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When one unelected bureaucrat decides the finances of a city
In 2017, the City of Hartford faced a $65 million deficit and was teetering on the edge of bankruptcy. Mayor Luke Bronin was trying to reach concessions deals with the city’s various government employee unions to save money, but at that point had only been able to reach a deal with the city’s firefighters.
In the midst of this, Hartford received an unexpected blow to its finances thanks to the decision of an arbitrator — an unelected bureaucrat who makes final, binding decisions in contract disputes between municipalities and unions.
Contract negotiations between the city and the Hartford Municipal Employees Association had been ongoing since 2013. Unable to reach an agreement, the parties ended up in arbitration. The union demanded 7.75 percent retroactive pay increases for its 181 members, some of whom are among the highest paid municipal employees in the state, according to the arbitratiors’ analysis.
The arbitration board consisted of James Ferguson representing the interests of the union, John M. Romanow representing the interests of the city, and Mark E. Sullivan, who was the designated neutral voice in the room — and ultimately the one person who would decide whether Hartford would have to pay out millions in back pay when it already couldn’t afford to pay its bills.
Sullivan is a retired University of Connecticut professor, where he was head of the Mediation Certificate Program. He serves as a neutral alternate, but has spent time working with labor organizations in the past. Members of the state mediation and arbitration board, including alternates, are appointed by the governor.
Per state statute, the arbitration panel considered a number of different factors: contracts in other municipalities as well as labor agreements between Hartford and its other labor unions; Hartford’s ability to pay; the financial well-being of the city; the economic condition of the state; the welfare and interest of the employees and, finally, whether or not such changes are in the public interest.
The disputed issue revolved around two retroactive pay increases of 1.25 percent dating back to 2013 and 2014. On the rest of the pay increases, the city and union agreed.
The arbitration panel knew that Hartford’s financial situation was dire. They noted that Hartford was facing “an unparalleled financial crisis which is often termed catastrophic,” and is one of the poorest municipalities in the state. At the time of the decision, Hartford had a negative cash flow of $19 million.
However, in a decision that Bronin decried as “stunning,” the arbitration panel awarded a pay increase of 6.25 percent retroactive to 2014, costing the city an additional $1.1 million and pushing it further down the road toward bankruptcy.
Bronin had previously attempted to bypass the arbitration process by supporting the creation of a panel which would have had final say on Hartford’s union contracts, but his idea was derided by union officials and eventually shot down by state lawmakers. Bronin serves on the board of directors for the Connecticut Conference of Municipalities, which pushed for municipal binding arbitration reform during the 2017 state budget negotiations.
In a similar case, with another big payout, the City of Waterbury in 2017 went to arbitration with its firefighters union. The union was demanding, among other things, retroactive wage increases totaling 7.75 percent, while the city was offering 4 percent.
Once again, the three person arbitration panel consisted of two members who had already agreed to disagree – the arbitrators representing labor and management.
The final deciding vote would come down to the designated neutral: Leslie A. Williamson, a retired state employee who worked as an attorney with the State Department of Education.
The financial history of Waterbury played a major role in a number of decisions made by the panel. Waterbury had nearly gone bankrupt and was placed under the control of a state oversight board between 2001 and 2006. The board was created to help the city get out from under a massive amount of debt and to improve its junk bond rating.
The union argued that the city had “indisputably rebounded from the economic conditions which promoted the intervention of the Oversight board,” according the arbitration decision. The union claimed the city’s grand list had expanded by $50.5 million between 2013 and 2014 and said Waterbury’s “effort to attract and expand businesses has been quite successful.” They noted the city had budget surpluses for several years and now had a 15 percent reserve fund.
After reviewing reports by Standard & Poor’s and Fitch Ratings, the arbitrators largely agreed with this finding, although they noted the state of Connecticut was reducing payments to the city in the amount of $3 million.
When the final decision was reached, the city of Waterbury came out a little worse off. The firefighters received a 7 percent increase in pay, with retroactive increases going back to 2014, totaling $2.4 million.
Wage increases were just one of more than twenty contract issues heard by the arbitration panel.
Waterbury Mayor Neil O’Leary – who also serves on CCM’s board of directors – said the decision was favorable for the city because Waterbury had enough money in reserves to cover the wage increases and was able to prevent costly pension changes demanded by the union.
