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City of Wilmington v. Fraternal Order of Police Lodge 1

Court of Chancery of Delaware

June 30, 2015

CITY OF WILMINGTON, Appellant,
v.
FRATERNAL ORDER OF POLICE LODGE 1, Appellee.

Submitted: March 24, 2015

David H. Williams, of MORRIS JAMES LLP, Wilmington, Delaware; Attorney for Appellant.

Jeffrey M. Weiner, of the LAW OFFICE OF JEFFREY M. WEINER, P.A., Wilmington, Delaware; Attorney for Appellee.

MEMORANDUM OPINION

GLASSCOCK, VICE CHANCELLOR

Employers and employees typically agree on terms before work commences. This common-sense custom did not prevail in the current dispute, which involves a small bargaining unit of police captains and inspectors (the "Bargaining Unit") employed by the City of Wilmington (the "City"). Those individuals have been working since mid-2010 without a contract. Negotiations between the City and the Bargaining Unit's exclusive bargaining representative, the Fraternal Order of Police, Lodge 1 (the "FOP"), did not even begin until November of 2010 and were not fruitful. The employees have been paid under the terms of the former contract, which expired on June 30, 2010, as called for in the law governing collective bargaining between police and Delaware governmental entities-the Police Officers' and Firefighters' Employment Relations Act (the "POFERA"), 19 Del. C. § 1601 et seq. Eventually, pursuant to the terms of the POFERA, the parties came before an arbitrator, who, under POFERA rules, was required to choose, based on statutory criteria, between the last, best, final offer ("LBFO") of each party, which had to be accepted in toto. In making this choice, the arbitrator had discretion, except with respect to one factor: If the City could not pay the salary and benefits proposed in the FOP's LBFO from "existing revenues, " the arbitrator was required to reject that proposal and impose the City's LBFO.

The arbitrator ruled on September 8, 2014, accepting the FOP's LBFO after finding that the City could "afford" it, apparently finding it could be paid for with existing revenues. The FOP's offer was for a period ending on June 30, 2014. Thus, as of the time of the arbitration order, the term of employment called for had been completed in its entirety. Exercising its rights under the POFERA, the City appealed the arbitrator's decision to the Public Employment Relations Board (the "PERB"), which affirmed, and then appealed the decision of the PERB to this Court.

The parties agree that the POFERA was adopted by the General Assembly under the apparent (and entirely reasonable) assumption that it would apply prospectively, here meaning the parties would use the POFERA to resolve collective bargaining disputes over contracts governing future relationships. The differences between the parties arise in large part because of the difficulties of applying the POFERA where the parties have acted in reverse order-work first, then agree to terms. The issues raised are legal, and subject to de novo review. I find, for the reasons below, that the arbitrator and the PERB got some issues of law right and some wrong. Because those issues they got wrong might have affected the exercise of discretion by the arbitrator, I ask the parties to comment on whether a remand is necessary. The facts, and my reasoning, are set out below.

I. BACKGROUND FACTS [1]

This case arises under the POFERA, which, generally, grants Delaware's police officers and firefighters certain rights to collectively bargain, sets forth the laws governing that process-including a process for resolving collective bargaining disputes-and charges the PERB with administering those laws.[2]Pursuant to the POFERA, collective bargaining disputes proceed first to mediation and, if mediation is unsuccessful, then to binding interest arbitration.[3] An arbitrator's decision may be appealed to the PERB, whose decision may then be appealed to this Court.[4] Before me is such an appeal by the City from a decision of the PERB, itself affirming on appeal an arbitrator's decision resolving a collective bargaining dispute between the FOP and the City in favor of the FOP.

A. The Parties

The City is a public employer within the meaning of Section 1602(l) of the POFERA.[5]

The FOP is an employee organization within the meaning of Section 1602(g) of the POFERA, [6] and is certified by the PERB as the exclusive bargaining representative of the Bargaining Unit, a small group of high-ranking police officers employed by the City [7] At the time of the arbitration hearing, the Bargaining Unit included seven captains and one inspector, and had one additional vacancy for an inspector.[8]

