Governor Andrew Cuomo has pulled the teeth out of his original proposal to reform the binding arbitration law for police and fire contract disputes, squandering an opportunity to deliver on a key mandate relief priority for many municipalities.

Under bill language reportedly agreed to by the governor and the Legislature, arbitrators will be required to give more weight to an employer’s “ability to pay” in contract disputes between local governments and police and fire unions. However, the governor has backed away from stronger language capping the cost of salaries and benefits awarded through arbitration. The final bill apparently reflects the governor’s efforts to negotiate a bill acceptable to unions — even though Cuomo was in a strong position to virtually dictate his terms for agreeing to an extension of the arbitration law, which is due to expire June 30. The new extension would expire in two years.

Background

Cuomo’s original arbitration reform proposal, packaged in an Article VII bill with his budget in January, included these crucial provisions:

“For any fiscally distressed local government entering interest arbitration, the arbitration panel would be barred from increasing the cost of the employees’ collectively bargained compensation package by more than two percent per year. Existing contractual step and longevity increases would not be affected nor would payments due to the relevant pension systems.

“Within this computation, the arbitration panel must also take into account the rising costs of health insurance for distressed local government employers and further reduce the amount awarded by the value of the increasing health insurance costs which exceeds two percent growth.”

This language was dropped from the final bill, which imposes absolutely no hard and fast limitation on the cost or value of arbitration awards.  Instead, the agreed-upon bill will require arbitrators to more heavily weigh an employer’s ability to pay higher salary and benefit costs among the factors used to determine the appropriate award in disputes involving “fiscally eligible” municipalities (defined as those with relatively high property tax burdens or fund balances of less than 5 percent, which would take in most of the state’s cities).

Under current law, arbitrators give more or less equal weight to several factors including contract deals involving comparable employees in other jurisdictions; the new law says arbitration panels “shall, first and foremost, consider ability to pay by assigning a weight of seventy percent to that portion of the criterion” already listed in the law for arbitration awards.  In addition, the bill would require arbitration panels to “recognize and take into account … the constraints, obligations and requirements imposed by” the state’s property tax cap.

Here are the two problems with this approach:

1. There are no rules for systematically quantifying and defining “ability to pay.” Arbitration rulings have long been maddeningly inconsistent on this very point, and will no doubt continue to be.
2. The tax cap itself can be overridden by a two-thirds vote of local governing boards — an option that surely will not be overlooked by arbitrators friendly to unions.

On the town level and in many smaller villages and cities, two-thirds of the governing body is equal to a simple majority. In larger cities and counties, just two or three additional votes are required to override the cap.  As a result, the tax cap is not enough of a real “constraint” to fundamentally change the arbitration game.

The main shortcoming of the governor’s original arbitration bill was its limitation of its applicability to “fiscally distressed” governments — the equivalent of slamming shut a barn door after horses have escaped.  Nonetheless, the bill was strong enough to attract opposition from unions and their allies in the Legislature, who refused to adopt the provision along with the budget. Unfortunately, the final version is just as limited in scope —but will be less effective.

The bottom line is that arbitrators will still have leeway to impose settlements that are unaffordable and unsustainable for taxpayers. Moreover, the bill makes no other reforms to the secretive, costly, and time-consuming binding arbitration process.

Squandered chance

Cuomo will likely note that he is the first governor in 39 years to make any alteration to the arbitration law. Nonetheless, he was in a commanding position to insist on much more sweeping reform.

While the Legislature is anxious to do the bidding of police and fire unions, opposition from Cuomo would have been a formidable roadblock to renewing the law beyond June 30. Notwithstanding the unions’ political power, there is no precedent in New York State for an override of a gubernatorial veto on a public employee union issue.

Just four years ago, Governor David Paterson shocked union leaders by vetoing a previously routine extender of the Tier 2 pension plan for police and firefighters. As a result, pensions for recently hired police and firefighters in New York City are significantly less costly. Outside the city, Paterson’s veto paved the way for subsequent Tier 5 and 6 pension changes.  While arguably not nearly sweeping enough themselves, these changes have made benefits somewhat less generous and less expensive for newer hires.

With this deal, Cuomo suffers by comparison both with Paterson and with his New Jersey counterpart, Governor Chris Christie. In December 2010, Republican Christie and the Democratic leadership of the New Jersey Legislature agreed to cap police and fire arbitration settlements at 2 percent, in line with that state’s own tax cap.  The bill also called for significant improvements in the arbitration process. That law expires in 2014.

The “restructuring” game

The arbitration provisions are included in a revised version of the financial restructuring bill first rolled out by Cuomo a few weeks ago.  It would create a 10-member “financial restructuring board” consisting of the governor’s budget director, who would act as chairman, along with the attorney general; the state comptroller; and the secretary of state; and six more members appointed by the governor, two at the recommendation of legislative leaders, and one who “shall have significant experience in municipal financial and restructuring matters.”  (So the governor would control six out of 10 votes on the panel.)

The board’s responsibilities are amorphous, essentially proceeding from the notion that the main problem faced by distressed municipalities is an inability to figure out how to run more efficiently or otherwise “restructure” themselves.  At best, it reflects the governor’s belief that many local officials lack the will, the stomach or the competence to address their fiscal problems.  At worst, the creation of this new entity is an elaborate way to avoid confronting the root cause of the problem: local governments are stressed primarily by rigid collective bargaining and civil service laws that rob them of the ability to restructure themselves. Fixing those laws would require pitched battles with public employee unions, however.

The creation of the financial restructuring panel also seems designed to forestall the creation of state financial control boards with powers to dictate financial policies to governments faced with imminent insolvency. Control board statutes have differed, but dating back to the original New York City board in the mid-1970s, they have generally had the power to approve all contracts and to freeze wages.  For that reason, public employee unions dislike control boards and resist their creation (while also resisting concessions that would make them unnecessary).

P.S. — The final bill also retains a provision of the governor’s original proposal to make the financial restructuring board an alternative arbitration panel at the joint request of employers and unions that have reached impasse in a contract dispute.  However, it’s difficult to conjure a situation in which parties to such a dispute would both find the restructuring board preferable to a standard Public Employment Relations Board arbitration panel.