LESSONS LEARNED; MULTI-YEAR LABOR AGREEMENTS DURING UNSTABLE FISCAL TIMES

LESSONS LEARNED; MULTI-YEAR LABOR AGREEMENTS DURING UNSTABLE FISCAL TIMES By Michael D. Mingee, Fire Chief Carpinteria-Summerland Fire Protection District Introduction This is a case study of mistakes made and lessons learned from entering into a multi-year labor agreement during a state and national fiscal crisis. Subjects: Carpinteria Summerland Fire District (District) and the Carpinteria Summerland Firefighters Association (Union). Mistakes: Explained are four mistakes made during the negotiations and term of the contract, why the mistake was made and management s perspective on lessons learned. Purpose: This study s purpose is to alert readers to pitfalls they may encounter if they are considering a long-term agreement at a time of revenue and expenditure instability likely to continue for the term of the agreement. Background The Carpinteria Summerland Fire District is a small Independent Special District serving 23,000 residents in the southern Santa Barbara County, California. The District provides fire prevention, suppression and paramedic rescue services to a 40 square mile area including the City of Carpinteria, California and surrounding unincorporated area. The District relies on property tax rates of 14 cents per dollar for 96% of its annual revenue. The remaining 4% comes from fees for service rendered. During the time of this case study, the District s average annual revenue was approximately 6 million dollars. The self-governed Independent Special District has three employee classifications: represented, unrepresented and management. Thirty firefighters including supervisors ranked as Fire Captains are represented by the International Associations of Firefighters Local 2042. In Fiscal years 2005-06, 2006-07 and 2007-08, the District experienced an unprecedented growth in revenue at the rates of 11%, 10% and 6% respectively. In early 2007, the Fire Chief (CEO) 1

announced his retirement at the end of 2007. Relying on the upturn in growth, the Fire Chief added 5 additional positions to the represented employee group, increasing the group s membership by 22% and the District s operating budget by 9%. The governing Board of Directors was convinced by the retiring Fire Chief that the growth rate would continue and that the new positions would be supported by this revenue growth trend. (THIS WAS MISTAKE #1.) A new Fire Chief began on January 1, 2008. This was at the same time the 5 new employees began working. It wasn t long before the new Chief realized there was no way to support these positions in the current budget and, unless a 7% or higher annual growth rate could be sustained, there would be a need to reorganize and to renegotiate some labor costs. The memorandum of understanding between the District and the Union was set to expire December 31, 2008. In March of 2008, the Tax Assessor s Office notified the District that the growth rate for the upcoming fiscal year (2008-09) would be 2.7%. This decrease reflected the drop in property values. Immediate disaster was avoided by the retirement of a high-ranking officer which allowed reorganization and downsizing at the management level. The Initial Bargaining Process Negotiations began in June 2008 for a Memorandum of Understanding to replace the one due to expire at the end of 2008. On the basis of the 2008-09 2.7% revenue growth projection, management developed a number of strategies before beginning bargaining. Those were: 1) Clearly inform the labor representatives that unless there were some real concessions, some, if not all, of the new hired members would face lay-offs. The reasoning behind this strategy was that the choice of whether or not their fellow union members retained in their jobs was in the hands of the Union, not the District. 2) To discontinue the previous practice of giving a generic Cost of Living increase that was not based on any forecasted revenue data or comparable studies. The reasoning behind this strategy was that the District knew that the Union s salary and benefit package was already at the top of comparables of surrounding agencies. This was a fact that the Union did not want to bring to the attention of the District. 3) The employee group had to be weaned from the expectation of large annual salary increases merely because the District was experiencing revenue growth so that the District could increase reserves for critical capital projects and other needs. The reason for this strategy was that over the past few years, the retired Fire Chief had given all 2

