Can Connecticut legislatively change wages, benefits, or other terms of an existing collective bargaining agreement with state employees, or does the federal Contract Clause stop it?

Plain-English summary

Speaker Aresimowicz and Majority Leader Ritter asked whether the cautions of AG Opinion 89-11 (which warned that legislation altering state employee collective bargaining agreements could violate the federal Contract Clause) still applied in 2017. The AG said yes, and walked through how federal court doctrine had evolved since 1989.

The framework is a three-step test. First, did the legislation substantially impair the contract? Wage cuts and changes to bargained-for benefits will almost always be found substantial. Second, does the law serve a legitimate public purpose? Courts treat addressing a fiscal emergency as legitimate, but the financial benefit to the state alone is not enough. Third, is the impairment reasonable and necessary? This is where most challenges win or lose. The state has to show it did not treat the impairment "on par with other policy alternatives," that no less drastic course would have worked, and that it acted reasonably in light of all the surrounding circumstances.

The Second Circuit cases cut both ways. New York's "lag-payroll" schemes in Surrogates (1991) and Condell (1993) failed because the state could have raised taxes or shifted money from other programs. Buffalo's wage freeze in Buffalo Teachers (2006) survived because the city had already tried hiring freezes, school closings, and over a thousand layoffs, and the wage freeze was both temporary and prospective. The Virgin Islands' 8% wage cut in United Steel (3d Cir. 2016) failed because the fiscal crisis was foreseeable when the contracts were signed and the government had reassured the unions during bargaining.

The bottom line for the General Assembly: alteration of existing state-employee contracts has the potential for running afoul of the Contract Clause, and any legislation needs a detailed factual record showing severe fiscal emergency, that the emergency was unforeseeable, and that no less restrictive alternative would suffice.

Currency note

This opinion was issued in 2017. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The federal Contract Clause provides that no State shall pass any law impairing the obligation of contracts. Although the clause applies to state alteration of private contracts as well, courts apply heightened scrutiny when the state is altering its own contracts, because the state then has a self-interest that could distort its judgment about necessity.

The 1989 AG opinion (Op. 89-11) addressed a proposal to alter cost-of-living adjustment provisions in state-employee CBAs to address a budget deficit. That opinion concluded the legislation could fail Contract Clause review unless three findings were made: (1) a severe financial emergency, (2) the emergency was not foreseeable when the agreements were entered, and (3) no alternative methods of meeting the fiscal crisis could substitute for the impairment.

The 2017 opinion explained how courts since 1989 had refined the framework while preserving its substance. The Second Circuit's Buffalo Teachers decision restated the three-part test as: (1) substantial impairment, (2) legitimate public purpose such as remedying a general social or economic problem, (3) means reasonable and necessary to accomplish that purpose. The third prong asks whether the state did not consider impairing the contracts "on par with other policy alternatives," whether it imposed a "drastic impairment when an evident and more moderate course would serve its purpose equally well," and whether it acted unreasonably in light of the surrounding circumstances.

On the first prong, Poole v. City of Waterbury shows that not every contract change is an impairment; if the contract itself reserves authority to modify benefits, the modification may not impair anything. But absent such a reservation, courts treat reductions in wages, working conditions, and bargained-for benefits as substantial impairments.

On the second prong, courts treat fiscal emergencies as legitimate public purposes. The cases place outer limits: the purpose cannot be "simply the financial benefit of the sovereign" or "the mere advantage of particular individuals." Within those limits there is substantial latitude.

The third prong does the heavy lifting. Surrogates struck down a lag-payroll scheme used to fund expanding the New York court system because the state could have shifted money from other programs or raised taxes, even though both options were politically unpopular. Condell struck down a similar scheme aimed at a $1 billion deficit because the deficit was not "much worse" than what Surrogates had rejected. Buffalo Teachers, in contrast, upheld a wage freeze where Buffalo had already tried hiring freezes, school closings, and 1000+ layoffs, the freeze was a temporary and prospective measure, and a state oversight board had to periodically reassess it. The Second Circuit in that case rejected the rule that taxes alone must be raised before contracts can be impaired, especially when the state had already raised taxes and further increases might worsen the problem.

The Third Circuit's United Steel decision is also instructive. The Virgin Islands imposed an 8% wage reduction to address a budget deficit. The court held the reduction was not reasonable for two independent reasons: the fiscal crisis existed and was foreseeable when the CBAs were signed, and the government had reassured unions during bargaining that it could pay the agreed wages. "Post hoc changes in contractual obligations" after the government had received the benefit of the bargain were not reasonable.

