BILL ANALYSIS Ó SB 3 Page 1 Date of Hearing: July 8, 2015 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Roger Hernández, Chair SB 3 (Leno) - As Amended March 11, 2015 SENATE VOTE: 23-15 SUBJECT: Minimum wage: adjustment. SUMMARY: Increases the state's minimum wage in two increments over two years then ties the wage increases to inflation annually. Specifically, this bill: 1)Increases the minimum wage to $11 an hour beginning on January 1, 2016. 2)Increases the minimum wage to $13 an hour beginning July 1, 2017. 3)Indexes automatically the minimum wage to inflation annually beginning January 1, 2019. 4)Requires the minimum wage to be calculated annually by multiplying the minimum wage in effect on December 31 of the SB 3 Page 2 previous year by the percentage of inflation that occurred during that year and adding that product to the minimum wage. 5)States that the minimum wage applies to all industries, including public and private employment. EXISTING LAW: 1)Set minimum wage at $7.25 an hour under federal law. (Fair Labor Standards Act of 1938, 29 U.S.C. Chapter 8) 2)States under state law that when state and federal laws differ, one must comply with the more restrictive requirement. In California, the minimum wage is $9.00 an hour. (Labor Code §1182.12) 3)States under state law that on January 1, 2016, the minimum wage in California will increase to $10.00 an hour. (Labor Code §1182.12) FISCAL EFFECT: According to the Senate Appropriations Committee: The Department of Industrial Relations will 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 data previously supplied to the Senate Appropriations Committee indicated that state government employs approximately 4,500 minimum wage workers, mostly student SB 3 Page 3 assistants and seasonal employees. Based on this figure, as a direct employer, this bill leads to an estimated increase in the low tens of millions of dollars (General Fund, and various special funds). Because of this bill's annual inflation adjustment, state payroll costs would continue to rise relative to existing law in the out-years and will 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). This bill will 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. COMMENTS: According to the author, although California took an important and much needed first step in 2013 with the passage of AB 10 (Alejo), it is essential that California increase the speed with which boosts in the minimum wage will occur, and it is equally essential that future annual increases be automatic and tied to the rate of inflation in order to protect low wage employees' purchasing power. The current federal minimum wage is $7.25. According to the Congressional Research Service, the purchasing power of the federal minimum wage has decreased steadily since 1968 when it was equal to about $10.77 in today's dollars. Under existing law, California will reach a minimum wage of $10 in 2016, still below the inflation purchasing power SB 3 Page 4 of the federal minimum wage in 1968. The author contends that SB 3 will reduce the state's level of income inequality while boosting the economy by increasing the minimum wage to $11 per hour in January 2016 and $13 per hour in July 2017. Beginning in January 2019, the statewide minimum wage would be increased annually based on inflation. There are 16 states including District of Columbia that have adopted an automatic indexing system to determining minimum wages. According to National Conference on State Legislatures June 1, 2015 web posting titled "State Minimum Wages: 2015 Minimum Wage by State," of the 16 automatically indexing minimum wage states, 7 states use the Consumer Price Index ("CPI") as is proposed in this bill. Furthermore, the states who do not use the CPI, instead use cost of living or another form of annual indexing. A 2012 data brief by National Employment Law Project (NELP) titled, "The Low-Wage Recovery and Growing Inequality," reports there was a significant loss of jobs during the recession of 2007-2009 in mid-wage jobs, however there has been an increased rate of employment in minimum wages jobs. Most of these jobs are provided by service sector businesses like fast food, retail stores, and home health care services. (NELP). One interpretation is that a higher minimum wage will result in less of a turn-over rate because of increased employee satisfaction and because the cost to hire and re-train an employee will be greater than the cost of keeping an existing employee. ARGUMENTS IN SUPPORT This bill is co-sponsored by the Service Employees International Union - California State Council, the United Food and Commercial Workers Union, and the Western Center on Law and Poverty. They argue that this bill will help lift Californians out of poverty SB 3 Page 5 by increasing the state's minimum wage in two steps and, beginning in 2019, would adjust the minimum wage annually to the rate of inflation. They argue that it is essential that California increase the speed with which boosts in the minimum wage will occur, and it is essential that future increases be indexed in order to protect low-wage employees' purchasing power. The Western Center on Law and Poverty (WCLP) particularly notes this bill's potential to help lift individuals and families out of poverty. It cites research by Greg Duncan and Katherine Magnuson of Stanford University that suggests that children are hindered in school and their earnings as adults shrink due to poverty at a young age. For example, it reports that children are less likely to finish high school, more likely to be poor, less likely to be working as a young adult, and that the longer children are poor during their early years, the worse are the adult outcomes. WCLP contends that this bill reduces poverty now and poverty in the future when young children become adults. Additionally, evidence suggests