Attached is a revised Davis-Bacon memo.
Could you please forward any additional comments and agencies positions by
noon Tuesday. Thanks.
Bruce -- can you forward a copy to Don and Jon please.
Thanks all.
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February 19, 1999
MEMORANDUM FOR
FROM:
RE: Davis-Bacon and School Construction
The President's FY2000 budget again includes a significant school construction proposal --
Federal tax credits to pay interest on nearly $25 billion in bonds. Last year, our proposal and the
legislative versions introduced in Congress were silent on Davis-Bacon. Our publicly stated
position has been that Davis-Bacon would not apply.
Organized labor, especially the Building Trades, have urged the Administration to reconsider our
position and the President has agreed to take another look at the issue. The NEC has convened
an inter-agency working group (including DPC, OMB, Treasury, Education, DOL) to examine
the key policy questions. Specifically, the working group has focused on whether adding a
Davis-Bacon requirement to the President's school construction proposal:
I) Is administratively feasible?
II) Is good labor policy?
III) Is good tax policy?
IV) And, how it would affect prospects of enacting the President's school construction
proposal.
Following a discussion of these key policy questions, the memo discusses the pros and cons of
four options:
1) Decide that Davis-Bacon does not apply.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
3) Affirmatively add Davis-Bacon to the proposal now.
4) Change the proposal to include an outlay component and thereby add Davis-Bacon.
A legislative history is attached as an appendix to the memo.
I. Administrative Feasibility
Legitimate concerns had been raised about enmeshing the IRS in the administration of a labor
program. There is consensus within the working group that Davis-Bacon could be applied In
such a way that the IRS would not have to play an enforcement role.
A Davis-Bacon requirement could instead be built into the process whereby states and school
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districts submit school construction plans to the Department of Education for review and
approval. It could work as follows:
The Department of Education would issue guidelines that would include payment of
Davis-Bacon prevailing wages as one of the required plan components.
States and eligible school districts would submit the proposed plans to Education.
Education would review the plans for completeness and compliance with construction plan
guidelines, and approves compliant plans.
States and school districts would issue bonds.
States and school districts would insert the Davis-Bacon prevailing wage clause into their
construction contracts.
The Department of Labor would investigate any complaint filed regarding the wage rate paid
on the contract. Treasury would have no role. rfDOL found a violation, it would require
the contractor to pay back wages; and may also request the school board to withhold payment
until the contractor has paid the back wages. DOL would not reach back to the bond.
(Note: the Federal tax credit interest payments to investors would in no way be conditioned
on compliance with Davis-Bacon).
II. Would it be Good Labor Policy?
Labor policy arguments in favor of adding a Davis-Bacon requirement to our school
construction proposal include:
A basic underlying purpose of the Davis-Bacon Act is to prevent construction workers' wages
from being undercut as a result of aggressive bidding on government construction contracts.
The government's large purchasing power combined with the public sector's emphasis upon
awarding contracts to the lowest bidder can easily create an environment that encourages
contractors to cut costs by paying less than the locally prevailing wage rate.
Even where no Federal money is directly involved to finance construction (e.g., HUD and
FHA loan guarantee programs) it has been recognized that the application of Davis-Bacon
labor standards is appropriate. These HUD and FHA programs recognize that the
construction in question would not take place without the Federal support. The Federal
government has a responsibility to ensure that its use of taxpayers' resources to support large
construction programs does not serve to undercut locally prevailing wages.
The application of the Davis-Bacon Act can help ensure quality construction. While the
payment of locally prevailing wages does not guarantee that the most skilled and qualified
craftsmen will be employed on construction projects, contractors that bid based on paying
less that the prevailing local wage rate may find it difficult to hire and retain qualified
employees which in tum may lead to inferior construction.
The Davis-Bacon Act simply requires that contractors and subcontractors pay their
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employees the wage rates and fringe benefits prevailing in the locality where the construction
work is performed. The Davis-Bacon Act does not impose federal standards inconsistent
with the local labor market.
A counter-argument would be that:
Traditionally, school construction is funded by some combination of State funding and local
bond initiatives. The Davis-Bacon Act has not applied to these locally-financed school
construction projects and the current tax incentive program should not be the catalyst to
change that dynamic.
The Administration has been successful in protecting Davis-Bacon in connection with
Federal outlays. Our position on Davis-Bacon could be weakened if we propose adding itto
our school construction bill and then sign a version without Davis-Bacon .
. III. Would it be Good Tax Policy?
Proponents of adding Davis-Bacon to our school construction proposal have made the following
tax policy arguments:
The tax code includes instances where favorable tax consequences of bond financing have
been conditioned. For example, the interest from state and local bonds is exempt from
Federal taxation, if, among other conditions, the bonds are used for a government purpose.
When marketing these bonds, state and local governments describe how proceeds will be
used and include covenants on the necessary actions that will be taken to preserve the tax
exemption.
The tax code includes "multiple objective" tax benefits. For example, there is a tax credit
for wages paid to a member or an Indian tribe. The credit, however, is not available if the
employee is performing certain gaming activities.
The Treasury Department has raised a range of tax policy arguments against adding a
Davis-Bacon requirement:
Currently there is no reference to the Davis-Bacon Act anywhere in the Internal Revenue
Code. Conditioning 5MBs on compliance with the Act would establish the dangerous
precedent of using a tax code incentive to implement social policies unrelated to the benefit
that is the object ofthe tax incentive.
It would invite attempts to impose compliance with Davis-Bacon on the whole range of
construction projects financed with tax-exempt bonds, low-income housing credits, historic
rehabilitation credits, and other tax code provisions.
If the tax code is used to apply Davis-Bacon, efforts to apply Buy America rules, restrict
abortion, meet energy efficiency targets, and obtain other unrelated objectives would surely
follow. It would not be long before insertion of such extraneous requirements into the
Internal Revenue Code would require enforcement by the IRS, imposing upon it an
impossible administrative task entirely foreign to its tax col~ecting mission and its efforts to
Hex-Dump Conversion
be more taxpayer friendly.
Proponents cite complex requirements associated with other tax incentives as precedent.
Such requirements are in the tax code to identify clearly the kind of activity for which the tax
benefit is intended and the class of taxpayers eligible to claim the benefit.
The tradition of tax-exempt State and local financing has always been regarded jealously as a
prerogative of State and local governments, free from totally unrelated conditions imposed by
the Federal government. Conditioning 5MBs, that differ from tax-exempt bonds essentially
in terms of the depth of the interest subsidy, on compliance with the Act would be considered
by State and local governments as an intrusion on their autonomy.
IV. Impact on Prospects for Enacting School Construction Proposal
Legislative Arguments in Favor of Adding Davis-Bacon:
The moderate Republicans most likely to support the President's school construction
proposal tend to be pro-Davis-Bacon. Adding Davis-Bacon could provide another reason
for these moderates to support the President's proposal.
Enactment of school construction will come down to the endgame. Ifthere is a tax bill,
which is an open question, success will hinge on the President rallying people behind school
construction and insisting that Republicans include it, and not on whether Davis-Bacon is in
or out.
Adding Davis-Bacon would energize the building trades to become strong advocates for the
school construction proposal.
Legislative Arguments Against Adding Davis-Bacon:
Given that the RepUblicans are ready to propose their own method of financing school
construction, however insignificant, it would be dangerous for Democrats to lose their focus
by opening a debate on competing proposals among themselves.
Expanding Davis-Bacon intothis new arena would only strengthen the resolve of the
opposition and provide them with a ready-made excuse to kill the President's bill and to pass
an alternative of lesser magnitude or of no magnitude.
It is possible that if Davis-Bacon were added, some of the groups could be forced to support
an alternative proposal put forth by the Republicans. For instance, NSBA is on record as
opposing a "federal mandate" that overrides state and local prevailing wage laws. As
mentioned above, the School Board constituency is one of the strongest in support of the
President's proposal.
Injecting the expansion of Davis-Bacon into this debate could split the coalition of education
groups, community-based organizations and architects that has been working together over
the last two years to build public support for the President's proposal. This would make it
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more difficult for Democrats who would have to choose between two opposing sides - voting
for the expansion of Davis-Bacon, particularly in a tax bill, and for more federal control over
education decisions than the constituency can support, or voting for the President's current
proposal that can potentially gamer bipartisan support.
While the House voted to protect Davis-Bacon in the FY1998 DC Appropriations bill by a
vote of234-188, further analysis shows that a majority of the members of the Ways and
Means Committee voted against maintaining Davis-Bacon. So although an expansion of
Davis-Bacon may have more success on the House floor, it is unlikely that it would ever be
passed out of committee in the first place. Moreover, the previous Davis-Bacon votes have
focused on its repeal or its application to spending proposals. The accuracy of those vote
counts in predicting the outcome on an expansion of Davis-Bacon to a tax proposal is
questionable. Thus, the whole school construction bill could be stalled without gaining any
ground on Davis-Bacon.
