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Binding Interest Arbitration
and the Ever-Rising
Property Tax

Gregory C. Fehrenbach
By Gregory C. Fehrenbach
Coordinator, League Interlocal
Cooperation and Management Advisory
Service and Principal, Government
Management Advisors, LLC

This article is based on comments that Mr. Fehrenbach made before the Making New Jersey More Affordable Conference

artisit graphic of per cent sign

of the Somerset County Business Partnership.

The free market no longer governs the compensation of local government workers. Instead, the precedents created by “binding interest arbitration” control the process.

What is binding interest arbitration? It is a state-mandated process for settling collective bargaining disputes between a local government and a police or fire employees’ union. It allows a union to bring in a third-party whenever economic issues, such as salary percentage increases, longevity pay, shift and rank differentials, etc., remain unresolved after at least three negotiation sessions. At that point, considering guidelines contained in the law, the arbitrator has the power to impose the terms of a new contract.

In the private sector, salary increases are typically based on the cost of an employee to the employer. Traditionally, in interest arbitration, the focus is on percentage increases to a salary schedule. The failure to consider the impact of factors, like longevity, promotions and shift differentials, leads to actual cost increases, often far in excess of arbitrators “official” decisions.

Since about 2000, salary schedule increases have averaged about 4 percent. (Prior to that, arbitration awards ranged upwards of 8 percent.) This means that, since then, each of the steps in a salary guide increase by about 4 percent each year. However, movement between steps in the schedule, which can be as much as $15,000 per year per officer or firefighter, is not even considered by interest arbitrators as a cost to the employer. As a result, a 4 percent increase to the salary guide can cost upwards of 10 percent, depending on the way it is structured!

Statutorily, arbitrators function without supervision or control. Even though the statute has three criteria dealing with ability to pay, and requires a measurement of the “total net annual economic change” for each year of the contract, little attention is given to these criteria or this calculation.

In addition to police and fire fighters, almost all other local government employees have benefited from this, though to a lesser extent. When the police are receiving a 4 percent increase to their guide, which is costing the municipality 6 or 10 percent, it is difficult for a governing body to justify a 1 or 2 percent increase for other public employees.

Over the past 20 years, the League of Municipalities and others have advocated for substantial reforms to the interest arbitration statute. But to date, they have been ignored. Even though there was a Special Legislative Session on the Property Tax, it never addressed this issue. The unions that benefit by the interest arbitration statutes wield a very strong hand with legislators. No one in a leadership position in Trenton has shown any interest in fixing this problem. It appears that no one finds it odd that some public employees receive higher compensation than the governor.

What can be done? There are a number of band aid solutions that can postpone the inevitable. The recent reopening of state labor contract negotiations, in which the state deferred salary increases for 18 months, with retroactive payments thereafter, is an example. But, the only sure fire reform is to repeal the entire interest arbitration statute.

That won’t be easy, due to the unions’ power in Trenton. Citizens need to rise up and vote against candidates who do not heed the call for action. A vocal majority must demand the repeal of this law. Only then might we see a more even playing field for those who are paying the bill with their ever-growing property tax payments.

What happens if nothing is done? We fear the eventual death spiral, predicted by former Attorney General John Farmer. It is an inevitable deterioration of quality of life, due to the inability to sustain it. Farmer foresees, “an economic downturn (which) causes governments to raise taxes in order to maintain revenues; this in turn causes many to leave, seeking a less expensive place to live; this causes government to raise taxes again, etc.”

We in New Jersey need to realize that we cannot continue telling the government, “Buy me, give me, take me.” Why? Because we are the government. Because we cannot afford to give ourselves everything that we want. Legislators and other elected officials in New Jersey have been trying to do this for years by bequeathing the costs to future generations. We must realize that it is mathematically impossible for the cost of governmental services to steadily rise at the rate of 4 to 8 percent per year, while the state’s economy grows at a lesser rate. Under this condition the body starts to devour itself.

Tell your senator and assembly persons to repeal this mandate on your local municipal government now.

This article was originally published in New Jersey Municipalities magazine. Vol. 86, No. 9, December 2009


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