City of Wilmington v. Fraternal Order of Police Lodge 1
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF WILMINGTON, ) ) Appellant, ) ) v. ) C.A. No. 10329-VCG ) FRATERNAL ORDER OF POLICE ) LODGE 1, ) ) Appellee. )
MEMORANDUM OPINION
Date Submitted: March 24, 2015 Date Decided: June 30, 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.
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
1 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.
2 I. BACKGROUND FACTS1
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
1 Unless otherwise indicated, the factual background is drawn from the record created in the PERB proceedings. Citations to that record appear as ―R. [page number],‖ without the use of short forms. 2 See 19 Del. C. § 1601. 3 See id. §§ 1614–1615. Interest arbitration is a process in which the terms and conditions of the parties‘ contract are established by an arbitral tribunal; it differs from so-called ―grievance arbitration,‖ in which an arbitral panel applies the terms and conditions of a contract already in existence between the parties to a dispute between those parties in order to determine whether the contract has been breached. Arvid Anderson & Loren A. Krause, Interest Arbitration: The Alternative to the Strike, 56 Fordham L. Rev. 153, 153 (1987). 4 See 19 Del. C. §§ 1609, 1615. 5 See id. § 1602(l).
3 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
6 See id. § 1602(g). 7 R. 1354; see also 19 Del. C. § 1602(h) (defining ―exclusive bargaining representative‖). 8 R. 600, 1224–25. In total, at the time of the hearing the City employed 306 police officers, including captains and inspectors, of its authorized strength of 320 officers. R. 1363. The FOP also represented the 298 rank-and-file officers employed by the City at the time. R. 1363. 9 R. 1354. The City‘s fiscal year runs from July 1st of the previous calendar year (i.e., FY X – 1) to June 30th of the following calendar year (i.e., FY X). 10 R. 1354, 1427. 11 R. 1355.
4 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.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF WILMINGTON, ) ) Appellant, ) ) v. ) C.A. No. 10329-VCG ) FRATERNAL ORDER OF POLICE ) LODGE 1, ) ) Appellee. )
MEMORANDUM OPINION
Date Submitted: March 24, 2015 Date Decided: June 30, 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.
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
1 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.
2 I. BACKGROUND FACTS1
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
1 Unless otherwise indicated, the factual background is drawn from the record created in the PERB proceedings. Citations to that record appear as ―R. [page number],‖ without the use of short forms. 2 See 19 Del. C. § 1601. 3 See id. §§ 1614–1615. Interest arbitration is a process in which the terms and conditions of the parties‘ contract are established by an arbitral tribunal; it differs from so-called ―grievance arbitration,‖ in which an arbitral panel applies the terms and conditions of a contract already in existence between the parties to a dispute between those parties in order to determine whether the contract has been breached. Arvid Anderson & Loren A. Krause, Interest Arbitration: The Alternative to the Strike, 56 Fordham L. Rev. 153, 153 (1987). 4 See 19 Del. C. §§ 1609, 1615. 5 See id. § 1602(l).
3 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
6 See id. § 1602(g). 7 R. 1354; see also 19 Del. C. § 1602(h) (defining ―exclusive bargaining representative‖). 8 R. 600, 1224–25. In total, at the time of the hearing the City employed 306 police officers, including captains and inspectors, of its authorized strength of 320 officers. R. 1363. The FOP also represented the 298 rank-and-file officers employed by the City at the time. R. 1363. 9 R. 1354. The City‘s fiscal year runs from July 1st of the previous calendar year (i.e., FY X – 1) to June 30th of the following calendar year (i.e., FY X). 10 R. 1354, 1427. 11 R. 1355.
4 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
12 R. 1355. 13 R. 1355. 14 Oral Arg. 36:15 – 23. By the time the dispute reached arbitration, though, the City had reduced the number of captains from its previous number of eight to seven through attrition, resulting in the work of the outgoing captain being redistributed among the remaining seven Captains. R. 1363. 15 Those factors are: (1) The interests and welfare of the public. (2) Comparison of the wages, salaries, benefits, hours and conditions of employment of the employees involved in the binding interest arbitration proceedings with the wages, salaries, benefits hours and conditions of employment of other employees performing the same or similar services or requiring similar skills under similar working conditions in the same
5 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
community and in comparable communities and with other employees generally in the same community and in comparable communities. (3) The overall compensation presently received by the employees inclusive of direct wages, salary, vacations, holidays, excused leaves, insurance and pensions, medical and hospitalization benefits, the continuity and stability of employment, and all other benefits received. (4) Stipulations of the parties. (5) The lawful authority of the public employer. (6) The financial ability of the public employer, based on existing revenues, to meet the costs of any proposed settlements; provided that any enhancement to such financial ability derived from savings experienced by such public employer as a result of a strike shall not be considered by the binding interest arbitrator. (7) Such other factors not confined to the foregoing which are normally or traditionally taken into consideration in the determination of wages, hours and conditions of employment through voluntary collective bargaining, mediation, binding interest arbitration or otherwise between parties, in the public service or in private employment. 19 Del. C. § 1615(d). 16 See id. (―The binding interest arbitrator shall make written findings of facts and a decision for the resolution of the dispute; provided however, that the decision shall be limited to a determination of which of the parties‘ last, best, final offers shall be accepted in its entirety.‖). 17 R. 1355. 18 R. 38.
6 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
19 See R. 38–42. 20 R. 38–39, 43–44; see also R. 1368–69. 21 R. 1369; see also R. 1304. 22 R. 1316. 23 R. 46, 49. 24 R. 46–47, 1374–75.
7 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
25 R. 1368. 26 19 Del. C. § 1615(d)(6). 27 See id. § 1615(d) (―In making determinations, the binding interest arbitrator shall give due weight to each relevant factor. . . . With the exception of paragraph (d)(6) of this section, no single factor in this subsection shall be dispositive.‖); Fraternal Order of Police, Lodge 5 v. New Castle Cnty., 2014 WL 351009, at *5 (Del. Ch. Jan. 29, 2014). 28 I note that this disqualifier technically works both ways—the arbitrator must accept the union‘s LBFO if she determines that the public employer has the ability, based on existing revenues, to meet the costs of the union‘s LBFO but not to meet the costs of its own LBFO— although this scenario, obviously, is unlikely.
8 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
29 See Wilm. C. (Charter) § 2-300(1) (―It shall be the duty of the council, at least thirty (30) days before the end of the fiscal year, to adopt the annual operating budget ordinance for the next fiscal year.‖); id. § 2-300(2) (―The annual operating budget ordinance shall provide for discharging any deficit and shall make appropriations to the council, the mayor, and all officers, departments, boards and commissions which form a part of the executive or administrative branch of the government, and for all other items which are to be met out of the revenue of the city.‖); id. § 2-302 (―Not later than the passage of the annual operating budget ordinance, the council shall ordain such revenue measures as will, in the opinion of the mayor, yield sufficient revenue to balance the budget.‖).
9 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
30 Id. § 4-401(b); R. 640–41. 31 Wilm. C. (Charter) § 2-300(1); see also R. 641. The Council‘s approved budget, however, is subject to the Mayor‘s traditional and line-item veto, both of which may be overridden by a two- thirds vote of the Council. See Wilm C. § 2-202. 32 Wilm. C. (Charter) § 2-300(3); see also R. 641. 33 See Wilm. C. (Charter) § 2-301; R. 641. For example, in FY 2014 the Council had to approve additional spending so the City could cover the unanticipated expenses of severe winter weather. R. 929. The OMB ―has the authority to transfer budget allocations between accounts that are within the same Fund, Department, and Account Group,‖ but the Council must approve ―[a]ny other type of transfer, such as between Funds, Departments or different Account Groups‖ as well as any deletions to the budget. R. 641. 34 R. 641. 35 Wilm. C. (Charter) § 2-301.
10 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‘
36 See Wilm. C. (Charter) §§ 2-300, 2-301; R. 929. 37 E.g., R. 646; cf. R. 641 (―For the budget to be legally balanced, revenues plus an amount of existing prior years‘ surpluses, if any, must equal operating expenditures plus any existing deficits.‖). The exceptions are those portions of prior years‘ accumulated surplus ―designated for debt service, encumbrances or the Budget Reserve Account.‖ R. 646; see also infra note 46 (explaining the Budget Reserve Account). 38 R. 646.
11 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
39 See, e.g., R. 929–30. 40 R. 642. With the exception of certain smaller funds within the Special Funds, the expenditures for all the four major funds are appropriated through the budget process. R. 651. 41 R. 642. 42 R. 649.
12 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.
43 See, e.g., R. 675. 44 E.g., R. 675. The City labels the difference between fund assets and liabilities as ―fund balance‖ on its financial statements for all funds designated as ―government funds,‖ including the General Fund and the Special Funds. R. 675; see also R. 649. For funds designated as ―proprietary funds‖ or ―fiduciary funds,‖ such as the Water/Sewer Fund, the City labels the difference between fund assets and liabilities as ―net assets‖ on its financial statements. R. 676. Information regarding fund balance or net assets pertains only to the specific fund in which it is reported, not the City‘s finances as a whole. 45 See, e.g., R. 928, 965–67. For example, the General Fund‘s fund balance may account both for cash assets that the City has invested in a specific CD as well as certain of the City‘s receivables that exist only as claims for payments.
13 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
46 The City is required to maintain a ―Budget Reserve Account‖ within the General Fund equal to 10% of the upcoming year‘s General Fund budget. Wilm C. §§ 2-376, 2-377; see also R. 955. The money in the Budget Reserve Account may only be used for ―adverse economic conditions or public emergency and when declared by council by ordinance enacted by a two-thirds vote (nine) of the city council, following certification by the mayor of such economic conditions or public emergency,‖ and the money must be replenished from year to year. Wilm. C. §§ 2-376, 2- 377; see also R. 955–56. However, in 2009, the City passed an ordinance allowing the City treasurer to use the money in the Budget Reserve Account to pay the City‘s employee payroll, debt service, and accounts payable in FY 2009, and requiring the treasurer to fully replenish the money in the Budget Reserve Account by the following October; the City renewed that ordinance for FY 2010, FY 2012, FY 2013, and FY 2014. See Wilm. C. § 2-379. On May 15, 2015, the City again renewed the ordinance for FY 2015. See Wilm. Ordinance 15-017, § 1 (May 15, 2015). 47 R. 675. 48 See R. 927–28.