The President has made flexibility and accountability major themes in his State of the Union
education message. In the President's speech to the National School Boards Association on
the day he released his budget, he made it clear that he did not want to micromanage schools
and school districts, but rather he wanted to invest in what works and stop investing in what
does not. Allowing school construction to be used as a vehicle for expanding Davis-Bacon
into the tax arena would raise the issue of increased federal intervention and control not only
in the school construction debate but also in the debate over results and accountability for all
of the President's education agenda.
Options:
1) Decide that Davis-Bacon does not apply.
We would convey to the Hill and to Labor that we are sticking to our existing position that
Davis-Bacon does not apply to our school construction tax credit proposal.
Pros:
Keeps focus on our underlying school construction proposal and keeps our coalition of
education supporters together (e.g. school boards).
Avoids setting tax policy precedent as described above.
Takes pressure off of our allies on the Hill.
Cons:
Misses an opportunity to advance a deeply held goal -- decent wages for construction (and
all) workers.
Rejects a key Labor priority and to this extent could diminish support for the underlying bill
from at least part of this constituency.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
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This option would have us continue our posture of''we're taking another look" until we would it
became critical later in the year when a bill is actually being considered.
Pros:
Keeps our options open and avoids offending a key constituency before we know how this
will play out.
Avoids (at least temporarily) setting tax policy precedent as described above.
Staying in limbo could hamper our ability to push the school construction proposal as
aggressively as we otherwise would.
o
It is unclear how sustainable this is. Hill may soon press us more flatly -- what is your
position?
3) Affirmatively add Davis Bacon to proposal now.
Would advance a deeply held goal-- decent wages for workers.
Would add an enthusiastic supporter -- building trades.
Sets a major tax precedent with potentially serious ramifications.
Jeopardizes the prospects of the underlying proposal-- risks turning battle over school
construction into a fight over Davis-Bacon, dividing the education coalition that is now
strongly behind our proposal, and handing Republicans an excuse to be against our proposal
and to coalesce around the Archer arbitrage ..
4) Change proposal to include an outlay component and thereby add Davis-Bacon.
We would apply Davis-Bacon indirectly by creating an internal component of the program
that results in outlays, thus making Davis-Bacon apply to construction financed by bonds
without an explicit Davis-Bacon provision.
As part of the school modernization legislation, include a legislative amendment to the
Elementary and Secondary Education Act of 1965 as amended (ESEA) which would create
a mandatory, capped grant program. The ESEA contains a labor standards provision (20
U.S.C. 1232b) that applies Davis-Bacon to all construction and minor remodeling projects
assisted under any applicable program under the Act.
Automated Records Management System
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Proposed Mandatory, Capped Grant Program (Outlay).
< Create a new grant program, administered by the Secretary of Education under the ESEA,
that provides resources to states and eligible school districts for administrative expenses
related to the bond. Examples of administrative expenses include developing the
construction plan, monitoring and overseeing the construction project, and annual reporting
to the Secretary on progress and modifications made regarding the construction plan. The
grant provision would be drafted such that the bond program could only be implemented to
the extent the grant program is implemented.
< Award $250,000 to states and $100,000 to each eligible school district annually. The
amount of the grant could also be sized by the school age population within the state or
eligible school district.
< The bond funds would be subject to Davis-Bacon indirectly due to the link with the grant
program. The bonds could not be issued absent the grant. It is unclear whether some
entities would not take advantage of the bond due to Davis-Bacon application. OMB
estimates the cost of this proposal to be $25.5 million.
Pros:
Applies Davis-Bacon while avoiding tax policy precedent.
Provides seed money to encourage states and localities to seek bond authority.
Adds a new and very late layer of complexity at a time when we need to make our proposal
as understandable as possible.
Would likely be transparent to Congressional members and interested organizations that
oppose application of Davis-Bacon to school construction bonds.
Would require joint referral of the bond initiative to the tax and education committees in the
House.
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Appendix -- Legislative History
FY1998
In the FY1998 budget, the President requested $5 billion over 5 years in mandatory spending that
would have leveraged up to $20 billion in bonds over a four year period. The Administration
made it clear that Davis-Bacon would apply to this initiative since it was a federal spending
proposal.
The Administration's bill was introduced by Rep. Nita Lowey in the House and Senator Carol
Moseley-Braun in the Senate. There was no action on the bill in either the authorizing or the
appropriations committees. The Republican leadership actively kept potential Republican
supporters off the bill and repeatedly argued that the federal government had no business getting
involved in building schools at the local level. Several Republicans touted the Davis-Bacon
requirement as proof of "federal intervention in local education decisions."
The education constituency was split on this issue. AFT, NEA, and urban school
superintendents supported the bill, but the National School Boards Association (NSBA), one of
the most vocal constituencies, could not support the President's proposal because ofthe federal
Davis-Bacon requirement. This split weakened the support of other groups, such as the National
PTA and rural and suburban superintendents.
Although school construction was one of the last items left on the table when the Balanced
Budget Agreement was struck in the summer of 1997, the Republican leadership refused to
move off their position that the federal government had no role- in communities' decisions to
build schools. The only provision they accepted was Rep. Rangel's Qualified Zone Academy
Bonds (QZABs) for a total of$800 million of new bonding authority (compared to the potential
$20 billion that would have been leveraged in the President's request). Davis-Bacon was not
applied to the QZABs.
FYl999
The President once again made School Construction a major priority in his FY1999 budget, but
this time the proposal provided a tax credit in lieu of interest and involved no direct federal
spending. The initiative would have provided federal funding to pay the interest on $22 billion
in bonds. The Administration was silent on whether Davis-Bacon applied to this proposal in
OMB's budget submission. In Qs and As, however, Administration officials twice confirmed
that Davis-Bacon had not applied to provisions in the tax code to date and was not expected to
apply in this case.
This allowed NSBA to become active in the Rebuild America's Schools coalition in support of
the revised proposal. School board members became strong advocates at the State and local
level for the proposed federal partnership arguing that the initiative would help leverage local and
State dollars for construction but would leave decisions on where and how to build schools to
local communities. Partly as a result of this more unified constituency support, Democrats were
able to make a strong case for their school construction bill to the voters. This was reflected in
the polling results and the Democrats' winning message on education.
Republicans continued to argue against this popular initiative, and in the process lost support for
,.. !lex-Dump Conversion
their position. The House Ways and Means Committee refused to act on the President's
proposal, although Chainnan Archer included a much smaller arbitrage provision in the
multi-billion dollar House tax bill that was never signed into law. Rep. Rangel succeeded in
forcing two House floor votes on the issue - an amendment to instruct conferees to include
school construction as an amendment to the Coverdell education savings account failed 192-222,
and an amendment to substitute school construction for Coverdell failed 196-225. Eight
Republicans were allowed to break ranks with the leadership on one or both of the votes (Leach,
IA; Morella, MD; Forbes, NY; Gilman, NY; Weller, IL; Johnson, CT; LoBiono, NJ; and
McHugh, NY).
Senator Moseley-Braun offered her school construction bill as a substitute to the Coverdell
savings account on the Senate floor. A motion to table the amendments passed 56-42 with
D' Amato and Specter voting against the motion and 4 Democrats voting in favor (Biden, DE;
Byrd, WV; Liebennan, CT; and Torricelli, NJ).
Although support for school construction was building, in the end there was no significant tax
bill that the Administration supported and could use to force an agreement on school
construction. Republicans rejected Administration efforts to attach school construction to the
tax extenders package.
FY2000
The President's FY2000 budget request for school construction expands the FY1999 tax bond
proposal, this time paying the interest on $24.8 billion in new bonds. Placeholder bills have
been introduced by Senators Daschle, Lautenberg, and Robb and Rep. Rangel is preparing to
introduce one in the House. The Senate bills have remained silent on Davis-Bacon. House
Democrats are working through this issue now and are looking for any signals from us.
Unlike the last two years, the Republican leadership has come out publicly in support of school
construction and is backing their own school construction proposals. Chainnan Archer has
introduced a $1.4 billion arbitrage initiative similar to his proposal on the tax bill last year.
While inadequate and flawed, the Archer proposal allows Republicans to argue that they are
addressing school construction.
The Speaker has mentioned this initiative as a high priority. However, Democratic efforts to get
bipartisan cosponsorship ofthe President's proposal have not been successful. It appears that
the Republican leadership understands they must advance some kind of school construction bill
this year - the question is whether our proposal will prevail.
==================== ATTACHMENT 1 ====================
ATT CREATION TIME/DATE: 0 00:00:00.00
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Hex-Dump Conversion
February 19, 1999
MEMORANDUM FOR
FROM:
RE: Davis-Bacon and School Construction
The President's FY2000 budget again includes a significant school construction proposal --
Federal tax credits to pay interest on nearly $25 billion in bonds. Last year, our proposal and the
legislative versions introduced in Congress were silent on Davis-Bacon. Our publicly stated
position has been that Davis-Bacon would not apply.
