On Wednesday, the Herb Wesson led City Council approved the Citywide Hotel Minimum Wage Ordinance without considering the impact on the hotel industry, the Convention Center, and the City’s well deserved “business unfriendly” reputation that has alienated employers and investors who create jobs.

78vAs a result, on July 1, nonunion hotels with 300 or more rooms will be required to increase its hourly wage rate for all employees, including “tipped” employees, to at least $15.37, one of the highest rates in the country.  On July 1, 2016, this mandated increase will apply to all nonunion hotels with 150 or more rooms.  This minimum wage will also be subject to cost of living adjustments. 

Unfortunately, the predisposed City Council did not engage in any real discussion or analysis of the proposed increase, ignoring the reports of three consulting firms that were only made available on Monday afternoon, hardly time for the Economic Development Committee and the City Council to digest the impact of this huge wage increase.  More than likely, only a few of the Councilmembers even bothered to read the reports.

As the Editorial Board of The Los Angeles Times put it, “It’s been clear for months that the proponents of the [hotel minimum] wage on the council have no desire to have a real debate on the merits of raising pay just for hotel workers.  Instead, they’ve ignored unfavorable economic studies, tuned out valid industry concerns, and overridden their own existing laws in an effort to enact what is in fact bad public policy.”

The one time increase associated with the implementation of the minimum wage for hotel workers is estimated to be in the range of $50 to $100 million, a significant hit to the bottom line of City’s hotel operators.  This will result in the loss of many jobs as hotels will be forced to reengineer their operations since it will be very difficult to pass along the higher costs through increased rack rates or higher restaurant and bar prices.

The higher minimum wage for hotel workers will also discourage the future development of hotels throughout the City, including in downtown LA.  Hotel operators and real estate developers will not be able to realize an adequate return on their investment, especially when the ROI is compared to other less risky developments in more business friendly cities.

The higher minimum wage will also have a negative impact on the Convention Center, an outdated, poorly laid out, second tier facility that competes on price as DTLA, where the action ain’t, is hardly a prime destination for the convention trade. If, and that is a big if, the hotels are able to increase their rack rates, it may drive price sensitive events away for the Convention Center to other more attractive venues.  Furthermore, risk adverse real estate developers, hotel operators, and their lenders will be reluctant to build new hotels, even if the City offers increased giveaways and subsidies. This will result in a shortage of desperately needed hotel rooms and the loss of thousands of well-paying construction jobs.

By kowtowing to politically powerful Los Angeles County Federation of Labor, the members of the City Council put their short term political interests ahead of the long term needs of our City’s economy by creating a hostile work environment for employers and investors.  Companies will be reluctant to invest, speculating what industry will be the City’s next target: apparel, hospitals and nursing homes, trucking companies at the Port, LAX and the airlines, the railroads, or warehouse operators, just to mention a few.

Despite Mayor Eric Garcetti’s claim that jobs are his top priority, the City is not “open for business.”

To the contrary, when implementing the hotel minimum wage, the City did not even consider a request by the business community to address the gross receipts business tax, by far the highest in the region.  The City recently approved, at the behest of organized labor, an Exclusive Trash Franchise over the objections of the business community and the advice of the City Administrative Officer.  It has also engaged in numerous other actions that have scared the hell out of employers, investors, and the business financing banks.

If the City is serious about creating jobs, Mayor Eric Garcetti, the Herb Wesson led City Council, and the business community need to develop and implement a definitive plan that provides a stable economic environment where employers are not subject to the whims and demands of the City Council and its campaign funding cronies.  At the same time, the City needs to enter into a long term plan that eliminates the Structural Deficit, fully funds its pension plans, and fixes our streets and sidewalks.

Until then, employers will vote with their feet and move to Texas and the City will be doomed to high unemployment and slow growth and a lower quality of life for all of its citizens other than those that occupy City Hall and their cronies.

Cross-posted at City Watch.