This report reviews the City’s prevailing wage practice as it pertains to both contracts for public works projects and contracts for maintenance and repair of public works. For the reasons outlined below and addressed in detail in the discussion section, staff recommends that the City Council require state-defined prevailing wages only on those contracts where it is mandated by law. Generally speaking, mandated contracts would be those that are funded by state and/or federal dollars. Under this policy, City-funded contracts generally would contain no requirement to pay the "prevailing wages" as defined by the state. Staff believes this change would result in a policy that is clear and specific while fairly balancing the needs of contractors, laborers and taxpayers. As subsequent information in this report will make clear, the absence of a state-defined prevailing wages requirement would not cause contracted workers to be paid low wages.

Ceasing to require contractors to pay state-defined prevailing wages except as required by law would yield the following additional benefits:

• The City would save money.
• More and/or new bidders would likely enter competition for contracts.
• Tax dollars would be used more efficiently and fairly as the City encouraged more contractors to respond to market-based – as opposed to statute-based – economic forces.

In April 1998, Council awarded a three-year contract for traffic signal maintenance (estimated at $372,252) that did not include a requirement that the contractor pay prevailing wages. At the meeting, Council Member Valerio requested a study issue regarding payment of state-defined prevailing wages on maintenance and repair contracts.

The California State Department of Industrial Relations (DIR) calculates wages that are then defined as "prevailing" for certain job classifications (e.g. "roofers") in construction trades. The wages are calculated on a county-by-county basis. Since the method of calculation can and does dramatically change the value of these wages, there is a history of intense debate, litigation, lobbying and legislative activity surrounding the methodology. Two methods are described in detail below.

The method used by the federal government and most states that have prevailing wage laws defines prevailing wage as the "weighted average" of hourly pay in a classification. In practice, the weighted-average wage is the same as would be calculated in a simple average. That is, it is the sum of wages divided by the number of wages summed. According to DIR, under this method, federal prevailing wages reflect the union scale (usually top dollar) about 30% of the time.

California does not set prevailing wages at the average of wage in a classification. Instead, the state calculates the "mode" in a group of wages in a given county and that wage is defined as prevailing. The mode is the single most frequently occurring value in a group of numbers.

In {1, 1, 2, 3, 4, 5, 5, 5, 6} "five" is the modal number.

The DIR says that under this method, prevailing wages adhere to the union scale more than 90% of the time. California’s "prevailing wages" are not reflective of the state’s "typical" or "average" pay scales. For example, in Shasta County in 1995, 18 workers were surveyed in the sheet metal classification. Wages ranged from $7.25 to $23.52. Five workers (27.7% of those surveyed) earned the top rate. Although the average method (federal method) would have produced a prevailing rate of $15.43, the modal method (California method) created a prevailing wage of $23.52.

During the 1990’s, the DIR had unsuccessfully attempted to change its "modal" methodology – which its own research shows greatly inflates wages – to the average methodology. Its efforts invoked intense and sustained disputes, prompting litigation, extensive lobbying activity and, finally, enactment earlier this year of legislation codifying the "modal" methodology. (See Appendix A for a more detailed history.)

Below is a visual illustration of a prevailing wage calculation based on 20 hypothetical workers’ salaries.

In addition to history, Appendix A provides actual state-defined "prevailing" wages for some classifications in Santa Clara County.

Vial v. San Diego (1981) established that charter cities are exempt from state prevailing wages requirements except when they contract for projects funded by state or federal monies or projects otherwise of "statewide" concern (as opposed to "municipal affairs.") The courts have acknowledged the lack of a simple definition of "municipal affairs" (Bishop v. City of San Jose) and have indicated that it is a matter for courts to determine case by case. Thus, on its own "municipal" contracts, the City of Sunnyvale could create its own "prevailing" salary scale, or the City could cease to require any certain wages.

Prevailing wages practices vary from municipality to municipality. Some charter cities, including Palo Alto, Irvine and Modesto, do not require payment of prevailing wages on public works construction or maintenance contracts unless mandated by the utilization of state or federal dollars. Copies of the Palo Alto, Irvine and Modesto policies are provided in Appendix B. The practices of Santa Clara County’s charter cities with respect to state-defined prevailing wages on maintenance and repair contracts are outlined in Appendix C.

