Assessing the Costs the Impact of Prevailing Wage Requirements on Affordable Housing Construction in New York City January 2015

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    Fiscal Brief  New York City Independent Budget Office  Summary The question of whether all city-subsidized affordable housing projects should be required to pay prevailing wages to construction workers has roiled housing advocates, developers, unionists, and others for decades. While proponents argue it is a matter of fair pay and better work, opponents counter that it raises costs at the expense of the amount of affordable housing that can be built. Legislation passed in Albany last June, at the urging of the Governor, requires labor and developers to reach an agreement by January 15 on wage levels for housing construction projects with 15 or more units that benefit from the 421-a property tax break. If no agreement is reached the 421-a tax break, which developers say is crucial to the financing of much housing construction in the city and is a key element of Mayor de Blasio’s affordable housing plan, would no longer be available for new projects. City Council Member Elizabeth Crowley has also introduced legislation that would require many projects receiving discretionary funding from the city to pay prevailing wages. Prevailing wages, which are set based on guidelines that examine wages for various construction trades in a geographic area, are already required on a subset of affordable housing projects in the city that draw on certain federal funding streams. From 2010 through 2015, there were 57 new construction projects with 4,702 apartments that were subject to federal prevailing wage requirements. By comparing the construction budgets of these projects with other publicly subsidized affordable housing projects financed during 2010-2015 that were not required to pay prevailing wages (controlling for various project characteristics ranging from building size to the number of affordable units), IBO has estimated the effect of prevailing wages on construction costs of affordable housing projects. Among our findings: ã There was on average an estimated 13 percent increase in total construction costs associated with prevailing wage requirements. ã Requiring prevailing wages translates to an estimated per unit cost increase of nearly $45,000. ã To maintain the de Blasio Administration’s plan for constructing a total of 80,000 new affordable housing units, a requirement to pay prevailing wages would necessitate roughly $2.8 billion in additional financing. The data used by IBO has enabled us to estimate the effect of prevailing wages on construction costs. Proponents argue that prevailing wages lead to safer and better working conditions and more timely completion of projects. Opponents counter that prevailing wages add monitoring, reporting, scheduling and other costs to projects. All of these assertions are outside the scope of our analysis.  January 2016  Assessing the Costs:  The Impact of Prevailing Wage Requirements on  Affordable Housing Construction in New York City  IBO New York City Independent Budget Ofce Ronnie Lowenstein, Director 110 William St., 14th oor New York, NY 10038Tel. (212) 442-0632Fax (212) 442-0350iboenews@ibo.nyc.ny.us www.ibo.nyc.ny.us  NEW YORK CITY INDEPENDENT BUDGET OFFICE 2 Introduction There have been numerous calls to expand prevailing wage requirements to a broader segment of publicly subsidized residential development projects in New York City, an issue that has been debated among housing advocates, developers, and construction trade unions for decades. Proponents of prevailing wages argue that they ensure fair compensation and a path to the middle class for construction workers doing often dangerous work. They claim that because workers on prevailing wage jobs often have more training and experience, productivity and safety is higher than at non-prevailing wage sites. Opponents argue that with limited public resources, the added cost of requiring prevailing wages on affordable housing projects may require larger public subsidies to make projects financially viable and will yield fewer affordable units. They also claim that paying a prevailing wage adds unnecessary red-tape and reporting requirements that then slows down development.This past June the state Legislature included language that would allow the 421-a tax property tax incentive program to continue with modifications, contingent upon labor unions and developers reaching an agreement on wages for construction projects over 15 units—including the possibility of wages pegged to existing state or federal prevailing wage schedules—by January 15, 2016. If an agreement is reached by the deadline, rental projects can receive the 421-a tax benefit if a portion of the apartments are reserved as affordable housing (the minimum share of affordable units to qualify for 421-a depends on the project’s financing and location. In April, Council Member Elizabeth Crowley of Queens along with 16 co-sponsors introduced a bill that would require many construction projects receiving discretionary financing from the city to pay prevailing wages. This bill would apply to residential construction projects with more than 50 units, and would affect much of the affordable housing being built under the Mayor’s Housing New York plan. As the debate on the expansion of prevailing wages continues, IBO sought to understand the impact requiring prevailing wages would have on affordable housing construction costs in New York City.In this brief, the Independent Budget Office examines the labor rules associated with prevailing wage laws and how prevailing wages compare with the median wages across construction trades. We then use a regression analysis to estimate the increase in