The Dec. 31 expiration of New Jersey’s public safety arbitration cap is a credit negative for the state’s municipalities, according to Moody’s Investors Service.

The law, which caps public safety arbitration awards at 2%, started on Jan. 1, 2011 and was extended for a three-year period in 2014 when it was last up for renewal.

The fate of the cap rests with the state legislature and Gov.-elect Phil Murphy, who are reviewing a recent report from a commission studying the policy’s impact on property taxes, government spending, collective negotiation agreements, personnel, and crime. Murphy will be sworn in on Jan. 16, taking over from term-limited Republican Chris Christie.

Phil Murphy, a Democrat, was elected New Jersey governor on Nov. 7, 2017.
The fate of the arbitration cap will rest with New Jersey Gov.-elect Phil Murphy. Murphy for Governor

“The cap played a major role in helping local governments manage public safety costs by instituting a limit on increases in police and fire salaries in arbitration and effectively tying the salary increases to the municipality’s or county’s revenue-raising capabilities,” said Moody’s analyst Douglas Goldmacher in a report Thursday. “The cap’s expiration, should it prove permanent, is credit negative for all local governments.”

Goldmacher noted the cap’s existence has been a “valuable tool” in contract negotiations when police and firefighter unions with negotiators often forced to consider small salary increases. A September report by Christie’s appointees to the Police and Fire Public Interest Arbitration Impact Task Force stated that municipal property taxes jumped at an annual average of 7.19% for the five years prior to the cap compared to 2.41% since 2011. The report also estimated that the cap has saved taxpayers a collective $429 million.

“Given that salary costs are among the largest of municipal expenditures, the cost implications are obvious and considerable,” said Goldmacher. “Police and fire contracts often serve as a benchmark contract for other negotiations, which had the effect of making a 2% annual increase something of a standard target for most contracts, even for non-public safety collective bargaining units.”

While it is possible the cap may be reinstated, Goldmacher stressed that while it remains expired New Jersey localities face “a potentially dangerous mismatch” aligning revenue and expenditures. The cap’s expiration becoming permanent would put New Jersey local governments “in a bind”, according to Goldmacher, since a 2% property tax cap law limits their budgetary flexibility.

“The effect of this is, in most cases, unlikely to be rapid, but ultimately, the loss of the arbitration cap is likely to cause the sector’s credit quality to deteriorate,” he said. “The degree of deterioration will depend on the idiosyncratic qualities of the given community.”

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