14 found, but instead each is an accounting of all the net assets of that ―type‖ that
exist in whatever form across the General Fund.
d. The Unassigned Fund Balance
The General Fund‘s unassigned fund balance (the ―Unassigned Fund
Balance‖) accounts for those net assets within the General Fund that are not subject
to any of the limitations found in the other subcategories. Typically, the General
Fund‘s ―unassigned‖ net assets include—but are not all—cash and cash
equivalents, such as checking accounts, savings accounts, and CDs.49 In the
arbitration proceedings, the Director of the OMB, Robert Greco, explained the
Unassigned Fund Balance in these general terms:
[I]n other words, just like a business or even for yourself as a person you have what is called net worth. And what [the City does] at the end of the fiscal year[,] the City looks and says, Here [are] our assets, subtract out [our] liabilities, and then also subtract out any reserve accounts like the budget reserve or reserve for encumbrances. The value left, that dollar amount, is called unassigned fund balance. It‘s not all cash and it‘s not a fund sitting there called unassigned fund balance, it just has cash. It is, again, a mathematical calculation that changes month-to-month, year-to-year.50
Greco testified that the Unassigned Fund Balance generally ebbs and flows
with the General Fund‘s net operating deficits and surpluses. If there is a net
operating surplus in the General Fund in any given fiscal year, the incoming assets
49 R. 967–69. For the sake of simplicity, for the remainder of this Memorandum Opinion I will refer to cash and cash equivalents together using the shorthand ―cash assets.‖ 50 R. 928–29; see also R. 966–69.
15 from that surplus are likely to be spendable, unrestricted, uncommitted, and
unassigned, and thus their value will ―flow,‖ conceptually, to the Unassigned Fund
Balance, causing it to grow from the previous year.51 Conversely, if there is a net
operating deficit within the General Fund in any given fiscal year, and the City has
appropriated prior years‘ accumulated surplus to finance the deficit expenditures,
the outgoing surplus assets may be assets that were previously categorized as
―unassigned,‖ causing the Unassigned Fund Balance to shrink.52 Greco explained
that this scenario is especially likely to play out in situations where the Council is
modifying the budget during the fiscal year to add appropriations for expenditures
that require quick payment; Greco explained that in this scenario, if the City lacks
the actual revenues, the Council is likely to finance the expenditures using
unassigned net assets from the General Fund, specifically, cash assets:
Where [the City] find[s] that money[,] in this case the money went out the door, so, it was actually working capital, cash that is on hand that the treasurer‘s office uses, he has money invested in CD‘s and other things, a checking account. So, at the end of the year all else being equal if [the City] overspend[s] . . . [it] ha[s] revenues and [it] ha[s] more expenses than revenues, that unassigned fund balance is going to go down; but, again, it‘s a calculation, it‘s not a true fund that sits there just with cash. The treasurer‘s office actually has to go to an asset account, cash account or CD, liquidate that to pay for these kind[s] of things.53 51 See R. 929 (―Now, if you do have more revenues than expenditures, those will flow into that calculation and, obviously, if it doesn‘t get put anywhere else or [the City‘s] liabilities don‘t increase or expenses [increase], it will increase [the City‘s] unassigned fund balance.‖). 52 See, e.g., R. 929–30; 965–66. 53 R. 929–30; see also R. 968 (―And, again, I can‘t state this more clearly than this. The [M]ayor is asking [the Council] to deficit spend, he is not allowed to do that on his own. He is asking [the
16 According to Greco, if the City was forced to accept the FOP‘s LBFO, this is also
the most likely scenario as to how the City would meet the costs of that proposal.54
2. The City‘s Financial Condition
The parties have stipulated that the City‘s budgets over the four years
covered by the FOP‘s LBFO generated the following net operating surpluses and
deficits in the General Fund: a net operating surplus of $6,055,527 in FY 2011; a
net operating surplus of $7,444,088 in FY 2012; a net operating surplus of
$1,326,984 in FY 2013; and a net operating deficit of $1,170,833 in FY 2014.55
Additionally, the parties have stipulated that the City is projected to generate a net
operating surplus of $1,400,905 in the General Fund for FY 2015, and a net
operating deficit of $333,508 in the General Fund for FY 2016.56
The Unassigned Fund Balance existing at the end of FY 2012 was
$21,964,373.57 In the City‘s budget for FY 2014, the City estimated that the
Unassigned Fund Balance had grown to $25,917,354 by the end of FY 2013, and
Council] to deficit spend and what [it is] doing is [it is] using assets on hand. Somewhere, somehow some assets have to be liquidated, a CD, money has to be taken out of a checking account. . . . [T]here is not this unassigned fund balance sitting alone and has cash in it. It always comes from the assets. Again, this calculation gives you a value of your unassigned fund balance. It is not in and of itself an actual savings account.‖). 54 See R. 946 (―That money [for the FOP‘s proposal] would come out of either reserves, unassigned fund balance, cash. We would then have to go back to [the Council]. [It] would make an appropriation. So you would actually see an increase in the fiscal year whenever it was paid. If it was paid this year, we would have to increase the budget in 14 and then [the City treasurer] would have to cash out a CD and pay out those increases.‖). 55 Stipulation (Mar. 16, 2015). 56 Id. 57 R. 675; see also R. 999–1000.
17 projected that the Unassigned Fund Balance would grow to approximately
$28,520,703 by the end of FY 2014.58 As of April 2014, cash assets accounted for
$5,699,343 of the Unassigned Fund Balance.59
E. The Arbitration Decision
The Arbitrator held a two-day hearing on May 6–7, 2015, after which, on or
about September 8, 2014, she issued her decision60 that ―the last, best, final offer of
FOP Lodge 1 is . . . the more reasonable [proposal] based upon the statutory
criteria set forth in 19 Del C. § 1615.‖61 In reaching that decision, the Arbitrator
first determined that ―[t]he record does not support the conclusion that the City has
an inability to afford the limited costs of the FOP offer.‖62 The parties agree that,
by this language, the Arbitrator was attempting to address subsection (d)(6) and its
requirement that the LBFO selected must be payable from ―existing revenues;‖
they disagree, however, as to whether she properly analyzed that factor. Although
the Arbitrator‘s decision covers each of the Section 1615(d) factors, only its
58 R. 675; see also R. 1000–01. Greco explained that the estimated growth in the unassigned fund balance in FY 2013 and the projected growth in the unassigned fund balance in FY 2014 was partially due to certain ―non-spendable‖ net assets in the General Fund being reclassified as ―unassigned.‖ See R. 1000–01. 59 R. 177; see also R. 1003–04. 60 In conducting my review of the PERB‘s decision, I find it necessary to also review the Arbitrator‘s decision. In doing so, I find I agree with the Arbitrator on some issues and depart on others. Notwithstanding the latter, her decision overall is thoughtful, tightly reasoned, and well- written, a truth to which the brief excerpts of that decision cited herein do scant justice. 61 R. 1386. 62 R. 1386 (emphasis added).
18 analysis as to this latter issue under subsection (d)(6) is relevant to this
Memorandum Opinion.
In the arbitration, the City argued that it ―does not have the financial ability,
based on existing revenues, to meet the costs of the FOP‘s LBFO.‖63 As support,
the City argued that, at the time of the hearing, it was projecting a structural deficit
through FY 2018 due to ―spiraling costs,‖ such as funding pension plans.64 In
addition, the City argued that the potential sources of funds identified by the FOP
to finance its LBFO, including the Unassigned Fund Balance, do not qualify as
―existing revenues‖ as required by subsection (d)(6).65 Specifically, the City
argued that the Unassigned Fund Balance is a reserve,66 which, according to the
PERB‘s and this Court‘s precedent, does not constitute revenue.67
The Arbitrator rejected both of the City‘s positions. First, she determined
that ―[t]he evidence does not establish the ‗structural deficit‘ asserted by the
City.‖68 Rather, she found that the City‘s projected deficits due in large part to
funding pension plans are ―commonly understood to be cyclical, rather than
structural, deficits because they occur as a result of downturns in the economy,‖ as
63 R. 1311. 64 See R. 1311–12. 65 See R. 1313–15. 66 R. 1314–15. 67 See, e.g., FOP Lodge 5 v. New Castle Cnty., 2014 WL 351009, at *5 (Del. Ch. Jan. 29, 2014). 68 R. 1364.
19 opposed to ―large and persistent imbalances in expenditures to revenues.‖ 69 In
actuality, the Arbitrator found, the City had ―been effective in addressing the
projected revenue declines and expense increases in a proactive manner, by
increasing property taxes, implementing budget cuts, and restructuring debt
service, as evidenced by the surpluses in FY 2011–2013, and a projected surplus
for FY 2015.‖70
Next, the Arbitrator determined that the Unassigned Fund Balance does not
constitute a reserve.71 In reaching that conclusion, she relied on a 2002 POFERA
arbitration decision, City of Seaford v. Fraternal Order of Police, Lodge 9,72
wherein the arbitrator defined ―reserves‖ as those assets whose utilization is within
the exclusive authority of the Council and which are assigned to reserve status by
an affirmative act of the Council.73 After briefly examining the nature of the
Unassigned Fund Balance, the Arbitrator concluded that it ―does not constitute a
reserve because assets are not ‗allocated‘ to this fund by an affirmative act of the
Council, nor are there restrictions upon its use.‖74 Further, she noted that the
―Council has allocated moneys from [the] [U]nassigned [F]und [B]alance to
69 R. 1365. 70 R. 1365. 71 R. 1368. 72 IV PERB 2659 (July 15, 2002) (Decision of the Interest Arbitrator on Remand). The City of Seaford was adopted by this Court in Fraternal Order of Police, Lodge 5 v. New Castle Cnty., 2014 WL 351009 (Del. Ch. Jan. 29, 2014). 73 See R. 1368 (quoting City of Seaford, IV PERB at 2675). 74 R. 1368.