that an increase in household income has a positive impact of health. A Health Impact Partners (HIP) report on SB 935 (Leno), a minimum wage bill that failed passage in 2014, and its health effects suggests that minimum wages have a direct relationship with employees' poor health relative to employees at three times the poverty level. Such health outcomes include exercise, smoking rates, and mental health. An increase in minimum wages may improve health and well-being by the fulfillment of material needs, living conditions, access to health care, and interpersonal relationships. (HIP). According to predictions by the federal Congressional Budget Office in 2014 regarding the impacts of raising federal minimum wage, the majority of low-wage workers would have higher wages and a greater family income as a result SB 3 Page 6 of such an increase. Overall, according to the CBO predictions cited in the HIP report, net incomes would increase for families with incomes less than six times the poverty threshold. Supporters also argue that raising the minimum wage will benefit the state by reducing state spending on health care through moving individuals' eligibility from Medi-Cal to Covered California. According to a recent study by UC Berkeley economists Sylvia Allegretto and Michael Reich, and Rachel West of the Center for American Progress, state health care spending is projected to be reduced as a result of an increased minimum wage. This study contends that because of increased wages, there will be a lifting of individuals from Medi-Cal coverage to qualify for Affordable Care Act's (ACA) Covered California. Those using Covered California as a vehicle to have health insurance at lower costs, where more than three-quarters of current enrollees (77%) pay less than $150 per month, do so by receiving premium federal subsidies meant to keep health care affordable. They argue that the state may benefit from workers using Medi-Cal, paid by the state and federal government, now being eligible for subsidized private coverage through Covered California. In addition, parents in some households affected by wage increases will remain eligible for Medi-Cal but will shift from a pre-ACA category where state and federal government split the costs to a "newly eligible" category under the ACA that's almost entirely federally-funded. In addition, the California Labor Federation, AFL-CIO is in support of this bill and presents evidence of how many persons will be affected positively by a minimum wage increase and annual indexing as well as why this bill will not cause lost jobs. It cites an Economic Policy Institute from June 30, 2013 entitled, "The demographics of workers who would be affected by a federal minimum wage increase state-by-state." This study states that 92% of workers affected by a minimum wage increase are over 20 years old and that 25% of all children live in a house with at least one minimum wage earning parent. This SB 3 Page 7 amounts to around 2.4 million California children who would benefit from this raise. Lastly, it cites a Center for American Progress study that compared minimum wages with job growth figures and found no correlation between minimum wage increases and job losses. Finally, the California Catholic Conference of Bishops supports this bill, quoting Pope Francis as follows: "For it is through free, creative, participatory and mutually supportive labor that human beings express and enhance the dignity of their lives. A just wage enables them to have adequate access to all other goods which are destined for our common use." ARGUMENTS IN OPPOSITION Opponents, including the California Chamber of Commerce, argue that this bill will overwhelm many businesses that are already struggling with the current minimum wage increase under AB 10 and will result in job loss. Opponents contend that indexing the minimum wage to inflation has always been troubling to the business community because it fails to take into account other economic factors or cumulative costs to which employers may be subjected to including higher taxes under Proposition 30, paid sick leave, and increased costs associated with the implementation of the Affordable Healthcare Act. Additionally, opponents argue that another increase in the minimum wage will negatively impact any economic recovery either by limiting available jobs or creating further job loss, pointing to various articles and studies. Opponents point to an article, "Minimum Wages: A Poor Way to Reduce Poverty" (Joseph Sabia) as well as a January 2015 study from Professor Jonathan Meer from Texas A&M and Jeremey West from MIT that reached similar conclusions: increasing the minimum wage reduces the number of jobs available, most likely harming low-wage workers. SB 3 Page 8 Opponents note the findings in these reports that increasing the minimum wage could potentially harm those living in poverty if low-wage jobs are reduced due to the increase cost on businesses. Opponents also bring attention to a Congressional Budget Office report from February 2014 regarding the impact of a $10.10 federal minimum wage which concluded that while low-wage workers would receive a higher income through the increase, other low wage jobs would probably be eliminated, resulting in the income of most workers who became jobless to fall substantially. Therefore, a result in a net job loss could be caused by a limitation to business operations from raising minimum wage and potential that an employer may no longer be able to employ as many individuals due to limited resources. Further, opponents contend that an increase in the minimum wage would not only increase hourly employees' wages, but also salaried employees' compensation as well. They note that for employees to qualify as "exempt" they must pass the salary-basis test, which is two times the monthly minimum wage. Opponents