5693199173_9a021e40e3_zThe state government enters into a contract with an employee union calling for pay increases for thousands of employees. The state legislature fails to appropriate enough money to cover the increases. Is the state in breach of contract, or was the state’s contractual promise to pay the increases conditional on the legislature actually appropriating the money? That’s the question the Illinois Supreme Court debated late in its September term, hearing oral argument in State of Illinois v. American Federation of State, County, and Municipal Employees, Council 3. Our detailed summary of the facts and lower court opinions in AFSCME is here.

The State of Illinois agreed to a four year collective bargaining agreement in 2008 with the defendant union, which represents most state employees. The CBA provided for small twice-yearly wage increases in 2009, 2010 and 2011, but the union agreed to defer the increases in 2009 and 2010 in deference to the state’s budget problems. In early 2011, then-Governor Quinn proposed a budget which would have funded the increases for that year, but the legislature balked. When a budget was finally approved, there wasn’t enough money to finance the increases for employees at 14 agencies. AFSCME sought arbitration, and the arbitrator ultimately ordered the increases paid. The State filed a complaint seeking review of the arbitrator’s order. Not long after, the legislature made certain supplemental appropriations, and attrition at some agencies opened up further budget room, but employees in six agencies remained without the increases. The trial court held that an overriding public policy made the CBA invalid unless the legislature appropriated the necessary money. Nevertheless, the court ultimately ordered payment of partial increases. The Appellate Court reversed the Circuit Court, holding that the State’s contracts were not implicitly conditioned on appropriations.

Counsel for the State began the argument. He argued that the Appellate Court had erred in two respects: first, by misinterpreting the Public Labor Relations Act to mean the opposite of what it says; and (2) by disregarding the appropriations clause of the Illinois constitution. Counsel argued that the Appellate Court’s conclusion essentially means that the Governor can unilaterally spend an unlimited amount of public funds without an appropriation. Justice Theis asked where the decision to apply funds to only certain agencies’ employees had come from. Counsel responded that appropriations were done agency by agency and at times operation by operation. The appropriations were sufficient for certain agencies, but not for others. Ultimately, there was no way for those agencies to both keep all facilities open and pay the increases. Justice Theis asked whether the case was moot, given that the State had made certain payments pursuant to the Circuit Court’s order. Counsel answered that $53 million dollars’ worth of increases had not been paid. Justice Burke asked whether the State’s position renders labor CBAs with the State meaningless. Counsel answered that this type of negotiation is the norm for public employers. He suggested that this was an unusual case because it was set against the background of recent financial and budget issues. Typically, what would happen is that the Governor would work towards furloughs, layoffs and facility closures. But here, the union had gotten a commitment from the Governor to make no such cuts. Justice Karmeier asked whether, if the budget appropriation was large enough to accommodate the increases, the agencies would have to make cuts elsewhere. Counsel responded that the analysis has to go back to the appropriation – you can’t pay for one obligation with another appropriation. If the result was otherwise, courts would essentially become the appropriating power. The legislature cannot delegate its appropriations power.

Counsel for the Union followed, arguing that as a review of an arbitration award, the standard of review was very narrow. The Union had made concessions worth $300 million, allowing layoffs to be reduced to 1200. Even in 2012, the Union agreed to another $100 million in concessions. The case isn’t about the Governor making commitments outside the scope of what the State can do, counsel argued. Nothing in the parties’ agreement violated the legislature’s authority to determine the level of state spending. Counsel explained that the budget passed by the legislature was incomplete – it would have required twelve agencies to close up shop before the end of the fiscal year. The arbitrator rested the decision, in part, upon the fact that where many other contracts had included contingencies, the contract with the Union had not (and hadn’t had one for years). The arbitrator merely held that if the State wanted a contingency in its contracts, it had to write one in. Justice Thomas asked how it would change the tenor of negotiations if the Union assumed that everything was contingent on appropriations. Counsel said it would change negotiations dramatically. Justice Thomas asked whether the Union would likely say they needed more if all promises were subject to appropriations. Counsel answered that the Union had no chance to contribute to state government efficiency if it knew that someone else might make any agreement impossible to execute. Justice Theis asked whether other contracts contained express language about the legislature’s role. Counsel answered that the parties adapt to whatever happens. But here, both the Governor and the Union negotiated a deal to fit within the State’s financial circumstances. Chief Justice Garman asked how the Union’s position factors in separation of powers. Counsel answered that there are significant exceptions to the legislature’s power to make appropriations. There’s no evidence in the record, counsel argued, that the legislature’s power to set the direction of spending was impacted. Justice Theis asked where the arbitrator’s power to order the State to pay came from. Counsel answered that the authority came from the contract – the arbitrator had the authority to say that the wage increase is an enforceable contractual obligation. That was contemplated with the legislature waived sovereign immunity in the Act. Justice Theis asked what happened if the legislature didn’t fund the award. Counsel said he didn’t know; last year, the legislature had enacted an appropriation to cut the amount due in half. If the award were affirmed, the agencies would have to look at appropriations and find the money in the budget. For example, counsel argued, there was evidence that Corrections had a fund for items like responding to court orders. Justice Theis asked whether the Union was asking the trial court to determine whether the money was and how it should be spent. Counsel answered that the Union’s position was that the State owed the full amount under the contract. The trial court’s order said they only had to pay what they had, but that amounted to an impairment of the CBA.

In rebuttal, counsel for the State argued that the Union’s argument made the appropriations power something unrecognizable, driving a giant hole through the appropriations clause. If the legislature makes unwise decisions about public spending, counsel argued, the voters should get rid of them, but those decisions aren’t subject to judicial review. Justice Theis asked whether this was a breach of contract. Counsel responded that this principle was consistent with established contract law. Justice Kilbride asked whether the logical extension of the State’s position was that the Union should negotiate everything but wages, and then go talk to the legislature. Counsel answered that the two-step process – negotiation followed by appropriation – was necessary to honor the constitutional structure. Counsel concluded by saying that nobody is accusing the union of bad faith, but the essential constitutional role of the legislature can’t be cut out of the process. Counsel argued that it would be disastrous policy to disregard the plain meaning of the Act even on these sympathetic facts.

We expect AFSCME to be decided in four to six months.

Image courtesy of Flickr by Ewe Neon (no changes).