20 adjusted projected budgets to conform to actual revenues and expenditures in the
same manner that all funds are allocated each fiscal year.‖75
Finally, the Arbitrator evaluated the projections offered by both parties for
the total cost of the FOP‘s LBFO, finding that ―[t]he City‘s estimate of $127,648
for FY 2011 through FY 2014 (backing out the estimated cost for FY 2015 of
$57,010) . . . [is] closer to accurate.‖76 She rejected as ―purely speculative‖ the
City‘s argument that the Bargaining Unit members‘ increased salaries under the
FOP‘s proposal would irreversibly carry over into FY 2015 and perhaps beyond,
reasoning that the POFERA collective bargaining process could lead to retroactive
reductions in the Bargaining Unit members‘ salaries for the fiscal years following
the effective term of the FOP‘s proposal:
Should the FOP prevail in this matter, the parties would be required to enter into negotiations for a successor agreement to be effective on July 1, 2014. If the City is able to establish that its fiscal situation has deteriorated, the next agreement could include cost savings and/or a change in either the structure or amounts of [salary] step increases for this bargaining unit.77
75 R. 1368. 76 R. 1369. 77 R. 1370. The arbitrator also chastised the parties for allowing so much time to pass without a CBA in place and encouraged them to immediately begin negotiations on a successor agreement to begin in FY 2015. See R. 1386 (―The extended period of time which has elapsed since the expiration of the last agreement is not reasonable and is contrary to the purposes of the POFERA and the interests and welfare of the public in the efficient and effective operation of the government. This decision will require the parties to initiate successor negotiations immediately. They are encouraged to enter into those negotiations with full and complete awareness of the City‘s financial projections as well as the recent and continuing fiscal concerns. The parties are further encouraged to actively engage in these negotiations quickly and expeditiously rather than allowing them to drag on to the detriment of their relationship and their capacity to move
21 As proof that ―[t]he City‘s presumption that all [salary] step increases are
immutable into the future is overly simplistic and not persuasive,‖ the Arbitrator
alluded to a 2012 POFERA arbitration decision wherein the arbitrator reduced
salaries for certain New Castle County police officers.78 Lastly, the Arbitrator
noted that City had failed to dispute the FOP‘s argument that the City would
realize salary savings of approximately $107,606 in FY 2014 due to the City
appropriating money to cover the salaries for two vacant positions—the Chief of
Police and one Inspector.79
After reaching these findings of law and fact, the Arbitrator ruled that ―[f]or
all these reasons, I conclude that the City has not established that it has either a
structural deficit or an inability to afford the costs of the FOP‘s last, best, final
offer.‖80
F. The PERB Decision
On September 15, 2014, the City filed its Request for Review of the
Arbitrator‘s Decision with the PERB, arguing that the Arbitrator committed three
legal errors in her decision: (1) the Arbitrator failed to apply the statutory standard
to evaluate the City‘s inability to meet the costs of the FOP‘s LBFO by assessing
forward to proactively and cooperatively address the public safety challenges facing the City and its residents.‖). 78 R. 1370–71. 79 R. 1371. 80 R. 1371.
22 the City‘s ―ability to afford‖ the FOP‘s LBFO rather than the City‘s financial
ability to meet the costs based on existing revenues; (2) the Arbitrator improperly
found that the Unassigned Fund Balance constitutes ―existing revenue;‖ and (3) the
Arbitrator erred by not considering the continuing nature of the salary increases in
the FOP‘s LBFO beyond FY 2014.81 The PERB convened a public hearing on
October 9, 2014, at which time the PERB met in public session to consider the
merits of the City‘s appeal and to hear oral arguments by the parties.82
On October 23, 2014, the PERB issued a written decision unanimously
affirming the arbitration decision.83 First, the PERB found that the Arbitrator had
properly focused on whether there were existing revenues to meet the costs of the
FOP‘s proposal, as evidenced by her analysis as to whether the Unassigned Fund
Balance was a reserve under City of Seaford.84 Second, the PERB found that the
Arbitrator had correctly applied City of Seaford to find that the Unassigned Fund
Balance is not a reserve, and thus ―is not excluded as ‗existing revenues.‘‖ 85 The
PERB also rejected a new argument the City raised on appeal86 that, even if the
Unassigned Fund Balance is not a reserve, it still does not constitute ―existing
81 See R. 1388–89. 82 R. 1428. 83 R. 1429. 84 See R. 1429–30. 85 See 1429–31. 86 Compare R. 1319–20 (arguing, in post-hearing briefing in the arbitration, only that the Unassigned Fund Balance is a reserve), and R. 1349 (same), with R. 1389 (arguing, in the appeal to the PERB, that ―even if the Arbitrator is correct in concluding that the [U]nassiged [F]und [B]alance does not constitute a reserve, the fact remains that it does not constitute revenue‖).
23 revenues‖ because it is not a stream of revenue ―flowing into the City‘s coffers,‖
finding that ―[t]he City conflate[d] ‗current revenues‘ with ‗existing revenues‘‖:
[The City] asserts the decision in Seaford requires a current stream of revenue to meet the additional costs of the last, best, final offer. The statute, however, focuses on the public employer‘s ‗existing revenues.‘ We construe that to mean that the analysis must focus on the City‘s financial landscape based on the sources of revenue it had at the time the analysis is undertaken without regard to its ability to raise additional revenue through taxation or other means. Nothing in the statute requires that the consideration of revenues be limited to the current fiscal year or to any other specific, limited period of time. The logical extension of the City‘s argument would result in the preclusion of any wage increase unless the City offered it.87
Finally, the PERB rejected the City‘s argument that the projected total cost of the
FOP‘s LBFO should include salary increases in FY 2015, reasoning, like the
Arbitrator, that the City ―is not prohibited (and is in fact encouraged) to engage in
negotiations which may modify wages and/or allow for savings in other areas
which are necessary to fund or to continue to fund negotiated wage rates.‖88
G. Procedural History
On November 7, 2014, the City appealed the PERB decision to this Court.
The grounds for appeal stated in the City‘s Notice of Appeal were that: (1) the
PERB erred as a matter of law; (2) the PERB erred as a matter of fact; (3) the
PERB acted in an arbitrary and capricious manner; and (4) the PERB‘s decisions
87 R.1430. 88 R. 1431.
24 are not supported by substantial evidence. The issues that the City has presented to
me, however, are purely legal.
On November 14, 2014, the City notified the PERB of its compliance with
the PERB decision, including that the City had distributed retroactive salary
payments to the Bargaining Unit members in accordance with the FOP‘s LBFO.89
I heard oral argument on the City‘s appeal on March 11, 2015.90 Following
argument, I issued a brief letter to the parties informing them that I was still
unclear as to how the term ―existing revenues‖ in 19 Del. C. § 1615(d)(6) was
supposed to apply in the context of arbitrating retrospective CBAs, and offering
them the opportunity to submit supplemental briefing on this narrow issue of
statutory interpretation. Those additional memoranda were fully submitted by
March 25, 2015.
H. The Parties’ Contentions
The City challenges three aspects of the Arbitrator‘s, and thus also the
PERB‘s, decision:
First, the decisions disregard the statutory standard (―The financial ability of the public employer, based on existing revenues, to meet the costs of any proposed settlement‖), and substitute the standard of ―inability to afford the costs of the FOP‘s last, best, final offer.‖ Second, the decisions incorrectly determine [that] the cash assets in 89 See R. 1433–34. 90 At the conclusion of oral argument, I asked the parties to submit a stipulation as to the City‘s General Fund net operating surpluses or deficits for FY 2011 to FY 2014 and projected net operating surpluses or deficits for FY 2015 and FY 2016. The parties submitted that stipulation on March 16, 2015.
25 the Unassigned Fund Balance are existing revenues. Third, the decisions refuse to acknowledge that the salary increases in the FOP‘s proposal are recurring, and will persist in [FY 2015], and in all likelihood beyond [FY 2015].91
Should this Court rule in its favor, the City contends that the record is
sufficient to demonstrate that it is unable to meet the costs of the FOP‘s LBFO,
and, since this factor is dispositive under Section 1615(d), that the Court must
reverse the Arbitrator‘s and the PERB‘s decisions and implement the City‘s LBFO
in its entirety. The FOP responds that both the Arbitrator and the PERB correctly
applied the provisions of the POFERA, and that the Court should affirm their
respective decisions.
1. ―Ability to Afford‖ Standard versus the Statutory Standard
The City argues that, in looking to whether the City could meet the costs of
the FOP‘s LBFO, both the Arbitrator and the PERB mischaracterized assets in the
Unassigned Fund Balance as existing revenues, causing them both to decide the
issue according to a standard of whether the City could ―afford‖ the costs based on
cash on hand, rather than the statutory standard required by Section 1615(d)(6).92
The FOP counters that both the Arbitrator‘s and the PERB‘s analysis on the
City‘s financial ability to meet the costs of the FOP‘s LBFO was based on existing
91 See City of Wilmington‘s Opening Br. in Supp. of Its Appeal at 10–11 (citations omitted). 92 See, e.g., id. at 11–13.
26 revenues.93 Essentially, the FOP argues that any reference to the City‘s ability to
―afford‖ the proposal was merely shorthand for the statutory standard.
As the parties‘ arguments indicate, the resolution of this issue is, at least
potentially, dependent upon resolution of whether the assets accounted for in the
Unassigned Fund Balance are statutory ―existing revenues.‖ In other words, if I
find that the Arbitrator and the PERB gauged the City‘s financial ability to meet
the costs of the FOP‘s proposal based on the Unassigned Fund Balance, the
question of whether that was an improper standard will depend on whether the
term ―existing revenues‖ applies to the Unassigned Fund Balance. If I find that the
Arbitrator and the PERB did not apply the proper statutory standard, I must still
consider whether those legal errors were material to the outcome of the decisions.