contend that if this bill passes, in January 2017 the "exempt" salary amount will rise from $34,560 to $49,920 - which is an increased cost to employers of over $15,000 per exempt employee. Opponents argue that such an increase will significantly burden companies that may not pay the minimum wage, yet will suffer a negative impact as a result of this bill. For example, where an employer has employees working at the minimum wage and just above it, it may be liable to raise the pay for each of those employees. Therefore some business interests argue that an increased minimum wage is not only an additional cost but also a burden on doing business. The California Restaurant Association (CRA) also opposes this bill, arguing that the restaurant industry has been struggling for the last several years to cope with one of the worst economies since the great depression. CRA contends that the minimum wage is a starting wage - not a forever wage. Minimum wage increases often have a perverse effect on the restaurant SB 3 Page 9 industry. CRA argues that wage increases typically benefit those who are the best paid individuals - minimum wage earners that are often tipped well above and beyond minimum wage. A minimum wage increase would ultimately hurt those it intends to help - hardworking non-tipped employees who are paid an hourly wage greater than the minimum wage, but are still at the lower end of the pay scale. Tipped employees earn substantially more than the state minimum wage. The added cost pressure from the mandatory annual wage increase for the employees already earning the most takes the finite labor dollars an operator may have and reduces, if not eliminates, their ability to provide non-tipped employees with a wage increase. CRA notes that, to help lessen this negative effect, 43 other states acknowledge tips to offset the unintended detrimental effects of a minimum wage increase. However, California is one of just a few states that lack such a provision. In addition, CRA argues that arbitrarily increased minimum wage rates eliminate jobs for young workers, and cites a 2014 Brookings Institution report that states that California is home to six of the nation's ten worst regions for teen employment. A number of groups, including the California School Funding Coalition and the California School Boards Association, oppose this bill and/or express concerns regarding the impact it will have on public school districts in California. First, they argue that the proposed timeline for implementation will have significant short and long term fiscal impacts on school districts' operating budgets. Second, they note that increasing the minimum wage will impact school districts' entire salary schedules, given that the minimum wage establishes the baseline for the wages of all other employees. Third, they argue that combined with other "new "costs, the "erosion" of the Local Control Funding Formula growth dollars will be accelerated. In addition, they contend that this bill further erodes the principle of local control by mandating wages rather than allowing for collaborative agreements between school employees and school boards. They conclude that, unless schools are provided funding to pay for the significant new costs associated SB 3 Page 10 with this bill, school districts will be forced to either make cuts in other programs or reduce staffing. OPPOSE UNLESS AMENDED A number of organizations that support individuals with intellectual and developmental disabilities in a wide variety of programs throughout the state oppose this bill unless amended. These organizations include, but are not limited to, The Alliance, The Arc & United Cerebral Palsy California Collaboration, the California Disability Services Association, the California Respite Association, and Easter Seals. They argue that direct service workers supporting people with intellectual and developmental disabilities are among the lowest paid workers in the state. However, they note that their agencies are forced to pay these low wages because the state, for the past two decades, has either cut or frozen rates and funding to these programs. Increasing the minimum wage without providing adequate funding will further push these organizations toward insolvency and collapse. They state that while recent budget proposals would have included language to provide payment to such organizations for such costs, the budget that was ultimately signed by the Governor did not contain such language. Instead, they state that the only relevant budget language requires the Department of Developmental Services to report back to the Legislature during the 2016-17 budget process, "long after the dramatic impact of this bill would be felt by our community." Therefore, they request that the bill be amended to fully fund specified budget items, including all direct and indirect costs increases associated with raising the minimum wage, address wage SB 3 Page 11 scale compaction, and cover minimum wage increases that occur at the state or local level. REGISTERED SUPPORT / OPPOSITION: Support 9to5 California, National Association of Working Women ACLU AFSCME Alliance of Californians for Community Empowerment American Academy of Pediatrics, California American Association of University Women, CA CA Child Care Resource and Referral Network CA School Employees Association California Alliance for Retired Americans SB 3 Page 12 California Association of Food Banks California Catholic Conference of Bishops California Communities United Institute California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Employment Lawyers Association California Federation of Teachers California Hunger Action Coalition California Immigrant Policy Center California Labor Federation, AFL-CIO California Nonprofits California Partnership California Rural Legal Assistance Foundation SB 