[author: John P. McLaughlin, Patrick J. Harvey]

Governor Corbett last week signed SB 1321, which requires that Act 111 interest arbitration awards comply with a municipality’s Financial Recovery Plan under the Municipalities Financial Recovery Act (Act 47). The law becomes effective on September 3, 2012—60 days after being signed by the Governor.

Officially numbered Act 133, the new law effectively supersedes the Pennsylvania Supreme Court’s controversial October 2011 holding in City of Scranton. In that decision, the Supreme Court held that, despite Act 47’s requirement that collective bargaining agreements comply with a Financial Recovery Plan, no such requirement exists for police and fire interest arbitration awards under Act 111.

The court’s decision created a critical loophole in Act 47, severely reducing the ability of distressed municipalities to regain fiscal health, because the personnel costs of uniformed employees are a principal cost for most municipalities, particularly those operating under Act 47.

The new law’s restoration of Act 47’s mandate over Act 111 awards re-establishes a necessary fiscal recovery tool for municipalities, though the overall effectiveness of the legislation for municipal fiscal recovery depends on careful presentation of an Act 47 case.

While the Act mandates that collective bargaining agreements and arbitration settlements “shall not in any manner violate, expand or diminish” the provisions of a Financial Recovery Plan, it allows for arbitration settlements, including interest arbitration awards, to deviate from the Plan under very limited circumstances. Deviation is permitted if it is established that the award:

• Will not cause the distressed municipality to exceed any limits on expenditures for individual collective bargaining units imposed under the plan—except if such limit on expenditures is determined to be arbitrary, capricious or established in bad faith
• Will not “further” jeopardize the financial stability of the distressed municipality
• Is not inconsistent with the policy objectives of the Act

 Act 133 requires that the interest arbitration panel determine if the above criteria are met. In doing so, the panel must make findings of fact that are supported by substantial evidence and by expert municipal finance testimony. The Act also specifically defines the credentials necessary for an “expert in municipal finance.” An arbitration award that deviates from the Financial Recovery Plan must be provided to the municipality’s Financial Recovery Coordinator by the chairman of the arbitration panel within 48 hours of issuance. The coordinator, however, does not have authority to take any action to prevent the implementation of the arbitration award, except for appealing the award.

Act 133 authorizes appeals to be taken by the municipality, union, coordinator, or secretary within the typical 30-day appeal period. However, the new law provides that the standard of review on appeal will be “de novo,” meaning that the court will not be bound by factual or legal conclusions of the arbitration panel. Act 133 also clarifies that nothing in the Act “otherwise affect[s] the scope or standard of review” applicable to interest arbitration awards. The Act further requires municipalities to obtain approval from the Department of Community and Economic Development prior to filing for Chapter 9 Bankruptcy protection.

Although the Act restores the jurisdiction of Act 47 over interest arbitration awards, it also creates new obligations for employers in such Act 111 arbitration proceedings. Public employers operating under a Fiscal Recovery Plan and their Act 47 coordinators must work closely with labor counsel experienced in litigating matters under Act 47 to ensure that any arbitration proceeding and contract award complies with the new law.

Ballard Spahr attorneys represent municipalities across Pennsylvania in contract negotiations and Act 111 arbitrations. If you have questions about Act 133 and its ramifications, please contact John P. McLaughlin at 215.864.8241 or mclaughlinj@ballardspahr.com, Patrick J. Harvey at 215.864.8240 or harveyp@ballardspahr.com, or the member of the Labor and Employment Group with whom you work.