BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:   January 4, 2012

                     ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
                                Sandre Swanson, Chair
                    AB 987 (Grove) - As Amended:  January 4, 2012
           
          SUBJECT  :   Public works: prevailing wages.

           SUMMARY  :   Makes various changes to existing law related to the 
          payment of prevailing wages on public works projects, including 
          repealing various provisions of current law.  Specifically,  this 
          bill  :

          1)Raises the threshold on public works projects exempt from 
            prevailing wage requirements from $1,000 to $100,000.

          2)Provides that specified public works and prevailing wage 
            requirements shall not apply to contracts for which the state 
            or any political subdivision pays a cumulative amount of less 
            than 50 percent of the total payment under the contract.

          3)Exempts from prevailing wage requirements any school district 
            construction, reconstruction or rehabilitation projects except 
            as required by federal law.

          4)Limits the application of prevailing wage law applicable to 
            specified irrigation, utility, reclamation, improvement 
            district, street, sewer and other improvement work, by 
            requiring that such projects be paid for in whole or in part 
            with public funds in order to be covered (current law does not 
            have a public funds requirement for these types of projects).

          5)Revises various provisions of public works law to apply only 
            to work done "in the execution of a contract."

          6)Revises provisions of existing law related to the 
            applicability of the law to private residential projects and 
            works on private development projects required as part of 
            regulatory approval of a project, as specified.

          7)Revives exemptions for specified residential and low-income 
            housing projects that (under current law) apply only to 
            projects before December 31, 2003.

          8)Eliminates the requirement in existing law that projects 








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            financed under the Bergeson-Peace Infrastructure and Economic 
            Development Bank Act comply with prevailing wage laws.

          9)Provides that "public works" does not include work performed 
            during the design and preconstruction phases of construction.

          10)Deletes provisions of current law that specify that "public 
            works" includes the hauling of refuse from a public works site 
            to an outside disposal location.

          11)Eliminates the sunset date on an exemption for specified 
            volunteers, volunteer coordinators and conservation corps 
            members.

          12)Provides that the requirement to pay prevailing wages does 
            not apply to fabrication or prefabrication work that is done 
            at permanent offsite facilities of contractors.

          13)Provides that the requirement to pay prevailing wages does 
            not apply to a public work project of a local agency that 
            adopts a resolution or ordinance that provides that prevailing 
            wage requirements shall apply to any public work of that local 
            agency only if required by a state or federal grant.

          14)Provides that workers employed on a hospital seismic 
            retrofitting project are not required to be paid prevailing 
            wages.

          15)Specifies that workers must be employed "directly at the 
            sight of the work" to be deemed to be employed upon a public 
            work.

          16)Extends the contract threshold for certain apprentice 
            requirements on public works projects from contracts of 
            $30,000 to contracts of $100,000 or more.

          17)Makes other related and conforming changes.

           FISCAL EFFECT  :   Unknown

           COMMENTS  :  This bill seeks to makes various changes to existing 
          law related to the payment of prevailing wages on public works 
          projects, including repealing various provisions of current law.

           A Brief History of State and Federal Prevailing Wage Law  








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          State prevailing wage laws vary from state to state, but do 
          share a common history that actually predates federal prevailing 
          wage law.  Many of these state laws were enacted as part of 
          general reform efforts to improve working conditions at the end 
          of the 19th and the beginning of the 20th centuries.  Between 
          1891 and 1923, seven states adopted prevailing wage laws that 
          required payment of specified hourly wages on government 
          construction projects.  The State of Kansas enacted the first 
          prevailing wage law in 1891.

          Eighteen additional states and the federal government adopted 
          prevailing wage laws during the Great Depression of the 1930s 
          amidst concern that acceptance of the low bid, a common 
          requirement of government contracting for public projects when 
          government had become the major purchaser of construction, would 
          operate to reduce the wages paid to workers on those projects to 
          a level that would disrupt the local economy.

          California's prevailing was law was enacted in 1931.

