Legislature Changes Prevailing Wage Law

Cities and other public agencies have long relied upon the ability to offer various forms of incentives to private developers to encourage economic development and affordable housing projects. Standard incentives have included permit fee waivers, rent forbearance and land write-downs. Under Senate Bill 975 of 2001 (Alarcon), such assistance will now subject many otherwise private construction projects to prevailing wages.

The California Labor Code imposes prevailing wage requirements upon “public works”, a term long defined to include “[c]onstruction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds.” (§1720(a)(1), emphasis added.) Prior to SB 975, public agencies could avoid subjecting otherwise private developments to the prevailing wage requirement by carefully structuring the form of assistance or development incentives offered to avoid a direct payment of cash equivalent, which the courts had held constituted a “payment” that was “out of public funds” within the meaning of the statute. (McIntosh v. Aubry (1993) 14 Cal.App.4th 1576, 1586-1590.)

SB 975 radically alters the established rule by adding to Section 1720 a definition of “paid for in whole or in part out of public funds” that seems to encompass the vast majority of transactions to which agencies have become accustomed to structuring:

(b) For purposes of this section, “paid for in whole or in part out of public funds” means the payment of money or the equivalent of money by a state or political subdivision directly to or on behalf of the public works contractor, subcontractor, or developer, performance of construction work by the state or political subdivision in execution of the project, transfer of an asset of value for less than fair market price; fees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, which are paid, reduced, charged at less than fair market value, waived or forgiven; money to be repaid on a contingent basis; or credits applied against repayment obligations.” (§1720(b).)

This new language sweeps an extremely wide range of forms of public agency assistance within the meaning of “paid for in whole or in part out of public funds.” Previously, an agency’s performance of construction on a portion of the project would not subject the remaining, private construction to prevailing wages; today, it will. Formerly, rent forbearance – regardless of amount or relative value in proportion to cost of entire project – would have been exempt; today, such an incentive will subject the private construction to prevailing wages. Under prior law, an agency could agree to pay bond premiums on a private development and the developer could count on that incentive without additional costs; today, the developer must pay prevailing wages.

SB 975 contains a number of exceptions defining circumstances in which the prevailing wage requirement will not apply, including the following: assistance to private residential projects built on private property (but not where redevelopment assistance is involved); privately constructed and funded portions of projects where public funds were used to fund public improvements (such as where a public street is required as part of an otherwise private subdivision development); the “construction or rehabilitation” of low or moderate income housing units funded solely from agency 20% set-aside of tax increment funds; low-income residential projects funded through bonds qualifying for credits under the Internal Revenue Code and single family residential developments which are financed with mortgage revenue bonds or veterans’ mortgage bonds qualifying for credit under the Internal Revenue Code. (§1720(d)(3).)

Most of these exceptions appear narrow in scope, tending to focus on affordable housing projects. Even for affordable housing projects, however, the statute relies on several ambiguous terms, leading to the result that the applicability of any exceptions in a given case will remain unclear. Worse, the statute inadequately addresses the fact that affordable housing projects tend to have a combination of funding sources, thus disqualifying those projects from any of the exceptions. Due to SB 975’s broad sweep and its narrow and vaguely defined exceptions, we will recommend that clients include disclaimers in every agreement providing for assistance to a private developer, even where the agency can otherwise rationalize the application of an exception.

It is unclear to what extent SB 975 applies to projects approved, or agreements executed, prior to SB 975’s 2002 effective date. Arguments can be advanced against SB 975’s application to existing contracts. The key consideration with respect to projects in existence, we think, will be whether the construction (or alterations, demolition, installation, or repair) has been completed before the effective SB 975 date. Naturally, each project must be evaluated separately.