Buffalo Teachers Federation v. Tobe (2006)

Buffalo Teachers Federation v. Tobe (2006)

464 F.3d 362

The Buffalo Teachers Federation appealed a judgment entered on August 19, 2005, in the United States District Court for the Western District of New York, contending that a wage freeze enacted by the Buffalo Fiscal Stability Authority (BFSA) violated the Contract Clause. The facts are spelled out in the opinion of a unanimous panel of the U.S. Court of Appeals for the Second Circuit written by Judge Richard J. Cardamore and joined by Judges Guido Calabresi and Peter W. Hall.

CARDAMONE, CIRCUIT JUDGE:

When a state is sued for allegedly impairing the contractual obligations of one of its political subdivisions even though it is not a signatory to the contract, the state will not be held liable for violating the Contracts Clause of the United States Constitution unless plaintiffs produce evidence that the state’s self-interest rather than the general welfare of the public motivated the state’s conduct. On this issue, plaintiffs have the burden of proof because the record of what and why the state has acted is laid out in committee hearings, public reports, and legislation, making what motivated the state not difficult to discern. In the appeal before us, the record of why the state acted is available, and plaintiffs have not met their burden.

Plaintiffs are the Buffalo Teachers Union and a number of other unions in Buffalo, New York (Buffalo or City), representing public employees of the school district of the City of Buffalo—including teachers, principals, bus drivers, cooks, food service helpers, etc. Defendants are the Buffalo Fiscal Stability Authority, its members, and New York State Governor George E. Pataki. Plaintiffs, alleging that a wage freeze instituted by defendant Buffalo Fiscal Authority violates the Contracts Clause sued defendants and sought a declaratory judgment with respect to the wage freeze’s constitutionality and also an injunction against its enforcement. Both sides moved for summary judgment. The United States District Court for the Western District of New York granted summary judgment for defendants in a judgment dated and entered August 19, 2005.

When in 2003 the speaker of the New York State Assembly became concerned by Buffalo’s declining financial health, he requested the state comptroller’s office to conduct a review of the City’s finances. The resulting report detailed Buffalo’s financial situation. The report recounted that the City had been operating for several years with a structural deficit and had been able to continue operations only with state aid and the use of the City’s reserves. . . . Based on these and other bleak findings, the comptroller concluded Buffalo was not in a position to resolve its fiscal woes on its own. For example, the record on this appeal shows that to remedy budgetary shortfalls, the City had already laid off 800 teachers and 250 assistant teachers over a four-year period. The report therefore suggested legislative intervention. Specifically, the comptroller recommended the creation of a control board—namely the BFSA—to oversee Buffalo’s finances. The board would have powers and duties similar to those given to boards that already oversaw the budgets of other fiscally troubled municipalities in New York State. The comptroller advised also that in the event of a ­board-declared fiscal crisis the board should have the power to freeze future wage increases.

In light of the comptroller’s report, the state legislature passed on July 3, 2003, the Buffalo fiscal stability authority act (Act) to address the City’s financial crises. The aim of the Act is to have Buffalo achieve fiscal stability by 2007–08. To attain that goal, the Act created the Buffalo Fiscal Authority, a public benefit corporation. . . . The Act . . . provides a means by which the Board may modify the financial plans to bring them into compliance with the Board’s strictures. If Buffalo fails or refuses to modify its financial plans, the Board may take corrective steps on its own. In particular, the Board may impose a wage and/or hiring freeze upon a finding that such a freeze is “essential to the adoption or maintenance of a city budget or a financial plan” that is in compliance with the Act.

On October 21, 2003, the Buffalo Fiscal Authority approved the City’s first four-year financial plan under the Act. Prior to the submission of the plan, the Board had already ordered the City to institute a hiring freeze and had also instructed the City to exclude from the plan wage increases that were not contractually required. The City approved a tax increase for its 2004–05 budget and planned for another tax increase in the last year of the four-year plan; together the city tax increases amounted to $6.3 million.

Six months later, in reviewing how the plan’s implementation was proceeding, the Board realized the plan no longer complied with the Act. The BFSA discovered that for the 2004–05 fiscal year Buffalo projected a budget gap $20 million greater than the $30 million gap previously estimated. The Board was further troubled by the estimate that the projected City budget gap for the next four years would exceed $250 million.