Organized labor, especially the Building Trades, have urged the Administration to reconsider our
position and the President has agreed to take another look at the issue. The NEC has convened
an inter-agency working group (including DPC, OMB, Treasury, Education, DOL) to examine
the key policy questions. Specifically, the working group has focused on whether adding a
Davis-Bacon requirement to the President's school construction proposal:
I) Is administratively feasible?
II) Is good labor policy?
III) Is good tax policy?
IV) And, how it would affect prospects of enacting the President's school construction
proposal.
Following a discussion of these key policy questions, the memo discusses the pros and cons of
four options:
1) Decide that Davis-Bacon does not apply.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
3) Affirmatively add Davis-Bacon to the proposal now.
4) Change the proposal to include an outlay component and thereby add Davis-Bacon.
A legislative history is attached as an appendix to the memo.
I. Administrative Feasibility
Legitimate concerns had been raised about enmeshing the IRS in the administration of a labor
program. There is consensus within the working group that Davis-Bacon could be applied In
such a way that the IRS would not have to play an enforcement role.
A Davis-Bacon requirement could instead be built into the process whereby states and school
Hex-Dump Conversion
districts submit school construction plans to the Department of Education for review and
approval. It could work as follows:
The Department of Education would issue guidelines that would include payment of
Davis-Bacon prevailing wages as one of the required plan components.
States and eligible school districts would submit the proposed plans to Education.
Education would review the plans for completeness and compliance with construction plan
guidelines, and approves compliant plans.
States and school districts would issue bonds.
States and school districts would insert the Davis-Bacon prevailing wage clause into their
construction contracts.
The Department of Labor would investigate any complaint filed regarding the wage rate paid
on the contract. Treasury would have no role. rfDOL found a violation, it would require
the contractor to pay back wages; and may also request the school board to withhold payment
until the contractor has paid the back wages. DOL would not reach back to the bond.
(Note: the Federal tax credit interest payments to investors would in no way be conditioned
on compliance with Davis-Bacon).
II. Would it be Good Labor Policy?
Labor policy arguments in favor of adding a Davis-Bacon requirement to our school
construction proposal include:
A basic underlying purpose of the Davis-Bacon Act is to prevent construction workers' wages
from being undercut as a result of aggressive bidding on government construction contracts.
The government's large purchasing power combined with the public sector's emphasis upon
awarding contracts to the lowest bidder can easily create an environment that encourages
contractors to cut costs by paying less than the locally prevailing wage rate.
Even where no Federal money is directly involved to finance construction (e.g., HUD and
FHA loan guarantee programs) it has been recognized that the application of Davis-Bacon
labor standards is appropriate. These HUD and FHA programs recognize that the
construction in question would not take place without the Federal support. The Federal
government has a responsibility to ensure that its use of taxpayers' resources to support large
construction programs does not serve to undercut locally prevailing wages.
The application of the Davis-Bacon Act can help ensure quality construction. While the
payment of locally prevailing wages does not guarantee that the most skilled and qualified
craftsmen will be employed on construction projects, contractors that bid based on paying
less that the prevailing local wage rate may find it difficult to hire and retain qualified
employees which in tum may lead to inferior construction.
The Davis-Bacon Act simply requires that contractors and subcontractors pay their
Hex-Dump Conversion
employees the wage rates and fringe benefits prevailing in the locality where the construction
work is performed. The Davis-Bacon Act does not impose federal standards inconsistent
with the local labor market.
A counter-argument would be that:
Traditionally, school construction is funded by some combination of State funding and local
bond initiatives. The Davis-Bacon Act has not applied to these locally-financed school
construction projects and the current tax incentive program should not be the catalyst to
change that dynamic.
The Administration has been successful in protecting Davis-Bacon in connection with
Federal outlays. Our position on Davis-Bacon could be weakened if we propose adding itto
our school construction bill and then sign a version without Davis-Bacon .
. III. Would it be Good Tax Policy?
Proponents of adding Davis-Bacon to our school construction proposal have made the following
tax policy arguments:
The tax code includes instances where favorable tax consequences of bond financing have
been conditioned. For example, the interest from state and local bonds is exempt from
Federal taxation, if, among other conditions, the bonds are used for a government purpose.
When marketing these bonds, state and local governments describe how proceeds will be
used and include covenants on the necessary actions that will be taken to preserve the tax
exemption.
The tax code includes "multiple objective" tax benefits. For example, there is a tax credit
for wages paid to a member or an Indian tribe. The credit, however, is not available if the
employee is performing certain gaming activities.
The Treasury Department has raised a range of tax policy arguments against adding a
Davis-Bacon requirement:
Currently there is no reference to the Davis-Bacon Act anywhere in the Internal Revenue
Code. Conditioning 5MBs on compliance with the Act would establish the dangerous
precedent of using a tax code incentive to implement social policies unrelated to the benefit
that is the object ofthe tax incentive.
It would invite attempts to impose compliance with Davis-Bacon on the whole range of
construction projects financed with tax-exempt bonds, low-income housing credits, historic
rehabilitation credits, and other tax code provisions.
If the tax code is used to apply Davis-Bacon, efforts to apply Buy America rules, restrict
abortion, meet energy efficiency targets, and obtain other unrelated objectives would surely
follow. It would not be long before insertion of such extraneous requirements into the
Internal Revenue Code would require enforcement by the IRS, imposing upon it an
impossible administrative task entirely foreign to its tax col~ecting mission and its efforts to
Hex-Dump Conversion
be more taxpayer friendly.
Proponents cite complex requirements associated with other tax incentives as precedent.
Such requirements are in the tax code to identify clearly the kind of activity for which the tax
benefit is intended and the class of taxpayers eligible to claim the benefit.
The tradition of tax-exempt State and local financing has always been regarded jealously as a
prerogative of State and local governments, free from totally unrelated conditions imposed by
the Federal government. Conditioning 5MBs, that differ from tax-exempt bonds essentially
in terms of the depth of the interest subsidy, on compliance with the Act would be considered
by State and local governments as an intrusion on their autonomy.
IV. Impact on Prospects for Enacting School Construction Proposal
Legislative Arguments in Favor of Adding Davis-Bacon:
The moderate Republicans most likely to support the President's school construction
proposal tend to be pro-Davis-Bacon. Adding Davis-Bacon could provide another reason
for these moderates to support the President's proposal.
Enactment of school construction will come down to the endgame. Ifthere is a tax bill,
which is an open question, success will hinge on the President rallying people behind school
construction and insisting that Republicans include it, and not on whether Davis-Bacon is in
or out.
Adding Davis-Bacon would energize the building trades to become strong advocates for the
school construction proposal.
Legislative Arguments Against Adding Davis-Bacon:
Given that the RepUblicans are ready to propose their own method of financing school
construction, however insignificant, it would be dangerous for Democrats to lose their focus
by opening a debate on competing proposals among themselves.
Expanding Davis-Bacon intothis new arena would only strengthen the resolve of the
opposition and provide them with a ready-made excuse to kill the President's bill and to pass
an alternative of lesser magnitude or of no magnitude.
It is possible that if Davis-Bacon were added, some of the groups could be forced to support
an alternative proposal put forth by the Republicans. For instance, NSBA is on record as
opposing a "federal mandate" that overrides state and local prevailing wage laws. As
mentioned above, the School Board constituency is one of the strongest in support of the
President's proposal.
Injecting the expansion of Davis-Bacon into this debate could split the coalition of education
groups, community-based organizations and architects that has been working together over
the last two years to build public support for the President's proposal. This would make it
Hex-Dump Conversion
more difficult for Democrats who would have to choose between two opposing sides - voting
for the expansion of Davis-Bacon, particularly in a tax bill, and for more federal control over
education decisions than the constituency can support, or voting for the President's current
proposal that can potentially gamer bipartisan support.
While the House voted to protect Davis-Bacon in the FY1998 DC Appropriations bill by a
vote of234-188, further analysis shows that a majority of the members of the Ways and
Means Committee voted against maintaining Davis-Bacon. So although an expansion of
Davis-Bacon may have more success on the House floor, it is unlikely that it would ever be
passed out of committee in the first place. Moreover, the previous Davis-Bacon votes have
focused on its repeal or its application to spending proposals. The accuracy of those vote
counts in predicting the outcome on an expansion of Davis-Bacon to a tax proposal is
questionable. Thus, the whole school construction bill could be stalled without gaining any
ground on Davis-Bacon.
The President has made flexibility and accountability major themes in his State of the Union
education message. In the President's speech to the National School Boards Association on
the day he released his budget, he made it clear that he did not want to micromanage schools
and school districts, but rather he wanted to invest in what works and stop investing in what
does not. Allowing school construction to be used as a vehicle for expanding Davis-Bacon
into the tax arena would raise the issue of increased federal intervention and control not only
in the school construction debate but also in the debate over results and accountability for all
of the President's education agenda.