2. The Unassigned Fund Balance as ―Existing Revenues‖
The City renews both its arguments from the PERB proceedings regarding
the categorization of the Unassigned Fund Balance, arguing that the Unassigned
Fund Balance is a reserve—and thus categorically prohibited from being
considered as existing revenues—and that, even if it is not a reserve, the
Unassigned Fund Balance does not include existing revenues.94 As to its first
argument, the City contends that the Unassigned Fund Balance meets the City of
93 Answering Br. of Appellee-Below Appellee Fraternal Order of Police Lodge 1 at 25–30. But see notes 102–108 and accompanying text. 94 See City of Wilmington‘s Opening Br. in Supp. of Its Appeal at 14–18.
27 Seaford criteria for a reserve, in that annual operating surpluses are, ―by operation
of law, set aside‖ into the Unassigned Fund Balance and that use of those assets
requires the approval of Council.95 As to its second argument, the City contends
that the Unassigned Fund Balance does not meet the City of Seaford criteria for
existing revenues, in that prior years‘ accumulated surplus is not ―dynamic in
character,‖ does not ―constitute[] a flow of moneys‖ into the City‘s coffers, and is
not an ―existing, stable and continuing source[] of revenue.‖96 Rather, according to
the City, these qualifiers illustrate that ―existing revenues‖ must be interpreted to
mean projected or actual revenues sufficient to meet the costs of the proposal in the
year or years that those costs are to be incurred by the City if the proposal is
adopted.97 Here, because ―the City was ordered to pay salary increases in a fiscal
year ([FY 2014]) when there was a deficit, . . . [there are] no existing revenues to
pay the salary increases.‖98
Additionally, in its supplemental briefing, the City raises for the first time
the argument that ―applying the ability to pay based upon existing revenues criteria
retroactively is unworkable.‖99 The City argues that the term ―existing revenues‖
inherently means projected revenues at the time of the arbitration and is
95 Id. at 14–15. 96 Id. at 15 (quoting Fraternal Order of Police, Lodge 5 v. New Castle Cnty., 2014 WL351009 at *6 (Del. Ch. Jan. 29, 2014) (quoting City of Seaford v. Fraternal Order of Police, Lodge 9, IV PERB 2659, 2675–76 (July 15, 2002) (Decision of the Interest Arbitrator on Remand))). 97 See City of Wilmington‘s Supplemental Mem. of Law in Supp. of Its Appeal at 2–6. 98 Id. at 5. 99 Id. at 1.
28 meaningless in the context of negotiating retroactive agreements, as evidenced by
both the fact that the POFERA‘s dispute resolution system is designed to forge a
successor agreement before the parties‘ current contract expires and by the
forward-looking language used in the City of Seaford criteria for existing
revenues.100 In support of both this argument and its previous argument that the
Unassigned Fund Balance does constitute existing revenues, the City further makes
a public policy plea that, were this Court to find that prior years‘ accumulated
surplus is existing revenues that may finance retroactive salary increases for the
Bargaining Unit employees, the City‘s surplus would be fair game for salary
increases for all the City‘s unions, effectively precluding the City from maintaining
an unrestricted and unassigned surplus.101
In its initial briefing, the FOP argued that the Arbitrator and PERB correctly
determined based on City of Seaford that the cash assets included in the
Unassigned Fund Balance are existing revenues.102 First, the FOP contended that
the Unassigned Fund Balance cannot be a reserve because assets are not
―allocated‖ to the Unassigned Fund Balance by an affirmative act of the Council,
nor are there restrictions on the use of the assets included in the Unassigned Fund
100 See id. at 6–9. 101 See City of Wilmington‘s Opening Br. in Supp. of Its Appeal at 17–18; City of Wilmington‘s Supplemental Mem. of Law in Supp. of Its Appeal at 9. 102 See Answering Br. of Appellee-Below Appellee Fraternal Order of Police, Lodge 1 at 30–37.
29 Balance beyond the requirements applicable to appropriating any funds.103
Second, the FOP argued that the cash assets accounted for by the Unassigned Fund
Balance are ―existing revenues,‖ because, even though the Unassigned Fund
Balance itself is not a ―stream of revenue,‖ there is no question that the cash assets
included in its value derive from streams of revenue in previous years.104 Finally,
the FOP dismissed the City‘s public policy concern, arguing that it ignores the fact
that the City is not bound by the POFERA or the Public Employment Relations
Act (the ―PERA‖)105 to grant comity or parity among CBAs for different
bargaining units.106
I note, however, that in its supplemental briefing as to the interpretation of
Section 1615(d)(6) in the context of arbitrating retroactive CBAs, the FOP‘s
position on this issue has somewhat shifted and no longer corresponds with the
decisions of the Arbitrator and the PERB. In that brief, the FOP avers that the
General Assembly intended the phrase ―based on existing revenues‖ to mean that
an arbitration decision ―cannot mandate an increase or imposition of new taxes,
103 Answering Br. of Appellee-Below Appellee Fraternal Order of Police, Lodge 1 at 32. 104 Id. at 33. 105 See 19 Del. C. §§ 1301–1319. The PERA is nearly identical to the POFERA and is likewise administered by the PERB, but the PERA applies to certain non-police and -firefighter public employees. See 19 Del. C. §§ 1301, 1302(o), 1306. 106 Answering Br. of Appellee-Below Appellee Fraternal Order of Police, Lodge 1 at 35. I note, however, that individual CBAs may include bargained-for parity provisions. See generally Wilmington Firefighters Ass’n, Local 1590 v. City of Wilmington, 2002 WL 418032 (Del. Ch. Mar. 12, 2002).
30 fees, charges or other sources of revenues.‖107 Based on this principle, the FOP
now contends that ―there is not any difference in the meaning of the phrase . . .
whether viewed prospectively or retrospectively; instead, the issue is whether,
based upon existing revenue in the years under consideration, operating surpluses
did (retrospectively) or will (prospectively)[,] without mandating an increase[,]
exist to fund the award.‖108
3. Recurring Costs of the FOP‘s LBFO
The City argues that, in determining the ―costs of any proposed settlements‖
as required by Section 1615(d)(6), the Arbitrator and the PERB should have
included costs for fiscal years following the effective term of the FOP‘s LBFO, at
the very least for FY 2015. According to the City, although the FOP‘s proposed
CBA expires in FY 2014, the salary increase it contains will actually carry over
into FY 2015 because the parties already have such a late start on negotiating a
successor CBA, and therefore the Arbitrator and the PERB were obligated to
include FY 2015 costs in the total cost of the FOP‘s proposal.109 The City
contends that the Arbitrator‘s characterization of the its projected FY 2015 costs as
―purely speculative,‖ ―overly simplistic,‖ and ―not persuasive‖ ignores the realities
that arbitration decision was issued two months after—and the PERB decision four
107 Supplemental Mem. of Appellee-Below, Appellee Fraternal Order of Police Lodge #1 at 12– 13. 108 Id. at 13 (emphasis added). 109 See City of Wilmington‘s Opening Br. in Supp. of Its Appeal at 18–20.
31 months after—the expiration of the term of the FOP‘s proposal; that the ―law
requires that any step increases be maintained pending the negotiation of a
successor agreement;‖ that the ―FOP almost certainly will not agree to roll back the
increases;‖ that ―[i]n the absence of agreement to roll back the increases, it
normally takes at least several months to negotiate an impasse;‖ that the ―parties
must then go through mediation;‖ and that it took in this case ―over 8 months from
the initiation of binding interest arbitration to get a decision.‖110
The FOP does not directly address in briefing the issue of whether salary
costs for FY 2015 must be included in the total costs of the FOP‘s LBFO. Instead,
it argues that, in any event, ―the Arbitrator clearly considered the $57,010
estimated costs for FY 2015 in light of the more than $5 million cash in the
Unassigned Fund [Balance] and the projected operating surplus of $1,125,905 for
FY 2015.‖111
II. STANDARD OF REVIEW
―On appeal of an administrative agency‘s adjudication, this Court‘s sole
function is to determine whether the [agency]‘s decision is supported by substantial
evidence and is free from legal error.‖112 The issues on appeal here are purely
110 Id. at 19–20. 111 Answering Br. of Appellee-Below Appellee Fraternal Order of Police, Lodge 1 at 34. I note that the FOP has since stipulated that the projected surplus in FY 2015 was $1,400,905. 112 Fraternal Order of Police, Lodge 5 v. New Castle Cnty., 2014 WL 351009, at *4 (Del. Ch. Jan. 29, 2014) (quoting Angstadt v. Red Clay Consol. Sch. Dist., 4 A.3d 382, 387 (Del. 2010)).
32 legal and, as such, are subject to this Court‘s de novo review.113 In undertaking
such a review, the Court is mindful of the PERB‘s expertise and specialized
competence in labor law.114 However, the Court ultimately ―remains obligated to
conduct a plenary review of a PERB decision when the issue is the proper
construction of statutory law and its application to undisputed facts.‖115
―Delaware courts do not accord agency interpretation of the statutes which
they administer so-called Chevron deference, as do federal courts in reviewing
administrative decisions under the federal Administrative Procedures Act.‖116 In
interpreting a statute, Delaware courts must ―ascertain and give effect to the intent
of the legislature.‖117 If the statute is clear and unambiguous, ―then the plain
meaning of the statutory language controls.‖118 The parties‘ disagreement as to the
meaning of the statute alone does not create an ambiguity.119 ―Rather, a statute is
ambiguous only if it ‗is reasonably susceptible [to] different interpretations,‘ or ‗if
a literal reading of the statute would lead to an unreasonable or absurd result not
113 E.g., id.; Fraternal Order of Police No. 15 v. City of Dover, 1999 WL 1204840, at *2 (Del. Ch. Dec. 10, 1999). 114 See, e.g., Fraternal Order of Police, Lodge 5, 2014 WL 351009, at 4 (―In undertaking such a review the Court accords due weight to PERB‘s expertise and specialized competence in labor law.‖ (internal quotation marks omitted)); Fraternal Order of Police No. 15, 1999 WL 1204840, at *2 (―[T]he Court is not unmindful that the agency whose decision is being reviewed is an expert one functioning in an area that requires or at least is greatly aided by such expertise.‖ (internal quotation marks omitted)). 115 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *4. 116 Id. (internal footnote and quotation marks omitted). 117 Del. Bay Surgical Servs. v. Swier, 900 A.2d 646, 652 (Del. 2009) (citations omitted). 118 Ins. Comm’r of State of Del. v. Sun Life Assurance Co. of Can. (U.S.), 21 A.3d 15, 20 (Del. 2011). 119 E.g., Chase Alexa, LLC v. Kent Cnty. Levy Ct., 991 A.2d 1148, 1151 (Del. 2010).
