BILL ANALYSIS                                                                                                                                                                                                    Ó






                 Senate Committee on Labor and Industrial Relations
                                 Ted W. Lieu, Chair

          Date of Hearing: September 1, 2011           20011-2012 Regular 
          Session                              
          Consultant: Alma Perez                       Fiscal:Yes
                                                       Urgency: No
          
                                   Bill No: AB 436
                                   Author: Solorio
                         Version: As amended August 30, 2011
          

                                       SUBJECT
          
                           Public works: labor compliance 


                                      KEY ISSUE
          
          Should the Legislature authorize the Department of Industrial 
          Relations (DIR) to charge and get reimbursed by awarding bodies 
          for prevailing wage and labor compliance enforcement activities 
          on public works projects, rather than having them pay a fee up 
          front?  

          Should the Legislature provide clarification regarding 
          legislative intent to authorize that costs of DIR's monitoring 
          and enforcement activities be paid from state bond proceeds in 
          order to address concerns raised regarding the legality of using 
          bond funds to pay the fees required in current law? 

          Should the prevailing wage and labor compliance enforcement fee 
          requirements be waived for state bond funded and specified 
          design-build projects if the awarding body has entered into a 
          collective bargaining agreement that binds all of the 
          contractors performing work on the contract and that includes a 
          mechanism for resolving disputes about the payment of wages? 

          
                                       PURPOSE
          
          To makes changes to existing law related to the prevailing wage 
          enforcement mechanism within the Department of Industrial 
          Relations in order to address potential legal questions about 
          the funding method of that process.  










                                      ANALYSIS
          
           Existing law  requires that workers employed on public works 
          projects in California be paid the applicable prevailing wage, 
          as determined by the Department of Industrial Relations, and 
          that the body awarding a contract for a public works project 
          assure compliance with this requirement.  



          Among other things, existing law regarding "public works" 
          projects:

                    Requires that not less than the general prevailing 
                 wage rate be paid to all workers
                 employed on a "public works" project costing over $1,000 
                 dollars and imposes misdemeanor penalties for a violation 
                 of this requirement.

                    Defines "public work" to include, among other things, 
                 construction, alteration, demolition, installation or 
                 repair work done under contract and paid for in whole or 
                 in part out of public funds. 

                    Defines "paid for in whole or in part out of public 
                 funds" as, among other things, "Fees, costs, rents, 
                 insurance or bond premiums, loans, interest rates, or 
                 other obligations normally required in the execution of a 
                 contract that are paid, reduced, charged at less than 
                 fair market value, waived or forgiven." (Labor Code 
                 §1720)

           The State Public Works Enforcement Fund (SPWEF)  was created as a 
          special fund in the State Treasury for the purpose of performing 
          prevailing wage and labor compliance enforcement activities by 
          the Department of Industrial Relations (DIR).  

          Among other things, existing law regarding DIR labor compliance 
          enforcement:

                  Authorizes the director of DIR, with the approval of 
          Hearing Date:  September 1, 2011                          AB 436  
          Consultant: Alma Perez                                   Page 2

          Senate Committee on Labor and Industrial Relations 
          








                the Director of Finance, to  determine and assess a fee  on 
                any awarding body using funds derived from any bond issued 
                by the state to fund public works projects.  

                  The assessed fee cannot exceed one-fourth of 1 percent 
                (1/4 of 1%) of the bond proceeds and is required to be 
                deposited in the State Public Works Enforcement Fund only 
                to be used for enforcement of prevailing wage requirements 
                on public projects. 

                  The administration and enforcement of prevailing wage 
                requirements is an administrative expense associated with 
                public works construction.  

                  For all projects required to pay a fee, DIR shall do 
                the following:

                a)      Review payroll records to verify compliance on a 
                  monthly basis;

                b)      Adopt regulations setting forth the manner in 
                  which the department will ensure compliance with and 
                  enforce prevailing wage requirements;

                 c)      Waive the fee  for an awarding body that has 
                  previously been granted approval by the director to 
                  initiate and operate a labor compliance program (LCP) on 
                  the awarding body's projects', and that requests to 
                  continue to operate that LCP in lieu of labor compliance 
                  by the department. 
                          However, the fee cannot be waived for an 
                awarding body that contracts with a third          
                     party to initiate and enforce an LCP on the awarding 
                body's projects. 
           
