New York’s Unsettled Contracts: What can the City Afford?

Stakes are high for New York City in its current negotiations with its municipal unions. All employees have been working without a contract since at least as far back as mid-2012; the United Federation of Teachers, representing about one-third of the city’s workforce, had its last contract expire over four years ago.

Mayor Bill de Blasio is determined to settle new contracts soon, but that won’t be easy. Union representatives seek billions in back pay—raises for the years spent working without a contract. Despite considerable improvement in New York’s revenue outlook since the recovery began, settling its contract dispute is not the only municipal priority in need of funding.

The unsettled contracts rank among the city’s greatest sources of fiscal uncertainty, particularly since back pay is not the only thing now on the table. Negotiators must also reach agreement over pay for the current and future years, and the de Blasio administration is pursuing savings from health benefit changes.

Within coming months, labor and management will sign off on contracts whose fiscal consequences will be felt for many years to come. So what can the city afford?

James Parrott

James Parrott

James Parrott is the Deputy Director and Chief Economist of the Fiscal Policy Institute (FPI), a non-partisan public policy research and education organization committed to improving public policies and private practices to better the economic and so...Read More »

Charles Brecher

Charles Brecher

Charles Brecher is the Consulting Research Director at the Citizens Budget Commission and a Professor of Health and Public Administration at New York University’s Robert F. Wagner Graduate School of Public Service, where he has been a tenured facul...Read More »

Day 1 – Opening Remarks

James:

Former New York City Mayor Michael Bloomberg left office leaving every single municipal labor contract unsettled, with about a third of the workforce left out of the last pattern settlement dating to 2008 and 2009.  The City has about 150 collective bargaining agreements covering 300,000 municipal employees. For several decades, pattern bargaining has been followed, under which the wage increases agreed to in the first major contract generally apply to other unions.

The previous round for 2-year contracts with two 4% wage increases was halted mid-round before settlements were reached with the 100,000-member teachers union whose contract expired in 2009, and with 10,000 nurses at city public hospitals whose contract expired in 2010. Arbitrations involving those unions have been underway for the past year. In addition, not a single settlement has been reached in the subsequent, or current, round of bargaining that affects all 300,000 municipal workers.

Policy disagreements between Bloomberg and the teachers union complicated those negotiations, but in his third term, Bloomberg took a decidedly anti-worker turn as his policies threatened the very existence of unions representing modestly-paid child care workers and school bus drivers and matrons. Even though City finances escaped the worst of the Great Recession, partly due to the taxpayer-financed Wall Street bailout, the former mayor sought a 3-year wage freeze, not only for the current round but also for the teachers and nurses instead of the increases that all other unions had received in the last round. The City had set aside funds in 2009 to extend the 4% pattern to the teachers but Bloomberg opted to use those funds in other ways.

When it came to collective bargaining, Bloomberg fiddled for his final four years, convincing no one that he had a credible position and letting all City worker contracts pile up for his successor.

What happens now? The first order of business is to complete the last round. Given the City’s historic reliance on pattern bargaining, the arbitrators would be hard-pressed to deviate much from the two 4% increases. The City cannot afford to jettison pattern bargaining—it has long used that to prevent leap-frogging and to manage expectations.

Several factors are in play for the current round of bargaining affecting all City unionized employees. Health care costs have risen and both sides are under pressure to seek savings. Gain-sharing, under which the labor side receives credit for union proposals to improve efficiency, is being explored. Several options may also be considered for how to pay for any negotiated wage increases, including deferrals, and one-time payments that are not added to base pay.

City finances are strong and the economic and revenue outlook is very positive. The City can both afford to pay the $3.5 billion retroactive cost to complete the last round, and modest increases for the current round. In addition to tax revenues growing 5% a year—adding $2.5 billion annually—the City budget is amply stocked with reserves of various kinds that are not normally counted as part of any “surplus.” The City budget will have the resources to reach constructive contracts with its workforce, to fund essential City services, and to pay for Mayor de Blasio’s new initiatives. 