There is no requirement in City Resolutions, Ordinances or the Charter mandating that City contractors pay prevailing wages. However, the City’s longstanding practice has been to require payment of state-defined prevailing wages on contracts for public works projects, regardless of the source of funds for the project. In 1996, in an effort to support a specific piece of legislation, Council approved a resolution expressing the City’s "…desire to uphold prevailing wage requirements on city public works projects…"

That phrase is the only official expression, albeit indirect, on the subject of prevailing wages. Section 1309 of the Charter deals with contracts on public works and expressly excludes "maintenance and repair" from the definition of "public works":

Appendix D contains the 1996 resolution and the pertinent portion of the Charter.

There are at least three main alternatives. The City could:

1. Cease to require state-defined prevailing wages on City contracts except where required by law.
2. Retain the status quo, that is, require state-defined prevailing wages on "public works" projects and not on maintenance and repair contracts.
3. Extend state-defined prevailing wages requirements to public works maintenance and repair contracts.

Alternative 1: Cease to require state-defined prevailing wages on City contracts except where required by law.

Some charter cities have opted to require state-defined prevailing wages only where mandated by statute and case law. That is, no type of contract requires state-defined prevailing wages unless the project involves state or federal dollars or is otherwise "of statewide concern." Examples of two such policies are in Appendix C. Staff recommends this alternative for the reasons discussed below.

1. The City would save money.

As previously discussed, the method of calculating "prevailing" wages inflates pay rates to levels above what would be paid in a market-based contracting environment. The following case is presented as an example of cost differences.

In rare instances, the City has received bids that permit comparisons of prevailing (or statutorily defined) vs. non-prevailing (or market-based) wages. Such was the case in the fall of 1998, when the City received bids for electrical services for the Parks and Recreation Department. Below are the bids of two contractors – one bidding at state-defined prevailing wages rates and the other bidding at market rates. Although the wages paid to the non-prevailing bidder’s employees are substantially lower than those of the prevailing bidder, they are not low wages.

A full-time, year-round journeyman employee of the non-prevailing bidder would still earn nearly $100,000 a year ($48 X 40 = 1920 X 52 = $99,840.) Thus, even "non-prevailing" wages may still be very high and there is no reason to think that the City would be fostering low wages by dropping the requirement that contractors provide state-defined prevailing wages.

The extent of City savings in the event of market-based contracting where possible (that is, where statutorily defined wages are not required by law) is uncertain. The volume of savings would depend on:

• The number and size of locally funded contracts (this is discussed in the Fiscal Impact section), and,
• The extent to which contractors would, in fact, bid market-based wages. At least in the short term, contractors who pay state prevailing or near-prevailing wages likely would continue to submit bids with costs similar to those of existing bids. (See Item 2 below for more discussion of this aspect.)

1. More and/or new lower-cost bidders would likely enter competition for contracts.

Even in the absence of mandated state-defined prevailing wages, some contractors may be forced by union contracts or other internal pressures to pay very high wages that are equal or comparable to state-defined prevailing. Over time, however, City savings would likely increase as new contractors – who are currently unable to compete in a very-high wage environment – begin to enter the competition. Over time, the cost of labor for City-funded contracts would be shaped more by supply, demand, competition and union pressure - that is - market forces. In contrast, the current shaping force is state statute.

At least two charter cities that have mandated state-defined prevailing wages only where required by law have seen an increase in new contractors and they have not experienced lower quality work or inadequate bidding. Such a policy appears to give smaller firms, especially women and minority-owned businesses, a better chance to compete. However, because unionized contractors could have difficulty providing lower bids than competitors, opponents likely would claim that the City is undermining union labor.

2. Tax dollars would be used more efficiently and fairly as the City encouraged more contractors to face market-based – as opposed to statute-based – economic forces.

Most Sunnyvale taxpayers obtain income from a market-based economy. Yet when the City buys contracted services at state-defined prevailing wages rates, those same taxpayers pay higher-than-market (prevailing) for those services. Thus, the most efficient contractors are excluded from competition by contracts that needlessly mandate statutorily defined wages. Furthermore, the City’s practice of requiring prevailing wages over and above the legal mandate discourages existing contractors from bidding as efficiently as possible.

