Program Review and Investigations Committee




<MeetMDY1> December 16, 2014


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Tuesday,<MeetMDY2> December 16, 2014, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Christian McDaniel, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Christian McDaniel, Co-Chair; Representative Martha Jane King, Co-Chair; Senators Tom Buford, Perry B. Clark, Ernie Harris, Jimmy Higdon, Dorsey Ridley, and Dan "Malano" Seum; Representatives Jim DeCesare, David Meade, Terry Mills, Rick Rand, and Arnold Simpson.


Legislative Guests: Senator Chris Girdler.


Guests: Larry L. Roberts, Secretary, and Anthony Russell, Commissioner of Workplace Standards, Labor Cabinet; Bryanna Carroll, Governmental Affairs Advocacy Manager, Kentucky League of Cities; and Wilson Sears, Kentucky Association of School Superintendents.


LRC Staff: Greg Hager, Committee Staff Administrator; Christopher Hall; Colleen Kennedy; Van Knowles; Jean Ann Myatt; William Spears; Shane Stevens; Joel Thomas; and Kate Talley, Committee Assistant.


Minutes for November 13, 2014

Upon motion by Representative DeCesare and second by Senator Harris, the minutes for the November 13, 2014, meeting were approved by voice vote, without objection.


Selection of Study Topics for 2015

Senator McDaniel moved to select three topics for study by staff:

·        reformulated fuel pricing;

·        the Kentucky Law Enforcement Foundation Program; and

·        statutory requirements that cities, counties, school boards, and other entities post information in local newspapers.


Senator Harris seconded the motion and the topics were approved by roll call vote.


Representative King moved to select three additional topics for study by staff:

·        the feasibility and potential savings of moving medical prisoners to secured facilities;

·        raising the minimum wage; and

·        leaseback deals, the request for proposals process and single-provider contracts


Representative Mills seconded the motion and the topics were approved by roll call vote.


Staff Report: How Kentucky’s Prevailing Wage Laws Affect Public Construction

Mr. Clark said that Kentucky’s prevailing wage laws require that contractors pay workers at least the prevailing wage on state government, local government, and school public works projects estimated to cost more than $250,000. He gave examples of required base wages and fringe benefits for different classifications of workers. Prevailing wage rates are set by the Labor Cabinet’s Department of Workplace Standards. For non-transportation projects, the department uses federal prevailing wage rates in 36 counties. The department sets rates in districts encompassing the remaining 84 counties. Based on a review of determinations in four localities, the department sets prevailing wage rates according to statute, and the process is well documented. As part of the rate determination process, the department holds a hearing in the locality. Contractors and union representatives may submit wage data on public projects, reasonably comparable private projects, and collective bargaining agreements in the locality. If a majority of workers are paid the same wage, that wage is used as the prevailing wage. If not, the department calculates a weighted average. For wage determinations in which a new prevailing wage rate was set over a 1-year period analyzed for the report, only union wage data were submitted in 98 percent of cases. Over a 4-year period analyzed for a 2001 Program Review report, the only data submitted were from unions in more than 60 percent of such determinations. So, in practice, prevailing wage rates are unrepresentative of local construction wages because of the overrepresentation of union wages.


Prevailing wage may increase costs by reducing flexibility to hire lower wage workers, but higher wages might be offset by hiring more productive workers. Research results are mixed on the effect of prevailing wage on construction costs, with all studies having limitations. A major issue in comparing projects subject to prevailing wage requirements to projects that are not is controlling sufficiently for other relevant factors that could affect costs. For this study, wages for workers on sampled prevailing wage projects for which work was done in 2012 or 2013 were compared to wages the same workers were paid on non-prevailing wage projects. Contractors and subcontractors provided wage data covering more than 400 workers for 12 school projects. They provided data covering more than 400 workers for 17 projects financed through the Finance and Administration Cabinet (FAC). For 60 percent of the workers on school projects, prevailing wage rates were higher than their private wages. The average difference was $11.37 per hour. For 36 percent of workers on FAC projects, prevailing wage rates were higher than private wages. The average difference was $8 per hour. For the remaining workers on school and FAC projects, there was no difference in prevailing wage rates and private wages. The total wage cost for school projects for which data were submitted was $1.91 million. If the same workers’ private wage rates had been paid, the cost would have been $1.26 million. The prevailing wage cost was 51 percent higher. The total wage cost for FAC projects for which data were submitted was $3.07 million. If the same workers’ private wage rates had been paid, the cost would have been $2.88 million. The prevailing wage cost was 6.7 percent higher. Mr. Clark noted some limitations of the study, a key one being that these differences are in wage costs, not total project costs.


