The Governor's budget proposes several actions related to public works labor enforcement, including steps to address a structural funding problem the Governor has identified. In this analysis, we discuss our findings and recommendations relative to this proposed actions.

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Ryan Woolsey

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Budget and Policy Post
March 3, 2017

The 2017-18 Budget

Funding Public Works Labor Enforcement


Background

Labor Code Establishes Prevailing Wage and Other Requirements for Public Works Projects. The California Labor Code places certain requirements on most construction projects that receive public funding, referred to as “public works projects.” One of these requirements is that contractors on public works projects pay their workers “prevailing wages”—defined as the wages paid to a majority of workers in a particular type of work within the locality where the work is performed. The Labor Code also establishes other requirements for public works projects, including a requirement that contractors on certain public works projects employ apprentices.

Division of Labor Standards Enforcement (DLSE) Responsible for Enforcing Public Works Requirements. State law places responsibility for enforcing public works requirements on the DLSE, within the Department of Industrial Relations (DIR). Specific DLSE responsibilities include determining prevailing wage rates, reviewing contractors’ payroll records, and conducting onsite investigations of public works projects.

Funding for Public Works Labor Enforcement. Currently, the prevailing wage determination function and enforcement of the public works requirements are funded from the State Public Works Enforcement Fund (SPWEF), a special fund that receives revenues from an annual registration fee of $300 paid by all contractors that wish to bid on public works contracts. The SPWEF is solely used to support public works enforcement. The contractor registration fee was established as part of the 2014‑15 budget package. Prior to 2014‑15, public works enforcement was supported by a combination of the Labor Enforcement and Compliance Fund (LECF), which receives the proceeds of a general assessment on all employers; a fee on bond proceeds for bond-funded public works projects; and the General Fund. Over the years, challenges with the previous system of collecting fees on bond proceeds made it difficult for DLSE to generate sufficient revenue to maintain public works enforcement, requiring the SPWEF to receive loans from other special funds and the General Fund. Currently, the SPWEF has a $1.3 million loan from the General Fund, a $2.2 million loan from the Uninsured Employer Benefit Trust Fund, and a $5 million loan from the Occupational Safety and Health Fund that have not been repaid.

Overview of the Governor’s Proposal

Governor Identifies Public Works Enforcement Structural Funding Problem. Actual annual revenues from the recently created contractor registration fee are less than estimated when the fee was established and do not cover current spending levels for public works enforcement. Specifically, the administration estimates that expenditures from the SPWEF in 2016‑17 will be $13 million, while revenues coming into the SPWEF from the contractor registration fee will be only $10 million. The shortfall of revenues will result in a $3 million decline in the SPWEF’s reserve. If fee revenues continue at this level and no adjustments are made to spending levels, SPWEF’s reserves would be virtually exhausted in 2017‑18.

Potential Noncompliance With Contractor Registration Requirement. The administration believes that one reason revenues have not met expectations is that some contractors may not be complying with the registration requirement. During 2015‑16, less than 30,000 contractors registered and paid the fee, compared to an initial rough estimate of 40,000 or more registrations. Through its enforcement efforts, DLSE found about 600 instances where contractors were working on a public works project during 2015‑16 without registration. Contractors that are found to be bidding or working on a public works contract without registration are subject to a penalty of up to $2,000 and may face temporary disqualification from bidding or working on public works projects for repeat violations. The administration also notes that some institutions that award public works contracts, known as “awarding bodies,” may not be adequately verifying that contractors bidding on projects have complied with the registration requirement before awarding the contract, thus potentially contributing to contractor noncompliance and reduced fee revenues. There currently is no specific penalty for an awarding body that fails to verify that contractors bidding or working on public works contracts are registered.

Provides Limited-Term Funding for Positions to Increase Awarding Bodies’ Awareness of Responsibilities. The Governor proposes a few actions to address the funding shortfall in the SPWEF in 2017‑18 and later years. First, the Governor proposes to provide funding to DLSE on a two-year limited-term basis for six positions to conduct outreach with awarding bodies to improve their awareness of their responsibility to ensure that contractors have complied with this requirement, with the intent of increasing compliance and fee revenue over time. Funding for these positions—$805,000 in 2017‑18 and $759,000 in 2018‑19—would be provided from the Labor and Workforce Development Fund, a special fund designated for enforcing Labor Code provisions and educating employers and workers about labor law. As part of this outreach, DLSE would encourage awarding bodies to require contractors to “prequalify,” or demonstrate compliance with various labor law requirements, including the contractor registration requirement, before bidding on public works contracts. Under current law, awarding bodies are authorized, but most are not mandated, to require contractors to prequalify. DLSE believes that increased use of prequalification could increase compliance with the contractor registration requirement and with labor law requirements generally.

Shifts Funding of Prevailing Wage Determination Function From Contractor Registration Fee to General Employer Assessment. The Governor’s proposal would reduce expenditures from the SPWEF by moving the support of the prevailing wage determination function from the SPWEF to the LECF beginning in 2017‑18. This action would free up $2.2 million in the SPWEF on an ongoing basis and would largely address the funding imbalance going forward, even if contractor registration fee revenues remain flat in future years.

Shifts SPWEF’s Allocated Administrative Expenses to Other Special Funds on a One-Time Basis. For 2017‑18 only, the Governor proposes to shift the portion of statewide administrative costs allocated to the SPWEF (such as the fund’s portion of reimbursements to the state Department of Finance and Department of Human Resources) to other special funds administered by DIR. This one-time action frees up an additional $1.1 million in the SPWEF in 2017‑18.

