Summary of LAO Findings and Recommendations on the 2013-14 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	Department of Industrial Relations	Compliance Monitoring Unit (CMU) funding	Adopt the Governor's proposal to redirect $431,000 General Fund to the CMU, but reject the additional $2 million General Fund redirection proposed. We have no policy issues with the proposed $5 million loan from the Targeted Inspection and Consultation Fund. We offer alternatives to the administration's statutory proposal for a long-term funding plan for CMU given fiscal and policy concerns.	2-28-13

Detailed Narrative
Background *Prevailing Wage Enforcement.The Department of Industrial Relations (DIR) is responsible for enforcing state prevailing wage laws for public works projects. In enforcing prevailing wage laws, the department determines local prevailing wage rates by occupational trade, responds to prevailing wage complaints, adjudicates wage claims, and investigates prevailing wage violations. Prior to 2009, the awarding bodies of public works contracts (mostly local governments) established Labor Compliance Programs (LCPs) to comply with prevailing wage enforcement requirements on projects that included state bond funding and other specified projects. We raised concerns about the “self-enforcement” of prevailing wage laws by the LCPs in a 2007 report, Implementing the 2006 Bond Package: Increasing Effectiveness through Legislative Oversight* (http://www.lao.ca.gov/2007/2006_bonds/2006_bonds_012207.aspx). In the report, we raised concerns about the limited enforcement activity initiated by LCPs. In particular, we noted that, “LCPs spent between $18 and $23 for every $1 of [back] wages, penalties, and forfeitures they…recovered.” *State Shifts LCP Prevailing Wage Enforcement to DIR.* Chapter 7, Statutes of 2009 (SBX2 9, Padilla), created the CMU within DIR, and shifted prevailing wage enforcement activities previously performed by LCPs to the CMU. Chapter 7 authorized DIR to charge a fee (for deposit in the State Public Works Enforcement Fund), not to exceed 0.25 percent of state bond funds allocated to a project (or 0.25 percent of total project costs for certain specified projects), for CMU operations. Upon request, awarding bodies that operated LCPs in-house (and not through third party contractors) were allowed to continue their LCP after creation of the CMU and were exempt from the CMU fee. Chapter 7 exempted certain public works projects from CMU enforcement while also broadening the scope of prevailing wage enforcement by the CMU to nearly all state bond-funded projects as well as certain specified design-build projects. (The previous system of LCP enforcement on state bond-funded projects only applied to certain state bonds.) *CMU Funding Is Insufficient.From the inception of the CMU, the program’s funding model has been insufficient to meet operational needs. To begin program operation, the CMU received a $1.3 million General Fund loan in 2009-10. However, program operation for the CMU was ultimately delayed until 2011 due in part to legal issues related to using state bond funding for CMU enforcement. In 2011-12, a $2.2 million special fund loan was made to provide additional resources to the CMU. During 2011-12, the CMU collected only $246,000 in fees with an estimated budget of $8 million and 67 authorized positions. The DIR filled only 9 of these positions and spent $611,000 for the CMU in 2011-12. The cap on CMU fees has prevented DIR from raising revenue commensurate with its appropriated budget. Governor’s Proposal* The 2013-14 budget proposes the following budget solutions for the CMU: Permanently shift $2 million in General Fund expenditure authority from other prevailing wage activities in DIR to the CMU, with a commensurate increase in Labor Enforcement and Compliance Fund (LECF) fees to backfill the redirection. Permanently shift $431,000 in General Fund expenditure authority from the Division of Occupational Safety and Health (“Cal/OSHA”) to the CMU, with a commensurate increase in Occupational Safety and Health Fund (OSHF) fees to backfill the redirection. A one-time $5 million loan from the Targeted Inspection and Consultation Fund to the State Public Works Enforcement Fund for CMU operations in 2013-14. Budget trailer legislation that would authorize DIR to recoup CMU enforcement costs that exceeded the existing 0.25 percent cap on bond proceeds on CMU fees by requiring awarding bodies to reimburse the CMU using “other funding sources tied to the project.” The legislation would also remove the 0.25 percent cap on total project costs for projects that were not state bond-funded. LAO Analysis *The CMU’s Current Funding Model Is Broken.* The CMU currently has insufficient fee authority to support its current operational model of $8 million in annual expenditure authority and approximately 55 staff. Due to insufficient fund resources, the CMU has not operated at its planned expenditure levels, and has required a series of General Fund and special fund loans to fund minimal levels of program operation. In part, the Governor’s budget continues the history of short-term budget solutions for the CMU by proposing another $5 million special fund loan for the CMU. We note that previous loans to the CMU have not been repaid. Due to legal restrictions on the eligible use of bond expenditures, the CMU may only use CMU fees generated from bond proceeds for enforcement on the project that the bonds originated from. Calculating the fee amount based on the project’s bond funding or total project costs can be problematic because there is not necessarily a direct relationship between the fee’s calculation and actual enforcement costs. Due to variability in project size (which dictates the maximum fee level for a project) and the necessary level of enforcement for each project, the existing CMU fee does not provide adequate funding for prevailing wage enforcement for many projects. *Governor’s Budget Proposes Fund Shifts as Permanent Solutions for the CMU.