The City of West St. Paul city currently requires payment of area prevailing wage rates to construction workers on projects that receive taxpayer-funded subsidies through the city's Tax Increment Financing (TIF) program. But the City Council is now considering repealing the prevailing requirement after Dominium Development Company indicated that the developer might withdraw its request for authorization needed to build 369 units of senior and workforce housing on the site of a former Kmart at Signal Hills Shopping Center if prevailing wages are required. The project is proposed to be financed using tax-exempt bonds and affordable housing tax credits according to the Pioneer Press. (1)
The first reading of the proposed repeal will take place at the Council’s regular meeting on Monday, March 23 -- a meeting where the opportunity for public participation will be restricted due to COVID-19 mitigation measures.
What the public needs to know about prevailing wage and the Dominium project
A decision by West St. Paul’s City Council to repeal existing wage protections could harm area workers and businesses, while escalating the risk of abuse and fraud on taxpayer-supported projects. The available evidence suggests that such a decision would not necessarily reduce the costs of construction projects that comply with other applicable wage, insurance and tax laws. A review of City documents also indicates that the project is expected to generate a payout to the existing property owner that is substantially higher than is typical for area housing projects, along with a steadily growing net cash flow for Dominium (totaling $15M over 15 years), while the developer will evidently not put equity into the publicly financed and subsidized project.
Peer-reviewed research suggests that prevailing wage requirements shouldn’t increase costs, (2) assuming that contractors comply with applicable wage, insurance, and tax laws. (3)
Repealing the prevailing wage requirement could increase the risk of wage theft, insurance fraud, tax fraud, and worker exploitation on taxpayer-supported projects by eliminating a policy that enforces transparency and proper classification of employees.
Repealing the prevailing wage requirement could also reduce opportunities and incomes available to local workers and businesses, which prevailing wage policies have been shown to provide.
Wage theft and other abuses represent a widespread and growing threat to immigrant construction workers in multi-family housing and other segments of the industry. (4)
Repealing the City’s prevailing wage requirement could mean that the Dominium project would be allowed to pay substandard rates for construction workers while the property owner would receive nearly double the per-unit price of area housing developments (~$17,250 vs. $8,000 to $12,000 per unit) according to the city’s consultant.
The proposed project would evidently generate $8.16M in development fees and $7.38M in expected net cash flow over the first 15 years -- amounts that seems excessive since Dominium is apparently not contributing equity to the deal. (5)
The project could become more profitable after Year 15 if net cash flows continue to grow from $1.56M in Year 14, and $1.66M Year 15,13 especially if Dominium is allowed to charge market rents when tax credit affordability requirements expire.
Management of affordable housing by Dominium’s operating arm has been criticized by advocates and residents who alleged “safety issues, unfair treatment from management and poor living conditions” and a “cavalier” use of evictions at Huntington Place in Brooklyn Park.
One construction worker described working on Dominium’s Legends of Spring Lake Park project for a subcontractor whose practices he compared to “a chain of theft that goes down, down, down and those people at the very bottom - those of us in the Latino community” at a recent housing forum in Minneapolis. When he finally quit his job, Mr. Hernandez said that his boss tried to pay him in cocaine.
New affordable housing is needed in communities across Minnesota. But we must ensure that workers and tenants are protected on taxpayer-financed projects. Prevailing wage standards are a critical mechanism to maintain family-supporting wages, preserve a level playing field for local workers and contractors and ensure wage transparency to prevent exploitation. The Council should reject calls to lower construction labor standards in West St. Paul.
(1) Nick Ferraro, “Developer has housing plan for former Kmart site in West Saint Paul”, Pioneer Press, September 3, 2019. https://www.twincities.com/2019/08/27/developer-has-housing-plan-for-former-kmart-site-in-west-st-paul/
(2) Prevailing wage requirements do not increase construction costs according to a large majority of peer-reviewed studies that have examined the question, including a recent large-scale analysis of more than 600 school construction bids in the Twin Cities metro area. Prevailing wage requirements do, on the other hand, deliver significant public benefits including boosting local incomes and access to health care, reducing reliance on food stamps, expanding opportunities for local contractors and workers, and increasing participation in registered apprenticeship programs. See Manzo, Frank and Kevin Duncan. “An Examination of Minnesota’s Prevailing Wage Law Effects on Costs, Training, and Economic Development.” Midwest Economic Policy Institute. May 2018.
(3) There is one important caveat to findings that prevailing wage requirements do not increase construction costs. While contractors on public projects not covered by prevailing wage requirements may not always pay area standard wages and benefits, they are generally believed to follow applicable laws covering payment of wage, insurance coverage, and tax obligations. The same is not necessarily true in private housing construction, where we find growing evidence of wage theft, insurance fraud, and tax fraud on projects that are not covered by prevailing wage requirements, which make it more difficult for employers to cheat workers or conceal payrolls. For example, report recently issued by the Worker Social Responsibility Network found that 48% of immigrant construction workers surveyed reported having experienced wage theft, while roughly half said they lacked proper safety equipment or training, and 42% reported suffering discrimination. See “Building Dignity and Respect: The Case for Worker-driven Social Responsibility in the Twin Cities Construction Industry." November 2019.
(4) A recent report from the Worker Social Responsibility Network found that 48% of Twin Cities area immigrant construction workers surveyed reported experiencing wage theft, roughly half said they lacked proper safety equipment or training, and 42% reported discrimination.“Building Dignity and Respect: The Case for Worker-driven Social Responsibility in the Twin Cities Construction Industry." November 2019.
(5) The financing proposal appears to rely exclusively on public subsidies (housing tax credits and tax increment financing) and public financing (tax-exempt development bonds) according to the list of funding sources provided in the Ehlers memo referenced in Footnote 7. No investment equity is listed, and Dominium’s contribution is limited to the company’s so-called “deferred developer fee” which is evidently nothing more than payments Dominium will receive over the project’s first decade from net cash flows.