SunnyvaleRTC

June 20, 2006

SUBJECT: Approval to Issue SMaRT Station^® Operations Request for Proposal

The existing contract for operation of the Sunnyvale Materials Recovery and Transfer (SMaRT^®) Station, currently held by GreenTeam/Zanker, will expire on December 31, 2007. Staff is requesting that the City Council approve the attached Request for Proposals for Operation of the Sunnyvale Materials Recovery and Transfer Station and direct staff to distribute the Request for Proposals (RFP) to potential proposers. The staff evaluation of the proposals received in response to the RFP will result in a recommendation to the Council for the award of a multi-year (2008 through 2014) contract to operate the SMaRT Station^®.

The recommended alternative has been modified, based on direction given by Council on May 23, 2006, to clarify how the RFP and the operating contract will handle the issues of prevailing wage and worker retention requirements.

Because the topic is of great importance to the SMaRT Station workers (as represented by Teamsters Local 350), any discussion of prevailing wage in the context of the 2008-2014 proposed contract inevitably leads to the topic of wages paid by the current contractor, GreenTeam/Zanker (GTZ). A brief history of the issue follows. However, it is important to understand that the prevailing wage provision proposed for the new contract is not the same as that in the existing contract. Further, the fact that the City was finally able to obtain a reliable prevailing wage determination means that this requirement in both the old and new contracts will be easier to enforce upon a contractor.

Although no law or regulation requires prevailing wages be paid by the contractor, since the SMaRT Station began operating in 1993 the City has voluntarily included in the contract a prevailing wage requirement. The requirement says that the floors for wages allowed to be paid to the workers are those determined to be “prevailing” by an impartial third party, the State Department of Industrial Relations. The contractor is, of course, free to pay wages higher than the contractual “floor.”

The current contractor and Teamsters Local 350 (which represents three bargaining units at SMaRT) have, for several years, been unable to agree on contracts for the workers. It is important to note that under Federal labor law the City is not, and cannot be a party to those negotiations. But the City has relied on the prevailing wage requirement in the contract to assure that workers are paid appropriate wages. City efforts to enforce the prevailing wage requirement were slowed by the initial unwillingness of the Department of Industrial Relations (DIR) to give the City a prevailing wage determination. Eventually, after State legislation sponsored by Assembly member Sally Lieber required DIR to give the City its determination, DIR began to work on providing the information that the City needed to require the contractor to pay its workers prevailing wages.

However, this effort was further delayed by multiple GT/Z legal protests that delayed DIR’s work and by inaccurate data provided to DIR by Teamsters Local 350 concerning the number of sorters working at one of the surveyed facilities. During this process, the City declared GT/Z in breach of its contract for failure to comply with this section of its contract.

Finally, on February 28, 2006, DIR issued a determination stating the prevailing wages for workers at the SMaRT Station as of May 2004. On April 28, 2006 DIR, while acting to deny a GT/Z appeal of the determination, noted that it had found clerical errors that affected the prevailing wage amounts for two of the maintenance positions and specified the amounts of the corrections. DIR has stated that it will soon reissue the determination to show the correct figures for those two wages. As of this date, a reissued determination has not been received by the City.

With this February 28, 2006 prevailing wage, the City is now able for the first time to specify in an RFP the specific floor amounts required to be paid for each of the positions at the SMaRT Station. Proposers can use these amounts to estimate their labor costs, but are free to propose wages that are higher. The City Council can give such higher wage proposals due consideration, while also giving due consideration of the impacts of proposer pricing on the residents and businesses of Sunnyvale, Mountain View and Palo Alto, who will pay the costs through their refuse collection charges.

Staff is recommending that Council approve the Alternative 2 described in the City Manager’s May 23 memorandum, as clarified, and direct staff to issue the RFP. Alternative 2 would provide sorters employed by the contractor with a minimum wage/benefit increase of 25% compared to the current value of wages and benefits they receive. It would raise SMaRT Station operating costs by approximately $636,000 in the first year of the contract and by $8.8 million over the seven-year term of the contract. Paying Sunnyvale’s 49% share of those costs would increase refuse collection rates for all Sunnyvale residents and businesses by approximately 1.1%. This increase would be in addition to the already planned increase of 5.5% for FY 07/08, resulting in a total increase of 6.6%. The cities of Mountain View and Palo Alto would pay the other 51% of the cost and see parallel financial impacts to their ratepayers.

BACKGROUND

The City’s seven-year contract with GreenTeam/Zanker (GT/Z) for operation of the Sunnyvale Materials Recovery and Transfer Station (SMaRT Station) expires on December 31, 2007. The SMaRT Station, located at 301 Carl Road, receives refuse from Sunnyvale, Mountain View and Palo Alto, processes it to recover recyclable materials, and transfers the residue 27 miles to the Kirby Canyon Landfill. It also receives and prepares for market the source-separated recyclables and yard trimmings collected by Sunnyvale and Mountain View and provides an area where residents can drop off recyclable materials.

