BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular SB 3 (Leno) - Minimum wage: adjustment ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: March 11, 2015 |Policy Vote: L. & I.R. 4 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: April 20, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 SB 3 (Leno) Page 1 of ? 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. SB 3 (Leno) Page 2 of ? 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 SB 3 (Leno) Page 3 of ? 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 SB 3 (Leno) Page 4 of ? 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.