BILL ANALYSIS Ó AB 1233 Page 1 Date of Hearing: January 6, 2016 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Roger Hernández, Chair AB 1233 (Levine) - As Amended January 4, 2016 SUBJECT: Public works: public subsidies SUMMARY: Provides a statutory definition for a "de minimis" public subsidy that does not trigger the requirements of prevailing wage law. Specifically, this bill: 1)Defines "de minimis" to mean a public subsidy that is both less than $250,000 and less that 2 percent of the total project cost. 2)Specifies that this bill does not apply to a contract that was advertised for bid, or a contract that was awarded, before January 1, 2017. EXISTING LAW: 1) Requires the prevailing wage rate to be paid to all workers on "public works" projects over $1,000. 2) 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. AB 1233 Page 2 3) Establishes a definition for "paid for in whole or in part out of public funds," as specified. 4) Provides that if the state or a political subdivision reimburses a private developer for costs that would normally be borne by the public, or provides directly or indirectly a public subsidy to a private development project that is "de minimis" in the context of the project, an otherwise private development project shall not thereby become subject to the requirement to pay prevailing wages. FISCAL EFFECT: Unknown COMMENTS: According to the author, this bill will clearly define when a public subsidy is "de minimis" for the purpose of determining when prevailing wage law applies to certain projects. 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 AB 1233 Page 3 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 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. AB 1233 Page 4 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 (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). AB 1233 Page 5 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. 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. "De Minimis" Public Subsidies AB 1233 Page 6 SB 975 also provided that if the state or a political subdivision reimburses a private developer for costs that would normally be borne by the public, or provides directly or indirectly a public subsidy to a private development project that is "de minimis" in the context of the project, an otherwise private development project shall not thereby become subject to the requirement to pay prevailing wages. However, SB 975 did not provide a definition for the term "de minimis." Therefore, since the enactment of SB 975, DIR has issued several coverage determinations attempting to define the term "de minimis." In 2005, DIR first articulated a standard for "de minimis" in Public Works Case No. 2004-024 (New Mitsubishi Auto Dealership)(March 18, 2005). In that case, DIR noted that nothing in the prevailing wage law or the applicable legislative history of SB 975 provided guidance as to the appropriate measure of what should be considered "de minimis." Therefore, DIR looked to other statutory or regulatory schemes for other state agencies (including Franchise Tax Board and the California Coastal Commission) and articulated a standard for "de minimis" to mean "the public funding was proportionally small enough, in relation to the overall cost of the Project, that the availability of those funds did not significantly affect the economic viability of the Project" (emphasis provided). In that specific case, DIR found that public reimbursement of $65,710 to a project with a total cost of $4,010,010 represented only 1.64 percent of the total project cost, and therefore could reasonably be considered "de minimis." AB 1233 Page 7 Since that time, DIR has applied this test to find a "de minimis" public subsidy in the following situations: a $317,330.80 public subsidy on a $22 million project (or 1.4 percent of the total project cost), PW Case No. 2007-012 (May 15, 2008); a $123,300.67 public subsidy on a $29 million project (or 0.4 percent of the total project cost), PW Case No. 2008-010 (August 4, 2008); a public subsidy of $202,337 on a $18 million project (or 1.1 percent of the total project cost), PW Case No. 2008-037 (January 2, 2009); a $23,475 public subsidy on a $2.4 million project (or 0.99 percent of the total project costs), PW Case No. 2008-038 (April 21, 2010); a $96,553.20 public subsidy on a $8 million project (or 1.2 percent of the total project cost), PW Case No. 2009-005 (April 21, 2010), a $500,000 public subsidy on a $25.5 million project (or 1.23 percent of the total project cost), PW Case No. 2008-025 (August 16, 2009); a $1,664,804 public subsidy on a $95 million project (or 1.75 percent of the total project cost), PW Case No. 2011-033 (May 9, 2012); and a $4.5 million public subsidy on a $315 million project (or 1.42 percent of the total project cost, PW Case No. 2013-023 (September 11, 2014). ARGUMENTS IN SUPPORT This bill is sponsored by the State Building and Construction Trades Council of California. They argue that the legal definition of de minimis is "trifling, minimal...so insignificant that a court may overlook it." Unfortunately, in recent years, DIR has strayed from this legal definition of "de minimis", and lacking a definition in statute, has loosely interpreted the definition to apply to subsidies ranging from thousands to millions of dollars. They contend that this bill would create a clear statutory definition by providing that a subsidy is "de minimis" if it is both less than $250,000 and less than two percent of the total project cost. AB 1233 Page 8 The sponsor notes that the exception was created in SB 975 in 2001. However, by not specifically defining "de minimis" for the purpose of determining when prevailing wage is applied to projects and given no other guidance as to the appropriate measure of what should be considered de minimis in the legislative history, several projects have moved forward that should have been covered by the prevailing wage law but were not. As a result, the sponsor argues that there has been uncertainty over the definition of "de minimis" over the last decade. DIR has made determinations of "de minimis" on projects that have had public subsidies given to developers that have ranged from $65,710 to $4.5 million. The sponsor concludes that a public subsidy as much or more than the definition used in this bill is a notable amount of taxpayer investment in a project and arguably is not "de minimis", so it is reasonable to require payment of prevailing wages if the developer wants a public subsidy over that amount. ARGUMENTS IN OPPOSITION Opponents to previous versions of this bill argued that when SB 975 was enacted in 2001, there was extensive debate regarding the "de minimis" exception. Although never codified, opponents contend that there was general agreement among the stakeholders that the trigger for the exception was 2 percent of the total project cost. This was a level the stakeholders generally agreed was reasonable to ensure that there is a true and substantial public investment in the project before other state mandates come into play. Opponents contend that this bill further caps that contribution at specific dollar amount, which may be inappropriate on large AB 1233 Page 9 multi-million dollar projects. Finally, opponents note that Governor Brown vetoed similar legislation in 2013 and 2015 (as discussed below). PRIOR LEGISLATION: This bill is identical to AB 251 (Levine) from 2015. That measure was vetoed by Governor Brown, who stated the following in his veto message: "This measure seeks to codify a definition of the term 'de minimis' to determine what level of public subsidy triggers prevailing wage requirements on an otherwise private project. Longstanding practice has been to view the subsidy in context of the project and use 2% as a general threshold for determinations. There has been no showing that the current practice is unreasonable. While I remain a staunch supporter of prevailing wages I am concerned that this measure is too restrictive and may have unintended consequences. Two years ago, I cited the same concerns when I returned a similar bill without my signature. This measure does not adequately address those concerns." This bill is similar to AB 302 (Chau) from 2013. That measure was vetoed by Governor Brown, who stated the following in his veto message: "This measure seeks to codify a definition of the term 'de minimus' for purposes of what level of public subsidy triggers prevailing wage requirements on an otherwise AB 1233 Page 10 private project. Longstanding practice has been to view the subsidy in context of the project and use 2% as a general threshold for determinations. By codifying a standard that establishes 'de minimus' as less than 1% and less than $25,000 few, if any, projects receiving public subsidies will be found to be exempt from prevailing wage requirements. While I remain a staunch supporter of prevailing wages and the associated quality work and good paying jobs, I am concerned that this measure is too restrictive. Finally, there has been no showing that the current practice is unreasonable." REGISTERED SUPPORT / OPPOSITION: Support State Building and Construction Trades Council of California (sponsor) Opposition None on file. AB 1233 Page 11 Analysis Prepared by:Ben Ebbink / L. & E. / (916) 319-2091