Supreme Court arguments in union fee case have municipal credit implications

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CHICAGO -- The power of public employee unions to influence elections and government policies on contracts, salaries, and pension benefits in many states is at stake in a case being argued before the U.S. Supreme Court Monday.

The case, Janus v. American Federation of State, County, and Municipal Employees Council 31, originated in Illinois. Unions, elected officials, and municipal market participants are all watching closely at it stands to impact government finances.

The court is being asked to declare so-called public “agency” or “fair-share” fees unconstitutional violations of the First Amendment. Many expect the court’s right-leaning majority to lift the rules requiring public-sector employees who aren't members of a union to pay compulsory fees to the union. They would do so by overturning the Supreme Court's 1977 Abood v. Detroit Board of Education ruling that upheld the practice.

If the court ends the fees, the shift could have far-reaching consequences by altering labor’s clout in states that lack “right-to-work” statutes that prohibit unions from requiring membership or dues as a condition of employment.

The decision stands to affect 5 million public workers across 22 states including California, Illinois, and New York. Missouri last year became the 28th state to pass such a "right-to-work" law but it has yet to take effect due to a petition drive that led to placement of the question on the November ballot.

If the court sides with Illinois state employee Mark Janus, local and state governments could gain the upper hand in negotiations, allowing them to trim labor costs. The theory is that public employee unions, with less money coming in from dues or agency fees, would have less money to spend on supportive politicians, reducing their clout in state capitals and with local governments.

“The first impact on the municipal market is it provides more latitude in public sector expenditures,” Philip Fischer, head of municipal bond research at Bank of America Merrill Lynch, said in an interview along with fellow municipal strategist Ian Rogow.

“The changing of the political relationship between the union members and their employees can be expected to alter the economic situation in the state by reducing state costs over the long term, and by shifting public attitudes,” Fischer added. “Over the long term how that plays out will be an interesting dynamic to watch," he said.

“Our expectation is if the court does rule as expected, it will provide a pretty good tailwind to the municipal market vis-a-vis a rebalanced employee-employer relationship,” Rogow said.

“The question is, ‘Is it a credit positive?’ For some it would be, not necessarily for all,” Fischer added. If the court overrules Abood, investors who hold bonds from states where labor costs run high should expect credit quality to improve and in turn the value of their holdings

The larger impact on political dynamics may take time to play out, especially in states that will continue to adhere to policies that favor labor, but if the fees are overturned expect a steady erosion of union clout, Fischer and Rogow said.

Effects might be noticeable sooner in states that move to rein in labor and pension costs where strong legal protections are not in place or pressure is high to preserve benefits. “When the music stops, so does the dancing,” Fischer said.

Reports from Fischer and Rogow cite the swift consequences of Wisconsin Gov. Scott Walker’s Act 10 that limited collective bargaining rights, allowed for contracts to be renegotiated, and put some limits on union fee collections in 2011. Median compensation for teachers soon decreased by 8.2% and median salaries have continued to fall, as have union membership levels.

Of the roughly 10.42 million public employees in the 28 states with right-to-work laws, 18.8% are members of public unions. In non-right-to-work states where unions have a stronger hand, about 50% of 5.15 million are union members.

Anti-union right-to-work states have a median pension funding ratio of 72.4%, while non-right-to-work states are at 62.6% based on fiscal 2016 data.

Right-to-work states' median debt, pension and other post-employment benefit liabilities as a percentage of gross state product was 4.65% while it’s 10.75% for non-right-to-work states, according to Bank of America Merrill Lynch reports.

At least 40 amicus briefs have been filed with the court from unions, local and state governments, Democratic and Republican groups, civic organizations, religious groups, and constitutional scholars.

The U.S. solicitor general is participating in oral arguments in support of Janus. In two prior cases that posed similar union due arguments, the federal government under President Obama supported the union position.


In their support for overruling Abood, several briefs from private organizations and Republican lawyers argue that collective bargaining played a key role driving the public pension funding crisis, local and state fiscal woes, and contributed to Chapter 9 bankruptcy filings in Detroit, Stockton, Calif. and San Bernardino, Calif. Union fees, they argue, supported labor to the detriment of government finances.

“AFSCME’s collective bargaining in Illinois has proven quite successful in obtaining concessions that Illinois taxpayers cannot sustain,” says an amicus brief filed by Illinois Gov. Bruce Rauner’s former general counsel, Jason Barclay, and former Illinois Gov. Jim Edgar attorney James Montana. Rauner, who initiated the Janus case, and Edgar are Republicans.

“Because it facilitates the financial destruction of states like Illinois while violating employee rights in three different ways,” the two lawyers urge the court to overturn Abood. Illinois is carrying a $129 billion unfunded pension liability and is the lowest rated state with two of its ratings at the lowest investment grade.

The National Conference on Public Employee Retirement Systems, which represents 500 funds across the country, defended Abood.