In anticipation of the current contract ending, the Public Works Department staff is preparing a Request for Proposals (RFP) that will be distributed to interested parties in the solid waste management industry. Included in the RFP is the operations contract that proposers will be asked to sign if awarded the contract by Council. The contract locks a proposer into a payment amount that is fixed for the seven-year term but that is adjusted each year by the percent change in a Consumer Price Index, the Bay Area All Urban Consumers index. An updated copy of the draft RFP is shown as Attachment 1.

At a Study Session held on March 21, 2006, Council gave staff general direction on key RFP issues, including communication guidelines that proposers and Council must follow during the RFP process and how to set the floor (minimum) for SMaRT Station worker wages in the new contract.

On May 16, 2006, Council was scheduled to hear this item (RTC 06-141, shown as Attachment 2). However, just prior to the start of the Council meeting, Council received a hand delivered letter from GT/Z stating that GT/Z had just become aware the previous evening that this item was to be considered and asking the Council to delay consideration of the item. Council granted the GT/Z request and delayed the matter to May 23, 2006. During the intervening week, representatives of Teamsters Local 350 contacted the City Council and the City Manager. Local 350 represents three bargaining units made up of GT/Z workers at the SMaRT Station, all of which are currently without labor agreements with GT/Z, the employer. In their meeting with the City Manager, the Teamsters requested that the Sunnyvale RFP be modified to include labor provisions used by the City of San Jose in its current RFP process to award a contract for refuse collection.

On May 23, a memo from the City Manager to the Council (see Attachment 3) described four alternative approaches on how the RFP could set the floor for wages:

1. Require the operator to pay at least the May 2004 wages contained in the February 28, 2006 determination (as modified by the April 28, 2006 DIR letter) of the Department of Industrial Relations (DIR). If a subsequent DIR determination raised wage levels, require the operator to give annual increases (at the cost of the operator) to the affected workers of 3% plus the annual change in the Consumer Price Index (CPI) until prevailing wage levels were reached. This is the language in the original draft RFP.

2. Require the operator to pay at least the May 2004 wages after they have been updated to 2006 levels based on the 2004-2006 change in the Consumer Price Index. If a subsequent determination raised wage levels, require the operator to give annual increases (at the cost of the operator) to the affected workers of 3% plus the annual change in the Consumer Price Index until prevailing wage levels were reached.

3. Adopt the San Jose formula for prevailing wages, in which the labor union and the proposer(s) agree on wage rates in advance, with those wage rates incorporated, at ratepayer expense, into the pricing of any proposals submitted.

4. Operate the SMaRT Station with City forces beginning in January 2008.

When Council considered this item on May 23, 2006 GT/Z and the Teamsters stated that they were actively working on labor agreements for the SMaRT Station employees and that they believed that the wage language in the City’s RFP for the future SMaRT^® contract was a factor in their ability to reach final labor agreements for the present SMaRT contract. Representatives of the two parties presented suggested wage language to replace Section 3.1 (Personnel) of the contract attached to the draft RFP.

Council directed staff to review the GT/Z-Teamster wage language and bring the issue back for Council consideration on June 20, but to include caps on the cost of both wages and benefits. The City Council also gave specific direction to incorporate worker retention language into the RFP and contract. Finally, Council asked staff to provide information (prior to the Council meeting, if possible) on wages for sorters and drivers throughout Santa Clara County.

History of Application of Prevailing Wage to SMaRT Station Operations Contract

The draft RFP starts the process of awarding the third contract for operation of the SMaRT Station. The first contract (1993-2000) and the second contract (2001-present) both included worker protection language that required the operator to pay wages that were at least as high as those contained in a “prevailing wage” determination issued by DIR. Put simply, the prevailing wage is the “modal” wage (the single wage paid to the largest number of workers) who do the same type of work within a given labor market. Prevailing wages are stated as an hourly amount that adds together the cash wage and the value (converted to an hourly amount) of benefits received by the workers. Thus the employer’s cost to provide sick leave, holiday pay, vacation leave, health and pension benefits, etc. is converted to an hourly rate and totaled with the cash wage. Compliance with this provision of the contract between the City and GT/Z could be demonstrated if the workers received any combination of cash wages and benefits (converted to an hourly cost) that equaled or exceeded the prevailing wage.

Because no determination relevant to the SMaRT Station job categories existed, the City asked DIR in 2002 to provide such a determination. The City made the request in the same way it had done several years earlier, when it was successful in obtaining a determination covering the drivers and other workers employed by Specialty Solid Waste and Recycling.

