SAN FRANCISCO -- In a historic reform to California's prevailing wage requirements at the direction of Governor Pete Wilson, the Department of Industrial Relations (DIR) today proposed regulations reforming certain prevailing wage requirements.
"In the interest of government efficiency, the Governor asked us to review California's prevailing wage requirements with an eye toward saving taxpayers' money on both the state and local levels," Director Lloyd W. Aubry, Jr. said. "We must face the fact that artificially inflated wage levels cost taxpayers money and work against competition. Taxpayers have not been getting the best use of their money. While most prevailing wage reforms would require legislation, the two changes today can be accomplished through the regulatory process."
The state Labor Code requires that contractors on public works projects pay workers the "prevailing wage" for a particular occupational classification in a geographic area, usually a county. State law generally defines a public works project as construction, alteration, demolition, repair or maintenance work performed under contract with a state or local agency and paid for in whole or in part by public funds. The project must have a value over $1,000. Common types of public works projects are school, highway, hospital, and jail construction. Under the state constitution, charter cities can exempt themselves from prevailing wage requirements when projects are funded entirely by municipal funds.
In his January budget message, the Governor requested that DIR review existing prevailing wage requirements for any needed regulatory or legislative changes. At that time, the Governor stated, "The state must reconsider the requirement that bidders pay prevailing wage. Competition is about getting the best available service at the lowest cost. Artificial barriers to competition, including specified wage requirements, work against government efficiency and eliminate otherwise qualified providers -- including minority- and women-owned businesses -- from competing for state contracts."
Prevailing wage reform reducing costs to taxpayers is needed in California because the state's capital and infrastructure needs are so large while state and local governments continue to face limited resources. In its most recent annual 10-year forecast, the Department of Finance identified $74.4 billion in projected needs. These demands could increase at any time as a result of an earthquake or any other natural disaster.
The regulatory reforms make two changes:
- New method of calculating the prevailing wage. The new regulations change the method for determining the prevailing wage to a 50 percent or weighted average from the present modal method. The proposed method is the same approach used by the federal government under the federal Davis-Bacon Act. Under this method, the prevailing wage rate will be the single rate paid to a majority of workers or a weighted average of the rates paid if there is no majority. This has been the federal rule since the early 1980's.
The repealed modal method inflated wages by causing wages to be considered prevailing even if they were significantly higher than the wages paid to a majority of workers in a locality. The modal approach required that the most frequently occurring wage rate be considered prevailing. This method often resulted in the wage rate under collective bargaining agreements qualifying as the prevailing wage. These rates will usually not be representative of the wages earned by a majority of workers in many areas. Union representation in construction has been declining in California. According to the Bureau of National Affairs, only 25.4 percent of construction workers in California were unionized in 1993. While difficult to quantify, savings under this provision could approach $200 million.
Other than California, only Minnesota and Wisconsin use the modal method.
- Repeal of "double asterisk" provision triggering an automatic increase in wage rates. Current prevailing wage regulations contain the predetermined "double asterisk" provision. This rule requires that prevailing wage rates must automatically increase when a collective bargaining agreement rate used as the basis for the prevailing wage determination contains an increase. In addition to an automatic escalation of wages, the provision has led to confusion for public agency awarding bodies and contractors. In some cases, this provision has led to changes in wage rates in the middle of a project, leaving contractors uncertain as to the proper rate and sometimes subject to civil penalties for paying a wage rate which was later revealed to be too low. In other cases, the parties to the collective bargaining agreement have rescinded the automatic increase, leaving the contractor and, in effect, the taxpayers to pay a rate which actually is higher than the prevailing wage rate under the collective bargaining agreement used as the basis for the determination.
The reform repeals the "double asterisk" requirement entirely. The federal Davis-Bacon Act contains no similar requirement. The California Department of Transportation estimates that the elimination of the rule will reduce labor costs by at least 1.6 percent on a project.
"No one should assume that these reforms are the only changes in the prevailing wage law that we would like to accomplish," Aubry said. "There are other requirements that are outmoded and result in an inefficient use of tax dollars. The Administration continues to support AB 138 by Assemblyman Goldsmith to make further changes that cannot be accomplished through the regulatory process."
AB 138, sponsored by the Department of Industrial Relations, is pending in the Assembly Labor and Employment Committee. Most of the changes would conform California's prevailing wage requirements with the federal Davis-Bacon Act. In addition to the two changes ordered by the Governor, AB 138 would:
- Require payment of prevailing wages on projects over $100,000 rather than the current $1,000 threshold. In his 1993 reinventing government plan, Vice President Al Gore proposed an identical threshold change in the Davis-Bacon Act. The current Davis-Bacon coverage threshold is $2,000.
- Limit prevailing wage coverage to workers directly employed on the public works worksite.
- Eliminate the inclusion of travel and subsistence payments to covered workers under the prevailing wage.
- Under specified conditions, authorize a local agency, by a majority vote of its governing board, to adopt a resolution exempting its public works projects from prevailing wage requirements. Under the state constitution, charter cities currently can exempt themselves from prevailing wage requirements if a project is funded entirely by municipal funds.
AB 138 enjoys broad support from local governments in California, including the League of California Cities, the Association of California Hospital Districts, the California School Boards Association, and the Association of California Water Agencies, and the Community College League. The California Taxpayers' Association also supports AB 138. Despite support by local governments, AB 138 stalled on a 4-4 party line vote in the Assembly Labor and Employment Committee. Assemblyman Goldsmith has made the bill a two-year bill so that it will be considered again when the Legislature returns from recess.
Aubry added that these prevailing wage reforms must be kept in the proper perspective. "This reforms simply are not a wholesale attack on the prevailing wage law," he said. "What California actually is doing is working to bring its own prevailing wage requirements in line with the federal Davis-Bacon Act. These changes are in the interest of taxpayers and will not affect the quality of work. They will save tax dollars at a time when California's infrastructure needs are great while state and local governments face limited resources to meet these needs. These reasonable prevailing wage reforms will help us to make our tax dollars stretch further while still maintaining a prevailing wage in accordance with national standards."
Reform of prevailing wage requirements has gained increasing focus on the federal, state, and local levels. Committees in both houses of Congress have approved legislation repealing the Davis-Bacon Act. Last spring, voters in the Town of Truckee overwhelmingly approved an initiative to incorporate the town as a charter city in order to avoid prevailing wage requirements. Truckee estimated that the charter city exemption will save $3.2 million over the next few years on a major street repair project. In November, San Francisco voters will consider an initiative to allow the San Francisco Board of Supervisors to suspend prevailing wage requirements in some cases in which public funds are used to provide job training and work experience for disadvantaged youths. As a charter city, San Francisco can decide to exempt itself or modify its prevailing wage requirements.
DIR has filed official notices of these regulatory changes with the Office of Administrative Law (OAL) to open the formal rule making process. This process involves publishing new draft regulations for public review and comment and scheduling public hearings on the proposed regulations.
Note: A Prevailing Wage Reform Fact Sheet is also availiable.