          In general, the proponents of prevailing wage legislation wanted 
          to prevent the government from using its purchasing power to 
          undermine the wages of its citizens.  It was believed that the 
          government should set an example, by paying the wages prevailing 
          in a locality for each occupation hired by government 
          contractors to build public projects.  Thus, prevailing wage 
          laws are generally meant to ensure that wages commonly paid to 
          construction workers in a particular region will determine the 
          minimum wage paid to the same type of workers employed on 
          publicly funded construction projects. 

          Most public construction projects contracted for or by the 
          federal government or the District of Columbia are covered by 
          the federal prevailing wage law, the Davis-Bacon Act (Act), 
          while 33 states have prevailing wage laws, often referred to as 
          "little Davis-Bacon Acts," that encompass projects financed by 
          states and their political subdivisions.
          
          The federal Davis-Bacon Act was enacted by Congress in 1931.  
          The Act requires workers employed under public construction 
          contracts of the federal government in excess of $2,000 to be 
          paid a minimum wage that the United States Department of Labor 
          determines to be prevailing for corresponding classes of 
          workers. In addition, sixty separate federal laws currently 








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          specify the payment of Davis- Bacon wages for work prescribed. 

          The federal government also has two additional prevailing wage 
          laws - the Walsh-Healy Public Contracts Act of 1935 (which 
          covers federal contractors in manufacturing and supply 
          industries), and the O'Hara-McNamara Services Act of 1965 (which 
          covers service contracts).

          The United States Supreme Court has stated the public policy 
          underlying the Davis-
          Bacon Act as one of: 

               "protecting local wage standards by preventing contractors 
               from basing their bids on wages lower than those prevailing 
               in the area . . . Ŭand] giving local labor and the local 
               contractor a fair opportunity to participate in this 
               building program."  Universities Research Ass'n. v. Coutu 
               (1981) 450 U.S. 754, 773-774).

           General Background on "Public Works" Under California Law
           
          In general, "public works" is defined to include construction, 
          alteration, demolition, installation or repair work done under 
          contract and "paid for in whole or in part out of public funds." 
           

          Over a decade ago, there was much administrative and legislative 
          action over what constituted the term "paid for in whole or in 
          part out of public funds."  This action culminated in the 
          enactment of SB 975 (Alarcón), Chapter # 938, Statutes of 2001, 
          which codified a definition of "paid for in whole or in part out 
          of public funds" that included certain payments, transfers, 
          credits, reductions, waivers and performances of work.  At the 
          time, supporters of SB 975 stated that it established a 
          definition that conformed to several precedential coverage 
          decisions made by the Department of Industrial Relations (DIR).  
          These coverage decisions defined payment by land, reimbursement 
          plans, installation, grants, waiver of fees, and other types of 
          public subsidy as public funds for purposes of prevailing wage 
          law.  According to the sponsors, SB 975 was intended to remove 
          ambiguity regarding the definition of public subsidy of 
          development projects.

          SB 975 also exempted certain affordable housing, residential and 
          private development projects that met certain criteria. 








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          Follow-up legislation, SB 972 (Costa), Chapter # 1048, Statutes 
          of 2002, was intended to clarify the application of SB 975 and 
          was the result of extensive discussions between the State 
          Building and Construction Trades Council (sponsor of SB 975), 
          affordable housing advocates, and the Davis Administration.  
          Supporters of SB 972 contended that the original legislation had 
          unintended consequences for self-help housing and housing 
          rehabilitation projects.  As a result of that compromise, SB 972 
          exempted from public works requirements the construction or 
          rehabilitation of privately-owned residential projects that met 
          certain criteria.

           Why It Matters: "Prevailing Wage"
           
          The determination of whether a project is deemed to constitute a 
          "public work" is important because the Labor Code requires 
          (except for projects of $1,000 or less) that the "prevailing 
          wage" to be paid to all workers employed on public works 
          projects.

           Specific Changes Proposed By This Bill  

          This bill seeks to makes various changes to existing law related 
          to the payment of prevailing wages on public works projects, 
          including repealing various provisions of current law.  