Provides New Position to Pursue Additional Contractor Debarments. Current law gives DLSE the authority to “debar,” or prohibit a contractor from bidding or working on public works contracts, for up to three years if the contractor violates public works requirements under certain conditions. The Governor’s proposal would provide $212,000 from the SPWEF for one additional Attorney III position to allow DLSE to conduct additional debarment proceedings.

Proposed Law Changes Related to Public Works Enforcement. In connection with this budget proposal, the administration has recently released several proposed changes to current law related to public works enforcement. While we are still reviewing the details of the trailer bill, the proposed changes appear to increase penalties on contractors that do not comply with the registration requirement, impose new penalties on awarding bodies that fail to verify contractor registration, and provide other new tools for DLSE to enforce contractor registration.

LAO Assessment and Recommendations

Shift of Support for Prevailing Wage Determinations

Shift of Support for Prevailing Wage Determinations to LECF Is Reasonable Way to Address Funding Imbalance in Short Run . . . In our view, the Governor’s proposal to begin paying for the costs of prevailing wage determinations from the LECF instead of the SPWEF is a reasonable and straightforward way to relieve pressure on the SPWEF in the near term while the administration pursues efforts to increase SPWEF revenues through greater compliance with the contractor registration requirement. Current law authorizes the LECF to be used to pay for DLSE activities generally, and prevailing wage determination was funded from the LECF in 2013‑14. Similarly, we have no issues with the proposed one-time redirection of statewide administrative costs allocated to SPWEF to other DIR special funds.

. . . But SPWEF Is Preferable as a Long-Term Funding Source. Prevailing wage rates determined by DLSE are generally only used to meet the prevailing wage requirement on public works projects. Shifting the prevailing wage determination function to the LECF would mean that the costs of determining prevailing wages are funded from a general assessment on all employers, most of whom are not affected by prevailing wage requirements. In our view, the SPWEF, funded by fees paid only by contractors that are subject to prevailing wage requirements, is a preferable long-term funding source. Ideally, the prevailing wage determination function would eventually shift back to the SPWEF as compliance with the contractor registration requirement improves and fee revenues increase. If the Legislature shifts prevailing wage determination to the LECF, we recommend that the Legislature require that DLSE report at a later date on the feasibility of returning the prevailing wage determination function to the SPWEF, as described in greater detail below.

Awarding Body Outreach and Contractor Registration Compliance

Unclear Whether Outreach to Awarding Bodies Would, on Its Own, Increase Compliance and Fee Revenue. To the extent that some awarding bodies are not sufficiently verifying contractor compliance with the registration requirement, conducting outreach relative to awarding responsibilities may contribute to increased compliance with the registration requirement and increased fee revenue. However, there may be other factors that affect compliance with the registration requirement that are at least as important as awarding bodies’ awareness of their responsibilities, including the extent to which awarding bodies are (or are not) held accountable for verifying the registration of contractors. In our view, the proposal to provide temporary positions for outreach to awarding bodies should be considered in the context of other possible changes to increase awarding bodies’ incentives to verify contractor registration. As we noted previously, the administration’s recently released trailer bill proposal appears to include provisions intended to address some of these compliance issues.

Direct DLSE to Comment on Additional Steps to Increase Compliance With Contractor Registration Requirement. We recommend that the Legislature direct DLSE to comment on what steps might be taken, in addition to outreach, to increase awarding body accountability relative to their responsibility to verify that contractors are registered, including the merits and drawbacks of law changes included in the administration’s recently released trailer bill proposal. We note that we will continue to review the trailer bill proposal and will update the Legislature with any additional comments we have.

Even if Compliance With Registration Requirement Increases, Fee Revenues May Not Meet Initial Expectations. While some level of noncompliance with the contractor registration requirement is likely, another reason fee revenues have come in below expectations may be that initial estimates overstated the number of contractors that would need to register. This is because there was no comprehensive database of contractors that would be bidding on public works projects. To the extent the initial estimate was too high, efforts to increase compliance with the registration requirement may not increase fee revenues to the levels expected based on initial rough estimates. This means that it will eventually be necessary to take stock of the number of contractors expected to register each year after any steps taken to increase compliance with the registration requirement, and evaluate what adjustments, if any, need to be made to the level of the registration fee to support public works enforcement on an ongoing basis.

Require a Report on Ongoing Public Works Enforcement. We recommend that the Legislature require DLSE to report by March 2019 on (1) changes in the amount of contractor registration fees collected; (2) the estimated effect of any efforts to increase compliance with the contractor registration fee, including outreach to awarding bodies and other steps to increase awarding body accountability for ensuring contractor registration; (3) what adjustments are necessary to the level of the contractor registration fee in order to support ongoing public works enforcement costs and repay the SPWEF’s outstanding loans to other funds; and (4) the feasibility of shifting support for the prevailing wage determination function back to the SPWEF (if support is transferred to LECF as proposed by the Governor).

Increased Staff for Debarments

Premature to Approve Additional Staff for Debarment Proceedings Given SPWEF Solvency Concerns. Given uncertainty in the level of ongoing contractor registration fee revenues in the SPWEF, we think it is premature to approve the administration’s requested staff to pursue additional contractor debarments, even after taking steps to reduce SPWEF expenditures (such as shifting public works determination to the LECF). Accordingly, we recommend that the Legislature reject the proposed position. We note, however, that there may be value in exploring what the root causes of contractor violations that lead to debarment proceedings may be and the extent to which the outreach efforts included in the proposal might address these causes. We recommend that the Legislature direct DLSE to comment on these issues in the course of budget hearings.