TO: Mayor and City Council
FROM: City Staff
SUBJECT: Status of Consideration of a Living Wage
Ordinance for Santa Monica and Deliberation on Alternatives for Further Process
This report
provides an update on staff and community activity regarding a living wage
ordinance for the City of Santa Monica and recommends that the City Council
consider further process to inform decision making.
During the
late summer of 2000, the City Council received an economic analysis of a living
wage proposal for Santa Monica commissioned from Dr. Robert Pollin of the
Political Economic Research Institute (PERI) at the University of
Massachusetts, Amherst. The proposal
studied had been advanced by Santa Monicans Allied for Responsible Tourism
(SMART.) Peer reviews were received
from Dr. Richard Freeman of Harvard University and Dr. David Neumark of
Michigan State University who were engaged to comment on the PERI report. Council also received a review of the report
commissioned by the Chamber of Commerce by Professor Richard Sander of the UCLA
School of Law.
On September
12, 2000, Dr. Pollin presented his work to Council and extensive public input
was heard. On September 28, at a
meeting continued from September 26, 2000, the City Council adopted objectives
for defining how to proceed. The
objectives included:
§
preserving the viability of local businesses
§
minimizing adverse impacts on residents
§
keeping solutions simple to administer and defend
In the
November election, Proposition KK, qualified by a coalition of hotels and other
interested businesses, was
defeated. This measure would have
enacted a lower wage than that proposed by SMART, but higher than a living wage enacted by the City of Los Angeles,
with applicability similar to the “contractor” models adopted by Los Angeles
and other cities. The measure would
have required a vote of the people to institute any other living wage model.
In subsequent
months, at Council direction, staff has considered various aspects of the
living wage proposal, the input from Council and the community and potential
strategies for improving the status of Santa Monica’s working poor. Specifically, staff has evaluated the
potential of creating a local Earned Income Tax Credit (EITC), made a
preliminary assessment of the viability of tip credits, considered methods for
providing predictability in regard to living wage implementation and increases,
weighed alternatives to the Coastal boundaries proposed, looked at the concept
of operating a hiring hall to support the measure and initiated research into
how to value health care as a component of a living wage measure.
Staff has also
held discussions with proponents and opponents of the living wage measure
proposed by SMART. These groups have
been meeting independently to plan their strategies and there has been little
if any contact between the groups.
Santa Monica
is considering a living wage measure that differs significantly from those
currently in place across the nation.
Those measures regulate the wages paid by firms that have a direct
business relationship with the enacting city (referred to in this report as a
“contractor model”). The proposal made
by living wage proponents in Santa Monica would have the city regulate private
sector wages in a particular geographic area of the City although firms located
in the area have no direct business relationship with the City. It is not clear that it is within the City’s
power to enact a minimum wage and require that other employment benefits be
provided by private sector employers under those circumstances. If the City passes such an ordinance, the
City Attorney cautions that a constitutional challenge is very likely. Substantial General Fund resources would be
devoted to defending the measure and, if the City prevailed, to its
administration and enforcement.
The objectives
of the living wage movement are appealing and Santa Monica residents may be
sympathetic with them. Although
Proposition KK was defeated, it is not altogether clear that this rejection can
be translated into support for the concept of a living wage or for a specific
living wage model. While voters have
rejected the model embodied in KK, it is not clear that the broader community
has engaged on the issue.
In addition to
balancing these uncertainties, the City Council must also consider the
following practical issues, which staff has been researching since the
election.
A local EITC
was proposed as an alternative to the living wage measure proposed by
SMART. Some experts consider this a
more finely targeted way to benefit the working poor than a living wage. The
federal government and a number of states administer such programs for
residents through their income tax to reduce the amount of tax owed by
qualifying low-income filers. An EITC
is an attractive option as it could be structured to benefit both the resident
and the non-resident working poor without burdening the business community
financially. On the other hand, the
EITC has clear drawbacks. Santa Monica
does not have an income tax and the EITC would consequently be difficult to
administer. The financial benefit to
qualified recipients, most of whom would be non-residents, would presumably
come from the City’s General Fund. This could adversely impact programs and
services that City residents have come to rely upon. The City Attorney advises that such a program would be legally
problematic.