After about two years had passed, DIR staff told the City that DIR no longer made determinations for contracts that were not “public works,” as that term is defined in California law. “Public works” in this context are typically construction projects that build roads, public buildings, and so on. The term “public works” does not include ongoing functions such as the operation of the SMaRT Station. DIR’s refusal to provide a non-public works determination left the City without the wage information it needed to determine if GT/Z’s wages complied with the contract requirement that it pay prevailing wages.

Shortly thereafter, Assembly member Sally Lieber introduced AB 852, which passed through the Legislature and was signed into law by Governor Davis on September 8, 2003. AB 852 addresses this situation, where work is not a traditional “public work” but a public agency and a contractor negotiate that prevailing wages are required. It amended the Labor Code to require that DIR provide wage determinations when they were requested by cities that have prevailing wage provisions in non-public works contracts. AB 852 took effect January 1, 2004. On January 2, 2004 the City submitted another request for a SMaRT Station wage determination, this time citing the provisions of AB 852.

On July 23, 2004, the DIR issued its prevailing wage determination. It found that for the sorters the prevailing wage was the $20.80 paid at the California Waste Solutions (CWS) facility in San Jose. At this facility, CWS subcontracts with Norcal Waste Systems to process City of San Jose’s curbside collection materials with a workforce made up of Teamsters from Local 350. This CWS facility and the process used to increase San Jose’s contract compensation to Norcal so that CWS could pay this wage to its workers is the basis for the current Grand Jury investigation of actions by San Jose Mayor Ron Gonzales.

Because GT/Z said that it was paying its sorters a wage of $12.92 per hour ($8.00 regular wages plus $4.92 health insurance), well short of the $20.80 paid by CWS, it was non-compliant with the prevailing wage requirement of its contract with the City. Based on this information, the City asked GT/Z to demonstrate compliance with the prevailing wage requirement of its agreement with the City and eventually declared the company in breach of the agreement for not doing so.

Over the next few months, various parties raised allegations that the determination was based upon inaccurate data concerning the number of sorters working at the surveyed facilities. This was partly because DIR failed to gather its information using its normal procedures, which would have allowed the information to be considered “verified.”

The determination that CWS wages were “prevailing” was based on unverified information provided to the DIR that said the CWS facility employed 78 sorters, one more than the 77 then employed at the SMaRT Station. The modal wage was thus determined to be the CWS wage, not the GT/Z wage. However, press accounts and the contents of a San Jose City Council agenda memo showed a much smaller number of sorters at CWS, with 54 sorters the best-documented number. Comparing 54 sorters to the 77 sorters at the SMaRT Station would make the SMaRT Station wage the prevailing wage.

Because of the flaws in the original determination, DIR said that it would issue a corrected determination and did so on February 28, 2006. This determination was significant in a number of ways:

It found that, for most positions, the number of employees at the SMaRT Station was the highest so that it made the GT/Z wages the prevailing wages.
It was based on verified May 2004 data and thus determined prevailing wages as of that date, 21 months earlier.
For sorter wages, it combined the $8 hourly regular wage paid to GT/Z with the $6.93 hourly value of the benefits paid by CWS to set the prevailing wage at $14.93. DIR took this approach because it did not get benefits cost information from GT/Z despite repeated requests. Based on more recent statements by GT/Z about the value of the benefits it provides, GT/Z’s full wage is said to be $12.92 per hour, about $2 less than the new prevailing wage. City staff estimates the annual cost to GT/Z of bringing sorter wages up to the DIR prevailing wage to be about $236,000 per year.

Again, the City asked that GT/Z provide documentation of its compliance with this provision of the agreement or a plan for achieving compliance. The City did not receive a response.

Instead, GT/Z asked the DIR to reconsider the determination. On April 28, 2006, DIR corrected typographical errors on two of the wages. The corrections changed the wages for Maintenance Mechanic Plant Electric and Maintenance Mechanic Plant Helper positions to $23.46 and $21.98, respectively. However, the DIR refused GT/Z’s request to further change the determination. GT/Z has stated its intent to challenge the latest DIR determination by other means, including court action.

As far as contract compliance is concerned, on June 9, 2006 GT/Z provided the City with a package of information on wages and benefits. Submittal deadlines did not provide enough time for analysis of the information (to determine whether GT/Z is in compliance) prior to the completion of this Report to Council.

EXISTING POLICY

Solid Waste Sub-Element, Policy 3.2D.2 – Reduce the amount of refuse being disposed, generate recycling revenues, and minimize truck travel to the disposal site through use of the Sunnyvale Materials Recovery and Transfer (SMaRT) Station.

Solid Waste Sub-Element, Goal 3.2F – Maintain sound financial strategies and practices that will enable the City to provide comprehensive solid waste management services to the community while keeping refuse rates at or below countywide averages for cities using cost of service pricing.

