Protect federal infrastructure dollars from state loopholes

Lower wages for blue-collar construction workers, more Chinese-made iron and steel and fewer federal infrastructure contracts won by businesses owned by women, people of color and veterans — that’s what infrastructure investment means in some states.

These states have enacted schemes — called “federal-aid swap” programs — that enable them to bypass federal construction standards.

“Federal-aid swaps” are essentially accounting gimmicks that exchange federal dollars for state dollars on infrastructure, thereby reducing the number of projects subject to Davis-Bacon prevailing wage, Disadvantaged Business Enterprise goals, and Buy America provisions.

Of the 15 states that have “swap” laws on the books, eight also lack state contracting rules that mirror federal requirements. In these eight states — Alabama, Arizona, Idaho, Indiana, Iowa, Kansas, Utah and Wisconsin — swaps function as a loophole for circumventing federal construction standards.

While proponents have argued that they provide flexibility or cost savings, the data tells a very different story.

According to the nonpartisan Government Accountability Office, Iowa has the nation’s most-utilized “swap” program — affecting as much as 18 percent of federal highway spending. Now, new research from the Midwest Economic Policy Institute (MEPI) has detailed the impact.

In analyzing more than 1,200 state highway projects between 2016 and 2020, MEPI found that swaps not only failed to save Iowa any money, but they also decreased the share of highway projects covered by local market-based prevailing wage standards by 10 percent and reduced those covered by Disadvantaged Business Enterprise goals by 4 percent. This translates to a multi-million-dollar wage cut for Iowa’s blue-collar construction workforce, and a pay cut of as much as 5 percent for workers on “swapped” projects.

These impacts have not been lost on many of Iowa leaders.  Two of the state’s Metropolitan Planning Organizations — Johnson County (Iowa City), and the Quad Cities have already opted out of the program.  In each of the past two years, former Rep. Abby Finkenaur (D-Iowa) and current Iowa Rep. Cindy Axne (D-Iowa) have introduced federal legislation to stop swaps from being used to undercut local construction wages.

Sadly, Iowa’s experiment mirrors that of a growing number of states that recently decided to erode local construction standards by repealing their state-level prevailing wage laws. In places like Indiana, Wisconsin and West Virginia, state politicians were enticed by promises of cost savings that never materialized. Instead, they saw lower earnings for construction workers, a weakening of the skilled trade apprenticeship programs that the industry relies on to produce a stable supply of skilled workers, and more public construction bids awarded to low-wage firms from out-of-state. 

States with strong prevailing wage laws have avoided these outcomes, and economic research has consistently shown why. First, because construction labor comprises a historically small and shrinking fraction of total construction costs — making it mathematically impossible to achieve any significant cost savings by cutting workers’ wages. 

Second, because prevailing wages reflect local market standards, they result in more local hiring, more investment in skills training and more construction workers earning middle-class incomes they spend in their local communities — all while producing improvements in job site productivity and efficiency that offset any differences in wage rates.

In Iowa, absent federal standards like prevailing wage or “Buy America,” the beneficiaries have not been Iowa-based workers, businesses or taxpayers — but rather businesses and workers from out-of-state or even out of the country. The research shows that Iowa’s swap program has boosted the market share of out-of-state firms on highway construction projects by more than $13 million, even as swapped projects failed to deliver any cost savings for taxpayers.

There is a reason why the Biden administration’s three major domestic policy priorities are called the American Rescue Plan, American Jobs Plan and American Families Plan. At their core, they are designed to invest in good-paying local jobs and strong local economies for the American people.

The data shows that “federal-aid swap” programs can undermine both goals. In Iowa, it’s clear they already are.

So as lawmakers complete their work on historic levels of national infrastructure investment, it’s not just a question of how much we spend or how we pay for it. It’s also a question of whether we are incorporating sufficient policy guardrails to protect the minimum labor and contracting standards that ensure these projects deliver the best possible value for taxpayers and our economy.

Frank Manzo IV is the policy director of the Illinois Economic Policy Institute and the Midwest Economic Policy Institute. He has authored or co-authored more than 30 studies on the impact of the federal Davis-Bacon Act and state prevailing wage laws.