California Supreme Court: Charter Cities Need Not Pay Prevailing Wages to Private Construction Workers on Locally Funded Municipal Public Works

On July 2, 2012, the California Supreme Court issued a decision that launched early fireworks throughout the state, either in celebration or alarm, over its far-reaching impact on public works projects. In State Building Construction Trades Council of California, AFL-CIO v. City of Vista, S173586, 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, decided by a 5-2 majority, the court found that the wage levels of contract workers constructing locally funded public works are a “municipal affair” and not a matter of “statewide concern.” As a result, the California Constitution protected Vista’s enactment of an ordinance prohibiting the payment of prevailing wages, because the ordinances of charter cities supersede state law with respect to “municipal affairs.”

In addition to California municipalities, the ruling has implications for real estate, construction and hospitality industry entities as well as for employers, whether they are in California or do business in the state with the country’s largest economy.

Background

Since 1931, California’s prevailing wage laws have influenced the planning, implementation and funding of public works or “work done for public agencies and paid for with public funds.” As a practical matter, prevailing wages reflect the wage rates that have been negotiated in collective bargaining agreements for union craft and apprenticeship workers.

In 2006, when Vista was a general law city rather than a charter city, city voters approved a 0.5 percent sales tax to fund construction and 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 express purposes of the change was to give the city council the ability to decide whether to impose prevailing wages on the construction of its planned public works projects.

Shortly after that, the Vista City Council adopted 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 adopted a resolution approving contracts for the design and build of 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 Opinion

The starting point for the court was 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 light 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 well-established framework for determining whether an ordinance of a charter city concerns “municipal affairs” or whether the ordinance would be overruled 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”).

It 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 a 1932 decision issued during the Great Depression, City of Pasadena v. Charleville, 215 Cal. 384, 389 (1932).

In support of its decision, 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 purport to cover public works of a city, whether a charter city or not, the court concluded 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” has now become a state concern. The union had argued that (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 integrated if not at the state level certainly then at the regional level, and (iii) prevailing wages support state-wide apprenticeship programs in skilled crafts. However, the court reframed the question: “Rather, the 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 its own question with a resounding “no.” The same principles that applied in the court’s prior decisions with respect to public employees held true for private employees as well.

Implications for Municipalities and Developers

City of Vista fundamentally changes the balance of power in California between the state legislature and charter cities 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 divorce themselves from the legislature’s far-reaching prevailing wage mandate. Now, charter cities can exert much greater control over their capital improvement expenditures.

The court’s decision benefits not only financially strapped charter cities, but also struggling real estate developers, because construction dollars can go farther with potentially greater public benefit. Public works that had been shelved 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 pocketbooks.

In addition, charter cities and developers may need to evaluate the tradeoffs in entering into Project Labor Agreements (“PLAs”) on large, multi-craft construction contracts, balancing the labor peace they foster against the new economic realities of electing not to pay prevailing wages. Finally, this case may also be relevant to California’s hospitality industry to the extent that hotel owners and managers operate hotels on properties owned by or leased from a charter city.

Looking Ahead

Going forward, the critical inquiry will be 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” on an improvement was expressly sanctioned by the court. What constitutes “a City’s own funds”? A voter-approved sales tax for public improvements qualified in City of Vista. If a charter city received payments under a development agreement from a developer for purposes of constructing a public park, would the use of those funds be an expenditure of “a City’s own funds”? If a charter city collected mitigation fees or impact fees under a city ordinance 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.

A more difficult question 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. Charter city-created public finance tools, such as facilities benefit assessments used by the City of San Diego and the City of Sacramento, may be best equipped to shield a charter city from the payment of prevailing wages.

The case also raises the possibility that, as a practical reality, unions might take bolder actions to press their agenda on charter cities that refuse to opt into the state’s prevailing wage mandate by direct political pressure on the 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.

City of Vista invites the development of careful political and legal strategy for future public works projects. Thoughtful planning by counsel can make a significant difference in the financial bottom line for public projects as well as public/private partnerships.