33 contemplated by the legislature.‘‖120 If a statute is ambiguous, the Court should
consider the statute as a whole, rather than in parts, reading each section in light of
all others to produce a harmonious whole.121 The Court should also ―ascribe a
purpose to the General Assembly‘s use of statutory language, and avoid construing
it as superfluous, if reasonably possible.‖122 I apply these precepts to the case at
hand as follows.
III. ANALYSIS
The scope of this appeal is narrowly focused. In it, the Court is asked to
interpret various provisions within 19 Del. C. § 1615(d)(6) and to determine, in
light of the statute‘s meaning, whether the Arbitrator, and thus the PERB, properly
administered the law in resolving the parties‘ dispute. As explained below, I
reverse the PERB‘s decision in part and affirm it in part.
A. The Arbitrator and the PERB Erred as a Matter of Law in Ruling that the Cash Assets Accounted for by the Unassigned Fund Balance Are Existing Revenues
I turn first to whether the Arbitrator and the PERB mischaracterized the
Unassigned Fund Balance as ―existing revenues,‖ as that term is used in Section
1615(d)(6). As a preliminary matter, I note that the scope of the Arbitrator‘s and
120 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *4 (quoting Centaur Partners, IV v. Nat'l Intergroup, Inc., 582 A.2d 923, 927 (Del. 1990); LeVan v. Independence Mall, Inc., 940 A.2d 929, 933 (Del. 2007)). 121 E.g., Fraternal Order of Police, Lodge 5, 2014 WL 351009 at * 4 (citing Taylor v. Diamond State Port Corp., 14 A.3d 536, 538 (Del. 2011)). 122 Id. (citing Diamond State Port Corp., 14 A.3d at 538)).
34 the PERB‘s holdings in this regard is unclear. In her decision, the Arbitrator ruled
that the ―[U]nassigned [F]und [B]alance does not constitute a reserve,‖ but she
never expressly spoke to whether the Unassigned Fund Balance constitutes existing
revenues, perhaps interpreting the holding in City of Seaford to create a dichotomy
between the two terms, under which all cash assets are either ―reserves‖ or
―existing revenues.‖123 Her ruling is also clearly directed towards the entire
Unassigned Fund Balance, though she does note at the beginning of her analysis
that the Unassigned Fund Balance is only partly composed of cash assets.124 In
affirming the Arbitrator‘s decision, however, the PERB appears to take the
Arbitrator‘s ruling further, portraying the Arbitrator as having implicitly held that
the cash assets accounted for by the Unassigned Fund Balance constitute existing
revenues, and itself endorsing this more specific position.125 In any event, I need
not consider how to resolve this discrepancy between the decisions, because the
parties have proceeded in this appeal as if both the Arbitrator and the PERB held
123 See R. 1368. 124 See R. 1366–67, 1368. 125 See R. 1430 (―The Arbitrator explicitly determined that the Unassigned Fund Balance was not a reserve; consequently, it is not excluded as ‗existing revenues‘ under Seaford. We Concur. The Arbitrator determined, based on the City‘s evidence, [that] the Unassigned Fund Balance constitutes the account or fund in which the City accumulates its excess revenues and from which the City draws funds to meet unanticipated or unfunded expenses in its budget. . . . There is no question that the Unassigned Fund Balance Balance‘s cash or cash equivalent is comprised of funds from existing revenues. It is and has been a stable source of funding.‖).
35 that cash assets accounted for in the Unassigned Fund Balance constitute existing
revenues.126 Thus, that is the specific issue I will consider here.
In order for a binding interest arbitrator to force a public employer to enter
into any CBA with a police officers‘ or firefighters‘ union, Section 1615(d) of the
POFERA requires that the public employer have the financial ability to meet the
costs of the CBA. Section 1615(d)(6) provides that the financial ability of the
public employer is to be determined solely ―based on [the public employer‘s]
existing revenues.‖ The FOP argues that the Arbitrator and the PERB correctly
determined that, as a matter of law, all of the cash assets accounted for by the
Unassigned Fund Balance constitute existing revenues, principally because these
assets are made up of prior years‘ surplus revenues. The City contends that these
rulings constituted legal error because the Unassigned Fund Balance is a reserve
or, in the alternative, because only revenues from the year or years that the costs of
the proposed CBA are to actually be incurred by the City may constitute existing
revenues. I do not find either party‘s argument fully persuasive, but I ultimately
agree with the City that the Arbitrator and the PERB erred as a matter of law in
126 See, e.g., City of Wilmington‘s Opening Br. in Supp. of its Appeal at 10 (―Second, the decisions incorrectly determine [that] the cash assets in the Unassigned Fund Balance are existing revenues.‖); cf. Answering Br. of Appellee-Below Appellee Fraternal Order of Police Lodge 1 at 34 (―Accordingly, based upon the evidence presented, the authorities referenced and the rationale applied thereto, FOP #1 submits that the Arbitrator and the [PERB] properly found that cash in the Unassigned Fund Balance represents surplus revenue (not an explicitly-allocated protected reserve).‖).
36 ruling that the cash assets accounted for in the Unassigned Fund Balance
categorically constitute existing revenues.
1. Revenues, Reserves, and Existing Revenues
In conducting my analysis under this issue, I am guided by this Court‘s
decision in Fraternal Order of Police, Lodge 5. There, the court reviewed a PERB
decision affirming an arbitrator‘s ruling that New Castle County could not meet the
costs of a union‘s LBFO. En route to her conclusion, the arbitrator below ruled
that certain assets held in reserves by the County did not constitute existing
revenues under Section 1615(d)(6) and, ultimately, that the County did not have
sufficient existing revenues to meet the costs of the union‘s proposal because
budget forecasts indicated that County would run a deficit in the two fiscal years
covered by the proposal, FY 2012 and FY 2013.127 In analyzing whether the
arbitrator properly applied the statutory standard under Section 1615(d)(6), the
court noted that the arbitrator below had relied on the following discussion of
revenues, reserves, and the statutory term ―existing revenues‖ previously set forth
in the City of Seaford arbitration decision:
Revenue is dynamic in character. It constitutes a flow of moneys, in this case, into the City[ of Seaford]‘s coffers. Revenues from the electricity, water and sewer enterprise funds consist of net income (operating and non-operating revenues less operating expenses), or ―profits‖ in the vernacular. Included in the non-operating revenues is
127 See Fraternal Order of Police, Lodge 5, 2014 WL 351009, at *8–10.
37 ―interest earned‖ which may include interest earned on the investment of reserved funds.
Reserves, on the other hand, are moneys which have been set aside, saved, or ―reserved.‖ While they may originate from excess revenues and be allocated to reserves in a given year, they do not constitute an active revenue stream. Funds are reserved or allocated to reserves through an affirmative act of the governing body. Likewise, how those reserves are expended, invested, or allocated is also within the exclusive authority of the City‘s governing body.
The term ―existing revenues‖ limits the Interest Arbitrator to considering revenues, based on existing fee and taxation rates. It is beyond the scope of the Arbitrator‘s authority to consider whether such rates should or could be increased, whether other expenses should or could be decreased or reallocated, and/or whether existing reserves should or could be allocated to fund the proposals. While it is certainly within the authority of the governing body of a public employer to make any of these choices subject to the political will of its citizenry, it is not within the province of the Interest Arbitrator under the [POFERA].128
After conducting its own review of the POFERA, the Fraternal Order of
Police, Lodge 5 court concluded that the City of Seaford arbitrator‘s ―discussion of
what constitutes ‗existing revenues‘ within the meaning of 19 Del. C. § 1615(d)(6)
is well-reasoned and persuasive,‖ and specifically that the ―arbitrator‘s approach
was guided by, and consistent with, this Court‘s precedent regarding statutory
interpretation.‖129 Based on the City of Seaford arbitrator‘s definitions, as well as
128 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *6 (quoting City of Seaford v. Fraternal Order of Police, Lodge 9, IV PERB 2659, 2675–76 (July 15, 2002) (Decision of the Interest Arbitrator on Remand)). 129 Id. at *6. Specifically, the court praised the City of Seaford arbitrator‘s decision to give words of common usage in a statute their ―usual, ordinary and natural meaning‖ where the statute‘s language is clear. See id. at *6 n.31 (pointing to the arbitrator‘s citation of and reliance on
38 its independent analysis of the POFERA, the court adopted the City of Seaford
arbitrator‘s conclusion that, ―based on the plain meaning of the word ‗revenues,‘
the POFERA excludes unambiguously a public employer‘s financial reserves from
consideration in an analysis under Section 1615(d)(6).‖130 Further, the court
affirmed the arbitrator‘s and the PERB‘s decisions that the County could not meet
the costs of the union‘s LBFO based on existing revenues, concluding that it was
appropriate for the arbitrator in its analysis under Section 1615(d)(6) to focus on
the County‘s revenues in the fiscal years covered by the LBFO, and specifying that
the proper inquiry is whether those years‘ revenues are sufficient in the aggregate
to meet the costs of that LBFO, i.e., whether there are sufficient revenues over the
entire term of the LBFO to meet the total costs of the LBFO, as opposed to
sufficient revenues in each individual year of the LBFO to meet the respective
costs in each individual year of the LBFO:
Even assuming that the FOP 5 is correct that no reasonable arbitrator could have concluded that the County was unable to afford FOP 5‘s proposal for the 2012 fiscal year, there is no evidence that the County could have paid for the proposal in fiscal year 2013. Each
Haddock v. Bd. of Pub. Educ. in Wilm., 84 A.2d 157, 161 (Del. Ch. 1951) and Seaford Bd. of Educ. v. Seaford Sch. Dist., 1988 WL 8773, at *2 (Del. Ch. Feb. 5, 1988)); see also City of Seaford, IV PERB at 2673. As noted by the court, the arbitrator relied on the dictionary definitions of ―revenues‖ as meaning ―the yield of income that a political unit collects and receives into the treasury for public use,‖ and of ―income‖ as meaning ―a gain or recurrent benefit, usually measured in money that derives from capital or labor; also, the amount of such gain received in a period of time.‖ Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *5 n.28; see also City of Seaford, IV PERB at 2674 (quoting Merriam Webster’s Collegiate Dictionary 558, 1002 (10th Ed. 1996)). 130 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *6.