Nevertheless, during the 2017 budget negotiations, Mayor O’Leary called for reforms to municipal binding arbitration.
When the budget passed, it included a small reform to the binding arbitration process: from now on 15 percent of a town or city’s reserves would be exempt from consideration as to whether or not a municipality can pay for a contract.
That may be some consolation to Waterbury, which has reserves, but it is of little comfort to Hartford, which will be facing financial hardship for years.
History of Binding Arbitration
Arbitration over contracts for both municipal employees and teachers began in 1975 as a way to expedite contract disagreements without resorting to the court system or strikes by public sector unions. The State Department of Education has its own arbitration panel to handle education contracts, while the state maintains an arbitration board for other municipal contracts.
There are two types of arbitration – interest arbitration, which focuses on collective bargaining disputes, and grievance arbitration, which involves workplace disputes or interpretation of the labor agreement. These are handled by different sets of arbitrators.
Most arbitration cases are handled by a three person panel of designated arbitrators, but in some cases a single arbitrator decides the case. Although it is not required that an arbitrator be an attorney, most of them are, and often the city and the union will hire attorneys to make their case before the panel.
Each side selects their representative on the panel, and then both must agree on who will be the designated “neutral.” So, when choosing a neutral, both sides examine the individual’s history of making decisions before accepting or rejecting them.
Both the town and the union will make their last best offer on each separate issue. Although the arbitrators are not allowed to split the difference between the two offers or agree to anything other than the last best offer from either side, they can often find a work-around by accepting the town’s final offer on one issue and the union’s final offer on another.
An arbitration award can be overturned by a 2/3 vote of the town or city’s legislative body. At that point, the award is reviewed by a new panel composed entirely of neutral arbitrators. Their decision is final and binding on the municipality, which must also pay for their services. This doesn’t happen often.
A 2006 study by the Legislative Program Review and Investigations Committee found that just 4.5 percent of municipal arbitrator decisions went to a second review hearing. Only 9 percent of the issues that went to a review hearing were reversed.
In rare situations, the municipality can take their case to court, although it is usually unsuccessful.
Controversy Over Binding Arbitration
Municipal leaders have been advocating for reforms to the binding arbitration process for years, claiming it leads to higher costs for local taxpayers. Unions increase the number of their demands, confident that an arbitrator will grant at least some of them.
With binding arbitration, the last best offer — put forward by elected leaders of a municipality — can be superseded by an unelected panel, which really comes down to a decision by the single neutral arbitrator.
A study by the Cato Institute said that arbitration is a boon for government unions “because an arbitrator will never award a settlement that is anything less than management’s final offer, so the union is guaranteed to obtain at least some of its demands and will never come out worse than the status quo ante.”
In the case of Waterbury and the firefighters, the union was guaranteed at least a 4 percent raise because that was the city’s final offer. Taking the issue to arbitration and making each year’s wage increase a separate issue almost guaranteed they would receive more than the bare minimum.
The report by the Legislative Program Review and Investigations Committee found that in most cases, there was a 1 percent per year difference in the wage offers between municipalities and unions. Because contract negotiations can take years, wage increases are often retroactive, compounding the costs to the municipality.
The Investigations Committee also reported that arbitrators sided with towns on 62 percent of the issues when it came to municipal labor contracts, and 51 percent of the time when it came to teachers’ issues.
But those statistics only tell half the story.
Arbitration decisions generally involve multiple issues. Even wages are not considered a single issue because each wage increase for each year is considered separate. If the arbitration panel sides with the town on 2 out of 3 wage increases, the majority of the panels’ decisions would be in favor of the town, but the union still walks away with a better deal, and the taxpayers have to pay more.
This is part of the problem with municipal binding arbitration, according to Betsy Gara, executive director of the Connecticut Council of Small Towns. In testimony before the state Labor Committee, Gara said that the arbitration process leads to a “one for you, one for him” outcome, rather than arbitrators picking one full final package.
The process “encourages extreme game playing in putting together the final offers package,” Gara wrote. “There is little incentive for either side to come together.”
It’s a “game” in which the union side has little to lose and can secure a better deal.
A 2015 arbitration decision in a contract dispute between the City of New Haven and the city’s attorneys’ union provides an example.
The union was demanding a 9 percent retroactive wage increase, while the city was offering a non-retroactive 6 percent raise. The city argued that it had virtually nothing in reserves to pay out retroactive wages.