construction costs associated with requiring prevailing wages, using final budget cost data for new construction affordable housing developments financed from 2010 through 2015. (Years refer to city fiscal years unless otherwise specified.) The impact that prevailing wage laws have on construction costs is one piece of a broader discussion of affordable housing development and worker wages. This analysis is focused solely on construction costs; we have not explored whether prevailing wage projects have better or worse safety or worker treatment records, or are built faster or slower when compared with similar projects that are not required to pay prevailing wages, and we have not explored how correlated the requirement to pay prevailing wages is to the use of union labor. Background Prevailing wages are established by job classification, such as electrician or carpenter, and include both wage and fringe benefit amounts that must be paid or provided to workers. Unlike the city’s living wage laws, prevailing wages are not a uniform wage floor. 1  Each trade is classified with a different wage, fringe, and paid holiday schedule. For some job classifications, there are different prevailing wages specified for new construction versus repair and maintenance work. A lower wage and fringe rate may be permitted for apprentice workers in a recognized apprenticeship program. Prevailing Wages Introduce Additional Labor Rules.  There are two sets of rules governing prevailing wages for construction workers in New York City, the federal Davis-Bacon and Related Acts and the New York State Labor Law Section 220. These laws establish wage and fringe benefit levels and also dictate overtime, holiday, and recordkeeping rules that for many aspects go beyond standard labor laws. Hourly wages are established by trade and the type of work being performed. In addition to wages, an hourly fringe amount is established for each job classification, paid in the form of employee benefits such as health insurance premiums, retirement contributions, life insurance, vacation and other paid leave, and contributions to training funds. Alternatively, the fringe amount may be paid to the employee directly in addition to hourly wage earnings. Beyond establishing minimum wages and fringe benefit levels, prevailing wage laws also regulate worker hours and pay schedules. The federal Davis-Bacon prevailing wage laws require the standard time-and-a-half pay rate for any work over 40 hours in a week. The state prevailing wage laws, varying by job classification, may require overtime at either time-and-a-half or double-time for any work over  3 NEW YORK CITY INDEPENDENT BUDGET OFFICE eight hours in a single day, and weekend or night shift work. Paid holidays are also specified under prevailing wage laws, but these too vary by job classification. For example, under the Davis-Bacon rules, a boilermaker would be required to get Christmas Eve and New Year’s Eve off, but an electrician would not. An electrician, however, would be required to receive Washington’s Birthday and Election Day as paid holidays, which a boilermaker would not. Employees working under prevailing wage rules must be paid weekly and records of their hours, pay rate, and  job classifications must be submitted to the government agency monitoring for compliance with the rules. Prevailing wage laws also encompass extensive antikickback rules, to ensure that workers are not being paid the prevailing wage rate but then coerced into returning some of that income back to their employer. A poster explaining worker rights under prevailing wage laws must be publicly displayed at the job site. The federal and state prevailing wage laws do not include a requirement to hire union labor, and therefore developers on projects that are required to pay prevailing wages are not mandated to hire union workers. Conversely, developers on projects with no prevailing wage requirements may choose to hire union workers. Prevailing Wage Rates Are Higher Than Median Industry Wages Comparing prevailing wages to other government measures of average or median wages in various industries can be problematic because of differences in how job titles and duties are classified. For example, Davis-Bacon breaks out wages and fringe for the electrician job title by new construction work and repair and maintenance work. Additionally, Davis-Bacon allows for a separate, lower pay schedule for apprentice workers. In contrast, the federal Bureau of Labor Statistics reports one median rate for the electrician job title that reflects any type of electrical work, and this median calculation includes union and nonunion wages and apprentice wages. Although there are local Davis-Bacon wages determined for construction projects in New York City, there is no requirement in the prevailing wage laws that workers be city residents—the construction industry in New York City employs workers who reside both within the city and in the How Prevailing Wages Are Determined The process used to set prevailing wage and fringe rates differ between the federal Davis-Bacon act and the state’s Section 220 rules, although for many job titles the results are quite similar. Davis-Bacon : The U.S. Department of Labor Wage and Hours Division conducts a survey of wage and fringe benefit rates paid to workers in a given construction trade every three years. Contractors identified through reports by F. W. Dodge (a construction data analytics firm) are contacted directly with requests to submit wage data, although the survey is open to any interested party working in a given construction trade. Survey participation is voluntary, and prevailing wages are based upon the returned surveys, which may or may not be representative of the industry as a whole. If more than 50 percent of