Developers, municipal officials say prevailing wage costs overtake value of state economic development incentives

Developer Avner Krohn says prevailing wage mandates attached to a $4 million state grant have blown a multimillion-dollar hole in his plan to build a 100-unit apartment building in downtown New Britain.

Now, Krohn said, he and city officials are working with the state Department of Economic and Community Development (DECD) to try to patch that financial gap in time to begin construction this summer.

Krohn is among an increasing number of developers, economic development officials and others raising concerns about the impact of a six-year-old law requiring “prevailing wage” for labor on private developments supported with $1 million or more in state financial assistance through DECD.

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The requirement was embedded in the two-year state budget adopted in 2017, and went into effect in 2018. Complaints began mounting a few years after the law went into effect.

The issue could threaten new projects, creating a roadblock to Gov. Ned Lamont’s and lawmakers’ efforts to add affordable housing in the state. DECD, in recent years, has been increasingly active in funding new apartment projects, investing hundreds of millions of dollars through various programs like the Community Investment Fund.

That’s opening up more developments to the prevailing wage mandate.

Additionally, developers and others say they’ve noticed a recent change in the way the state is applying the 2017 law. The mandate is increasingly being applied by the state Department of Labor to an entire development, rather than part of a project being supported by state funding, like brownfield remediation.

That has upended budgets for some new apartment developments, experts say, adding costs that exceed the value of state grants.

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RENDERING | CONTRIBUTED

A rendering of The Strand, a 100-unit apartment development in New Britain led by developer Avner Krohn.

Krohn, for example, said the added costs of prevailing wages on his $26 million development — planned to be located on a parking lot that formerly housed the Strand Theatre — would top the $4 million state grant. He’s already invested more than $1 million in the project, including buying the Main Street property from the city of New Britain last year for $125,000.

Krohn said he’s not opposed to paying prevailing wages on a portion of his development. He accepts that state assistance comes with strings, including a requirement that 20% of the units be set aside as affordable.

“We’re not saying take away the strings,” he said. “We’re just saying be aware, if the goal is to incentivize additional housing in the state of Connecticut, then the incentive actually has to be a viable incentive.”

‘Stop subsidizing poverty wages’

Prevailing wage has a long history in the U.S., having been enshrined in the federal Davis-Bacon Act of 1931, which established a requirement that public projects pay laborers at a rate at least equal to the wages that “prevail” in their geographic area. Connecticut eventually adopted its own prevailing wage requirements for public projects.

Today, Connecticut’s Department of Labor posts prevailing wages based on union rates. The agency also determines prevailing wage applicability under the 2017 law.

Prevailing wages in the state can vary significantly by job type and geographic location. In New Britain, for example, the 2023 prevailing wages for a residential project range from $61.42 per hour for an elevator mechanic, to $15 for a common laborer. A power-equipment operator makes at least $43.38 per hour, while roofers make at least $41.20 per hour, according to DOL data.

Developers and consultants interviewed for the story say prevailing wage requirements typically increase costs by 20%.

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Kimberly Glassman

That’s a figure contested by Kimberly Glassman, director of the Foundation for Fair Contracting of Connecticut, which lobbies on behalf of labor unions and union-affiliated developers. She contends there is no basis in fact or peer-reviewed study that supports that cost estimate.

Glassman said prevailing wage protections are meant to ensure workers get fair wages and are not reliant on public subsidies for food and health care.

She said her organization would oppose any effort to roll back the 2017 law, which also benefits non-union workers and is backed by contractors who understand livable wages are key to maintaining a skilled workforce.

“At what point is the state going to stop subsidizing poverty wages to line the pockets of developers?” Glassman said. “… We want to see a commitment back to the state if we are going to invest in your project. Invest back in us. Hire local Connecticut companies. Hire a Connecticut workforce and make sure that workforce is earning family-sustainable wages. Make sure they have access to secure retirement, health care for them and their families. If we’re going to make that investment in you, make it back to us.”

Extra costs jeopardize projects

However, developers and economic development professionals say some large-scale projects might not happen if prevailing wage is applied too broadly.

At a public hearing before Fairfield’s Town Plan and Zoning Commission in January, a developer behind a proposed 245-unit apartment redevelopment told town officials that a prevailing wage mandate tied to a $3 million state brownfield grant would add $20 million to the project.

“So, if I had to explain that to investors and lenders, I would have a hard time,” said Thomas Montelli, a partner in Fairfield-based Post Road Residential, which proposed the apartment development on an industrially polluted, 5-acre site on Black Rock Turnpike.

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Mark Barnhart

Fairfield Economic Development Director Mark Barnhart said he and the development team anticipated the state would require prevailing wages, but only on a roughly $5 million environmental cleanup ahead of construction. Instead, Barnhart said, the Department of Labor decided that prevailing wages would be required for all labor on the $125 million project.

The town and developer are still trying to figure out a path forward.

Combined with elevated construction costs and high interest rates, losing the state grant puts the project at risk, Barnhart said.

