BILL ANALYSIS Ó Senate Committee on Labor and Industrial Relations Ted W. Lieu, Chair Date of Hearing: March 13, 2013 2013-2014 Regular Session Consultant: Alma Perez Fiscal:yes Urgency: no Bill No: SB 7 Author: Steinberg and Cannella As Introduced/Amended: February 19, 2013 SUBJECT Public works: charter cities KEY ISSUE Should the Legislature prohibit a charter city from receiving/using state funds for a construction project if the city has a provision or ordinance authorizing a contractor to not comply with prevailing wage requirements on any public works contract? ANALYSIS Existing law defines the term "public works" 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. Existing law also defines "public works" as street, sewer, or other improvement work done under the direction and supervision or by the authority of any officer or public body of the state, or of any political subdivision or district thereof, whether the political subdivision or district operates under a freeholder's charter or not. [Labor Code §1720(a)(3)] Under existing law , "paid for in whole or in part out of public funds" means, among other things, the following: 1. The payment of money or the equivalent of money by the state or political subdivision directly to or on behalf of the public works contractor, subcontractor, or developer. 2. The performance of construction work by the state or political subdivision in execution of the project. 3. Fees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, that are paid, reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision. 4. Money loaned by the state or political subdivision that is to be repaid on a contingent basis. Existing law requires all employees who work on public works projects costing $1,000 or more to be paid the general prevailing rate of per diem wages and the general prevailing rate for holiday and overtime work for the specific location where the public work is to be performed (Labor Code §1771) This requirement is applicable to work performed under contract and it does not apply to work carried out by a public agency with its own forces. Existing law provides certain exemptions to the payment of prevailing wage that includes, among others, private residential projects. The Director of the Department of Industrial Relations (DIR) is tasked with the responsibility of determining the general prevailing rate of per diem wages in accordance with specified standards. (Labor Code §1773) The California Constitution grants cities the ability to become charter cities. A county or city may adopt a charter by majority vote of its electors voting on the question. Under existing law, a charter city may make and enforce all ordinances and regulations in respect to "municipal affairs," subject only to restrictions and limitations provided in their charters and in respect to other matters they are subject to general laws. [CA Const. art. XI §3 & 5] This Bill would prohibit a charter city from receiving or using state funding or financial assistance for a construction project - if the city has a charter provision or ordinance that authorizes a contractor to not comply with prevailing wage requirements on any public works contract. Specifically, this bill would: Hearing Date: > SB > Consultant: > Page 2 Senate Committee on Labor and Industrial Relations § Provide that a charter city includes any agency of a charter city and any entity controlled by a charter city whose contracts would be subject to this article. § Specify that it does not apply to contracts awarded prior to January 1, 2014. § Prohibit receipt or use of state funds for a construction project if the city has awarded, within the current or prior two years, a contract without requiring compliance of all prevailing wage requirements. § Specify that this prohibition does not apply [and state funds may be used] if a charter city: o Has a provision or local ordinance that requires the payment of prevailing wage. o Has adopted a local prevailing wage ordinance that includes requirements that are equal to or greater than the state's existing prevailing wage provisions and that do not authorize a contractor to not comply with such. § Exclude contracts for projects costing $25,000 or less when the project is for construction work, or projects of $15,000 or less when the project is for alteration, demolition, repair, or maintenance work. § Define what is included under "state funding and financial assistance", and would exempt from its definition, tax revenues that charter cities are entitled to receive without conditions under the Constitution. § Require the Director of the Department of Industrial Relations to maintain a list of charter cities that may receive and use state funding for their construction projects. § Lastly, this bill includes several related legislative findings and declarations. Hearing Date: > SB > Consultant: > Page 3 Senate Committee on Labor and Industrial Relations COMMENTS 1. A Brief History of State and Federal Prevailing Wage Law: State prevailing wage laws vary from state to state, but do share a common history that predates federal prevailing wage law. Many of these state laws were enacted as part of Progressive Era 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 being the first in 1891. Eighteen additional states (including California in 1931) 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, would reduce local wages and disrupt the local economies. This was particularly in the depths of the Great Depression, where, for some local economies, the government had become the primary purchaser of construction products and a significant employer. 