Fiscal Impact section), and, . The extent to which contractors would, in fact, bid market-based wages. At least in the short term, contractors who pay state prevailing or near- http-//www.ci.sunnyvale.ca.us/200004/rtcs/00-1 15.asp 4/10/02 RTC #00-115 Page 5 of 12 prevailing wages likely would continue to submit bids with costs similar to those of existing bids. (See Item 2 below for more discussion of this aspect.) 2. More and/or new lower-cost bidders would likely enter competition for contracts. Even in the absence of mandated state-defined prevailing wages, some contractors may be forced by union contracts or other internal pressures to pay very high wages that are equal or comparable to state-defined prevailing. Over time, however, City savings would likely increase as new contractors - who are currently unable to compete in a very-high wage environment - begin to enter the competition. Over time, the cost of labor for City funded contracts would be shaped more by supply, demand, competition and union pressure that is - market forces. In contrast, the current shaping force is state statute. At least two charter cities that have mandated state-defined prevailing wages only where required by law have seen an increase in new contractors and they have not experienced lower quality work or inadequate bidding. Such a policy appears to give smaller firms, especially women and minority-owned businesses, a better chance to compete. However, because unionized contractors could have difficulty providing lower bids than competitors, opponents likely would claim that the City is undermining union labor. 3. Tax dollars would be used more efficiently and fairly as the City encouraged more contractors to face market-based - as opposed to statute-based - economic forces. Most Sunnyvale taxpayers obtain income from a market-based economy. Yet when the City buys contracted services at state-defined prevailing wages rates, those same taxpayers pay higher-than-market (prevailing) for those services. Thus, the most efficient contractors are excluded from competition by contracts that needlessly mandate statutorily defined wages. Furthermore, the City's practice of requiring prevailing wages over and above the legal mandate discourages existing contractors from bidding as efficiently as possible. Alternative 2: Retain the status quo. A second alternative is to make no change to current practice; that is, to continue requiring state-defined prevailing wages for contracts for public works projects but not for contracts for maintenance or repair of public works. For the following reasons, staff does not recommend Alternative 2: The City would forgo the savings associated with Alternative #1. . Even on locally funded projects, the City would continue to subject itself to wages established by the state. In doing so, the City inflates its own costs and limits market-based competition for its contracts. . The status quo discourages competition from the most efficient bidders - that is, contractors paying market rates for labor. http://www.ci,sunnyvale.ca.us/200004/rtcs/00-115.asp 4/10/02 RTC #00-115 � � Page 6 of 12 Alternative 3: Extend state-defined prevailing wages requirements to public works maintenance and..repair contracts. The City could choose a third alternative and require maintenance and repair contractors to pay their workers state-defined prevailing wages. Staff does not recommend this alternative. Extending state-defined prevailing wage requirements to City maintenance and repair contracts would: . Significantly increase the cost of these services, potentially forcing reductions in levels of service; . Create a new barrier for smaller contractors, thus limiting competition; . Increase staff administrative duties and costs; . Reduce City control of maintenance and repair costs; . Potentially be difficult to reverse. Such an extension would address "competitive disadvantage" concerns of maintenance and repair contractors who provide state-defined prevailing or near- prevailing wages independent of any requirement to do so. However, when compared to current practice, such a change would replace those concerns with several new ones: 1. State-defined "prevailing" wages are neither "average" nor "typical" for a given trade in a given area. Usually, California's state-defined prevailing wages are higher than the average wage of workers in the classification. Firms that cannot afford to pay state-defined prevailing wages would be eliminated from competition for City maintenance and repair contracts. The firms most likely to be unable to compete are small companies. 2. The City's Purchasing Officer estimates that extending the state-defined prevailing wages requirement to maintenance and repair contracts would increase the City's cost for that work by at least 25% -- $375,000 -- in the first year. Over ten years, the estimated additional cost of maintaining and repairing City facilities exceeds $4 million. This increase would reduce the affordability of maintenance and repair services and could force reduction or elimination of some of those services over time. 3. Current and future Councils likely would face pressure to retain the policy, even if its costs were to exceed the above estimates. As an example of pressure to retain state-defined prevailing wages policies in spite of costs, see Appendix A, which details the state Department of Industrial Relations'years of unsuccessful efforts to make state methodology consistent with that used by the federal government. 4. Creation of a state-defined prevailing wages program for public works maintenance and repair contracts would increase administrative duties for City staff. The extent and cost of the increase would depend on unknown factors, such as the volume of compliance complaints. Staff members currently do not possess expertise in prevailing wages compliance investigations. 