Pillsbury Winthrop Shaw Pittman LLP
The Wages
of Subsidy
Prevailing Wages as the
Cost of Public Assistance
to Development Projects
in California
By Jon Goetz
California developers who obtain public funding for their
projects may be in for a rude surprise—that assistance
may trigger prevailing wages, labor requirements that often make the project much more expensive, perhaps costing
even more than the value of the public assistance itself.
Until recent years, “prevailing wages” were required only
in connection with government construction projects in
California, such as a city storm drain project. Prevailing
wages, adopted by regulation of the California Department of Industrial Relations (DIR) for a wide variety of
construction trades, are pay rates roughly equivalent to
union-scale wages and benefits. Starting in 2002, however, prevailing wage requirements became applicable to
many otherwise private construction projects receiving
government financial assistance. Prevailing wages can be
significantly higher than non-union wage rates for certain types of construction, and a prevailing wage requirement can make otherwise feasible projects financially
impossible to build.
When an otherwise private development project is “paid
for in whole or in part out of public funds,” prevailing wages
are required for the project. Senate Bill 975, adopted with
the strong support of trade union groups, changed the
law to broadly define “paid for in whole or in part out of
public funds” to include public agency payments to or on
behalf of a contractor or developer, public agency construction of a project, transfer of property for less than its
“fair market price,” reduced or waived fees, below-market
loans, and forgiveness of or credits against outstanding
loans. The sweeping new definitions incorporate most types
of public assistance that might be provided to a development project. For the most part, public assistance to a
project now triggers a prevailing wage requirement unless
one of the statutory exemptions to prevailing wages applies.
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One of the most important exceptions for commercial
projects is for public agency subsidies for public works
“required as a condition of regulatory approval.” Prevailing wages must be paid on the public works portion of
the project, but not on the private portion of the project.
A common form of public assistance to a large project is
the issuance of tax-exempt bonds through a Mello-Roos
or Community Facilities District (CFD), which finances
the costs of required public works. The DIR has found
that the use of CFD bond funds constitutes the use of
public funds for the project, triggering the prevailing
wage requirement for the public works, but not for the
private portion of the project. Finding the public works
exception applicable, the DIR will then examine the
project to determine whether the public works and other
portions of the project constitute a “single, integrated
and interdependent project.” If prevailing wages are
required for the public works portion of the project, and
the public works are found to be integrated with the remainder of the project, the DIR will find that prevailing
wages are required for the entire project.
