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New California Law Threatens State Funding for Local Public Works

on Monday, 4 November 2013 in Dirt Alert: David C. Levy, Editor

Controversial California legislation threatens a charter city’s ability to avoid the state’s prevailing wage law. Senate Bill 7, which Governor Brown signed into law on October 13, 2013, adds section 1782 to the California Labor Code. The law generally provides that a charter city cannot receive or use state funding or financial assistance for a construction project if the city authorizes a contractor to avoid paying prevailing wages on any public works contract.

In 2012, the California Supreme Court, in State Building and Construction Trades Council of California v. City of Vista, found that “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.” The court then held, therefore, that the petitioner union had not presented a statewide concern that justified “the state’s regulation of the wages that charter cities require their contractors to pay to workers hired to construct locally funded public works.” Because of this ruling, section 1782 does not mandate that cities comply with California’s prevailing wage law; rather, it conditions cities’ receipt of state funds on compliance with the law.

Following the decision, the City of Vista’s example was a roadmap with potentially far-reaching consequences. The other 120 charter cities in California could adopt ordinances similar to Vista’s that would allow contractors to avoid paying prevailing wages. California’s 361 general law cities could become charter cities, like Vista had done, and then adopt ordinances exempting contractors from paying prevailing wages.

Now, after the passage of Senate Bill 7, California’s Labor Code incentivizes charter cities to meet or beat the state’s prevailing wage requirements. Indeed, even before Senate Bill 7 became law, the City of San Diego adopted a prevailing wage ordinance in July 2013 to pay union wages. Other charter cities face a similar choice: pay prevailing wages or forgo state construction funding.

Section 1782 is controversial and will probably be subject to legal challenges. Portending as much, the court in City of Vista expressly did not determine whether any statewide concern justified California’s prevailing wage law or whether the law was narrowly tailored to avoid unnecessary interference with local governance. Critics argue that section 1782 does exactly that—interferes with a charter city’s ability to govern its own affairs—and that it drives up construction costs. Some city officials argue that paying prevailing wages could add approximately 30 percent to the cost of any public works project. Advocates of the legislation counter that higher wages bolster local economies and attract better workers, increasing quality and productivity, which saves taxpayers’ money over time.

Exact costs are difficult to determine, as is the outcome of any litigation challenging the constitutionality of the legislation. In the meantime, it is important to know the details of the new law. As stated above, section 1782 disqualifies from state funding any charter city that has a charter provision or ordinance that exempts contractors from complying with California’s prevailing wage law. Notwithstanding this disqualification, a charter city may receive state financial assistance if it adopts a local ordinance with wage requirements equal to or greater than the state’s wage requirements. The legislation also disqualifies from state funding any cities that have awarded public works contracts without requiring the payment of prevailing wages within the current or prior two calendar years.

Notably, the legislation does not apply to all public works contracts. It does not affect contracts awarded by cities prior to January 1, 2014. The legislation also excludes construction contracts of $25,000 or less or alteration, demolition, repair, or maintenance contracts of $15,000 or less.

A charter city includes any agency of a charter city and any entity controlled by a charter city. State funding includes direct funding, state loans and loan guarantees, state tax credits and any other type of state financial support for construction projects. To bolster the defense against claims that the legislation is unconstitutional, state funding does not include “tax revenues that charter cities are entitled to receive without conditions under the California Constitution.”


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