United Steel Paper and Forestr v. Government of the Virgin Islan , 842 F.3d 201 ( 2016 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
No. 14-4357
______
UNITED STEEL PAPER AND FORESTRY RUBBER
MANUFACTURING ALLIED INDUSTRIAL AND
SERVICE WORKERS INTERNATIONAL UNION AFL-
CIO- CLC,
Appellant
v.
GOVERNMENT OF THE VIRGIN ISLANDS;
GOVERNOR OF THE VIRGIN ISLANDS;
ANGEL DAWSON, Finance Commissioner;
DEBRA GOTTLIEB, Director of Management and Budget
______
No. 14-4358
______
ST. CROIX FEDERATION AFT LOCAL 1826;
ROSA SOTO-THOMAS,
Appellants
v.
GOVERNOR OF THE VIRGIN ISLANDS; VI COMM. OF
FINANCE ANGEL DAWSON, JR.; DIR. OF VIOMB
DEBRA GOTTLIEB; 29TH LEGISLATURE OF THE
VIRGIN ISLANDS; VIRGIN ISLANDS DEPARTMENT
OF EDUCATION; GOVERNMENT OF THE VIRGIN
ISLANDS
On Appeal from the District Court
of the Virgin Islands
(D.V.I. No. 3-11-cv-00076)
(D.V.I. No. 3-11-cv-00079)
District Judge: Honorable Curtis V. Gomez
______
Argued: December 8, 2015
Before: FISHER, KRAUSE and ROTH, Circuit Judges.
(Filed: November 15, 2016)
Nathan L. Kilbert, Esq. [ARGUED]
Daniel M. Kovalik, Esq.
United Steelworkers of America
Five Gateway Center
60 Boulevard of Allies, Room 807
Pittsburgh, PA 15222
Counsel for Appellant United Steel Paper
and Forestry Rubber Manufacturing Allied Industrial
and Service Workers International Union AFL-CIO-
CLC
Amos W. Carty, Jr., Esq.
Law Offices of Richard P. Bourne-Vanneck
2
9800 Buccaneer Mall, Suite 9
St. Thomas, VI 00802
Counsel for Appellant St. Croix Federation AFT Local
1826 and Rosa Soto-Thomas
Joss N. Springette, Esq.
Office of Collective Bargaining
3438 Kronprindsens Gade, Second Floor
St. Thomas, VI 00802
Samuel A. Walker, Esq. [ARGUED]
Office of Attorney General of Virgin Islands
6040 Castle Coakley
Christiansted, VI 00820
Counsel for Appellees
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
In 2011, the Virgin Islands faced a severe budget crisis
as a result of the economic recession. In response to this
crisis, the Government of the Virgin Islands enacted the
Virgin Islands Economic Stability Act of 2011 (“VIESA”),
3
2011 V.I. Sess. Laws 84, which reduced most Government
employees’ salaries by 8%. Many of the Government
employees, however, were covered by collective bargaining
agreements negotiated on their behalf by their representative
unions. The collective bargaining agreements, agreed to and
signed by the Governor on behalf of the Government, set
forth detailed salary and benefit schedules to be paid to
covered Government employees.
The unions brought suit alleging that the salary
reductions in VIESA constituted an impermissible
impairment of the collective bargaining agreements, in
violation of the Contract Clause of the United States
Constitution. The District Court, after a bench trial, held that
VIESA did not violate the Contract Clause. We will reverse.
I.
A.
Beginning in 2009, the Virgin Islands experienced a
fiscal crisis: for the fiscal year 2009, the Government
projected a budget deficit in excess of $300 million; in 2010,
the deficit was $275 million; in 2011, after initially predicting
a small surplus, a revised report projected a $75.1 million
deficit for 2011 and a $131.5 million deficit for 2012. On
February 22, 2010, Debra Gottlieb, from the Government’s
Office of Management and Budget, testified before the Virgin
Islands Legislature. She warned the Legislature of the
financial crisis, stating that “the territory’s cash balances are
precariously low,” App. 321, 328, and that the operating
deficit for fiscal year 2009 was estimated to be $159 million.
She predicted that the operating deficit would continue
throughout fiscal year 2011.