          Among other things, this bill proposes to do the following:

           Raise the threshold on public works projects exempt from 
            prevailing wage requirements from $1,000 to $100,000.
           Provide that specified public works and prevailing wage 
            requirements shall not apply to contracts for which the state 
            or any political subdivision pays a cumulative amount of less 
            than 50 percent of the total payment under the contract.
           Exempt from prevailing wage requirements any school district 
            construction, reconstruction or rehabilitation projects except 
            as required by federal law.
           Limit the application of prevailing wage law applicable to 
            specified irrigation, utility, reclamation, improvement 
            district, street, sewer and other improvement work, by 
            requiring that such projects be paid for in whole or in part 
            with public funds in order to be covered (current law does not 
            have a public funds requirement for these types of projects).
           Revise various provisions of public works law to apply only to 








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            work done "in the execution of a contract."
           Revise provisions of existing law related to the applicability 
            of the law to private residential projects and works on 
            private development projects required as part of regulatory 
            approval of a project, as specified.
           Revive exemptions for specified residential and low-income 
            housing projects that (under current law) apply only to 
            projects before December 31, 2003.
           Eliminate the requirement in existing law that projects 
            financed under the Bergeson-Peace Infrastructure and Economic 
            Development Bank Act comply with prevailing wage laws.
           Provide that "public works" does not include work performed 
            during the design and preconstruction phases of construction.
           Delete provisions of current law that specify that "public 
            works" includes the hauling of refuse from a public works site 
            to an outside disposal location.
           Eliminate the sunset date on an exemption for specified 
            volunteers, volunteer coordinators and conservation corps 
            members.
           Provide that the requirement to pay prevailing wages does not 
            apply to fabrication or prefabrication work that is done at 
            permanent offsite facilities of contractors.
           Provide that the requirement to pay prevailing wages does not 
            apply to a public work project of a local agency that adopts a 
            resolution or ordinance that provides that prevailing wage 
            requirements shall apply to any public work of that local 
            agency only if required by a state or federal grant.
           Provide that workers employed on a hospital seismic 
            retrofitting project are not required to be paid prevailing 
            wages.
           Specify that workers must be employed "directly at the sight 
            of the work" to be deemed to be employed upon a public work.
           Extend the contract threshold for certain apprentice 
            requirements on public works projects from contracts of 
            $30,000 to contracts of $100,000 or more.

          Some of the more significant of these proposals are discussed in 
          more detail below:
           
          Response to Recent Azusa Decision?

           Although the background information provided by the author does 
          not specifically mention it, it appears that several of the 
          provisions of this bill are brought forward in response to a 
          recent significant decision of a California appellate court in 








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          Azusa Land Partners v. Department of Industrial Relations.  
          Therefore, a very brief discussion of that case and its holding 
          may be useful here.

          At issue in that case was a mixed use project comprised of over 
          1,200 residential homes and 50,000 square feet of commercial 
          space.  The developer entered into an agreement with the City of 
          Azusa (as a condition of regulatory approval of the project) to 
          construct certain public improvements, including school, rail, 
          sanitation, road, bridge and utility construction work.  The 
          City established a Community Facilities District under the 
          Mello-Roos Act to issue bonds to reimburse the developer for a 
          portion of cost of the public improvements.

          DIR concluded that the entire project constituted a public work 
          because it was funded "in whole or in part" with public funds.  
          However, citing an exception under Labor Code Section 1720(c), 
          DIR determined that no more public funds were contributed than 
          required to pay the cost of the public infrastructure projects.  
          Therefore, prevailing wages only had to be paid for the 
          construction of the public improvements.  

          The Second District Court of Appeal upheld DIR's interpretation 
          of the prevailing wage law in the case.  The first part of the 
          decision related to whether the overall master-planned 
          development at issue in the case was a "public work" under Labor 
          Code Section 1720 because it was "paid for in whole or in part" 
          out of public funds.   The Court held that the prevailing wage 
          law (as it existed prior to, but especially so after SB 975 of 
          2001 which codified "paid for in whole or in part" out of public 
          funds) applied to the "overall scheme of improvement."  Thus, 
          the entire project at issue was a "public work" under Section 
          1720.  The second main part of the decision dealt with, despite 
          the fact that the entire project was a "public work," whether a 
          specified exemption in 1720(c)(2) limited the obligation to pay 
          prevailing wages only to specified "public improvement work" 
          that was part of the overall project.







