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Minnesota faces a severe affordable housing shortage, with low-cost rentals down 25% over the last decade and home prices doubling from 2012 to 2022. As a result, state and local governments set aside a record $1 billion for housing affordability in 2023.

Sadly, many of the new housing projects intended to address this crisis are built on the backs of vulnerable workers who earn too little to live in the homes they build.

A recent report by North Star Policy Action exposed the troubling reality of taxpayer-funded construction practices that exploit immigrant and at-risk workers, and revealed a disheartening truth: Public financing often flows to private, for-profit housing developers who employ contractors with a track record of labor violations.

While government support is crucial for affordable housing, it has also fueled abusive labor practices in construction. Wage theft, payroll fraud, lack of safety standards and other forms of exploitation remain persistent problems in Minnesota's construction industry, and troubling allegations have surfaced of construction firms cutting corners and abusing workers on projects in Rochester, Eagan and Minneapolis.

Arturo Hernandez was a victim of labor abuses while employed by Painting America, a drywall and painting contractor. In 2019, he testified before the Minnesota House of Representatives Labor Committee stating that his foreman insisted on paying him in drugs, claiming it would make him more money if he sold them. Hernandez refused, and reported the incident to Painting America, as well as to government oversight agencies. To this day, no action has been taken against Painting America or the contractor, and Arturo was never compensated for his three weeks of work.

Many workers face similar exploitation, especially those who don't fully understand their rights because of language barriers. In another case, government investigations found that Absolute Drywall, a construction company based in Lakeville, deprived workers of more than $126,000 in wages, violated child labor laws, misclassified workers, and submitted false and misleading information during the course of an investigation.

These cases are just the tip of the iceberg. Midwest Economic Policy Institute estimates that 30,100 Minnesota construction workers — accounting for 23% of the workforce — are misclassified or are paid off the books. These illegally employed construction workers earn 36% less ($29,700 annually) in combined wages and fringe benefits, while Minnesota loses $136 million each year in state tax revenues due to construction payroll fraud.

On May 19, the Minnesota Legislature passed a large omnibus package, including historic provisions that will expand prevailing wage mandates to certain multifamily housing projects receiving Low-Income Housing Tax Credits (LIHTC).

LIHTC is a federal program that is administered by state governments. It is the largest source of government funding for affordable housing projects, and prior to this legislation, lacked comprehensive labor standards. As a result, workers on 25 projects that received approximately $31 million in LIHTC funding over the last seven years were at risk of exploitation by problem contractors.

Prevailing wage laws reduce this risk by establishing a wage and benefit floor based on local standards, ensuring that government-financed projects do not undercut area wages. Publicly funded projects typically go to the lowest-cost bidders, and without prevailing wage requirements, contractors often cut worker pay and benefits to lower costs, leading to a race to the bottom and encouraging practices like wage theft and payroll fraud. These laws improve workers' quality of life and job stability, boost local economies through increased spending and reduced reliance on public assistance, and promote higher quality work.

Importantly, these laws accomplish all of this without raising costs. A 2018 analysis of 640 school construction bids showed that prevailing wage bids were no more costly, proving fair compensation for workers doesn't hinder development.

Minnesota is the first state in the nation to adopt prevailing wage requirements on LIHTC projects. This is a huge win for workers, and shows that we are willing to hold developers and contractors accountable for labor abuses, especially ones that utilize public subsidies. Other states will hopefully follow our example to ensure that public financing for affordable housing will no longer fuel wage theft and worker exploitation.

Jake Schwitzer is the executive director of North Star Policy Action. He has been a grassroots organizer, communicator and senior staffer to U.S. Sens. Al Franken and Tina Smith.