LEAGUE WHITE PAPER ON ARBITRATION REFORM (September 23, 2010)
It has now been two months since the Governor signed the new 2% levy cap into law. The League had asked the Governor and the Legislature to delay action on the cap until after they had agreed on management reforms and mandates relief items that would make that cap workable. Our request was ignored. As we feared, there is a danger that inertia has set in. Agreement on management reforms and mandates relief has NOT been reached.
All around the State, responsible municipal officials are reviewing their “Best Practices” to receive their full final payment of State aid and have begun planning their 2011 budgets. At this point, those plans MUST account for the new cap. At this point, those plans must be based on the assumption that meaningful management reforms and mandates relief initiatives will NOT be in place. At this point, those plans must also be based on the further assumption that next year’s State budget will not provide statutorily required revenue replacement funding.
Accordingly, though Mayors and governing bodies will do whatever they can to prevent negative outcomes, however property taxpayers should anticipate service cuts. And local government employees should expect lay-offs.
These consequences may be unavoidable in 2011. Going forward, the situation can only improve IF serious reforms are enacted and unfunded mandates are relieved or repealed. Attention to the Binding Interest Arbitration mandate should top the list of State priorities for meaningful property tax relief.
Binding Arbitration – Impact on Property Taxes
- The primary driver of local government costs has been the inexorable increase in employee salaries.
- Over the past 30 years, the salaries of police and paid fire personnel have risen faster than all others, though other personnel have also seen higher than CPI increases in salary rates, just at a slightly lower rate.
- This has occurred primarily as the result of the 1977 legislation mandating binding interest arbitration to settle contractual disputes.
- In 1968, the Legislature passed the Employer Employee Relations Act, which authorized collective negotiations by public employees, though the practice had been underway for some time prior to that.
- In 1977, the Legislature authorized binding interest arbitration to eliminate the possibility of public safety employees striking to resolve an impasse in collective negotiations.
- Initially, binding interest arbitration was conducted under a terminal procedure that had as its method of resolution a default decision making mechanism for arbitration known as last best offer.
- In this method, each party provides the arbitrator with a final offer. Each proposal is presented in two parts: a package of economic items, and a package of non-economic items. The arbitrator was required to choose either the employer’s or the collective negotiations unit’s economic package in total. The arbitrator then decides non-economic proposals of either party on an item by item basis
- In 1996, the Legislature reformed binding interest arbitration and the terminal procedure default impasse resolution procedure changed to conventional arbitration
- In this method the arbitrator receives the final position of the parties on each economic and non-economic issue and decides each item. The arbitrator’s decision may be the position of either party, or some point the arbitrator deems appropriate given the testimony and facts presented. These decisions must be supported by arguments addressing prescribed statutory criteria.
- In addition to the default impasse resolution procedure, in 1996, the Legislature introduced a series of additional “reforms” into the process. Some of these included:
- the use of 8 statutory criteria that must be addressed by the arbitrators;
- Inclusion of Criteria #5, “the lawful authority of the employer,” which required recognition of the appropriations cap by the arbitrator as one of the required criteria to be addressed;
- Required annual training for an elite corps of arbitrators who would be assigned these cases.
- The requirement that the arbitrator separately determine whether the “total net annual economic change” for each year of the contract is reasonable under these criteria.
- The parties were to choose arbitrators by lot to reduce the concentration of cases among a small number of arbitrators. However, the law permitted the parties to mutually agree on an arbitrator, which has become the common practice.
- These “reforms” have seemed to do little to “level the playing field.” The reasons for this are varied and depend upon individual decisions and communities.
- From 1993-1996 there were 139 awards issued with an average salary increase ranging from 5.65% to 4.24%. During this same period there were 201 reported voluntary settlements ranging from average salary increases of 5.56% to 4.19%.
- From 1997-2000 there were 127 awards issued with an average salary increase ranging from 3.63% to 3.64%. During this same period there were 209 reported voluntary settlements with salary increases ranging from 3.95% to 3.87%.
- From 2001-2009 there were 154 awards issued with an average salary increase of 3.75%. During this same period there were 425 reported voluntary settlements with and average salary increase ranging from 3.91% to 3.6%.
- During the first six months of 2010, there were 5 awards issued with an average salary increase of 2.43%. During this same period, there were 23 reported voluntary settlements with an average salary increase of 2.8%.