4
As an initial response to the crisis, on June 5, 2009,
the Virgin Islands Legislature authorized the Governor to
borrow up to $500 million. Despite borrowing, the situation
continued to worsen, and so from December 30, 2010, to June
21, 2011, the Government undertook additional measures to
combat the deficit. It imposed a marine terminal user’s tax of
$1 per cruise ship passenger; reduced appropriations to the
executive branch by 3%, or $17.7 million; reduced
appropriations to the judicial branch by 3%, or $1.1 million;
increased the tax on all gross receipts from 4% to 4.5%;
increased the hotel tax from 8% to 10%; increased marriage
licensing fees, liquor-licensing fees, court filing fees, fines for
traffic violations, and the motor-vehicle rental surcharge; and
reduced its expenditures related to its employment functions,
including limiting energy consumption, freezing all hires, and
cutting back on training and travel.
Notwithstanding these measures, the Government
projected a deficit of $17.4 million for 2011, $90.1 million for
2012, and $49.9 million for 2013. In response, the
Government considered implementing several additional cost-
cutting measures, including laying off 600 Government
employees, eliminating some or all of the eighteen paid
Government holidays, instituting furloughs and workweek
reductions for Government employees, and increasing the
gross-receipts tax. By June 21, 2011, the Governor had
exhausted his $500 million statutory borrowing authorization,
and the Government had made only interest payments on its
debt.
B.
The Government ultimately rejected these cost-cutting
measures, and instead adopted VIESA. Under VIESA, all
employees of the executive and legislative branches of the
Government whose annual salary exceeded $26,000 would
5
receive an 8% reduction in pay, but no employee’s salary
would be reduced below $26,000. The legislation also
allowed any employee who had attained thirty years or more
of service to retire and receive a one-time payment. As a
result of VIESA, the Government projected savings of
approximately $28 million annually. VIESA passed the
Legislature on June 22, 2011, and was signed into law by the
Governor on July 5, 2011. The salary reductions contained in
VIESA expired on July 3, 2013.
C.
Many of the affected union employees were subject to
collective bargaining agreements. Relevant for our purposes,
the Appellants—United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service
Workers International Union (“USW”), the American
Federation of Teachers Local 1826 (“AFT”), and one of
AFT’s vice presidents (collectively, the “Unions”)—had
negotiated collective bargaining agreements on their
members’ behalf.
USW is party to four collective bargaining agreements:
a Master agreement, which covers all 1,000 employees and
became effective on October 1, 2009; a Supervisors
agreement, effective on October 1, 2005 and set to expire on
September 30, 2008, but later extended on a day-to-day basis;
a Non-Supervisors agreement, effective on October 1, 2008;
and an Enforcement Officers agreement, effective on October
1, 2009. The Master and Non-Supervisors agreements were
concluded in October 2010.
The USW collective bargaining agreements set forth
detailed payment schedules that specify the wages or salaries
and benefits for all of the employees covered in the
agreements. The Master agreement called for a 2.5% pay
increase from the previous year. The USW Supervisors, Non-
6
Supervisors, and Enforcement Officers collective bargaining
agreements provide that the Government may reduce the
workforce through layoffs; they also provide that the member
employees will not strike during the duration of the
agreement. Those three agreements further set forth grievance
and arbitration procedures that allow for adjudication of any
dispute. The Non-Supervisors and Enforcement Officer
agreements provide that no modification to the agreement is
effective unless agreed to in writing by both USW and the
Government; the Supervisors agreement states that the parties
are bound by the agreement and will comply with all terms
and conditions in the agreement.
AFT is party to three collective bargaining
agreements—one for each type of employee it represents:
professionals, paraprofessionals, and support staff. All three
collective bargaining agreements were effective September 1,
2007, and set to expire on August 31, 2011, but have been
extended on a day-to-day basis. These collective bargaining
agreements were concluded in May 2009, but they were made
retroactively effective from September 1, 2007.
Like the USW agreements, the AFT collective
bargaining agreements set forth detailed payment plans for
wages or salaries and benefits of its members. They provide
that the employees will not strike for the duration of the
agreement, and they set forth arbitration procedures for any
dispute involving the collective bargaining agreements. All of
the AFT agreements require that any modification be in
writing and agreed to by all parties.
D.
Shortly after VIESA’s enactment, USW, AFT, and
other collective bargaining representatives filed suit in the
District Court of the Virgin Islands, and their cases were
7
consolidated. 1 The Union-plaintiffs alleged that VIESA
violates the Contract Clause, the Fifth Amendment’s Takings
Clause, due process, equal protection, the separation-of-
powers doctrine, and 42 U.S.C. § 1983. They also alleged that
VIESA constitutes a breach of contract and a breach of the
duty of good faith and fair dealing.