DISCUSSION

When this item was considered by Council on May 23, 2006, attorneys representing the Teamsters and GT/Z appeared during the public hearing and announced that those two parties had agreed on prevailing wage language that they would like the City to substitute for the existing language in Section 3.10 of the draft contract attached to the RFP. Todd Storti of GT/Z presented substitute language to the Council, which is shown as Attachment 4. Attachment 5, provided to staff by Mr. Storti after the meeting, is a similar document that is distinguished from Attachment 4 by capping future increases in wages and benefits, where Attachment 4 allows unlimited increases in benefits and only caps future increases in wages.

Because the City staff had not seen any of the language before it was presented during the public hearing and because the City Attorney identified several issues requiring legal review in the document, Council continued consideration of the item until June 20, 2006 to allow staff additional time to review it.

By way of background, the purpose of the RFP process is to provide all potential proposers with uniform information that provides, with clarity and as much detail as is practical, the data each proposer needs to independently predict the cost of operating the SMaRT Station. By doing so, the City can assure itself that it:

Is receiving proposals that are comparable with each other and that fully account for all cost and risk factors
Is protected against proposers who underestimate costs to lower their price for competitive purposes, then try to argue that they did so because the City’s information was incomplete, unclear or deceptive.

Thus, the draft RFP provides a detailed financial and operational history that informs proposers on the costs, revenues, and potential risks of the operation.

Because labor is the largest single SMaRT Station operating expense, it is very important that the City provides to proposers information that is clear regarding the City’s minimum standards for employee wages and benefits. This interest in clarity may mean that the City’s interests are best served with language different from language that would emerge from a labor negotiation process. The interests of the two parties in labor negotiations (employer and employees) are not the same as the interest of the City, which is to clearly and consistently communicate costs and potential risks to a variety of potential proposers.

It is also important to note that the wage standard in the contract, whatever the Council decides it should be, merely sets the floor for the wages the contractor pays. Proposers are free to propose and pay wages that are higher than the floor and to explain that fact in their proposals. Potential proposers who are concerned that doing so would make their prices too high are reminded that this procurement process is structured as a Request for Proposals. As such, it is not a bid process and the contractor selection is based on five criteria. Although price is significant, three of the five criteria are unrelated to pricing. In selecting a contractor from among those proposing, the City Council must consider issues other than price and has complete discretion in weighing the five criteria as it makes its decision.

Analysis of Legal Issues and Economic Consequences

As requested by Council, the City Attorney has reviewed legal issues arising from the alternate Section 3.10 language presented on May 23 by the Teamsters and GT/Z. This section of the Report to Council incorporates the analysis provided by the City Attorney. Since the legal analysis results in financial implications, the economic impacts are included.

Each of the alternatives to section 3.10 of the draft RFP submitted at the May 23 Council meeting presents legal issues with economic consequences. Either alternative may discourage prospective proposers, other than GT/Z, from competing for the work due to the uncertainty of a GT/Z-Union collective bargaining agreement (CBA) settlement. Even if such labor costs can be clearly determined, they will mandate a uniform and probably rather high labor cost base so that proposals will compete within a narrow range.

The personnel provisions (section 3.10) of the draft RFP for the SMaRT Station, prepared by city staff would require the Successful Proposer (SP) to furnish qualified personnel sufficient to perform the work required and to pay them no less than the prevailing wage rates determined by the Director of the Department of Industrial Relations (DIR) in his letter of February 28, 2006. The SP would also be required to raise employee compensation in accordance with any future DIR determination, subject to certain limitations intended to protect the SP from dramatic escalations in required employee compensation in any one year. The previous draft RFP did not obligate the SP to hire any of the employees employed by GTZ and would not prescribe specific terms of their employment as long as their total compensation meets DIR's prevailing wage standards. Because the City's evaluation of proposals will focus to a significant extent upon price, the draft RFP provides substantial incentive for the SP to manage and contain its costs of operation, including labor costs, which are a major part of the total cost of operation of the SMaRT Station.

The GT/Z-Teamsters alternative personnel provisions would (1) substantially restrict the SP's right to decide whom it would hire and (2) prescribe how they would be compensated, initially and in the future. It would obligate the SP to "fill positions required to perform" the services required by the RFP "by first offering employment" to the predecessor company's (i.e., GT/Z's) employees. All who accept such offers must be retained for at least 120 days, absent just cause for termination. If there are not enough positions to hire all of the predecessor company's employees who desire work, the SP remains obligated to offer them any positions that become available during the first 180 days of operation "by seniority within each job classification." As a consequence, the SP's workforce is likely to be drawn almost entirely from the GT/Z workforce. Under private sector labor law principles, this requirement would have the consequence of obligating the SP to recognize the Teamsters as the exclusive bargaining representative of its employees at the SMaRT Station from the outset of its operation of the facility.