Charles:

The Preliminary Budget proposed by Mayor BIll de Blasio in February did not change the amount allocated for pay increases for the municipal workforce from that in the three previous annual budgets. For union contracts expiring since fiscal year 2010, no funds are available for raises in the first three years and in subsequent years raises are to be 1.25 percent annually. For workers represented by the United Federation of Teachers, whose contract expired in 2009, no raises are funded for five years, and subsequent raises are 1.25 percent annually.

This a reasonable wage policy based on the two most relevant criteria – competitive compensation that attracts a qualified work force, and affordability in the sense that burdensome tax increases or service cuts are not required.

With respect to competitiveness, the freeze has not had adverse consequences. In 2012, an exam for new firefighters had 41,734 individuals pass, but only about 300 were needed for the new class. The Department of Education increased its new hiring in the last two years, and the Mayor’s recent plan for expansion of pre-kindergarten programs indicates that 8,000 qualified teachers are available to fill the 1,000 needed positions.

The competitiveness of municipal jobs derives from generous fringe benefits and high wages. The benefits include a defined benefit pension and a comprehensive health insurance policy with no premium sharing from workers, an arrangement rare in the private sector and even among other public employers. With only a few exceptions, the direct wages of municipal workers tend to be higher than those of workers in the same occupations in the local private sector. The Citizens Budget Commission documented this pattern from metropolitan area surveys by the U.S. Bureau of Labor Statistics  in 2009, and recent statewide data indicate the pattern continues.

If the City can hire qualified workers, should raises be given simply because the City can afford it? That is arguably a misguided policy, but that debate need not be joined because the City does not have “extra” money.

The City’s audited financial statements document repeated annual deficits and enormous debts that will be a burden far into the future. The annual deficits for the three most recent fiscal years were $4.6 billion, $7.5 billion and $9.6 billion, respectively. This year’s deficit likely will be of a similar magnitude.

These deficits contrast with “surpluses” sometimes reported in City budgets because the budgets exclude the liability for health insurance coverage for retirees, debt for capital projects not owned by the City itself ( money the City borrows and gives away), and depreciation of municipal physical assets. When the proper accounting is used, the City has a cumulative deficit of $130 billion. Changes in the accounting standards for pension funds effective in fiscal year 2015 will indicate an additional gap of $72 billion in the City’s funding of pension liabilities.

These enormous unfunded obligations are not accounting fiction; the health insurance premiums, bond payments and pension benefits must eventually be paid. Current policies pass debt to future generations for the services consumed today. Our children should not be handed these burdens while the City simultaneously gives raises on the specious grounds that extra money is available for them. 

Day 2 – Rebuttals

James:

Chuck Brecher supports a City three-year wage freeze by citing “competitiveness” and “affordability.” On competitiveness, Brecher points to the huge applicant pool for would-be City firefighters, and claims that the City workers receive generous benefits and high wages.

First, it is a common mistake to crudely compare public and private sector wages without adjusting for education, age or experience. A 2011 study by the city comptroller’s office that controlled for education found that city workers with a high school education earned 13% more than their private counterparts, but city workers with a college degree earned 9-18% less than their private counterparts.

The fact that the City employs lots of teachers and others with higher education largely explains why City wages might exceed private sector wages. The disproportionate growth in low-wage private sector jobs in recent years certainly has pulled down the median private sector wage.

Second, recruitment is one thing, retention of experienced workers is another. News reports abound of long lines of job seekers at career fairs and when any company announces large-scale hiring, even at fairly modest wages. New York City continues to lose significant numbers of teachers and police officers to the suburbs where pay is higher. Recent data provided by the Teachers Union show that the number of mid-career teachers (6-15 years of experience) who leave city schools nearly doubled over the past 5 years. Such experienced teachers can earn $10,000-$20,000 more a year in the suburbs and teach smaller classes.

 On the “affordability” front, Brecher curiously relies on an arcane accounting measure to suggest that the City’s finances put it in league with Detroit. In Brecher’s eyes, the City has a cumulative deficit of $130 billion. That’s a big number, but most of that is related to retiree health benefits or to debt issued for the City’s water and sewer system or its public hospitals, assets technically owned by entities legally distinct from the City itself.

What does that sort of accounting leave out? Among other things, the City’s future tax revenue stream that currently generates $50 billion a year and is growing 5% annually in an economy that is larger than that of 45 states. If that tax stream doesn’t have any value in Brecher’s view, I’d be happy to take it off his hands.