On December 5, 2011, the District Court held a one-
day bench trial. It rendered its judgment on March 29, 2012.
In its opinion, the District Court first addressed the Union-
plaintiffs’ Contract Clause claim and found that, although
VIESA substantially impaired the collective bargaining
agreements, such impairment was justified and did not violate
the Contract Clause. It also held that VIESA did not violate
the Takings Clause, procedural due process, and substantive
due process. Accordingly, the District Court dismissed those
federal constitutional claims.
USW brought an appeal to this Court, which we
dismissed for lack of jurisdiction because the other Union-
plaintiffs’ territorial claims were still pending before the
District Court. On September 30, 2014, following our
dismissal of the initial appeal, the District Court dismissed all
of the territorial claims. The court also dismissed the
separation-of-powers claim because, since no injunctive or
declaratory relief could be granted as a result of VIESA’s
expiration, the claim was moot. On all the other claims,
jurisdiction was proper, but they were nonetheless dismissed.
AFT and USW timely appealed.
1
In addition to AFT and USW, several other unions
brought suit in the District Court. We refer to those plaintiffs
below as the “Union-plaintiffs.” For purposes of our case,
only AFT, AFT’s vice president, and USW appealed the
District Court’s judgment.
8
II.
We review the District Court’s findings of fact for
clear error and exercise plenary review over the District
Court’s conclusions of law. Post v. St. Paul Travelers Ins.
Co., 691 F.3d 500, 514-15 (3d Cir. 2012). The District Court
had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction
under 28 U.S.C. § 1291. 2
The Government argues that this case is moot, thus
depriving this Court of subject-matter jurisdiction. Because
Article III of the Constitution limits the jurisdiction of federal
courts to certain “Cases” or “Controversies,” U.S. Const. art.
III, § 2; see also Rendell v. Rumsfeld, 484 F.3d 236, 240 (3d
Cir. 2007), we must determine, before reaching the merits,
whether this appeal presents a justiciable case or controversy.
The constitutional requirement that the exercise of
2
We perceive no obstacle to the Unions’ suit posed by
the Eleventh Amendment because the Revised Organic Act of
the Virgin Islands—which extends constitutional provisions
to the Virgin Islands and does not expressly provide Eleventh
Amendment protection, see 48 U.S.C. § 1561—authorizes
suits against the Virgin Islands “arising out of contract,” id. §
1541(b). Thus, even if the Eleventh Amendment did apply to
the Virgin Islands—a question we do not decide today—the
Revised Organic Act indicates that Contract Clause violations
would fall outside the scope of the Amendment’s protection.
Cf. United States v. Government of Virgin Islands, 363 F.3d
276, 286-87 (3d Cir. 2004) (declining to decide whether the
Eleventh Amendment applies to the Virgin Islands); Fleming
v. Dep’t of Pub. Safety, 837 F.2d 401, 407 (9th Cir. 1988)
(concluding the Northern Mariana Islands lack Eleventh
Amendment immunity because it was not expressly conferred
upon them).
9
judicial power depends upon the existence of a case or
controversy has three elements: “(1) a legal controversy that
is real and not hypothetical, (2) a legal controversy that
affects an individual in a concrete manner so as to provide the
factual predicate for reasoned adjudication, and (3) a legal
controversy with sufficiently adverse parties so as to sharpen
the issues for judicial resolution.” Int’l Bhd. of Boilermakers
v. Kelly, 815 F.2d 912, 915 (3d Cir. 1987) (quoting Dow
Chem. Co. v. EPA, 605 F.2d 673, 678 (3d Cir. 1979)). A case
is moot when “the issues presented are no longer live or the
parties lack a legally cognizable interest in the outcome.”
County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979)
(internal quotation marks omitted). “The central question of
all mootness problems is whether changes in circumstances
that prevailed at the beginning of the litigation have
forestalled any occasion for meaningful relief.” Rendell, 484
F.3d at 240 (internal quotation marks omitted). “[I]f a case
becomes moot after the District Court enters judgment, an
appellate court no longer has jurisdiction to review the matter
on appeal.” Id. at 241.
The Government argues that this case is moot because,
since the District Court rendered its judgment, VIESA has
expired. The Unions present two bases on which, despite
VIESA’s expiration, we may reach the merits: (A) the
“capable of repetition, yet evading review” exception to
mootness applies; and (B) the case is not moot because our
decision here will affect collateral arbitration proceedings
between the same parties.
A.