* The 2013-14 budget proposes some permanent solutions for the CMU, including a total shift of $2.4 million General Fund from other DIR programs to permanently fund the CMU. The proposed $431,000 General Fund redirection from Cal/OSHA’s injury and illness statistics program to the CMU, and the corresponding funding backfill to Cal/OSHA through increased OSHF fees and expenditure authority, is an appropriate way to provide some base funding for the CMU. Cal/OSHA’s injury and illness statistics program is a regulatory program affecting employers at large, and thus the program could be appropriately funded through the OSHF (which receives fee revenue from all employers for regulatory functions related to occupational safety). In contrast to the Cal/OSHA redirection, the proposed $2 million General Fund redirection from general prevailing wage activities to the CMU, and the corresponding backfill of the redirected funding through increased LECF fees, raises policy concerns. The Governor is proposing to backfill funding for prevailing wage enforcement, which affects a small subset of the state’s employers, with a general fee on all employers (the LECF fee). In this case, there appears to be an insufficient nexus between fee payer and the activities proposed to be funded by the fee to support the proposed backfill mechanism on policy grounds. We also note that these fund shifts proposed by the Governor, and the corresponding increases in regulatory fees in the LECF and OSHF, are contingent upon the Legislature’s approval of the administration’s proposal to reauthorize the LECF and OSHF regulatory assessments which are both scheduled to sunset on July 1, 2013. For more background on the Governor's LECF and OSHF proposal, please see our analysis “Regulatory assessments and related proposals” in our *Summary of LAO Findings and Recommendations on the 2013-14 Budget* (http://lao.ca.gov/laoapp/budgetlist/PublicSearch.aspx?PolicyAreaNum=0&Department_Number=7350&KeyCol=624&Yr=2013). *Governor’s Proposal to Recoup Additional Enforcement Costs Unlikely to Solve the Program’s Fiscal Challenges.The Governor’s proposal attempts to solve the CMU’s funding challenges by allowing the CMU to recoup a greater share of its enforcement costs. The Governor’s proposed legislation would allow the CMU to charge the awarding bodies for the difference between what the existing capped CMU fee pays for state bond-funded projects and actual CMU enforcement costs through “other funding sources tied to the project,” and would also remove the CMU fee cap for projects that were not state bond-funded. However, since approximately 68 percent of the projects overseen by the CMU are projects that are entirely state bond-funded, the majority of CMU projects would not provide any additional funding for CMU enforcement costs under the Governor’s proposal. It is likewise uncertain how feasible the proposal would be with respect to construction projects that included funding other than state bond funding, as it is uncertain whether project funding from sources other than state bond funds would be available in sufficient amounts to reimburse the CMU for its enforcement costs. Even if the CMU could fully recoup its costs in respect of projects with funding sources other than state bonds under the Governor’s proposal, the Governor's proposal would still fund only a portion of the CMU’s total enforcement costs given the large number of projects--the solely state bond-funded ones--that would be unaffected by the Governor’s funding proposal. Additionally, in requiring local awarding bodies to pay CMU enforcement costs through “other available funding sources,” the Governor’s proposal raises concern over potential state mandate costs. LAO Recommendations* We have the following recommendations for the CMU for 2013-14: Approve the Governor’s proposal to redirect $431,000 General Fund from Cal/OSHA to the CMU and increase OSHF fees and expenditure authority to backfill this redirection. This action would provide a minor, yet permanent level of base funding for the CMU. We have no policy issues with the concept of the Governor’s proposal to loan $5 million from the Targeted Inspection and Consultation Fund to the State Public Works Enforcement Fund for CMU operations in 2013-14. However, we note that there is uncertainty regarding the timing and capacity of the State Public Works Enforcement Fund to repay the loan. We have raised several concerns with the Governor’s proposed budget trailer legislation and the ability of this legislation to address the ongoing funding requirements of the CMU. We think that there are several alternatives to the Governor's proposed budget trailer legislation to address ongoing funding for the CMU and each of these alternatives could potentially be combined in various ways to address CMU’s ongoing fiscal challenges. We have the following alternatives for the Legislature to consider: *Scale Back the Program.* As an alternative to the Governor’s proposal, and in conjunction with our recommendation to permanently redirect $431,000 General Fund to the CMU, the Legislature could reduce expenditure authority and authorized positions in the CMU to a level that would be supported by the $431,000 General Fund redirection and the CMU’s current fees. In considering this proposal, we would recommend that the administration report to the Legislature on the level of enforcement provided by this funding level. (We also note that the State Public Works Enforcement Fund is continuously appropriated, and therefore the Legislature would have to amend existing law to make any changes to CMU’s expenditure authority.) *Establish New Revenue Source.* Alternatively, the Legislature could direct the administration to develop an alternative and sustainable fee-based funding source for the CMU that is likely to generate sufficient revenue to operate the program at its current budgeted funding level or another funding level that reflects legislative priorities for the CMU. Clearly, enacting a new fee involves many policy considerations and tradeoffs for the Legislature to consider. *Increase General Fund Support.* Alternatively, the Legislature could approve the $431,000 General Fund redirection, and provide an additional General Fund appropriation that would fund the level of enforcement that reflected legislative priorities for the CMU. This would increase General Fund costs but would provide a stable funding source for the CMU. *Raise Caps on Existing CMU Fee.* Alternatively, the Legislature could raise the caps on the existing CMU fee to increase funding for CMU operations. However, this alternative would not address the existing issues with the CMU fee--the potential lack of a direct relationship between the fees generated and actual enforcement costs and the legal constraint that fees generated from bond proceeds can only be used on the project that the fee originated from.