It has been argued that prevailing wage might cause contractors to hire more experienced and better trained workers, which could improve construction quality and reduce long-run maintenance and repair costs. In practice, quality effects are difficult to measure, and requiring higher wages does not ensure that higher quality workers are hired. Regardless of wages paid, government agencies have procedures to monitor quality. It has also been argued that prevailing wage laws might cause contractors to hire better trained workers who will have fewer work-related injuries. There is little evidence to determine whether this occurs.


There is a trend of contractors shifting to prefabricated materials because of their lower cost. Prevailing wage laws do not apply to labor used in prefabricated materials, so prevailing wage laws may contribute to this trend.


Some reports indicate that repealing prevailing wage laws reduces construction worker wages, which reduces economic activity and tax revenue. These reports ignore offsetting effects; lower wages are not money that is lost to the economy. Lower construction worker wages could result in savings on government construction, more spending on materials, or higher profits for contractors.


In response to questions from Representative DeCesare, Mr. Clark explained that because prevailing wage laws increase construction costs, the requirement would also increase the cost to borrow funds to finance construction projects. This issue was not specifically considered in this study. Utility projects were also not considered.


In response to a question from Representative DeCesare regarding how construction companies’ profit margins might be affected if the prevailing wage statute were repealed, Mr. Clark replied that nonunion contractors would reflect the lower wage rates in their bids with no change in profit margins. Union wages are specified in long-term union collective bargaining agreements. For this reason, a change in the statute might not affect the wages that union contractors pay in the short run. Given that their wage costs would not decrease in the short run, union contractors might have to accept lower profit margins to be competitive until wages could be renegotiated.


Senator McDaniel recognized Senator Girdler as a guest.


In response to a question from Representative King, Mr. Clark said unions often submit data on wages paid by multiple contractors.


In response to a question from Representative King, Mr. Clark agreed that having more data submitted by nonunion contractors could cause the prevailing wage to be lower. It would take a concerted effort by a relatively large number of such contractors to have an effect.


In response to a question from Representative Rand, Mr. Clark said that, compared to sampled school projects, more of the Finance and Administration Cabinet projects were done using union contractors.


 In response to questions from Representative Rand, Mr. Clark said that 29 school projects were sampled. For the 12 such projects for which data were submitted, 40 percent of subcontractors submitted data.


In response to a question from Representative Rand, Mr. Clark confirmed that the study focused on labor costs and did not estimate the effect of prevailing wage on the total cost of projects. Other potential factors could reduce the total cost of a project.


In response to questions from Senator Ridley, Mr. Clark said that he will provide information on the number of projects from which the sample projects were selected. As discussed in the report, sampling was done so that there would be projects of different sizes.


In response to Senator Higdon, Mr. Clark said that the report had no recommendations because there were no problems identified with relevant state agencies’ compliance with statutory requirements. The 2001 Program Review report had recommendations for the General Assembly to consider should it wish prevailing wage rates to be more representative of market wage rates.


In response to questions from Senator Seum, Mr. Clark said some states do not have prevailing wage requirements. However, projects in those states that receive federal funding would still be subject to the prevailing wage requirements of the Davis-Bacon Act. There are limitations to comparisons of projects in states with prevailing wage and states without prevailing wage. Such research has been done, but not for this report.


In response to questions from Representative Mills, Mr. Clark said that the study did not include analysis of the annualized wages of construction workers or the potential impact of prevailing wage on the number of undocumented workers.


Secretary Roberts and Commissioner Russell appeared before the committee.


Mr. Russell described how the Department of Workplace Standards is organized. He noted that the data submitted for the study were confidential and not available to the cabinet for review. Despite a 40 percent cut in staff, the department, as noted in the report, is following the statutory requirements related to prevailing wage.


In response to a question from Senator Seum regarding notifications of prevailing wage hearings, Mr. Russell said that a notice is placed in the largest newspaper in the area 10 to 20 days prior to the hearing. Electronic mailings are sent to those who have elected to receive them. Electronic notices are also posted on trade organizations’ websites.


Secretary Roberts said that the issue is not union versus nonunion workers, it is high-wage/high-skill versus low-wage/low-skill workers. The majority of evidence from research projects is that prevailing wage does not affect construction cost. Prevailing wage encourages more education and training. The report does not address the total costs of projects.


