NEW YORK--(BUSINESS WIRE)--Monday's decision by the Philadelphia School District's School Reform Commission (SRC), an independent control board, to cancel a long-expired contract with the Philadelphia Federation of Teachers (PFT) provides a compelling case study that other financially distressed municipal entities might use to reduce labor costs, according to Fitch Ratings. We believe the SRC took unusually strong action to address a large budget gap by imposing new terms on the PFT, including requiring employee contributions to maintain current healthcare coverage.
Fitch believes control boards such as the SRC can provide not only the legal ability to reduce labor costs but also the opportunity to effect changes locally elected officials cannot achieve directly due to constraints in the political environment. Pennsylvania's Act 46 grants broad powers to SRCs to manage distressed school districts. Philadelphia's SRC has been in place since 2001.
Act 46 prohibits PFT members from striking under penalty of suspension of their teaching certificates. The SRC believes the Act grants the power to cancel the existing contract and impose work rules. PSD has already submitted a request to the commonwealth of Pennsylvania to affirm that it can proceed with this action; however, the PFT is likely to challenge its legality and seek an injunction.
Despite improving economic conditions in most of the U.S., municipal issuers continue to face challenges managing labor-related benefit costs. The SRC's use of its state oversight powers to impose spending reductions on the PSD could influence the strategies of other financially distressed municipal entities, including the crafting of legislation to create control boards.
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