          The Azusa decision has generated significant discussion in the 








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          public works arena, particularly among the developer community.  
          Those stakeholders who support the Court's finding in Azusa 
          contend that the Court rightly interpreted longstanding 
          interpretation that a project is a public work if it is paid for 
          in whole or in part out of public funds.  Otherwise (as the 
          argument goes) a legal fiction could be developed on paper to 
          split a project into multiple smaller projects and designate the 
          "public funding" only for one small subset of the overall 
          project (thereby limiting the payment of prevailing wages).  
          However, many industry observers strongly disagree with the 
          Azusa decision and feel that it was an unwarranted expansion of 
          prevailing wage law into otherwise private projects.   They most 
          object to what they call the Court's "development-wide" approach 
          to determining whether a given project is a "public work."

          Thus, in light of this, it appears that several provisions of 
          this bill are intended to address issues raised in the Azusa 
          decision.  First, this bill recasts various provisions of 
          existing law to focus on work done "in execution of a contract" 
          instead of the project itself.  This could be seen as an attempt 
          to overturn the Azusa Court's "development-wide" approach 
          discussed above.  Second, this bill provides that the 
          requirements do not apply where the public funds amount to less 
          than 50 percent of the total payment under contract.  This too 
          may be seen as a response to Azusa by attempting to limit 
          application of the law only to projects where a "majority" of 
          the financing is paid with public funds.  Finally, this bill 
          recasts the exemption in Labor Code Section 1720(c) (which was 
          at issue in the Azusa case) to reference this new definition of 
          "paid for in whole or in part out of public funds."
           
          "Public Works" Threshold

           Under current law, prevailing wages are required to be paid to 
          all workers employed on public works projects.  Existing law 
          excludes projects of less than $1,000 from this requirement.  
          This bill proposes to increase this threshold to $100,000.

           Local Agency Opt-Out Requirements  

          This bill authorizes the governing body of a local agency to 
          adopt, by an affirmative vote of a majority of its members, a 
          resolution or ordinance providing that the prevailing wage 
          requirements shall apply to any public work of the local agency 
          only if required by a state or federal grant.








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           Exemption for School Construction Work

           Under current law, "public works" are defined as construction, 
          alteration, demolition, installation or repair work paid for in 
          whole or in part out of public funds.  A significant portion of 
          public works construction work consists of school construction 
          and modernization work.

          This bill provides that the governing board of a school district 
          is not required to comply with prevailing wage requirements with 
          regard to the construction, reconstruction or rehabilitation of 
          school facilities, except to the extent required by federal law.

          AB 1018 (Nakanishi) of 2003 would have exempted school facility 
          new construction or modernization projects from any requirement 
          to pay local prevailing wages.  AB 1018 failed passage in this 
          Committee. 
           
           Refuse Hauling  

          Since 1976, the Labor Code has defined "public works" to include 
          the hauling of refuse to an outside disposal facility with 
          respect to public works contracts involving any state agency, 
          including the California State University and the University of 
          California.  In 1999, SB 302 (Floyd) added contracts involving 
          cities, counties, and other political subdivisions of the state 
          to this requirement.

          Last year, AB 514 (R. Hernández) clarified what materials from 
          the worksite are included in the definition of "hauling of 
          refuse."  AB 514 was signed by the Governor and enacted into 
          law.

          AB 1140 (Cox) of 2003 attempted to repeal the provision of law 
          that defines public works to include the hauling of refuse.  
          That bill failed passage in this Committee.  Like AB 1140, this 
          bill proposes to eliminate this provision of law.

           Offsite Fabrication  

          This bill provides that the requirement to pay prevailing wages 
          does not apply to fabrication or prefabrication work that is 
          done at permanent offsite facilities of contractors.  This bill 
          also specifies that workers must be employed "directly at the 








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          sight of the work" to be deemed to be employed upon a public 
          work.