39 party submitted a two-year proposal to the Arbitrator. Therefore, the relevant inquiry was whether the County could afford FOP 5‘s proposal throughout its entire two-year duration. The County submitted unchallenged evidence that it was projecting a $5.1 million deficit in the 2013 fiscal year if FOP 5 accepted the 2.5% concession and a $5.7 million deficit if it did not. An actual deficit of even half that amount would have exceeded the County‘s projected 2012 budget surplus. Because a reasonable arbitrator could have found the County‘s budget forecasts credible, it follows that the record before the Arbitrator and the PERB contained evidence sufficient to support a reasonable determination that the County could not afford to pay for the FOP 5‘s proposal over the entirety of its two-year duration.131
2. The Unassigned Fund Balance Is Not a Reserve
Based on the bright-line rule set forth in Fraternal Order of Police, Lodge 5,
the City argues that the assets accounted for by the Unassigned Fund Balance meet
the City of Seaford‘s criteria for reserves and thus categorically cannot be
considered existing revenues. That argument, however, is without merit.
As made clear by the Director of the OMB, Robert Greco, in the arbitration
proceedings, the Unassigned Fund Balance is not a specific account or set of
accounts wherein assets are held, but rather it is an accounting function that tallies
net assets of a certain classification across the General Fund. The City Council
does not and cannot set aside, save, or reserve assets in the Unassigned Fund
Balance through an affirmative act, because the Unassigned Fund Balance is just a
numerical value that exists only on the City‘s financial statements. It is not even a
value that accounts for assets in the General Fund that the City Council has set
131 Id. at *10.
40 aside, saved, or reserved through an affirmative act; rather, the specific parameters
of the Unassigned Fund Balance exclude such assets from being included in its
value. Put simply, the Unassigned Fund Balance is no more than a tally of net
assets in the General Fund not allocated to be spent or placed in a reserve.
Therefore, I do not find that the Unassigned Fund Balance is itself a reserve, nor
can any of the assets for which it accounts be considered reserves.
3. The Cash Assets Included in the Unassigned Fund Balance Are Not ―Existing Revenues‖
Just because the cash assets included in the Unassigned Fund Balance are
not reserves, however, does not necessarily mean that they are ―existing revenues.‖
Neither Fraternal Order of Police, Lodge 5 nor City of Seaford imposes a rule that
a specific asset must either be a reserve or existing revenue, only that any reserved
asset cannot be considered existing revenue. Thus, it is appropriate to
independently consider whether the cash assets included in the Unassigned Fund
Balance are ―existing revenues.‖
The FOP initially argued, consistent with the rulings of the Arbitrator and
the PERB, that the cash assets included in the Unassigned Fund Balance are
―existing revenues‖ because the source of the Unassigned Fund Balance is
revenues; it points out that the Unassigned Fund Balance is merely the
accumulation of prior years‘ surplus revenues. This surely is true, but it also
highlights the problem with the Arbitrator‘s and the PERB‘s‘ reasoning.
41 ―Revenue‖ inherently involves a temporal aspect: It is the amount of money an
entity receives over a specific period of time.132 This is what is meant by the
arbitrator‘s observation in City of Seaford that ―[r]evenue is dynamic in character‖
and that ―[i]t constitutes a flow of moneys, in this case, into the City[of Seaford‘s]
coffers.‖133 The magnitude of that movement cannot be calculated in a vacuum;
there must be a definitive beginning and ending point for the calculation. Hence,
the Arbitrator and the PERB are correct that the cash assets in the Unassigned
Fund Balance originated as revenues during certain periods of time in the past, but
they are incorrect to say that those assets are categorically revenues in the
present.134
The modifier ―existing‖ does not change this ordinary, temporal meaning of
revenues such that ―existing revenues‖ becomes a static concept. As the arbitrator
in City of Seaford illuminated, and as the FOP acknowledges in its supplemental
briefing, the modifier ―existing‖ merely limits the scope of potential revenues that
132 See id. at *5 & n.28 (noting that the arbitrator in City of Seaford relied on the dictionary definitions of ―revenues‖ as ―the yield of income that a political unit collects and receives into the treasury for public use,‖ and ―income‖ as ―a gain or recurrent benefit, usually measured in money that derives from capital or labor; also, the amount of such gain received in a period of time‖); see also City of Seaford, IV PERB at 2674 (quoting Merriam Webster’s Collegiate Dictionary 558, 1002 (10th Ed. 1996)). 133 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *6. 134 This distinction is further highlighted by basic principles of accounting. An entity records its revenues in an income statement, which tracks profitability of the entity over a specified period of time, based on the entity‘s revenues and expenditures over that period. The entity‘s balance sheet—wherein the Unassigned Fund Balance is found—does not record revenues; rather, it provides a snapshot of the entity‘s financial position at a specific point in time, based on the entity‘s assets and liabilities at that moment.
42 the arbitrator may consider in gauging the City‘s financial ability to meet the costs
of any proposal.135 Specifically, the term ―existing revenues‖ confines the
arbitrator‘s analysis to revenues that are ―based on existing fee and taxation rates‖
as a means to prevent the arbitrator from overriding the Council‘s legislative
authority to raise, appropriate, and set aside funds.136 It ensures, in other words,
that the arbitrator does not usurp this core legislative function; it requires that the
arbitrator take into account the information available at the time of the arbitration
and, based on that information, consider only those revenues that have already
been ordained by the City. In looking at that snapshot of information, however, the
arbitrator cannot identify any particular revenues without first narrowing her
search to a specific period of time, the time to be covered by the LBFO. In other
135 See id. (―The term ‗existing revenues‘ limits the Interest Arbitrator to considering revenues, based on existing fee and taxation rates.‖ (emphasis added) (quoting City of Seaford, IV PERB at 2675)); Supplemental Mem. of Appellee-Below, Appellee Fraternal Order of Police Lodge #1 at 11–13. 136 See Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *6 (―It is beyond the scope of the Arbitrator‘s authority to consider whether such rates should or could be increased, whether other expenses should or could be decreased or reallocated, and/or whether existing reserves should or could be allocated to fund the proposals. While it is certainly within the authority of the governing body of a public employer to make any of these choices subject to the political will of its citizenry, it is not within the province of the Interest Arbitrator under the [POFERA].‖ (quoting City of Seaford, IV PERB at 2675–76)); Supplemental Mem. of Appellee-Below, Appellee Fraternal Order of Police Lodge #1 at 12–13 (―[T]here is not any legislative history that the adjective ―existing‖ in the phrase ‗existing revenue‘ was intended to have any meaning different from it[s] dictionary meaning ‗in existence or operation at the time under consideration, current.‘ . . . [T]he only reasonably conclusion is that Delaware substituted the phrase ‗based on existing revenues‘ as a shorthand method of indicating that any award cannot mandate an increase or imposition of new taxes, fees, charges or other sources of revenue, the imposition of which remains in the discretion of the legislative body[,] but, instead, financial ability to pay must be based upon existing or proposed revenue, i.e., taxes, fees, charges or other sources of revenue.‖).
43 words, ―existing revenues‖ are still ―revenues;‖ they are still ―dynamic in
character‖ and can only be ascertained in reference to a specific span of time.
An analogy may help to clarify the point. Consider two retirees on a fixed
pension: In year X, Retiree A receives $60,000 per year and has no productive
assets; Retiree B receives $50,000 per year and has $500,000 invested with a fixed
return of 2%. What are the revenues of Retiree A and Retiree B in year X? Both
have a dynamic inflow of funds of $60,000; this is their revenue. Retiree B has
saved half a million dollars from past income—past revenue—and is undeniably
wealthier than Retiree B, but revenue in year X to each is the same. The fact that
many years ago Retiree B had revenue streams from which, unlike Retiree A, he
retained a surplus does not make that surplus part of his revenue in year X,
although the interest which flows to him each year from that surplus is revenue.
The Arbitrator‘s and the PERB‘s decisions ignore the plain meaning of the
word ―revenues‖ by categorically applying the term ―existing revenues‖ to the cash
assets accounted for by the Unassigned Fund Balance as those assets presently
exist in static form in various accounts across the General Fund, without regard to
when those assets actually flowed to the City.137 In doing so, the Arbitrator and the
PERB conflate ―existing assets‖ with ―existing revenues.‖ It may be true that the
City itself can, and occasionally has, used its existing assets to finance
137 See, e.g., R. 1430 (―Nothing in the statute requires that the consideration of revenues be limited to the current fiscal year or to any other specific, limited period of time.‖).
