BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                     AB 852

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          Date of Hearing:  April 8, 2015


                               Roger Hernández, Chair

          AB 852  
          (Burke) - As Amended April 6, 2015

          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 general acute care hospital when the project is  
          paid for in whole or in part with the proceeds of conduit  
          revenue bonds issued by a public agency.  For purposes of this  
          section, "general acute hospital" has the same meaning as in  
          subdivision (a) of Section 1250 of the Health and Safety Code. 

          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  


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            corporation, nonprofit corporation, joint powers authority, or  
            other statutorily constituted public entity that issues one or  
            more conduit revenue bonds. 

          FISCAL EFFECT:  Unknown


          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  


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          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  
          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: 


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               "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 (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.


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          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  

          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  


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          #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  
          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.  


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          For example, in a 2005 determination regarding a Rancho Santa Fe  
          Village Senior Affordable Housing Project, the director stated  

              "?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 thecoffers 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  
          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  


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          contract on a general acute care hospital project when the  
          project is "paid for in whole or in part" with the proceeds of  
          conduit revenue bonds issued by a public agency.


          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.

          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  


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          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.    

          It is also worth noting that this bill narrows the focus of its  
          predecessor, SB 615, by shifting the focus of the public works  
          from "a hospital or health care facility project" to a general  
          acute care hospital.



          CA Chapters of the National Electrical Contractors Association

          CA Conference Board of the Amalgamated Transit Union

          CA Conference of Machinists

          CA Legislative Conference of the Plumbing, Heating and Piping  


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          Industry United Contractors

          California Teamsters Public Affairs Council

          Construction Employers' Association

          Engineers & Scientists of California

          International Longshore & Warehouse Union

          Professional & Technical Engineers

          Southern California Contractors Association

          State Building and Construction Trades Council (Sponsor)

          Union Roofing Contractors Association


          Utility Workers Union of America


          None on file.


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