A case is not necessarily moot simply because the
challenged law has expired; “if the underlying dispute
between the parties is one ‘capable [of] repetition, yet
evading review,’ it remains a justiciable controversy within
10
the meaning of Article III.” N.J. Turnpike Auth. v. Jersey
Cent. Power & Light, 772 F.2d 25, 31 (3d Cir. 1985) (quoting
Neb. Press Ass’n v. Stuart, 427 U.S. 539, 546 (1976)). The
“capable of repetition, yet evading review” exception to the
mootness doctrine applies “only in exceptional situations,
where (1) the challenged action is in its duration too short to
be fully litigated prior to cessation or expiration, and (2) there
is a reasonable expectation that the same complaining party
will be subject to the same action again.” Kingdomware
Techs., Inc. v. United States, 136 S. Ct. 1969, 1976 (2016)
(brackets and internal quotation marks omitted); see Rendell,
484 F.3d at 241.
The Unions argue that this case triggers the “capable of
repetition, yet evading review” exception because the short
duration of VIESA means that it, or similar legislation, could
never be reviewed. The continued financial problems facing
the Virgin Islands make it plausible that the Virgin Islands
will enact new wage-reduction legislation despite being party
to collective bargaining agreements.
We agree that the duration of VIESA—two years—is
too short to be fully litigated prior its expiration. That much is
clear from the procedural history of this case. The Unions
filed suit immediately after VIESA was enacted in July 2011,
and the District Court resolved the federal claims, including
the Contract Clause claim, on March 29, 2012, and the
remaining territorial claims on September 30, 2014. The
Unions timely appealed, but VIESA had expired over a year
prior to the notice of appeal.
The more difficult question is whether this case meets
the second prong of the two-part test: is there a reasonable
expectation that the Unions will be subject to the same
action? For the alleged harm to occur again, the Government
would have to pass another law calling for another round of
11
wage reductions that affects the same Union employees. But
the mere power to reenact a challenged law is not enough.
“Rather, there must be evidence indicating that the challenged
law likely will be reenacted.” Nat’l Black Police Ass’n v.
District of Columbia, 108 F.3d 346, 349 (D.C. Cir. 1997).
The Unions claim that new “wage-reduction legislation is
entirely plausible in view of the fiscal crisis facing the Virgin
Islands.” Unions’ Supp. Letter Br. 4. For example, the Unions
point to statements made by the Governor in his State of the
Territory Address that “our government is teetering on the
brink of financial collapse,” and “our territory has never been
in such a state in its history.” Id. (brackets omitted). But these
statements show only that the Virgin Islands’ economy
remains in a perilous state; they do not show that this new
wage-reduction legislation is likely to be enacted. Similarly,
the Governor’s statement that “even meeting the
government’s payroll will continue to be a challenge,” id., is
simply an observation of the financial situation facing the
Virgin Islands, not evidence that the Legislature might pass
new legislation similar to VIESA. The Unions provide no
basis on which we can determine that they could reasonably
expect to be subject to VIESA-like legislation again. Without
such evidence, we are left to speculate. That is not enough to
trigger the “capable of repetition, yet evading review”
exception to the mootness doctrine.
B.
Even if this case is not “capable of repetition, yet
evading review,” the Unions argue that it is not moot because
this Court’s decision will have collateral legal consequences,
namely, that it will affect the Unions’ rights in a pending
arbitration before the Virgin Islands Public Employee
Relations Board in which the Unions are challenging
VIESA’s wage cuts.
12
An action is not moot if it will have collateral legal
consequences. Nat’l Iranian Oil Co. v. Mapco Int’l, Inc., 983
F.2d 485, 490 (3d Cir. 1992). In National Iranian Oil, we
held that the case was not moot because, inter alia, the district
court’s order below would have possible collateral legal
consequences in the form of collateral estoppel in future
actions. Id. National Iranian Oil had petitioned the district
court to compel arbitration of a contract dispute with Mapco.
The district court dismissed National Iranian Oil’s petition as
untimely based on its holding that the three-year Delaware
statute of limitations applied to the action, rather than the ten-
year Iranian statute of limitations urged by National Iranian
Oil, who had filed its petition six years after the relevant
events. In response to this decision, National Iranian Oil filed
two additional lawsuits in other federal district courts for the
same breach of contract claim for which it sought arbitration.
Because the “district court’s holding that the Iranian statute of
limitations does not apply would have a collateral estoppel
effect in those actions and could result in their dismissal,” we
held that the action was not moot. Id.
