The proposed state budget has a public policy issue inserted that will require any private development that uses any form of public financing in excess of $2,000.00 to pay a prevailing wage to all laborers involved with the project.
While this is a laudable goal, the Wisconsin Realtors Association believes that this mandate could increase the cost of development for a particular project anywhere between 10% – 40%. The current form of the mandate has far reaching implications for the life of a development.
As an example, there are two possible scenarios that come to mind that extend well beyond the initial development where the mandate could be detrimental to job creation and new development. After Mr. Developer has developed a new 100-acre business park that required public financing and Mr. Developer has paid the prevailing wage mandate for the development of the land, the prevailing wage mandate is attached to any new development that occurs within this project for the life of the project.
As an example, two years from the completion of the new business park, ABC Manufacturing would like to build a new 50,000 manufacturing facility on a 5 acre parcel of land within the development. Although ABC Manufacturing had nothing to do with the original development ABC will have to pay a prevailing wage to any contractor they select to construct their new facility within this business park.
Another example would include Mr. Real Estate Investor constructing a multi tenant office building in this business park. Mr. Investor will pay a prevailing wage at the time of construction, as well as during the life of the property as tenants move on and the space needs to be re-tenanted. Mr. Investor will have to pay the prevailing wage every time that he has to complete renovations to a space within the property.
There are certainly trades within a development, especially on larger scale and complex developments that warrant paying a higher cost to the contractors to ensure the necessary expertise and quality of the task. There are also areas of construction, such as small-scale tenant improvements, where small businesses compete more on flexibility, speed, and price. The need for a highly skilled laborer and the additional costs that they bring are not necessary for these types of projects. The prevailing wage mandate will drive up the cost of development for developers, investors, and for businesses.
The end result will be that the development does not happen or the cost will be passed on in one or all of the following ways; to the taxpayers in the form of a larger request for public funding, to the tenant in the form of higher rent, or to the business in the form of a higher cost for the facility.
A strong argument can also be made that small businesses associated with the field of construction will be disproportionately affected by this mandate because their distinct competitive advantages include competing on pricing, flexibility, and speed. All things being equal on pricing, if a developer is faced with paying a prevailing wage to a large union shop who has the reputation of better training and skill level and a choice of paying a prevailing wage to a small business owner who does a quality job but doesn’t necessarily have the access to the skilled and trained labor pool, the easy selection would be to employ the large union shop. The small business will also be hampered by the increased burdens of record keeping and confusing classification issues both of which are issues that a human resource department could easily handle, however such departments are rarely in place at small contracting companies.
The use of public financing in the form of TIF districts, new market tax credits, and other public incentives are extremely important tools to spur economic development. Two projects that were recently in the news and related to Wisconsin included the announcement by the State of Michigan offering nearly $150 million in tax credits and incentives to Johnson Controls for a state of the art lithium-ion Battery Plant and the State of Louisiana offering $9 million in public incentives to lure Thomas Industries away from Sheboygan. In a globally competitive market place the State of Wisconsin should be looking at ways to enhance the effectiveness and use of appropriate public financing options to spur economic development as opposed to creating obstacles to the implementation of a successful tool that encourages job creation.
Prevailing wage is certainly warranted for many aspects of larger scales developments, however mandating prevailing wage for all aspects of a development with $2,000 or more in public funding will drive up the costs for developers, businesses, and taxpayers, potentially prevent projects from happening, and also impact the ability for small businesses in construction to land contracts because their competitive advantage on pricing will be taken off of the table.
Jeff Hoffman is the president of IBA-Wisconsin, the Commercial Association of Realtors Wisconsin Government Affairs Committee and is a vice president with Pewaukee-based Judson & Associates, S.C.