Detailed Narrative

Background

Prevailing Wage Enforcement.The Department of Industrial Relations (DIR) is responsible for enforcing state prevailing wage laws for public works projects. In enforcing prevailing wage laws, the department determines local prevailing wage rates by occupational trade, responds to prevailing wage complaints, adjudicates wage claims, and investigates prevailing wage violations. Prior to 2009, the awarding bodies of public works contracts (mostly local governments) established Labor Compliance Programs (LCPs) to comply with prevailing wage enforcement requirements on projects that included state bond funding and other specified projects. We raised concerns about the “self-enforcement” of prevailing wage laws by the LCPs in a 2007 report, Implementing the 2006 Bond Package: Increasing Effectiveness through Legislative Oversight (http://www.lao.ca.gov/2007/2006_bonds/2006_bonds_012207.aspx). In the report, we raised concerns about the limited enforcement activity initiated by LCPs. In particular, we noted that, “LCPs spent between $18 and $23 for every $1 of [back] wages, penalties, and forfeitures they…recovered.”

State Shifts LCP Prevailing Wage Enforcement to DIR. Chapter 7, Statutes of 2009 (SBX2 9, Padilla), created the CMU within DIR, and shifted prevailing wage enforcement activities previously performed by LCPs to the CMU. Chapter 7 authorized DIR to charge a fee (for deposit in the State Public Works Enforcement Fund), not to exceed 0.25 percent of state bond funds allocated to a project (or 0.25 percent of total project costs for certain specified projects), for CMU operations. Upon request, awarding bodies that operated LCPs in-house (and not through third party contractors) were allowed to continue their LCP after creation of the CMU and were exempt from the CMU fee. Chapter 7 exempted certain public works projects from CMU enforcement while also broadening the scope of prevailing wage enforcement by the CMU to nearly all state bond-funded projects as well as certain specified design-build projects. (The previous system of LCP enforcement on state bond-funded projects only applied to certain state bonds.)