OBLIGATION TO OFFER EMPLOYMENT TO GTZ WORKFORCE

The City's imposition of an obligation upon the SP to provide those currently working at the SMaRT Station the opportunity to continue working under the new operator may discourage some prospective proposers, especially those who are resistant to unionization and aware of the successorship doctrine in labor law. But such requirements are legal and not uncommon when public entities contract for on-going services and provide the advantage of an experienced workforce. The GT/Z-Teamsters language generally parallels the language used in a recently issued San Jose RFP for refuse collection, but gives the employer less ability to manage the workforce and excludes workers presenting a risk. A copy of the San Jose RFP’s wage policy is shown as Attachment 6.

In the area of worker retention, San Jose requires that workers be employed for at least 120 days (“Current Eligible Retention Employee”) or six months (“Displaced Worker”) prior to the change of contractors in order to qualify. The GT/Z-Teamsters language contains no such qualifying period. Theoretically, a person could be employed on just the final day of the old contract and still be guaranteed a job under the new contract.

Additionally, San Jose allows the employer to bar from employment displaced workers who have been convicted of a crime that is related to the job or to job performance and employees who present a demonstrable danger to customers, coworkers or City staff. The GT/Z-Teamsters language has no such protection, which is of significance to the City, the contractor and its employees and members of the public who interact with the contractor’s employees.

MINIMUM TERMS OF OFFER

The GT/Z-Teamsters alternative language may legally mandate the terms of each employment offer the SP must make to the predecessor's employees.

A. Matching A New GT/Z-Teamsters Contract

If GTZ and the Teamsters have agreed upon a collective bargaining agreement (CBA) that is in effect at the time the SP offers employment to GT/Z employees then working at the SMaRT Station, the GT/Z-Teamsters version of section 3.10 would also obligate the SP to include in that offer "the same wages, benefits, seniority and working conditions enjoyed by employees covered" by the CBA. And the SP would also be obligated "to provide any future increases or improvements" in wages benefits and working conditions that the predecessor's employees "were then scheduled to receive" under the CBA, subject to certain limitations on the magnitude of such future adjustments.

These provisions would have several potentially significant consequences for the cost of the operation and upon the competitive bidding process if GT/Z and the Teamsters have a CBA that is in effect at the time the SP makes its offers of employment to the predecessor's employees.

GT/Z and the Union have not been able to reach agreement on a CBA over the last several years. There are several advantages that each would gain from a CBA entered into under their joint RFP proposal language.

If the RFP includes the Section 3.10 they now sponsor, and GT/Z and the Teamsters are able to reach agreement, GT/Z may have an advantage as the incumbent bidder. The projected cost of labor under the RFP would be about the same for any prospective proposer but would be determined by GT/Z, especially if the new CBA is agreed upon shortly before bids are due to be submitted. If the new CBA "backloads" the increases in labor costs so that most of the increased cost would be effective during the new contract with the City, (i.e., after January 1, 2008) the impact of the CBA settlement upon GT/Z's current contract with the City would be minimized. For the Teamsters such a settlement would resolve a long and difficult dispute on terms that would likely raise wages and benefits significantly. It would be assured of continued representation of the bargaining unit, whether under GT/Z or a new contractor. Such a settlement would probably include resolution of the prevailing wage dispute and related litigation.

The GT/Z and the Teamsters proposed language would most likely result in a compromised competitive bidding process and a more expensive future operation of the SMaRT Station. If prospective proposers are unable to determine the likely cost of labor, whether because the new CBA has not yet been reached or because its consequences are difficult to calculate, they may not bid at all. Some terms and conditions of employment established by the CBA, such as benefit plans, may be difficult for a new contractor to replicate. If prospective proposers are able to estimate labor costs under the CBA with sufficient accuracy to support a bid, the price range for such bids is likely to be rather narrow because of the necessarily similar cost assumptions.

While both the GT/Z-Teamsters-sponsored amendment to the RFP and the revision proposed by GT/Z contain language that purports to limit the magnitude of future increases a CBA may prescribe, the language, though difficult to understand, does not appear to provide significant or effective limitations upon labor cost increases. The magnitude of the future scheduled increases or improvements in the CBA are limited in several ways by the GT/Z-Teamsters alternative. First, future increases or improvements in wage, benefit, and working conditions must be "comparable" to those at other recycling stations in Santa Clara County represented by the Teamsters. That is the San Jose facility, so whatever "comparable" may mean, it is not a limitation and may arguably be a floor. Second such increases must not exceed the most recent increases in comparable classifications at other recycling stations in Santa Clara County represented by the Teamsters (San Jose again). Third, future wages would in any event be limited to 3% plus the percentage increase in the CPI, in total a significant increase in an era that has seen low CPI escalation. The GT/Z alternative, not supported by the Teamsters, broadens this last limitation so that the aggregate percentage limit would include benefits and working conditions as well as wages. The increasing cost of existing benefits, a major source of increased costs, does not appear to be limited. Thus, new benefits could be added within the prescribed cost limit without regard to escalation in the cost of existing benefits. These limits do not provide legally binding assurance that labor costs would be meaningfully constrained.

