Monday, January 17, 2011

States And Municipalities Should Not Honor Unaffordable Labor Contracts That Force Essential Services Cuts During Fiscal Crises

Why do States and municipalities put their constituents and residents at a lower priority and value than union labor agreements, when there are valid legal arguments for not complying with the onerous and expensive portions of labor agreements in these hard financial times?

Cutting Essential Services

As one example of many, a recent article in The Wall Street Journal Opinion, "Detroit and Decay: The city may abandon half its schools to pay union benefits" discusses the dire fiscal situation in Detroit's school system. Detroit has closed 59 schools in the last two years, will close 70 more schools of the remaining 142, faces high school class sizes of 62 kids and is seeking to save an additional $12 million dollars by abandoning the closed schools. Yet, under its teacher contract, Detroit has to pay a bonus of $11 million, above salaries, to schoolteachers for class sizes above 35 pupils.

Does anyone doubt that there are better uses in the Detroit school system for $11 million than to pay bonuses to teachers for handling larger class sizes? Some possibilities are hire aides or more teachers to assist in or reduce the number of the larger classes, or provide other essential educational services to students, such as tutoring, remedial classes, etc.

While this Wall Street Journal article focused on Detroit, many other states and municipalities are facing difficult economic times and they are cutting basic services to their residents during this recession. Yet, expensive and unaffordable labor contracts for unionized government workers are honored without question.

Legal Arguments

In the current and recent economic environments, States and their municipalities have several possible valid legal arguments for not complying with all the terms of negotiated labor contracts. These exculpatory factors are: Force majeure, sovereignty, general welfare of its citizenry, and maybe a business judgment rule.

When these labor contracts were negotiated and entered into neither the states nor economic forecasters expected a fiscal crisis and recession as severe as the one we entered. No one, including economic forecasters, foresaw the unprecedented decline in home prices of 20 to 50 percent, and more in some areas. No one foresaw the near collapse of the US industrial and financial sectors. No one foresaw the doubling of US unemployment and the resulting severe drop in state and local government revenues from the decline in sales, income and real estate taxes, fees and other government revenue sources.

As Maryland and Oregon learned with their millionaire taxes, and as New York learned with its cigarette tax, increasing the tax rate will not increase tax revenues anywhere near what was expected. Governments are limited in bad economic times from finding ways to increase revenues.

Force Majeure

All contracts have an implied escape clause called "force majeure." Force majeure excuses a party to a contract from complying with the contract if an unforeseen event that is not in the party's control stops the party from meeting its obligations under the contract. States and their municipalities did not cause the recession or the severe drop in state and local government revenues. Due to the severity of the recession, state and their local governments are forced to choose between providing essential services for the general welfare of their citizenry or to honor union contracts that will force cuts in basic and essential services that may cause irreparable harm, such as drastic cuts in k-12 education, significant reductions in the number of police, fire and other essential services personnel, essential repairs to basic infrastructure.

Are there any appeal level judges who would force states and local governments to comply with bonuses, salary raises, etc. in labor contracts negotiated before the recession that would force governments to sharply cut back on essential services? Is there any government union that would call for a strike in these hard times and face the public and politicians' wrath because some extra benefit beyond basic salary was not given?

All that the states and local governments need to do is to say they cannot comply with those parts of the agreements due to unforeseen circumstances, force majeure. There are many examples in the US where attempts to raise additional revenues from more taxes has failed. When there are hard economic times, states are forced to make cuts.

Sovereignty and General Welfare

In our federalist system of government, both states and the federal government are sovereigns. Sovereignty in the US in not only an offshoot of the king's sovereignty, but also includes an English concept parliamentary sovereignty, which grants equal sovereignty to our legislature and our courts. Otherwise known as our checks and balances form of government.

Sovereignty not only limits the power that one branch of government has over another; it also limits the power of the current sovereign over a later sovereign. For example, a legislature cannot pass a law that cannot be modified, amended or repealed by a subsequent legislature. A later President can undo the executive orders of a previous President, etc.

For this and other reasons, States and local governments pass one-year budgets instead of multi-year budgets. As a sovereign, can the state and local governments of an earlier year bind the actions of a later sovereign and prevent the later government from protecting the general welfare of its citizens. When courts have considered this point, they have separated the government actions into sovereign and proprietary. Proprietary is more about the business side of government of doing what the private sector does, such as in Westchester, NY where the county government owns and operates an amusement park, Rye Playland. Government as sovereign taxes and provides for the general welfare of its citizens, such as police and fire protection. Government it its proprietary capacity acts without all its sovereign rights.

If state and local governments acting in the best interest of the general welfare of their citizens, ignore the clauses in the labor contracts for bonuses, salary increases and benefits and divert the funds to sovereign activities during financial crises, and say they are not bound by prior agreements from previous governments, will any appeals level court stand in their way and say they are wrong? Do not sovereigns have the power to provide foremost for their citizens' general welfare during a time of fiscal crisis and use whatever funds they have available?

Despite cries of unfairness by the labor unions, remember in the above situation, the labor unions could have requested and negotiated in their contract for untouchable escrowed funding for future increases, bonuses and benefits. The unions did not because they did not want the total costs of the contract extras presented to the public at the time of negotiations. Creditors to local governments, bondholders, usually mandate that part of the principal be put into escrow each year for the final bond principal payment at the end of the bond term. Unions do not make equivalent requests for future contract payments.

Business Judgment Rule

The last and weakest argument is that of business judgment. When corporate boards of directors make business decisions, they are afforded protection from legal liability and second-guessing by courts or shareholders under the legal doctrine called the business judgment rule. If states and local governments are found to be acting in a proprietary manner during a fiscal and economic crisis as opposed to a sovereign manner, in ignoring parts of union contracts and using the funds for the general welfare of their citizens, should not the courts allow the governments the benefit of the doubt as to the local governments business, proprietary decisions, as to their citizens' general welfare and allow the states and local governments to ignore the union labor contract provision without incurring liability?

Complicit with the Unions

It seems that during the current, severe and unprecedented in recent times, economic and fiscal hardships, the states and local governments have been too complicit with the unions and their government worker labor contracts. The states and local governments have not been aggressive enough in seeking means to legally avoid the economically harsh terms of their existing labor contracts. The municipalities have been too quick to penalize their citizenry by cutting back on essential services instead of seeking ways to reduce current labor contract expenses.

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