Options:
1) Decide that Davis-Bacon does not apply.
We would convey to the Hill and to Labor that we are sticking to our existing position that
Davis-Bacon does not apply to our school construction tax credit proposal.
Pros:
Keeps focus on our underlying school construction proposal and keeps our coalition of
education supporters together (e.g. school boards).
Avoids setting tax policy precedent as described above.
Takes pressure off of our allies on the Hill.
Cons:
Misses an opportunity to advance a deeply held goal -- decent wages for construction (and
all) workers.
Rejects a key Labor priority and to this extent could diminish support for the underlying bill
from at least part of this constituency.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
Hex-Dump Conversion
This option would have us continue our posture of''we're taking another look" until we would it
became critical later in the year when a bill is actually being considered.
Pros:
Keeps our options open and avoids offending a key constituency before we know how this
will play out.
Avoids (at least temporarily) setting tax policy precedent as described above.
Staying in limbo could hamper our ability to push the school construction proposal as
aggressively as we otherwise would.
o
It is unclear how sustainable this is. Hill may soon press us more flatly -- what is your
position?
3) Affirmatively add Davis Bacon to proposal now.
Would advance a deeply held goal-- decent wages for workers.
Would add an enthusiastic supporter -- building trades.
Sets a major tax precedent with potentially serious ramifications.
Jeopardizes the prospects of the underlying proposal-- risks turning battle over school
construction into a fight over Davis-Bacon, dividing the education coalition that is now
strongly behind our proposal, and handing Republicans an excuse to be against our proposal
and to coalesce around the Archer arbitrage ..
4) Change proposal to include an outlay component and thereby add Davis-Bacon.
We would apply Davis-Bacon indirectly by creating an internal component of the program
that results in outlays, thus making Davis-Bacon apply to construction financed by bonds
without an explicit Davis-Bacon provision.
As part of the school modernization legislation, include a legislative amendment to the
Elementary and Secondary Education Act of 1965 as amended (ESEA) which would create
a mandatory, capped grant program. The ESEA contains a labor standards provision (20
U.S.C. 1232b) that applies Davis-Bacon to all construction and minor remodeling projects
assisted under any applicable program under the Act.
Automated Records Management System
Hex-Dump Conversion
Proposed Mandatory, Capped Grant Program (Outlay).
< Create a new grant program, administered by the Secretary of Education under the ESEA,
that provides resources to states and eligible school districts for administrative expenses
related to the bond. Examples of administrative expenses include developing the
construction plan, monitoring and overseeing the construction project, and annual reporting
to the Secretary on progress and modifications made regarding the construction plan. The
grant provision would be drafted such that the bond program could only be implemented to
the extent the grant program is implemented.
< Award $250,000 to states and $100,000 to each eligible school district annually. The
amount of the grant could also be sized by the school age population within the state or
eligible school district.
< The bond funds would be subject to Davis-Bacon indirectly due to the link with the grant
program. The bonds could not be issued absent the grant. It is unclear whether some
entities would not take advantage of the bond due to Davis-Bacon application. OMB
estimates the cost of this proposal to be $25.5 million.
Pros:
Applies Davis-Bacon while avoiding tax policy precedent.
Provides seed money to encourage states and localities to seek bond authority.
Adds a new and very late layer of complexity at a time when we need to make our proposal
as understandable as possible.
Would likely be transparent to Congressional members and interested organizations that
oppose application of Davis-Bacon to school construction bonds.
Would require joint referral of the bond initiative to the tax and education committees in the
House.
Hex-Dump Conversion
Appendix -- Legislative History
FY1998
In the FY1998 budget, the President requested $5 billion over 5 years in mandatory spending that
would have leveraged up to $20 billion in bonds over a four year period. The Administration
made it clear that Davis-Bacon would apply to this initiative since it was a federal spending
proposal.
The Administration's bill was introduced by Rep. Nita Lowey in the House and Senator Carol
Moseley-Braun in the Senate. There was no action on the bill in either the authorizing or the
appropriations committees. The Republican leadership actively kept potential Republican
supporters off the bill and repeatedly argued that the federal government had no business getting
involved in building schools at the local level. Several Republicans touted the Davis-Bacon
requirement as proof of "federal intervention in local education decisions."
The education constituency was split on this issue. AFT, NEA, and urban school
superintendents supported the bill, but the National School Boards Association (NSBA), one of
the most vocal constituencies, could not support the President's proposal because ofthe federal
Davis-Bacon requirement. This split weakened the support of other groups, such as the National
PTA and rural and suburban superintendents.
Although school construction was one of the last items left on the table when the Balanced
Budget Agreement was struck in the summer of 1997, the Republican leadership refused to
move off their position that the federal government had no role- in communities' decisions to
build schools. The only provision they accepted was Rep. Rangel's Qualified Zone Academy
Bonds (QZABs) for a total of$800 million of new bonding authority (compared to the potential
$20 billion that would have been leveraged in the President's request). Davis-Bacon was not
applied to the QZABs.
FYl999
The President once again made School Construction a major priority in his FY1999 budget, but
this time the proposal provided a tax credit in lieu of interest and involved no direct federal
spending. The initiative would have provided federal funding to pay the interest on $22 billion
in bonds. The Administration was silent on whether Davis-Bacon applied to this proposal in
OMB's budget submission. In Qs and As, however, Administration officials twice confirmed
that Davis-Bacon had not applied to provisions in the tax code to date and was not expected to
apply in this case.
This allowed NSBA to become active in the Rebuild America's Schools coalition in support of
the revised proposal. School board members became strong advocates at the State and local
level for the proposed federal partnership arguing that the initiative would help leverage local and
State dollars for construction but would leave decisions on where and how to build schools to
local communities. Partly as a result of this more unified constituency support, Democrats were
able to make a strong case for their school construction bill to the voters. This was reflected in
the polling results and the Democrats' winning message on education.
Republicans continued to argue against this popular initiative, and in the process lost support for
,.. !lex-Dump Conversion
their position. The House Ways and Means Committee refused to act on the President's
proposal, although Chainnan Archer included a much smaller arbitrage provision in the
multi-billion dollar House tax bill that was never signed into law. Rep. Rangel succeeded in
forcing two House floor votes on the issue - an amendment to instruct conferees to include
school construction as an amendment to the Coverdell education savings account failed 192-222,
and an amendment to substitute school construction for Coverdell failed 196-225. Eight
Republicans were allowed to break ranks with the leadership on one or both of the votes (Leach,
IA; Morella, MD; Forbes, NY; Gilman, NY; Weller, IL; Johnson, CT; LoBiono, NJ; and
McHugh, NY).
Senator Moseley-Braun offered her school construction bill as a substitute to the Coverdell
savings account on the Senate floor. A motion to table the amendments passed 56-42 with
D' Amato and Specter voting against the motion and 4 Democrats voting in favor (Biden, DE;
Byrd, WV; Liebennan, CT; and Torricelli, NJ).
Although support for school construction was building, in the end there was no significant tax
bill that the Administration supported and could use to force an agreement on school
construction. Republicans rejected Administration efforts to attach school construction to the
tax extenders package.
FY2000
The President's FY2000 budget request for school construction expands the FY1999 tax bond
proposal, this time paying the interest on $24.8 billion in new bonds. Placeholder bills have
been introduced by Senators Daschle, Lautenberg, and Robb and Rep. Rangel is preparing to
introduce one in the House. The Senate bills have remained silent on Davis-Bacon. House
Democrats are working through this issue now and are looking for any signals from us.
Unlike the last two years, the Republican leadership has come out publicly in support of school
construction and is backing their own school construction proposals. Chainnan Archer has
introduced a $1.4 billion arbitrage initiative similar to his proposal on the tax bill last year.
While inadequate and flawed, the Archer proposal allows Republicans to argue that they are
addressing school construction.
The Speaker has mentioned this initiative as a high priority. However, Democratic efforts to get
bipartisan cosponsorship ofthe President's proposal have not been successful. It appears that
the Republican leadership understands they must advance some kind of school construction bill
this year - the question is whether our proposal will prevail.
Attached is a revised Davis-Bacon memo.
Could you please forward any additional comments and agencies positions by
noon Tuesday. Thanks.
Bruce -- can you forward a copy to Don and Jon please.
Thanks all.
Unable to convert ARMS_EXT: [ATTACH.D29]MAIL46912645R.036 to ASCII,
The following is a HEX DUMP:
FF5750431Ell00000l0A02010000000205000000EE90000000020000972BF48C1D780CC9FFEF65
79A1B081DDFD6248DBD197AD6A79476ABD775CD31B75712E20521176D6DOFC43932165ED53C33C
A97B47D44F6C7C3BCE71D2EA87A9F58C7FD288E60CCABB79F1A133312B4D82C540267DCD5F152E
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8CD9F3BCC8B13E2717BFDA870F3030A773655ABA974F81A1B9B79BOC450BCD78F6ABD513868ADF
February 19, 1999 Hex-Dump Conversion
MEMORANDUM FOR
FROM:
RE: Davis-Bacon and School Construction
The President's FY2000 budget again includes a significant school construction proposal--
Federal tax credits to pay interest on nearly $25 billion in bonds. Last year, our proposal and the
legislative versions introduced in Congress were silent on Davis-Bacon. Our publicly stated
position has been that Davis-Bacon would not apply.
