Charter Cities Not Required To Pay Prevailing Wages to Private Construction Workers on Locally Funded Public Works

In July, the California Supreme Court issued an opinion with far-reaching impact on the payment of prevailing wages in public works projects. In State Building Construction Trades Council of California, AFL-CIO v. City of Vista, 54 Cal.4th 547 (July 2, 2012), the court exempted charter cities and their contractors from the obligation to pay workers state-mandated prevailing wages when a public improvement project is a “locally funded public work.”

In City of Vista,  the court held that the wage levels of contract workers building locally funded public works are a “municipal affair” and not a matter of “statewide concern.” As a result, the California Constitution protected Vista’s adoption of an ordinance prohibiting the payment of prevailing wages, because the ordinances of charter cities supersede state law with respect to “municipal affairs.”

Facts

In 2006, while Vista was a general law city rather than a charter city, city voters approved a sales tax to fund renovation of several public buildings. In February 2007, following a special election, Vista changed from a general law city to a charter city. One of the purposes of the change was to give the council the power to decide whether to impose prevailing wages on the construction of its planned public works projects.

Shortly after that, the Vista City Council enacted a city ordinance to prohibit city contracts from requiring payment of prevailing wages, except in three limited circumstances: “(a) such payment is compelled by the terms of a state or a federal grant, (b) the contract does not involve a municipal affair, or (c) payment of the prevailing wage is separately authorized by the city council.”  The city council then enacted a resolution approving contracts for the public buildings to be financed by the sales tax, but did not require compliance with the state’s prevailing wage laws. The State Building and Construction Trades Council of California (“the union”) then filed suit.

The Court’s Decision

The court started its analysis with what is commonly known as California’s “home rule doctrine.”  This doctrine is set forth in Article XI, section 5, subdivision (a) of the California Constitution, which provides, “It shall be competent in any city charter to provide that the city governed thereunder may make and enforce all ordinances and regulations in respect to municipal affairs, subject only to restrictions and limitations provided in their several charters and in respect to other matters they shall be subject to general laws. City charters adopted pursuant to this Constitution shall supersede any existing charter, and with respect to municipal affairs shall supersede all laws inconsistent therewith.”

In view of the language of the California Constitution, the court said, “[T]he controlling inquiry is how the state Constitution allocates governmental authority between charter cities and the state.”

The court then applied the framework for determining whether an ordinance of a charter city concerns “municipal affairs” or whether the ordinance would be superseded by state law as dealing with matters of “statewide concern.” California Fed. Savings & Loan Assn. v. City of Los Angeles, 54 Cal. 3d 1, 17 (1991) (“California Fed. Savings”).

The court concluded “that the wage levels of contract workers constructing locally funded public works are a municipal affair (that is, exempt from state regulation), and that these wage levels are not a statewide concern (that is, subject to state legislative control),” reaffirming City of Pasadena v. Charleville, 215 Cal. 384, 389 (1932). 

In support of its holding, the court reasoned as follows: 

  • First, “the construction of a city-operated facility for the benefit of a city’s inhabitants is quintessentially a municipal affair, as is the control over the expenditure of a city’s own funds. Here, the two fire stations in the City of Vista, like the municipal water system in Charleville, … are facilities operated by the city for the benefit of the city’s inhabitants, and they are financed from the city’s own funds. We conclude therefore that the matter at issue here involves a ‘municipal affair.’” Second, noting that the prevailing wage laws expressly cover public works of a city, whether a charter city or not, the court found that “an actual conflict exists between state law and Vista’s ordinance.”
  • The court rejected the union’s arguments that what may have once been a “municipal affair” was now a state concern because (i) the prevailing wage is now set by the Director of the California Department of Industrial Relations, rather than the local contracting body, as when Charleville was decided, (ii) the state’s economy is interconnected at the state level and regional levels, and (iii) that prevailing wages support state-wide apprenticeship programs in skilled crafts. The court considered these arguments and instead stated: “[T]he question presented is whether the state can require a charter city to exercise its purchasing power in the construction market in a way that supports regional wages and subsidizes vocational training, while increasing the charter city’s costs. No one would doubt that the state could use its own resources to support wages and vocational training in the state’s construction industry, but can the state achieve these ends by interfering in the fiscal policies of charter cities?” The court answered “no.” The same principle that applies in the court’s prior decisions with respect to public employees held true for private employees as well.

Factors Cities and Developers Should Consider

City of Vista significantly changes the trend in California on the issue of the payment of prevailing wages. Over the past 10 years, the legislature has expanded the types of projects that qualified as “public works” and were subject to the payment of prevailing wages. This ruling allows charter cities to separate themselves from the legislature’s prevailing wage requirements. Today, charter cities can exert much greater control over their capital improvement expenditures. 

The court’s decision helps financially strapped charter cities and struggling real estate developers.   Construction spending can go farther with potentially greater public benefit. Public works that had been put on hold because construction was too expensive may be possible. A private development dependent on significant public improvements may not have been financially feasible if prevailing wages (and benefits) had to be paid, but now the project may be possible, simulating the local economy. On the other hand, union employees may find that the wages they will be paid on public works projects will drop in the aftermath of this decision, affecting their wallets.

What’s more, developers and charter cities may need to more closely evaluate Project Labor Agreements (“PLAs”) on multi-craft construction contracts, balancing their costs against the labor relations benefits they offer.

The important question is whether a charter city’s proposed improvement is a “locally funded public work” — something the court does not specifically define. However, the expenditure of “a City’s own funds” was identified as a municipal concern exempt from prevailing wages. But what constitutes “a City’s own funds”? A voter-approved sales tax measure for public construction purposes qualified in City of Vista. If a charter city received money under a development agreement from a developer for constructing a public park, would the use of those proceeds be an expenditure of “a City’s own funds”? If a charter city received mitigation fees or impact fees for a new public library, would the spending of those dollars be “an expenditure of a City’s own funds”? A good argument can be made for each of these, if properly structured.

An interesting strategy worth considering is whether a charter city can create a Mello-Roos communities facilities district, or another special taxing district, and cloak the funds expended by those entities with the constitutional “home rule” protection granted to charter cities. A particularly plausible alternative is using charter city-created public finance tools, such as facilities benefit assessments used by the City of San Diego and the City of Sacramento, to shield a charter city from the payment of prevailing wages.  

The case also raises the issue that unions may take actions to press their agenda on charter cities which refuse to opt into the state’s prevailing wage mandate.  Those strategies could include direct political pressure of city council, the ballot box or use of other legal tools (such as environmental laws and regulations) that prevent or delay the commencement of construction.

— Kenneth Kecskes