Likewise, in our case, the District Court’s holding that
VIESA does not violate the Contract Clause will have
collateral legal consequences on the binding arbitration
between the Unions and the Government, which is set to take
place before the Public Employee Relations Board. In the
arbitration, the Unions allege that the Government failed to
pay the covered employees their full wages and salaries due
to them. The arbitrator’s decision will likely depend on the
validity of VIESA. But the Public Employee Relations Board
may not adjudicate the constitutionality of VIESA because it
lacks the authority to do so. As a result, a decision here is
necessary to provide a preclusive effect in the binding
13
arbitration. 3 Therefore, the case is not moot, and we may
proceed to the merits.
III.
The Contract Clause provides that no State shall pass
any law “impairing the Obligation of Contracts.” U.S. Const.
art. I, § 10. 4 Although the Clause speaks in absolute terms, it
is not “the Draconian provision that its words might seem to
imply.” Allied Structural Steel Co. v. Spannus, 438 U.S. 234,
240 (1978). The Contract Clause “does not prevent the State
from exercising such powers as are vested in it for the
promotion of the common weal, or are necessary for the
general good of the public,” even though contracts previously
entered into may be affected. Id. at 241 (internal quotation
marks omitted). Thus, the Contract Clause “does not trump
the police power of a state to protect the general welfare of its
citizens.” Buffalo Teachers Fed’n v. Tobe, 464 F.3d 362, 367
(2d Cir. 2006).
The Supreme Court has developed a three-part analysis
“for harmonizing the command of the Clause with the
necessarily reserved sovereign power of the states to provide
for the welfare of their citizens.” Balt. Teachers Union v.
Mayor & City Council of Balt., 6 F.3d 1012, 1015 (4th Cir.
1993) (internal quotation marks omitted). To determine
whether legislation violates the Contract Clause, this Court
must analyze whether the law has operated as a substantial
3
The Government and Unions both agreed to stay the
arbitration pending the outcome of this appeal.
4
The Contract Clause was made applicable to the
Virgin Islands in 1954 through section 3 of the Revised
Organic Act of the Virgin Islands, 48 U.S.C. § 1561. See
West Indian Co. v. Government of Virgin Islands, 844 F.2d
1007, 1016 (3d Cir. 1988).
14
impairment of a contractual relationship; whether the
government entity, in justification, had a significant and
legitimate public purpose behind the regulation; and whether
the impairment is reasonable and necessary to serve this
important public purpose. See Energy Reserves Grp., Inc. v.
Kan. Power & Light Co., 459 U.S. 400, 411-13 (1983);
Nieves v. Hess Oil V.I. Corp., 819 F.2d 1237, 1243 (3d Cir.
1987).
A.
The Government conceded before the District Court
that the collective bargaining agreements entered into with
the Unions constitute contractual relationships and that, if any
impairment of the contractual relationship existed, such
impairment was substantial. App. 32. Therefore, for our
purposes, we must decide only whether VIESA impaired the
collective bargaining agreements. We have no trouble
concluding that it did.
To assess whether there has been an impairment of a
contractual relationship, we ask whether legitimate
expectations have been thwarted. See Transp. Workers Union
of Am., Local 290 ex rel. Fabio v. Se. Pa. Transp. Auth., 145
F.3d 619, 622 (3d Cir. 1998). The collective bargaining
agreements set forth detailed payment and benefits schedules
at which the Union employees were to be compensated. The
Government agreed to the collective bargaining agreements
and had already approved the appropriations to pay those
salaries. In exchange for the agreed-upon salaries, the Union
employees made various concessions, including their right to
strike. In return for those concessions, the Union employees
expected that they would receive the salary provided for in
the collective bargaining agreements. See Buffalo Teachers
Fed’n, 464 F.3d at 368 (“The promise to pay a sum certain
constitutes not only the primary inducement for employees to
15
enter into a labor contract, but also the central provision upon
which it can be said they reasonably rely.”). 5
Moreover, the collective bargaining agreements
provided that they could not be modified without mutual
assent. As a result, the Government lacked the unilateral
power to alter the employees’ salaries. The Union employees’
expectation that they would receive the benefit of their
bargain without unilateral modification by the Government
was therefore a reasonable expectation. Compare Transp.
Workers, 145 F.3d at 622 (holding that, because the
government retained the power to modify the contracts
without the plaintiffs’ agreement, the plaintiffs had no
reasonable expectations that could be thwarted), with Balt.