Organized labor, especially the Building Trades, have urged the Administration to reconsider our
position and the President has agreed to take another look at the issue. The NEC has convened
an inter-agency working group (including DPC, OMB, Treasury, Education, DOL) to examine
the key policy questions. Specifically, the working group has focused on whether adding a
Davis-Bacon requirement to the President's school construction proposal:
I) Is administratively feasible?
II) Is good labor policy?
III) Is good tax policy?
IV) And, how it would affect prospects of enacting the President's school construction
proposal.
Following a discussion of these key policy questions, the memo discusses the pros and cons of
four options:
1) Decide that Davis-Bacon does not apply.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
3) Affirmatively add Davis-Bacon to the proposal now.
4) Change the proposal to include an outlay component and thereby add Davis-Bacon.
A legislative history is attached as an appendix to the memo.
I. Administrative Feasibility
Legitimate concerns had been raised about enmeshing the IRS in the administration of a labor
program. There is consensus within the working group that Davis-Bacon could be applied in
such a way that the IRS would not have to play an enforcement role.
A Davis-Bacon requirement could instead be built into the process whereby states and school
n~,lOtimr;p Cmnrmion.
districts submit school construction plans to the Department of Education for review and
approval. It could work as follows:
The Department of Education would issue guidelines that would include payment of
Davis-Bacon prevailing wages as one of the required plan components.
States and eligible school districts would submit the proposed plans to Education.
Education would review the plans for completeness and compliance with construction plan
guidelines, and approves compliant plans.
States and school districts would issue bonds.
States and school districts would insert the Davis-Bacon prevailing wage clause into their
construction contracts.
The Department of Labor would investigate any complaint filed regarding the wage rate paid
on the contract. Treasury would have no role. If DOL found a violation, it would require
the contractor to pay back wages; and may also request the school board to withhold payment
until the contractor has paid the back wages. DOL would not reach back to the bond.
(Note: the Federal tax credit interest payments to investors would in no way be conditioned
on compliance with Davis-Bacon).
II. Would it be Good Labor Policy?
Labor policy arguments in favor of adding a Davis-Bacon requirement to our school
construction proposal include:
A basic underlying purpose ofthe Davis-Bacon Act is to prevent construction workers' wages
from being undercut as a result of aggressive bidding on government construction contracts.
The government's large purchasing power combined with the public sector's emphasis upon
awarding contracts to the lowest bidder can easily create an environment that encourages
contractors to cut costs by paying less than the locally prevailing wage rate.
Even where no Federal money is directly involved to finance construction (e.g., HUD and
FHA loan guarantee programs) it has been recognized that the application of Davis-Bacon
labor standards is appropriate. These HUD and FHA programs recognize that the
construction in question would not take place without the Federal support. The Federal
government has a responsibility to ensure that its use of taxpayers' resources to support large
construction programs does not serve to undercut locally prevailing wages.
The application of the Davis-Bacon Act can help ensure quality construction. While the
payment of locally prevailing wages does not guarantee that the most skilled and qualified
craftsmen will be employed on construction projects, contractors that bid based on paying
less that the prevailing local wage rate may find it difficult to hire and retain qualified
employees which in tum may lead to inferior construction.
The Davis-Bacon Act simply requires that contractors and subcontractors pay their
Hex-Dump Conversion
employees the wage rates and fringe benefits prevailing in the locality where the construction
work is performed. The Davis-Bacon Act does not impose federal standards inconsistent
with the local labor market.
A counter-argument would be that:
Traditionally, school construction is funded by some combination of State funding and local
bond initiatives. The Davis-Bacon Act has not applied to these locally-financed school
. construction projects and the current tax incentive program should not be the catalyst to
change that dynamic.
The Administration has been successful in protecting Davis-Bacon in connection with
Federal outlays. Our position on Davis-Bacon could be weakened if we propose adding it to
our school construction bill and then sign a version without Davis-Bacon.
III. Would it be Good Tax Policy?
Proponents of adding Davis-Bacon to our school construction proposal have made the following
tax policy arguments:
The tax code includes instances where favorable tax consequences of bond financing have
been conditioned. For example, the interest from state and local bonds is exempt from
Federal taxation, if, among other conditions, the bonds are used for a government purpose.
When marketing these bonds, state and local governments describe how proceeds will be
used and include covenants on the necessary actions that will be taken to preserve the tax
exemption.
The tax code includes "multiple objective" tax benefits. For example, there isa tax credit
for wages paid to a member or an Indian tribe. The credit, however, is not available if the
employee is performing certain gaming activities.
The Treasury Department has raised a range of tax policy arguments against adding a
Davis-Bacon requirement:
Currently there is no reference to the Davis-Bacon Act anywhere in the Internal Revenue
Code. Conditioning 5MBs on compliance with the Act would establish the dangerous
precedent of using a tax code incentive to implement social policies unrelated to the benefit
that is the object of the tax incentive.
It would invite attempts to impose compliance with Davis-Bacon on the whole range of
construction projects financed with tax-exempt bonds, low-income housing credits, historic
rehabilitation credits, and other tax code provisions.
If the tax code is used to apply Davis-Bacon, efforts to apply Buy America rules, restrict
abortion, meet energy efficiency targets, and obtain other unrelated objectives would surely
follow. It would not be long before insertion of such extraneous requirements into the
Internal Revenue Code would require enforcement by the IRS, imposing upon it an
impossible administrative task entirely foreign to its tax collecting mission and its efforts to
Hex-Dump Conversion
be more taxpayer friendly.
Proponents cite complex requirements associated with other tax incentives as precedent.
Such requirements are in the tax code to identify clearly the kind of activity for which the tax
benefit is intended and the class of taxpayers eligible to claim the benefit.
The tradition of tax-exempt State and local financing has always been regarded jealously as a
prerogative of State and local governments, free from totally unrelated conditions imposed by
the Federal government. Conditioning 5MBs, that differ from tax-exempt bonds essentially
in terms of the depth of the interest subsidy, on compliance with the Act would be considered
by State and local governments as an intrusion on their autonomy.
IV. Impact on Prospects for Enacting School Construction Proposal
Legislative Arguments in Favor of Adding Davis-Bacon:
The moderate Republicans most likely to support the President's school construction
proposal tend to be pro-Davis-Bacon. Adding Davis-Bacon could provide another reason
for these moderates to support the President's proposal.
Enactment of school construction will come down to the endgame. Ifthere is a tax bill,
which is an open question, success will hinge on the President rallying people behind school
construction and insisting that Republicans include it, and not on whether Davis-Bacon is in
or out.
Adding Davis-Bacon would energize the building trades to become strong advocates for the
school construction proposal.
Legislative Arguments Against Adding Davis-Bacon:
Given that the Republicans are ready to propose their own method of financing school
construction, however insignificant, it would be dangerous for Democrats to lose their focus
by opening a debate on competing proposals among themselves.
Expanding Davis-Bacon into this new arena would only strengthen the resolve of the
opposition and provide them with a ready-made excuse to kill the President's bill and to pass
an alternative oflesser magnitude or of no magnitude.
It is possible that if Davis-Bacon were added, some of the groups could be forced to support
an alternative proposal put forth by the Republicans. For instance, NSBA is on record as
opposing a "federal mandate" that overrides state and local prevailing wage laws. As
mentioned above, the School Board constituency is one of the strongest in support of the
President's proposal.
Injecting the expansion of Davis-Bacon into this debate could split the coalition of education
groups, community-based organizations and architects that has been working together over
the last two years to build public support for the President's proposal. This would make it
HeX-D anagement System
ump Conversion
more difficult for Democrats who would have to choose between two opposing sides - voting
for the expansion of Davis-Bacon, particularly in a tax bill, and for more federal control over
education decisions than the constituency can support, or voting for the President's current
proposal that can potentially garner bipartisan support.
While the House voted to protect Davis-Bacon in the FY1998 DC Appropriations bill by a
. vote of 234-188, further analysis shows that a majority of the members of the Ways and
Means Committee voted against maintaining Davis-Bacon. So although an expansion of
Davis-Bacon may have more success on the House floor, it is unlikely that it would ever be
passed out of committee in the first place. Moreover, the previous Davis-Bacon votes have
focused on its repeal or its application to spending proposals. The accuracy of those vote
counts in predicting the outcome on an expansion of Davis-Bacon to a tax proposal is
questionable. Thus, the whole school construction bill could be stalled without gaining any
ground on Davis-Bacon.