revenue increases to employees and not reserved any funds for crucial capital maintenance and improvements. 4) A long-term agreement with set salary adjustments based on economic growth would be more favorable than annual contract negotiations. The reason for this strategy was that the District would gain stability for its annual budgets for the term of the agreement. (THIS WAS MISTAKE #2.) 5) That the negotiations would be data-driven and that the District would be making salary adjustments based on the current economic forecast. The reasoning behind this strategy was that the Union would buy in to the process if the numbers used for budgetary purposes were clear and indisputable. (THIS WAS MISTAKE #3.) The District s Board of Directors appointed two of its members as management representatives in negotiations. The Fire Chief would have the role of facilitator and provide data to the entire group as requested. The employee group also appointed two representatives who were experienced in previous contract negotiations. Management presented its strategy. In general the employee representatives responded favorably, stating that they realized the District was in an economic downturn. However, the Union was adamant that the over-hiring was not pushed by them; that was management s mistake and therefore management employees should take the biggest hit in their salaries. The labor representatives also favored a long-term contract if the numbers could be agreed upon. Once those positions were established, the process turned to a series of back and forth negotiating sessions involving numerous data requests. In the end, the salary adjustment agreement was: Salary Increases. All employees represented by the Union shall receive salary increases as follows effective the first payroll period commencing on or after the designated dates: January 1, 2009 1.5% July 1, 2009 3% July 1, 2010 4% if County Tax Assessor forecasted property tax revenue growth for FY 2010-11 exceeds 6.8% 3% if County Tax Assessor forecasted property tax revenue for FY 2010-11 is 5 to 6.8% 2.25% if County Tax Assessor forecast tax revenue growth for FY 2010-11 is 3 to 4.9% 3

1.5% if County Tax Assessor forecasted tax revenue growth for FY 2010-11 is less than 2.9% The State Declares a Fiscal Crisis and Enacts Assembly Bill 4X14 and 4X15 No sooner than the contract went into effect, the California Legislature passed AB 4X14 and 4X15 that enacted language in the 2004 Proposition 1A allowing the State to take 8% of local government s tax revenue. The effect on the District was a reduction in revenue of $554,000 for the fiscal 2009-10. It was clear that if the recently approved employee Memorandum of Understanding went into full effect, the District could not meet the financial commitment of the contract and also sustain the current labor force. The District notified the Union of this reality and asked them to return to the table. A number of concessions were discussed. The Union expressed concerned that their group would have to absorb the total loss to keep their labor force intact and presented their logic that the unrepresented, not being essential 24/7 safety services, could furlough without any significant harm to public safety. After a number of meetings, agreement was reached on salary reductions as long ad the reductions were equally applied to unrepresented employees and also that unrepresented would take an additional 1.5% salary reduction through furloughs. The terms of the agreement were: Section 20.1 - Salary Increases The 3% COLA adjustment due July 1, 2009, is suspended for 1 budgetary year to account for the revenue loss from a property tax shift to the State. Beginning July 1, 2010, the previously negotiated 3% COLA adjustment will be added to each employee s base salary along with any other salary adjustment due in the current MOU. The money saved by the District from this one year loss of base salary adjustment, will be deferred until revenue loss from a property tax shift to the State is repaid in full to the Fire District. The Salary Increase deferrals will be repaid to all members in one lump sum and shall be calculated as to the actual cost (step pay) at time of loss. The interest earned on the principle borrowed by the State and refunded to the Fire District will also be calculated and distributed to each employee in proportionate amount. In November of 2009, the State repaid its loan and the salary losses were repaid. The furloughs remained in effect for the entire calendar year. Devaluation and Revenue Forecasting On the heels of recovering from the State revenue loan, the County Tax Collector delivered a second dose of bad news to the District. For the first time the District would experience a negative revenue growth. Early in 2010, the revenue forecast was a negative 1.25%. The contract language for the July 2010 salary increase was 1.5% if County Tax Assessor forecasted tax revenue growth for FY 2010-11 is less than 2.9% (THIS WAS MISTAKE #4). The intent of 4