B. The Parties' Collective Bargaining Dispute

The City and the FOP were parties to a collective bargaining agreement ("CBA") for the Bargaining Unit that had a term of July 1, 2007 through June 30, 2010, which comprises the City's fiscal year ("FY") 2008 through FY 2010.[9]Following the expiration of that CBA, the City and the FOP entered into prolonged and unsuccessful negotiations on a successor CBA from November 2010 to February 2012.[10] Unable to reach an accord, the parties attempted, again unsuccessfully, to mediate their dispute from June 2012 to January 2014 with a PERB-appointed mediator.[11] On January 20, 2014, the mediator recommended, at the behest of the FOP, that the parties' dispute be submitted to arbitration.[12] The PERB determined that arbitration was appropriate and commenced arbitral proceedings with Deborah L. Murray-Sheppard, the Executive Director of the PERB, serving as arbitrator for the dispute (the "Arbitrator").[13]

Following the expiration of the parties' previous CBA and during the pendency of the parties' dispute over a successor CBA, the members of the Bargaining Unit remained employed with the City and, as is required by law, continued to receive the pay and benefits to which they were entitled in the last year that the previous CBA was in effect (i.e., FY 2010).[14]

C. The Parties' Last, Best, Final Offers

Pursuant to the POFERA, arbitration on collective bargaining disputes between a public employer and its police and firefighter unions is done "baseball style." Each side presents to the arbitrator its LFBO, and the arbitrator is then required, based on an evaluation of seven factors set out in 19 Del. C. § 1615(d), [15] to chose the LBFO of either the public employer or the union; the arbitrator may not pick and choose between provisions of the two LBFOs, or create terms of her own.[16]

In February 2014, the FOP and the City each submitted its LBFO for consideration by the Arbitrator.[17] In the FOP's LBFO, the FOP proposed a CBA with a term of July 1, 2010 through June 30, 2014-i.e., covering the fiscal years that had passed since the parties' previous CBA had expired.[18] Among other things, the FOP's LBFO included retroactive cost-of-living adjustments to the salary schedules for FY 2012 and FY 2013, effectuating retroactive increases in annual salary of $1, 000 to $3, 000 (depending on the specific Bargaining Unit employee) for each of those years.[19] The cost of these salary increases, as well as of other costs generated by the FOP's LBFO, would be partially offset by crediting the City for a one-time payment it made to all City employees in lieu of a cost-of-living adjustment in November 2012 and by increasing the Bargaining Unit employees' contributions to healthcare costs, effective retroactively on January 1, 2013.[20] The FOP estimated that the total projected cost of its LBFO through FY 2014 would be $45, 653.56.[21] The City, on the other hand, estimated the projected cost through FY 2015, arguing that the costs of the increased salaries would carry over automatically when the CBA expired in FY 2014; it placed this projected cost at $184, 685.[22]

As to the City's LBFO, the City proposed a CBA with a term from July 1, 2014 through June 30, 2016-i.e., covering, at the time, future fiscal years. Among other things, the City's LBFO increased the Bargaining Unit employees' contributions to healthcare costs.[23] However, the City's LBFO did not include any cost-of-living adjustments, to either the fiscal years covered by the proposed CBA or the fiscal years prior.[24] As a result, the City's LBFO would not cause the City to incur any additional costs, and in fact would decrease total compensation to the Bargaining Unit employees by increasing their healthcare costs.[25]

D. The City's Finances

Among the seven Section 1615(d) factors which the arbitrator must consider in making her determination as to which LBFO to adopt is subsection (d)(6), "the financial ability of the public employer, based on existing revenues, to meet the costs of any proposed settlement."[26] While the arbitrator is statutorily bound to consider all factors listed in Section 1615(d), the factor in subsection (d)(6), and only this factor, may be dispositive on the arbitrator's analysis.[27] In other words, subsection (d)(6) serves as a disqualifier: The arbitrator must accept the public employer's LBFO if it determines that the public employer does not have the financial ability, based on existing revenues, to meet the costs of the union's LBFO, provided, of course, that the public employer has the financial ability to meet the costs of its own LBFO.[28]

In the arbitration, on appeal to the PERB, and now on appeal to this Court, the City has argued that it does not have the financial ability, based on existing revenues, to meet the costs of the FOP's LBFO. Thus, in all three proceedings, the City's finances have been a central focus.

