The continuing budget crisis in states and cities has prompted some notable reform efforts, including pension and health benefit cuts that begin to address long-term problems. But one expensive mandate that's gone almost completely unchallenged has been binding arbitration, the process by which unelected arbitrators get to rule on pay and benefits for workers when unions and government reach an impasse in contract negotiations. In many places around the country, binding arbitration has been slanted to favor workers and drive up costs. In testimony before California's Little Hoover Commission, San Jose Mayor Chuck Reed, for instance, described how arbitrators helped to spread the pension mess that now affects many California cities by granting rich pensions in places where city officials balked at the cost.
Reed noted that an outside arbitrator in 2007 increased San Jose firefighters' pension maximum from 85 to 90 percent of final compensation and made the change retroactive to the day the firefighter began working for the city. On a going forward basis, this benefit increase would have cost San Jose $5 million a year, Mayor Reed said. By making it retroactive, the City of San Jose, and ultimately the taxpayers, was faced with a $30 million unfunded liability for the prior service cost. "Historically, arbitrators come into town, spend our money and leave," Reed told the commission.My latest piece for City Journal, published online this week by the Washington Examiner, looks at the issue of binding arbitration, where since the state and local fiscal crisis began in 2008 only one state, New Jersey, has enacted substantial reforms, and they sunset in three years unless they are renewed. Meanwhile, arbitration laws continue to hamstring cities in dire need of fiscal reform, including troubled Pennsylvania cities like Scranton and Philadelphia.In New York, the law continues to drive up salaries, as a Manhattan Institute study that compared the wage gains of workers covered by arbitration with other government workers showed.