CMU Funding Is Insufficient.From the inception of the CMU, the program’s funding model has been insufficient to meet operational needs. To begin program operation, the CMU received a $1.3 million General Fund loan in 2009-10. However, program operation for the CMU was ultimately delayed until 2011 due in part to legal issues related to using state bond funding for CMU enforcement. In 2011-12, a $2.2 million special fund loan was made to provide additional resources to the CMU. During 2011-12, the CMU collected only $246,000 in fees with an estimated budget of $8 million and 67 authorized positions. The DIR filled only 9 of these positions and spent $611,000 for the CMU in 2011-12. The cap on CMU fees has prevented DIR from raising revenue commensurate with its appropriated budget.

Governor’s Proposal

The 2013-14 budget proposes the following budget solutions for the CMU:

Permanently shift $2 million in General Fund expenditure authority from other prevailing wage activities in DIR to the CMU, with a commensurate increase in Labor Enforcement and Compliance Fund (LECF) fees to backfill the redirection.
Permanently shift $431,000 in General Fund expenditure authority from the Division of Occupational Safety and Health (“Cal/OSHA”) to the CMU, with a commensurate increase in Occupational Safety and Health Fund (OSHF) fees to backfill the redirection.
A one-time $5 million loan from the Targeted Inspection and Consultation Fund to the State Public Works Enforcement Fund for CMU operations in 2013-14.
Budget trailer legislation that would authorize DIR to recoup CMU enforcement costs that exceeded the existing 0.25 percent cap on bond proceeds on CMU fees by requiring awarding bodies to reimburse the CMU using “other funding sources tied to the project.” The legislation would also remove the 0.25 percent cap on total project costs for projects that were not state bond-funded.

LAO Analysis

The CMU’s Current Funding Model Is Broken. The CMU currently has insufficient fee authority to support its current operational model of $8 million in annual expenditure authority and approximately 55 staff. Due to insufficient fund resources, the CMU has not operated at its planned expenditure levels, and has required a series of General Fund and special fund loans to fund minimal levels of program operation. In part, the Governor’s budget continues the history of short-term budget solutions for the CMU by proposing another $5 million special fund loan for the CMU. We note that previous loans to the CMU have not been repaid.

Due to legal restrictions on the eligible use of bond expenditures, the CMU may only use CMU fees generated from bond proceeds for enforcement on the project that the bonds originated from. Calculating the fee amount based on the project’s bond funding or total project costs can be problematic because there is not necessarily a direct relationship between the fee’s calculation and actual enforcement costs. Due to variability in project size (which dictates the maximum fee level for a project) and the necessary level of enforcement for each project, the existing CMU fee does not provide adequate funding for prevailing wage enforcement for many projects.

Governor’s Budget Proposes Fund Shifts as Permanent Solutions for the CMU. The 2013-14 budget proposes some permanent solutions for the CMU, including a total shift of $2.4 million General Fund from other DIR programs to permanently fund the CMU. The proposed $431,000 General Fund redirection from Cal/OSHA’s injury and illness statistics program to the CMU, and the corresponding funding backfill to Cal/OSHA through increased OSHF fees and expenditure authority, is an appropriate way to provide some base funding for the CMU. Cal/OSHA’s injury and illness statistics program is a regulatory program affecting employers at large, and thus the program could be appropriately funded through the OSHF (which receives fee revenue from all employers for regulatory functions related to occupational safety).

In contrast to the Cal/OSHA redirection, the proposed $2 million General Fund redirection from general prevailing wage activities to the CMU, and the corresponding backfill of the redirected funding through increased LECF fees, raises policy concerns. The Governor is proposing to backfill funding for prevailing wage enforcement, which affects a small subset of the state’s employers, with a general fee on all employers (the LECF fee). In this case, there appears to be an insufficient nexus between fee payer and the activities proposed to be funded by the fee to support the proposed backfill mechanism on policy grounds.