          Existing law  authorizes the awarding body for a public works 
          project to not require the payment of the general prevailing 
          rate of per diem wages on public works projects of specified 
          sizes and types of work, if the awarding body elects to initiate 
          and enforce a  Labor Compliance Program (LCP)  containing 
          specified requirements for every public works project. (Labor 
          Code §1771.5 and 1771.55)
          Hearing Date:  September 1, 2011                          AB 436  
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           Existing law  gives specified authority for certain school 
          district governing boards, governing boards of community college 
          districts and community college facility construction projects, 
          cities, counties, qualified entities, solid waste management 
          facilities, or water recycling facilities, transit operators, 
          and unified school districts to enter into design-build 
          contracts for specified projects if certain requirements are 
          met, including the establishment and enforcement of an LCP, or 
          the contracting with a 3rd party to operate an LCP.   

                    However, existing law provides that after the 
                 effective date of the regulations adopted by DIR for 
                 labor compliance monitoring, these bodies are only 
                 allowed to waive the fee for DIR enforcement if the 
                 entities have previously initiated and operated an 
                 approved "in-house" labor compliance program (not through 
                 a 3rd party). 

                    Design-build" is defined as a procurement process in 
                 which both the design and construction of a project are 
                 procured from a single entity. 

           Existing law  also requires an awarding body that chooses to use 
          funds derived from either the Kindergarten-University Public 
          Education Facilities Bond Act of 2002 or the 
          Kindergarten-University Public Education Facilities Bond Act of 
          2004, or the body awarding any contract for a public works 
          project financed in any part with funds made available by the 
          Water Security, Clean Drinking Water, Coastal and Beach 
          Protection Act of 2002 or the Safe, Reliable High-Speed 
          Passenger Train Bond Act for the 21st Century, to pay a fee to 
          the department sufficient to support the department's costs in 
          ensuring compliance with and enforcing prevailing wage 
          requirements on the project and labor compliance enforcement, as 
          specified. 
           

          This Bill  would make changes to existing law with regards to the 
          current mechanism that funds prevailing wage and labor 
          compliance enforcement activities through the Department of 
          Industrial Relations. 
          Hearing Date:  September 1, 2011                          AB 436  
          Consultant: Alma Perez                                   Page 4

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          Specifically, this bill would: 

          1)Provide that the Department of Industrial Relations (DIR) 
            shall monitor and enforce compliance with applicable 
            prevailing wage requirements for any public works project paid 
            for in whole or part out of public funds that are derived from 
            bonds issued by the state, and shall charge each awarding body 
            (to be calculated at the percentage currently required in law) 
            for the reasonable and directly-related costs of monitoring 
            and enforcing compliance with the prevailing wage requirements 
            on each such project. 

          2)State that the reasonable and directly-related costs of 
            monitoring and enforcing compliance with the prevailing wage 
            requirements on a public works project incurred by DIR are 
            payable by the awarding body of such public works project as a 
            cost of construction.

          3)Provide that the awarding body may elect not to receive or 
            expend amounts from bond proceeds to pay such costs of the 
            project; however, such election does not relieve the awarding 
            body from reimbursing DIR for monitoring and enforcing 
            prevailing wage requirements on the project.

          4)State legislative intent that monitoring and enforcing 
            compliance with the applicable prevailing wage requirements on 
            a public works project paid for out of public funds that are 
            derived from state-issued bonds, whether by use of an approved 
            labor compliance program or other method, is and historically 
            has been a necessary and prudent oversight activity, and under 
            existing law, the authority to use bond proceeds for 
            construction of a public works project inherently includes 
            authority to pay reasonable costs of such oversight activities 
            that are directly related to such construction from state bond 
            proceeds allocated to such construction.

