f:\atty\muni\strpts\mjm\livingwage

City Council Meeting 5-22-01 Santa Monica, California

TO: Mayor and City Council

FROM: City Staff

SUBJECT: Ordinance Adding Chapter 4.65 to the Santa Monica Municipal Code Creating Minimum Wage Requirements Applicable to Certain Businesses Located in the Coastal Zone and Extended Downtown Core and to City Service Contractors

Introduction

On March 27, 2001, the City Council directed preparation of an ordinance establishing minimum wage and benefit requirements applicable to certain employers in the Coastal Zone and extended Downtown Core and to City service contractors. The attached ordinance responds to that directive. Additionally, the Council directed staff to continue to receive comments from the public about the living wage proposal. A report on the public input received since March 27^th is also included.

Background

Over the last two years, the advocates have debated, the City has studied, and the City Council has considered various proposals for establishing Aliving wage@ requirements applicable to private employers in Santa Monica. A voluminous record, including City Council minutes, staff reports, public hearing tapes, consultants= studies, and numerous written submissions made by attorneys and members of the public to the Council and City staff, documents the community=s enormous effort to forge municipal policy on this issue.

On March 27^th , the Council received a report from the City Manager which summarized the present status of staff=s work on the issue. A copy of that report appears as Attachment AA@. After considering the report, Council opted to significantly advance the process of formulating policy by directing staff to begin drafting an ordinance while continuing to receive public input. In particular, the Council requested an ordinance which would set forth the basic components of a living wage law including:

1) A requirement that covered employers pay a minimum wage in an amount to be specified in the range of $8.00 - $10.69 per hour with health care benefits in an amount to be specified within the range of $1.50 - $2.50 per hour;

2) Applicability provisions specifying that the law would apply to businesses in the Coastal Zone and extended Downtown Core with gross receipts exceeding $3 million annually and to City service contractors;

3) A provision establishing employees= rights, including the right to complain of violations;

4) A provision specifying that the requirements of the law could be superceded by collective bargaining agreements; and

5) A hardship exemption which would cover, among other things, employers whose workforce consists primarily of youth or seasonal workers.

Overall, the Council made clear that the proposed ordinance should advance the formulation of policy by providing a concrete framework for further discussion; it should not be viewed as a final formulation of policy.

Additionally, Council directed staff to continue receiving input from the public while the ordinance was being prepared.

Discussion

The attached proposed ordinance fulfills the Council=s directive in very simple form. In the short run, this simplicity should serve to facilitate the Council=s work by focusing the deliberation on basic policy, rather than minutiae. In the long run, adopting a simple ordinance, which leaves as much as possible to administrative interpretation, may be more likely to withstand a legal challenge to the measure=s facial validity. Once a court has upheld the ordinance, it can always be expanded. Moreover, the Council asked for a draft ordinance which would be only a starting point in discussing content for the living wage law. This proposal is intended to be just that.

The proposed ordinance does not specify a particular minimum wage. Rather, consistent with the Council=s discussion on March 27^th, it requires payment of a minimum wage in the range of $8.00 - $10.69 per hour plus health care benefits in the range of $1.50 - $2.50; or, in the alternative, a minimum wage without benefits in the range of $9.50 - $13.19. The Council will need to deliberate on and select specific figures.

The proposed ordinance incorporates the basic applicability standards discussed on March 27^th. It applies to businesses in the Coastal Zone or extended Downtown Core, as defined by state law and the Land Use Element. The economic threshold of gross receipts in excess of $3,000,000 annually is also incorporated. In addition, as presented, the proposed ordinance specifies that the business=s receipts must exceed $3,000,000 for the two preceding years. This suggestion is included to promote fairness by ensuring that temporary fluctuations in receipts do not impact an employer=s obligations or employees= wages. The proposal also clarifies that the gross receipts figure applies to receipts at the particular site and that the minimum wage requirement applies to workers at that site. These suggestions would effectuate the Council=s goal of impacting only those businesses in this particular region and would minimize ambiguity.

Additionally, pursuant to the Council=s direction, the proposed ordinance contains a hardship provision. It sets forth certain considerations for determining hardship, including whether the employer relies on youth or seasonal employees. The ordinance also contains a supersession clause, a remedies section, and a provision establishing an administrative remedy for employees.

