BILL ANALYSIS �
SB 615
Page 1
Date of Hearing: June 26, 2013
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Roger Hern�ndez, Chair
SB 615 (Galgiani) - As Amended: April 1, 2013
SENATE VOTE : 30-9
SUBJECT : Public works: prevailing wages.
SUMMARY : Specifies that "public work" for purposes of
prevailing wage law 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.
EXISTING LAW :
1)Defines "conduit revenue bond" to mean 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.
2)Defines "conduit financing provider" to mean 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.
FISCAL EFFECT : According to the Senate Appropriations
Committee, this measure would increase the number of public
works projects. Consequently, the Department of Industrial
Relations (DIR) would likely experience additional workload
related to the administration and enforcement of California
prevailing wage law. The number of future health facility
construction projects subject to this bill is unknown; however,
if the additional workload to DIR required a new position, total
costs (salary, benefits and equipment expenses) could be as high
as $100,000.
COMMENTS :
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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 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
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determines to be prevailing for corresponding classes of
workers. In addition, sixty separate federal laws currently
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 . . . [and] 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 (Alarc�n), 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
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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.
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.
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.
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
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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 percent of all municipal bonds,
they have been responsible for about 70 percent of all defaults
in the municipal bond market in recent years, according to the
Income Securities Advisors, a Florida research firm.
Because these types of public subsidies are arguably 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. Several determinations by DIR have
addressed this issue finding that conduit bond funded projects
are not public works, and therefore not subject to the
prevailing wage.
For example, in a 2005 determination 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
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
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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.
ARGUMENTS IN SUPPORT :
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 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.
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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 supporters, 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.
ARGUMENTS IN OPPOSITION :
The California Hospital Association opposes this measure,
arguing that it expands the definition of public works to
include projects paid with the proceeds of conduit revenue
bonds, including those issued by the California Health
Facilities Financing Authority (CHFFA):
"CHFFA programs were designed to help eligible and
creditworthy non-profit and public health facilities reduce
their cost of capital, and promote important California
health access, healthcare improvement and cost containment
objectives by providing cost-effective tax-exempt bond,
low-cost loan, and direct grant programs. Imposing
prevailing wage obligations on public and private hospital
construction projects, including children's and rural
hospitals would have two undesirable consequences. While
essential construction projects would continue, the
imposition of prevailing wage obligations would
substantially increase the cost thereby diverting resources
from patient care activities to the construction project.
Similarly, non-essential construction projects would be
delayed or abandoned due to the increase in cost. Under
either scenario, health care access for the state's most
vulnerable populations is adversely affected."
Other opponents, including a number of providers and advocates
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for senior living and care facilities, also oppose this bill and
argue that it will increase the costs of construction and
effectively preclude current avenues of affordable financing.
Among other things, they argue that access to tax-exempt bonds
issued through conduit authorities are the primary method of
financing for such projects and allow providers to keep costs
low for the seniors they serve. They contend that access to
low-cost financing is particularly important in rural and
underserved areas where programs like Cal-Mortgage operate.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation, AFL-CIO
State Building and Construction Trades Council of California
(sponsor)
Opposition
Air Force Village West (Riverside)
American Baptist Homes of the West (Pleasanton)
California Hospital Association
Center for Elders' Independence (Oakland)
LeadingAge California
Northern California Presbyterian Homes & Services
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091