In Fairfield, New Britain and elsewhere, DECD is working with developers and local officials who have found prevailing wage requirements unpalatable, trying to plug unanticipated funding gaps.

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Matthew J. Pugliese

DECD Deputy Commissioner Matthew Pugliese said his agency cannot advise a grant applicant what portion of their project might be subject to prevailing wage. That determination is made by the Department of Labor after an award is granted, he said.

Pugliese said his department has heard “from a small percentage” of grant recipients that are frustrated with recent Department of Labor rulings.

DECD is trying to navigate these projects through other financing options, Pugliese said, including reducing grants to under the $1-million threshold, reducing the scope of projects, or identifying other state grant sources not subject to prevailing wage.

Some developers and municipalities in recent months have opted to reduce their grant requests to under $1 million, Pugliese said. Other projects have “gone on hold” while trying to resolve funding gaps.

“Obviously, DECD wants to see the projects move forward and to happen, but DECD also needs to abide by the law that is in place, that really governs this,” Pugliese said. “So, when developers come to us, or municipalities are upset, what we try to do is steer them towards what the other way to move forward with the project could be, and we try to be problem-solving partners with them.”

Pugliese said concerns raised about prevailing wages have not diminished overall demand for DECD funding.

Applications for brownfield grants are on pace to top the $30 million the state has set aside for this year. And the $74.3 million in Community Investment Fund awards announced in March received applications seeking $550 million, Pugliese said.

The Community Investment Fund, which was established in 2022, is providing hundreds of millions of dollars in grants over several years to historically underserved communities for various economic development initiatives, including brownfield remediation and affordable housing projects.

Mountains or molehills?

Thomas Wydra, director of the state Department of Labor’s Wage and Workplace Standards Division, said his agency’s method of determining prevailing wage applicability under the 2017 law has not changed in the intervening years. Prevailing wage is not being applied more frequently, he said. 

If a municipality cleans a brownfield to advance a private redevelopment using $1 million or more in DECD-connected funding, that would trigger prevailing wage for the cleanup, and the following construction, he said.

“I think it’s important to remember we conduct a careful analysis of all bid documents, architectural drawings, contracts and any materials associated with the project so that we can make a final determination on whether there is a phase one and a phase two of a project that is connected via those documents,” Wydra said.

Wydra said the number of requests to determine prevailing wage applicability have “ramped up” over the past 18 months, something he attributes to an increase in DECD-funded projects.

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Ann M. Catino

Ann M. Catino, a partner at law firm Halloran Sage and co-chair of the state’s Brownfields Working Group, contends the Department of Labor has, in fact, changed the way it’s applying the 2017 law.

For “a while” the development community had an understanding that prevailing wage would be applied only to those portions of a project funded by a DECD grant, Catino said.

“But, in this past year or so, it has gone off the rails and there is an interpretation that is much broader,” Catino said. “It is unfortunate because it definitely is having a chilling effect on a lot of projects.”

Catino said it appears this issue will have to be settled by state policymakers, but that is a difficult prospect during this year’s short legislative session.

Sources close to the issue say concerns about prevailing wage mandates have been raised with DECD Commissioner Daniel O’Keefe and state lawmakers.

Asked for comment on the issue, state Sen. Joan Hartley (D-Waterbury), co-chair of the General Assembly’s Commerce Committee, issued a statement: “The state’s economic development is central to the work of the Commerce Committee, which continually evaluates state investments, its policies and practices.”

She declined further comment.

A spokesman for Commerce Committee co-chair Rep. Stephen Meskers (D-Greenwich) said the prevailing wage issue has not “come before” the committee during this session, which ends May 8.

Not penciling out

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Paige Bronk

Paige Bronk, president of the Connecticut Association of Economic Development, said concerns about the prevailing wage have been “bubbling to the surface” for about two years. While the law is six years old, it takes years to plan, permit and gather funding to launch a building project, especially a large multifamily development, Bronk noted.

“I think people are learning about it now because they are getting closer to that implementation,” Bronk said.

Bronk, who is also the economic and community development manager for Groton, acknowledged the issue caused his town to forgo $2 million of an $8.46 million DECD grant announced in 2022.

The grant was meant to subsidize an $81.4 million redevelopment of underutilized downtown lots by the Poquonnock River.

The Groton Housing Authority would build 51 affordable apartments. A development group led by David Preka of Advanced Construction would build just over 200 housing units. And the town would improve a riverside boardwalk, and build a pedestrian bridge over the river, as well as bikeways and park space.

The private housing development accounted for more than $50 million of the anticipated budget, a cost that was going to be defrayed by $2 million from the state grant, Bronk said. But the town decided to carve out that portion of the grant after learning it would prompt a prevailing wage requirement for the entire $50 million private development.

It “was just not going to pencil out,” Bronk said.

Instead, DECD was able to connect Preka’s group with a state Department of Housing grant program, which is not subject to prevailing wage, Bronk said.

Bronk anticipates it will take another two years or more for the project to come to fruition.

“DECD, to their credit, they found a way to work with another state agency to assist that component, so the project could advance,” Bronk said.