B. A New DIR Determination As A Floor

If there is no CBA in effect at the time the SP must extend offers to the GT/Z workforce, the GT/Z-Teamsters version of section 3.10 would require that the offers be no less than the prevailing wage for the applicable classification in accordance with a determination of prevailing wages as of January 1, 2008. This alternative would require the City to seek another DIR determination, which can be quite protracted and subject to controversy. Since the SP will have to assemble its workforce before January 1, 2008, there is no way it can know what wages and benefits to offer nor what the DIR would eventually determine to be prevailing as of that date. In fact, no company, including GT/Z, would know what the DIR will determine to be prevailing wages as of January 1, 2008 when they submit their bids (sometime in late 2006).

Worker Retention Language

As directed by Council on May 23, 2006, the agreement now contains in Section 3.10.B worker retention language that requires that the contractor fills the positions required in the job classifications drivers, sorters mechanics and operators by first offering employment to those employees of the predecessor company operating the Station who (1) have been working continuously at the Station from July 1, 2007 in one or more of the listed job classifications, (2) are eligible for employment under federal and state law, (3) have not been convicted of a crime that is related to the job or job performance, and (4) do not present a demonstrable danger to customers, co-workers or City employees.

If the contractor does not have enough positions available in the listed job classifications to offer employment to all of the predecessor company’s employees who are eligible for employment (as described above), the contractor must maintain a list of the predecessor contractor’s employees who were not offered employment. If any positions become available during the first six months of operation the contractor must offer employment to persons on the list by seniority within each job classification.

Results of Wage Survey

Also as requested by Council on May 23, staff has surveyed current rates of wages and benefits for sorters and drivers at similar facilities in Santa Clara County. In doing the survey, staff found that facility operators were quite unresponsive to the City’s requests and very little information could be obtained. This list of facilities and the information that was obtained is shown as Attachment 7. It must be kept in mind that even the limited information shown is not verified and is not necessarily reliable. Unlike the DIR, the City has no way of compelling employers to respond to a wage survey and cannot require that statements be made under penalty of perjury so as to deter false or careless mis-reporting of wage and benefit information.

FISCAL IMPACT

Staff has calculated and compared the total annual cost of the non-management workforce at the SMaRT Station under various wage policies, using as a baseline the estimated annual labor cost of the current contractor, GT/Z. All analyses assume inflation (CPI) at 3% per year, health benefits inflation at 6% per year, and that the current wage determination covering the SMaRT Station remains in place.

Table 1 below, compares the current cost (for Year One only) of the contract to three alternatives:

1. The original wage language in the draft RFP (which uses the DIR determination and 2004 wages)

2. Alternative 2 from the City Manager’s May 23 memo to Council, clarified so that:

DIR wages are inflated by CPI for three years to bring DIR’s 2004 wages to 2007 levels
All non-management job classifications are required to receive a CPI wage increase during each year of the contract
Any subsequent determination issued by DIR would not affect wages during this contract but would be used to set wages for the next contract

3. The wages that would result from adoption of the language requested by Teamsters and GT/Z on May 23, which would effectively require payment of the wages in the Teamsters-Norcal agreement for the new San Jose refuse collection contract (or other, higher, wages agreed to between a contractor and the Teamsters).

Alternative Total Wages as of 2007
Initial Increase in Wages, Total Work Force
Initial Annual Cost Increase Initial Sunnyvale Share (49%) Rate Increase due to Wage Increase Only Total Refuse Rate Increase (including planned 5.5%) Cost to SMaRT City Ratepayers over Contract 7-Year Term

Current Wages/Benefits $4,215,000 --- --- --- --- ---
$29.5 million (currently planned)

1. Draft RFP--DIR determination, 2004 wage levels
$4,474,000
6% $259,000 $126,000 0.4% 5.9% $31.3 million

2. (Recommended) DIR determination brought forward to 2007 by CPI, annual CPI raises
$4,851,000

15%* $636,000 $309,000 1.1% 6.6% $38.3 million

3. GT/Z –Teamsters Proposal – Norcal San Jose labor agreement
$6,957,000
65% $2,742,000 $1,334,000 4.7% 10.2% $61.9 million

* Total initial increase in wages + benefits totaling all workers, all positions. Initial increase for sorters is 25%, as shown on Table 2.

Table 1 shows the increase in wages compared to the current wage cost and the increases in Sunnyvale refuse collection rates that are likely to result from each alternative compared to the recently adopted rates for FY 2006/07.