“Neither public-sector collective bargaining nor fair-share laws are responsible for the present financial situation state and local governments or their pension systems face,” the group’s brief says. “The insinuation that public employees or their unions are the cause of these problems is baseless,” and the argument “obscures genuine issues that should be addressed, such as some plans’ lack of fiscal discipline and the failure to make regular actuarially determined contributions.

“It is also disingenuous …to claim that public-sector collective bargaining has an outsized effect on a state’s budget and is therefore a burden on public entities’ financial health. Perhaps most directly, municipal bond credit ratings demonstrate that this is not the case,” the filing says.

The group contends an analysis of municipal credit ratings found that allowing public employees to collectively bargain and charge non-members for the cost associated with union representation had no negative effect on the creditworthiness of issuers.

The group also cites fiscal challenges in states like Kansas, which has had right-to-work laws on the books since 1958.

“In short, although no one factor alone caused Detroit’s financial collapse, it is clear that Detroit’s problems cannot be attributed to public pensions or collective bargaining,” the group writes, citing state aid cuts, bad borrowing practices, and a faltering tax base as reasons behind the city’s bankruptcy. The filing further accuses opposing briefs of cherry picking snippets from the California cities’ bankruptcy cases to paint a picture implying they were driven by collectively bargaining practices.


“Prohibiting agency shop fees would strip jurisdictions like New York City of a tool that has for years helped foster productive relationships between governments and their public workforces,” New York City Corporation Counsel Zachary Carter said in a city statement announcing its filing of amicus brief supporting the fees.

A recent Empire Center for Public Policy report says New York government unions collected $862 million of dues and fees in 2016, which included $53 million that was automatically deducted from the paychecks of New York City and state employees who chose not to become union members. An estimated $50 million in additional agency fees came from workers in other local governments. The Manhattan Institute said it could take around five to 10 years before determining the union membership declines and the revenue impact to municipalities.


Janus v. AFSCME originated in a complaint brought by Rauner, Illinois' first-term Republican leader who has pursued what the General Assembly’s Democratic majorities have labeled an anti-union agenda.

Rauner argued the Illinois Public Relations Act requiring non-union members to pay limited “agency” or “fair share” fees to cover costs of collective bargaining and contract administration violates the First Amendment by compelling employees who don’t agree with union positions to contribute money to it.

The district court dismissed the governor as a member of the suit because he did not pay union dues and therefore lacked standing but the court allowed the suit to proceed based on the participation of several other state employees, including Mark Janus who was not a member of the union and opposed paying the fee.

The district court and the Court of Appeals for the Seventh Circuit sided with the unions, concluding they were bound by the Abood decision. The plaintiffs petitioned the high court and it agreed last year to hear the case.

Janus argues that Abood was wrongly decided because issues negotiated by public-sector unions like salaries, pensions and benefits for government employees are inherently political and therefore even limited fair share and agency fees can be applied for political purposes.

“AFSCME and the state of Illinois have not shown and cannot show that unions’ desire to keep taking money out of government workers’ paychecks is more important than the workers’ fundamental First Amendment right to choose which advocacy groups they will and won't support,” Janus attorney Jacob Huebert, of the Liberty Justice Center, said in a recent statement.

Arguing in support of the Illinois law and against overturning Abood is the union and Illinois Attorney General Lisa Madigan. Department of Central Management Services acting director Michael Hoffman is also a respondent.

“Agency fees are justified by the state’s interest in dealing with a fairly and adequately funded exclusive representative. Both Congress and this Court have long recognized that exclusive representation contributes to stable and effective labor-management relations,” the Madigan brief says.

In the Abood case, the court found a public employer whose employees were represented by a union could require non-union employees to pay union fees because they benefited from the union’s collective bargaining agreement.

The fees could only be great enough to cover the cost of the union’s activities that benefited them and they could not be used for the expression of political views, on behalf of political candidates, or toward the advancement of other ideological causes.

While conservative-leaning Supreme Courts have been reluctant to overturn established legal precedent, Fischer and Rogow believe the writing is on the wall that Abood will be overruled. That’s because of both recent actions by the high court and societal dynamics.

At the time of the Abood decision, the nation faced great labor strife and achieving labor peace provided reasoning for the decision. Such strife has dramatically eased, they said.

The justices had also previously heard in 2014 another Illinois case – Harris v. Quinn -- that argued similar questions. The court found that the employees behind the case – home health aides – should not be required to pay the fees. Because the aides were not formally state employees, the justices issued only a narrow ruling and let Abood, which dealt with government employees, stand.

The majority opinion from five of the nine justices did, however, lay the groundwork for a future challenge to Abood in suggesting the 1977 decision rested on “questionable foundations.”

The court in 2016 heard a California case – Friedrichs v. California Teachers Association -- that many believed spelled the end to Abood, but Justice Antonin Scalia died before a decision was rendered and the court deadlocked, leaving the lower court decision in place.

The addition of conservative Justice Neil Gorsuch to the court last year tilts the decision toward overturning Abood, legal and market participants following the case say.

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Court cases Government finance Public pensions Employee relations State of Illinois Illinois District of Columbia