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. Even today, 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. 2. Brief Background on Charter Cities: The California Constitution gives cities the power to become charter cities. For a charter city, the charter adopted constitutes state law and has the force of legislative Hearing Date: > SB > Consultant: > Page 4 Senate Committee on Labor and Industrial Relations enactment. Changes to a charter can originate in three ways: a charter commission; the governing body of the city; or by petition of the voters. A charter is adopted only with a majority vote of the city's voters. The California Constitution authorizes a charter city to exercise plenary authority over "municipal affairs," while a general law city is subject to the general laws passed by the Legislature. Whether a given activity is a municipal affair over which a city has sovereignty, or a statewide concern, over which the legislature has authority, is a determination that has been the legal question of many cases before the court. The California Constitution does not define "municipal affair" and thus, the determination of whether an activity is a municipal affair or statewide concern is done on a case-by-case basis. The Constitution does, however, set out a list of four core categories that are presumed to be municipal affairs. Article XI, Section 5(b) of the California Constitution states: (b) It shall be competent in all city charters to provide, in addition to those provisions allowable by this Constitution, and by the laws of the State for: (1) the constitution, regulation, and government of the city police force (2) subgovernment in all or part of a city (3) conduct of city elections and (4) plenary authority is hereby granted, subject only to the restrictions of this article, to provide therein or by amendment thereto, the manner in which, the method by which, the times at which, and the terms for which the several municipal officers and employees whose compensation is paid by the city shall be elected or appointed, and for their removal, and for their compensation, and for the number of deputies, clerks and other employees that each shall have, and for the compensation, method of appointment, qualifications, tenure of office and removal of such deputies, clerks and other employees. [CA Const. art. XI §5(b)] 3. Court Decisions on Charter Cities and Prevailing Wage: Determining whether the payment of prevailing wages is a municipal affair subject to charter sovereignty versus an issue of statewide concern, has been the subject of court Hearing Date: > SB > Consultant: > Page 5 Senate Committee on Labor and Industrial Relations cases for many decades. Historically, charter cities have been found to not be bound by state prevailing wage requirements as long as the project is a "municipal affair," and not funded by state or federal grants requiring the payment of prevailing wage. Such was the case in Vial v. City of San Diego [122 Cal. App. 3d 346, 348 (1981)], in which Donald Vial (Director of the Department of Industrial Relations) and Labor Commissioner James L. Quillin petitioned for a writ of mandate to compel the City of San Diego to comply with the state prevailing wage laws. The superior court denied the petition and the department appeals. In a more recent case, State Building & Construction Trades Council of California v. City of Vista, 173 Cal. App. 4th 567, 93 Cal. Rptr. 3d 95, 2009 Cal. App. LEXIS 627 (Cal. App. 4th Dist., 2009), the issue was again at question. The case involved two contracts to design and build fire stations with local public funds. The State Building & Construction Trades Council contends that the subject matter of the state's prevailing wage law is a "statewide concern" over which the state has primary legislative authority requiring the payment of prevailing wages. The City responded that the matter was a municipal affair and therefore governed by its local ordinances. The court agreed with the city. In a 5-2 decision, the California Supreme Court affirmed the right of charter cities to opt-out of the state's prevailing wage law pursuant to California's Constitution and stated, "Here, we reaffirm our view - first expressed 80 years ago [see City of Pasadena v. Charleville (1932) 215 Cal. 384, 389 (Charleville)] - that the wage levels of contract workers constructing locally funded public works are a municipal affair (that is, exempt from state regulation), and that these wage levels are not a statewide concern (that is, subject to state legislative control)." However, the court went further in questioning the existence of an "actual conflict" between state law and charter city law and stated the following: "This court's 1991 decision in California Fed. Savings, supra, 54 Cal.3d at pages 16-17, emphasized the importance of determining, as a matter of statutory construction, that state law actually conflicts with local law before Hearing Date: > SB > Consultant: > Page 6 Senate Committee on Labor and Industrial Relations proceeding to the difficult state constitutional question of which law governs a particular matter." According to the court, in this case, no party was contending that California' prevailing wage law exempts charter cities from its scope. They state that indeed, the prevailing wage law makes express reference to charter cities, defining "public works" to include "street, sewer, or other improvement work . . . of any political subdivision or district [of the state], whether the political subdivision or district operates under a freeholder's charter or not." ([Labor Code, §1720(a)(3)]; and §1720(a)(1) [applying the law to any construction work "done under contract and paid for . . . out of public funds"].) According to the court, because the state's prevailing wage law does not exempt charter cities, and because Vista's ordinance prohibits compliance with that law, they concluded that an actual conflict exists between state law and Vista's ordinance. 