Finally, he contends that “no funds are available for raises in the first 3 years” for contracts expiring since FY 2010. That is true only in the narrowest sense that the City budget doesn’t have a pot of money earmarked as such. No one should be surprised by that. But just like the MTA will “re-purpose” funds in its budget to meet the cost of its recent settlement with the Transport Workers Union, there are several places in the City budget where literally hundreds of millions of dollars are “parked” that will be called on when needed to fund a contract settlement.

Charles:

A constructive debate reveals points of agreement as well as assembles evidence supporting differing positions. Accordingly, this rebuttal starts with three items of agreement.

First, the local economic and tax revenue outlook is positive. If the de Blasio Administration builds upon established policies that have led New York City to outpace the nation in the recovery from the Great Recession, then jobs and revenues will keep growing.

Second, savings from “gain sharing” arrangements in which changes to contract provisions yield greater productivity should, as the phrase implies, be shared between taxpayers and workers. When savings are achieved, not just promised, then the workers’ portion should fund raises. Third, if any retroactive pay is agreed upon, it should be one-time payments not added to base pay.

Moving to points of disagreement, four of James Parrott’s arguments have little merit. He argues that Mayor Michael Bloomberg bears full responsibility for the lack of agreement on new union contracts, and he behaved in an “anti-worker” manner. In fact, the administration sought negotiations, and the union leaders bear great responsibility for lack of timely agreements. They appear to have decided about two years before the 2013 election that it was in their interest to wait out the term-limited mayor’s tenure and bargain only with his successor.

Parrott believes the decision, proposed in Bloomberg’s fiscal year 2011 Executive Budget and adopted by the City Council, to freeze teachers’ wages after others received two annual raises was unjustified. The move was necessary to avoid layoffs due to large cuts in state aid for education. The logic of this decision was clearly stated by the Mayor in June 2010: “Laying off thousands of teachers is simply not the answer. It would devastate the school system…when it came to a choice between teacher raises or laying off teachers, I have chosen to protect our children and their futures.” The need for such tradeoffs was rooted in State fiscal decisions and justifies the changes in wage policy that followed agreements with other unions.

Parrott also believes that pattern bargaining serves the City well and should be continued. In practice giving all workers the same percentage raises creates recruitment challenges in certain skilled occupations such as computer specialists and well-qualified science and math teachers while other positions are easily filled. Instead of blindly following “the pattern” collective bargain should have flexibility to adjust for the realities of the labor market.

Finally, Parrott is wrong in characterizing the City’s finances as strong enough to support generous raises, continued services and new mayoral initiatives. He fails to note that current “surpluses” rely on non-recurring sources such as the sale of taxi medallions and refunding of municipal bonds. More importantly, as documented in my initial statement, the City is burdened by unfunded long-term obligations for health insurance and pensions that are passing costs onto future generations; reducing those obligations should be a higher priority than raises for already well compensated workers. 

Day 3 – Questions from the Moderator

Moderator:

James, In addition to affordability and competitiveness, we should touch also on the principle of fairness. Fairness is, or should be, a two way street. 4% raises, for years of tremendous economic strain, during which pay freezes and layoffs were standard, and inflation was negligible, seems very generous. Why should the standard for the back pay be what’s affordable now, as opposed to what was affordable during the years in question? You seem to be open to concessions for the workforce as a whole in the current round of negotiations. Would it truly be labor chaos if the UFT agreed to a slight departure from pattern bargaining and made additional concessions to reflect both (a) the extraordinary fiscal conditions of the time and (b) the fact that not giving out raises helped preserve teacher jobs?

James:

In addressing the moderator’s suggested “principle of fairness,” it is the understatement of the decade to say that the Great Recession was not fair to working people. The question of what was fair during the recession and its aftermath should be posed first to bankers. Then we should take up the fairness of the fact that 95% of all income gains in the recovery have been siphoned off by the richest 1%, as data analyzed by economist Emmanuel Saez indicates?

I come from a large family. It wasn’t fair for me to clobber my little brother just because my big brother clobbered me.