- The average number of awards issued annually from 1997-2007 (22) is lower than the number of awards (74) issued each year from 1978-1995, and also lower than the average number (39) issued annually from 1993 through 1995,
Binding Arbitration – 2010 Options
At this point, the Legislature has been asked by the Administration to approve further binding arbitration reforms. Among the possible governmental changes and outcomes are the following.
1) The Governor and Legislature reach impasse and do nothing to address the problem. The result would be:
a. For taxpayers - As the payers of last resort, they will continue to foot a larger and larger property tax bill albeit capped at 2% increases each year. Their services will be further limited as a greater percentage of municipal resources are dedicated to public safety services at the expense of other public service. This would be a continuation of a trend started 33 years ago.
b. For uniformed employees with seniority - Those uniformed employees with seniority will initially probably be protected and will continue to receive benefits, such as top loading the salary range increases so those at the top step will see the bulk of the new money. After several years, it is possible that younger officers will rebel against this top loading. A possible schism will develop in the ranks of the paid uniformed services.
c. For junior uniformed employees - The bottom of the range will remain static or new guides will be negotiated or awarded and over time the salary will have less and less buying power. However, they will be able to look forward to step increases of some significance as they mature in the force. More likely is fewer police officers and fire fighters will be hired because of the lack of money. Now, in many circumstances, the union accepts layoffs or reductions in force to fund salary increases. This is not paying more to employees because their increased productivity has increased output.
d. The safety of the public (layoffs and attrition leading to smaller forces) - Similarly, the ratio of employees to population falls. The natural though unlikely extension of this is that there will be one officer for every 10,000 - 15,000 residents, instead of 2 to 4 per thousand, as is common now.
e. For other municipal employees - Most other discretionary employees will be laid off, unless other funding can be found to support them. Salaries for some will be frozen or reduced, both of which have already occurred in many municipalities to non-union employees. Eventually, there will be hiring problems associated with lower compensation levels. Here the effects of a free market of labor will be seen.
f. Increased push toward shared services or consolidation in police and fire services as well as other municipal services.
The continued status quo is unacceptable – especially as local budget makers confront the new 2% tax levy cap.
2) The Legislature could repeal the current statute and authorize the use of the same impasse resolution methods for police and fire personnel as used for other employees. In the end, if resolution cannot be achieved between the parties, duly elected local officials should have the authority to impose a contract. The imposition of contract terms has been available to public employers for non-public safety employees at the local level since 1968, yet in only about 20 or so instances has management imposed a contract. Eventually the parties have come together, though neither party is typically happy with the result.
- This is the process that should apply to police and fire fighters as it has applied to their partner local public employees since 1968.
- The removal of binding interest arbitration as an impasse resolution method will then place in the hands of locally elected officials in this democracy the authority to determine the needs of their community and permit them to allocate scarce resources as many statutes empower them to do.
If cost are to be minimized, those closest to the tax payers and responsible and accountable to the tax payers should control the field. But even with the repeal of the binding arbitration mandate, all that can be hoped for at this point in time is some stabilization of the cost of municipal services. Without roll backs of police and fire salaries, which is unlikely, and new revenue replacement money from the state, the property tax burden cannot be reduced. In effect, property tax payers will begin to see continued property tax increases and reduced service levels.
3) If the State imposes a strict requirement that the total economic impact of the arbitration award NOT exceed the cap, as has been suggested in the Governor’s ‘toolkit’ releases, the results will depend on the level of flexibility given to arbitrators. Up until now arbitrator’s awards have usually been decided with more weight given to the comparability criterion rather than the public interest, employer’s ability to pay or the pattern of bargaining in the municipality Negotiations not going to arbitration have followed suit. They have resulted in compensation increases consistent with the corridor within which arbitrators have decided.
Accordingly, for this reform to work, at all, the reforms must address a specific road map with no loopholes for the arbitrator to use. Because police and fire compensation and benefit packages have reached the heights they are at today, not even this would allow local budget-makers to meet future arbitration demands without jeopardizing other services and the jobs of other employees.
Senior employees will receive the same salaries until they retire with generous benefits. Until the system approaches a new equilibrium, there will be few, if any, new police and firefighters.