Teachers Union, 6 F.3d at 1015 (“Only if the employees’
salaries were subject to unilateral adjustment by the City
under the terms of the contract could it possibly be concluded
[that there was no impairment of the contracts at issue].”).
We therefore find that VIESA impaired the collective
bargaining agreements. Because the Government stipulated
5
Other courts have consistently found that contracts
were impaired where compensation levels called for in the
contracts were reduced. E.g., Balt. Teachers Union, 6 F.3d at
1018 (finding that “[i]n the employment context, there likely
is no right … more central to the contract’s inducement” than
the right to compensation, and holding that salary reductions
constituted a substantial impairment); Condell v. Bress, 983
F.2d 415, 419 (2d Cir. 1993) (holding that a payroll lag
whereby union employees were paid 90% of their salary and
received the withheld 10% of their pay at the termination of
their employment constituted a substantial impairment); Ass’n
of Surrogates & Supreme Court Reporters v. New York, 940
F.2d 766, 772 (2d Cir. 1991) (same).
16
that, should we find the collective bargaining agreements
were impaired, such impairment was substantial, the first
prong of the three-part test is met.
B.
Because we find that VIESA substantially impaired the
collective bargaining agreements, we must next determine
whether the Government had a significant and legitimate
public purpose in enacting VIESA. A legitimate public
purpose is one aimed at remedying a broad and general social
or economic problem; it need not be addressed to an
emergency or temporary situation. See Energy Reserves Grp.,
459 U.S. at 411-12. The record in this case is replete with
evidence that the Virgin Islands faced an immediate fiscal
problem that needed to be addressed, and the Unions do not
dispute that VIESA was enacted to address this significant
and legitimate public purpose.
C.
That VIESA was aimed at a significant and legitimate
public purpose does not end our inquiry. Once a legitimate
public purpose has been identified, we must then decide
whether the impairment is both necessary and reasonable to
meet the purpose advanced by the Government in
justification. See U.S. Trust Co. v. New Jersey, 431 U.S. 1, 22
(1977) (“Legislation adjusting the rights and responsibilities
of contracting parties must be upon reasonable conditions and
of a character appropriate to the public purpose justifying its
adoption.”); N.J. Retail Merchs. Ass’n v. Sidamon-Eristoff,
669 F.3d 374, 386 (3d Cir. 2012) (“[T]he court must ascertain
‘whether the adjustment of the rights of the parties to the
contractual relationship was reasonable and appropriate in
light of that purpose.’” (quoting Transp. Workers, 145 F.3d at
621)).
When determining whether legislation is necessary and
17
reasonable, the State is ordinarily entitled to deference in its
legislative judgment. However, when the State itself is a
contracting party, “complete deference to a legislative
assessment of reasonableness and necessity is not appropriate
because the State’s self-interest is at stake.” U.S. Trust, 431
U.S. at 26. If we afforded complete deference to the State in
such a case, “a State could reduce its financial obligations
whenever it wanted to spend the money for what it regarded
as an important public purpose, [and] the Contract Clause
would provide no protection at all.” Id. For this reason, when
a State is a contracting party, its “legislative judgment is
subject to stricter scrutiny than when the legislation affects
only private contracts.” Nieves, 819 F.2d at 1249. Despite our
more exacting scrutiny, some deference is appropriate, and
the inquiry becomes “whether a less drastic modification
would be sufficient and whether the legislation was
reasonable in light of changed circumstances.” Keystone
Bituminois Coal Ass’n v. Duncan, 771 F.2d 707, 717 (3d Cir.
1985).
1.
We first consider whether VIESA was necessary. To
determine whether the impairment was necessary, our task is
two-fold. First, we must ensure that the Government did not
“consider impairing the obligations of [its] contracts on a par
with other policy alternatives.” Balt. Teachers Union, 6 F.3d
at 1020 (quoting U.S. Trust, 431 U.S. at 30-31). Second, we
must consider whether the Government imposed a drastic
impairment when an “evident and more moderate course
would serve its purposes equally well.” Id. (quoting U.S.
Trust, 431 U.S. at 31).
We have reason here to be concerned that the
Government considered impairing the collective bargaining
agreements on a par with other policy alternatives. While the
18
Government clearly implemented the various measures
described above in an attempt to raise revenue and alleviate
the effects of the fiscal crisis before it implemented VIESA
and the record reflects it considered some additional measures
as alternatives to VIESA, the record also indicates that
Government officials did not place impairment of the
agreements in a category separate from other policy options.
