Part I - Minnesota taxpayers pay top dollar for every state building project

Click here to view Part II - Prevailing Wage Law

Soaring gas and food prices and sinking home values, have pretty much everybody these days managing their money differently.

But on a large government scale, the same values are harder to find. In fact, Minnesota's been spending your tax money the same way for decades and critics argue it's costing us more than ever before.

The focus here - Minnesota's prevailing wage.

The prevailing wage is the dollar amount mandated, worker to worker, for labor on the states biggest construction projects - things like roads and buildings funded by billions of your tax dollars.

Minnesota was the last state in the union to jump on the 'prevailing wage bandwagon' in 1973.

It came about after the University of Minnesota hired inexpensive out-of-state labor for a building project on one of its farms.

Prevailing wage laws were written with the goal of preventing local wages from being 'undercut' by contractors who come in with low bids, using out-of-market cheap labor.

But critics argue, what's happened over time, is that prevailing wage laws have actually seriously inflated local-wage standards whenever taxpayers are footing the bill.

Here in the Twin Cities proper, because of the strong union presence, KARE 11 News found that the prevailing wage is pretty consistent with the 'going' market rate.

We've found nobody arguing that the government is spending excessive amounts of money on public works projects in the few counties ringing the tight metro.

But as close as St. Cloud, and throughout greater Minnesota, we've found many examples where the prevailing wage drove labor costs far beyond the market rate.

In Koochiching County, up along the Canadian border, we found the state mandating pay rates for the most basic labor - they call it "common labor" - at $34.43/hour. This is a combination of wages and benefits.

If the employer doesn't have benefits totaling at least $10.61/hour, the state requires that the difference be made up in cash.

The bottom line is, the minimum pay ordered for entry level and unskilled labor in Koochiching county is $34.41/hour, if your tax dollars are being used to pay the bill.

That rate holds true (within a few pennies) all the way to the far arrowhead region along the northern border.

Points west drop as low as $26.70/hour.

In St. Cloud, the W Gohman Construction Company is building a parking ramp and public safety office on the campus of St. Cloud State University. It's a job paid for with your state tax dollars, so prevailing wages must be paid. The total job cost is about $7 million - half of it is labor costs.

Company president Michael Gohman tells us, if he could pay the market rate on this job, instead of the 'prevailing wage' he would save taxpayers between $350,000 & $700,000.

What's more, he took specific labor groups and compared the cost with and without the prevailing wage to show how prevailing wage inflates the cost of a project.

Gohman says those working under the state classification of "common laborers" are normally paid $25/hour in wages and benefits.

But on this taxpayer-funded project, the prevailing wage requires that they be paid $32.99. That's a 32% raise.

Cement Masons who are normally paid $32/hour have wages set by the state under the prevailing wage at $42.30. That's another 32% raise.

Gohman says he generally pays carpenters $30/hour. Under the prevailing wage laws he is required to pay them $32.99/hour. That's a more modest 8% raise.

Unions have told us the higher prevailing wage brings better quality work by more highly skilled workers.

Gohman doesn't believe that. He says he's paying the same people, with or without the prevailing wage. So the work quality is the same.

The only difference is, under the law, they all get big raises if taxpayers are footing the bill.

Gohman says it's nice when his workers make more money but, "This is a real public policy issue."

"The general public needs to decide whether or not we'd like to have employees paid a higher rate, or they'd like to have more work and higher employment in society," Gohman said. "Because the higher you drive the rate the less work we can perform for the same dollar."

In fact, Twin Cities employment lawyer Doug Seaton says the only thing guaranteed to the public under the prevailing wage laws of Minnesota is that, "They pay the highest rate possible for a given piece of work."

Not far from where Micheal Gohman has that big St. Cloud State project going, Midsota Manufacturing makes specialty trailers with hydraulic lifts.

Owner Todd Schultz said he'd never heard of the prevailing wage, until a few years ago when one of his top employees announced he was leaving to take another job.

Schultz says he tried to persuade the man to stay, but learned his employee was leaving for a "prevailing wage" job with a highway construction firm.

Schultz said the man's hourly pay rate was going to triple from $16/hour (he was becoming a skilled welder and was just out of high school) to $44/hour. Schultz said the man told him he was taking a "common labor" position with a construction company in town.