Dr. Pollin
recognized that it was the intent of the SMART proponents to benefit low rather
than higher level earners. Consequently
he suggested eliminating from coverage those workers earning 50% or more of
their income from tips. A tip credit
would also reduce a key business concern about the measure. However, the City Attorney cautions that
there may be legal impediments. SMART
lawyers agree that a tip credit is not possible under California minimum wage
laws. Opponents point to this problem
as another indication that the living wage is too blunt an instrument and are
engaged in their own legal research on the topic. Dr. Pollin projected an average 9.6% increase in restaurant costs
under the SMART proposal. In the
absence of a tip credit, this would be a substantial underestimate and the
effects could run counter to Council’s objectives for maintaining the viability
of local businesses and the vitality of commercial areas.
SMART proposes
a living wage of $10.69/hr based on the income required to bring a family of
four above food stamp eligibility.
Council will ultimately determine whether to accept that rationale and
wage level. A phased implementation
would provide firms time to adjust their business plans and financing. Typically, contractor model ordinances have
not been phased in, but the scale of the proposed increase in Santa Monica
nearly doubles the minimum wage. One
option would be to set the initial Santa Monica wage at the current City of Los
Angeles wage level and increase it annually over a period of years to the
proposed wage, adjusting for the passage of time.
Most
contractor-model living wage measures include an escalator to adjust the
required wage over time. Those measures
specify a variety of methodologies for doing so. The fundamental objective of establishing a living wage would be
lost over time without an escalator.
Opponents of the measure consider predictability essential for employers
who must make timely financial and business plans. The City uses the Los Angeles- Riverside-Orange County Consumer
Price Index for Urban Wage Earners and Clerical Workers in the wage provisions
of contracts with its bargaining units and in other contract documents. This measure is a widely employed escalator
and its methodology is defensible. If a
gross receipts threshold is ultimately adopted (see below), it would be
equitable to consider application of the CPI to that as well as to the mandated
wage.
Dr. Pollin’s
analysis recognizes the possibility that employers will substitute higher
skilled workers for lesser skilled workers if they are required to pay higher
wages. This could harm the intended
beneficiaries of a living wage measure. SMART and Dr. Pollin proposed the use
of a mandatory hiring hall to ensure that this does not occur. However, Santa Monica is a small city
embedded within a major metropolitan area.
While the City administers or supports a number of job placement
programs, they were created and are operated to benefit Santa Monica
residents. It is unlikely that employer
needs could be met solely by referring Santa Monica residents and it would be
unreasonably burdensome for the City to operate or support a hiring hall that
serves the entire labor market. The
City Attorney advises that such a provision would also provide opponents with a
basis for legal challenge and could be difficult to defend.
Dr. Pollin
recommended that the threshold for applicability of the minimum wage be $3M in
gross receipts. His reasoning was that
a threshold based upon the number of employees could provide businesses close
to the threshold with an incentive to lay off workers. Gross receipts is a readily accessible
measure as businesses must report this figure to the City for business license
tax purposes. His research indicated
that there is a reasonably close relationship between receipts of $3M and the
employment levels envisioned by the SMART proposal. He also found that there were relatively few firms clustered near
the $3M mark, reducing the likelihood of an individual business moving from
covered to non-covered status from year to year. Opponents argue that gross receipts bear little relationship to
profitability. However, a profitability
standard applicable to all businesses would be difficult to identify and
administer. A hardship exemption is a
feature of the proposed living wage measure.
Presumably hardship will have to be demonstrated through some
measurement of profitability. Staff is
consulting CPAs regarding profitability measures. The City Attorney cautions that hardship exemptions must be very
carefully formulated and administered to avoid legal pitfalls.