The President has made flexibility and accountability major themes in his State of the Union
education message. In the President's speech to the National School Boards Association on
the day he released his budget, he made it clear that he did not want to micromanage schools
and school districts, but rather he wanted to invest in what works and stop investing in what
does not. Allowing school construction to be used as a vehicle for expanding Davis-Bacon
into the tax arena would raise the issue of increased federal intervention and control not only
in the school construction debate but also in the debate over results and accountability for all
of the President's education agenda.
Options:
1) Decide that Davis-Bacon does not apply.
We would convey to the Hill and to Labor that we are sticking to our existing position that
Davis-Bacon does not apply to our school construction tax credit proposal.
Pros:
Keeps focus on our underlying school construction proposal and keeps our coalition of
education supporters together (e.g. school boards).
Avoids setting tax policy precedent as described above.
Takes pressure off of our allies on the Hill.
Cons:
Misses an opportunity to advance a deeply held goal -- decent wages for construction (and
all) workers.
Rejects a key Labor priority and to this extent could diminish support for the underlying bill
from at least part of this constituency.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
Ii D anagement System:
ex- ump Conversion
This option would have us continue our posture of "we're taking another look" until we would it
became critical later in the year when a bill is actually being considered.
Keeps our options open and avoids offending a key constituency before we know how this
will play out.
Avoids (at least temporarily) setting tax policy precedent as described above.
Cons:
Staying in limbo could hamper our ability to push the school construction proposal as
aggressively as we otherwise would.
It is unclear how sustainable this is. Hill may soon press us more flatly -- what is your
position?
3) Affirmatively add Davis Bacon to proposal now.
Would advance a deeply held goal-- decent wages for workers.
Would add an enthusiastic supporter -- building trades.
Cons:
Sets a major tax precedent with potentially serious ramifications.
Jeopardizes the prospects of the underlying proposal -- risks turning battle over school
construction into a fight over Davis-Bacon, dividing the education coalition that is now
strongly behind our proposal, and handing Republicans an excuse to be against our proposal
and to coalesce around the Archer arbitrage ..
4) Change proposal to include an outlay component and thereby add Davis-Bacon.
We would apply Davis-Bacon indirectly by creating an internal component of the program
that results in outlays, thus making Davis-Bacon apply to construction financed by bonds
without an explicit Davis-Bacon provision.
As part of the school modernization legislation, include a legislative amendment to the
Elementary and Secondary Education Act of 1965 as amended (ESEA) which would create
a mandatory, capped grant program. The ESEA contains a labor standards provision (20
U.S.C. 1232b) that applies Davis-Bacon to all construction and minor remodeling projects
assisted under any applicable program under the Act.
Hex-Dump Conversion
Proposed Mandatory, Capped Grant Program (Outlay)_
< Create a new grant program, administered by the Secretary of Education under the ESEA,
that provides resources to states and eligible school districts for administrative expenses
related to the bond. Examples of administrative expenses include developing the
construction plan, monitoring and overseeing the construction project, and annual reporting
to the Secretary on progress and modifications made regarding the construction plan. The
grant provision would be drafted such that the bond program could only be implemented to
the extent the grant program is implemented.
< Award $250,000 to states and $100,000 to each eligible school district annually. The
amount of the grant could also be sized by the school age population within the state or
eligible school district.
< The bond funds would be subject to Davis-Bacon indirectly due to the link with the grant
program. The bonds could not be issued absent the grant. It is unclear whether some
entities would not take advantage of the bond due to Davis-Bacon application. OMB
estimates the cost ofthis proposal to be $25.5 million.
Applies Davis-Bacon while avoiding tax policy precedent.
Provides seed money to encourage states and localities to seek bond authority.
Adds a new and very late layer of complexity at a time when we need to make our proposal
as understandable as possible.
Would likely be transparent to Congressional members and interested organizations that
oppose application of Davis-Bacon to school construction bonds.
Would require joint referral of the bond initiative to the tax and education committees in the
House.
Hex-Dump Conversion
Appendix -- Legislative History
FY1998
In the FY1998 budget, the President requested $5 billion over 5 years in mandatory spending that
would have leveraged up to $20 billion in bonds over a four year period. The Administration
made it clear that Davis-Bacon would apply to this initiative since it was a federal spending
proposal.
The Administration's bill was introduced by Rep. Nita Lowey in the House and Senator Carol
Moseley-Braun in the Senate. There was no action on the bill in either the authorizing or the
appropriations committees. The Republican leadership actively kept potential Republican
supporters off the bill and repeatedly argued that the federal government had no business getting
involved in building schools at the local level. Several Republicans touted the Davis-Bacon
requirement as proof of "federal intervention in local education decisions."
.The education constituency was split on this issue. AFT, NEA, and urban school
superintendents supported the bill, but the National School Boards Association (NSBA), one of
the most vocal constituencies, could not support the President's proposal because of the federal
Davis-Bacon requirement. This split weakened the support of other groups, such as the National
PTA and rural and suburban superintendents.
Although school construction was one of the last items left on the table when the Balanced
Budget Agreement was struck in the summer of 1997, the Republican leadership refused to
move offtheir position that the federal government had no role in communities' decisions to
build schools. The only provision they accepted was Rep. Rangel's Qualified Zone Academy
Bonds (QZABs) for a total of$800 million of new bonding authority (compared to the potential
$20 billion that would have been leveraged in the President's request). Davis-Bacon was not
applied to the QZABs.
FY1999
The President once again made School Construction a major priority in his FY1999 budget, but
this time the proposal provided a tax credit in lieu of interest and involved no direct federal
spending. The initiative would have provided federal funding to pay the interest on $22 billion
in bonds. The Administration was silent on whether Davis-Bacon applied to this proposal in
OMB's budget submission. In Qs and As, however, Administration officials twice confirmed
that Davis-Bacon had not applied to provisions in the tax code to date and was not expected to
apply in this case.
This allowed NSBA to become active in the Rebuild America's Schools coalition in support of
the revised proposal. School board members became strong advocates at the State and local
level for the proposed federal partnership arguing that the initiative would help leverage local and
State dollars for construction but would leave decisions on where and how to build schools to
local communities. Partly as a result of this more unified constituency support, Democrats were
able to make a strong case for their school construction bill to the voters. This was reflected in
the polling results and the Democrats' winning message on education.
Republicans continued to argue against this popular initiative, and in the process lost support for
JIcx-D anagement System
ump Conversion
their position. The House Ways and Means Committee refused to act on the President's
proposal, although Chairman Archer included a much smaller arbitrage provision in the
multi-billion dollar House tax bill that was never signed into law. Rep. Rangel succeeded in
forcing two House floor votes on the issue - an amendment to instruct conferees to include
school construction as an amendment to the Coverdell education savings account failed 192-222,
and an amendment to substitute school construction for Coverdell failed 196-225. Eight
Republicans were allowed to break ranks with the leadership on one or both of the votes (Leach,
IA; Morella, MD; Forbes, NY; Gilman, NY; Weller, IL; Johnson, CT; LoBiono, NJ; and
McHugh, NY).
Senator Moseley-Braun offered her school construction bill as a substitute to the Coverdell
savings account on the Senate floor. A motion to table the amendments passed 56-42 with
D' Amato and Specter voting against the motion and 4 Democrats voting in favor (Biden, DE;
Byrd, WV; Lieberman, CT; and Torricelli, NJ).
Although support for school construction was building, in the end there was no significant tax
bill that the Administration supported and could use to force an agreement on school
construction. Republicans rejected Administration efforts to attach school construction to the
tax extenders package.
FY2000
The President's FY2000 budget request for school construction expands the FY1999 tax bond
proposal, this time paying the interest on $24.8 billion in new bonds. Placeholder bills have
been introduced by Senators Daschle, Lautenberg, and Robb and Rep. Rangel is preparing to
introduce one in the House. The Senate bills have remained silent on Davis-Bacon. House
Democrats are working through this issue now and are looking for any signals from us.
Unlike the last two years, the Republican leadership has come out publicly in support of school
construction and is backing their own school construction proposals. Chairman Archer has
introduced a $1.4 billion arbitrage initiative similar to his proposal on the tax bill last year.
While inadequate and flawed, the Archer proposal allows Republicans to argue that they are
addressing school construction.
The Speaker has mentioned this initiative as a high priority. However, Democratic efforts to get
bipartisan cosponsorship of the President's proposal have not been successful. It appears that
the Republican leadership understands they must advance some kind of school construction bill
this year - the question is whether our proposal will prevail.
