Federal Court Rules Furloughs of Union Members Unconstitutional 

August 20, 2009 – The United States District for the District of Maryland has issued a decision considering litigation between various unions and Prince George’s County, Maryland, ruling that furloughs of 5,900 (at 80 hours per employee) were unconstitutional. The suit was brought by locals of the IAFF, Fraternal Order of Police (FOP) and the American Federation of State, County and Municipal Employees (AFSCME) to remedy the lost pay for those employees. After extensive discovery, including depositions of budgetary and other County officials, the Court concluded that the furloughs violated the Contracts Clause of the U.S. Constitution.

The basic facts are as follows. Even as early as 2007, the County had internal warnings that a developing housing crisis severely threatened revenue for the upcoming fiscal year 2009. A County Spending and Affordability Committee (SAC) warned the County’s Office of Management and Budget of a general risk to substantially lower revenue than in years past and suggested substantial cuts. Nevertheless, while acknowledging the forecasts, the County Executive proposed a budget with a 1.3 percent rate of growth from the following year. The budget amounted to $44 million more than was recommended by the SAC.

Meanwhile, the County made presentations to bond agencies and in June, Prince George’s County obtained its first-ever AAA bond rating from Standard & Poor’s. In the course of the presentations, County representatives emphasized the sizable estimates for three of the County’s reserve funds, including an unrestricted fund called the Undesignated Fund Balance (UFB). The representatives also made affirmative commitments that the County was “willing to take strong action to reduce expenditures … includ[ing] things like furloughs” to maintain a balanced budget. When the bond rating was announced, the County projected the UFB to reach $70 million as of the end of June 2008.

The budget proposed by the County Executive was enacted and year-old collective bargaining agreements were approved by the County Council. Those CBAs included provisions that, although not expressly prohibiting furloughs, nevertheless expressly guaranteed a minimum level of annual income to the employees (in the form of annual salaries, COLAs, etc.).

Shortly after the County obtained its bond rating, approved the budget and ratified the CBAs, County officials reprojected revenues and discovered that revenue estimates were substantially worse than had previously been calculated or reported. County officials requested that each labor organization give up COLAs effective July 1, 2008. This request was made for the first time, according to the District Court, in late June. County officials claimed that the County budget would be $48 million in the red, and the UFB would be only $16 million. The County’s requests totaled $13 million. The County stated that the alternative was layoffs. The unions declined the request to reopen negotiations.

In September 2008, the County again reprojected revenue and discovered a larger deficit of $57 million (as opposed to $48 million). However, it also announced that the UFB would total $65 million. A few weeks later, it announced the Employee Furlough Plan (EFP) that is the subject of this litigation. The EFP was carried out in full during the pendency of the suit. The amount saved by the County under the EFP was $7 million to $20 million more than the requests made in June.

The Court considered some challenges under state law. The Constitutional challenge rested on the Contracts Clause, found in U.S. Const. art. I, § 10. It states that “[n]o State shall … pass any … Law impairing the Obligation of Contracts.” This provision has been used in the past to enforce certain contractual agreements between municipal governments and public employee unions.

The Court easily found that there was a substantial impairment based on the toughness of the contractual language.

The Court then touched on multiple arguments in concluding that the County did not have a sovereign power to furlough the workers despite the contracts.

The District Court first concluded that the furloughs were not reasonable for several reasons. First, County officials stated directly that the furloughs occurred only because the unions refused to give up their COLAs, even though the unions were under no obligation to give up their COLAs or merit increases. But the County was, indeed, under an obligation to perform under the CBAs. Second, the County never explained why it chose to make up a $57 million deficit with furloughs saving $20 million, as opposed to some other number. Third, the County requested $13 million in cuts from the unions when the UFB was deemed to be $16 million, but when the UFB was discovered to in fact have $65 million, the County recouped $20 million in furloughs. In short, the County officials’ posturing, as well as some very ill-advised and intemperate remarks made in deposition testimony by a County official, convinced the District Court that the County’s actions were not reasonable.

More importantly, the District Court also concluded that the County’s EFP was not necessary because it could easily be demonstrated that the County was aware of fiscal problems well ahead of the time, concluded negotiations with the unions and approved its budget for that fiscal year. The District Court was swayed by the fact that the County Executive ignored warnings and recommendations of the SAC, and that the County’s actions to balance the budget on the backs of employees, rather than make use of the UFB, seemed prompted far more by the desire to maintain the County’s new AAA rating. The Court noted that, in its approved budget, the County had authorized $5 million for real estate purchases and $3 million for equipment purchases, even though the County was not under any contractual obligation to pay these monies, but simply set the money aside for desired purchases. The intemperate County official mentioned above defiantly said in deposition that the UFB funds may be spent only if the County were to choose to spend it.

Most importantly, the Court decided that there were multiple other means by which the County could have made up the deficit but which were never considered, and that the County instead chose the manner which was politically expedient. Those included cuts to the non-contractual expenditures already mentioned, or cuts to the community college, or using the UFB. Or, the Court noted, the County could have “from the beginning heeded the warnings from the SAC and planned its budget to address potential shortfalls.”

A local television station reported that James P. Keary, the Communications Director for Prince George's County, said in a statement, “To comply with the Court's opinion, we will have massive layoffs.” That has been the County’s refrain for some time, and it is not clear if the CBAs prohibit layoffs the same way that they prohibit furloughs, although the CBAs may not prohibit layoffs because the subject of layoffs is generally a management right. With that assumption, the unions’ ability to challenge in court any substantial layoffs is doubtful.

The Court expressly did not rule on the furloughs proposed to commence during the current fiscal year.