We also note that these fund shifts proposed by the Governor, and the corresponding increases in regulatory fees in the LECF and OSHF, are contingent upon the Legislature’s approval of the administration’s proposal to reauthorize the LECF and OSHF regulatory assessments which are both scheduled to sunset on July 1, 2013. For more background on the Governor's LECF and OSHF proposal, please see our analysis “Regulatory assessments and related proposals” in our Summary of LAO Findings and Recommendations on the 2013-14 Budget (http://lao.ca.gov/laoapp/budgetlist/PublicSearch.aspx?PolicyAreaNum=0&Department_Number=7350&KeyCol=624&Yr=2013).

Governor’s Proposal to Recoup Additional Enforcement Costs Unlikely to Solve the Program’s Fiscal Challenges.The Governor’s proposal attempts to solve the CMU’s funding challenges by allowing the CMU to recoup a greater share of its enforcement costs. The Governor’s proposed legislation would allow the CMU to charge the awarding bodies for the difference between what the existing capped CMU fee pays for state bond-funded projects and actual CMU enforcement costs through “other funding sources tied to the project,” and would also remove the CMU fee cap for projects that were not state bond-funded. However, since approximately 68 percent of the projects overseen by the CMU are projects that are entirely state bond-funded, the majority of CMU projects would not provide any additional funding for CMU enforcement costs under the Governor’s proposal. It is likewise uncertain how feasible the proposal would be with respect to construction projects that included funding other than state bond funding, as it is uncertain whether project funding from sources other than state bond funds would be available in sufficient amounts to reimburse the CMU for its enforcement costs. Even if the CMU could fully recoup its costs in respect of projects with funding sources other than state bonds under the Governor’s proposal, the Governor's proposal would still fund only a portion of the CMU’s total enforcement costs given the large number of projects--the solely state bond-funded ones--that would be unaffected by the Governor’s funding proposal. Additionally, in requiring local awarding bodies to pay CMU enforcement costs through “other available funding sources,” the Governor’s proposal raises concern over potential state mandate costs.

LAO Recommendations

We have the following recommendations for the CMU for 2013-14:

Approve the Governor’s proposal to redirect $431,000 General Fund from Cal/OSHA to the CMU and increase OSHF fees and expenditure authority to backfill this redirection. This action would provide a minor, yet permanent level of base funding for the CMU.
We have no policy issues with the concept of the Governor’s proposal to loan $5 million from the Targeted Inspection and Consultation Fund to the State Public Works Enforcement Fund for CMU operations in 2013-14. However, we note that there is uncertainty regarding the timing and capacity of the State Public Works Enforcement Fund to repay the loan.

We have raised several concerns with the Governor’s proposed budget trailer legislation and the ability of this legislation to address the ongoing funding requirements of the CMU. We think that there are several alternatives to the Governor's proposed budget trailer legislation to address ongoing funding for the CMU and each of these alternatives could potentially be combined in various ways to address CMU’s ongoing fiscal challenges. We have the following alternatives for the Legislature to consider:

Scale Back the Program. As an alternative to the Governor’s proposal, and in conjunction with our recommendation to permanently redirect $431,000 General Fund to the CMU, the Legislature could reduce expenditure authority and authorized positions in the CMU to a level that would be supported by the $431,000 General Fund redirection and the CMU’s current fees. In considering this proposal, we would recommend that the administration report to the Legislature on the level of enforcement provided by this funding level. (We also note that the State Public Works Enforcement Fund is continuously appropriated, and therefore the Legislature would have to amend existing law to make any changes to CMU’s expenditure authority.)
Establish New Revenue Source. Alternatively, the Legislature could direct the administration to develop an alternative and sustainable fee-based funding source for the CMU that is likely to generate sufficient revenue to operate the program at its current budgeted funding level or another funding level that reflects legislative priorities for the CMU. Clearly, enacting a new fee involves many policy considerations and tradeoffs for the Legislature to consider.
Increase General Fund Support. Alternatively, the Legislature could approve the $431,000 General Fund redirection, and provide an additional General Fund appropriation that would fund the level of enforcement that reflected legislative priorities for the CMU. This would increase General Fund costs but would provide a stable funding source for the CMU.
Raise Caps on Existing CMU Fee. Alternatively, the Legislature could raise the caps on the existing CMU fee to increase funding for CMU operations. However, this alternative would not address the existing issues with the CMU fee--the potential lack of a direct relationship between the fees generated and actual enforcement costs and the legal constraint that fees generated from bond proceeds can only be used on the project that the fee originated from.