1. The City's Budget

a. The Budget Process

The City's charter (the "Charter") requires the City each fiscal year to pass and maintain a balanced budget, which, according to the Charter, means a budget where projected revenues equal operating expenditures plus any existing deficits.[29]Each budget cycle, the Office of the Mayor of the City (the "Mayor"), working in conjunction with the Office of Management and Budget (the "OMB") and the Department of Finance, and in consultation with the heads of the City's various other departments and the public, must determine the City's existing deficit and surplus, create revenue projections for the City for the upcoming year, develop an initial budget proposal, and submit all of this information to the City's legislative body, the City Council (the "Council").[30] The Charter reserves the authority to alter and adopt the budget on behalf of the City to the Council.[31] However, in finalizing the budget provided to it by the Mayor, the Council must utilize the Mayor's estimates for the City's surplus, deficit, and projected revenues.[32]

Once the Council has adopted the budget, it may not make any additional operating appropriations in that fiscal year except in certain situations enumerated in the Charter, such as to meet the costs of unanticipated emergencies.[33] In cases where the Council does modify the budget to appropriate additional money, the Council "must determine and approve the revenue by which [the] addition to the budget will be funded" in order to maintain a balanced budget;[34] any portion of the additional costs that cannot be paid out of the revenues for that fiscal year carry over to the following fiscal year as deficit.[35]

The City can only spend money that has first been appropriated through the budget process, either as part of the budget's initial approval or as part of an ex post modification.[36]

b. Deficit Spending

Despite the balanced budget requirement in the Charter, it is still possible for the City to engage in deficit spending, meaning in any given fiscal year the City's expenditures exceed revenues generated by the City. This could occur inadvertently in the budget process, such as if the Mayor overestimates the City's revenues in its projections, allowing the Council to appropriate more money than the City can actually match with revenues, but it could also occur advertently at certain stages in the budget process. First, in the development phase, it is the City's financial policy that the Mayor may, with limited exceptions, include prior years' accumulated surplus in its revenue projections.[37] This allows the City to "limit[] tax increases because prior years' surplus [is] used prior to revenue enhancements."[38] Second, if the Council modifies the budget during the fiscal year to make additional appropriations, the Council may ordain prior years' accumulated surplus as the "revenue" by which to fund those additional expenditures.[39]

c. Fund Accounting

In order to "segregate the specific purposes and operations of the various activities of the City, " the City organizes its budget, including both the accounting and budgeting portions, into four major funds: The General Fund, the Special Funds, the Water/Sewer Fund, and the Internal Service Fund.[40] According to the City, "Funds can be thought of as being like the subsidiaries of a major conglomerate corporation. Each subsidiary is responsible for its own operational results and strategy, yet is still part of the larger conglomerate corporation when it comes to overall management and financial results."[41] Basic municipal operations and services, including police and fire protection, fall under the General Fund, the revenues for which are derived from taxes, fees, fines, and interest on investments.[42] The parties here agree that the revenue available to meet the costs of their CBA must come from the General Fund.

For each budget cycle, the City's budget includes balance sheets in its financial statements that tally the General Fund's "fund balance" as of the end of the prior fiscal year.[43] This value accounts for the difference between the General Fund's assets and liabilities at that moment in time.[44] In other words, the General Fund's fund balance in the financial statements represents the net calculation for the General Fund's annual operating surpluses and deficits in all previous years: If the fund balance is positive, the City has accumulated a net surplus in the General Fund; if it is negative, the City has accumulated a net deficit in the General Fund. It is important to note that, if the City has accumulated a surplus in the General Fund, the fund balance is not an actual repository where the assets constituting that accumulated surplus can be found, but rather it is simply an accounting of those assets across the General Fund, in whatever form or location they may actually exist.[45]

The budget's balance sheets further break down the General Fund's fund balance into the following subcategories:

Non-spendable – Amounts that cannot be spent either because they are in a non-spendable form or because they are legally or contractually required to be maintained intact.
Restricted – Amounts that can be spent only for specific purposes because of the City Charter, City Code, State or federal laws, or externally imposed conditions by grantors or creditors.
Committed – Amounts that can be used only for specific purposed [sic] determined by a formal action by City Council ordinance or resolution. This includes the Budget Reserve Account.[46]
Assigned – Amounts that are allocated for a future use by the Mayor, but are not spendable until a budget ordinance appropriating the amounts is passed by City Council.
Unassigned – All amounts not included in other spendable classifications.[47]

Like the fund balance, each of these subcategories represents a mathematical calculation-each tracks a specific portion of the net assets in the General Fund based on the nature of the restrictions placed on the City's ability to utilize the assets.[48] Thus, also like the fund balance, none of the subcategories represent an actual repository where the certain "type" of asset in that subcategory can be found, but instead ...


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