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SR-703-003 (8) City Council Meeting: September 26, 2000 Santa Monica, CA To: City Council From: City Staff Subject: Discussion of Status of Research on a Living Wage Ordinance for Santa Monica and Deliberation on the Matter, Including Direction to Prepare an Ordinance and/or to Conduct Further Inquiry Introduction This report discusses the status of research on a Living Wage Ordinance for Santa Monica and recommends that the City Council deliberate on the matter, determining whether to direct staff to prepare an ordinance and/or to conduct further inquiry. Background In September of 1999, the City Council directed staff to obtain an economic analysis of a proposal by Santa Monicans Allied for Responsible Tourism (SMART) that the City adopt a living wage ordinance governing businesses in the private sector. It was clear that such a study would entail considerable original research as the proposed ordinance, unlike others nationwide, would regulate private businesses with no contractual or other direct financial ties to the City. A request for proposal was widely distributed to universities, research institutions and research firms. Dr. Robert Pollin of the Political Economy Research Institute of the University of Massachusetts-Amherst submitted the only proposal to conduct the study. 1 Dr. Pollin, who had previously conducted studies of living wage proposals in Los Angeles and New Orleans, was engaged to conduct the study. th Professor Pollin?s report has been publicly available since Monday, August 28 Reviews of the study by two other economists have been received and disseminated. In the interim, opponents of the SMART proposal organized and sponsored a ballot initiative that would require that contractors to the City of Santa Monica pay a minimum wage of $8.32 ($9.46 if no benefits are provided) and provide certain benefits to their employees. The measure, which would also require that any other living wage proposals be submitted for public vote, qualified and will appear on the November ballot as Proposition ?KK.? The opponents engaged Professor Richard Sander of the UCLA School of Law to evaluate the SMART proposal and suggest alternatives. Professor Sander, who evaluated the City of Los Angeles ?contractor? model living wage ordinance, released his report on the Santa Monica proposal in early September. The Analyses Dr. Pollin?s work, based on surveys conducted for the project as well as existing data sources, concludes that the SMART proposal, with some adjustments, would significantly benefit the intended population and, on average, be affordable to affected businesses. For purposes of his study, Dr. Pollin assumed a living wage figure of $10.75 per hour and also evaluated impacts at $9.50 per hour. He assumed a health insurance contribution of $1.25 per hour or an equivalent pay increase where health 2 insurance is not employer-provided. He assumed that employers would provide 15 days of paid leave annually to each employee. He suggests a threshold based on gross receipts ($3 million) rather than number employed to remove an incentive for businesses to reduce employment. He recommends a partial exemption for tipped workers (those receiving 50% or more of their income in tips.) Dr. Pollin developed profiles of target population workers based on a non-random survey of Santa Monica workers and on existing data sources that describe the Los Angeles labor force. He determined that relatively few workers in the target population reside in Santa Monica, that most are well into their working lives and that most are Hispanic. A typical family, as identified by Pollin?s research, would realize a 13 to 20% increase in disposable income with enactment of a living wage ordinance at $10.75 per hour. Dr. Pollin finds the argument for restricting applicability of a living wage ordinance to the Coastal Zone persuasive given that Santa Monica?s slow growth policies, and in particular Proposition ?S?, which precludes the addition of hotels and sizable restaurants within the zone, significantly limits competition. This makes it possible for hotels to raise prices without the reduction in demand (loss of business) that would be expected in a competitive market. He posits that businesses covered by the ordinance could also realize productivity gains of as much as 20 to 25% stemming from the worker incentives for job retention that exist at higher wage levels. On average, Dr. Pollin estimates that hotels would experience a 10.4% increase in costs, restaurants a 9.6% increase, retail a 3 2.8% increase and other businesses a 1.9% increase with enactment of a living wage ordinance based on his assumptions. Businesses could recover some or all of these costs through some combination of increased prices, higher productivity, work force reduction or relocation. Alternatively, they could reduce profits. The composition of businesses and the dynamics of competition citywide differ from those in the Coastal Zone, and Dr. Pollin concluded that a citywide ordinance would have greater impact on the viability of businesses. Dr. Pollin estimates that administration/enforcement of the Coastal Zone model would not significantly burden the City and that the impacts on City residents should be minimal. The report did not treat the issue of how enactment of a living wage might affect other City policies and priorities. The two peer reviewers reach somewhat different conclusions regarding Professor Pollin?s work. Professor David Neumark, Professor of Economics at Michigan State University, wonders why a smaller city would pass a law that effectively taxes local businesses to benefit workers who are not residents. He raises general concerns about the essential fairness of applying the living wage to some employees and not others on bases (geographical location, city versus private sector and/or gross receipts threshold) other than need. His research on