this language was to include a control in the agreement that would allow for salary adjustments only if the revenue increased. However, the idea of negative revenue was never considered. Since the District had always experienced revenue increases in the past, the possibility of negative growth was never considered. The Fire Chief began informal discussions with the labor representatives about the forecasted negative growth and the language of the Memorandum of Understanding. It was the Fire Chief s position that the language assumed negative growth would mean no salary increase. It was the position of the Union that the language less than 2.9% included negative growth. In addition, if the labor group gave up their salary increase, there would need to be some give back or concession by the Fire District. A formal process ensued while the District continued to assert its interpretation that the contract language implied that negative growth meant no salary adjustments. The District prevailed and a Side Letter was agreed upon which stated: All salary increases that would be due July 1, 2010 are suspended until July 1, 2011. Addition of language stating: If County Tax Assessor forecast tax revenue growth at zero or in negative percentage no salary adjustment will be given. This language shall have no affect on Section 20.2 Step Increase Plan, or Section 12 Longevity. Mistakes Made and Lesson Learned The Carpinteria Summerland Fire Protection District management team made some mistakes in its strategy and design of the Carpinteria Summerland Firefighters Association Memorandum of Understanding. Those mistakes were: Mistake #1) Relying on a short-term upswing in revenue growth to expand the long term labor force. The California real estate market was bound to peak and deflate at some point. Public agency fiscal management requires revenue forecasts to project long-term trends. The career life of a public employee is approximately 30 years. During that career, that employee s salary will increase due to merit systems, longevity systems, pay steps and promotions. When making a long-term commitment to an employee, the committed funding should be based on long-term trends. In the case of the Fire District, the trend should have been calculated for more than 3 years. In addition, when a CEO retires he/she should not use those final years to give away a reckless amount of salary increases to the Union in an attempt to avoid conflict during. Mistake #2) Assuming that a long term agreement would provide more budget stability without acknowledging that the revenue sources were unstable. 5

Longer-term agreements are usually beneficial to the agency. They ease financial planning by providing the knowledge of future salary and benefits commitments. However, long-term agreements in an unstable financial climate can, as illustrated in this situation, create the need for more time at the bargaining table and more distrust from both sides. When revenue forecasting is difficult due to an unsure real estate market, the term of the employee agreement should be for a shorter duration and allow for re-openers during that contract term. Mistake #3) Assuming data-driven bargaining would create buy-in from labor. Managers who are comfortable with budgeting assume that everyone is comfortable with the budget. The fact is that public agency budgeting takes much longer than a few bargaining sessions to learn. It actually takes many years for most managers to understand their agency s budget. It is very difficult and potentially time consuming to ensure that the labor representatives understand the agency s financial data. If a bargaining team believes it is important, schedule adequate time to present how the budget works and what the data represents. Mistake #4) Basing salary adjustments on a percentage of revenue growth and not including language addressing negative revenue growth. Conclusion Basing employee salary and benefits increases on projected revenue increases is prudent and a requirement in good faith bargaining. An agency cannot commit to any cost if there is no discussion or knowledge of how the cost will be funded. If employee salaries are determined by revenue increases, then the revenue must be forthcoming. There must be language included that addresses a loss of revenue. Simply stating ZERO to an agreed upon percentage of revenue would have solved the problem encountered in this case study. This study gives the reader a picture of what happened over a three-year period of economic downturn while negotiating, writing and administering a Memorandum of Understanding between an employee bargaining group and a small government agency. While the intentions of the contract were genuine and in the best interest of both parties, the consequences were not intended. These lessons learned can be helpful in designing a labor agreement by realizing one simple idea. Unstable economic times mean unsure data and unsure support for a long-term agreement. When economic times are unstable, contracts should be short. In addition, the language of the contract should include 6

the what if, even if the what if is not expected at the time of bargaining. When considering a contract term, it is the author's hope that the reader can gain some knowledge and wisdom from the road that was traveled in this case study and thus prevent similar mistakes from being repeated. Michael D. Mingee, Fire Chief Carpinteria-Summerland Fire Protection District 1140 Eugenia Place Carpinteria, CA 93013 805-566-2450 7