BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                                2015 - 2016  Regular 

          SB 3 (Leno) - Minimum wage:  adjustment
          
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          |Version: March 11, 2015         |Policy Vote: L. & I.R. 4 - 1    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: April 20, 2015    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.


          Bill Summary: Under current law, the State's minimum wage will  
          be increased from $9.00 per hour to $10.00 per hour on January  
          1, 2016. This bill would instead set the minimum wage as  
          follows:
                 $11.00 per hour on January 1, 2016.
                 $13.00 per hour on July 1, 2017.
                 Beginning in 2019, increases to minimum wage would be  
               indexed annually to the change in the California Consumer  
               Price Index (CCPI), as specified. 


          Fiscal Impact: 
                 The Department of Industrial Relations (DIR) would incur  
               costs (materials, printing and postage) of about $500,000  
               (General Fund) to issue new Minimum Wage Orders to  
               approximately 800,000 employers statewide each time the  
               minimum wage is adjusted pursuant to this bill.
                
                 State Controller's Office (SCO) data previously supplied  
               to this Committee indicated that state government employs  
               approximately 4,500 minimum wage workers, mostly student  







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               assistants and seasonal employees. Based on this figure, as  
               a direct employer, this bill would lead to an estimated  
               increase in the low tens of millions of dollars (General  
               Fund, and various special funds). Because of the bill's  
               annual inflation adjustment, state payroll costs would  
               continue to rise relative to current law in the out-years  
               and would be driven by future inflation rates. 

                 Additionally, the State pays the minimum wage to private  
               individuals who provide certain services at the local level  
               (heath care, social services, after-school programs, etc.).  
               The related impact of this bill's raising the minimum wage  
               is unknown (and partially dependent on interactions with  
               the federal government), but likely to be in the hundreds  
               of millions of dollars annually (primarily General Fund and  
               federal funds).

                 The bill would result in cost pressures to increase  
               wages for state employees who at present earn slightly more  
               than the current minimum wage to avoid salary compaction. 

                 See the Staff Comments section for a general discussion  
               of the impact of this measure to the economy and revenues.
          
          Background: The California minimum wage was established at $0.16  
          per hour in 1916. The California minimum wage was $0.33 per hour  
          when the federal minimum wage of $0.25 per hour was created in  
          1938. The California minimum wage has been increased 27 times  
          since its inception, and has been $9.00 per hour since mid-2014.  
          As noted above, under current law, the minimum wage will  
          increase to increase to $10.00 per hour on January 1, 2016.  
          Because of increases in the overall cost of living, when the  
          minimum wage is unchanged for several years, its purchasing  
          power declines.

          Proposed Law: This bill would replace the scheduled increase to  
          $10.00 per hour effective January 1 2016, and instead would (1)  
          increase the state's minimum wage to $13.00 per hour by 2017,  
          (2) provide for the automatic adjustment of the minimum wage  
          each year by the percentage change in the CCPI, beginning  
          January 1, 2019. Specifically, this bill would:

                 Increase the minimum wage to $11.00 beginning January 1,  
               2016, and to $13.00 per hour beginning July 1, 2017.








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                 Require the minimum wage adjustment to be made based on  
               the change in the CCPI, as specified. This measure also  
               would require the Industrial Welfare Commission (IWC) to  
               publicize the adjusted wage. 

                 Prohibit the IWC from adjusting the minimum wage, if the  
               change in the CCPI is negative. 

                 Define percentage of inflation as the percentage of  
               inflation specified in the CPI for All Urban Consumers  
               (CPI-U), as published the Department of Industrial  
               Relations (DIR), or its successor. 

                 Define "previous year" as the 12-month period that ends  
               on August 31 of the calendar year prior to the adjustment. 


          Related Legislation: SB 935 (Leno, 2014), would have increased  
          the minimum wage in a similar pattern to this bill. SB 935  
          failed passage in the Assembly Labor and Employment Committee. 

          Staff Comments: Relative to the current-law level of $10.00 per  
          hour scheduled to occur in about 12 months, this measure would  
          raise California's minimum wage by 30 percent by 2017; this  
          amount is in addition to the $2 per hour increase implemented by  
          AB 10 (Alejo, 2013). Assuming an annual inflation rate of 3  
          percent, the indexing provisions of the bill would raise the  
          minimum wage by about 40 cents per year beginning in 2019.

          The fiscal impacts of raising the minimum wage (nationally, in  
          California, and in other states) has become a source of much  
          debate. A myriad of studies from academia, private consultants  
          and the Congressional Budget Office present conflicting findings  
          with respect to the impact on employment levels, income levels,  
          and tax revenue. 

          Unclear though they are, much of the fiscal impacts of this  
          measure would be related to its various effects on the economy,  
          including changes in employment, prices, and profits. For  
          example:

                 Most employees earning less than the proposed minimum  
               wage would earn more. Consequently, they would spend more  








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               on goods and services, thereby generating certain increases  
               in economic activity. 

                 At the same time, however, employers would face higher  
               wage costs, which they would either absorb in the form of  
               lower profits or attempt to offset through a variety of  
               means. For instance, they may attempt to shift the costs of  
               the higher wages to consumers by raising prices of the  
               goods and services they sell. Alternatively, some employers  
               may offset the costs of the increase in wages by  
               automating, hiring fewer workers (or reducing workers'  
               hours), or limiting fringe benefits. Some businesses that  
               are not able to shift the effects of the higher minimum  
               wage may reduce economic activity in California. This would  
               most likely occur in industries that have a large share of  
               expenses for low-wage workers or that are subject to  
               competition from other states and other countries. 


          The measure would have varying impacts on state and local  
          revenues. For instance, a reduction in business activity,  
          employment, and income in California would result in lower  
          income tax revenues. These declines could be offset, however, by  
          increased spending on goods subject to the sales tax. Higher  
          sales taxes would occur if businesses raised prices of taxed  
          goods in response to the increase in the minimum wage, and this  
          increase is not offset by reduced quantities of goods sold.  
          Sales taxes could also increase if those receiving the higher  
          minimum wage spent a relatively high portion of their new  
          earnings on goods subject to the sales tax. The net impact on  
          state and local revenues is unknown. 

          State and local governments provide various public services --  
          primarily in the health and welfare area -- that use low-wage,  
          private sector employees. The increase in the minimum wage would  
          directly raise these costs by an unknown amount, but likely in  
          the hundreds of millions of dollars annually.

          Families with limited income currently qualify for public  
          assistance in California, with benefit levels generally being  
          phased out as a recipient's income rises. By raising the  
          earnings of some public assistance recipients, this measure  
          would result in reduced state costs. These savings, primarily in  
          the Medi-Cal and CalWORKs programs, are unknown. On the other  








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          hand, the measure's impact on business activity would increase  
          public assistance payments to some people who lose their jobs.  
          These costs would partially offset the public assistance savings  
          noted above.

          The higher minimum wage could increase state and local  
          government costs in other ways. For instance, to the extent that  
          the measure results in a slight increase in inflation, the  
          public sector could incur added costs for expenses indexed for  
          inflation, such as building leases and welfare payments.  
          Additionally, a higher minimum wage would make the State incur  
          higher unemployment benefits paid out by the Employment  
          Development Department, as well as increased disability  
          insurance premiums. The amounts are unknown, but likely in the  
          low millions of dollars of annually.