==================== ATTACHMENT 1 ====================
ATT CREATION TIME/DATE: 0 00:00:00.00
TEXT:
Unable to convert ARMS_EXT: [ATTACH.D29]MAIL46912645R.036 to ASCII,
The following is a HEX DUMP:
FF5750431Ell00000l0A02010000000205000000EE90000000020000972BF48C1D780CC9FFEF65
79A1B081DDFD6248DBD197AD6A79476ABD775CD31B75712E20521176D6DOFC43932165ED53C33C
A97B47D44F6C7C3BCE71D2EA87A9F58C7FD288E60CCABB79F1A133312B4D82C540267DCD5F152E
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8CD9F3BCC8B13E2717BFDA870F3030A773655ABA974F81A1B9B79BOC450BCD78F6ABD513868ADF
February 19, 1999 Hex-Dump Conversion
MEMORANDUM FOR
FROM:
RE: Davis-Bacon and School Construction
The President's FY2000 budget again includes a significant school construction proposal--
Federal tax credits to pay interest on nearly $25 billion in bonds. Last year, our proposal and the
legislative versions introduced in Congress were silent on Davis-Bacon. Our publicly stated
position has been that Davis-Bacon would not apply.
Organized labor, especially the Building Trades, have urged the Administration to reconsider our
position and the President has agreed to take another look at the issue. The NEC has convened
an inter-agency working group (including DPC, OMB, Treasury, Education, DOL) to examine
the key policy questions. Specifically, the working group has focused on whether adding a
Davis-Bacon requirement to the President's school construction proposal:
I) Is administratively feasible?
II) Is good labor policy?
III) Is good tax policy?
IV) And, how it would affect prospects of enacting the President's school construction
proposal.
Following a discussion of these key policy questions, the memo discusses the pros and cons of
four options:
1) Decide that Davis-Bacon does not apply.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
3) Affirmatively add Davis-Bacon to the proposal now.
4) Change the proposal to include an outlay component and thereby add Davis-Bacon.
A legislative history is attached as an appendix to the memo.
I. Administrative Feasibility
Legitimate concerns had been raised about enmeshing the IRS in the administration of a labor
program. There is consensus within the working group that Davis-Bacon could be applied in
such a way that the IRS would not have to play an enforcement role.
A Davis-Bacon requirement could instead be built into the process whereby states and school
n~,lOtimr;p Cmnrmion.
districts submit school construction plans to the Department of Education for review and
approval. It could work as follows:
The Department of Education would issue guidelines that would include payment of
Davis-Bacon prevailing wages as one of the required plan components.
States and eligible school districts would submit the proposed plans to Education.
Education would review the plans for completeness and compliance with construction plan
guidelines, and approves compliant plans.
States and school districts would issue bonds.
States and school districts would insert the Davis-Bacon prevailing wage clause into their
construction contracts.
The Department of Labor would investigate any complaint filed regarding the wage rate paid
on the contract. Treasury would have no role. If DOL found a violation, it would require
the contractor to pay back wages; and may also request the school board to withhold payment
until the contractor has paid the back wages. DOL would not reach back to the bond.
(Note: the Federal tax credit interest payments to investors would in no way be conditioned
on compliance with Davis-Bacon).
II. Would it be Good Labor Policy?
Labor policy arguments in favor of adding a Davis-Bacon requirement to our school
construction proposal include:
A basic underlying purpose ofthe Davis-Bacon Act is to prevent construction workers' wages
from being undercut as a result of aggressive bidding on government construction contracts.
The government's large purchasing power combined with the public sector's emphasis upon
awarding contracts to the lowest bidder can easily create an environment that encourages
contractors to cut costs by paying less than the locally prevailing wage rate.
Even where no Federal money is directly involved to finance construction (e.g., HUD and
FHA loan guarantee programs) it has been recognized that the application of Davis-Bacon
labor standards is appropriate. These HUD and FHA programs recognize that the
construction in question would not take place without the Federal support. The Federal
government has a responsibility to ensure that its use of taxpayers' resources to support large
construction programs does not serve to undercut locally prevailing wages.
The application of the Davis-Bacon Act can help ensure quality construction. While the
payment of locally prevailing wages does not guarantee that the most skilled and qualified
craftsmen will be employed on construction projects, contractors that bid based on paying
less that the prevailing local wage rate may find it difficult to hire and retain qualified
employees which in tum may lead to inferior construction.
The Davis-Bacon Act simply requires that contractors and subcontractors pay their
Hex-Dump Conversion
employees the wage rates and fringe benefits prevailing in the locality where the construction
work is performed. The Davis-Bacon Act does not impose federal standards inconsistent
with the local labor market.
A counter-argument would be that:
Traditionally, school construction is funded by some combination of State funding and local
bond initiatives. The Davis-Bacon Act has not applied to these locally-financed school
. construction projects and the current tax incentive program should not be the catalyst to
change that dynamic.
The Administration has been successful in protecting Davis-Bacon in connection with
Federal outlays. Our position on Davis-Bacon could be weakened if we propose adding it to
our school construction bill and then sign a version without Davis-Bacon.
III. Would it be Good Tax Policy?
Proponents of adding Davis-Bacon to our school construction proposal have made the following
tax policy arguments:
The tax code includes instances where favorable tax consequences of bond financing have
been conditioned. For example, the interest from state and local bonds is exempt from
Federal taxation, if, among other conditions, the bonds are used for a government purpose.
When marketing these bonds, state and local governments describe how proceeds will be
used and include covenants on the necessary actions that will be taken to preserve the tax
exemption.
The tax code includes "multiple objective" tax benefits. For example, there isa tax credit
for wages paid to a member or an Indian tribe. The credit, however, is not available if the
employee is performing certain gaming activities.
The Treasury Department has raised a range of tax policy arguments against adding a
Davis-Bacon requirement:
Currently there is no reference to the Davis-Bacon Act anywhere in the Internal Revenue
Code. Conditioning 5MBs on compliance with the Act would establish the dangerous
precedent of using a tax code incentive to implement social policies unrelated to the benefit
that is the object of the tax incentive.
It would invite attempts to impose compliance with Davis-Bacon on the whole range of
construction projects financed with tax-exempt bonds, low-income housing credits, historic
rehabilitation credits, and other tax code provisions.
If the tax code is used to apply Davis-Bacon, efforts to apply Buy America rules, restrict
abortion, meet energy efficiency targets, and obtain other unrelated objectives would surely
follow. It would not be long before insertion of such extraneous requirements into the
Internal Revenue Code would require enforcement by the IRS, imposing upon it an
impossible administrative task entirely foreign to its tax collecting mission and its efforts to
Hex-Dump Conversion
be more taxpayer friendly.
Proponents cite complex requirements associated with other tax incentives as precedent.
Such requirements are in the tax code to identify clearly the kind of activity for which the tax
benefit is intended and the class of taxpayers eligible to claim the benefit.
The tradition of tax-exempt State and local financing has always been regarded jealously as a
prerogative of State and local governments, free from totally unrelated conditions imposed by
the Federal government. Conditioning 5MBs, that differ from tax-exempt bonds essentially
in terms of the depth of the interest subsidy, on compliance with the Act would be considered
by State and local governments as an intrusion on their autonomy.
IV. Impact on Prospects for Enacting School Construction Proposal
Legislative Arguments in Favor of Adding Davis-Bacon:
The moderate Republicans most likely to support the President's school construction
proposal tend to be pro-Davis-Bacon. Adding Davis-Bacon could provide another reason
for these moderates to support the President's proposal.
Enactment of school construction will come down to the endgame. Ifthere is a tax bill,
which is an open question, success will hinge on the President rallying people behind school
construction and insisting that Republicans include it, and not on whether Davis-Bacon is in
or out.
Adding Davis-Bacon would energize the building trades to become strong advocates for the
school construction proposal.
Legislative Arguments Against Adding Davis-Bacon:
Given that the Republicans are ready to propose their own method of financing school
construction, however insignificant, it would be dangerous for Democrats to lose their focus
by opening a debate on competing proposals among themselves.
Expanding Davis-Bacon into this new arena would only strengthen the resolve of the
opposition and provide them with a ready-made excuse to kill the President's bill and to pass
an alternative oflesser magnitude or of no magnitude.
It is possible that if Davis-Bacon were added, some of the groups could be forced to support
an alternative proposal put forth by the Republicans. For instance, NSBA is on record as
opposing a "federal mandate" that overrides state and local prevailing wage laws. As
mentioned above, the School Board constituency is one of the strongest in support of the
President's proposal.
Injecting the expansion of Davis-Bacon into this debate could split the coalition of education
groups, community-based organizations and architects that has been working together over
the last two years to build public support for the President's proposal. This would make it
HeX-D anagement System
ump Conversion
more difficult for Democrats who would have to choose between two opposing sides - voting
for the expansion of Davis-Bacon, particularly in a tax bill, and for more federal control over
education decisions than the constituency can support, or voting for the President's current
proposal that can potentially garner bipartisan support.
