If we can prevent the government from wasting the labors of the people under the pretense of taking care of them, they must become happy. — Thomas Jefferson

The California Housing Consortium and California Coalition for Affordable Housing recently told Governor Schwarzenegger that affordable housing in California “continues to lag far behind the desperate need.” Fortunately, there is a way to alleviate the problem.

The Legislature should build on last year’s proposal by Sen. Gloria Romero (D-Los Angeles) and scrap prevailing-wage requirements for affordable-housing projects. These requirements drive up housing costs, locking out low-income families from home ownership.

State law requires contractors to pay a local “prevailing wage” to workers on publicly funded construction projects. The state’s formula yields prevailing wages that are almost always the wage rate in union collective-bargaining agreements. A December study by the California Institute for County Government finds prevailing wages are 36 to 55 percent higher than market wages.

Because of SB 975, enacted in 2001, virtually all affordable-housing projects are considered “publicly funded,” thereby subject to prevailing-wage mandates. The umbrella widened on January 1 when a provision of SB 975 expired that had exempted housing projects financed by tax credits and tax-exempt bonds, two of the most popular means of financing affordable-housing projects.

Romero has proposed extending these exemptions to reduce construction costs. But unions claim the cost effects of prevailing wages are minimal. The California Labor Federation says, “The payment of prevailing wages does not increase the cost of construction significantly, if at all.” The facts tell a different story.

Prevailing wages substantially raise construction costs, resulting in fewer affordable homes. A September 2003 working paper by Sarah Dunn, John Quigley, and Larry Rosenthal at U.C. Berkeley’s Program on Housing and Urban Policy (quoted with permission), estimates the additional construction costs attributable to prevailing wages to be nine to 32 percent. This includes costs that rise when prevailing wages are required such as interest rates, origination fees, and insurance coverage. Administrative costs also rise because employers must periodically submit certified payroll reports.

The Berkeley researchers focus on housing projects funded by the California Low-Income Housing Tax Credit Program. As a result of higher construction costs, they estimate that more than 2,600 low-income dwellings will not be built each year under this program. They acknowledge that this is the tip of the iceberg since they did not look at other government financing programs.

Not surprisingly, developers are fleeing the affordable-housing market. Steven Eggert of St. Anton Partners, previously Sacramento’s top builder of affordable apartments, says, “We are no longer pursuing affordable-housing projects because the additional cost of prevailing wages is greater than the financial incentives from affordable housing financing programs.”

This is bad news for low- and moderate-income families. Already only 29 percent of Californians can afford a home at the statewide median price, compared to 57 percent nationally. California has the fourth-lowest rate of home ownership in the country. Housing production lags behind new demand by 250,000 units each year, reports the California Department of Finance.

A January report by the California Budget Project concludes, “California’s affordable housing crisis has reached emergency status.” The situation will get worse now that SB 975 impacts more projects. Developers such as Mr. Eggert are not the biggest victims.

“I’ve got plenty of other work,” he says. Instead, the biggest victims are low- and moderate-income working families struggling to buy a home—the most significant way Americans build up wealth—and who will literally pay the price for fewer units built. This makes the state’s prevailing-wage laws deserving of the California Golden Fleece Award.

SB 975 should be repealed to help the poor put a roof over their heads. If the Legislature won’t act, the governor should help place a referendum on the ballot, allowing millions of low- and moderate-income voters to decide SB 975’s fate.

About PRI
For more than two decades, the Pacific Research Institute for Public Policy (PRI) has championed individual liberty through free markets. PRI is a non-profit, non-partisan organization dedicated to promoting the principles of limited government, individual freedom, and personal responsibility.