SFBG Blogs

There’s been a lot of discussion at City Hall about the pressing need for mandatory local hire legislation, as opposed to San Francisco’s current “good faith” efforts. And it seems that everyone agrees upon is that something needs to be done, as the Board prepares to vote December 7 on Sup. John Avalos’ local hire proposal, which seeks to ensure that 50 percent of workers hired on city-funded construction projects will be local residents.
The move comes at a time of high unemployment in the recession-hit construction industry, but would kick in as San Francisco stands poised to spend $27 billion on public works projects over the next decade.
‘The city needs to leverage its funding position to ensure that our residents benefit from these investments,” Avalos said at a Dec. 1 committee hearing on his legislation, which would require 25 percent of hours on city-funded construction projects, to be worked by local residents in the first year. This rate would rise 5 percent each year to 50 percent.
It would also require 50 percent of apprentice hours to be worked by local residents in the first year (with out-of-state workers exempt from these requirements).

These requirements currently apply to each individual construction trade (carpenters, painters, laborers, operators, brick masons, plasterers) and not to overall project hours.

The city would pay incentive bonuses to contractors that exceed the requirements.
Contractors who failed to meet the requirements would have the option of paying liquidated damages to the city, or sponsoring apprentices during the project.

But a December 1 report from Ted Egan, the city’s chief economist, estimates the legislation would raise the city’s contracting costs by $9.3 million per year, while creating 350 jobs.
 
Egan breaks down the city’s estimated $9.3 million in contracting and administrative costs into three distinct piles: $2 million in higher bid costs from hiring the unemployed, $4.5 million in higher bid costs from hiring the already unemployed, and $2.8 million in higher costs associated with penalties.

‘This cost represents approximately 1 percent of the city’s $934 million estimated annual spending on covered projects,” Egan noted, adding that the cost to the city will be lower in early years, because unemployment is high now and labor is widely available.

“This is a conservative estimate,” Egan added, “as it assumes no contractor exceeds the target and receives incentive bonuses from the city, and also excludes any contractor productivity losses caused by breaking up core crews.”

Egan acknowledges that most city expenses are associated with inflated contractor bids.
“These will occur because the local supply of skilled trades workers is insufficient to meet the local hiring requirements of the legislation,” he observed. “Contractors will be forced to pay above-the-market wages to workers that already have jobs, and pay the city penalties because resident labor is unavailable in many trades. These costs will be passed on to the city. This excess cost to the city could largely be mitigated by choosing local hiring targets that better reflect local supply.”

“The legislation will increase local employment and associated spending at local businesses, at the cost of higher City contracting costs,” Egan warned. “The legislation creates a net spending and jobs benefit, as written; with recommended mitigations, the positive economic impact can increase, and the cost to the city can decline.”

Egan calculated that estimated costs to the city could be reduced to $2.4 million, if Avalos’ proposed legislation is amended in the following ways:

1.    Replace across-the-board 50 percent mandatory requirements with trade-specific mandates to reflect “supply and demand in each trade.”
Egan argues that across-the-board requirement would lead to higher contracting costs “for several trades where required demand exceeds current supply.”
These impacted occupations include operators, brick masons and plasterers, and represent 50 percent of projected demand for city projects, over the next ten years, Egan said.
“Other occupations, such as carpenters, painters, laborers, and drivers are less impacted and can sustain the scheduled mandate, provided goals are set on an industry-wide and not a project-by-project basis,” Egan stated.

2.    Require a study every two years “to modify requirements and assess progress to a 50 percent mandatory requirement.”
Egan’s report suggests that the city conduct a review for two years, and then set mandatory participation levels for two years for brick masons, block masons, stone masons, cement masons, carpet, floor and tile installers and finishers, concrete finishers and terrazzo workers, construction equipment operators (except paving, surfacing and tamping equipment operators), drywall installers, ceiling tile installers and tapers, electricians, pipe layers, plumbers, pipe fitters and steam fitters, plasterers, stucco masons, roofers and sheet metal workers.
Egan’s proposal is that the city assess the length of time required for each of these trades to develop a pool of qualified resident workers to support a 50 percent local hire mandate, and then, if necessary, propose amendments to the mandatory levels for these trades.