For example, Debra Gottlieb testified that the Governor’s
economic policy team gave no “special consideration” to
policy options that would not alter the agreements, but rather
“considered all options available to the Government.” App.
869; see also App. 938 (Member of Governor’s economic
team indicating the Government never even considered
eliminating tax breaks before pursuing VIESA, thereby
placing contractual impairment above other policy options.).
There is also reason for concern here that, as the
Unions claim, the Government imposed a more drastic
impairment than was necessary. The Unions argue, for
example, that the Government could have laid off 600
Government employees, resulting in $30 million of savings;
furloughed some employees using the layoff provisions in the
collective bargaining agreement; and reduced the number of
paid Government holidays. Tax increases and renegotiation
of the collective bargaining agreements present other
alternatives the Government could have explored and,
perhaps, discarded after thoughtful review. See, e.g., U.S.
Trust, 431 U.S. at 30 n.29, 32 (raising the possibility that tax
increases could have been used to avoid impairing a contract);
Sidamon-Eristoff, 669 F.3d at 388 (considering policies used
in other States as potential alternatives). In dismissing the
Unions’ policy alternatives, the District Court observed that
proposals such as additional taxing, borrowing, furloughs,
and layoffs could have resulted in a greater net reduction in
19
pay for Government employees, while at the same time
reducing the Government’s ability to provide basic services.
App. 49-51. The absence of any feasibility studies, which it
appears were not commissioned by the Government, not only
deprives us of any meaningful way to corroborate the District
Court’s assessment, but also reinforces our concern that the
Legislature indeed may have imposed a more drastic
impairment than necessary and may not have adequately
considered alternatives before impairing its contractual
obligations.
That said, these are close and difficult decisions for
any legislature to make in the face of a financial crisis, and
VIESA provides a close case as to the necessity inquiry. The
courts are tasked with assessing the necessity of a given
impairment and do not accord legislatures “complete
deference,” U.S. Trust, 431 U.S. at 26—particularly where, as
here, a State or territory is itself a party to the contract it seeks
to abrogate. But the Contract Clause also “does not require
the courts … to sit as superlegislatures,” choosing among
various options proposed by plaintiffs, as “we [are] ill-
equipped even to consider the evidence that would be relevant
to such conflicting policy alternatives.” Balt. Teachers Union,
6 F.3d at 1021-22.
Fortunately, we need not decide today whether—
despite our concerns—VIESA was necessary because, as
explained below, we conclude it was unreasonable, which is
alone sufficient to render it improper under the Contract
Clause. Thus, for purposes of this analysis, we assume
without deciding that VIESA was necessary and move on to
consider its reasonableness.
2.
Even assuming VIESA was necessary, the
Government is not entitled to impair its contracts at will. The
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Contract Clause is not toothless. In addition to being a
necessary impairment, any impairment must also be
reasonable, and it “is not a reasonable one if the problem
sought to be resolved by an impairment of the contract
existed at the time the contractual obligation was incurred.”
Univ. of Haw. Prof’l Assembly v. Cayetano, 183 F.3d 1096,
1107 (9th Cir. 1999) (internal quotation marks omitted); see
also U.S. Trust, 431 U.S. at 31.
In United States Trust, the Supreme Court held that
New Jersey’s impairment of its covenant was unreasonable
because, inter alia, the problem the impairment was meant to
remedy was well known when New Jersey agreed to the
covenant it impaired. 431 U.S. at 31-32. New Jersey enacted
the law at issue to repeal a covenant between itself and New
York that limited the ability of the two states to subsidize
transportation. Id. at 3, 13-14. New Jersey claimed that doing
so served an important public purpose—the need for mass
transportation in the New York metropolitan area. Id. at 29-
30. The Court, however, found that, because the need for
mass transportation had been well known for many years,
including when New Jersey entered into the covenant with
New York, changed circumstances could not justify impairing
its covenant. Id. at 31-32. Thus, the law at issue was not
reasonable, and it violated the Contract Clause.
In this case, the Government claims that VIESA was
necessary because of the economic crisis and severe budget
deficits. But to pass muster under our Contract Clause
analysis, the impairment must be reasonable, in addition to
being necessary. Even assuming VIESA was necessary to
address the economic crisis and severe budget deficits, the
Government knew of the economic crisis facing the Virgin
Islands at the time it was negotiating with the Unions and
when it concluded the collective bargaining agreements with
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USW and AFT.