Table 2 shows the effects of the various options on the sorters, the bargaining unit most often discussed.

Alternative	Cash Wage (hourly)	Value of Benefits (hourly	Total Sorter Wages (hourly)	Percent Increase
Current Wages/Benefits	$8.00	$4.92	$12.92/hr	---
1. Draft RFP (DIR determination, 2004 levels)	$8.00	$6.93	$14.93	16%
2. DIR determination brought forward to 2007 by CPI	$8.68	$7.52	$16.20	25%
3. GT/Z –Teamsters Proposal	$15.80	$9.71	$25.51	97%

The prevailing wage language in the current agreement between the City and GT/Z has to date failed to provide the City with an enforceable wage “floor” that would assure the City that its contractor’s employees were being paid a fair wage. Despite the City’s best efforts, including declaring GT/Z in breach for its failure to comply, a multi-year stalemate has existed between the employer and the bargaining units to the detriment of the workers at the facility.

An enforceable prevailing wage determination has now been provided by the California Department of Industrial Relations. With that determination in hand and brought current with three years of inflation adjustment, Staff is confident that the new prevailing wage approach recommended in Alternative 2 (which includes mandatory, CPI-based wage increases in each year of the contract) will provide SMaRT Station workers with wages that meet or exceed local standards. At the same time, Sunnyvale ratepayers will be protected from the large and potentially unpredictable cost increases that will result from acceptance of the GT/Z-Teamsters language, while potential contractors will be able to provide the City with competitive proposals.

This report was included in the publication and posting of the Council agenda on the City’s official bulletin board and the City’s web page. This report is also available at the Sunnyvale Public Library and the City Clerk’s Office.

Those who spoke on this item on May 23 were notified by telephone or email that the item was continued to June 20. The Teamsters, GT/Z, and other interested parties received notice via email that this Report to Council was available on the City’s web site. The notice included the web link to the report and the text of Section 3.10 of the contract, as it was revised to reflect direction received from Council on May 23, 2006.

Throughout this process, staff has gotten input from the cities of Mountain View and Palo Alto and has kept them informed as to issues and events related to the issuance of the RTC. On June 13, 2006, the Public Works Directors of the three SMaRT Station cities met to review the alternatives presented in this Report to Council. The Public Works Directors from Mountain View and Palo Alto expressed their support for the alternative recommended by staff (Alternative 2). Under the Memorandum of Understanding that has governed the SMaRT Station partnership for the past 15 years, Sunnyvale has full authority for operation of the facility and approval of the partner cities is not required. However, Sunnyvale strives to reach consensus with the other cities on matters, like this one, that have significant policy or financial implications.

On June 13, 2006, Mayor Swegles received a letter from Assemblywoman Sally Lieber. In the letter, the Assemblywoman states, among others, her opinion that the RFP and contract should contain provisions that provide for “living wages and benefits.”

Staff would note on this point that “prevailing wages” and a “living wage” are two very different concepts. Prevailing wages are determined by impartial and precisely defined administrative methodologies and the amounts of various prevailing wages vary based on the different types of work being done under the contract in question. For example, in the matter before you, Council is being asked to provide policy guidance that will be used to determine 14 different wage “floors” (the sum of regular wages and the value of employee benefits) for 14 categories of workers in a single contract. The underlying administrative methodology looks in a scientific way at the nature of the work being done and defines the boundary of the labor market within which the work is being done. Council has twice in recent years (2000 and 2004) studied the topic of requiring prevailing wages in all City maintenance contracts. In both cases, Council decided to not move forward on a broad prevailing wage requirement.

In contrast to prevailing wages, a “living wage” is a single determined wage amount that sets a floor for all wages for work done for a city under a contract regardless of the type of work being done. It is essentially a “City Minimum Wage” set higher than the state minimum wage. In the case of Sunnyvale, it would apply to contracted work that includes janitorial services, Parks and Recreation class instructors, fence installation and repairs, auto body repairs, car washing, consultants, graphic designers, transcription services, office equipment maintenance, tree pruners, pest control, uniform rental services, property managers, package delivery, printers, towing services, water labs, catering companies, and a host of others. The potential financial and service impacts to the City are too widespread and significant to discuss in the context of this Report to Council and would require separate Brown Act noticing and opportunity for public contact. Examining the pros and cons for such a policy and describing the impacts would be a major policy issue in its own right.

However, some potential financial and competitive risks are readily evident. First, if a City living wage increased wages for employees of a particular City service provider, the City would pay more for the service in question. Further, the increased prices would be expected to apply to all customers (residents, other businesses, etc.) of the business in question, increasing costs to the community at large. This could also make businesses that locate in Sunnyvale and contract with the City but sell their services in a broader area uncompetitive with businesses located elsewhere.

