BRADENTON, Fla. — A Florida law allowing local governments and school districts to declare a “financial urgency” can be an effective strategy to work out longer-term fiscal solutions, according to Fitch Ratings.

The statute allowing local governments to declare a financial urgency enables them to unilaterally alter existing labor contracts for a limited period, according to a review of the law by Fitch analyst Michael Rinaldi.

Several entities, including Miami, have used the legal mechanism for budget relief. However, “it does not imply insolvency or default, nor does it represent an authorization or intent of the government to seek bankruptcy protection,” he said.

“Fitch Ratings believes that the use of financial urgency can provide financially stressed municipalities with a temporary respite to work with labor on longer-term fiscal solutions.” Rinaldi said. “However, Fitch would be concerned if financial urgency is employed by fiscally healthy localities, as it can exacerbate labor problems and lead to litigation.”

On July 27, Miami city manager Johnny Martinez declared a financial urgency for the third year in a row to open a 14-day period of negotiations with police, fire and employees’ unions. A circuit court judge Monday ruled that only the City Commission can invoke the urgency, not the manager.

Miami intends to use cuts in union contracts to close a $40 million gap in its $900 million fiscal 2013 budget.

The city also declared fiscal urgencies in 2010 and 2011 to solve ongoing financial problems that underpin potential charges that may be brought by the Securities and Exchange Commission. The SEC has indicated in its investigation that the city failed to disclose the seriousness of its budget problems in documents released for the sale of bonds in 2007 and 2009.

In addition to Miami, the cities of Hollywood and Lake Worth, as well as the Manatee County School District, have declared financial urgencies in the recent past.

Once the urgency is declared, the municipality and bargaining units are required to negotiate the terms and conditions of collective bargaining agreements. If a dispute still exists after 14 days, an impasse is declared and a mediator can be appointed by the Florida Public Employees Relations Commission to decide unresolved contract issues, according to Rinaldi.

If the mediator’s recommended decision is rejected by either side, the governing body can resolve the impasse by taking action. Florida law does not limit the number of times a local government or school district can declare a financial urgency.

“Fitch considers the use of financial urgency as indicative of a difficult and fractious labor environment and a high level of budgetary and financial stress, consistent with Fitch’s below-average ratings,” Rinaldi said. Fitch rates Miami and Hollywood A-minus and A respectively,  both with negative outlooks.

Use of the statutory mechanism can elevate rancor between labor and management, and raise the possibility of legal challenges, which has occurred in Miami and Hollywood, he said.

Despite the potential pitfalls, Fitch believes that financial urgency can be an effective strategy when used judiciously and infrequently as an opportunity to work out longer-term fiscal solutions.

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