By Lorraine Bailey
(CN) – The Third Circuit ruled Tuesday that the Virgin Islands cannot renege on its salary promises to unionized government employees, because it knew about its impending budget crisis when it signed the contracts.
In 2011, the Virgin Islands sought to alleviate its nine-figure budget deficit by enacting the Virgin Islands Economic Stability Act (VIESA). The law reduced the salaries of government employees who made more than $26,000 a year by 8 percent.
Many of these employees were covered by collective bargaining agreements, with guaranteed salary and benefit schedules. Their unions sued the Virgin Islands, claiming the salary reductions violated the Contract Clause of the Constitution.
The Third Circuit found for the unions Tuesday, reversing and remanding to U.S. District Court.
While VIESA serves a legitimate public purpose, “the government is not entitled to impair its contracts at will. The Contracts Clause is not toothless,” Circuit Judge Michael Fisher wrote for the three-judge panel in Philadelphia.
The Third Circuit found it unreasonable for the Virgin Islands government to break contracts it had signed when it knew it was facing a budget crisis. The government projected a deficit of more than $300 million in 2009; the deficit was $275 million in 2010; a projected $75 million in 2011 and $132 million in 2012, according to the Third Circuit’s summary.
Nonetheless, “the government agreed to provide a 2.5 percent salary increase to USW [United Steel Workers] employees – as indicated by the USW Master agreement – on October 23, 2010. Prior to those agreements and as early as 2009, the Government had already projected significant budget deficits,” the court wrote.
Judge Fisher said the “timing is nearly as suspect” in the American Federation of Teachers’ contract, signed in May 2009, when the economy was in a full-blown recession due to the subprime mortgage crisis. Just one month later, the Legislature authorized the Virgin Islands governor to borrow $500 million to cover budget shortfalls.
“We are also troubled by the assurances made to union representatives during the negotiations,” Fisher wrote.
Union officials were concerned during negotiations that the government would struggle to find funding to pay salary increases due to the financial crisis, but the government’s chief negotiator promised funding would be available. In return for the salary increases, the union made several concessions.
“Instead of honoring that promise or never making it in the first place, the government chose the politically expedient route of reducing wages after it had received its benefit of the bargain. The Contract Clause is not a dead letter, and if it is to continue to have any force, it must prohibit such self-serving, post hoc changes in contractual obligations,” Fisher wrote.
While Puerto Rico’s debt crisis has made national news, few people know that the U.S. Virgin Islands has an even high per capita debt than Puerto Rico, with $2.4 billion in liabilities and a population of just 104,000.
Puerto Rico’s struggle has shined a spotlight on difference between U.S. states and U.S. territories: Territories cannot file for bankruptcy protection.
This fact attracted many investors to territory bonds, because investors were confident they’d be paid back. But territories do not receive as much federal money for social services as states do, forcing them to borrow.
Puerto Rico borrowed more than it could afford, as investors discovered when the island defaulted on its debt in July.
The U.S. Supreme Court heard arguments in March on whether Puerto Rico can restructure the debt of public utilities, such as electricity and water, and a ruling is pending.
Virgin Islands Governor Kenneth Mapp and Rep. Stacey Plaskett oppose a proposed bill to allow for federal control board to oversee territory finances, warning that it will hurt its standing with investors.
The appellant was the United Steel Paper and Forestry Rubber Manufacturing Allied Industrial and Service Workers International Union AFL-CIO-CLC. Its lead counsel was staff attorney Nathan Kilbert, of Pittsburgh.
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