Labor Costs and Collective Bargaining Agreements

The powers of the emergency manager under Public Act 4 of 2011 are materially different from those of the emergency financial manager under Public Act 72 of 1990. As stated above, however, the most material alterations were allowing the emergency manager to modify, reject or terminate the terms and conditions of contracts and — under certain conditions — collective bargaining agreements.

Providing a power to alter collective bargaining agreements has a practical basis. The primary expenses of most local units of government are not in materials, utilities or vendor contracts. They are in the cost of personnel. In Michigan, most local government personnel are unionized, and their compensation is determined by collective bargaining agreements.

There are several conditions that must be met before an emergency manager can unilaterally alter collective bargaining agreements under Public Act 4. The emergency manager needs to first meet and confer with union representatives. He or she then needs to determine that “a prompt and satisfactory resolution is unlikely to be obtained”[49] regarding alterations to a union collective bargaining agreement.

While these may seem like subjective determinations, a collective bargaining agreement can be amended only if the state treasurer and emergency manager make a series of determinations: that the intervention is “reasonable and necessary” in achieving a “significant and legitimate public purpose” and addressing “a broad, generalized economic problem”;  that the amendments are “directly related to and designed to address the financial emergency for the benefit of the public as a whole”; and that the amendments are temporary and do not “target specific classes of employees.”[50]

These conditions are reflective of constitutional requirements that grant states a limited ability to amend contracts.[*] They also prevent an arbitrary abrogation of the agreements made by elected officials. The treasurer and emergency manager’s conclusions can be challenged in court if the union believes that they have not been met.

The use of this power has been relatively light. Only three of the seven governments with emergency managers — Detroit Public Schools, Pontiac and Flint — have utilized this section of the law, amending at least  26 collective bargaining agreements. [†], [51] A number of these amendments were designed to get the contracts under uniform terms. These amendments provided substantial savings to the local units.

For instance, Pontiac’s emergency manager was able to negotiate changes and consolidate most of the city’s 70 different health insurance offerings into a single plan. He was not able, however, to negotiate changes to retiree health insurance.[52] He requested permission to change this benefit unilaterally from the state treasurer, who approved his plan to consolidate retiree health care, cap the city’s costs and provide the government flexibility in choosing plans and providers. The city is expected to save nearly $3.4 million annually, thereby eliminating more than 45 percent of the city’s projected operating deficit.[53]

Likewise, Flint had negotiated 20 different insurance plans for current employees and retirees.[54] Consolidating these plans into just three was expected to save nearly $7.9 million annually for the city — 44 percent of its projected operating deficit.[55] The savings from emergency managers’ modifications to contracts in Pontiac and Flint is summarized in Graphic 2.

Note that offering health insurance coverage to retirees is a rare benefit in Michigan’s private-sector. In a 2010 AonHewitt survey of 24 major private-sector Michigan employers, only three offered some form of employer-subsidized retiree health insurance coverage.[56]

Graphic 2: Estimated Savings From Modifications to Government-Employee Union Contracts in Flint and Pontiac Under Public Act 4, 2011-2012

Graphic 2: Estimated Savings From Modifications to Government-Employee Union Contracts in Flint and Pontiac Under Public Act 4, 2011-2012 - click to enlarge

Source: Various Michigan Treasury Department letters of determination to Pontiac and Flint Emergency Managers, 2011 and 2012.

The emergency manager for Detroit Public Schools abrogated a number of collective agreements, adding into their non-teacher union collective bargaining agreements such common terms as pay cuts, suspension of terminal sick leave,[‡] suspension of longevity bonuses,[§] suspension of step increases[¶] and a requirement that employees pay 20 percent of their health insurance premium. These changes led to an estimated annual savings of $15.4 million to the district.[57]

Modifications to the DPS’ collective bargaining agreement for the district’s 6,000 teachers included ending special bonuses for each of the following: teaching an oversized class, losing a preparation period, receiving advanced certification, and teaching special education. Extra payments if the teacher was assaulted were also ended.[58]

Notably, the emergency manager sought approval from the Department of Treasury to alter the terms of the teacher collective bargaining agreement only after 11 meetings with union leaders. The changes to the teachers’ contract are estimated to save the district $70.1 million annually,[59] leading to a total estimated annual savings of $85.5 million from DPS union contract modifications. A summary of the savings achieved by the DPS emergency manager using modifications to the collective bargaining agreements appears in Graphic 3.

Graphic 3: Estimated Savings From Modifications to Government-Employee Union Contracts in the Detroit Public Schools Under Public Act 4, 2011-2012

Graphic 3: Estimated Savings From Modifications to Government-Employee Union Contracts in the Detroit Public Schools Under Public Act 4, 2011-2012 - click to enlarge

Source: Detroit Public Schools Emergency Manager Roy Roberts, 13 letters to State Treasurer Andy Dillon, June 23, 2011 and June 26, 2012.

The modifications discussed above are structural reforms dealing with the costs of providing services. They affect the terms of employment, but do not directly affect service quality or quantity. In short, they are efficiency gains.

It is true, of course, that reductions in compensation can affect employee service quality indirectly. Emergency managers would presumably try to account for this in the modifications they make, but inevitably, they could make decisions that ultimately reduce service quality. Nevertheless, it is not clear that court-supervised receivership or bankruptcy would lead to more judicious decisions.

The emergency manager’s power to change union contracts may not need to be used to be useful. It may affect union negotiations, tipping the bargaining table more towards the emergency manager and his or her mandate to address the city’s finances.

The November 2012 ballot presents an interesting wrinkle. If Proposal 2 passes, union contracts would gain the power to supersede most state laws governing wages, hours and other terms and conditions of employment.[60] Municipal- and school-employee unions would, under Proposal 2, be empowered to negotiate clauses in their collective bargaining agreements that prevented emergency managers from altering union contracts, unilaterally or otherwise. The major material difference between Public Act 4 and Public Act 72 would thereby be nullified independent of voters’ preferences on Proposal 1.

[*] The state’s ability to amend a contract was set out in the New Deal era in the case Home Building & Loan Assn v Blaisdell, 290 US 398 (1934).

[†] Two of the governments with emergency managers — Highland Park schools and Muskegon Heights schools — may not have needed to exercise this power because of their move to “charterize” the districts — essentially turning the existing schools into charter schools that contract out the management of their operations. When charterizing the district, the current collective bargaining agreements do not cover employees working for the new charter firm. See Public Act 277 of 2011.

[‡] Terminal sick leave is a cash payment to an employee for unused paid sick leave when he or she retires.

[§] Longevity payments are additional that bonuses employees receive when they have served a specified number of years. The bonuses are in addition to the step increases in the uniform union salary schedule (see adjacent footnote).

[¶] Step increases are automatic additions to an employee’s annual salary based on his or her length of employment. These increases are governed by a uniform union schedule.