5. The bulk of the cost of maintenance and repair contracts is labor. By allowing the state to set minimum pay and benefits for City contracts, control of the http://www.ci.sunnyvale.ca.us/200004/rtcs/00-11 S.asp 4/10/02 RTC #40-115 � � Page 7 of 12 City's maintenance and repair expenditures would in effect be in the hands of the State. RESEARCH FOLLOWING DECEMBER STUDY SESSION Practices o Qther Municipalities In December 1999, the City Council held a study session on the prevailing wage issue. At that session, Council requested information regarding how area cities that do not require prevailing wages on locally funded public works contracts ensure that workers are protected from low wages and unsafe working conditions. Palo Alto and Mountain View, as well as other Charter cities, report no ill effects resulting from a policy that does not require prevailing wages on locally funded contracts. Their experiences are highlighted below. Palo Alto: . The City continues to pay union-scale wages, even though the City has no wage requirements. The Director of Public Works believes this is driven by strong demand for workers and the desire of contractors to minimize turnover. . The City has experienced no problems with either the quality or quantity of bids, and no problems with accidents at construction sites. Mountain View: . Although contract workers'wages are not known, competition between union and non-union contractors is close on large jobs; presumably this results in similar wages for union and non-union workers. . The City has "plenty" of bidders and has experienced no problems with the quality of work. On smaller jobs, non-union contractors have an advantage over large contractors. . The City has experienced no problems with accidents; however, this may be a consequence of the City's bid requirements. Mountain View requires each potential contracting firm to provide assurance that it has a training program in place, the City will not award a bid in the absence of a training program. These experiences are consistent with the experiences of other Charter cities that do not require prevailing wages on locally funded contracts. If the City of Sunnyvale did not require contractors to pay prevailing wages on locally funded jobs, the wages for those workers would be established by the marketplace. With the exception of minimum wage standards, wages are market driven for: . City employees . State employees . Federal employees http://www.cl.sunnyvale.ca.us/200004/rtcs/00-1 15.asp 4/10/02 .`RTC #00-115 Page 8 of 12 • Sunnyvale's public works maintenance and repair contractors • Sunnyvale's non-public works contractors • Private-sector employees The University of Utah Study Also at the December study session on prevailing wages, the City Council received a report titled "Losing Ground-Lessons from the Repeal of Nine Little Davis Bacon Acts" from a representative from the Building Trades Industry. This study was completed in February of 1995 at the University of Utah. It should be noted that the study was completely funded by union organizations, including Local 3 of the International Union of Operating Engineers, the United Association of Plumbers and Pipefitters of Utah, and the AFL-CIO. This report addresses the abolishment of federal and state prevailing wage laws. No such abolishment is under consideration in the State of California. Under staff recommendation, the City of Sunnyvale would continue to require payment of prevailing wages on state and federally funded contracts. Consequently, many of the Utah report's sweeping conclusions are not applicable to Sunnyvale's situation. The report provides background on the original purpose of the 1931 Federal Davis Bacon Act. The Act was passed into law at a time when the Federal government was infusing large amounts of money into state and local economies to recover from the depression in the form of large federal construction projects. The fear at the time was that this large infusion of funds would cause a mass influx of workers into specific locations that would overwhelm the existing construction industry and erode wage rates. Given the large amount of Federal funds that were being spent at the time, this was a real problem and needed to be addressed by the Federal government. In today's market, it is unlikely that repeal of prevailing wage laws would result in an increase in construction companies or workers from outside of the local area. In our discussions with other local agencies not paying prevailing wages for local construction, they have confirmed this fact. Again, if Council adopts staffs recommendation, prevailing wage laws will continue to cover all federal and state- funded public works projects. The report states that advocates of repeal of Davis Bacon have said that: • The act inflates construction costs • The act costs the federal government huge amounts of money • The act is poorly administered • The act is biased towards union contractors and hurts non-union contractors • The act causes wage inflation • The act discriminates against minorities because they are disproportionately represented among the low scale labor force • The free market system is suppressed The report notes that worker income fell after repeal of prevailing wage in the state httpa/www.ci.sunnyvale.ca.us/200004/rtes/00-1 15.asp 4/10/02 RTC #00-115 Page 9 of 12 of Utah. By definition, construction wage earnings will decrease with the repeal of any prevailing wage law if the free market allows workers to be paid at a lower rate. However, the report notes that construction workers continued to be paid higher than average wages in the state. Along with a reduction in construction earnings, the report indicates an increase in total employment due to the repeal of prevailing wage laws. The report cites a construction cost savings of between 1% and 11%. The Congressional Budget Office favors an estimate of 1.7%. A 1996 report from the Congressional Budget Office estimates that if the Davis Bacon Act were repealed, federal taxpayers would save $3.2 billion over five years. The report also indicates an increase in injury rates after the repeal of prevailing wage rates in the State of