BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: April 24, 2013 2013-2014 Regular
Session
Consultant: Alma Perez Fiscal:Yes
Urgency: No
Bill No: SB 615
Author: Galgiani
As Introduced/Amended: April 1, 2013
SUBJECT
Public works: prevailing wages
KEY ISSUE
Should the Legislature require the payment of prevailing wages
for any work done under private contract on a hospital or health
care facility project that is paid for in whole, or in part,
with the proceeds of conduit revenue bonds?
ANALYSIS
Existing law requires that workers employed on public works
projects in California be paid the applicable prevailing wage,
as determined by the director of 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
rate of per diem wages be paid to all workers employed on
a "public works" project costing over $1,000 dollars and
imposes misdemeanor penalties for violation of this
requirement. (Labor Code �1771)
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" to include, 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 by the state
or political subdivision. (Labor Code �1720)
Exempts from the definition of "paid for in whole or
in part out of public funds" specified types of
affordable housing, private residential housing, private
development projects, qualified residential projects, low
income housing projects, state manufacturing tax credits,
and single family residential projects.
Existing law , Government Code �5870, provides the following
definitions:
"Conduit financing provider" means any county, city,
city and county, public district, public authority,
public corporation, nonprofit corporation, joint powers
authority, or other statutorily constituted public entity
that issues one or more conduit revenue bonds.
"Conduit revenue bond" means any municipal security
the proceeds of which are loaned to any nongovernmental
borrower, including, but not limited to, persons,
for-profit corporations, nonprofit corporations pursuant
to Section 501(c)(3) of the Internal Revenue Code,
partnerships, and other legal entities for purposes that
are permitted for qualified private activity bonds under
applicable federal law.
This Bill would expand the definition of "public works," for
purposes of prevailing wage payment requirements, to also
include any construction, alteration, demolition, installation,
or repair work done under private contract on a hospital or
health care facility project when the project is paid for in
whole or in part with the proceeds of conduit revenue bonds, as
Hearing Date: April 24, 2013 SB 615
Consultant: Alma Perez Page 2
Senate Committee on Labor and Industrial Relations
defined.
COMMENTS
1. A Brief History of 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 followed
(including California in 1931) and the federal government in
adopting prevailing wage laws.
Existing law requires that not less than the general
prevailing wage rate of per diem wages, as determined by the
director of the Department of Industrial Relations (DIR), be
paid to all workers employed on a "public works" projects.
The prevailing wage rate is the basic hourly rate paid on
public works projects to a majority of workers engaged in a
particular craft, classification or type of work within the
locality and in the nearest labor market area. 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.
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." These debates
culminated in the enactment of SB 975 (Alarc�n), Chapter #
938, Statutes of 2001, which codified a definition of "paid
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Senate Committee on Labor and Industrial Relations
for in whole or in part out of public funds" that included
certain payments, transfers, credits, reductions, waivers and
performances of work. SB 975 also exempted certain affordable
housing, residential and private development projects that met
specific criteria.
2. Background on Conduit Revenue Bonds:
Bonds that are issued for the purpose of making loans to
entities other than state or local governments are commonly
referred to as "conduit bonds" or "conduit issues," and state
or local governments which issue these bonds are commonly
referred to as "conduit issuers." (Your Responsibilities as a
Conduit Issuer of Tax-Exempt Bonds, Publication 5005 (4-2012)
Catalog #59471F, Department of the Treasury, Internal Revenue
Service) According to the IRS, a conduit issuer in a conduit
bond financing typically issues the bonds and loans the bond
proceeds to a conduit borrower. A conduit borrower is
generally responsible for the payment of debt service on the
conduit bond issue and is usually contractually obligated to
maintain the tax-exempt status of the bonds.
The California Infrastructure and Economic Development Bank
(I-Bank), housed within the CA Business, Transportation and
Housing Agency, is the State's only general purpose financing
authority whose mission is to finance public infrastructure
and private development that promote a healthy climate for
jobs, contribute to a strong economy and improve the quality
of life in California communities. The I-Bank facilitates
access to funding from private capital markets through its
Conduit Revenue Bond Financing Program, which provides
tax-exempt bond funding for eligible economic development
facility projects located throughout the State. The bonds are
repaid by the private sector borrower, and are not a debt of
the I-Bank or the State of California.
According to the I-Banks annual activity report from fiscal
year 2011-2012, I-Bank issued $867,856,500 of conduit revenue
bonds for qualified California manufacturing companies,
501(c)(3) nonprofit entities and for other governmental
entities to create/retain jobs in the state, to facilitate
research and cultural endeavors and for other public purposes.