The contract that set the 4% pattern was agreed to by Mayor Bloomberg in mid-September 2008, in the very same week as the Lehman Brothers collapse, and the massive AIG bailout. Given his background at the pinnacle of finance, Mayor Bloomberg must have known where the economy was headed. There was certainly no question what was on the economic horizon six weeks later in early November when the pattern was extended to the 100,000 members of D.C. 37.  After all, this was a mayor who staked his case for a 3rd term a few months later on his financial management acumen.

At the contract announcement in mid-September, the Mayor stated, “This contract agreement establishes the basic parameters for collective bargaining settlements in this round of bargaining. … It also will go another step forward in providing budget predictability and stability in municipal labor relations.” The classic case for pattern bargaining. Sounds to me like he knew where he was and what he was doing.

Obviously, something changed after that. But was it because the mayor didn’t know where the economy was going?

It is a pure fiction that the City couldn’t afford teacher raises in early 2010. It was just a policy choice. The Retiree Health Benefits Trust, which Mayor Bloomberg nearly drained dry by the end of his last term, had over $3 billion in it at the time. The cost of settling the teachers’ contract, even at 4%, was a fraction of that amount at that time. It was well within the range of manageable budget needs. The amount needed to settle the contract retroactively only became a big deal precisely because the former mayor kicked the can down the road as long as he did.

It’s not a question of fairness, or even of money.  It’s really about priorities, management and leadership. Why would any leader/CEO of a great city be so dismissive for so long of the needs of public school teachers who educate our children and of public hospital nurses who care for our poor?  

Moderator:

Charles, You suggest that New York City’s personnel management practices are not the model of efficiency. Under current labor law, it is a fact of life that all administrative questions affecting working conditions must also become fiscal questions at the bargaining table. You can’t get something for nothing. Given that that the city’s revenue position is improving, do think it would be appropriate for the de Blasio administration to focus more on seeking workforce efficiencies than savings?

Charles:

In collective bargaining wages, fringe benefits and work rules are each appropriate targets for obtaining savings. It is typically impossible or impractical to change work rules or fringe benefits retroactively, but going forward increased attention should be given to these elements as a source of savings.

Health insurance arrangements stand out as an area for reform. As Citizens Budget Commission reports have repeatedly noted, The City of New York is unique among pubic and private employers in the generosity of its benefits. The City pays the full cost of premiums for a comprehensive health benefit package for current workers, retirees and their families; in contrast, most employers require significant cost sharing for premiums from workers and few offer subsidized coverage to retirees. For example, the State of New York requires employees to pay between 12 and 16 percent of the premium for single coverage and 27-31 percent of the premium for family coverage, depending on their salary level. Such cost sharing is not only equitable; it also promotes efficiency because it gives workers a visible stake in health care cost containment.

Taxpayer contributions to union welfare funds are another ripe target for reform. The City contributes more than $1 billion to 81 union funds, and the bulk of the money supports prescription drug benefits for members. Consolidating the funds in one comprehensive plan would save taxpayers money and give workers better benefits by eliminating high administrative costs and getting a better deal from pharmacy benefit mangers who value a large number of enrollees.

Work rules tend to be unique to categories of workers. Consequently reforms are complex and can conflict with bargainers’ desire to follow a common pattern across unions. But opportunities for savings exist such as converting extra time at the start of police officers’ shifts into additional annual shifts, dropping substantial guaranteed overtime for firefighters, and stopping paying bonuses to sanitation workers even when they fail to meet the target established for the bonus. Productivity savings are worth the difficult bargaining often required to implement them, but the gains should be measurable and their continued achievement carefully monitored. 

Day 4 – Closing Remarks

James:

I would expect to see settlements soon with the teachers, nurses and the other remaining unions that haven’t yet received the last pattern round of two 4% wage increases. Given the City’s essential reliance on pattern bargaining, I would expect those settlements to fairly closely adhere to that pattern.

And just as the MTA is revising its financial plan to accommodate the recent agreement with Transport Workers Union Local 100, the City will be able to move things around in its current budget to fund the City settlements.