The opinion also noted a circuit split on which party bears the burden under the third prong. Buffalo Teachers arguably puts the burden on plaintiffs; Donohue v. Paterson (N.D.N.Y.) put it on defendants.

The AG identified seven fact-specific inquiries that determine outcomes: (1) severity of the fiscal crisis, (2) nature, scope, severity and duration of the impairments, (3) extent to which the State has implemented other alternatives in the past, (4) extent to which the State has considered, studied, and made findings about other alternatives in the future, (5) whether other alternatives would be less drastic, (6) whether the problem existed or was foreseeable when the contract was negotiated, and (7) the State's conduct and representations when negotiating the contract. The seventh factor, drawn from United Steel, makes labor-bargaining records part of the constitutional inquiry.

Common questions

Did the AG say a specific Connecticut budget proposal was unconstitutional?

No. The opinion was carefully framed to articulate general standards, not to evaluate any specific proposal. The AG noted in a footnote that the office had not assessed the constitutionality of any particular budget proposal nor analyzed whether the State could unilaterally alter wages or benefits governed by expired CBAs.

What kind of fiscal emergency is severe enough?

Condell held that a $1 billion deficit was not severe enough. Buffalo Teachers held that Buffalo's spiraling budget deficit, combined with extensive prior cost-cutting measures, was severe enough. The line is fact-specific. The takeaway is that "we have a deficit and need to balance the budget" is not, by itself, sufficient.

Can the state always raise taxes instead?

Not according to Buffalo Teachers. The Second Circuit there explicitly rejected the argument that the Contract Clause requires tax increases as the only response to a fiscal emergency, especially when the state has already raised taxes. Surrogates and Condell, however, treated the availability of tax increases as a reason to invalidate impairments. The cases are in tension and outcome turns on the severity of the crisis and the breadth of alternatives already tried.

What about expired CBAs?

The opinion expressly disclaimed any analysis of expired contracts. Different rules apply to expired collective bargaining agreements (where in many jurisdictions an employer may unilaterally implement its last best offer) and the Contract Clause analysis would not necessarily extend.

Does this affect bargained pension or retirement benefits?

Poole v. City of Waterbury shows that vested-benefit modifications can survive if the contract itself permits them and if the modified benefits remain "reasonably commensurate" with prior benefits. The Contract Clause analysis still applies, but the first-prong analysis (substantial impairment) is more contract-specific.

Citations

Constitutional and statutory authority

• U.S. Const. art. I, § 10, cl. 1 (Contract Clause)

Cases

• Buffalo Teachers Fed'n v. Tobe, 464 F.3d 362 (2d Cir. 2006) (wage freeze upheld; three-part test)
• Ass'n of Surrogates & Supreme Court Reporters v. New York, 940 F.2d 766 (2d Cir. 1991) (lag payroll struck down)
• Condell v. Bress, 983 F.2d 415 (2d Cir. 1993) (lag payroll struck down; $1B deficit not severe enough)
• Poole v. City of Waterbury, 266 Conn. 68 (2003) (modification of vested benefits permitted where contract reserved authority)
• United Steel Paper & Forestry Workers v. Gov't of Virgin Islands, 842 F.3d 201 (3d Cir. 2016) (8% wage cut struck down)
• United Auto., Aerospace, Agr. Implement Workers v. Fortuno, 633 F.3d 37 (1st Cir. 2011) (burden of proof split)
• Donohue v. Paterson, 715 F. Supp. 2d 306 (N.D.N.Y. 2010) (burden on defendants)
• In re Subway-Surface Supervisors Ass'n v. NYC Transit Authority, 44 N.Y.2d 101 (1978)

Prior AG opinion

• Conn. AG Op. No. 89-11 (May 9, 1989) (cost-of-living adjustment changes)

Source

• Landing page: https://portal.ct.gov/AG/Opinions
• Original PDF: https://portal.ct.gov/-/media/ag/opinions/2017/2017-06_opinion_aresimowicz_ritter-pdf.pdf?rev=ef0810219b434256bea5ee8b57cb18a7