As a result of these concerns, on April 21, 2004, the Buffalo Fiscal Authority invoked its wage freeze power and determined “that a wage freeze, with respect to the City and all Covered Organizations, is essential to the maintenance of the Revised Financial Plan and to the adoption and maintenance of future budgets and financial plans that are in compliance with the Act.” The Board further resolved that “effective immediately, there shall be a freeze with respect to all wages . . . for all employees of the City [which] shall apply to prevent and prohibit any increase in wage rates.” The wage freeze took effect that day, and effectively prohibited members of the plaintiff unions from enjoying a two percent wage increase that the unions had negotiated as part of their labor contracts with the City.

Our standard of review here is well known. We review the grant of summary judgment de novo, viewing the facts in the light most favorable to plaintiffs and resolving all factual ambiguities in their favor. Under this standard, we are only to “determine whether there is a genuine issue for trial.” With this in mind, we turn to plaintiffs’ claims.

 . . . The Contracts Clause [was] a provision of the Constitution that even prior to its adoption was at the center of heated discourse. After 11 states had ratified the Constitution, James Madison lamented privately to Thomas Jefferson that the articles relating to treaties, paper money, and contracts “created more enemies than all the errors in the System positive & negative put together.” Our attention turns to this clause, which provides that no state shall pass any law “impairing the Obligation of Contracts.” Although facially absolute, the Contracts Clause’s prohibition “is not the Draconian provision that its words might seem to imply.” Allied Structural Steel Co. v. Spannaus (1978). It does not trump the police power of a state to protect the general welfare of its citizens, a power which is “paramount to any rights under contracts between individuals.” Rather, courts must accommodate the Contracts Clause with the inherent police power of the state “to safeguard the vital interests of its people. Home Building & Loan Association v. Blaisdell (1934). Thus, state laws that impair an obligation under a contract do not necessarily give rise to a viable Contracts Clause claim.

To determine if a law trenches impermissibly on contract rights, we pose three questions to be answered in succession: (1) is the contractual impairment substantial and, if so, (2) does the law serve a legitimate public purpose such as remedying a general social or economic problem and, if such purpose is demonstrated, (3) are the means chosen to accomplish this purpose reasonable and necessary. We also consider the level of deference to give to a legislature’s determination that a law was reasonable and necessary. We address each of these questions.

We discuss questions (1) and (2) together. First, we agree with the district court that the wage freeze substantially impairs the unions’ labor contracts with Buffalo. To assess whether an impairment is substantial, we look at “the extent to which reasonable expectations under the contract have been disrupted.” Contract provisions that set forth the levels at which union employees are to be compensated are the most important elements of a labor contract. The promise to pay a sum certain constitutes not only the primary inducement for employees to enter into a labor contract, but also the central provision upon which it can be said they reasonably rely. With that in mind, we may safely state the wage freeze so disrupts the reasonable expectations of Buffalo’s municipal school district workers that the freeze substantially impairs the workers’ contracts with the City.

Second, we next ask if the legislature had a legitimate public purpose in passing the Act and providing for a wage freeze. When a state law constitutes substantial impairment, the state must show a significant and legitimate public purpose behind the law. A legitimate public purpose is one “ at remedying an important general social or economic problem rather than providing a benefit to special interests.” And as discussed in a moment, the purpose may not be simply the financial benefit of the sovereign.

The New York legislature had a legitimate public purpose in passing the Act and its wage freeze power. It is not disputed that Buffalo was suffering at the time, and continues to suffer, a fiscal crisis. The state legislature passed the Act to address specifically the City’s financial problems. This is not a case in which the Act and wage freeze were passed “for the mere advantage of particular individuals”; rather, the legislature passed the law “for the protection of a basic interest of society. Further, courts have often held that the legislative interest in addressing a fiscal emergency is a legitimate public interest. We find no reason to reach a [contrary] conclusion. . . .

That a contract-impairing law has a legitimate public purpose does not mean there is no Contracts Clause violation. The impairment must also be one where the means chosen are reasonable and necessary to meet the stated legitimate public purpose. U.S. Trust v. New Jersey (1977). If it is not, then the law offends the Contracts Clause.

