Time to Repeal Prevailing Wage Law
Many, perhaps most, Pennsylvania school districts are facing a financial crunch. With taxpayers already stretched to the limit and Harrisburg contemplating large cuts to K-12 education spending, districts must watch every penny. One way the Legislature can help offset the budget cuts and assist school districts would be to repeal the prevailing wage requirement for school construction and renovation.
Prevailing wages are determined by the state and are usually set at the local union wage for construction occupations, which are usually well above free-market wages. Research has shown these wages can inflate construction costs by anywhere from ten to thirty percent. Eliminating this requirement for school districts can help alleviate the cost and provide much needed breathing room. For example, the Mt. Lebanon School District is planning to build a new high school. The bids for the project came in 16.5 percent over the budget forecast. If the prevailing wage requirement was not in place and the bidding opened up to non-union contractors, there likely would have been a bid near or under the projected budget.
There are thirty one states with prevailing wage laws including Pennsylvania and Ohio. But where Pennsylvania diverges from its neighbor is with school districts. In 1997, Ohio exempted school construction and renovation work from the law. The legislature did so with the understanding that a study would be completed to analyze the effects. The Ohio Legislative Service Commission in 2002 released the study’s findings that school districts saved nearly $500 million with an average savings on construction spending of 10.7 percent. The results were encouraging enough for the Ohio legislature to uphold the exemption.
How much could Pennsylvania’s school districts save if the prevailing wage law was eliminated?
The Pennsylvania Department of Education releases an annual Report on School Buildings in which they survey all school districts across the state on the status of the school facilities and projected future construction needs. The most recent report is from the 2007-08 school year (274 school districts (55%) responded to the survey). One of the main findings of the report is that nearly 85 percent of the buildings were originally constructed before 1980. Only fifteen percent were constructed since 1980. Given the age of these buildings it is likely most districts will embark on major renovations or be looking to construct new facilities in the near future.
Using estimated construction costs can give an idea as to the savings that could be realized by opening up the bidding to competition and market wages. Districts responding to the survey indicated that in the 2007-08 school year they would spend $1.67 billion in a combination of new construction, building additions, and renovations. Using Ohio’s 10.7 percent construction savings from eliminating prevailing wage would have translated into Pennsylvania savings of over $178.98 million in 2007-2008. The Report also estimated that, for the 2010-11 school year, districts were to spend $521.6 million. Again using the 10.7 percent savings rate would amount to $55.8 million in total savings. Keep in mind that this represents a conservative estimate. Some studies have shown savings to be as high as 39 percent. Ultimately, the rate of saving will depend heavily on the location of the school district and the difference between the prevailing wage rates and market wages in the area. Savings will also depend on the strength of the negative impact resulting from union work rules and their ability to create workplace inefficiencies.
Proponents of the prevailing wage law will argue that the upfront savings achieved by opening up the bidding to competition will be offset with lower quality work that will have to be redone thus costing the school district more in the long-run. Again the Ohio Legislative Report looked at this argument and found no conclusive evidence of lower quality work. In fact, 98 percent of the respondents to the survey reported “no change in quality or an improvement in quality.” Even if prevailing wage proponents dismiss the survey as being biased, there is one simple fix to ensuring quality-proper monitoring by building inspectors. Not only does the Commonwealth set standards for building quality, many municipalities have building inspectors that monitor these standards.
As we noted in a previous Policy Brief (Volume 11, Number 29), the percentage of Pennsylvania’s private sector workers belonging to a union has fallen below ten percent. Even though the percentage of private construction union membership has remained steady over the last two decades, at twenty-five percent, this represents a small minority of workers in the construction trades. Thus, the prevailing wage law is benefitting a relative handful of the state’s construction workers. In short, there is a massive transfer of income from taxpayers to union construction workers with no accompanying taxpayer benefit or output increase relative to the situation that would exist in the absence of prevailing wages requirement.
The prevailing wage law is an insult to taxpayers and the 75 percent of construction workers who are not in unions. Why is it so sacrosanct in Harrisburg?