minimum wage and living wage measures suggests that they poorly target the population most in need. He favors a well-targeted income support approach over mandated wage measures. Dr. Neumark believes that Professor Pollin dismisses too lightly employers? survey responses about the measures 4 they would take if a living wage measure is enacted, and therefore understates the potential for employment losses. He also suggests that the report?s conclusion that hotel room sales are not negatively affected by price (and therefore hotels could simply raise prices to cover increased costs of the living wage) is based on faulty methodology. He believes that the report ?severely understates the proportion of income gains that are likely to accrue to teenagers, and conversely overstates the proportion of the gains that would accrue to older workers.? While indicating that he doubts that the living wage proposal would do either a lot of good or a lot of harm here, Dr. Neumark believes the study ?provides an insufficient basis to draw strong conclusions about the likely effects of the living wage proposal? and ?that the authors often overreach and draw conclusions that cannot be supported by the data and methods they use.? Professor Richard Freeman, Professor of Economics at Harvard University, compliments Professor Pollin?s work, finding the results to be quite sensible. He notes that the report uses a variety of data to explore the issues, presents empirical evidence clearly and reaches a measured assessment. He notes that there is a basic tension in a living wage policy as follows, ?The greater the shift in money to the covered workers, the greater the benefit to them but the greater the risk that the policy will self-destruct.? Consequently he indicates that ?a balance must be struck between the extent of the living wage ? its level and coverage ? and the risk that the policy will have unintended adverse consequences on workers and firms.? He indicates that Pollin?s work on the Coastal Zone proposal suggests a defensible balance. In particular he emphasizes ?economic rents.? That is, hotels enjoy limited competition based on Santa Monica?s 5 restrictive coastal development policies, consequently reap extra profits and can therefore transfer benefits to workers without significantly changing their operations. He notes that the argument that restaurants can similarly adjust is less powerful than that for hotels. Professor Freeman suggests that more consideration should have been given to a graduated system of wage increases that would take into consideration in some way the size of covered firms. He believes that even if some substitution of higher skilled workers occurs, the overall conclusion that the living wage will benefit low- income workers does not change. He notes that based on literature assessing the effects of increases in the minimum wage, overall job losses from the Santa Monica Coastal Zone model would likely be modest. The report commissioned by opponents of the SMART proposal and conducted by Richard Sander, Professor of Law at UCLA, was substantially completed before Dr. Pollin?s report became available and reaches significantly different conclusions than Dr. Pollin?s. There has been no peer review of Dr. Sander?s report. Working from standard data sources and with access to information from businesses in the affected sectors, Dr. Sander concluded that the economic impacts on business would be substantially greater than Dr. Pollin predicts, particularly in the areas of ripple effect (upward movement of salaries and application of benefits beyond the mandated population.) He projects a greater loss of jobs than Dr. Pollin estimates. He identifies a likely gradual decrease in property values (due to falling profits) and a consequent decrease in property tax revenue to the City as a result of the living wage measure. He calls for a more careful reading of distinctions within the retail sector, suggesting that retail chain 6 stores on the Promenade may better withstand the impacts of the living wage than department stores, at least one of which may be at risk of closure should the ordinance go into effect. Dr. Sander derives a significantly different profile of the coastal zone worker than does Dr. Pollin, indicating that the median household income of the low- wage workers is not far below the median income for all Los Angeles households. He anticipates a gradual shift in the composition of businesses in the wake of implementation of the living wage proposal. Small and medium sized retailers would increase in numbers while the proportion of restaurants would decline, with smaller and more expensive restaurants more likely to survive. To the extent that the appeal of the current mix stimulates business, such a shift would result in a gradual downward spiral in prosperity of the Coastal Zone. He proposes a local Earned Income Tax Credit as a better targeted means of affecting the incomes of the target population while avoiding harmful employment and business effects Public Comment On September 12, Dr. Pollin presented the results of his study to the City Council. Dr. Neumark and Dr. Sander were also present and commented on the report. The City Council also heard questions and comment from the public. Workers in local businesses spoke of their difficulty meeting the needs of their families on their current wages. Some workers were concerned that they would not have been offered a chance to succeed if their employers had been required to pay a higher wage. Representatives of SMART spoke of their sympathy with the workers and opposition to 7 the ballot measure which would preclude adoption of the SMART proposal by the City Council. Some business owners spoke of what the SMART proposal would mean for their situations. Among the businesses represented were one that employs primarily teenaged and young adult workers in their first jobs, a local lending institution that