Mindbending Recent Decision of the Department of Industrial Relations

Mindbending in its circularity, a recent decision of the Department of Industrial Relations (DIR) illustrates an absurdity of SB 975, the 2001 legislation that requires the payment of prevailing wages on most projects that receive some sort of financial assistance from a public agency.

A redevelopment agency agreed to sell land to a developer of a large mixed use shopping center/residential project for $1, and pay for city fees and infrastructure required for the project. As originally structured, the developer would be required to pay prevailing wages for the construction of the project, which are roughly equivalent to union-scale wage levels. When it became apparent to the developer that a prevailing wage requirement would make the project infeasible, the agreement was restructured to require the developer to repay the agency for all of the agency assistance. The note for the developer’s reimbursement carried interest at prime plus 1½%. That is a market rate loan, said the DIR, which is not a subsidy under SB 975 and does not trigger the prevailing wage requirement. So far, so good.

But here’s the irony. The revised agreement contained an escape clause that allowed the loan to be forgiven (and another $8 million to be granted to the developer) if the DIR later found that the agreement triggered a prevailing wage requirement. According to the DIR, that escape clause makes this “money loaned …that is to be repaid on a contingent basis,” which is one of conditions under SB 975 that requires prevailing wages to be paid. So while the basic terms of the loan agreement itself do not trigger prevailing wages, the prevailing wage escape clause does! Is your brain spinning yet?

Because of the sparse record of what the legislature was trying to accomplish in SB 975, it’s hard to say whether the DIR is correct in its interpretation of the “repaid on a contingent basis” language of SB 975. But the result is certainly nonsensical. It points out the need to find a more effective way of determining whether prevailing wages are applicable to a project before entering into a multi-million dollar agreement for development.

By Jon Goetz