Between the three years of wage increases and whether or not they would be awarded retroactively, there were 5 separate issues for the arbitration panel to decide:
- If wage increases would be retroactive to 2013.
- If the 2013 wage increase would be 2.5 percent or 3 percent.
- If wage increases would be retroactive to 2014.
- If the 2014 wage increase would be 2 percent or 3 percent.
- If current wages going forward would be increase 2 percent or 3 percent.
In the end, the arbitrators decided in favor of the city on issues 1, 3, and 5 and with the union on issues 2 and 4 resulting in a non-retroactive 8 percent raise.
While the city won most of the decisions, it still had to raise wages 2 percent over their final offer. The city didn’t have to pay a lump sum in retroactive wages, but still had to pay more going forward.
State Budget Problems
As budgetary problems at the state level trickle down to cities and towns, municipalities find themselves struggling to pay for wage increases for employees and teachers. Sometimes a few percentage points can make a big difference, particularly because towns face contract negotiations with multiple bargaining units, all looking for a bigger piece of the pie.
During Connecticut’s 2017 budget crisis, Gov. Dannel Malloy temporarily cut education funding to 139 towns and cities, leaving some towns on the verge of insolvency. Although funding was mostly restored through the budget agreement, Malloy cut another $90 million from education funds when he had to make an additional $180 million in cuts.
The Empire Institute’s study of New York’s binding arbitration decisions for public-safety employees – the only employees allowed to use binding arbitration in New York – found that wages increased three times faster for police and firefighters than for other public-sector employees. An arbitration decision raising wages in one municipality essentially sets the bar higher for other towns and cities when negotiating with their unions.
Binding arbitration can also set up fiscally responsible towns for difficulty, as the arbitrators consider what a town has in savings as fair game when deciding whether or not wages and benefits can be increased under a new contract.
Connecticut municipalities, on average, have about 12 percent of their budget in reserve.
In testimony before the Labor and Public Employees Committee, Gara argued that allowing arbitrators to consider a town’s fund balance essentially puts a town’s credit rating at risk.
“Requiring towns to lower fund balance reserves to pay for increased employee benefits will adversely impact a municipality’s bond rating,” Gara said in her written testimony. “This can be very costly to municipalities and their taxpayers.”
Education costs are generally the largest expense in any municipality’s budget, so binding arbitration for teachers, administrators and paraprofessionals can end up costing a town big money out of its reserves, particularly when it involves a payout of retroactive wages.
The 2006 study by the Investigations Committee found that when it came to wage increases, arbitration panels found in favor of teacher wage increases 58 percent of the time, and for administrators 78 percent of the time.
Education costs – the majority of which are pay and benefits for employees – increased 32 percent on average between 2006 and 2016, much faster than the rate of inflation. Those increases came despite declining student populations.
Contract negotiations almost always include raises for employees, increasing payroll costs for municipalities, even when there may not be any increased revenue. If a city or town is not expanding, growing its grand list or receiving more money from the state, it may have to resort to property tax increases to support wage or benefit increases.
In a 2012 arbitration decision between the Town of Westport and its public works union over an 8 percent wage increase, the town argued that its grand list had actually decreased by 12.4 percent and state funds were decreasing, putting the burden of the wage increase on taxpayers.
“Thus, the Town’s only option to meet increased expenses, and presumably what the Union expects the Town to do in order to fund their salary and benefit increases, is to further burden Town taxpayers,” Westport argued. The town also pointed out that its reserve funds had been used to balance the budget in the past.
In this case, the arbitration panel sided with Westport on the wage increases, limiting the increase to 6.5 percent.
Arbitration can also inhibit a municipality’s ability to change its benefit structure in a timely manner. In 2014, the Town of Cheshire attempted to move eight new police officers onto a 401(k) style retirement plan. The town had already moved all its other new employees onto the new system. A contentious arbitration fight between the town and the police union resulted in four of the officers receiving the old pension plan and four being moved onto the new defined contribution plan.
Under the decision, all officers hired in the future would be part of the defined contribution system, but Vice Chairman of the town council, David Schrumm, said the decision “will cost taxpayers for years to come.”