survey respondents report being paid the same wage and fringe benefit rate, then those wage and fringe rates are determined to be the “prevailing” amounts. If the majority threshold is not met, a weighted average of reported wages is calculated. Section 220 : In New York City, the Office of the City Comptroller establishes prevailing wage rates for Section 220 purposes on an annual basis. Prevailing wages are calculated according to the wages and fringe benefits for the trade union governing that job classification, so long as the Comptroller determines that at least 30 percent of workers in that trade belong to the union. If the 30 percent threshold is not met, then the Comptroller sets prevailing wages by averaging the wages and fringe paid to workers in each trade over the previous year. For Davis-Bacon wage determinations in New York City, more than 50 percent of respondents in each trade reported the same wage and fringe rates—indicating that they are working under the same collective bargaining agreement—which then becomes the basis for the prevailing wage rates under the federal statute. For Section 220 purposes, the Comptroller has found at least 30 percent of workers to be unionized in each trade, so union collective bargaining agreements are used to set prevailing wages. In both cases, prevailing wage and fringe rates end up being based upon the collective bargaining agreements for the construction trade union that corresponds to a prevailing wage job classification. Both the federal and the state prevailing wage schedules specify the local chapter of the construction trade union whose collective bargaining agreement formed the basis for the prevailing wage determinations.  NEW YORK CITY INDEPENDENT BUDGET OFFICE 4 greater metro area. In comparing a selection of job titles with a single Davis-Bacon wage rate for the city to the New York metro area median wage for the equivalent title reported by the Bureau of Labor Statistics, IBO found that prevailing wage rates are higher than the industry median but by varying degrees. 2  (This side-by-side comparison does not differentiate between worker training or experience levels.) For example, the prevailing hourly wage for a boilermaker is 22 percent higher than the median for the industry, while the prevailing hourly wage for a carpenter is 71 percent higher than the median. These comparisons suggest that workers under prevailing wage rules are making higher wages than workers performing similar duties in the industry as a whole. Since prevailing wages in New York are based upon union collective bargaining agreements, wage differences between prevailing wages and median industry wages will be influenced by the share of workers in that trade who are unionized—greater differences between prevailing wages and industry median wages may reflect fields that are less unionized than others. Prevailing Wages Already Apply to Some Affordable Housing Projects Projects using selected federal funding sources through the U.S. Department of Housing and Urban Development (HUD) are currently required to pay Davis-Bacon wages for construction work being performed. The use of even $1 of the specific federal funding sources that trigger Davis-Bacon rules results in a requirement that prevailing wages apply to the entire construction project. There are two main HUD funding sources used for the new construction and preservation of affordable housing in New York City that require Davis-Bacon rules if funds assist 12 or more units: the HOME Investment Partnership Program and Section 202 Supportive Housing for the Elderly. Funding for these HUD programs is allocated through the city’s Department of Housing Preservation and Development (HPD). From 2010 through 2015, 71 affordable housing projects totaling 6,415 units were required to pay prevailing wages under the Davis-Bacon and Related Acts. The majority, 57 projects containing 4,702 units, were new construction. During the study period, 2011 saw the most prevailing wage activity with the financing of Davis-Bacon construction work for 1,419 units; 2014 saw the least prevailing wage activity, with the financing of Davis-Bacon construction work for 382 units. Methods of Estimating the Impact of Prevailing Wages on Construction Costs Most of the existing research looks at the impact of prevailing wages on large, publicly funded infrastructure projects such as highway and school construction, which are difficult to then translate to impacts on affordable housing construction. There are only a few previous studies that have attempted to directly relate prevailing wages to the cost of constructing affordable housing. Analysts have used two approaches to estimating the impact of requiring prevailing wages, either a hypothetical model or multiple regression analysis. Estimating the Davis-Bacon Wages Are Higher Than Industry Median Wages: Selected Trades Construction TradeDavis-Bacon Prevailing Hourly WagesMedian Industry Hourly WagesPercent Difference Boilermaker$49.47 $40.61 22%Carpenter50.50 29.48 71%Cement Mason45.88 37.37 23%Roofer40.70 24.41 67%Structural Ironworker48.75 42.62 14% SOURCES: Davis-Bacon Wage Determinations as modified November 13, 2015; U.S. Department of Labor Bureau of Labor Statistics Occupational Employment and Wage Estimates, May 2014NOTE: Area median wages represent the New York-White Plains-Wayne, NY-NJ metropolitan division. New York City Independent Budget Office 02505007501,0001,2501,500 City’s Housing Department Routinely Finances Prevailing Wage Construction Affordable Housing UnitsFiscal YearNew ConstructionPreservation201020112012201320142015 SOURCE: IBO analysis of Department of Housing Preservation and Development data New York City Independent Budget Office
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