The Labor Cabinet determines the prevailing wage for 84 counties. On average, wages are submitted for only 30 percent of classifications. Given that 70 percent of classifications have no submitted data, it should be easy for contractors to submit data and affect wages. When comparing the wages of a worker, one must consider factors other than wages. For example, workers can be organized differently to be more productive.


The data provided for workers on private projects are not certified. There is a concern as to whether contractors submitted accurate wage data. Higher wage workers are more productive, which should be considered when discussing prevailing wage. The small sample size is a concern.


In response to a question from Senator McDaniel, Mr. Roberts was unsure why higher wages related to higher quality is not apparent in the private sector.


In response to a question from Representative DeCesare regarding how many nonunion contractors participate at prevailing wage hearings, Mr. Roberts said that there were few during the time period of the study.


In response to questions from Representative DeCesare, Mr. Roberts explained that jobs are classified as highway, heavy, or building construction. City parks that do not include buildings would likely be classified as heavy construction.


Representative DeCesare commented that it is unfair to say the private sector contractors who participated in the study were not acting with integrity in submitting data.


In response to questions from Senator Clark, Mr. Clark reiterated that sample size is an important issue. Gathering this type of data is very labor intensive. During the time period covered in both Program Review studies, the majority of data for determinations was submitted by union contractors.


Mr. Clark said that in reviewing the literature on prevailing wage, it is important to consider the quality of research, not the quantity. The incentive to pay higher wages to get increased productivity exists with or without prevailing wages.


In response to a question from Representative Rand, Mr. Clark said that the report did not indicate what percentage of school project costs was labor. The Kentucky Department of Education estimated 50 percent at the time of the 2001 study and 38 percent more recently.


Mr. Roberts said that labor represents 21 percent of total costs for projects in Kentucky. He can provide more information on this.


Bryanna Carroll and Wilson Sears appeared before the committee.


Ms. Carroll said that the Kentucky League of Cities (KLC) is aware of the impact prevailing wage laws have on increasing the costs of public construction. A 2006 study from the Kentucky Governor’s Office for Policy Research concluded that prevailing wage laws can cost cities and other local governments 18 to 30 percent more on construction projects than a comparable project completed by entities not subject to prevailing wage laws.


KLC’s board of directors has since had a long-standing policy to advocate for the repeal of the existing prevailing wage laws or a significant amendment of the laws that would raise the threshold and the manner in which prevailing wage rates are calculated. The issue is again one of the top initiatives of KLC’s 2015 legislative agenda. KLC estimates that cities would save approximately $16.9 million annually on public construction costs if the prevailing wage law was repealed based on the findings of the 2001 and 2014 Program Review reports.


Ms. Carroll explained that expenditures continue to rise for 911 emergency services, sanitation services, and infrastructure. Although workers’ wages would likely decrease if prevailing wage were repealed, the savings would be spent in other ways to generate economic activity and tax revenue.


Mr. Sears explained that superintendents have long had issues with prevailing wage. They operate on the assumption that costs will be 17 to 21 percent higher with prevailing wage.


Representative Rand asked Mr. Sears whether superintendents, when getting bids for projects, ask contractors to estimate what non-prevailing wage costs would be. Mr. Sears said that they did not. Representative Rand asked how superintendents could know what the additional project cost would be because of prevailing wage requirements. Mr. Sears said that superintendents base their assumption of higher costs on the information in the report from the governor’s office.


Representative Rand commented that this study reflects a policy question the General Assembly must ultimately decide. He noted that the General Assembly recently gave a tax credit to the bourbon industry, which is thriving. He advocated that repealing the prevailing wage law would mean taking money from working people. The best way to get money into the economy is to put it into the hands of working people.


Mr. Sears said that he agreed with paying workers what they are worth. It is a question of how best to spend taxpayer money.


Senator McDaniel said that Representative Rand was badgering the witness and was out of order.


Representative Rand said that he was just trying to get information. He repeated his view that this is a policy issue for the General Assembly to address.


Representative DeCesare commented that cost comparisons can be done using periods of time when prevailing wage was not required or by looking at states that do require prevailing wage.


Upon motion by Senator Harris and second by Senator Higdon, a roll call vote was requested to approve the report. It was not approved.


Five members of the committee explained their “no” votes. Senator Clark noted that the report did not examine total project costs. Senator Ridley said that the sample sizes of projects were small and submitted wage information was not verifiable. The Commonwealth is better served with prevailing wage. Representative Mills said that wages have been stagnant and reducing workers’ income affects children and families. Representative Simpson said that the small sample size is an issue. He would like data from states repealing prevailing wage. Representative King said the sample data were inconclusive.


The meeting adjourned at 12:01 PM.