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Senate Committee on Labor and Industrial Relations
A Los Angeles Times article from 2011 reported that conduits
had grown roughly three times faster than the general
municipal market over the last five years, according to data
from Thomson Reuters, a New York data firm; $84 billion of
these bonds were issued in 2010 alone. ('Conduit' muni bond
defaults draws scrutiny, June 14, 2011) According to the
article, investors don't have to pay taxes on their interest
from municipal bonds, enabling companies to borrow money at
lower interest rates than they could get on their own. The
article notes that although conduits account for roughly 20%
of all municipal bonds, they have been responsible for about
70% of all defaults in the municipal bond market in recent
years, according to the Income Securities Advisors, a Florida
research firm.
3. Need for this bill?
Because these types of public subsidies are not included under
the definition of "paid for in whole or in part out of public
funds," they don't currently trigger the coverage of the
prevailing wage law. A couple of determinations by the
Department of Industrial Relations (DIR) have addressed this
issue finding that conduit bond funded projects are not public
work, and therefore not subject to the prevailing wage.
In a 2005 determination [by then acting director of DIR, John
Rea] regarding a Rancho Santa Fe Village Senior Affordable
Housing Project, the director stated that:
"?money collected for, or in the coffers of, a public entity
is "public funds"
within the meaning of Section 1720 (which defines public
works). Here
neither the conduit bond revenues nor the loan repayments
ever enter the
coffers of a public entity, nor are they collected for the
public entity. Since
none of the money flows into or out of public coffers, the
conduit bond financing
is not "the payment of money or the equivalent of money by
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Senate Committee on Labor and Industrial Relations
the state or
political subdivision?"
Rancho Santa Fe Village Senior Affordable Housing Project,
PW 2004-16 (Feb. 25, 2005)
The acting director argued that because it assigns all of its
rights to a bond trustee, the issuer never has possession of
either the bond proceeds or the loan repayments that are made
by the borrower directly to the bond trustee. However, the
State Building and Construction Trades Council argued that the
use of tax-exempt bond financing constitutes a loan at
below-market interest rates and therefore is covered under
Labor Code �1720(b)(4). This code section states that "paid
for in whole or in part out of public funds" includes "(4)
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."
This bill would address this uncertainty regarding conduit
revenue bonds being paid for by public funds by specifying
that "public work" also means any construction, alteration,
demolition, installation, or repair work done under private
contract on a hospital or health care facility project when
the project is "paid for in whole or in part" with the
proceeds of conduit revenue bonds issued by a public agency.
4. Proponent Arguments :
The author of the measure states that the proposed changes
with this bill, would add conduit bond financing to the types
of subsidies that trigger prevailing wage coverage, thereby
recognizing that public funds (through foregone tax revenues)
are being used to subsidize the project.
According to the author, conduit revenue bond financing is a
method by which the public subsidizes a private development
project. A public entity acts as the "issuer" of the bonds so
the interest payments on the bonds will be tax-exempt to the
bondholders under the income tax code. Because the
bondholders will not be taxed on the interest, they are
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Senate Committee on Labor and Industrial Relations
willing to accept a lower return on their investment, and the
cost of borrowing is lower. The bond proceeds are transferred
to a private developer, which is responsible for making the
payments to the bondholders. The public entity issuing the
bonds acts purely as a "conduit" - it does not receive the
bond proceeds or pay back the bondholders. But the tax code
looks to the form of the transaction, not its substance, so
the interest on the bonds is still tax-exempt to the
bondholders. The public thereby subsidizes the private
development project by foregoing the tax revenues that would
otherwise be paid by the bondholders.
According to the author, due to the fact that private entities
utilize these bonds to save money in interest payments, it
makes sense to ensure that any work being paid for by proceeds
from conduit bonds should, at the very least, go towards
providing a livable wage for the construction workers building
the projects that the bonds fund. Additionally, they argue,
the prevailing wage ensures that the most skilled and
qualified workers build these complex medical facilities.
According to proponents, this bill will close a loophole in
state law by requiring healthcare companies electing to
receive tax-exempt conduit bond financing from a public agency
to pay construction workers the prevailing wage and therefore
attract the most competent and skilled local workforce to
build these complex medical facilities.
5. Opponent Arguments :
None received.
6. Prior or Related Legislation :
SB 975 (Alarcon) of 2001: Chaptered
This bill declared legislative intent that projects financed
through Industrial Development Bonds issued by the California
Infrastructure and Economic Development Bank must comply with
existing laws pertaining to prevailing wages. Additionally,
the bill established a definition for "public funds" and
included "installation" in the existing definition of "public
works."
Hearing Date: April 24, 2013 SB 615
Consultant: Alma Perez Page 7
Senate Committee on Labor and Industrial Relations
SUPPORT
State Building and Construction Trades Council - Sponsor
California Labor Federation, AFL-CIO
OPPOSITION
None received
Hearing Date: April 24, 2013 SB 615
Consultant: Alma Perez Page 8
Senate Committee on Labor and Industrial Relations