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

GEORGE JEPSEN
ATTORNEY GENERAL

55 ELM STREET
P.O. BOX 120
HARTFORD, CT 06141-0120

Office of the Attorney General (860) 808-5319

State of Connecticut

July 27, 2017

The Honorable Joe Aresimowicz
Speaker of the House of Representatives
State House of Representatives
State Capitol
Hartford, CT 06106

The Honorable Matthew Ritter
House Majority Leader
State House of Representatives
State Capitol
Hartford, CT 06106

Dear Speaker Aresimowicz and Majority Leader Ritter:

You have requested an opinion about whether the legal principles and cautions set forth in Attorney General Opinion No. 89-11, 1989 WL 505894 (May 9, 1989) ("Opinion 89-11") concerning the constitutionality of legislative enactments altering the provisions of collective bargaining agreements between the State and its employees remain in force today. Although subsequent cases have further developed the law, we conclude that the principles and cautions expressed in Opinion 89-11 continue to apply.

In Opinion 89-11, this Office addressed the question of whether proposed changes to cost of living adjustment provisions in collective bargaining agreements between the State and its employees would violate state or federal law. Although no state or federal statute prohibited such changes, we concluded that such legislation might run afoul of the Contract Clause of the federal constitution in some circumstances.

In reaching that conclusion, we noted that "the Contract Clause limits the power of the states to modify their own contracts as well as to regulate those between private parties," and that "a greater degree of judicial scrutiny will be applied to the impairment of the state's own contracts." Opinion 89-11 at 1. We identified several factors that courts consider to determine whether such legislation violates the Contract Clause, including: (1) the severity of the impairment, id. at 2-3; (2) whether the State has an important and legitimate public purpose for the impairment, id. at 3; and (3) whether the impairment at issue is reasonable and necessary to achieve that public purpose. Id. at 4-6.

Applying those principles, we opined that a decrease in the cost of living adjustment provisions in the State's collective bargaining agreements would impair those agreements, and that such an impairment likely would be deemed substantial. Id. at 1-3. We further opined that the stated purpose of the legislation to alleviate the State's anticipated budget deficit likely would constitute an important public purpose. Id. at 3.

Turning to the third prong of the analysis, whether the impairment is reasonable and necessary, we first noted "that the application of the tests of necessity and reasonableness requires a much greater degree of judicial scrutiny in cases involving legislation which purports to abrogate a state's own financial obligation, than in cases involving an impairment by the state of contracts between private parties." Id. at 4 (emphasis in original). We stated that the question of "'reasonableness' requires a determination of whether relevant circumstances have changed from the time the contract was made to the present, and whether this change was foreseeable at the time the contract was entered into." Id. We further stated that the "necessity" component requires analysis of: (1) whether a less drastic modification of contractual obligations would have been sufficient to accomplish the state's purposes; and (2) whether the state could have achieved its goals through alternative means, such as tax increases or reducing costs in other state programs. Id. We noted that courts that have applied these standards in the past have struck down legislation that is intended to remedy a state's fiscal crisis by denying contractually guaranteed salary increases. Id. at 4-6.

Based on the foregoing, we advised that "the legislature will need substantial justification . . . for any denial of salary increments promised in collective bargaining agreements." Id. at 6. More specifically, we advised that, "prior to the adoption of any such legislation, [the General Assembly] should engage in a detailed analysis of the surrounding circumstances and come to the conclusion that all of the following facts exist: (1) that there is a severe financial emergency, (2) that this emergency was not foreseeable when the collective bargaining agreements at issue were entered, and (3) that there are no alternative methods of meeting the fiscal crisis that constitute less of an impairment of contract obligations." Id. at 1.

The legal principles under the Contract Clause have not significantly changed since 1989, although several cases have applied those principles in different factual contexts, with varying results.

Consistent with the advice in Opinion 89-11, courts continue to ask three questions when confronted with Contract Clause challenges to legislative impairments of a contract: "(1) is the contractual impairment substantial and, if so, (2) does the law serve a legitimate public purpose such as remedying a general social or economic problem and, if such purpose is demonstrated, (3) are the means chosen to accomplish this purpose reasonable and necessary." Buffalo Teachers Fed'n v. Tobe, 464 F.3d 362, 368 (2d Cir. 2006).