4. Need for this bill? As of July 1, 2011, there were 482 incorporated cities in California. Of California's 482 cities, 121 of them are charter cities. Although California's prevailing wage law has been in the books since 1931, the question of whether something is a municipal affair versus one of statewide concern continues to spark much heated discussion. The many cases that have been before the courts on this issue are a clear indication of the need for clarity on what are matters of statewide concern - warranting the payment of prevailing wage. This bill, however, does not focus on the issue of clarity for what is or isn't a "municipal affair," since that is a matter that would require amending the California Constitution, but it does focus on providing clarity on how state funds can be used by charter cities. This bill would prohibit a charter city from receiving or using state funding for a construction project if the city has a charter provision or ordinance that authorizes a contractor not to comply with prevailing wage requirements on any public works contract. Hearing Date: > SB > Consultant: > Page 7 Senate Committee on Labor and Industrial Relations Current law has similar limitation on the use of state funds under Public Contract Code §2502 and 2503. Under these existing conditions, if a charter provision, initiative, or ordinance prohibits, limits, or constrains the governing board's authority or discretion to adopt a project labor agreement, as specified, or prohibits the governing board from considering whether to allocate funds to a city-funded project covered by such an agreement, then the state funding or financial assistance shall not be used to support any construction projects awarded by the city. 5. Proponent Arguments : According to proponents of the measure, the prevailing wage law is critical to the delivery of a quality construction product because it encourages contractors to perform the work with an efficient, skilled and streamlined workforce, ultimately creating long-term cost-savings to the taxpayers. Proponents argue that this legislation is designed to provide incentives to charter cities to follow the prevailing wage law on municipal projects and thereby deter the underground economy and low-road construction models driven by unscrupulous contractors. Proponents argue that a long list of academic studies and public policy research has confirmed that the prevailing wage continues to be a useful and effective driver for local economic growth. They argue that in charter cities with prevailing wage exemptions, new developments have failed to generate quality jobs and, in fact, these cities have not seen the cost savings promised by prevailing wage exemptions and instead have had their construction costs go up due to substandard construction performed by under-qualified contractors. Further, proponents argue that removing prevailing wage protections pushes workers into requiring more subsidies in healthcare, housing and other social services. According to proponents, this bill does not change the outcome of State Building and Construction Trades Council v. City of Vista; instead it helps protect other local governments, Hearing Date: > SB > Consultant: > Page 8 Senate Committee on Labor and Industrial Relations including all general law cities and the majority of charter cities, from the practices of a minority group of charter cities that wish to reward their allies with prevailing wage exemptions that consequently pass on the costs of healthcare and apprenticeship training to the surrounding cities. They argue that cities that follow the prevailing wage law are furthering a policy that benefits the State, not just their own residents, so they are more deserving of state funds for their construction projects. Proponents argue that this bill would not require charter cities to follow the prevailing wage law and, therefore does not prevent charter cities from having their own policies. As such, there is no conflict between this bill and the constitutional authority of charter cities. Instead, they argue, this bill will reward the majority of cities that currently follow the state prevailing wage law. 6. Opponent Arguments : According to opponents of the measure, their opposition rests on the fundamental principle of local control and the constitutional limits on state authority over charter cities, as recently upheld by the California Supreme Court in the Vista decision. They argue that in Vista, the Court firmly protected the right of charter cities to determine whether they should pay prevailing wages when contracting for public works projects paid for with local funds. Opponents argue that this measure conflicts with Vista by attempting, via the Legislature, to leverage a different outcome than the Court's