The Third Circuit Court of Appeals ruled Tuesday the V.I. government’s 8 percent pay cut in 2011 violated the U.S. Constitution’s contracts clause, overturning a 2012 District Court decision upholding the legislation causing the pay cuts. [Third Circuit Order on 2011 V.I. Pay Cuts]
The ruling, by a three-judge panel, sends the case back for reconsideration by U.S. District Court in the Virgin Islands. The ruling affects an ongoing arbitration between the government and several unions, but it does not automatically mandate that the government pay the lost wages. And with the U.S. Virgin Islands wallowing in a severe fiscal crisis, it is unclear if workers would be likely to see back pay anytime soon even if there is eventually a judgment requiring it.
Seven unions ultimately sued the government over the pay cuts, arguing they violated their negotiated contracts and that other remedies, such as layoffs, were possible.
In March 2012, the unions lost the case in U.S. District Court. U.S. District Judge Curtis Gomez ruled the pay cuts enacted by the V.I. Legislature were legally permissible abrogations of the union contract because the actions have "a legitimate and important public purpose," there is a lack of readily available alternatives, and the law was crafted to apply across the V.I. government and not directed toward a particular entity.
Some of those unions praised the new ruling Wednesday.
"This ruling makes it clear that the government cannot just break our contracts,” Rosa Soto-Thomas, president of the St. Croix Federation of Teachers, said in a statement.
"The court’s decision should serve as a deterrent to any future attempts by the Virgin Islands Legislature or governor to adopt laws that override our members’ collective bargaining rights," she said, adding that the union plans to work with members and other unions "toward a final resolution of this case.”
The United Steelworkers, which represents several classes of government employees, also praised the ruling.
"This is a victory for all government workers of the Virgin Islands," USW District 9 Director Daniel Flippo said in a statement.
Asked what happens next, Flippo said the case will now go back to the U.S. District Court for the territory, "and we will work vigorously there to hold the government accountable for its contractual obligations to workers covered by the USW agreements."
The Third Circuit’s ruling argues the dispute is still important, even though the pay cuts were restored several years ago, because it could happen again. It also argues the pay cuts were improper because when the government entered into the labor contracts with the unions, it already knew it faced a fiscal crisis.
"Prior to those agreements and as early as 2009, the government had already projected significant budget deficits," the ruling says, pointing in part to the fact that then-budget director Debra Gottlieb testified before the Legislature in February of 2010, before some of the contracts were signed, saying the government’s “cash balances are precariously low.”
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; $275 million in 2010; $75 million in 2011; and $132 million in 2012, according to the Third Circuit’s summary.
The ruling cites case law saying governments can sometimes break contracts, in emergency situations, but ruled that in this case the government chose pay cuts among other possible options. The court argued that the government got concessions from the unions in exchange for pay raises but rescinded the pay raises while keeping the concessions.
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,” Judge Dennis Fisher wrote in the panel’s opinion. “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.”
"There is also reason for concern here that, as the unions claim, the government imposed a more drastic impairment than was necessary," Fisher wrote. “The unions argue, for example, that the government could have laid off 600 government employees, resulting in $30 million of savings; furloughed some employees using the layoff provisions in the collective bargaining agreement; and reduced the number of paid government holidays.”
“Tax increases and renegotiation of the collective bargaining agreements present other alternatives the government could have explored," Fisher wrote.
The legislation [Act 7261] was enacted in 2011 as an alternative to a package of budget fixes proposed by then Gov. John deJongh Jr. The measure was sponsored by Sens. Carlton "Ital" Dowe, Celestino White and Ronald Russell. DeJongh signed it into law in July of 2011.
Current senators who voted for the act were: Sens. Sammuel Sanes and Janette Millin Young. Sens. Positive Nelson, Neville James and Nereida "Nellie" Rivera-O’Reilly voted against the bill.