WASHINGTON — In a case that has grabbed national attention, a federal judge in Maryland ruled Tuesday that Prince George's County violated the contract clause of the Constitution by furloughing about 5,900 union employees, in part to preserve its triple-A credit rating for 2008 government obligation bonds instead of tapping reserve funds.
Judge Alexander Williams Jr., of the U.S. District Court for the District of Maryland, Southern Division, ruled that the county "exceeded its discretion and chose to substantially impair its contractual obligations to address an arguably foreseeable budget shortfall when, in light of surrounding circumstances, other more moderate alternatives would have served its purposes equally well."
The county said it would appeal the decision and threatened "massive layoffs" to comply with the ruling, in a statement issued by James Keary, a county spokesman. He declined to comment further. The appeal will be filed in the U.S. Court of the Appeals for the Fourth Circuit.
The Prince George's case centers on a lawsuit that five unions and several individuals filed against the county over a furlough program approved in September 2008 by the county counsel that cut annual salaries by 3.9% in an effort to save the county about $17 million. The unions and individuals said the furloughs violated their collective bargaining agreement with the county because the county had other alternatives to fill a $57 million budget gap for fiscal 2009, which began July 1, 2008.
The budget troubles started in Prince George's as the housing bubble burst in 2007. The county had the state's highest number of foreclosures in the second quarter of 2007, according to court documents.
Despite revenue declines, the county acquired a AAA rating from Standard & Poor's in June 2008 for $110 million of GO bonds issued that month. Prince George's total interest cost for the bonds was 3.95%, compared with 4.32% for GO bonds in 2007 that were rated AA.
The unions claimed workers were furloughed in part so that the county could maintain reserve funds to protect the rating. The county had $210 million of unreserved funds in fiscal 2007, according to a Standard & Poor's report issued in 2008. Additionally, the county had a contingency reserve of at least 7% of the general fund budget. Standard & Poor's said these reserves have historically been above this threshold. The unions estimated that the county had at least $226 million in reserves in fiscal 2009.
Jonathan R. Seeman, the county's director of the Office of Management and Budget, said in a deposition in the case that Standard & Poor's was told the county would consider furloughing workers and that it would "take whatever action necessary" to "maintain [the county's] reserves."
Williams, who sided with the unions, warned against interpreting the ruling as a precedent for other state employees that have been furloughed amid declining revenues. "This court's holding is not a pronouncement regarding furloughs in general, but rather applies to the narrow issue of legality" in Prince George's, he said.
But the ruling has already spurred representatives of the Service Employees International Union Local 1000 in California, which represents about half of the state employees there, to consider taking to federal court one of the legal challenges it has brought in state court over the furloughs of about 95,000 workers. The union has four separate lawsuits in California state courts over furloughs, Jim Zamora, a spokesman for the union, said yesterday in an interview. California furloughed state workers for two or three days each month from February until June and in July and August, which amounted to an annual pay cut of as much as 14%, he said.
"Based upon the judge's ruling in the Maryland case, we may file legal action on similar grounds in federal court in California," Zamora said. "We definitely intend to see how this will apply to California state workers," he said.
Though the unions have won the first round of the case involving Prince George's County, employees in other states have been less successful. Union employees in Vallejo, Calif., ended their challenge this month that the city was eligible for bankruptcy and could cut salaries. The unions had contended that Vallejo had $136 million in funds that could have helped close its deficit and avoid bankruptcy.
"Vallejo said their reserves are tied up as reserves," said Charles P. Carlson, a lawyer who writes Bond Case Briefs. "Even though you've got all these reserves, you are bankrupt," he said.