Hope Springs Eternal: Public Legislative Bodies Curb Interest Arbitrators’ Ability to Increase Benefits

In the past month something rare has happened: Elected officials of two public entities have taken steps to prevent interest arbitrators from issuing decisions that could be financially detrimental to local governmental entities.

In New Jersey, on December 21, 2010, Governor Christie signed into law new legislation that caps “base salary” increases for police and fire interest arbitration awards involving collective bargaining agreements that expire between January 1, 2011 and April 1, 2014 to 2% per year over the life of the contract. This limitation applies to longevity, length of service, salary increments, cost of living increases, and other items included in the base salary as understood by the parties in their previous contract. The parties or an arbitrator may agree to distribute the aggregate monetary value of an interest arbitration award over the term of the contract, however, in unequal percentages.

The cap is on base salary increases only, and does not apply to non-salary economic items such as pension and health insurance costs. Thus, an employer’s overall annual contract cost increases after taking into account health insurance and pension costs may exceed 2%. Notably, however, an arbitrator is prohibited from awarding “base salary items and non-salary economic issues which were not included in the prior collective negotiations agreement.”

The law also makes several other changes, including: (1) capping interest arbitrators’ fee schedules to no more than $1,000 per day and $7,500 for the total assignment; (2) providing for mandatory annual ethics training for interest arbitrators; (3) requiring that the arbitrators who wish to be on the state’s arbitration panel list be added based on their qualifications, knowledge and experience in accordance with certain rules; (4) requiring the panel arbitrators be guided by the Code of Professional Responsibility for Arbitrators of Labor Management Disputes, and (5) creating a task force to study the impact of the cap in curbing local governmental spending and making recommendations regarding its continued use.

The change was a compromise agreed to between the Governor and the Democratic Legislature as part of a larger strategy to address budget deficits. The two percent cap parallels earlier legislation which limited local property tax increases to two percent per year. This legislation gives employers newly facing tax caps the luxury of knowing there is a similar outside cap to any interest arbitration award regarding base salary.

Not to be outdone, in December Montgomery County Maryland modified its County Code’s interest arbitration procedures to require consideration of County economics. The new procedure provides that, in reviewing the parties competing final package offers, the interest arbitrator must first evaluate and give “the highest priority” to the ability of the County to pay for additional short-term and long-term expenditures by considering: (i) limits on the County’s ability to raise taxes under state law and its charter; (ii) the added burden on County taxpayers resulting from increases in revenues needed to fund a final offer; and (iii) the County’s ability to continue to provide the current standard of all public services. Only after the interest arbitrator evaluates the ability of the County to pay, may the interest arbitrator consider the numerous other criteria set forth in the County Code. Included among those criteria is, as it was prior albeit in a slightly different form, the “interest and welfare of County taxpayers and service recipients.”

Before these changes, the Code permitted interest arbitrators to take into account the ability of the employer to finance economic adjustments and the effect of the adjustments upon the normal standard of public services. But it was one of the many statutory factors for consideration common in public bargaining statutes, and the Code did not prescribe any weight to be given to any one factor. The new Code provisions, adopted at a time the County is facing budget pressures, should give the County some comfort of knowing that any interest arbitrator will give the highest priority in his determination as to whether the County is able to pay for what its unions are seeking without reducing its current level of services.

These two changes demonstrate a new-found willingness among some elected officials to consider and enact changes to minimize the possibility of interest arbitrators issuing interest arbitration decisions that simply cannot be afforded without service cuts or untenable tax increases. Notably, and perhaps in light of the economic times and the renewed focus on public employee pay and benefits, support for the New Jersey measure was bipartisan. While reform may not be a political possibility in some states or localities, public employers who believe their public bargaining laws need to be changed should consider petitioning their elected officials for reform. Thanks to New Jersey and Montgomery County, interest arbitration reform may catch on elsewhere.

Feel free to contact your Seyfarth attorney should you wish to discuss these matters further.