Design and construction

Prevailing wage fight spreads to California

by Bendix Anderson

(Editor’s Note: This is the first part in a two-part series on the escalating debate over prevailing wage laws. The second part will examine how prevailing wage rates are set, why they vary from place to place and how builders are coping with the issue.)

Affordable housing developers in California won only slight relief from that state’s tough prevailing wage laws on September 30, when Governor Gray Davis signed SB 972 into law. Volunteer developers that build “self-help” projects, in which the future homeowner helps to build the house, are the first to benefit. These developers may allow their workers to volunteer their time instead of paying them the prevailing wage set by the the California Department of Industrial Relations (DIR).

Developers can also apply to the DIR for the right to pay workers less than the prevailing wage for developments where 40% or more of their project’s tenants will earn less than 80% of the area median income and where the project is funded with below-market interest rate financing from a funding source, usually a local government, that doesn’t trigger the prevailing wage. It’s unclear how many projects will be spared from the wage requirements as a result.

The new law takes a little of the bite out of California’s prevailing wage laws, which were applied to affordable housing last year. Historically, affordable housing projects built by private developers have not been subject to California’s prevailing wage laws, although they may trigger federal prevailing wage rules if they use HOME, Community Development Block Grants or Federal Housing Administration financing, among other federal resources. But in October 2001, California passed legislation that broadened existing law to cover any construction work paid for in whole or in part from public funds.

Affordable housing developers cried foul, saying that the cost of paying a prevailing wage could add from 10% to 30% to the cost of their projects. But the unions estimate the increased cost is much less – between 3% and 7%, according to Michael Dugan, director of communications for the State Building and Construction Trades Council of California. Both the unions and the builders are hesitant to reveal the math behind their numbers. Possible differences include the wage level of workers that a responsible affordable development might hire on the open labor market.

Unions see the question as one of fairness to workers.

“We are opposed to situations where the people who build the affordable housing can’t afford to live there,” Dugan said.

“[The law] is ambiguous and totally unclear,” said Geoffrey Brown, president of USA Properties Trust, a housing developer based in Roseville, Calif. If tax credits and tax-exempt bonds do trigger prevailing wage laws, that would make California’s laws among the toughest in the nation, which Brown thinks would reduce affordable housing production by 30%. “Fewer projects will be funded because the subsidy won’t go as far,” he said.

Next year, Brown, along with organizations including the California Building Industry Association and the California Council for Affordable Housing, will lobby hard to loosen the law.

California’s prevailing wage law is similar to the federal Davis-Bacon Act, which requires that projects that receive federal money (not including tax credits or tax-exempt bonds) also pay construction workers a prevailing wage, this one set by the U.S. Department of Labor.

The debate is raging on a national basis, too. “We try to have no effect – that is our goal,” said Mark Wilson, deputy assistant secretary for the Employment Standards Administration at the Department of Labor. According to Wilson, a federally funded construction project can be an “800-pound gorilla,” with the power to distort local wages. “We try to ensure that federally funded construction projects do not skew local wages in any fashion.”

But some housing advocates claim that the real impact of the federal law varies from market to market. In some areas, the wages set by the Department of Labor are close to the wages paid on market-rate projects. But in other areas, especially rural ones, the prevailing wage rates set by government agencies may be much higher than real market wages and can add millions of dollars to the cost of a project.

For example, in Cincinnati, Ohio, Tom Smith, a project manager for Community Builders, finds the federal Davis-Bacon prevailing wage rates to be only slightly inflated for his affordable garden apartment communities. The prevailing wage for a relatively unskilled laborer in a project less than three stories is $9.50 an hour. Smith has a difficult time finding qualified workers willing to brave hard work and bad weather for less pay than that.

But Tom Bozzuto, president of The Bozzuto Group, contends that paying the federal prevailing wage would have added millions of dollars to the total cost of a 430-unit project in Loudoun County, Va., not far from Washington, D.C. Bozzuto switched the $54 million project from Federal Housing Administration Sec. 221(d)(4) financing to conventional financing and saved $3.5 million. Less expensive labor accounted for more than two-thirds of the savings, according to Bozzuto.

Bozzuto says he isn’t trying to undercut wages. “No one I know objects to paying a prevailing wage,” he said. His concern is that the prevailing wage set by the government bore little resemblance to the actual prevailing rate.

The federal prevailing wages are determined by surveys sent to all the contractors in a geographic area. The survey results are then averaged by the Department of Labor. “We send letters to everybody … union and nonunion,” said Wilson. The geographic areas are as small as the agency can make them while still containing enough construction companies to provide a good sample. However, in some rural markets a geographic area can still cover several counties. “Are the determinations perfect? Probably not,” Wilson said. “But they are the best determinations we could possibly make.”

Wilson also strongly encouraged builders to appeal prevailing wage determinations that they do not agree with.

But as a commissioner for the Millennial Housing Commission (MHC), Bozzuto pushed for a closer examination of the determinations. “Evidence presented to the MHC suggests that wage levels set under this procedure are higher than actual wages paid,” said the commission in its supplemental recommendations to Congress, released this May. The commission asked Congress to “undertake a study of the Davis-Bacon requirements and make improvements in such areas as the accuracy of the wage data, the applicability threshold, and the reporting requirements.”

The commission was lobbied to eliminate Davis-Bacon by the National Leased Housing Association (NLHA), the National Association of Home Builders (NAHB) and many developers. However, Bozzuto doubts that prevailing wage rules will be scaled back. The mood has changed since the 1980s and early 1990s, when nine states repealed their prevailing wage laws, he said. “There is very little sympathy for my position.”

Supporters of prevailing wage laws say that when the industry must pay more for its workers, those workers are treated better and do better work. “The Southern California Association of Non-Profit Housing [SCANPH] is supportive of the prevailing wage legislation, believing it will increase housing quality down the line,” said Sam Mistrano, SCANPH’s deputy director. He referred to a University of Utah report that found that the states that repealed their prevailing wage laws saw cost overruns on public works jobs triple, construction injuries increase and apprenticeship training decreases by 40% as some employers skimped on training and hired less qualified workers. Today 31 states still have prevailing wage state laws on their books.

Builders counter that prevailing wage laws impede their ability to bring new, often-minority workers into the construction industry, despite the federal requirement mandating the use of local labor. Prevailing wage rates make it difficult to try a worker out who lacks formal training but might be good at the work. “I’ve got to start out a guy at $16 per hour to find out if he knows how to dig a hole,” said one developer. “I can’t do that.”

In Cincinnati, Smith also finds that prevailing wage rules make it expensive and time-consuming to give an unskilled worker the chance to learn a skill. “In the market, you can blend a person. A worker does a lot of different kinds of work,” Smith said. The manager and the worker can then negotiate a pay rate that reflects the actual work being done. But the prevailing wage law requires that whenever a worker uses the tools of, for example, the electrical trade, he must be paid as an electrician for that short period of time. Filling out time sheets for the worker becomes a complicated chore. In addition, once a person has been paid as an electrician for a few hours, getting that person to hammer a nail at a lower wage is difficult. “People get used to the higher rate,” Smith said.

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