That will set the stage for the current round of bargaining to move forward in earnest. Initial reports are that constructive talks are underway on several fronts including health benefits, union-administered health and welfare funds, union suggestions for improving the efficiency of City operations, and other give-and-take discussions on fixing problems, saving money and improving the quality of City services. That is, labor-management dialogue in a spirit of mutual respect. Not a miracle, but something indispensable that had been lost.

Separate from the bargaining table, I would hope that there would also be renewed discussions on how to save hundreds of millions of dollars through more streamlined pension investment management in a way that preserves the involvement of all union trustees who best know their members’ interests.

Paying for wage increases in a new round is integral to bargaining those increases. Union members are city residents, too, and most of them certainly want to see the new Mayor succeed in carrying out an ambitious agenda to move toward more broadly shared prosperity and greater opportunities for all.  Unions are far from perfect organizations, but they are also far more democratic that most institutions. In the modern economy—the workplace and the marketplace—unions are the only democratic institutions.

I think the biggest challenge for labor unions is to get behind a broader agenda of raising wages and restoring hope for all workers, including those who are not union members. Poverty, deprivation and desperation are labor’s enemies. For a change, City Hall is squaring off against those enemies. All of labor needs to join that battle alongside City Hall.

Charles:

This concluding statement recommends the key elements of a satisfactory settlement for the current round of contract negotiations and suggests some desirable changes in collective bargaining for future rounds.

The resolution of the current round should have five elements: (1) It should bring all workers up to date in their pay scales covering at least through fiscal year 2014 and perhaps fiscal year 2015. (2) Its cost for taxpayers should not exceed what is currently budgeted. (3) Much of the retroactive payments should be in the form of one-time, lump sum payments rather than compounded base pay increases. (4) Its financing should not require any fiscal gimmicks or the tapping of needed reserves.  (5) It should include savings from a new policy of cost sharing with employees and retirees for health insurance premiums.

Once the expired contracts are brought up to date, future collective bargaining should take place in an updated framework including new practices and a modernized state legal framework. The City should build on the new policy of premium cost sharing by revamping its health insurance program, offering options with multiple cost containment features and combining the prescription, optical and other health benefits now offered by multiple, inefficient union welfare funds into a single, comprehensive program. The City’s negotiators should not follow a strict pattern for all workers; instead, substantial raises should be targeted to specific occupations with recruitment challenges and rewards should be structured for individual performance rather than exclusively for longevity.

Finally, changes should be sought in the state law regulating labor relations in order to (a) narrow the scope of issues covered by collective bargaining and expand the scope of managerial discretion over work rules, and (b) mandate timely settlement of contracts, perhaps through a system of binding arbitration based on “last best offers” submitted by each party within six months of a contract’s expiration. In the future, taxpayers should not be put at risk for retroactive settlements spanning as long as five years and potentially costing billions of dollars. 

James Parrott

James Parrott is the Deputy Director and Chief Economist of the Fiscal Policy Institute (FPI), a non-partisan public policy research and education organization committed to improving public policies and private practices to better the economic and social conditions of all New Yorkers. Parrott directs FPI’s economic and labor market analyses, and analyzes New York City and State budgets and tax policies. He is a frequent media commentator on economic and fiscal policies. FPI’s publications can be found at www.fiscalpolicy.org. In previous positions, Parrott worked for former State Comptroller H. Carl McCall, served in the administration of Mayor David N. Dinkins, and was Executive Assistant to the President of the International Ladies’ Garment Workers’ Union. Parrott has served in various state advisory positions, including on Governor Andrew Cuomo’s Tax Reform and Fairness Commission. He received his B.A. in American Studies from Illinois Wesleyan University and his M.A. and Ph.D. in Economics from the University of Massachusetts at Amherst.

Charles Brecher

Charles Brecher is the Consulting Research Director at the Citizens Budget Commission and a Professor of Health and Public Administration at New York University’s Robert F. Wagner Graduate School of Public Service, where he has been a tenured faculty member since 1980. Brecher is the author and editor of numerous books and articles in the fields of state and local budgeting and health care financing. His books include Power Failure: New York City Politics and Policy Since 1960, written with Raymond D. Horton and published by Oxford University Press, and Privatization and Public Hospitals, a Twentieth Century Fund publication. He received a BA degree with honors from the University of Florida and a Ph.D. in political science from the Graduate Division of the City University of New York.

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