While the House voted to protect Davis-Bacon in the FY1998 DC Appropriations bill by a
. vote of 234-188, further analysis shows that a majority of the members of the Ways and
Means Committee voted against maintaining Davis-Bacon. So although an expansion of
Davis-Bacon may have more success on the House floor, it is unlikely that it would ever be
passed out of committee in the first place. Moreover, the previous Davis-Bacon votes have
focused on its repeal or its application to spending proposals. The accuracy of those vote
counts in predicting the outcome on an expansion of Davis-Bacon to a tax proposal is
questionable. Thus, the whole school construction bill could be stalled without gaining any
ground on Davis-Bacon.
The President has made flexibility and accountability major themes in his State of the Union
education message. In the President's speech to the National School Boards Association on
the day he released his budget, he made it clear that he did not want to micromanage schools
and school districts, but rather he wanted to invest in what works and stop investing in what
does not. Allowing school construction to be used as a vehicle for expanding Davis-Bacon
into the tax arena would raise the issue of increased federal intervention and control not only
in the school construction debate but also in the debate over results and accountability for all
of the President's education agenda.
Options:
1) Decide that Davis-Bacon does not apply.
We would convey to the Hill and to Labor that we are sticking to our existing position that
Davis-Bacon does not apply to our school construction tax credit proposal.
Pros:
Keeps focus on our underlying school construction proposal and keeps our coalition of
education supporters together (e.g. school boards).
Avoids setting tax policy precedent as described above.
Takes pressure off of our allies on the Hill.
Cons:
Misses an opportunity to advance a deeply held goal -- decent wages for construction (and
all) workers.
Rejects a key Labor priority and to this extent could diminish support for the underlying bill
from at least part of this constituency.
2) Remain silent on Davis-Bacon until it becomes critical during consideration of a bill.
Ii D anagement System:
ex- ump Conversion
This option would have us continue our posture of "we're taking another look" until we would it
became critical later in the year when a bill is actually being considered.
Keeps our options open and avoids offending a key constituency before we know how this
will play out.
Avoids (at least temporarily) setting tax policy precedent as described above.
Cons:
Staying in limbo could hamper our ability to push the school construction proposal as
aggressively as we otherwise would.
It is unclear how sustainable this is. Hill may soon press us more flatly -- what is your
position?
3) Affirmatively add Davis Bacon to proposal now.
Would advance a deeply held goal-- decent wages for workers.
Would add an enthusiastic supporter -- building trades.
Cons:
Sets a major tax precedent with potentially serious ramifications.
Jeopardizes the prospects of the underlying proposal -- risks turning battle over school
construction into a fight over Davis-Bacon, dividing the education coalition that is now
strongly behind our proposal, and handing Republicans an excuse to be against our proposal
and to coalesce around the Archer arbitrage ..
4) Change proposal to include an outlay component and thereby add Davis-Bacon.
We would apply Davis-Bacon indirectly by creating an internal component of the program
that results in outlays, thus making Davis-Bacon apply to construction financed by bonds
without an explicit Davis-Bacon provision.
As part of the school modernization legislation, include a legislative amendment to the
Elementary and Secondary Education Act of 1965 as amended (ESEA) which would create
a mandatory, capped grant program. The ESEA contains a labor standards provision (20
U.S.C. 1232b) that applies Davis-Bacon to all construction and minor remodeling projects
assisted under any applicable program under the Act.
Hex-Dump Conversion
Proposed Mandatory, Capped Grant Program (Outlay)_
< Create a new grant program, administered by the Secretary of Education under the ESEA,
that provides resources to states and eligible school districts for administrative expenses
related to the bond. Examples of administrative expenses include developing the
construction plan, monitoring and overseeing the construction project, and annual reporting
to the Secretary on progress and modifications made regarding the construction plan. The
grant provision would be drafted such that the bond program could only be implemented to
the extent the grant program is implemented.
< Award $250,000 to states and $100,000 to each eligible school district annually. The
amount of the grant could also be sized by the school age population within the state or
eligible school district.
< The bond funds would be subject to Davis-Bacon indirectly due to the link with the grant
program. The bonds could not be issued absent the grant. It is unclear whether some
entities would not take advantage of the bond due to Davis-Bacon application. OMB
estimates the cost ofthis proposal to be $25.5 million.
Applies Davis-Bacon while avoiding tax policy precedent.
Provides seed money to encourage states and localities to seek bond authority.
Adds a new and very late layer of complexity at a time when we need to make our proposal
as understandable as possible.
Would likely be transparent to Congressional members and interested organizations that
oppose application of Davis-Bacon to school construction bonds.
Would require joint referral of the bond initiative to the tax and education committees in the
House.
Hex-Dump Conversion
Appendix -- Legislative History
FY1998
In the FY1998 budget, the President requested $5 billion over 5 years in mandatory spending that
would have leveraged up to $20 billion in bonds over a four year period. The Administration
made it clear that Davis-Bacon would apply to this initiative since it was a federal spending
proposal.
The Administration's bill was introduced by Rep. Nita Lowey in the House and Senator Carol
Moseley-Braun in the Senate. There was no action on the bill in either the authorizing or the
appropriations committees. The Republican leadership actively kept potential Republican
supporters off the bill and repeatedly argued that the federal government had no business getting
involved in building schools at the local level. Several Republicans touted the Davis-Bacon
requirement as proof of "federal intervention in local education decisions."
.The education constituency was split on this issue. AFT, NEA, and urban school
superintendents supported the bill, but the National School Boards Association (NSBA), one of
the most vocal constituencies, could not support the President's proposal because of the federal
Davis-Bacon requirement. This split weakened the support of other groups, such as the National
PTA and rural and suburban superintendents.
Although school construction was one of the last items left on the table when the Balanced
Budget Agreement was struck in the summer of 1997, the Republican leadership refused to
move offtheir position that the federal government had no role in communities' decisions to
build schools. The only provision they accepted was Rep. Rangel's Qualified Zone Academy
Bonds (QZABs) for a total of$800 million of new bonding authority (compared to the potential
$20 billion that would have been leveraged in the President's request). Davis-Bacon was not
applied to the QZABs.
FY1999
The President once again made School Construction a major priority in his FY1999 budget, but
this time the proposal provided a tax credit in lieu of interest and involved no direct federal
spending. The initiative would have provided federal funding to pay the interest on $22 billion
in bonds. The Administration was silent on whether Davis-Bacon applied to this proposal in
OMB's budget submission. In Qs and As, however, Administration officials twice confirmed
that Davis-Bacon had not applied to provisions in the tax code to date and was not expected to
apply in this case.
This allowed NSBA to become active in the Rebuild America's Schools coalition in support of
the revised proposal. School board members became strong advocates at the State and local
level for the proposed federal partnership arguing that the initiative would help leverage local and
State dollars for construction but would leave decisions on where and how to build schools to
local communities. Partly as a result of this more unified constituency support, Democrats were
able to make a strong case for their school construction bill to the voters. This was reflected in
the polling results and the Democrats' winning message on education.
Republicans continued to argue against this popular initiative, and in the process lost support for
JIcx-D anagement System
ump Conversion
their position. The House Ways and Means Committee refused to act on the President's
proposal, although Chairman Archer included a much smaller arbitrage provision in the
multi-billion dollar House tax bill that was never signed into law. Rep. Rangel succeeded in
forcing two House floor votes on the issue - an amendment to instruct conferees to include
school construction as an amendment to the Coverdell education savings account failed 192-222,
and an amendment to substitute school construction for Coverdell failed 196-225. Eight
Republicans were allowed to break ranks with the leadership on one or both of the votes (Leach,
IA; Morella, MD; Forbes, NY; Gilman, NY; Weller, IL; Johnson, CT; LoBiono, NJ; and
McHugh, NY).
Senator Moseley-Braun offered her school construction bill as a substitute to the Coverdell
savings account on the Senate floor. A motion to table the amendments passed 56-42 with
D' Amato and Specter voting against the motion and 4 Democrats voting in favor (Biden, DE;
Byrd, WV; Lieberman, CT; and Torricelli, NJ).
Although support for school construction was building, in the end there was no significant tax
bill that the Administration supported and could use to force an agreement on school
construction. Republicans rejected Administration efforts to attach school construction to the
tax extenders package.
FY2000
The President's FY2000 budget request for school construction expands the FY1999 tax bond
proposal, this time paying the interest on $24.8 billion in new bonds. Placeholder bills have
been introduced by Senators Daschle, Lautenberg, and Robb and Rep. Rangel is preparing to
introduce one in the House. The Senate bills have remained silent on Davis-Bacon. House
Democrats are working through this issue now and are looking for any signals from us.
Unlike the last two years, the Republican leadership has come out publicly in support of school
construction and is backing their own school construction proposals. Chairman Archer has
introduced a $1.4 billion arbitrage initiative similar to his proposal on the tax bill last year.
While inadequate and flawed, the Archer proposal allows Republicans to argue that they are
addressing school construction.
The Speaker has mentioned this initiative as a high priority. However, Democratic efforts to get
bipartisan cosponsorship of the President's proposal have not been successful. It appears that
the Republican leadership understands they must advance some kind of school construction bill
this year - the question is whether our proposal will prevail.
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