How to prepare for minimum wage increases

Planned changes in California will have a notable impact on seniors housing.

By Humair Sabir

Possibly because of the recent election, there has been significant misinformation and confusion circulating around the scheduled minimum wage increases in California. At Granite Investment Group, we are in the process of acquiring seniors housing facilities in California, and have considered the impact of the SB-3 minimum wage legislation on those facilities. 

Here’s the background information: California has been fairly proactive in raising its minimum wage, especially when compared with the federal government. Even in the midst of an economic downturn, on Jan. 1, 2008, California increased its hourly minimum wage from $7.50 to $8. It was further increased to $9 on July 1, 2014 and $10 on Jan. 1, 2016, which currently remains in effect. 

By comparison, the federal minimum hourly wage is currently $7.25 and has not changed since July 2009. The spread between California and the federal minimum wage is expected to increase sharply, unless the federal government institutes a drastic increase. This is unlikely in the plans for a Trump presidential administration and Republican-controlled Congress.

Looking at the legislation

On April 4, 2016, California Gov. Jerry Brown signed legislation that made California the first state in the country to commit to a $15 minimum wage for its hourly employees. This legislation, called Senate Bill No. 3 (SB-3), mandates phased increases in the state minimum wage until 2023, when the whole state will have a $15 minimum wage.

Thereafter, starting in 2024, the minimum wage will be indexed annually for inflation with a floor of zero percent, meaning no decreases, and a ceiling of 3.5 percent.

Since SB-3 is intended to increase the minimum wage consistent with economic expansion, it provides the governor with safety valves, or “off-ramps,” to suspend wage increases if economic or budgetary concerns emerge. 

The governor can act by Sept. 1 of each year to pause the next year’s wage increase if there is a forecasted budget deficit (of more than 1 percent of annual revenue), or poor economic conditions (negative job growth and retail sales).

It is also important to note that SB-3 is only related to the state of California’s minimum wage. Counties and cities are free to enact their own minimum wages that are higher than the state minimum. So far, at least 17 local bodies in California, including San Francisco, San Jose and Los Angeles, have adopted timelines to reach $15 per hour that are more aggressive than the state.

Impact on seniors housing

There are approximately 7 million hourly workers in California, of which almost 2.2 million are currently paid minimum wage. It is estimated that 5.6 million Californians will be impacted either directly or indirectly by SB-3. Of that total, 440,000 workers (8 percent) are tied to the healthcare industry.

It is unclear how many seniors housing and skilled nursing employees these increases will directly impact. What is clear, though, is that the effects will be greatest among lower-skilled, but extremely critical roles, such as nurses’ assistants and caregivers. Also, when the wage floor rises, all categories close to the floor tend to rise as well, therefore indirectly impacting the entire labor force.

From an operating standpoint, the area most immediately and hardest hit will be the larger operator/managers, not just because they have the largest payrolls, but also because the minimum wage increases occur a year earlier for them. Mom-and-pop operators with one-off facilities typically tend to have fewer than 25 employees and therefore will have an extra year to plan for the increase in labor costs. However, smaller operators will start seeing the indirect effects of wage increases much earlier than expected.

Location of the facilities will also be a key factor, as most of the major metropolitan areas in California have local ordinances mandating a higher minimum wage than the state. For example, in May 2015, the Los Angeles City Council approved a proposal for a gradual establishment of a citywide minimum wage of $15 per hour by July 1, 2020, far earlier than the state requirement. San Francisco has an even more aggressive timeline and is scheduled to jump to $15 per hour starting July 1, 2018.

Navigating the storm

Eventually, private-pay operators will have to figure out how to pass these increased wage costs on to consumers in the form of rate increases. This will likely have to take place over time and will depend on the competitiveness of each facility. 

During this transitional period, we should all expect significant margin compression. 

Theoretically speaking, facilities that depend on the government should expect reimbursement to grow and catch up to the increased labor costs. However, practically speaking, we can all expect reimbursement to significantly lag behind expense increases.

In the meantime, while economists continue to endlessly debate the merits of raising the minimum wage, healthcare providers will have to look for ways to improve productivity in order to stay in business. 

Seniors housing and skilled nursing operators are already engaged in efforts to increase the quality of the care they provide while lowering costs. Increasing the productivity of labor at every level of their organization is crucial to that effort. Operators with outdated operating models will leave the industry and efficient care providers will gain valuable market share.

There is no doubt that increases in the minimum wage will cause some pain in the short term. But in the long run, this will benefit organizations that streamline their operations to provide the highest quality of care in the lowest-cost setting.

 

Humair Sabir is vice president of acquisitions at Granite Investment Group. He has been involved in reviewing and closing billions of dollars in seniors housing and skilled nursing transactions.

More News