The pending end to a cap on arbitration awards for New Jersey police officers and firefighters could pressure local government finances , according to Fitch Ratings.

The public safety arbitration cap is set to end on Dec. 31, at least temporarily, as the state legislature and Governor-Elect Phil Murphy review a final year-end report from a commission studying the law’s impact on property taxes, government spending, collective negotiation agreements, personnel, and crime. The law, which caps such arbitration awards at 2%, has been in effect since Jan. 1, 2011 and was extended for a three-year period in 2014 when it was last up for renewal.

Phil Murphy, a Democrat, was elected New Jersey governor on Nov. 7, 2017.
Gov.-elect Phil Murphy will decide the future of New Jersey's 2% public safety arbitration cap. Murphy for Governor

“Fitch believes the arbitration cap is beneficial to local government credit quality as it helps to align revenue and spending measures and supports structural balance in the context of statutory caps on property tax growth,” said Fitch analyst Michael Rinaldi in a Dec. 20 report. “Without the cap arbitration awards would remain subject to a reasonable determination of the issues, including the financial impact on the local government and taxpayers, and the ability of the local government to maintain or expand its programs or services.”

The New Jersey Association of Counties hosted a Dec. 19 press conference with a coalition of cap supporters urging the state legislature and Murphy to support permanently extending the law. The press office for Murphy did not respond to a request for comment on his plans for the expiring legislation once he gets sworn into office on Jan. 16.

Rinaldi noted that if the cap ends up expiring with no renewal, bargaining groups may become more “emboldened” to take an arbitration route rather than take a voluntary settlement. A recent report from the New Jersey Public Employment Relations Commission showed that prior to the cap, arbitration awards ranged from 2.5% to 5.65% from 1993-2010, according to Rinaldi. He said that while a majority of Fitch-rated New Jersey municipalities have high “financial flexibility”, an elimination of the arbitration cap would force tough fiscal decisions.

“Elimination of the arbitration cap could force local governments to reduce governmental services and/or rely on one-time resources to accommodate higher wage expenses,” said Rinaldi.” Furthermore, elimination of the arbitration cap could also have an impact on pension liabilities and contribution levels, as plan benefits are based on employee wages, among other factors.”

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