Unless the state itself is a party to the contract, courts usually defer to a legislature’s determination as to whether a particular law was reasonable and necessary. In this appeal, the parties committed the majority of their arguments in their briefs to discussing the appropriate level of deference our court owes to the legislature here. Therefore, before we can answer the third question of reasonableness and necessity, we first address the issue of deference. . . .

The parties disagree with respect to what level of deference we should apply. Plaintiffs argue that we owe little deference to the state’s decision because the Act is, in their view, self-serving to the state, while defendants insist we owe substantial deference to the legislative judgment. Of particular significance in the case at hand is the absence of a contract to which New York State is a party. Defendants contend that substantial deference is due because New York State is not a party to the contracts that are being impaired, that is, the state did not impair the obligations of its own contracts. Plaintiffs concede that their contracts are with the City of Buffalo and that no state contracts or obligations run to them or to the City. But, they assert, that absence of a state contract does not preclude heightened scrutiny. The plaintiff unions urge us to focus on the alleged self-serving nature of the Act and the wage freeze. They argue that a less deferential standard applies because the wage freeze is in plaintiffs’ view, self-serving insofar as it may save the state money by reducing future aid the state may feel obliged to give to the City. . . .

[A]ssuming the state’s legislation was self-serving to the state, we are less deferential to the state’s assessment of reasonableness and necessity than we would be in a situation involving purely private contracts, but what does giving less deference to the legislature actually mean? We hasten to point out that less deference does not imply no deference. Relatedly, we agree . . . that U.S. Trust Co. does not require courts to reexamine all of the factors underlying the legislation at issue and to make a de novo determination whether another alternative would have constituted a better statutory solution to a given problem. Nor is the heightened scrutiny to be applied as exacting as that commonly understood as strict scrutiny. Such a high level of judicial scrutiny of the legislature’s actions would harken a dangerous return to the days of Lochner v. New York (1905).

Ultimately, for impairment to be reasonable and necessary under less deference scrutiny, it must be shown that the state did not (1) “consider impairing the . . . contracts on par with other policy alternatives” or (2) “impose a drastic impairment when an evident and more moderate course would serve its purpose equally well,” nor (3) act unreasonably “in light of the surrounding circumstances. U.S. Trust Co.

With the above standard in mind, we hold the wage freeze was reasonable and necessary. The legislature and Board did not treat the wage freeze on par with other policy alternatives. According to the Act, the Buffalo Fiscal Authority was empowered to enact the wage freeze provision only if it was essential to maintenance of the City’s budget. We read this to mean the wage freeze must have been a last resort measure. Indeed the Board imposed the freeze only after other alternatives had been considered and tried. The Board first instituted a hiring freeze pursuant to its powers under the Act. Moreover, the City had already taken other more drastic measures including school closings and layoffs; in the four years prior to the wage freeze Buffalo eliminated 800 teaching and 250 teaching assistant positions. Only after these more drastic steps were taken and a finding that the freeze was essential was made, did the BFSA institute the wage freeze. . . .

The temporary and prospective nature of the wage freeze underscores further its reasonableness. . . . The impairment here does not affect past salary due for labor already rendered or money invested. It only suspends temporarily the two percent increase in salary for services to be rendered.

In sum, the prospective and temporary quality of the wage freeze convinces us of its reasonableness.

The unions argue the wage freeze was unnecessary because other alternatives existed. Namely, taxes could have been raised or other programs and services could have been eliminated or burdened. We cannot adopt this position for at least three reasons. First, it is always the case that to meet a fiscal emergency taxes conceivably may be raised. It cannot be the case, however, that a legislature’s only response to a fiscal emergency is to raise taxes. Also, defendants have shown that Buffalo had already increased City taxes to meet its fiscal needs, and it is reasonable to believe that any additional increase would have further exacerbated Buffalo’s financial condition. Second, even if the state could have raised its taxes, appellants have not shown how any monies so raised would flow to Buffalo. Finally, on the undisputed facts of this case, we find no need to second-guess the wisdom of picking the wage freeze over other policy alternatives, especially those that appear more Draconian, such as further layoffs or elimination of essential services.