In a "Saturday Night Live" skit four years ago, cast member Jason Sudeikis, playing Joe Biden, comically described Scranton, Pa. -- the then-vice presidential candidate's hometown -- as "the absolute worst place on Earth." Scranton has indeed suffered through hard times: The city's poverty rate today is several percentage points above the national average, and its median household income is just two-thirds the national average. Yet Scranton managed to avoid insolvency until recently, when an arbitrator ruled that it owed fire and police personnel $30 million in raises and backpay. In June, with only $5,000 in the bank, Scranton defaulted on some of its debt. It's currently trying to stave off bankruptcy.
Scranton has become the latest victim of Pennsylvania's one-sided binding-arbitration law, which allows unelected mediators to burden cities with large compensation awards that ignore fiscal reality. Pennsylvania isn't alone: About 20 states foist some form of binding arbitration on their local governments, despite studies showing that the system is often biased against taxpayers and frequently results in much bigger pay awards than government workers earn in places without arbitration. Even as reformers seek ways to cut local-government costs during the ongoing fiscal crisis, binding arbitration has largely escaped unchanged.
Arbitration for government workers originally arose as a byproduct of states' bans on public employee strikes. If workers couldn't go out on the picket line, legislators reasoned, they should be given some system of independent mediation in contract disputes. But as public employee unions gained power, they helped shape these systems to their advantage. In some states, like New York, laws ban arbitrators from considering a local government's fiscal limitations when ruling on new contracts. In other states, arbitrators calculating an award for workers in one city can base the amount on the pattern of pay increases in nearby cities, even if those cities are much wealthier and can afford to pay more. Government unions have learned to claim that negotiations with local officials are at an impasse, thus moving the process into arbitration, where they can expect a better deal. A study by the Manhattan Institute's Empire Center for New York State Policy has found that, for New York government workers in jobs covered by arbitration, pay increased over a 10-year period by 59 percent -- compared with a one-third gain for other government workers.
Unions know the value of binding arbitration; that's why they often try to expand its scope. In 2009, unions and Democrats in Congress lobbied hard for the Employee Free Choice Act. Though most of the debate on that legislation focused on its proposed elimination of secret votes in union elections, the bill also would have required compulsory arbitration in the private sector similar to what we now have in government. The bill died because proponents couldn't secure a filibuster-proof Senate majority.
But for government workers, binding arbitration remains a powerful force in many states. Scranton got into its mess last year, when Pennsylvania's Supreme Court struck down a law exempting places that the state had declared "distressed municipalities" from binding arbitration. Scranton, considered "distressed" for two decades, was then hit with the backpay bill, despite protests by city officials that they couldn't pay it. Subsequently, arbitrators have ruled that another distressed city, Philadelphia, must adhere to an arbitration ruling granting $200 million in extra compensation to police and fire personnel. The award included 3 percent annual pay raises for three years, additional city funding for health benefits, and protection from worker furloughs that the city had ordered to balance its budget. The city has appealed the arbitration award twice.
Critics, including many mayors in affected states, continue to call for repeal or reform of mandatory arbitration, largely without success. Only New Jersey has enacted substantial reform since the states' financial crisis began in 2009. Despite its obvious flaws, the system of binding arbitration lives on. Government unions can't afford to let it die.
Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. This article is adapted from City Journal's autumn 2012 issue.