In a decision with important implications for developers and charter cities alike, the California Court of Appeal held in Palm Springs Promenade, LLC v. Department of Industrial Relations that a city’s contribution of funds to a private development project does not automatically exempt the project from California’s Prevailing Wage Law ("PWL"), even if the city is a charter city with a local ordinance opting out of prevailing wage requirements.
Background
Palm Springs Promenade, LLC ("PSP") entered into a development agreement with the City of Palm Springs (a charter city) to redevelop a blighted 13-acre downtown site into a mixed-use commercial and residential project. The City contributed approximately $51 million in local funds, which included payments for public infrastructure improvements and property acquisition. PSP provided over $143 million in private capital and executed the construction contracts independently, selecting the contractors and managing disbursement through a third-party fund control agent.
Under the City's municipal code at the time, public works projects were exempt from the PWL. Relying on this exemption, PSP paid below-prevailing wages to workers on the project.
However, the Department of Industrial Relations ("DIR") subsequently determined that the project was subject to the PWL, because it was “paid for in part out of public funds.” PSP challenged this determination, arguing that as a charter city undertaking a municipal affair, Palm Springs could lawfully opt out of the PWL.
The Court’s Holding
The Court of Appeal affirmed the DIR's position, concluding that:
- Although the City provided substantial public funds, the project was not a “municipal affair” under the California Constitution’s home rule doctrine.
- The primary beneficiary of the development was PSP, not the City. PSP owned the land, selected the contractors, bore the risk of cost overruns, and retained control of the completed improvements.
- The City’s participation — focused on limited public improvements like roads, a parking structure, and a pad for a future event center — did not convert the privately-driven project into a municipal affair.
- Accordingly, the City's municipal code exemption from prevailing wages did not apply, and the PWL governed the entire project.
Why This Case Matters
This is the first published California appellate decision to explicitly hold that a charter city’s financial contribution to a privately developed, privately owned project does not make it a municipal affair — even when the city receives some public benefit in return.
For developers and municipalities, the key takeaways are:
- Prevailing wage obligations are likely to apply whenever public funds support a project – especially if the developer retains ownership and control.
- A city’s status as a charter city does not immunize private development from prevailing wage laws, unless the project is truly public in nature and intended to delivery public facilities from the outset, bringing it within the "municipal affair" safe harbor provision.
- Structuring matters: The more control a private party retains, and the more the project serves private (rather than public) interests, the less likely courts will view it as a municipal affair.
Looking Ahead
This case serves as a cautionary tale for public-private partnerships. Developers cannot rely on a charter city's local ordinances to avoid prevailing wage requirements when projects are privately managed and primarily benefit private interests.
Public entities and private developers should consult experienced counsel early in the planning and contracting process to evaluate prevailing wage exposure under California law.
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