          The issue of prevailing wage law and the offsite fabrication of 
          work has been a controversial subject in recent years.  Labor 
          unions and others have expressed concern that unscrupulous 
          contractors have begun to perform certain fabrication and 
          prefabrication work away from the work site in an effort to 
          evade the requirements of California's prevailing wage law.  
          According to such allegations, some contractors were performing 
          the bulk of fabrication work offsite, where employees were not 
          paid prevailing wages.  The fabricated work would then be 
          brought to the actual work site and installed, with workers 
          receiving prevailing wages only for that final stage in the 
          process.

          On March 4, 2003, the DIR issued two precedential public works 
          coverage determinations addressing whether employees engaged in 
          certain offsite fabrication in conjunction with construction 
          projects are deemed to be employed upon public works.   Cuesta 
          College  (PW Case #2000-027);  City of San Jose/SJSU Joint Library 
          Project  (PW Case #2002-064).  In two lengthy analyses, DIR 
          concluded that California's prevailing wage law does not limit 
          coverage to the site of the public works project.  Moreover, DIR 
          noted that one of the purposes of the prevailing wage law is to 
          "protect employees from substandard wages that might be paid if 
          contractors could recruit labor from distant cheap-labor areas" 
          (citation omitted).

          Both of the coverage determinations were administratively 
          appealed.  In addition, various legal actions were filed 
          challenging the determinations.  On April 16, 2003, the Acting 
          Director of DIR announced that, until the resolution of the 
          administrative appeals, the implementation of the public works 
          coverage test enunciated in those determinations regarding 
          offsite fabrication work would be stayed.



          In a subsequent case, DIR determined that certain offsite 
          fabrication work performed in the permanent shop of an on-site 
          heating, ventilating and air conditioning subcontractor was done 
                                                                                    in the execution of a contract for public work and was therefore 
          subject to prevailing wage law requirements.   Russ Will 
          Mechanical, Inc.  , (PW Case # 2007-008).  However, the 








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          subcontractor filed a notice of administrative appeal, which DIR 
          granted and ordered the determination reversed.  A labor 
          organization subsequently brought a legal action wherein the 
          trial court vacated the decision and ordered DIR to reconsider.  
          DIR did not appeal the trial court decision, but the 
          subcontractor did.  The matter is currently pending on appeal in 
          the California First District Court of Appeal.

          AB 1310 (Dutton) of 2003 and AB 1995 (Cox) of 2004 both 
          attempted (as this bill does) to exempt offsite fabrication work 
          from the requirements of prevailing wage law.  Both of those 
          measures failed passage in this Committee.

           Hospital Seismic Retrofitting Projects  

          In 1994, after the Northridge earthquake damaged 12 hospitals, 
          the legislature passed SB 1953 (Alquist), Chapter # 740, 
          Statutes of 1994, which required that the most vulnerable 
          hospital buildings be retrofitted by 2008.  Although many of the 
          seismically-unsafe hospitals have had the deadline extended, 
          some hospitals continue to argue that they are not able to 
          afford the costs of seismic retrofitting.

          AB 549 (Adams) of 2007 proposed to exclude any hospital seismic 
          retrofitting project from the prevailing wage requirements of 
          current law.  Proponents of that bill argued that this bill was 
          necessary for hospitals to meet California's seismic 
          retrofitting requirements by helping to lower the cost of the 
          retrofitting projects.  Opponents, however, argued that that 
          hospital construction requires some of the most highly skilled 
          construction workers in the industry and that lowering the wage 
          standards to lower construction costs would be "penny wise and 
          pound-foolish."  AB 549 failed passage in this Committee.

          This bill provides that workers employed on a hospital seismic 
          retrofitting project are not required to be paid prevailing 
          wages    
           
          ARGUMENTS IN SUPPORT  :

          This bill is sponsored by the Associated Builders and 
          Contractors of California.  The author writes the following in 
          support of this measure:

               "ŬThis bill] restores an honest definition of a 'public 








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               work' by clarifying when construction is actually being 
               done on a public work and by repealing provisions of law 
               added during the administration of Governor Gray Davis that 
               distorted the definition of 'public work.'  It increases a 
               project cost threshold for prevailing wage that was set in 
               1931 and remains in place today.  It gives local 
               governments the right to establish their own prevailing 
               wage policies for local projects?