3.    Allow contractors to transfer credit hours
Egan suggests that contractors and sub-contractors could accumulate credit for hiring local residents on non-City funded projects, transfer those accumulated credit hours to other contractors, and apply those credit hours to contracts for covered projects to meet the applicable minimum mandatory hiring requirements, or work off assessed liquidated damages. “Transferred credit hours may only be applied against mandatory hiring requirements for the trade in which they were accumulated,” Egan’s report states.

4.    Eliminate incentive payments
Egan recommends eliminating incentive payments, “since the ability to transfer accumulated credit hours provides a similar, and more efficient, incentive for contractors to exceed targets.”

Egan notes that his analysis assumes that annual public works spending is equal to the 10-year average in the city’s capital plan, which is $3.1 billion.
“60 percent of that will be spent on projects not covered by the legislation, because they are state- or federal-funded,” Egan stated.

He predicts that unemployment in the trades will average 10 percent in the next decade.
“Current unemployment in construction is 20 percent in San Francisco,” Egan said.

Egan argued that allowing contractors that exceed local hire requirements to transfer the additional hours, within a trade, to other contractors “would allow the same local hiring targets to be met on an industry-wide basis, not a project-by-project basis.”

He also recommended eliminating proposed incentive payments.
‘Giving contractors the ability to sell their excess hours creates a private incentive to exceed hiring targets. Contractors which do not meet the local hire requirements will compensate those that do,’ Egan wrote.

But at a Dec. 1 hearing by the Board’s Budget and Finance committee, not everyone agreed with Egan’s findings.

Missing from his “economic costs” equation, some speakers observed, were estimated savings from reduced law enforcement costs and poverty rates, if residents got jobs.
Egan acknowledged that his report does not factor in socio-economic benefits of the plan.
‘It’s a very fair point, but it’s hard to quantify,” Egan told the Guardian.

And while Avalos’ legislation proposes to phase in the local hiring mandate over the course of six years, Egan’s report simply focuses on costs when the city hits 50 percent.

Egan said he could have broken down his report into a phased-in, year by year, basis.
“But it gives the impression of greater certainty,” Egan said, noting that it’s not clear how much the city is going to spend on construction next year. “So, given what we’re planning to spend over the next 10 years, here’s an average estimate,” he explained.

I asked Egan about his report’s claim that there is a 20 percent unemployment rate in the construction industry in San Francisco, given that other city officials, including Mayor Gavin Newsom and Sup. John Avalos, have cited a 40 percent rate.

“The 2009 census figures came out in November and it said that 20 percent of San Francisco residents who are in construction say they are unemployed,” Egan said.

He acknowledged that the 40 percent unemployment rate that Newsom and Avalos cited likely refers to unemployment among folks who work in San Francisco’s construction industry, but live outside the city, where housing prices are cheaper.

Asked if his office was recommending that the local hire percentage start at 20 percent, as some building trades requested during the Budget Committee hearing on Avalos’ proposal Egan indicated this was not the case.
“We don’t see a problem in year one,” Egan explained. “There are a lot of unemployed people in year one that are available, so that target is not hard to meet.

The main problem, to Egan’s mind, was not the mandatory 50 percent local hiring goal, per se, but the requirement that it be achieved by every individual trade.
“That’s why we recommend doing a process every two years to take a look at how good a job individual trades are doing, and then set targets based on the rates of producing a supply of qualified workers,” he said.

“Some won’t take seven years to achieve a 50 percent rate, but others could take much longer,” Egan explained. ‘Otherwise, contractors, will have to raise bids so they can afford to pull qualified workers off other contracts. That would lead to shuffling people around, and the city paying for it, without new people being trained.”

So, that’s where the conversation seems to be headed going into Tuesday’s Board meeting, with the building trades still pushing for amendments, and Avalos, the chief sponsor of the legislation, reportedly trying to win support from Sup. Bevan Dufty, so that he can pass veto-proof legislation before the end of the month. Stay tuned.