Death by Arbitration
One more way that cities are going broke
In a Saturday Night Live skit four years ago, cast member Jason Sudeikis, playing Joe Biden, comically described Scranton, Pennsylvania—the vice presidential candidates hometown—as the absolute worst place on Earth. Scranton has indeed suffered through hard times: the citys poverty rate today is several percentage points above the national average, and its median household income is just two-thirds the national average. Yet Scranton managed to avoid insolvency until recently, when an arbitrator ruled that it owed fire and police personnel $30 million in raises and back pay. In June, with only $5,000 in the bank, Scranton defaulted on some of its debt. Its currently trying to stave off bankruptcy.
Scranton has become the latest victim of Pennsylvanias one-sided binding-arbitration law, which allows unelected mediators to burden cities with large compensation awards that ignore fiscal reality. Pennsylvania isnt alone: about 20 states foist some form of binding arbitration on their local governments, despite studies showing that the system is often biased against taxpayers and frequently results in much bigger pay awards than government workers earn in places without arbitration. Even as reformers seek ways to cut local-government costs during the ongoing fiscal crisis, binding arbitration has largely escaped unchanged.
Arbitration for government workers originally arose as a by-product of states bans on public-employee strikes. If workers couldnt go out on the picket line, legislators reasoned, they should be given some system of independent mediation in contract disputes. But as public-employee unions gained power, they helped shape these systems to their advantage. In some states, like New York, laws ban arbitrators from considering a local governments fiscal limitations when ruling on new contracts. In other states, arbitrators calculating an award for workers in one city can base the amount on the pattern of pay increases in nearby cities, even if those cities are much richer and can afford to pay more. Government unions have learned to claim readily that negotiations with local officials are at an impasse, since that step moves the process into arbitration, where they can expect a better deal. A study by the Manhattan Institutes Empire Center for New York State Policy has found that, for New York government workers in jobs covered by arbitration, pay increased over a ten-year period by 59 percent—compared with a one-third gain for other government workers.
Unions know the value of binding arbitration; thats why they often try to expand its scope. In 2009, unions and Democrats in Congress lobbied hard for the so-called Employee Free Choice Act. Though most of the debate on that legislation focused on its proposed elimination of secret votes in union elections, the bill also would have required compulsory arbitration in the private sector similar to what we now have in government. The bill died because proponents couldnt secure a filibuster-proof Senate majority.
But for government workers, binding arbitration remains a powerful force in many states. Scranton got into its mess last year, when Pennsylvanias supreme court struck down a law exempting places that the state had declared distressed municipalities from binding arbitration. Scranton, considered distressed for two decades, was then hit with the back-pay bill, despite protests by city officials that they simply didnt have the money to pay it. Subsequently, arbitrators have ruled that another distressed city, Philadelphia, must adhere to an arbitration ruling granting $200 million in extra compensation to police and fire personnel. The award included 3 percent annual pay raises for three years, additional city funding for health benefits, and protection from worker furloughs that the city had ordered to balance its budget. The city has appealed the arbitration award twice, claiming that it cant afford to pay it.
Critics, including many mayors in affected states, continue to call for repeal or reform of mandatory arbitration, largely without success. Only one state has enacted substantial reform since the states financial crisis began in 2009. In late 2010, a bipartisan alliance in New Jersey passed a law that limits arbitrators awards in various ways, including capping the pay increases that they can award at 2 percent. The states mayors had backed the reform after Trenton imposed a property-tax cap on municipalities that limited their ability to raise revenue. But even Jerseys arbitration-award cap sunsets in three years and will have to be renewed.
Despite its obvious flaws, the system of binding arbitration lives on. Government unions cant afford to let it die.
Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.