3 Page 13 California School Employees Association California Teachers Association California Teamsters Public Affairs Council California Women's Law Center California Work and Family Coalition Californians United for a Responsible Budget Career Ladders Project Child Care Law Center Children's Defense Fund-California Cities Association of Board of Directors, Santa Clara County Cities of Long Beach, Los Angeles, Mountain View, Santa Ana, Oakland and San Jose City and County of San Francisco City of Sunnyvale SB 3 Page 14 Coalition of California Welfare Rights Organizations, Inc. Consumer Federation of California County of Napa County Welfare Directors Association of California Courage Campaign Engineers and Scientists of CA, IFPTE Local 20, AFL-CIO Equal Rights Advocates Family Economic Security Partnership Friends Committee on Legislation International Longshore and Warehouse Union LIUNA Locals 777 & 792 Long Beach Mayor Robert Garcia Lutheran Office of Public Policy - California SB 3 Page 15 Mayor Eric Garcetti, Los Angeles Mujeres Unidas Y Activas Napa County Board of Supervisors National Association of Social Workers, California Chapter National Council of Jewish Women National Domestic Workers Alliance National Employment Law Project Oakland Mayor Libby Shaaf Older Women's League Sacramento Capitol Organization of SMUD Employees, Organize Sacramento Parent Voices Peace and Freedom Party of California SB 3 Page 16 Professional and Technical Engineers, IFPTE Local 21, AFL-CIO Raising California Together Roots of Change Sacramento Central Labor Council, AFL-CIO San Bernardino Public Employees Association San Diego County Court Employees Association San Diego Hunger Coalition San Francisco Mayor Ed Lee San Francisco Unified School District San Jose Mayor Sam Liccardo San Luis Obispo County Employees Association Santa Ana Mayor Miguel Pulido SEIU-California State Council (co-sponsor) SB 3 Page 17 Some Individuals The Center for Popular Democracy The Women's Foundation of California TradesWomen Inc. Ultra Violet United Domestic Workers of America/AFSCME Local 3930 United Food and Commercial Workers (co-sponsor) UNITE-HERE, AFL-CIO Utility Workers Union of America Ventura County Board of Supervisors Western Center on Law and Poverty (co-sponsor) Western Regional Advocacy Project Young Invincibles SB 3 Page 18 Oppose Unless Amended California Respite Association California Supported Living Network Easter Seals Superior California Harmony Home, Associated New Advances for People with Disabilities Pleasantview Industries ResCoalition Strategies to Empower People The Alliance The Arc California and United Cerebral Palsy CA Collaboration Vocation Plus Services, Inc. SB 3 Page 19 Opposition Agricultural Council of California Air Conditioning Trade Association Alhambra Chamber of Commerce American Pistachio Growers Auburn Chamber of Commerce Automotive Service Councils of California California Agricultural Aircraft Association California Ambulance Association California Association of Bed and Breakfast Inns California Association of Health Services at Home California Association of Nurseries and Garden Centers California Association of School Business Officials (Concerns) SB 3 Page 20 California Association of Winegrape Growers California Attractions and Parks Association California Autobody Association California Automotive Business Association California Business Properties Association California Chamber of Commerce California Citrus Mutual California Cotton Ginners Association California Cotton Growers Association California Dairies, Inc. California Delivery Association California Disability Services Association California Farm Bureau Federation SB 3 Page 21 California Fresh Fruit Association California Golf Course Owners Association California Grocers Association California Hotel and Lodging Association California Landscape Contractors Association California League of Food Processors California Manufacturers and Technology Association California Professional Association of Specialty Contractors California Restaurant Association California Retailers Association California School Boards Association California School Funding Coalition California Taxpayers Association SB 3 Page 22 California Travel Association Camarillo Recycling, Inc CAWA - Representing the Automotive Parts Industry Chamber of Commerce Alliance of Ventura and Santa Barbara Counties Compass Culver City Chamber of Commerce El Dorado Hills Chamber of Commerce and California Welcome Center Family Business Association Fullerton Chamber of Commerce Greater Bakersfield Chamber of Commerce Greater Fresno Area Chamber of Commerce Greater Riverside Chambers of Commerce SB 3 Page 23 Howard Jarvis Taxpayers Association InHome Care Solutions Innovative Healthcare Consultants Irvine Chamber of Commerce Long Beach Area Chamber of Commerce National Federation of Independent Business Nisei Farmers League Numerous Individuals Official Police Garages Association of Los Angeles Orange County Business Council Oxnard Chamber of Commerce Pleasantview Industries, Inc. Plumbing-Heating-Cooling Contractors Association of California SB 3 Page 24 Redondo Beach Chamber of Commerce & Visitors Bureau Roseville Chamber of Commerce Sacramento Metropolitan Chamber of Commerce San Diego Regional Chamber of Commerce Santa Clara Chamber of Commerce & Convention/Visitors Bureau South Bay Association of Chambers of Commerce Southwest California Legislative Council The Greater Corona Valley Chamber of Commerce Torrance Area Chamber of Commerce Valley Industry & Commerce Association Western Agricultural Processors Association Western Carwash Association Western Electrical Contractors Association SB 3 Page 25 Western Growers Association Western United Dairymen Zia's Italian Caffe & Gelato Bar Analysis Prepared by:Diego Vera / Ben Ebbink / L. & E. / (916) 319-2091