As to public input received since March 27^th, there has been a considerable amount. A number of people commented generally on the measure via the City website and their communications are appear as Attachment B. SMART representatives provided various writings, including a rationale for the $10.69 wage level and suggestions regarding exemption and grievance procedures which appear as Attachment C. Attorneys for Pacific Park have suggested specific exemption language based on federal law which would apparently cover their client. Their proposal appears as Attachment D. In response to information regarding a possible exemption threshold provided by a Councilmember at a meeting of the Montana Merchant=s Association, Tom Larmore submitted comment on its impact on the restaurant sector which is included as Attachment E. Dr. Robert Pollin=s communication regarding his recent contact with SMART representative appears as Attachment F. Finally, attorneys and other representatives have communicated other arguments and proposals, and they are included as Attachment G.

While Council did not request additional research in March, Dr. Pollin has indicated his willingness to recalculate impacts in the restaurant sector given that the tip credit that may have been assumed appears to be legally barred. He can recalculate impacts in all sectors based on the higher medical insurance figure that SMART now proposes. He would also be happy to elaborate on the information that he recently provided to SMART regarding exemptions. If this information would be helpful, it could be ready in a matter of weeks.

In addition, Council is considering applicability within a zone that exceeds the boundaries originally evaluated by Dr. Pollin. This will increase the number of businesses covered by the ordinance. It may also change the mix of covered businesses and, potentially, the anticipated effects. Finally, there has been some discussion of selecting a threshold higher than $3,000,000, and this too would change the study parameters. Should Council determine that additional analysis is desirable, staff will determine if this too could be completed by Dr. Pollin within the month.

Financial/Budget Impact

First year costs to the City of enforcing a living wage ordinance are estimated at $350,000. This includes the time of two and one-half full-time employees plus hearing officer services that should be sufficient to cover the anticipated initial volume of exemption requests. It is possible that hearing officer costs would decrease in the years following implementation. The ongoing volume of grievances is difficult to anticipate.

As service contracts are renewed, it is likely that the City will bear a portion of the higher labor costs experienced by contractors. Little guidance exists on the experience of other municipalities that have adopted contractor model ordinances. Assuming the City bears the full cost increase at a $10.69 wage figure, and a $2.50 health insurance escalator, staff=s working estimate of increased costs to the City when all contracts have been renewed under the provisions of the ordinance is $450,000 annually. Contract costs will be tracked as they are renewed and staff will report results to the City Council periodically.

In regard to City employees, it is difficult to anticipate how the living wage ordinance will affect costs. The City has relatively few job classifications that pay below $10.69 per hour. However, the City has a number of part-time and seasonal employees who do not qualify for health insurance as their work schedules do not exceed half-time. Implementing the $2.50 health insurance escalator for those employees will constitute a substantially greater cost than raising the wage floor. In addition, the supersession provisions of the proposed ordinance leave details of implementation almost entirely subject to collective bargaining. It may prove challenging to minimize the Aripple@ effect of paying an escalator to employees who do not qualify for health insurance based on hours worked, as well as increasing the wage floor of $10.69. A working estimate of the maximum increased costs exceeds $1,500,000.

A total of $500,000 has been included in the proposed City budget for living wage implementation and impacts. Enactment of a living wage ordinance with the parameters proposed by SMART would necessitate a reordering of ongoing expenditures to accommodate the increased costs as they become known with greater certainty.

In regard to City revenues, Dr. Pollin argued that the living wage would have little impact on the City=s ability to weather a recession. The national and state economic picture has changed substantially since Mr. Pollin=s report was submitted and it is likely that his premise will be tested.

Recommendation

Staff recommends that the Council consider the attached proposed ordinance and either direct revisions or introduce it for first reading.

PREPARED BY: Susan E. McCarthy, City Manager
Marsha Jones Moutrie, City Attorney

ATTACHMENTS:

A: Proposed Ordinance (Revised 05/18/01)

(Please note that attachments B through G are not available electronically. They are available at the City Clerk’s Office and at the public libraries.)