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Binding Arbitration Has Hurt, Not Helped, Struggling Cities

December 04, 2013

By Steven Malanga

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In the last five years, fiscal troubles in places like Vallejo, Calif., Detroit and Scranton, Pa., have focused attention on high government employee costs, especially from retirement programs that aren’t properly funded.

But behind the crushing outlays that these and some other distressed cities have faced is another feature of modern municipal government binding arbitration.

This mediation tool, which allows unelected arbitrators to decide employee contract matters when negotiations between unions and government break down, sometimes has resulted in big compensation awards that cities can’t afford.

So controversial has arbitration become that at least one formerly bankrupt city has repealed it, and a number of states have modified their arbitration practices to restrain the judgments.

Binding arbitration emerged and spread rapidly during the 1970s, largely as a reaction against strikes by public workers. States and cities rushed to outlaw or limit work stoppages by government employees, and many places simultaneously put in place proceedings to resolve contract disputes.

By 1977 alone, some two dozen states had enacted some form of binding arbitration. Over time, however, lobbying by public employees helped shape arbitration laws in their favor.

In some places, such as Michigan, the law didn’t require an independent mediator to take into account a city’s fiscal condition when rendering an award, prompting unrealistic judgments.

In other places, including New Jersey, arbitrators were told to pattern judgments after similar contracts in bordering communities, sometimes producing big salary increases to workers in moderate-income municipalities surrounded by richer ones.

Michigan was one of the earliest states to craft an arbitration law, thanks to the efforts in 1969 of former labor organizer turned politician Coleman Young. He quickly discovered the shortcomings of the law when Detroit voters elected him mayor four years later, just as the city’s budget began reeling from an economic downturn.

Amid stagnant revenues, arbitration panels granted Detroit workers generous cost-of-living increases. The size of the judgments contributed to a fiscal pinch that prompted steep layoffs, including some 1,500 police officers just as crime was rising in Detroit.

By 1981 Young complained: "Slowly, inexorably, compulsory arbitration destroys sensible fiscal management."

While arbitration alone didn’t undo Detroit, decades of rulings in favor of workers undermined finances to the point that in 2006 the Detroit News urged officials, including then-Michigan Gov. Jennifer Granholm, to "demand that the Legislature repeal the binding arbitration law."

Vallejo became the first California municipality to enact arbitration, passing the law in 1970. While arbitrators occasionally awarded unions with big raises over the years, the straw that helped break the city’s back came in September 2007, when a mediator ruled that Vallejo could not cut the size of its fire department even though it faced a fiscal emergency.

Locked into high employee costs and unable to reduce its workforce, the city filed bankruptcy eight months later.

In June 2010, Vallejo voters, intensely aware of the role that arbitration played in Vallejo’s fiscal demise, amended the city charter to eliminate it. "Binding interest arbitration was a nightmare for Vallejo," wrote city councilwoman Marti Brown in a recent op-ed in the Sacramento Bee.

Now Scranton faces default and possible bankruptcy. The struggling Pennsylvania city is part of a state-run program to aid distressed cities.

Nonetheless, two years ago the state’s Supreme Court ruled that, despite Scranton’s status as a troubled city, it was not exempt from an arbitrator’s ruling that overturned a city freeze on police and fire salaries. The court ordered the city to pay public safety workers a whopping $17 million in back pay.

Last year Scranton faced a cash crunch that at one point left it with just $5,000 in the bank, and the city temporarily suspended some payments on some of its bonds, hurting its credit rating. Since then, Scranton has been unsuccessful in securing a loan to pay the arbitration award, and now a judge has ruled that the city’s unions can begin seizing city assets.

Moody’s recently warned investors that the city’s fiscal woes could drive it into bankruptcy. Meanwhile, Scranton’s mayor has proposed increasing property taxes a whopping 50% to address the crisis.

Arbitration awards have also helped fuel pension problems. A series of rulings by an arbitrator in San Jose, Calif., helped send that city’s pension costs soaring from $73 million in 2002 to $250 million last year.

In two rulings spanning 10 years, for instance, an arbitrator decided that San Jose must increase initial pensions for public safety workers from 75% to 90% of final salary. The arbitrator even made the increase retroactive, so it applied to every current worker.

"Out-of-control costs are why we can’t keep all of our libraries, community centers and swimming pools open," Mayor Chuck Reed has said. "Many of these costs are the result of big pay and benefit increases awarded to our public safety unions by outside arbitrators."

Some states have begun reforming arbitration. In 2011, Michigan Gov. Rick Snyder signed legislation that requires an arbitrator to take into consideration a city’s ability to pay. New Jersey has gone further, putting a 2% cap on all arbitration awards.

America’s municipalities are facing unprecedented fiscal pressures.

Binding arbitration often forces officials elected by the people to cede control to an unelected administrator. Sometimes the results are disastrous.

Original Source: http://news.investors.com/ibd-editorials-viewpoint/120313-681507-some-cash-strapped-cities-pushed-to-the-brink-by-arbitrators-rulings.htm

 

 
 
 

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