Prevailing Wage Law Has Mixed Impact: Affordable Housing Projects Likely To Cost More
A new requirement that nearly every California development project built with any public subsidies — including many affordable housing projects — must be constructed with prevailing wage labor appears to be having an impact. But the effects may not be as substantial as some people fear, at least not yet.
No one disputes that the law will raise the cost of many subsidized affordable housing projects; the ironic impact of the measure is to increase wages for workers on subsidized projects but not on private developments for affluent residents. Whether the law has actually forced a reduction in the number of units built is unclear.
The law also applies to many local economic development and redevelopment efforts, but local officials say the new requirement in and of itself will not cause businesses to flee to other states.
"Our projects are going to be more costly," summed up Ken Emanuels, a lobbyist for the California Redevelopment Association (CRA).
Last year, the Legislature approved SB 975 (Alarcon) —amending the Labor Code and the Government Code — on votes that fell along party lines. Some of the key parts of the bill were added late in last year's legislative session, and there was only one hearing on those amendments, Emanuels recalled. Stopping or greatly amending SB 975 was a top priority for the CRA, which was joined in its opposition by local governments, economic development organizations and business interests. But, Emanuels said, the die was cast.
"Labor wasn't willing to give an inch. Why would they? They got exactly what they wanted," said Emanuels, noting that no lawmakers or members of the Davis administration requested amendments.
The bill was a tough one for affordable housing advocates, who often sing from the same hymnal as labor leaders. "There was a split in strategy and probably in policy, too," said Marc Brown, of the California Housing Law Project. "I was one of those who thought it was not absolutely crazy not to oppose SB 975. … I think in the end, they (labor) will bring more to the table than they will take away."
The San Francisco-based California Housing Partnership Corporation (CHPC), which serves as a consultant to affordable housing developers, was among those who thought Brown was crazy.
"I understand the unions want to make a decent wage," said Janet Falk, CHPC executive director, "but they are doing it on the backs of the poorest people, not on the market. People building luxury housing don't have to do a thing."
The prevailing wage is typically a union-level, big-city pay scale. The state Department of Industrial Relations establishes prevailing wage. It is the basic hourly rate paid to the majority of workers in a particular trade or craft within a defined geographic area, explained Dean Fryer, a department spokesman. When setting the prevailing wage, the agency looks at the nearest big city "labor market." Thus, for example, the agency uses San Francisco rates to determine the prevailing wage for the nine-county Bay Area, and uses Sacramento rates for a huge area stretching from the Oregon border to Tulare County. The agency sets new rates or adjusts existing rates only on request, Fryer said.
In general, contractors who receive public works contracts for projects like building roads and courthouses have long had to pay prevailing wage. Senate Bill 975 closed a loophole that allowed projects financed with Industrial Development Bonds issued by the California Infrastructure and Economic Development Bank to be built without prevailingwage labor. Few people argued with that new requirement. However, SB 975 also extended prevailing wage requirements to many private developments that receive public funds. The legislation defined "public funds" to include grants, fee waivers, tax reimbursement plans, and even the installation of infrastructure — nearly every financial incentive local government offers to business.
While SB 975 applies to the entire state, many of its provisions are no stricter than ordinances already adopted by local officials in Los Angeles, San Jose, San Francisco and elsewhere.
Most affordable housing projects receive some kind of "public funds." The legislation exempted some housing projects, but the biggest exemptions expire at the end of 2003.
A bill to increase the housing exemptions to the prevailing wage requirement, SB 972 (Costa), appeared headed toward approval at the end of the legislative session. As of late August, it had received the backing of labor and the Davis administration. That bill would exempt sweat-equity projects, mortgage and down payment assistance programs for single-family homes, and some emergency or transitional housing projects. (See CP&DR in October for a full wrap up of the legislative session.)
Housing advocates hoped for more expansive clean-up legislation. But it appears that labor interests were unwilling to budge. Representatives of the California Building and Construction Trades Council, SB 975's primary backer, did not return CP&DR telephone calls.
"It's an extremely narrow and extremely modest bill," CRA lobbyist Emanuels said of SB 972. "It doesn't solve any of the problems we have with prevailing wage."
The real impact
How much the prevailing wage regulations truly affect housing and economic development projects remains to be seen. Falk, of the CHPC, figures that after SB 975's exceptions sunset in 2003, 85% to 90% of affordable housing projects will be affected. If the amount of available subsidies is fixed, she said, then the final result will be fewer units. The impact could be largest in rural areas, where construction laborers often work for considerably less than prevailing wage.
Brown agreed that projects will require greater subsidies than in the past. But, he noted, Los Angeles affordable housing developers have been able to complete projects within the confines of local prevailing wage mandates.
In the area of economic development, the picture is equally muddy. Again, the greatest potential impact is in rural areas. Emanuels said redevelopment projects of all kinds will cost more, as trade unions saw redevelopment as "the last great loophole."
Craig Johnson, vice president of the California Association of Enterprise Zones, noted that manufacturers' tax credits — in which businesses get income tax credits in exchange for projects that add jobs — are not subject to SB 975. Other tax breaks that enterprise zones offer could be subject to the prevailing wage requirements, but the law is vague and there appears to be no enforcement mechanism, he said.
"From an enterprise zone standpoint, we kind of shrug," Johnson said. "But for the people who have bricks and mortar projects, they have concerns."
John Lehn, president of the Kings County Economic Development Corporation, said the prevailing wage mandate by itself will not cause growing businesses to look outside of California. Rather, the requirement is simply another factor businesses need to consider when making location choices.
"It certainly has an impact on our overall attractiveness," Lehn said. Still, many of the largest businesses in the Central Valley need to be close to farms, and government financial incentives mean little in the end, he said.
Because of SB 975, the City of Redding has dropped its primary financial incentive program, in which the city offered development fee discounts or waivers in exchange for new jobs, said Economic Development Director Mike Mitchell. "It's too bad that what little incentive package we had has gone by the wayside," he said. Still, the incentives were never a big factor in private enterprise location decisions, Mitchell said.
To induce economic growth now, Redding is considering putting in some infrastructure for areas where businesses could locate in the future, Mitchell said. City officials are also studying the local job market to determine whether the official prevailing wage is substantially greater than laborers would earn in Shasta County anyway. Depending on what they find, officials might reinstate the incentive program.
Some housing advocates plan to press for legislation next year that would exempt more projects from the SB 975 requirements. But Emanuels said he sees no reason to go the legislative route. "I think the policy has been set. Democrats in the Legislature won't consider it. Prevailing wage is an article of faith with them," he said.
Instead, redevelopment supporters plan to work with the Department of Industrial Relations on clear administrative regulations.
Ken Emanuels, California Redevelopment Association lobbyist, (916) 444-6798.
Marc Brown, California Housing Law Project, (916) 739-6293.
Janet Falk, California Housing Partnership Corporation, (415) 433-6804.
Craig Johnson, California Association of Enterprise Zones, (323) 890-7107.
Mike Mitchell, City of Redding, (530) 225-4060.
John Lehn, Kings County Economic Development Corporation, (559) 585-3536.