          5)Specify that the enforcement fee requirements do not apply to 
            state bond funded projects and specified design-build projects 
            if the awarding body has entered into a collective bargaining 
            agreement that binds all of the contractors performing work on 
            the contract and that includes a mechanism for resolving 
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          Consultant: Alma Perez                                   Page 5

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            disputes about the payment of wages. 

             a)   In lieu of reimbursing DIR for this enforcement, the 
               awarding body of state bond funded projects and specified 
               design-build projects may:

               i)     Elect to continue operating an existing previously 
                 approved LCP to monitor and enforce prevailing wage 
                 requirements on the project as long as it is an 
                 "in-house" LCP (not contracted through a 3rd party); or
               ii)    Entered into a collective bargaining agreement that 
                 binds all of the contractors performing work on the 
                 contract and that includes a mechanism for resolving 
                 disputes about the payment of wages.

          6)Upon order of the Director of Finance, authorize a loan in the 
            amount of four million three hundred thousand dollars 
            ($4,300,000) to be provided from the Uninsured Employers 
            Benefit Trust Fund to the State Public Works Enforcement Fund 
            to meet the startup needs of the Labor Compliance Monitoring 
            Unit which would be created to provide this enforcement.  

          7)Make related and conforming changes to existing law.

          8)Make other related findings and declarations. 


                                      COMMENTS
          
          1.  Background on LCP's and DIR's Labor Compliance Monitoring 
            Unit:

            The laws regulating public works projects require, among other 
            things, that contractors and subcontractors pay their workers 
            not less than the general prevailing wage rates as determined 
            under the Labor Code.  State prevailing wage requirements are 
            enforced both by contracting agencies, known as "awarding 
            bodies," through review of certified payroll records and 
            taking cognizance of violations, and by the state Labor 
            Commissioner (also known as the Chief of the Division of Labor 
            Standards Enforcement), through the investigation of 
            complaints and issuance of civil wage and penalty assessments.
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            Prior to 2009, existing law required awarding bodies to adopt 
            and enforce a labor compliance program approved by the 
            Department of Industrial Relations as a method of meeting 
            their obligation of assuring compliance with payment of the 
            prevailing wage on their public works projects. The first 
            DIR-approved LCPs were established on a voluntary basis to 
            obtain higher exemptions from prevailing wage requirements 
            under the law.  However, the Legislature later began to 
            require awarding bodies to use LCPs to monitor and enforce 
            compliance on specified projects, including school 
            construction projects funded by the Kindergarten-University 
            Public Education Facilities Bond Acts of 2002 and 2004, 
            projects funded by the Water Security, Clean Drinking Water, 
            Coastal and Beach Protection Act of 2002, and projects built 
            under a variety of statutes authorizing design-build 
            procurement.

            However, on January 22, 2007 the Legislative Analyst's Office 
            (LAO) released the report, "Implementing the 2006 Bond 
            Package: Increasing Effectiveness through Legislative 
            Oversight," in which the effectiveness of labor compliance 
            programs (LCP) was questioned.  
            According to LAO, a review of summary data from annual reports 
            filed with DIR by LCPs suggested that the amount of wages 
            recovered for workers by the LCPs was minor given the volume 
            of public works contracts and the amount spent on 
            administering LCPs. In its report, LAO stated that if the 
            Legislature wished to extend LCP requirements to future bonds, 
            then legislation needed to be passed requiring DIR to 
            strengthen its oversight of LCPs.  
            
            Dissatisfaction with the overall performance of LCPs led to 
            the adoption of SBX2-9 (Padilla) in 2009.  The Legislature 
            determined that it would be more cost effective to utilize the 
            expertise of the DIR to monitor and enforce compliance with 
            the prevailing wage requirements on public works projects than 
            to use labor compliance programs as the method of assuring 
            compliance with payment of prevailing wages.  Essentially, 
            SBX2-9 replaced the LCP requirement in a variety of statutes 
            with a requirement to pay a fee for compliance monitoring and 
            enforcement by DIR on the same types of projects covered by 
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          Consultant: Alma Perez                                   Page 7

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            those statutes.  SBX2-9 also expanded the number of projects 
            that would be covered by this requirement by extending it to 
            any project funded in whole or in part by a state public works 
            bond rather than just the four bonds that previously had been 
            subject to an LCP requirement. The Legislature further 
            authorized that the cost of the department's monitoring and 
            enforcement activities on state bond-funded public works 
            projects be paid from state bond proceeds.