44 expenditures—both through the Mayor including prior years‘ accumulated surplus
in the City‘s revenue projections and the Council appropriating prior years‘
accumulated surplus to make modifications to the budget—but the potential for
these assets to be expended does not make them revenues. ―Revenue‖ refers to a
flow in over a given time, not a flow out. Rather, assets accounted for by the
Unassigned Fund Balance, like any City asset, can be considered part of the City‘s
projected revenues only after the City has opted to appropriate them for future
expenditures, which authority is left to the discretion of the Mayor and the Council,
and not the arbitrator, under the City‘s Charter.
I note that, although neither the Arbitrator‘s decision nor the PERB‘s
decision expressly say so, their holdings could be interpreted to imply that an
arbitrator should graft onto the POFERA an understanding that, specifically with
respect to arbitration awards for periods in the past, all prior years‘ revenues,
including those now accounted for by the Unassigned Fund Balance, be available
as ―existing revenues,‖ since the arbitrator could find that the LBFO can be
satisfied using these assets without changes in taxing/spending policy on the part
of the City. I reject that implication. Nothing in the POFERA as interpreted by
our caselaw is ambiguous here so as to allow departure from the statute‘s express
language; as I describe in my analysis below,138 the revenues from years covered
138 See infra Part III.A.4.
45 by the FOP‘s LBFO are easily ascertainable and form the outer limit of the
permissible cost, and nothing about that result is absurd or unworkable.139
Because the cash assets accounted for by the Unassigned Fund Balance are
not ―existing revenues‖ within the meaning of Section 1615(d)(6), I find that the
Arbitrator and the PERB committed legal error by holding otherwise.
4. ―Existing Revenues‖ Are Those Revenues the City Received During the Term of the Proposed CBA
Having found that calculation of ―existing revenues‖ inherently requires
consideration of a specific period of time, however, the question remains as to
what specific period of time the Arbitrator should have considered here in gauging
whether the City had the financial ability to meet the costs of the FOP‘s LBFO. As
noted above, in the Fraternal Order of Police, Lodge 5 decision, this Court—as
well as the arbitrator and the PERB below—held that the ―relevant inquiry‖ under
Section 1615(d)(6) in the context of arbitrating CBAs governing future years
139 Even if I were to interpret the statute as ambiguous with respect to past application, the result would be the same. Employing the principle of interpretation found in Seaford Bd. Of Educ. v. Seaford Educ. Ass’n, 1988 WL 8773, at *2 (Del. Ch. Feb. 5, 1988), see infra note 142 and accompanying text, I do not find that the term ―existing revenues‖ should be reinterpreted to include the cash assets included in the Unassigned Fund Balance in the limited context of arbitrating retroactive CBAs. Section 1615(d)(6) is designed as a control on the collective bargaining process to ensure that the costs of any proposal the public employer is forced to accept is commensurate with the public employer‘s financial condition during that period, as set by the governing legislative body. If the arbitrator were to analyze a union‘s request for retroactive salary increases based on the public employer‘s prior years‘ accumulated surplus, it would allow the union to spread the costs of its proposal over years beyond those actually covered by the proposal, granting the union an advantageous bargaining position to which it would not be entitled when arbitrating a CBA for future years. Such an interpretation would create an incentive for the unions to delay negotiations on CBAs and thus would be inconsistent with the purpose of the POFERA.
46 involves net existing revenues over the contract period; that is, ―whether the
[public employer] could afford [the union‘s] proposal throughout its entire . . .
duration.‖140 However, also as noted above, the situation here is complicated by
the fact that the parties are negotiating a retroactive CBA.
The City makes the argument—for the first time in supplemental briefing—
that the POFERA reference to ―existing revenues‖ can have no logical application
to past, as opposed to prospective, periods of employment. According to the City,
the restriction on the arbitrator to choose an offer that can be satisfied from
existing projected revenues prevents the arbitrator from impinging on a core
legislative function, but applying the term to past revenues would actually cause
the arbitrator to impinge on that function. Specifically, the City argues that
applying the ―existing revenues‖ standard retroactively ―leads to an unreasonable
result as it would require the public employer to set aside surplus revenues in prior
years in the event there is a subsequent [POFERA] proceeding, and the arbitrator
determines the surplus constitutes ‗existing revenues‘ available to pay for a
retroactive proposal.‖141 Better, according to the City, to judicially rewrite the
statute to impose the revenue restriction on the future year or years in which the
payment for work in the past will be paid. I reject this argument.
140 Fraternal Order of Police, Lodge 5, 2014 WL 351009 at *10. 141 City of Wilmington‘s Supplemental Mem. of Law in Supp. of Its Appeal at 9.
47 It is true that the POFERA is clearly designed in contemplation that public
employers and unions will collectively bargain over CBAs to govern their future
relationships. However, that does not mean that the revenue restriction cannot, or
should not, be applied retrospectively. In situations where it is ―reasonably plain
that the legislature had no specific intention with respect to the specific problem
that later arises,‖ this Court has found that ―the best technique to employ—the one
most consistent with the special, limited judicial role in our democracy—is for the
court to interpret the words used, in a manner consistent both with their ordinary
usage and with the discernible overall intent of the statute.‖142 Employing that
principle of statutory interpretation here, it is clear that the City‘s interpretation
would lead to an unreasonable result. If the arbitrator were to analyze a union‘s
request for retroactive salary increases based on the public employer‘s budget in
the year that it is to make those retroactive payments, it would constrict the union‘s
ability to obtain raises over multiple years to the revenues that the public employer
can generate in a single year, granting the public employer an advantageous
bargaining position to which it would not be entitled when arbitrating CBAs for
prospective terms of employment. Such an interpretation would create an
142 Seaford Bd. Of Educ. v. Seaford Educ. Ass’n, 1988 WL 8773, at *2 (Del. Ch. Feb. 5, 1988).
48 incentive for public employers to delay negotiations on CBAs and thus would be
inconsistent with the purpose of the POFERA.143
Instead, I see no reason to depart from this Court‘s position in Fraternal
Order of Police, Lodge 5 that ―existing revenues‖ refers to the revenues in the
fiscal years covered by the proposed CBA, taken as a whole.144 Not only is this
interpretation consistent with the plain meaning of the statute‘s language and with
prior precedent of this Court interpreting that language, it also maintains, more
than any other interpretation offered by the parties or the decisions below, the
public employer‘s and the union‘s respective bargaining positions in arbitrations
over retroactive CBAs as those positions already exist under the POFERA in
arbitrations over CBAs for prospective terms of employment. The key difference
between the two situations is that in arbitrations over retroactive CBAs the
arbitrator will be guided by actual revenue figures for the years covered by the
proposal, as opposed to revenue projections for those years. However, it does not
seem to me that this difference inherently favors either the public employer or the
union in the collective bargaining process.
143 For a discussion of the analogous incentive problem arising from the FOP‘s (initial) argument that all prior years‘ surpluses should be available for retroactive CBAs, see supra note 139. 144 That is, for a LBFO to be paid out of the General Fund, the arbitrator must consider whether or not the public employer could pay the net costs of the contract envisioned by the LBFO from the net of actual and/or projected annual operating surpluses or deficits—―existing revenues‖— in the General Fund during the years that contract would be in existence.
49 Furthermore, I do not find persuasive the City‘s argument that applying a
revenue restriction for retroactive CBAs based on prior years‘ revenues improperly
allows the arbitrator to intrude on the core legislative functions of the City‘s
elected officials by ―[e]ffectively requiring the City to set aside surpluses in prior
fiscal years.‖145 The City‘s concern is not unique to arbitrations over retroactive
CBAs. It is unchallenged that an arbitrator‘s decision may require a public
employer to pay for the costs of CBAs covering future years out of surplus
revenues that the public employer is projected to receive in those years, and thus
may, under the City‘s reasoning, effectively require the public employer to ―set
aside‖ those future revenues for a specific use as they are obtained. If anything,
there is actually less of a concern that using net surplus revenues over the years
covered by the contract as a basis for Section 1615(d)(6) will cause an arbitrator to
impinge on a core legislative function in the context of retroactive CBAs,
considering that revenues and expenses in prior years are definitively known, as
opposed to forecasted, and thus the arbitrator cannot overestimate the public
employer‘s financial ability. Rather, what the City is actually arguing is that
applying the approach laid out in Fraternal Order of Police, Lodge 5 in
arbitrations over retroactive CBAs will effectively tie up a portion of the City‘s
surplus assets. I note that such a consequence is not necessarily unreasonable nor
145 City of Wilmington‘s Supplemental Mem. of Law in Supp. of Its Appeal at 9.
50 should it be unexpected, considering that, in situations where collective bargaining
on a successor CBA has lagged past the termination of the previous CBA, the City
is aware that its cost of labor for these employees is unsettled and, because that
cost is set at a time in the past, likely deflated. In any event, the City‘s concern
does not find support in the language or the underlying purpose of the POFERA.
Therefore, I find that the term ―existing revenues‖ in Section 1615(d)(6)
required the Arbitrator in this situation to analyze the City‘s financial ability to
meet the costs of the FOP‘s LBFO using the City‘s revenues in the General Fund
over the duration of the four years covered by that proposal, FY 2011 to FY 2014.