ruling by withholding vital state construction funds - derived from all of the state's taxpayers - from charter cities that fail to adopt prevailing wage requirements for projects built with local funds. According to opponents, while prevailing wage is the issue raised in this bill, the threat posed by the measure to local charter authority is much broader. They argue that if this framework is authorized, there will be no end to efforts to leverage compliance with other state edicts, while ignoring the constitutional legitimacy of the doctrine of municipal affairs. Hearing Date: > SB > Consultant: > Page 9 Senate Committee on Labor and Industrial Relations Some cities writing in opposition argue that they already require the payment of prevailing wages for city funded projects, but fear that this legislative tactic could be used in the future to erode other local flexibility that is important to their communities. Additionally, opponents argue that by saddling local taxpayers with higher costs, the state will guarantee less construction will take place on locally funded projects. Overall, opponents argue that whether a charter city pays prevailing wage with local funds is up to each city and not the Legislature. 7. Prior Legislation : SB 829 (Rubio) of 2012: Chaptered SB 829 would provide that if a charter provision, initiative, or ordinance of a charter city prohibits, limits, or constrains in any way the governing board's authority or discretion to adopt, require, or utilize a project labor agreement (PLA) that includes specified taxpayer protection provisions for some or all of the construction projects to be awarded by the city, state funding or financial assistance may not be used to support any construction projects awarded by the city, as specified. SB 922 (Steinberg) of 2011: Chaptered SB 922 would authorize a public entity to use, enter into, or require contractors to enter into, a PLA for a construction project, if the agreement includes specified taxpayer protection provisions. This bill would also provide that if a charter provision, initiative, or ordinance prohibits the governing board's consideration of a PLA for a project to be awarded by the city, or prohibits consideration whether to allocate funds to a city-funded project covered by such an agreement, then state funding or financial assistance may not be used to support that project, as specified. SUPPORT State Building and Construction Trades Council of California, Hearing Date: > SB > Consultant: > Page 10 Senate Committee on Labor and Industrial Relations AFL-CIO (Sponsor) Bricklayers and Allied Craftworkers, AFL-CIO California Chapters of the National Contractors Association California Labor Federation California Legislative Conference of the Plumbing, Heating and Piping Industry California Sheet Metal and Air Conditioning Contractors National Association California State Council of Laborers Carpet Linoleum & Soft Tile Workers Local Union No. 12 Cement Masons Local Union No. 500 Contra Costa Building and Construction Trades Council District Council 16 Local Union 294 Fresno, Madera, Kings and Tulare Counties Building & Construction Trades Council, AFL-CIO Glaziers, Architectural Metal and Glass Workers Union, Local 718, of San Francisco Imperial County Building Trades and 16 Affiliate Unions International Brotherhood Electrical Workers International Brotherhood of Electrical Workers Local Union 234 International Brotherhood of Electrical Workers Local Union No. 340 International Union of Painters and Allied Trades Local Union 376 Kern, Inyo and Mono Counties Building and Constructions Trades Council Los Angeles/Orange Counties Building and Construction Trades Council Northern California Carpenters Regional Council Painters & Allied Trades District Council 36 Painters & Allied Trades Local # 3 Painters & Drywall Finishers Local 741 District Council 16 Painters & Drywall Finishers Local Union 913 Painters and Drywall Finishers Local 83 Plaster Tenders of Southern California Local Union 1414 Plumbers & Steamfitters Local Union # 230 Plumbers, Steamfitters and Refrigeration Fitters Local Union # 467 San Diego County Building & Construction Trades Council, AFL-CIO San Mateo County Building & Construction Trades Council Santa Clara & San Benito Counties Building & Construction Trades Council Hearing Date: > SB > Consultant: > Page 11 Senate Committee on Labor and Industrial Relations Sheet Metal, Air, Rail, Transportation Workers Local Union 105 United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry Underground Utility/Landscape Local 355 United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States Local Union 114 Ventura County Plumbers and Pipefitters local # 484 OPPOSITION Air Conditioning Trade Association Associated Builders and Contractors of California League of California Cities Plumbing-Heating-Cooling Contractors Association of California The City of Arcadia The City of Cerritos The City of Folsom The City of Glendora The City of Grass Valley The City of Indian Wells The City of Norco The City of Petaluma The City of Pico Rivera The City of Roseville The City of Selma The City of Shafter The City of Solvang The City of Torrance The City of Wasco Western Electrical Contractors Association Western Electrical Contractors Association Hearing Date: > SB > Consultant: > Page 12 Senate Committee on Labor and Industrial Relations Hearing Date: > SB > Consultant: > Page 13 Senate Committee on Labor and Industrial Relations