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Businesses Can Bear Brunt of Living Wage Proposal, Report Concludes

By Jorge Casuso

A pioneering living wage proposal that has spurred months of debate and sparked one of the costliest political wars in Santa Monica history likely will have little impact on its primary target - the city's luxury beachfront hotels.

That was the key conclusion of an eagerly awaited report analyzing the economic impacts of a proposed ordinance that would make Santa Monica the first city in the nation to require businesses with no municipal contracts or subsidies to pay their workers a living wage.

The 370-page report - which was posted Monday on the City's web site - weighed what would happen if the 72 businesses in Santa Monica's lucrative coastal zone grossing more than $3 million a year were required to pay their workers at least $10.75 an hour.

Hotels, which employ half of the 2,477 workers slated to receive wage hikes under the proposal, "would bear the heaviest share of the total cost increases," according to the report by Massachusetts economist Dr. Robert Pollin, a leading proponent of the living wage. They also would have the easiest time absorbing the increased costs, which would average $200,000 per business.

"Hotels could raise prices to cover at least some, if not all, of their additional living wage costs," said the report, which has been expected for more than a month. "Hotels' gross receipts have been rising rapidly. If the hotels' gross revenues were to continue growing over time, the cut in their profit margins due to the living wage ordinance would occur on a one-time basis only."

Hardest hit would be the coastal zone's six restaurants - all of them upscale -- that gross more than $3 million each. After tipped employees are exempted (one of the report's key recommendations), 214 employees would qualify for raises. The increased costs, however, can be offset by raising the price of the average meal from $30 to $33 per person, including tax and tips.

"Within this segment of the market, customers choose restaurants more on the basis of product quality and service than price alone," according to the report, which was compiled by Pollin and nine contributing authors and researchers for the Political Economy Institute at the University of Massachusetts Amherst.

But unlike hotels, which have had little new competition since voters approved a ballot initiative banning new hotels along the beach in the early 1990s, restaurants are more vulnerable to wage hikes. In addition, their profit margins are much slimmer than those of hotels, which saw gross revenues more than double between 1993 and 1999, according to the report.

"The restaurants have not experienced gains in gross revenues in recent years comparable to the hotels," the report said. "It therefore appears unlikely that the restaurants would be able to operate at profit margins significantly below those that they presently receive."

Least affected would be the 55 "low impact" businesses, including retailers, which would be required to give raises to approximately 1,000 workers. While the hotels and restaurants covered by the proposal face average increases of 10 percent of gross receipts, other businesses would see increases of only 2 percent to 2.5 percent.

"Those firms should therefore be able to manage a fairly smooth transition into a living wage environment through some combination of small price and productivity increases, and perhaps slight one-time declines in profit margins," according to the report.

Despite the fears of Santa Monica's business community, the report found that the proposed ordinance would result in, at most, between 30 and 186 layoffs. While some businesses would likely hire more educated workers, the change would not be dramatic and can be countered "if the city were to establish a hiring hall provision that would give special priority to placing disadvantaged workers."

If anything, the report concluded that increasing salaries could benefit businesses by reducing turnover and increasing employee morale and productivity.

"For some firms increases in productivity resulting from living wage raises could absorb as much as 20 to 25 percent of the total cost increase in hotels and restaurants," according to the report.

The report suggests that the City use gross income instead of the number of employees (50 according to the original proposal) to determine which businesses would be required to pay a living wage. It also recommends exempting workers earning at least 50 percent of their income from tips, a measure that would "dramatically reduce the costs of the ordinance for covered employees."

If the proposal is viewed as a bane by business owners (who predicted a report by a living wage proponent would be biased), it would be a boon for low-wage workers, who would see salaries increase by an average of $3.17 an hour, or $5,819 a year.

"The people coming in are making $6.50 an hour," said Edith Garcia, who has been a housekeeper at the Loews Santa Monica Beach Hotel for 11 years. "Those making $10 have been there for 10 to 15 years. We should have made that a long time ago."

Garcia, like many of the employees of hotels along the coast, saw her salary increase only after the living wage proposal was floated last Summer by Santa Monicans Allied for Responsible Tourism (SMART). In fact, the results of the report, which surveyed workers between March and June, may be outdated since they likely don't reflect a recent flurry of raises reported by the Hotel Employees and Restaurant Employees Union Local 18.

Some hotel officials were quick to react to the report, which they argue does not accurately reflect the financial realities of operating a hotel. Gross receipts, they contend, are not an indication of profitability.

"Hotels increase rates to cover increased costs," said Sig Ortloff, the general manager of Le Merigot Beach Hotel, which opened in January and which expects to begin turning a profit in its third year. "This is just ludicrous. Somebody makes an assumption that we work with margins that are beyond anyone's imagination.

"The number one plan from day one has been to get it from the hotels because hotel guests are not voters, so they can get it from the goose that lays the golden egg," Ortloff said.

Proponents of the living wage measure dismiss protests that the hotels can't pay workers more. They point to a recent campaign bankrolled by half a dozen beachfront hotels, which donated $443,000 to qualify a living wage initiative for the November ballot. The initiative, which follows that of 51 other U.S. city's by requiring businesses with municipal contracts or subsidies to pay workers a living wage, also has an unprecedented clause - it would erase any action the council might take on any living wage proposal.

Erwin Chemerinsky, a USC law professor who chaired the Los Angeles Charter Reform Commission, views the Pollin report as a model of research for policy making.

"I think this is exactly the right way of looking at a living wage proposal," Chemerinsky said. "I thought the (hotel-backed initiative) was a very dishonest attempt at tricking people into limiting the living wage. This is a very careful study."

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