There has been
considerable discussion of whether a measure should be applicable to businesses
within the Coastal Zone only, businesses citywide or businesses within some
other boundaries. The City Attorney has
previously advised that zone applicability raises equal protection issues and
will likely be challenged. The original
SMART proposal justified Coastal Zone applicability on the basis that City
investment in that area has disproportionately benefited businesses located
within the zone. Dr. Pollin was
provided with capital expenditures in the Zone since 1984 and operating
expenses for 1998/99, from all City sources, and reported that the City
investment in the Coastal Zone was not disproportionate to investment
Citywide. He argued, however, that
Santa Monica’s slow growth policies, and in particular the provisions of
Proposition S, have suppressed competition and delivered disproportionate
financial benefit to hotels and restaurants in the Coastal zone. Furthermore, he found a greater
concentration of hotels, restaurants and retail stores within the zone than
Citywide. These sectors, he maintains,
are able to withstand the increased costs associated with the living wage
proposal. Although eliminating one
legal challenge, a citywide measure carries with it greater uncertainty
regarding effects. Boundaries other
than the Coastal Zone, particularly Lincoln Boulevard, have been
discussed. No rationale has been put
forward, however, and those boundaries would be vulnerable to challenge as a
result.
Providing
health insurance coverage for affected workers is a key objective of living
wage proponents. They propose a wage
differential where health benefits are not provided by an employer. In California, most cities adopting a
contractor model living wage appear to have used $1.25/hour as the
differential, but the rationale for that figure is not apparent. Berkeley set a higher differential. They took into consideration 1) a recent
William Mercer/California Health Care Foundation survey of business owners
regarding health insurance costs and specific to the San Francisco area and 2)
the rates of Pacific Health Advantage, a government-sponsored cooperative that
allows small businesses to add their employees to a much larger experience
pool. Berkeley used that information to
set a differential that was higher than Pacific Health Advantage’s individual
coverage, but lower than full-family coverage.
Berkeley recognized that while it is consistent with the goals of the
living wage movement to provide dependent coverage, low-wage workers may be single
without dependents or have a spouse covered by an insurance plan. They used employee plus children rates
rather than full family rates as a result.
Health insurance costs are rising and staff is researching source
material for Southern California that may assist in establishing a regionally
appropriate differential. Early
indications are that employee plus children coverage could cost in excess of
$1.50/hour.
As noted
above, it will be challenging to reconcile the objectives set by Council in
September 2000 and further work on the issue with the community may be needed
before proceeding.
Contact with
proponents and opponents of the living wage proposal indicate that there has
been little post-election interchange between the groups. Proponents reportedly remain committed to
the proposal originally presented to Council with some modifications based on
recommendations in the Pollin report.
While willing to talk informally with opponents, they are not supportive
of a community task force model to establish approaches or parameters. Opponents recall that the task force model
was helpful in bridging differences in regard to the City’s policies and
services relating to homeless persons.
In September,
a Council member suggested a mediated approach. Staff has discussed use of a mediator with opponents and
proponents. There is general
acknowledgement that mediation is most successful where there is clarity about
who the parties are. It would be difficult
in this circumstance to determine who should be at the table. Moreover, a mediated “settlement” between
proponents and opponents would not preclude a lawsuit by another interested
party or taxpayer.
An alternative
could be a focused set of hands-on workshops held over a period of two to three
months, addressing key elements of a living wage measure. Such a process would bring residents,
business owners, employees, city staff and activists together in small groups,
each with a skilled mediator, to address specific topics. This option has all the risks of design by
committee and the results could be legally indefensible or too complex to
administer successfully. The results of
these workshops, however, could inform subsequent Council debate even if they
cannot be implemented in total. There
are other concerns about this approach.
To the extent that parties are unwilling to roll up their sleeves and
try to find common ground, it will be a waste of time. Opponents have concerns that further process
will be window dressing, designed to look like real public process. If Council proceeds with this approach, it
will be important to work with all sides to gain their meaningful
participation.
The costs of
staffing a task force, a professional mediator or facilitated workshops would
be borne by the City. Costs could range
from $5,000 to $15,000, depending on the course taken. Sufficient funds are available at
01274.544390 in the Non-departmental budget to support such processes.
It is recommended that the City Council consider the progress to-date in evaluation of a living wage measure for Santa Monica, identify other areas, if any, for staff inquiry and consider the desirability of and alternatives for further public process.
Prepared
by: Susan E. McCarthy, City
Manager