               ?The State of California needs to encourage economic growth 
               and job creation by eliminating the government requirement 
               that contractors pay inflated and inaccurate state-mandated 
               construction wage rates on private projects that are not 
               truly public works. In addition, local governments should 
               have the right to establish their own prevailing wage rates 
               that more accurately reflect local market conditions?

               ?ŬThis bill] would establish a more reasonable state 
               definition of 'public work' for the purposes of 
               state-mandated construction wage rates, thus limiting the 
               coverage of these mandates to legitimate government 
               projects.  The bill relieves regulatory burdens for small 
               businesses and governments by increasing the cost threshold 
               for prevailing wage coverage from $1,000 to $100,000.  It 
               achieves consistency in state law by setting the cost 
               threshold for apprenticeship mandates at $100,000.  It 
               repeals laws signed by Governor Gray Davis that expanded 
               the definition of public works, thus extending 
               state-mandated prevailing wage coverage to numerous kinds 
               of privately-built projects, including affordable housing 
               and certain other private developments.  It repeals laws 
               signed by Governor Gray Davis that expanded state-mandated 
               prevailing wage coverage to occupations in which workers do 
               not actually build or fix structures for taxpayers, such as 
               land surveying, inspection services, refuse hauling, and 
               off-site manufacturing and fabrication work.  It 
               incorporates several bills introduced in the legislature 
               since 1993 that would have exempted certain kinds of 
               sensitive construction projects from state-mandated 
               prevailing wage coverage: school construction, seismic 
               retrofitting of hospitals, and volunteer work.  Finally, it 
               gives local governments the ability to establish their own 
               prevailing wage policies for public works exclusively 
               funded by local taxpayers."









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           ARGUMENTS IN OPPOSITION  :

          Writing in opposition to this bill, the State Building and 
          Construction Trades Council of California states the following:

               "Prevailing wage has helped establish and preserve our 
               nation's middle class by ensuring skilled construction 
               workers on public works projects earn a fair wage to 
               provide for themselves and their families, as well as 
               dignity and respect for their work?

               ?California's building and constructions trades unions have 
               fought many legislative, regulatory, and electoral battles 
               to strengthen and protect our state's prevailing wage law?

               ?The payment of prevailing wage ensures fair competition by 
               leveling the playing field for signatory contractors - 
               offering the employer and the general public a construction 
               product at a reduced cost by minimizing workplace injuries 
               due to a highly skilled and trained workforce, on-time 
               project delivery, and higher quality construction that 
               results in decreased maintenance costs after project 
               completion?

               ?ŬS]tates and cities that have abolished or weakened their 
               prevailing wage laws have experienced a tripling of cost 
               overruns on public works projects, significant increases in 
               construction injuries, steep declines in apprenticeship 
               training, and a depression of local and statewide wages."





          Similarly, the California Labor Federation, AFL-CIO states the 
          following:

               "ŬThis bill] would exempt a laundry list of current school 
               construction work from prevailing wage laws.  It would cut 
               prevailing wage from various residential projects and 
               triple a dollar threshold at which prevailing wage applies.

               These exemptions would only hurt school construction 
               projects.  Prevailing wage guarantees projects come in on 
               time and on budget.  Countless studies and reams of 








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               evidence confirm that weakened prevailing wage standards 
               result in inadequate training programs, longer foreman 
               hours, shoddier work that requires more maintenance and, 
               inevitably, cost overruns.  These overruns and late 
               completions end up costing tax payers more in the long-run.

               ŬThis bill] would not benefit workers, communities or 
               students.  Our children deserve to go to schools that were 
               built by skilled professionals under the highest quality 
               standards and for a fair cost."
           
          REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Associated Builders and Contractors of California

           Opposition 
           
          California Labor Federation, AFL-CIO
          California Sheet Metal and Air Conditional Contractors' National 
          Association
          California State Pipe Trades Council
          California Teamsters Public Affairs Council
          California-Nevada Conference of Operating Engineers
          Coalition of California Utility Employees
          International Brotherhood of Electrical Workers
          International Union of Elevator Constructors
          State Building and Construction Trades Council of California
          Western States Council of Sheet Metal Workers
           

          Analysis Prepared by  :    Ben Ebbink / L. & E. / (916) 319-2091