Utah. However, the data used is only for a union- dominated classification of plumbers and pipefitters, and does not capture the experience of the total labor force. The Utah study concludes that construction costs will decrease, resulting in lower wages for construction workers. It also concludes that there will be an increase in construction employment, and that there will be lost revenue due to lower income taxes. It should be noted, however, that because of the relationship between state and local governments in the State of California, this lost revenue would not directly affect local governments. Staff believes that the net effect would be positive to local government. Chamber of Commerce Action Following the Council's December Study Session on prevailing wages, the Sunnyvale Chamber of Commerce considered the issue and on March 7, 2000, adopted a formal resolution opposing prevailing wages. In the cover letter, the Chamber states: "The Chamber of Commerce supports market-driven wages and opposes any government interference to set an artificial wage standard. It is our opinion that mandates such as prevailing wage standards would create significant increases in the demand on the city's budget, discourage business from participating in the bidding process due to the higher labor costs and small businesses would be held to an unfair and inequitable standard that affects their ability to remain competitive." The Chamber of Commerce letter and resolution are attached as Appendix C. Staff Meeting with the Building Trades Council On March 22, 2000, the Director of Public Works and the Director of Finance met with John Neece and Neil Struthers of the Santa Clara & San Benito Counties Building & Construction Trades Council. The purpose of the meeting was to share information and gain an understanding of the issues from the point of view of the construction unions. At this meeting, staff clarified the intent of our recommendation and answered questions regarding the effect of the proposal. http://www.ci.sunnyvale.ca.us/200004/rtcs/00-1 15_asp 4/10/02 RTC 400-115 Page 10 of 12 Although we did not reach agreement on the issue, the meeting was an excellent opportunity to reach greater understanding of the respective positions. FISCAL IMPACT . Alternative #1 would generate savings over existing expenditures for contracts for public works projects and maintenance and repair. The extent of savings would depend on the number and size of locally funded contracts and the extent to which contractors submit bids based on market wages. As an indication of the volume of City public works contracts, the public works capital projects budget for 1999-00 is $10.57 million and the public works infrastructure budget is $2.16 million, for a total of$12.7 million. Approximately $1 million of the revenue for these projects comes from state or federal sources. Thus, approximately $11.7 million is generally funded by City revenues. Given that several million dollars worth of contracts are involved, even a small drop in the bid prices could result in substantial savings to the City. . Alternative #2 would not increase existing expenditures but also would not capture savings available from Alternative #1. Alternative #3 would not capture savings available from Alternative #1 and additionally would increase costs for maintenance and repair contracts from $1.5 million to an estimated $1,875,000 in the first year. Alternative #3 would increase costs by an estimated $4 million over ten years. The long-term estimate assumes modest increases in the amount of maintenance and repair work as the City's relatively young infrastructure ages. Additionally, an increase in administrative work for the new policy would result in higher staff costs. The amount of those costs is undetermined. The estimate also does not include opportunity costs (e.g. loss of interest) associated with expenditure of significant funds on Alternative #3 and failure to capture Alternative #1 savings. PUBLIC CONTACT Reports to Council are available in the Library and on the City's Internet home page. Additionally, the Council Agenda has been published and posted as required by law and on the City's Internet homepage. As indicated earlier, staff met with the Santa Clara & San Benito Counties Building & Construction Trades Council on March 22, 2000 and they have received copies of this report. ALTERNATIVES 1. Limit state-defined prevailing wages requirements to those contracts for public works projects that are paid for by state/federal monies or otherwise mandated by law. 2. Maintain the status quo. Take no action to extend state-defined prevailing wages to public works maintenance and repair contracts, but continue the practice of requiring state prevailing wages on contracts for public works projects as defined in Section 1309 of the City Charter. 3. Extend state-defined prevailing wages requirements to maintenance and http://www.ci.sunnyvale.ca.u000004/rtcs/00-115.asp 4/10/02 RTC #00-115 Page 11 of 12 0 repair contracts. RECOMMENDATION Staff recommends Alternative #1. If Council adopts Alternative #1 and staff monitoring indicates significant problems with the policy, staff will return to Council with this new information. Appendices . A - Brief history of the state-defined prevailing wages in California and a copy of actual prevailing wages. B - Prevailing wages polices of the Cities of Irvine, Modesto and Palo Alto. C - Resolution and cover letter of the Sunnyvale Chamber of Commerce D - Prevailing wages resolution of 1996 and Section 1309 of the City Charter Prepared by: Cheryl Waldrip Management Analyst Reviewed by: Mary J. Bradley Director of Finance Reviewed by: Marvin Rose Director of Public Works Approved by: http J/www.ci.sunnyvale.ca.us/200004/rtcs/00-115.asp 4/10/02 RTC 400-115 Page 12 of 12 0 Robert S. LaSala City Manager Previous Council Item Next Council Item Corresponding Agenda List of Council Meetinas List of Reports to Council Sunnyvale Home Pale http://www.cl.sunnyvale,ca.us/200004/rtcs/00-1 15.asp 4/10/02