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
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          |Author:    |Burke                                                |
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          |Version:   |June 15, 2015                                        |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Alma Perez-Schwab                                    |
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                      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  








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                 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  







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          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  







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            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.  







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            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  







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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 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  







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            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 







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            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

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