With regard to the first prong of the analysis, not all modifications of contractual benefits will impair a contract, and whether a particular modification constitutes an impairment will depend on the specific language of the contract at issue and of the legislation that modifies it. See generally Poole v. City of Waterbury, 266 Conn. 68, 99-107 (2003) (upholding modification of vested benefits because contract language permitted government to modify benefits, and because the benefits provided under the modified plan were "reasonably commensurate" with the benefits that retirees previously had enjoyed). That being said, courts generally have held that legislative reductions in wages, working conditions and other contractually bargained for benefits constitute a substantial impairment of the contract. See, e.g., Buffalo Teachers, 464 F.3d at 368. Thus, legislative changes materially diminishing collectively bargained guarantees on working conditions and benefits would likely be deemed to substantially impair contracts.

With regard to the second prong, "[a] legitimate public purpose is one aimed at remedying an important general social or economic problem rather than providing a benefit to special interests." Id. (quotation marks omitted). Although that purpose "may not be simply the financial benefit of the sovereign" or "the mere advantage of particular individuals," courts frequently have held that "the legislative interest in addressing a fiscal emergency is a legitimate public interest." Id. at 368-69. Based on your letter, we assume that the budget proposals at issue are intended to advance such a public purpose.

With regard to the third prong, for an impairment of a government contract to be reasonable and necessary "it must be shown that the state did not (1) 'consider impairing the . . . contracts on par with other policy alternatives' or (2) 'impose a drastic impairment when an evident and more moderate course would serve its purpose equally well,' nor (3) act unreasonably 'in light of the surrounding circumstances.'" Id. at 371 (quotation marks omitted). Although this standard is relatively easy to state, it is more difficult to apply.

For example, in Ass'n of Surrogates & Supreme Court Reporters Within City of N.Y. v. State of N.Y., 940 F.2d 766, 769 (2d Cir. 1991), New York faced a budget deficit at the same time that it wanted to expand its court system. It therefore imposed a "lag-payroll scheme" that would have "finance[d] an expansion of its court system by deferring the wages of certain court employees contrary to their collective bargaining agreements." Id. at 768. New York argued that such impairments were reasonable and necessary because they were only temporary and prospective measures, and because the alternatives, not hiring new judges or cutting court programs, would have exacerbated the crisis in the court system. Id. at 773. The Second Circuit flatly rejected those arguments, and held that the impairments were not "essential" because New York could have shifted money from other government programs, or alternatively, could have simply raised taxes. Id. While the court acknowledged that such alternatives would not be politically popular, that was not an excuse for impairing the contracts in that case. Id.

The Second Circuit invalidated a similar "lag payroll" scheme in Condell v. Bress, 983 F.2d 415 (2d Cir. 1993). In that case, New York sought to reduce a more than $1 billion budget deficit by imposing a lag payroll scheme for executive branch employees. Id. at 417. New York admitted that it had alternative options, including raising taxes or laying off more employees, but asserted that it had considered and rejected those alternatives as "unwise fiscal policy" that "would cause further damage to the state's competitive position vis-a-vis other states or have unacceptable adverse impacts on state programs and employees." Id. (quotation marks omitted). In holding that the impairments were unconstitutional, the court acknowledged that impairments of state employee contracts might be permissible in "extreme crises," but held that such crises must be "much worse" than the $1 billion deficit that New York faced. Id. at 420. Because that $1 billion budget crisis was not sufficiently severe, and because "other (albeit unpopular) alternatives existed," the court held that the impairments were not reasonable or necessary.

In contrast to Surrogates and Condell, the Second Circuit upheld legislative impairments of government contracts in Buffalo Teachers. In that case, the City of Buffalo confronted a severe and spiraling budget deficit, and a state oversight board therefore imposed wage freezes on City employees that conflicted with the terms of their collective bargaining agreement. Buffalo Teachers, 464 F.3d at 365-67. Although the Second Circuit noted that the wage freeze substantially impaired the employees' contract, it held that the freeze was reasonable and necessary to address the State's legitimate public purpose of ensuring the City's fiscal stability.

In reaching that conclusion, the court emphasized that "[t]he legislature and Board did not treat the wage freeze on par with other policy alternatives," and instead allowed the wage freeze only as "a last resort" and only after a finding had been made that it "was essential to maintenance of the City's budget." Id. at 371. The court emphasized that the government previously had attempted other alternatives, including a hiring freeze, school closings, and more than 1000 layoffs. Id. The court concluded that imposing more of those alternatives would have been a more drastic solution to the problem than the wage freeze. Id. In addition, the court emphasized that the nature and scope of the impairment, a temporary and prospective wage freeze that did not impact past salaries for labor already rendered, and which the board had to periodically reassess, demonstrated that the impairment was reasonable and tailored to the State's goal of ensuring the City's fiscal stability. Id. at 371-72.