spoke of the difficulty that businesses would face in obtaining credit if their profit margins were substantially decreased, a theater chain that pointed to recent bankruptcies in their industry and the potential effects on Promenade multiplex cinemas and a restaurateur who warned that only large chains could sustain the cost increases the living wage would enact. The Chamber of Commerce argued that the Council should not rely on the average impacts projected by the economists when each business will face its own unique dynamics and should consider profit thresholds rather than gross receipt thresholds. Supporters of the SMART proposal questioned the independence of Dr. Sander?s work and urged the City Council to implement the Coastal Zone living wage based on Dr. Pollin?s results. The Chamber of Commerce argued that Dr. Pollin?s work was flawed and encouraged Council consideration of an earned income tax credit as an alternative to the living wage. 8 Discussion Potential for Challenge The City Attorney has advised that an ordinance enacting a true local minimum wage (as opposed to a minimum applicable to City contractors) will almost certainly face immediate legal challenge. Challengers will claim that state and federal law preempt local legislation. If the local law applies in only one area of the City, an equal protection challenge is also likely. Other claims may also be made. Consequently, if Council wishes to adopt such a measure, careful consideration should be given to its rationale and scope. In any lawsuit, the findings will receive close scrutiny, and a simpler ordinance will minimize opportunities for legal challenges. Options for Proceeding The City Council is faced with constituencies polarized on the desirability of implementing a non-traditional living wage in Santa Monica and a considerable range of expert opinion on the likely costs and benefits of the measure. None of the consultants can predict with certainty the impacts of a living wage measure in Santa Monica, and none of them will live with those impacts. The City Council has several options for proceeding. One is to request that the peer reviewers of Dr. Pollin?s study, Dr?s Neumark and Freeman, comment on the Sander report to gain additional perspective on the potential range of effects before acting. A second is to forego further consultation, choose between competing constituencies and 9 opposing experts, define the elements of a measure to assist the working poor, direct staff to return with an implementing ordinance and see what impacts in fact transpire. A third option is to clearly define Council objectives in this matter. Those might include improving the economic status of the working poor in this community whether resident or non-resident, preserving the viability of local businesses, maintaining the City?s economic well-being and the vitality of its commercial areas, minimizing adverse effects on residents and keeping solutions simple to administer and defend. This would assist in identification of various means to accomplish the Council?s goals. For example, would a phased implementation or other methods to reduce uncertainty and allow for timely business planning be possible? Are there practical measures of the profitability of a business? Would some combination of wage regulation and public assistance better reach the target population? While expert advice could be sought in the course of such an exploration, the goal would be development of a community-focused solution, sensitive to the particular qualities and issues of Santa Monica residents, businesses and workers. A Traditional Model The City Council has expressed interest in establishing a traditional living wage measure for City contractors and City employees. If the Council wishes to do so at this time, and is not yet prepared to implement a broader private sector measure, staff recommends that the minimum wage be set at the current level of the City of Los Angeles living wage measure. Staff will return with an ordinance and updated cost 10 estimates. If a different (higher) living wage is subsequently enacted for private employers other than City contractors, the Council may wish to apply it to contractors and employees at that time. In regard to contractors, staff estimated that the additional annual cost to the City would be $400,000. (At the time the estimate was made the City of Los Angeles figure was $7.25 per hour with benefits or $8.50 without benefits.) No ripple effect costs were included in this estimate and the City of Los Angeles has applied the cost escalator to the $7.25 figure in the interim. In regard to City employees, most workers affected by a living wage measure would be temporary employees. The estimated annual cost (at the time the estimate was made City of Los Angeles figure was $7.73 per hour with benefits or $8.98 without benefits) was approximately $500,000. No ripple effects were included in this estimate. The City will have a meet and confer obligation in regard to represented employees and the degree to which employee unit interests align with the Council objective will determine final costs. Budget/Financial Impact Any costs for additional expert consultation can be accommodated within the current General Fund budget. If the City Council chooses to implement a Coastal Zone living wage, City staff will prepare estimates of administrative and enforcement costs and present them for Council consideration with the implementing ordinance. If the Council 11 chooses to proceed with a traditional living wage model only at this time, staff will update the estimates of contractor and employee cost impact and present them for Council consideration with the implementing ordinance. Recommendation It is recommended that the City Council deliberate on the issue of implementing a living wage for Santa Monica and provide staff with direction regarding the next steps. Prepared by: Susan E. McCarthy, City Manager 12