The Second District Court of Appeal has upheld a determination by the Department of Industrial Relations that required public improvements in a master planned community project to abide by prevailing wage laws. The court further ruled that Mello-Roos proceeds are "public funds," and that once a project is deemed a "public work" under the Prevailing Wage Law, all public portions of the project are subject to the law – including those public improvements that are privately financed.
This case is significant because it turns the historical interpretation of "public work" under the Prevailing Wage Law on its head. Typically, the analysis to ascertain whether each public improvement is a public work is based on whether a portion of the required public improvement work received a direct allocation of public funds. Under this decision, developers will be required to pay prevailing wages for work on public facilities and infrastructure financed only partially by public funds.
The Department of Industrial Relations (DIR) sets prevailing wage rates for different regions of the state based largely on union-level wages in the largest cities. Developers can often find contractors and subcontractors willing to work for less than the prevailing wage.
The project at issue in this case – the Rosedale project in the City of Azusa – involves development of more than 1,200 homes, upwards of 50,000 square feet of commercial space, and various public infrastructure on the site of a former nursery. In an agreement with the city, developer Azusa Land Partners (ALP) agreed to conditions of approval requiring construction of certain public infrastructure and improvements, including a public school and adjoining park, sewer and water facilities, and street work, on behalf of the cities of Azusa and Glendora.
The planning, design and construction of the facilities were to be funded through Mello-Roos bonds issued by a Community Facilities District (CFD). Under agreements between the city and the developer, ALP was obligated to perform the public improvements required by the city as conditions of project approval, even if the cost of the improvements exceeded the amount of the authorized bond funds, which was $120 million. Ultimately, the cost of the improvements totaled $147 million. The CFD issued only $71 million in bonds, leaving $76 million in public improvements to be borne by the developer.
In 2007, DIR determined that ALP was required to comply with prevailing wage laws for all construction of public improvements required by the city's conditions of approval for the Rosedale project. After the agency rejected ALP's administrative appeal, the developer sued. ALP argued the project was not a public work under the Labor Code and, accordingly, it should be required to pay prevailing wages only for the public improvements actually financed with bond proceeds – not for privately funded infrastructure improvements for which no bond proceeds were received. A Los Angeles Superior Court judge ruled against ALP, and a three-judge panel of the Second District upheld the ruling on appeal.
In defining the term "public work" under the Prevailing Wage Law (Labor Code §§ 1720-1861), the court held that the entire project constituted a "public work" because the project was funded in part through public funds. The court based much of its decision on 2001 legislation that expanded the universe of projects subject to the Prevailing Wage Law (see CP&DR, September 2002).
"The phrase ‘work done for' in §1720 subdivision (a)(2) includes all the infrastructure work performed for the CFD and required by the city as a condition of its approval of the project, not merely the work for which ALP received funding through the CFD," Justice Jeffrey Johnson wrote for the court.
The court also held that under the plain meaning of § 1720, the Mello-Roos bond proceeds constituted public funds. The court focused on the phrase "paid for in whole or in part out of public funds" and reasoned that the city and CFD are public entities that directed Wells Fargo, the holder of the loan proceeds, to pay the developer for public works constructed.
Finally, the court concluded that the obligation to pay prevailing wages applies to all required public works improvements, including those that are privately funded.
The court ruled that "once the determination is made that the project is a ‘public work' under [the statute], the entire project is subject to the prevailing wage laws." The Court reasoned that the law does not contain a requirement that funds be directly allocated to specific works of public improvements or require dollar-for-dollar reimbursement for infrastructure improvements. The court found that "public work of improvement" means all public infrastructure and improvements required as conditions of approval.
Assuming the court's holding stands, ALP will be required to pay prevailing wages on the $76 million in public improvements that it privately financed.
Azusa Land Partners v. Department of Industrial Relations, No. B218275, 2010 DJDAR 19029. Filed December 21, 2010.
The Lawyers: For ALP: Patrick Perry and Nancy Fong, Allen, Matkins, Leck, Gamble, Mallory & Natsis, (213) 622-5555.
For DIR, Vanessa Holton, Anthony Mischel and Christopher Jagard, Department of Industrial Relations, (415) 703-4240.