Notably, the court rejected the argument that the wage freeze "was unnecessary because other alternatives existed." Id. at 372. The court stated that "it is always the case that to meet a fiscal emergency taxes conceivably may be raised." Id. But the court held that the Contract Clause does not require "that a legislature's only response to a fiscal emergency is to raise taxes," especially when the government already has increased taxes and when further increases might exacerbate the problem. Id. (emphasis in original). The court therefore declined to "second-guess" the legislature's choice about how to deal with the fiscal crisis it confronted. Id.

Buffalo Teachers appears to be in tension with Surrogates and Condell. Buffalo Teachers distinguished those cases by emphasizing that in Condell and Surrogates there was a question about whether there was a sufficiently dire fiscal emergency to justify the impairment of contracts, or whether the impairments were instead simply matters of "political expediency" that could and should have been addressed in different ways. Id. at 373. In Buffalo Teachers, by contrast, there was no dispute that the nature and extent of the fiscal crisis rose to the level of an emergency. The court thus held that the case was more akin to In re Subway-Surface Supervisors Association v. New York City Transit Authority, 44 N.Y.2d 101 (1978), which upheld analogous contractual impairments. See Opinion 89-11, at 5.

Finally, in United Steel Paper & Forestry Rubber Mfg. Allied Indus. & Serv. Workers Int'l Union AFL-CIO-CLC v. Gov't of Virgin Islands, 842 F.3d 201, 204-05 (3d Cir. 2016), the Virgin Islands attempted to address a budget deficit by imposing an 8% reduction in government employee wages, in violation of their collective bargaining agreements. The Third Circuit held that the reductions substantially impaired the contracts, that the government had a legitimate purpose for imposing the impairment, and assumed without deciding that the reductions were necessary to achieve the government's legitimate goals. Id. at 210-13. However, the court concluded that the reductions were not reasonable for two reasons.

First, the court concluded that the impairment was not reasonable because the fiscal crisis existed and was foreseeable when the government negotiated and entered into the collective bargaining agreements. Id. at 213-14. The fact that the crisis worsened after the collective bargaining agreements were approved did not change the court's conclusion, since "the Government knew it was facing severe budget deficits and that the financial condition of the Virgin Islands was precarious. That the budget deficit projections grew and the financial condition became increasingly dire is not a change in the kind of problem that VIESA sought to solve. It is a change in degree." Id. at 214.

Second, the court was "troubled by the assurances made to Union representatives during the negotiations," and in particular, the government's representations that it could and would pay for the wages it agreed to in exchange for concessions that the unions accepted as part of the agreement. Id. at 214-15. Because "the Government chose the politically expedient route of reducing wages after it had received its benefit of the bargain" instead of "honoring [its] promise or never making it in the first place," the court concluded that the "post hoc changes in contractual obligations" were not reasonable. Id. at 215.

As the cases discussed above reflect, whether a legislative impairment of collective bargaining agreements between the State and its employees will survive scrutiny under the Contract Clause is a difficult question that will depend on a number of factors. Chief among them are a variety of fact-specific inquiries about the circumstances surrounding the impairments, including but not limited to: (1) the severity of the fiscal crisis; (2) the nature, scope, severity and duration of the impairments; (3) the extent to which the State has attempted to implement other alternatives in the past; (4) the extent to which the State has considered, studied and made findings about the feasibility of adopting other alternatives in the future; (5) whether adopting other alternatives would be a less drastic remedy than the impairments at issue; (6) the extent to which the problem that the impairment is intended to address existed, or was foreseeable, when the State negotiated and entered into the contract; and (7) the State's conduct and representations when negotiating the contract.

Ultimately, to the extent that the budget proposals that you identify in your letter impair existing contracts between the State and its employees, those impairments would raise substantial constitutional questions under the Contract Clause. It is difficult to predict with any certainty how a court would likely rule if presented with a constitutional challenge, given the need for a careful and detailed factual analysis of any specific proposal and the circumstances of its enactment. Accordingly, we reaffirm the caution expressed in Opinion 89-11 that the alteration of existing contracts between the State and its employees has the potential for running afoul of the constitutional standards under the Contract Clause.

We trust that this is responsive to your question.

GEORGE JEPSEN
ATTORNEY GENERAL