Schultz found the news shocking and it was only outdone by a slow drain of his employees. He says four of the last five guys to leave his firm, did so for prevailing wage jobs.

"While I'm happy for the individual," he said, "I feel like it's wasteful and it's not the real world. In the real market economy, things like that could never happen. If it wasn't for the government intervention, nobody could afford to pay a high school kid $45/hour."

"When it happens once you kinda shrug your shoulders and think 'okay,'" Schultz continued. "And then it happens a second time, a third time, and you think 'well, we're paying the taxes that are running our own best people out of our business."

He says while watching his taxes go up, he's become increasingly frustrated by how that money is being spent.

Minnesota's Building and Trades Union, along with the state of Minnesota itself, see the situation differently.

Dick Anfang, president of the Building and Trades Union, says the law is doing exactly what it's supposed to be doing when it comes to protecting local market economies from cheap, out-of-market labor.

The union's lawyer, Brendan Cummins, takes it one step further saying, "What prevailing wage does is reward quality, it rewards skill. And as the law assumes, higher paid workers are likely to have more skill."

Cummins said there's a link between pay and skill and it's called, "You get what you pay for."

The state, for its part, has been largely supportive. In a report published last year by the Legislative Auditor, there were recommendations made to improve the system. But it fell far short of calling for an overhaul of the system.

The author of that report, John Yunker, went so far as to say, "There is no connection, no relationship, between the prevailing wage requirements and the overall construction costs."

When asked if it weren't logical to understand that if labor is half the cost of construction, and the cost of labor increases substantially, the cost of the job would increase, Yunker said, "No."

"I don't think it is logical," he told us, "because you have to look at productivity and the wage issue."

Doug Seaton, the employment lawyer, called that counter-intuitive.

"And I think it's counter-intuitive for a reason," he said. "It just cannot be true. It is not true."

Another group that took a look at the same issue, the Minnesota Taxpayers Association, came to a very different conclusion than the state legislative auditor.

In a 2005 study, looking at 2002 data, they concluded that taxpayers would have saved between $125 million and $175 million if the state had used a better formula for determining the prevailing wage.

They say the prevailing wage adds between 7.4% and 10% to the total cost of public works projects.

Their study was funded by a coalition of non-union contractors.

Specifically, the MTA argued the key problem with the prevailing wage is the way the state does the math.

Minnesota uses what is called a "modal" system to determine the prevailing wage. The mode is the number that shows up most often in their surveys.

The state comes up with prevailing wage figures -job-to-job - by conducting wage surveys annually.

Ultimately, the state sets pay rates for 48 positions in the building and construction industry for each of Minnesota's 87 counties. That's 4,176 unique rates of pay. They set these rates every year.

They establish another 48 rates in each of 10 regions around the state for highway contractors. That's another 480 unique rates of pay figured there.

Minnesota is among a small handful of states nationally using a simple "mode" system.

Here's how it works. They take the wage that shows up most often, to-the-penny, in their surveys and they set that wage as "prevailing."

It becomes a "floor." Think of it as a super-sized minimum wage.

Mark Haveman, executive director of the Minnesota Taxpayers' Association says the system has "very, very serious flaws."

Haveman says the consequence for taxpayers is, "hundreds of millions, even billions of dollars over time."

In their report, the MTA said that instead of creating their own survey (which even the Minnesota Department of Labor recognizes to have a low level of return) the state should use wage data from the Department of Employment and Economic Development.

The DEED surveys are mandatory and the organization doesn't publish a wage with anything less than a 75% response rate.

MTA also says the state should use some kind of a weighted average of the wages, not the mode system.

The unions have argued that the DEED surveys are flawed because they take into consideration lower-pay construction jobs, like residential construction.

Haveman has said that's not complicated, the state could extract job classes it thought to be non-comparable.

The debate hasn't seemed to matter much because there's no apparent interest from the legislature to change the status quo.

In our next story on the prevailing wage system, we'll show you other ways the system increases the cost of taxpayer-funded construction.

You can watch that story Sunday night on KARE 11 News at 10 p.m., or read and watch it online Sunday night, after the news.

To watch a portion of Thursday night's KARE 11 Extra webchat click here.

By Rick Kupchella, KARE 11 News

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