As to USW, there is extensive evidence demonstrating
the Government’s knowledge of the budget crisis at the time
the Government agreed to provide a 2.5% salary increase to
USW employees—as indicated by the USW Master
agreement—on October 23, 2010. Prior to those agreements
and as early as 2009, the Government had already projected
significant budget deficits. Revenue had fallen by 30%—
more than $250 million. And on February 22, 2010, Debra
Gottlieb testified before the Legislature regarding the Virgin
Islands’ difficult financial situation. Gottlieb warned that the
Government’s “cash balances are precariously low.” App.
321. She further cautioned that “the operating deficit is
expected to continue throughout fiscal year 2011.” App. 322.
Gottlieb’s testimony expressly indicated that one possibility
for addressing the crisis was to implement “an across the
board payroll reduction that equated to a 10% salary
reduction,” which “would yield approximately $51.7 million
in expenditure reductions.” App. 325. At this point, as shown
by Gottlieb’s testimony, both the Governor—who signed the
agreements—and the Legislature—which later voted to
impair them—were fully aware from the outset that tax
revenues continued to decline, and that in order to maintain a
balanced budget, the Virgin Islands would have to
significantly increase revenue or substantially reduce
expenditures. And apart from Gottlieb’s presentation, the
Governor had already been authorized to borrow $500 million
to alleviate some of the Government’s budget shortfalls,
which were predicted for the upcoming years.
With respect to the AFT collective bargaining
agreements, although these agreements were concluded
earlier, in May 2009, the timing is nearly as suspect. In May
2009, the economic recession was in full swing. The
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Legislature initially authorized the Governor to borrow $500
million in early June 2009, only a few weeks after the
Governor signed the AFT agreements. It was obvious then
that the Virgin Islands’ budget crisis would require legislative
action. And the Government already knew that revenue had
dropped sharply. Despite its knowledge of the financial
difficulties, the Government nevertheless entered into the
collective bargaining agreements.
Even if the crisis worsened after the collective
bargaining agreements were approved, we would not alter our
conclusion. 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. Under United States Trust, this
change in degree is not enough to render the impairment
“reasonable in light of changed circumstances.” 431 U.S. at
32.
We are also troubled by the assurances made to Union
representatives during the negotiations. USW representatives,
concerned that funding would not be available for the salary
increases as a result of the financial crisis, asked the
Government’s chief negotiator if the Government would be
able to fund the agreements. He responded yes. Rather than
negotiating lower salaries with the Union employees, the
Government promised the Union employees certain wages—
even a pay increase for USW employees—in return for their
making several concessions. Instead of honoring that promise
or never making it in the first place, the Government chose
the politically expedient route of reducing wages after it had
received its benefit of the bargain. The Contract Clause is not
a dead letter, and if it is to continue to have any force, it must
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prohibit such self-serving, post hoc changes in contractual
obligations.
We do not fault the Virgin Islands Government for its
attempt to alleviate the severe budget crisis it was facing. The
financial crisis required a solution. While we afford
considerable deference to the Legislature’s decision as to
what the solution should be—even when the State (or, as in
this case, the territorial government) is a party to an impaired
contract—that deference is not absolute, nor can a
Legislature’s decision to impair a contract stand if it was
unreasonable. Here, we are asked to decide whether the
Virgin Islands’ impairment of its contracts with Union
employees was reasonable in light of the fact that it knew of
the precarious financial condition when it agreed to the
contracts. United States Trust requires that we hold that the
impairment was unreasonable. Because any impairment must
be both necessary and reasonable, the impairment here does
not survive Contract Clause scrutiny. 6
IV.
Because VIESA substantially impaired the USW and
AFT collective bargaining agreements, and such impairment
was unreasonable, we hold that VIESA violates the Contract
6
We note, however, that although VIESA substantially
impaired the collective bargaining agreements, such
impairment was not unreasonable on its face. Rather,
VIESA’s impairment of the agreements here was
unreasonable in light of the timeline of events in this
particular case. The agreements with AFT and USW were
concluded after the justification for VIESA was known to the
Government. Thus, VIESA violates the Contract Clause as
applied only to the USW and AFT collective bargaining
agreements.
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Clause as applied to those collective bargaining agreements.
Accordingly, we will reverse the District Court’s order. We
will also remand to the District Court so that it may
reconsider its holding with respect to the Unions’ territorial
claims, specifically the Public Employee Relations Act claim,
in light of this opinion.
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