          2.  Issue in Question: Legality of using bond funds to pay for fee 
            required for DIR enforcement

            SBX2-9 required the Director of DIR to establish the fees with 
            the approval of the Department of Finance for this service and 
            to adopt reasonable regulations setting forth the manner in 
            which DIR would enforce compliance on covered projects.  The 
            legislation further provided that the new fee-based monitoring 
            and enforcement system would only apply to projects awarded 
            after the fees and regulations had been adopted.  Thereafter, 
            the Director proposed and adopted regulations that, among 
            other things, addressed the new system's applicability, 
            notices, fees, fee waivers, the establishment of a Compliance 
            Monitoring Unit, payroll record review and other monitoring 
            and investigative activities.  These regulations were approved 
            on June 29, 2010 and became effective on August 1, 2010, 
            making the provisions of SBX2-9 effective for projects for 
            which the contract was awarded on or after that date.

            However, subsequent to the adoption of these regulations, bond 
            counsel for the State Public Works Board indicated that it was 
            unwilling to write an "unqualified opinion letter" for 
            specified bond sales due to potential questions about the 
            legality of using bond funds to pay for fees in the manner 
            prescribed in SBX2-9 and the regulations.  

            As a result, DIR sought to amend and delete portions of the 
            regulations on a temporary emergency basis, for the purpose of 
            suspending and postponing the commencement of fee-based 
            compliance monitoring and enforcement by DIR on public works 
            projects until these legal issues are resolved.

            According to DIR, discussions have occurred over the past 
          Hearing Date:  September 1, 2011                          AB 436  
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            several months with bond counsel and other interested 
            stakeholders regarding resolving the potential legal questions 
            at issue with the funding mechanism.  Therefore, according to 
            DIR this bill would make the necessary statutory changes to 
            address these potential issues and allow the enforcement 
            mechanism to move forward.

          3.  Need for this bill?

            Technical changes in the manner in which awarding bodies pay 
            for DIR enforcement services is required in order to address 
            the concerns raised by the Attorney General's office that the 
            current method of reimbursement could be challenged as 
            inconsistent with constitutional bond law.  Without providing 
            these changes, the State Public Works Board is unable to issue 
            an unqualified opinion letter for the bond sale.  According to 
            the then Director of DIR, John Duncan, in a letter to 
            interested person, he stated that "Without the customary 
            unqualified opinion letter, the bonds will be unmarketable, 
            leaving the state unable to pay for the projects in question, 
            resulting in a loss of employment and economic stimulus to the 
            community at a time of continuing stress to local, state and 
            national economies.: ƯNotice of Proposed Emergency Action to 
            Suspend Effect of SBX2-9 Regulations and Compliance Monitoring 
            Unit, October 21, 2010]

            This bill would change the method by which DIR receives the 
            funds to cover prevailing wage and labor enforcement 
            activities from a fee to reimbursement from awarding bodies on 
            the public works projects. This bill would also state that the 
            Legislature finds and declares that the reasonable and 
            directly related costs incurred by the department in 
            monitoring and enforcing compliance with the prevailing wage 
            requirements for an awarding body on any public works project 
            paid for out of public funds that are derived from 
            state-issued bonds is a necessary and prudent oversight 
            activity and constitutes an inherent cost of construction of 
            the authorized public works project, payable from state bond 
            proceeds allocated to such construction.  
           

          4.  Proponent Arguments  :
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            Proponents argue that although current law created the State 
            Public Works Enforcement Fund in order to allow the director 
            of DIR to determine and assess a fee on all state bond funds 
            issued for public works projects for enforcement purposes, the 
            fund is yet to be enacted as the regulations for it were 
            suspended due to concerns raised by the Attorney General's 
            office in the fall of 2010. 

            According to proponents, there exists an urgent need to 
            provide enforcement resources which enable DIR to hold 
            contractors and sub-contractors accountable for prevailing 
            wage violations.  Currently, DIR employs less than two dozen 
            staff to cover the tens of thousands of public works projects 
            statewide.  Proponents argue that tax payers, law-abiding 
            contractors and construction workers are the primary victims 
            when publicly funded projects go unprotected against fraud and 
            abuse by unscrupulous contractors seeking to profit at the 
            public's expense.  Additionally, proponents argue that 
            non-compliance is often a sign of other violations such as 
            failure to carry workers' compensation coverage and 
            unemployment insurance and participation in the underground 
            economy. 

