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PA: Mandatory arbitration law binds financially distressed municipalities

By   /   July 13, 2012  /   No Comments

Part of 4 in the series Trouble in Scranton

The city of Scranton is broke, and state law mandating $15 million in arbitration awards is making things worse.

By Eric Boehm | PA Independent

HARRISBURG – With unsustainable debt, an underfunded pension system and massive costs from collective bargaining contracts, the city of Scranton is running out of options.

The city is struggling under a $300 million pile of debt, which includes about $15 million in arbitration awards the city must pay to its firefighters’ union as the result of a state Supreme Court decision last year.

Even municipalities in financial distress are not free from a state law mandating the payment of arbitration awards to police and firefighters unions, according to the court.

Even if Scranton is unable to pay its bills or meet its payroll – last week Mayor Chris Doherty cut all city workers’ pay to minimum wage of $7.25 per hour because the city is out of money – it must still pay the $15 million arbitration settlement.

Scranton’s financial problems, though complex, are not unique.

Richard Vilella is mayor of Lock Haven and president of the Pennsylvania League of Cities. A major problem facing cities is Act 111 of 1968, the state law governing the way municipalities negotiate with unions through the collective bargaining process, he said.

“If we’re going to be able to maintain our police departments and fire departments for the next 20 years, we have to reform the process to control the costs,” Vilello said. “The whole process is tilted towards the unions right now.”

Act 111 prevents police and firefighters from going on strike, but in return provides for compulsory interest arbitration during a labor impasse.  Municipalities are also required to cover all costs of the arbitration process, including the cost for the arbitrator.

A report from the Coalition for Sustainable Communities, a group of several chambers of commerce and local government organizations across Pennsylvania, called the state’s binding arbitration law “one of the primary causes for escalating costs” in municipal government.

The state Supreme Court struck a blow against cities like Scranton and others last year when it ruled that the provisions of Act 111 could not be overruled by the distressed cities law, known as Act 47.

The ruling in City of Scranton v. Fire Fighters Local Union 60 says Act 47 recovery plans did not apply to determining arbitration awards given under Act 111 for police and fire unions, despite the fact the city, in its distressed financial state, would have no ability to pay the full award.

In doing so, it left Scranton on the hook for a $30 million settlement with its local firefighters’ union.  The union later agreed to a $15 million settlement after negotiating with the cash-strapped city.

The arbitration award was part of the reason Scranton Mayor Chris Doherty proposed a 78 percent increase in taxes over the next three years in the city, but the City Council blocked the plan.

A plan by council to borrow money in place of raising taxes also hit a snag when the city was unable to find a bank willing to lend it, creating the current cash crunch.

As for the arbitration law, state lawmakers jumped to rewrite a portion of Act 47 this spring to prevent more municipalities from falling into the trap, but the changes – signed into law by Gov. Tom Corbett last week – are not retroactive, so Scranton will still have to make the entire $15 million settlement payment.

I strongly believe we must ensure that there is a path back to fiscally sound ground for those municipalities that are financially distressed or approaching such a status,” said state Sen. Jane Earll, R-Erie, who sponsored the legislation to fix the so-called “Scranton loophole” created by the Supreme Court decision.

The changes will require that future arbitration settlements fall within the overall expenditure caps set by municipalities, which are part of the state’s program for distressed municipalities, said Steve Kratz, spokesman for the state Department of Community and Economic Development, which oversees the Act 47 program.

A state-appointed financial adviser must approve the caps.

In a memo to members, the Pennsylvania Professional Firefighters Association, an umbrella group for local firefighters’ unions across the state, called the changes “a compromise between labor and management interests” that maintains “meaningful collective bargaining.”

But the changes signed by the governor last week do not change the basis of the 1968 state law establishing  mandatory payment of arbitration settlements.

Labor unions are opposed to further changes to the law, but municipal groups like the League of Cities argue the binding arbitration law jeopardizes the financial future of many Pennsylvania cities.

“The core communities in this state are all on the same train. Scranton and Harrisburg are on the front of the train, but it’s heading towards a bridge that is out,” Vilello said.

The League wants to change the law so both sides share the cost of arbitration – under current law the municipality bears the full cost – to make unions more willing to negotiate before moving to the arbitration process.  They also want to remove some benefits, such as retiree health-care costs, from the arbitration process altogether and require that proposals submitted to the arbitration process be made public.

State Sen. John Blake, D-Lackawanna, who represents the beleaguered city of Scranton, said reforms to Act 47 and Act 111 are definitely needed, but public safety and public services are his top concerns.

“These union members are living in these cities. They don’t want to bankrupt the cities,” he said.

Kratz said the administration was preparing to review how the state handles financial distressed municipalities, but it was too soon to say whether the binding arbitration law would be part of any potential changes.

Part of 4 in the series Trouble in Scranton

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Eric is a reporter for Watchdog.org and former bureau chief for Pennsylvania Independent. He lives in Minneapolis, Minnesota, where he enjoys great weather and low taxes while writing about state governments, pensions, labor issues and economic/civil liberty. Previously, he worked for more than three years in Harrisburg, Pennsylvania, covering Pennsylvania state politics and occasionally sneaking across the border to Delaware to buy six-packs of beer. He has also lived (in order of desirability) in Brussels, Belgium, Pennsburg, Pa., Fairfield, Conn., and Rochester, N.Y. His work has appeared in Reason Magazine, National Review Online, The Freeman Magazine, The Philadelphia Inquirer, The Washington Examiner and elsewhere. He received a bachelor's degree from Fairfield University in 2009, but he refuses to hang on his wall until his student loans are fully paid off sometime in the mid-2020s. When he steps away from the computer, he enjoys drinking craft beers in classy bars, cheering for an eclectic mix of favorite sports teams (mostly based in Philadelphia) and traveling to new places.

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