Alternative 2: Retain the status quo.

A second alternative is to make no change to current practice; that is, to continue requiring state-defined prevailing wages for contracts for public works projects but not for contracts for maintenance or repair of public works. For the following reasons, staff does not recommend Alternative 2:

• The City would forgo the savings associated with Alternative #1.
• Even on locally funded projects, the City would continue to subject itself to wages established by the state. In doing so, the City inflates its own costs and limits market-based competition for its contracts.
• The status quo discourages competition from the most efficient bidders – that is, contractors paying market rates for labor.

Alternative 3: Extend state-defined prevailing wages requirements to public works maintenance and repair contracts.

The City could choose a third alternative and require maintenance and repair contractors to pay their workers state-defined prevailing wages. Staff does not recommend this alternative. Extending state-defined prevailing wage requirements to City maintenance and repair contracts would:

• Significantly increase the cost of these services, potentially forcing reductions in levels of service;
• Create a new barrier for smaller contractors, thus limiting competition;
• Increase staff administrative duties and costs;
• Reduce City control of maintenance and repair costs;
• Potentially be difficult to reverse.

Such an extension would address "competitive disadvantage" concerns of maintenance and repair contractors who provide state-defined prevailing or near-prevailing wages independent of any requirement to do so. However, when compared to current practice, such a change would replace those concerns with several new ones:

1. As indicated above and described in detail in Appendix B, state-defined "prevailing" wages are neither "average" nor "typical" for a given trade in a given area. Usually, California’s state-defined prevailing wages are higher than the average wage of workers in the classification. Firms that cannot afford to pay state-defined prevailing wages would be eliminated from competition for City maintenance and repair contracts. The firms most likely to be unable to compete are small companies.
2. The City’s Purchasing Officer estimates that extending the state-defined prevailing wages requirement to maintenance and repair contracts would increase the City’s cost for that work by at least 25% -- $375,000 – in the first year. Over ten years, the estimated additional cost of maintaining and repairing City facilities exceeds $4 million. This increase would reduce the affordability of maintenance and repair services and could force reduction or elimination of some of those services over time.
3. Current and future Councils likely would face pressure to retain the policy, even if its costs were to exceed the above estimates. As an example of pressure to retain state-defined prevailing wages policies in spite of costs, see Appendix A, which details the state Department of Industrial Relations’ years of unsuccessful efforts to make state methodology consistent with that used by the federal government.
4. Creation of a state-defined prevailing wages program for public works maintenance and repair contracts would increase administrative duties for City staff. The extent and cost of the increase would depend on unknown factors, such as the volume of compliance complaints. Staff members currently do not possess expertise in prevailing wages compliance investigations.
5. The bulk of the cost of maintenance and repair contracts is labor. By allowing the state to set minimum pay and benefits for City contracts, control of the City’s maintenance and repair expenditures would in effect be in the hands of the State. Appendix B provides detail regarding the State’s calculation methodology.

Alternative #3 would not capture savings available from Alternative #1 and additionally would increase costs for maintenance and repair contracts from $1.5 million to an estimated $1,875,000 in the first year. Alternative #3 would increase costs by an estimated $4 million over ten years. The long-term estimate assumes modest increases in the amount of maintenance and repair work as the City’s relatively young infrastructure ages. Additionally, an increase in administrative work for the new policy would result in higher staff costs. The amount of those costs is undetermined. The estimate also does not include opportunity costs (e.g. loss of interest) associated with expenditure of significant funds on Alternative #3 and failure to capture Alternative #1 savings.

Reports to Council are available in the Library and on the City’s Internet home page. Additionally, the Council Agenda has been published and posted as required by law and on the City’s Internet homepage.

Staff recommends Alternative #1.

B – Prevailing wages polices of the Cities of Irvine, Modesto and Palo Alto

D – Prevailing wages resolution of 1996 and Section 1309 of the City Charter

Prepared by:

Cheryl Waldrip
Administrative Analyst

Reviewed by:

Mary J. Bradley
Director of Finance

Reviewed by:

Marvin Rose
Director of Public Works

Approved by:

Robert S. LaSala
City Manager