Second, reports from cities that have adopted living wages indicate that imposition of a living wage requirement in City contracts significantly reduces the competitiveness of bid processes. Bids are less competitive because labor costs are typically the largest component of bids for services. If the imposition of a living wage results in all bidders for a particular contract paying higher wages than they would otherwise, they all have nearly the same labor cost and “flat bidding” (little price competition) is seen. The broad scale financial effects of a living wage for the City would be increased costs or (if funds were limited) reductions in services to the community. A bidder could decide not to contract with the City if the City was such a small part of its customer base that sales to the City did not justify the higher labor cost. A full analysis of the issue would provide in-depth research of the experience of other cities and a fuller description of the various benefits and costs of a living wage.

Council has the option to consider the issue of living wage in general and could chose to apply it to this and other contracts in some way after appropriate Brown Act noticing and due consideration of the full impacts of such a policy decision. If Council wishes to consider the living wage issue, its alternatives would include:

In the absence of a comprehensive look at the issue, staff cannot recommend ad hoc application at this time of the unanalyzed living wage concept to the current Council action on the SMaRT Station RFP. This is a very complicated issue and has the potential for far-reaching impacts for service delivery and costs throughout the City and community. It would be financially irresponsible to take action on this issue without studying its implications and impacts on the City’s long-term financial plan.

After getting direction from Council on May 23, staff has modified Alternative 2 presented on that date and also shows it as Alternative 2 in today’s RTC. Alternative 2 provides the sorters with a minimum wage rate for the first year of the contract that is 25% more than they earn at present. Each subsequent year of the contract they, and all non-management workers, would receive a raise equal to the change in the CPI. In analyzing the cost of all alternatives, the CPI is assumed to increase by 3% per year. Alternative 2 has also been clarified to show worker retention language that protects established employees from arbitrary dismissal by a new operator, while also allowing the contractor the tools necessary to manage the workforce in a way that protects the safety of the public and the other workers at the facility.

Alternative 1 – Direct staff to issue the RFP for SMaRT Station Operations, using the wage language in the original draft RFP (which uses the DIR determination and 2004 wages) that would result in a 16% raise in sorter wages, an estimated refuse rate increase in April 2007 of 5.9% ($126,000 due to Sunnyvale’s 49% share of higher wages) and a minimum of $31.3 million in wage cost over seven years.

Alternative 2 - (as clarified in this report to reflect direction given by Council on May 23) – Direct staff to issue the RFP for SMaRT Station Operations, using the following approach to prevailing wages that would result in a 25% raise in sorter wages and a total refuse rate increase in April 2007 of 6.6% ($309,000 due to Sunnyvale’s 49% share of higher wages) and a minimum of $38.3 million in wage cost over seven years:

Alternative 3 – Direct staff to issue the RFP for SMaRT Station Operations, using the following approach to prevailing wages that would result in a 97% raise in sorter wages and a total refuse rate increase in April 2007 of 10.2% ($1,334,000 due to Sunnyvale’s 49% share of higher wages) and a minimum of $61.9 million in wage cost over seven years:

Staff recommends Alternative 2 (as it has been clarified to reflect direction given by Council on May 23, 2006): Direct staff to issue the RFP for SMaRT Station Operations, using the following approach to prevailing wages that would result in a 25% raise in sorter wages and a total refuse rate increase in April 2007 of 6.6% ($309,000 due to Sunnyvale’s 49% share of higher wages) and a minimum of $38.3 million in wage cost over seven years:

With regard to the “living wage” concept that arose in comments received from the public, it would be financially irresponsible to adopt a living wage without studying its implications and impacts on the City’s long-term financial plan.

Approval of Alternative 2 will provide the sorters with a 25% wage increase upon the start of operations of the new contract and will provide annual raises that protect the workers from the effects of inflation. It will result in an $8.8 million cost increase to the SMaRT Station Cities over the seven-year term of the new contract, compared to the cost of the current contract. Because Sunnyvale ratepayers pay about 49% of the total, this will mean an across-the-board (all customers, all rates) refuse collection rate increase that is 1.1% higher than previously planned. Added to the 5.5% increase presently planned for 2007, the total 2007 rate increase will be 6.6%.

[1] A business that takes over a unionized operation is obligated to recognize the Union when the underlying operation is substantially the same and it is staffed by at least a majority of those employed by the predecessor within the bargaining unit in question. NLRB v. Fall River Dyeing, 482 US 27 (1987).

[2] These limitations, which we will discuss below, are somewhat difficult to understand and do not appear to provide significant limitations upon such future adjustments.

[4] That process requires DIR to base the prevailing wage for each classification upon the wages and benefits paid by the recycling operation in Santa Clara County that employs the largest number of employees in that classification. The only recycling operations of any size are those of Sunnyvale and San Jose so the "prevailing wage" will be that paid by the one that employs the larger number in each job category.