            Proponents argue that the technical and necessary changes in 
            the bill are required as a result of concerns raised by the 
            Attorney General's office regarding the reimbursement 
            methodology in the original statute.  This bill would revise 
            the manner in which awarding bodies pay for the DIR service so 
            that the Attorney General's office may issue the necessary 
            "unqualified bond opinion" which allows the State Treasurer to 
            issue bonds for infrastructure projects.  Proponents argue 
            that enacting these changes will not only save the state money 
            by discontinuing the use of 3rd party LCPs, but awarding 
            agencies will see increased productivity, better quality 
            construction and fewer injuries as a direct result of 
            compliance with prevailing wage law. 

          5.  Opponent Arguments  :

            According to opponents of the measure, when the Legislative 
            Analyst criticized the State's use of Labor Compliance 
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            Programs (LCPs) as ineffectual they agreed and supported the 
            legislation that created the framework for the Compliance 
            Monitoring Unit in the Department of Industrial Relations - 
            along with funding for this effort from the public agencies 
            who undertake the project.  Opponents state their 
                       disappointment when opposition from the Attorney General 
            derailed that effort; however, they are very much opposed to 
            the inclusion of additional language that would allow some 
            projects to go unregulated. 

            Opponents argue that there is no conceivable public benefit to 
            eliminate the role of the State in enforcing prevailing wage 
            law.  According to opponents, this bill would create three 
            distinct regulatory schemes:
               1. Projects which may continue under LCP supervision
               2. Projects that are supervised by the state
               3. Projects with absolutely no supervision whatsoever - 
               only a reliance on a contractual agreement between the 
               public agency and a handful of non-governmental entities 
               who agree ahead of time to resolve "disputes about the 
               payment of wages."

            According to opponents, this Legislature has no fewer than 
            eight separate bills that enhance penalties and levy new 
            extractions on public works wage and benefit violations, yet, 
            this bill suggests that the state should have no authority to 
            enforce the law on specific projects.  Opponents are urging 
            the author to remove these provisions and make the bill apply 
            to the entire construction industry. 

          6.  Prior Legislation  :

            SBX2-9 (Padilla) of 2009: Chapter 7, Statutes of 
            2009-10/Second Extraordinary Session
            This bill made general changes to law dealing with the payment 
            of prevailing wages and its enforcement.  Primarily, the bill 
            changed the enforcement method from one involving Labor 
            Compliance Programs to a procedure involving a fee that would 
            be imposed on awarding bodies to directly fund DIR to enforce 
            prevailing wage laws on those public works projects.  

            SB 191 (Padilla) of 2007: Vetoed by the Governor 
          Hearing Date:  September 1, 2011                          AB 436  
          Consultant: Alma Perez                                   Page 11

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            This bill, similar concepts as found in SBX2-9, would have 
            established an alternative mechanism to fund enforcement of 
            prevailing wage and apprenticeship requirements on specified 
            public works projects. 

            SB 18 (Perata) of 2007: Vetoed by the Governor 
            This bill would have required an awarding body that chooses to 
            use funds for a public works project using the 
            Kindergarten-University Public Education Facilities Bond Act 
            of 2006 to monitor the project with a Department of Industrial 
            Relations  approved  labor compliance program.

            AB 306 (Eng) of 2007: Held in Senate Appropriations Committee
            This bill sought to add specific administrative procedures and 
            responsibilities to an approved private entity that contracts 
            to initiate and enforce a Labor Compliance Program. 
              

                                       SUPPORT
          
          State Building and Construction Trades Council, AFL-CIO
          The Solis Group 
          

                                     OPPOSITION
          
          Associated Builders and Contractors of California 
          Plumbing-Heating-Cooling Contractors Association of California
          Western Electrical Contractors Association












          Hearing Date:  September 1, 2011                          AB 436  
          Consultant: Alma Perez                                   Page 12

          Senate Committee on Labor and Industrial Relations