“I don’t begrudge us going to arbitration because there are times when you have to stand up for something, not just lay down and take it,” Schrumm told the New Haven Register. “This is another example of public employees and our state’s political system being joined at the hip.”
The composition of the panel has also been scrutinized because the arbitrators representing labor and management will always vote in favor of their side. Even instances in which the town and union agree, the arbitrators will choose one side for the award and the arbitrator representing the other side will dissent.
Essentially the designated neutral is the only vote that matters. Gara claimed that the neutrals are a “good old boys” list and “are essentially political appointees.”
The process can take years and can become expensive for taxpayers. The City of Waterbury spent $135,000 on legal fees during one arbitration process.
However, one of the most consistent criticisms about the binding arbitration process is that it takes control of a municipality’s finances away from elected officials and puts it in the hands of an unelected panel.
Small Reforms Part of the New Budget
Unlike other states, some of which only use binding arbitration for public safety workers, Connecticut requires arbitration for all collective bargaining units, whether they are New Haven attorneys, librarians in Wethersfield, or paraprofessionals in Monroe. Any and all bargaining units can take a town to binding arbitration for a chance to increase their pay and benefits.
Municipal leaders have been calling for binding arbitration reform for years and this year they got one small reform as part of the budget.
Under the new law, arbitrators can only consider 85 percent of a municipality’s reserve funds when deciding whether or not a municipality has the ability to pay for increased costs. In the case of Waterbury and its firefighters, the arbitrators considered Waterbury’s $13.9 million in reserve funds. Under the new law, that number would have been $11.8 million.
In an op-ed for the Hartford Courant, Connecticut Conference of Municipalities Director Joe DeLong wrote, “This provision alone would allow towns to maintain healthy reserves for bonding and necessary capital projects without fear of the money being diverted into increased salaries and benefits.”
It was a small victory. Critics point out that even a healthy reserve fund of 15 percent of the town budget could be quickly depleted to nearly nothing. Fifteen percent of fifteen percent doesn’t add up to much, after all.
It is not unheard of that an arbitration decision can ruin a city. A 2011 arbitration decision against the City of Scranton, Pennsylvania cost the distressed municipality $17 million in retroactive pay increases to police and firefighters. The city had to pay all its other employees minimum wage in a scramble to meet the increased costs.
When the city was unable to come up with the funds, a judge ordered the amount of back pay increased to $21 million and the unions threatened to seize the city’s assets.
In Connecticut, recognition of the need for reform comes from both sides of the political aisle. Gov. Malloy pushed for binding arbitration reform as part of his budget package, possibly to tempt municipal leaders and organizations into accepting his proposal to shift part of the state teacher pension costs onto municipalities.
Part of the governor’s reforms also included making the selection of a neutral arbitrator random, similar to the way court judges are appointed, but this reform was left out of the final budget agreement. COST has called for the arbitrators to be chosen from an unbiased organization such as the American Arbitration Association.
Republicans had long advocated for reforms to the arbitration system for municipalities, but their Democratic counterparts also put forward the idea of reforming binding arbitration laws in order to better help towns and cities manage their budgets.
Some other states have taken on binding arbitration reforms more aggressively. New Jersey instituted a wage increase cap of 2 percent for binding arbitration, making the process less palatable for unions seeking large wage increases.
New York, Massachusetts and Rhode Island only allow binding arbitration for public safety workers like police and firefighters, although that didn’t prevent Boston from being forced to give 25 percent wage increases to its police officers, costing the city $80 million and a 19 percent raise to its firefighters, which cost $74 million
As Connecticut’s fiscal problems continue and state deficits add up, towns and cities may continue to see less revenue coming in from the state, while employees and teachers continue to demand higher wages.
This year’s state budget agreement resulted in less money flowing to cities and towns, while those municipalities struggle to meet growing expenses and end up draining their budget reserves.
These difficulties will lead to further examination of the state’s binding arbitration laws, and lawmakers will have to decide whether this process is best for taxpayers and the state moving forward.
Hartford has been placed under the control of an oversight board similar to the board which took over Waterbury’s finances in 2001, in exchange for receiving an additional $40 million from the state. The board will have greater power to negotiated contracts with the city’s unions.
Although contract negotiations with employees continually ratchets up employee costs, it appears likely that in the future a municipality’s ability to pay is going to become a bigger and bigger consideration for arbitrators — namely, because some towns won’t be able to.
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