B. The Arbitrator and the PERB Erred as a Matter of Law in Ruling on the City’s Financial Ability to Meet the Costs of the FOP’s LBFO Based on Factors Other than Existing Revenues
Having found that the term ―existing revenues‖ refers here to the period
covered by the FOP‘s LBFO, I turn next to whether the Arbitrator and the PERB
applied an improper standard to gauge the City‘s financial ability to meet the costs
of the FOP‘s LBFO. As a preliminary matter, I note that it is not clear exactly how
the Arbitrator reached her conclusion that the City did not have ―an inability to
afford the costs of the FOP‘s last, best, final offer.‖ The Arbitrator did not detail
the calculation that she used or the specific figures upon which she relied for her
conclusion, only that she had reached that conclusion ―[f]or all the[] reasons‖ set
out over the previous seven pages of the decision. For instance, at the beginning of
51 her analysis, the Arbitrator noted that the FOP had only asked for salary increases
for Bargaining Unit members in ―FY 2012 and FY 2013, years in which the City
accrued surpluses and increased its unassigned fund balance,‖ and that ―[t]he
revenue, expenditure and fund balances are known for FY 2011 through FY 2014,
with the FY 2014 unassigned fund balance projected to be $28,520,703, which
includes $5,699,343 in cash,‖146 but the decision is silent as to whether—and if so,
how—any of these pieces of information factored into her final decision that the
City could afford the FOP‘s proposal; nor does the decision explain how the
projected savings of approximately $107,606 in FY 2014 from certain vacancies
within the City‘s police force factored into the Arbitrator‘s decision.147
However, assuming, as the PERB appears to in its decision148 and as the
parties do in briefing,149 that the Arbitrator based her ruling that the City could
―afford‖ the FOP‘s LBFO solely on the $5,699,343 in cash assets that was
projected to be included in the Unassigned Fund Balance at the expiration of FY
2014, I find that the Arbitrator and the PERB did not apply the standard required
146 R. 1367. 147 See R. 1371. 148 See R. 1430 (―The Arbitrator determined, based on the City‘s evidence, [that] the Unassigned Fund Balance constitutes the account or fund in which the City accumulates its excess revenues and from which the City draws funds to meet unanticipated or unfunded expenses in its budget. . . . There is no question that the Unassigned Fund Balance Balance‘s cash or cash equivalent is comprised of funds from existing revenues. It is and has been a stable source of funding.‖ (emphasis added)). 149 See, e.g., City of Wilmington‘s Opening Br. in Supp. of Its Appeal at 10, 15–16; Answering Br. of Appellee-Below Appellee Fraternal Order of Police, Lodge 1 at 34.
52 by Section 1615(d)(6). As I have found above, the Arbitrator and the PERB
should have evaluated the City‘s financial ability to meet the costs of the FOP‘s
LBFO based on whether the City generated sufficient revenues in the General
Fund from FY 2011 to FY 2014.
C. The Arbitrator and the PERB Did Not Err as a Matter of Law in Holding that FY 2015 Costs Should Not Be Included in the Total Projected Costs of the FOP’s LBFO
Finally, I turn to the issue of whether FY 2015 costs—and perhaps those
from succeeding years as well—should be included in the total projected costs of
the FOP‘s LBFO. Section 1615(d)(6) requires the Arbitrator and the PERB to
consider ―[t]he financial ability of the public employer, based on existing revenues,
to meet the costs of any proposed settlements.‖150 The City argues that, as a matter
of law, ―costs of any proposed settlements‖ must be interpreted to include costs of
a proposed CBA in non-contract years where, like here, the terms of the proposed
CBA will realistically continue into those non-contract years. As support for its
interpretation, the City cites a passage from City of Seaford wherein the arbitrator
was describing the rationale underlying using ―existing revenues‖ to qualify the
City‘s financial ability meet the costs of any proposal, which passage was cited
150 19 Del. C. § 1615(d)(6) (emphasis added).
53 favorably by this Court in Fraternal Order of Police, Lodge 5 v. New Castle
County151:
There is a very clear and logical reason the General Assembly limited the Interest Arbitrator to consider only ―existing revenues‖ in reaching a determination as to whether a public employer can afford a proposed settlement. Many costs, including those for wages and benefits, are recurring and generally tend to automatically increase annually, either as a result of negotiated provisions of a collective bargaining agreement or due to inflationary pressure on the costs of services or goods an employer has agreed to provide. Consequently, they constitute an on-going and frequently increasing financial obligation.152
According to the City, because the parties do not have a CBA in place to succeed
the FOP‘s proposed CBA and are unlikely to have one in place by the end of FY
2015, and because the City must, by law, honor the terms found in the last year of
the parties‘ previous CBA until a successor CBA can be executed, the salary
increases in the FOP‘s LBFO will actually be ―on-going,‖ ―recurring,‖ and
―automatically‖ continued through at least FY 2015, and thus are the type of costs
envisioned by Section 1615(d)(6). I do not find this argument persuasive.
The POFERA does not define the phrase ―costs of any proposed settlement‖
as it appears in Section 1615(d)(6), nor does its twin, the PERA, define the phrase
as it appears in identical form in Section 1315(d)(6), 153 nor does this Court‘s
151 2014 WL 351009 (Del. Ch. Jan. 29, 2014). 152 Id. at *6 (quoting City of Seaford v. Fraternal Order of Police, Lodge 9, IV PERB 2659, 2676 (July 15, 2002) (Decision of the Interest Arbitrator on Remand)). 153 See 19 Del. C. § 1615(d)(6).
54 limited caselaw reviewing PERB decisions under either of these acts define the
phrase. The dictionary definition of ―cost‖ is ―the amount or equivalent paid or
charged for something.‖154 Based on the plain meaning of ―cost,‖ the phrase ―costs
of any proposed settlement‖ is unambiguous; it can only be reasonably interpreted
to mean the amount of money the City would necessarily expend in order to satisfy
its obligations under the proposed CBA. It unambiguously does not include costs
of the City‘s obligations following the expiration of the proposed CBA, i.e., the
amount of money the City will have to expend until the parties execute a different,
successor agreement. In other words, the fact that the City‘s costs to operate
within the law in the absence of a CBA may be initially determined by the terms of
the parties‘ previous CBA does not mean that those are ―costs of‖ the previous
CBA.
My conclusion in this regard is supported by the fact that, even if the City is
forced to provide pay and benefits to the Bargaining Unit employees in FY 2015
based on the FY 2014 levels in the FOP‘s LBFO, the parties must still negotiate
and adopt a new CBA to retroactively govern FY 2015, which new CBA will
dictate the actual salaries and benefits the employees were entitled to in FY 2015,
154 Webster’s II New College Dictionary 255 (1995); see also Black’s Law Dictionary (10th ed. 2014) (defining ―cost‖ as ―the amount paid or charged for something; price or expenditure‖).
55 and thus the City‘s actual costs in FY 2015.155 The City‘s plea for pragmatism,
that the Court can be assured that collective bargaining will yield costs in FY 2015
at least on level with FY 2014 because the Bargaining Unit will never agree to
retroactively reduce salaries and benefits, is also unavailing, considering the
Bargaining Unit will not be entitled to retain FY 2014 salaries and benefits in any
successor CBA under Section 1615(d)(6) if the City does not have sufficient
revenues to meet those costs during the period of the successor CBA.156 Even if
the City can meet those costs in retrospect, the salaries and benefits will still be
subject to evaluation under the seven factors in Section 1615(d). Thus, while I
have no doubt that the City will face resistance in any effort to claw back salaries
and benefits in FY 2015, that resistance is of the same variety that the City would
face in attempting to avoid salary and benefit increases that it could afford in
CBAs with prospective contract terms; at the very least, this resistance is not so
materially different in the context of negotiating retroactive CBAs as to constitute
an ―unreasonable or absurd result‖ that would cause this Court to ignore the plain
meaning of the statute‘s language.157 Therefore, I find that the Arbitrator and the
155 The same principle applies if the parties‘ negotiations over a successor agreement stretch past FY 2015. 156 See supra Part III.A.4. 157 This specific collective bargaining dispute illustrates my point. Here, whereas the FOP‘s LBFO included a modest cost-of-living adjustment in prior years, the City‘s LBFO included no cost-of-living adjustment and called for an increase in employee contributions to healthcare costs in then-future years, effecting a prospective reduction in the City‘s costs in those years. The
56 PERB did not err as a matter of law in excluding FY 2015 costs from its
calculation of the total projected costs of the FOP‘s LBFO.
D. Applying the Proper Standard, the FOP’s LBFO Is Not Disqualified Under Section 1615(d)(6)
Having determined the applicable standard under Section 1615(d)(6), as well
as the appropriate estimation of the costs of the FOP‘s LBFO, I turn to considering
whether the City had the financial ability to meet the costs of the FOP‘s LBFO.
The record on appeal is sufficient to find that, though the Arbitrator and the PERB
applied the wrong standard in the decisions below, their ultimate determination
that the City could meet the costs of the FOP‘s proposal was correct. The parties
stipulated that, as to the City‘s General Fund, the City had a net operating surplus
of $6,055,527 in FY 2011; a net operating surplus of $7,444,088 in FY 2012; a net
operating surplus of $1,326,984 in FY 2013; and a net operating deficit of
$1,170,833 in FY 2014. Netting these throughout the four-year duration of the
FOP‘s proposal—as I must under the rationale of Fraternal Order of Police, Lodge
5—the City had a net operating surplus in the General Fund of $13,655,766 from
FY 2011 to FY 2014, more than sufficient to cover the proposal‘s estimated costs
of $127,648.
City‘s own position in this collective bargaining dispute, then, illustrates that costs are not necessarily ―locked in‖ in from contract to contract.
57 IV. CONCLUSION
For the foregoing reasons, the decision of the PERB is reversed in part and
affirmed in part. Although I have found that the Arbitrator‘s and the PERB‘s legal
errors were ultimately insignificant in their consideration of whether the FOP‘s
LBFO should be disqualified under Section 1615(d)(6), I am hesitant to enter a
final judgment in this matter based on that conclusion. A POFERA arbitrator, after
determining that the parties‘ LBFOs are not disqualified under subsection (d)(6), is
given discretion to choose between the proposals based on a balancing of the other
Section 1615(d) factors. Though the Arbitrator here has already exercised that
discretion and selected the FOP‘s proposal, it is unclear to me to what extent the
legal rulings in this Memorandum Opinion may affect the balancing of the other
Section 1615(d) factors, and thus to what extent an entry of final judgment in this
Court at this point in the proceedings would tread on the Arbitrator‘s statutory
discretion. Therefore, the parties should confer and inform the Court whether a
remand to the Arbitrator is appropriate in light of this Memorandum Opinion.
IT IS SO ORDERED.
City of Wilmington v. Fraternal Order of Police Lodge 1 (City of Wilmington v. Fraternal Order of Police Lodge 1) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.