BILL ANALYSIS Ó SENATE COMMITTEE ON LABOR AND INDUSTRIAL RELATIONS Senator Tony Mendoza, Chair 2015 - 2016 Regular Bill No: AB 852 Hearing Date: June 24, 2015 ----------------------------------------------------------------- |Author: |Burke | |-----------+-----------------------------------------------------| |Version: |June 15, 2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Alma Perez-Schwab | | | | ----------------------------------------------------------------- Subject: Public works: prevailing wages. KEY ISSUES Should the Legislature require the payment of prevailing wages for any work done under private contract on a project for a general acute care hospital when the project is paid for, in whole or in part, with the proceeds of conduit revenue bonds? Should a project for a rural general acute care hospital with a maximum of 76 beds be exempt from this requirement? 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 AB 852 (Burke) Page 2 of ? 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 expands the definition of "public works," for purposes AB 852 (Burke) Page 3 of ? of prevailing wage payment requirements, to also include any construction, alteration, demolition, installation, or repair work done under private contract on a project for a general acute care hospital, except on a project for a rural general acute care hospital with a maximum of 76 beds, when the project is paid for, in whole or in part, with the proceeds of conduit revenue bonds issued by a public agency on or after January 1, 2016. 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 AB 852 (Burke) Page 4 of ? whole or in part out of public funds." These debates 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. 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. AB 852 (Burke) Page 5 of ? 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 draw 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 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 AB 852 (Burke) Page 6 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 project for a general acute care hospital, except on a project for a rural general acute care hospital with a maximum of 76 beds, 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 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. 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 AB 852 (Burke) Page 7 of ? 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. 5. Opponent Arguments : None received. 6. Prior Legislation : SB 615 (Galgiani) of 2013: Vetoed by the Governor SB 615 was very similar to this bill and would have expanded the definition of "public works" 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. In his veto message, the Governor stated the following: "While I am staunchly supportive of prevailing wages, and the quality work and good paying jobs that are associated with these wages, I am unable to sign this measure. Applying prevailing wage requirements to healthcare facility projects that receive conduit revenue bond financing would result in unbudgeted state enforcement and investigative costs. Further, the measure fails to define the term 'health care facilities' which could result in many more projects being subject to this measure than intended." SB 975 (Alarcon) of 2001: Chaptered AB 852 (Burke) Page 8 of ? 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." SUPPORT State Building and Construction Trades Council of California (Sponsor) California Chapters of the National Electrical Contractors Association California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Labor Federation, AFL-CIO California Legislative Conference of the Plumbing, Heating and Piping Industry California Teamsters Public Affairs Council Construction Employers' Association Engineers & Scientists of California International Longshore & Warehouse Union Professional & Technical Engineers UNITE-HERE, AFL-CIO Union Roofing Contractors Association United Contractors Utility Workers Union of America Wall and Ceiling Alliance OPPOSITION None received -- END - AB 852 (Burke) Page 9 of ?