Cities at Tipping Point Tear Up Contracts to Stay Solvent

Philadelphia, which may close a quarter of its schools by 2017 to save cash, has to boost pay for firefighters even though the city’s fiscal overseer says that would “blow up the budget.”

An arbitration award means the estimated $238 million cost of the wage and benefit increase through 2017 must be borne by the city where a quarter of residents live in poverty, double the state rate.

The burden of personnel expenses shouldered by Philadelphia also bears down on cities across the U.S. as tax revenue fails to keep pace with labor costs. Municipal leaders now regard steps that were considered drastic, such as imposing unpaid time off and using IOUs, as reasonable options, said Gary Chaison, who teaches industrial relations at Clark University in Worcester, Massachusetts. He called it a “tipping point.”

“So many cities are under financial siege that they are ready to abandon their collective-bargaining agreements even if they have emergency procedures in place like Detroit, and even if it means antagonizing completely, and probably permanently, their public-sector unions,” Chaison said. Some, such as Central Falls, Rhode Island, have used bankruptcy to break labor contracts.

Rising personnel costs have helped drive revenue-strapped cities toward insolvency from coast to coast.

Cost Driver

“A majority of their costs are tied up in people,” said Christopher Hoene, research director for the National League of Cities in Washington. “If you look at any organization of any size around the country, you’ll see anywhere between 60 to 80 percent of their costs are in personnel-related expenditures.”

A league survey in 2010 showed 79 percent of cities cited increasing employee-pension expenses as a source of budget pressure, up from 61 percent in a 2003 survey. Tax increases and service rollbacks, which can bog down economic growth, lie in wait for those that can’t control labor expenses, Hoene said.

“It’s likely a lot of cities faced with these cuts have a slow road to recovery,” he said.

In the wake of the housing collapse that helped spark longest recession since the 1930s, local governments that depend on property taxes must gird for a “couple years of continued decline,” said Michael Pagano, dean of the University of Illinois at Chicago’s Urban Planning and Public Affairs college.

Labor Cuts

Detroit Mayor Dave Bing, a Democrat, cut wages for most city workers under union contracts by 10 percent on July 18. Another Democrat, Mayor Alvin Brown in Jacksonville, Florida, said July 19 that he closed an $80 million budget gap this year partly by reducing the city payroll by almost 500 jobs.

For some communities, bankruptcy has provided a respite. In California, Stockton sought court protection last month, while San Bernardino’s City Council has voted to take that step. Both cities cited labor costs among the reasons for insolvency. Last year, Central Falls, the Ocean State’s smallest city, entered Chapter 9 partly to cut personnel expenses, including pensions.

Yet bankruptcies by municipal governments, numbering 43 since 1981, are dwarfed by corporate Chapter 11 filings, at more than 20,000 in the same period, according to data compiled by Bloomberg. Most cities will opt for service cuts and tax increases instead of court protection, Hoene said.

In Phoenix, budget pressures driven partly by personnel costs led lawmakers to impose a 2 percent tax on groceries in 2010, said Sal DiCiccio, a City Council member. This year, he sought to restrain pay increases for union workers without success, he said.

Saying ‘No’

“It’s up to political figures to say no,” DiCiccio said about dealing with union demands.

The median sale price for Phoenix homes in June was down 43 percent from a peak of about $264,000 in June 2006, according to DataQuick, a San Diego-based provider of property information.

Philadelphia, the fifth-most-populous U.S. city with more than 1.5 million residents, has raised property taxes in each of the past three years. Yet municipal firefighters haven’t had a pay increase in four years, said Bill Gault, president of Local 22 of the International Association of Fire Fighters. From 2008 to 2012, inflation pushed prices almost 8 percent higher, according to a Federal Reserve Bank of Minneapolis calculator.

Michael Zobrak, the lawyer who led a legally mandated arbitration examining firefighters’ wages in Philadelphia, concluded that the city could afford annual raises of 3 percent for three years, retroactive to July 2010. Kenneth Jarin, the city’s representative on the three-member panel, said that would cost taxpayers $238 million through fiscal 2017, including retiree benefits. He put this year’s expense at $77 million.

Precedent Setter

As it stands, the award would “blow up” this year’s budget and set a precedent for other unions to pursue similar deals, said Sam Katz, chairman of the Pennsylvania Intergovernmental Cooperation Authority, which oversees Philadelphia finances. Mayor Michael Nutter hasn’t decided whether to appeal, according to Mark McDonald, a spokesman. The union has sued, asking a state court to compel the city to implement the award.

“It’s a really difficult moment,” Katz said. “There are some clouds on the horizon, and affordability of this and future labor contracts are very much a part of those clouds.”

Concessions already made by his union’s members will save Philadelphia taxpayers $14 million a year, Gault said.

“There are no private-sector cops and firemen to compare us to,” Gault said. “We’re just an easy target. We can’t strike.”

Minimum Wage

About 125 miles (200 kilometers) north of Philadelphia, Scranton Mayor Christopher Doherty resorted to minimum-wage paychecks earlier this month in the city of 76,000. The move prompted workers to sue in U.S. District Court, claiming Doherty violated federal laws.

A state court ruling that upheld an arbitration award to police and fire unions, estimated to cost Scranton $30 million in back pay, sparked the current fiscal crisis. The unions have agreed to accept about $20 million, and wait until June 2013, said Thomas Jennings, a lawyer for the bargaining units.

In many cities, unions are bowing to demands from mayors and managers, said Adam Weigold, a portfolio manager at Eaton Vance Corp., a Boston-based fund manager with $1.2 billion of municipal debt. While cutting such a deal often “doesn’t make headlines,” it helps keep communities solvent, he said.

“Unions at some point will have to make some concessions for these entities to be viable financially in the long term,” he said. “I think we’re there.”

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