Appendix — Buffalo Teachers Federation v. Tobe, 127 S. Ct. 2133 (2007) (No. 06-1168)

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2005

Docket No. 05-4744-cv

(Argued March 7, 2006 Decided September 21, 2006)

BUFFALO TEACHERS FEDERATION, BUFFALO EDUCATIONAL

SUPPORT TEAM, NEA/NY, TRANSPORTATION AIDES OF

BUFFALO, NEA/NY, SUBSTITUTES UNITED BUFFALO

NEA/NY, BUFFALO COUNCIL OF SUPERVISORS AND

ADMINISTRATORS, AFSCME LOCAL 264, PROFESSIONAL

CLERICAL AND TECHNICAL EMPLOYEES’ ASSOCIATION and

LOCAL 409 INTERNATIONAL UNION OPERATING ENGINEERS,

Plaintiffs-Appellants,

Vv.

RICHARD TOBE, THOMAS E. BAKER, ALAIR TOWNSEND,

H. CARL MCCALL, JOHN J. FASO, JOEL A. GIAMBRA,

MAYOR ANTHONY MASIELLO, RICHARD A. STENHOUSE,

ROGER G. WILMERS, in their official capacities as

directors/members of the BUFFALO FISCAL STABILITY

AUTHORITY and GEORGE E. PATAKI,

Defendants-Appellees.

Before: CARDAMONE, CALABRESI, and HALL,

Circuit Judges.

CARDAMONE, Circuit Judge:

When a state is sued for allegedly impairing the contractual

obligations of one of its political subdivisions even though it

2a

is not a signatory to the contract, the state will not be held

liable for violating the Contracts Clause of the United States

Constitution unless plaintiffs produce evidence that the state’s

self-interest rather than the general welfare of the public

motivated the state’s conduct. On this issue, plaintiffs have

the burden of proof because the record of what and why the

state has acted is laid out in committee hearings, public

reports, and legislation, making what motivated the state not

difficult to discern. In the appeal before us, the record of

why the state acted is available, and plaintiffs have not met

their burden.

Plaintiffs are the Buffalo Teachers Union and a number of

other unions in Buffalo, New York (Buffalo or City), rep-

resenting public employees of the school district of the City

of Buffalo—including teachers, principals, bus drivers, cooks,

food service helpers, etc. (plaintiffs, unions, or appellants).

Defendants are the Buffalo Fiscal Stability Authority (Buffalo

Fiscal Authority, BFSA, or Board), its members, and New

York State Governor George E. Pataki (collectively defen-

dants). Plaintiffs, alleging that a wage freeze instituted by

defendant Buffalo Fiscal Authority violates the Contracts

Clause and the Takings Clause of the United States Consti-

tution, sued defendants and sought a declaratory judgment

with respect to the wage freeze’s constitutionality and also an

injunction against its enforcement.

Both sides moved for summary judgment. The United

States District Court for the Western District of New York

(Skretny, J.) granted summary judgment for defendants in a

judgment dated and entered August 19, 2005.

BACKGROUND

A. Buffalo's Fiscal Crisis & Comptroller's Report

When in 2003 the speaker of the New York State Assem-

bly became concerned by Buffalo’s declining financial health,

he requested the state comptroller’s office to conduct a re-

3a

view of the City’s finances. The resulting report detailed

Buffalo’s financial situation. The report recounted that the

City had been operating for several years with a structural

deficit and had been able to continue operations only with

state aid and the use of the City’s reserves. Buffalo had relied

increasingly on state aid to fund its budget increases (state aid

grew from $67 million in 1997-98 to $128 million in 2002-

03). The City faced exponential increases in its budget

deficits; the comptroller projected budget deficits of $7.5

million for 2002-03, $30-$46 million for 2004-05, $76-$107

million for 2005-06, and $93-$127 million for 2006-07.

Based on these and other bleak findings, the comptroller

concluded Buffalo was not in a position to resolve its fiscal

woes on its own. For example, the record on this appeal

shows that to remedy budgetary shortfalls, the City had

already laid off 800 teachers and 250 assistant teachers over a

four year period. The report therefore suggested legislative

intervention. Specifically, the comptroller recommended the

creation of a control board—namely the BFSA—to oversee

Buffalo’s finances. The board would have powers and duties

similar to those given to boards that already oversaw the

budgets of other fiscaily troubled municipalities in New York

State. The comptroller advised also that in the event of a

board-declared fiscal crisis the board should have the power

to freeze future wage increases.

B. Buffalo Fiscal Stability Authority Act

In light of the comptroller’s report, the state legislature

passed on July 3, 2003 the Buffalo fiscal stability authority

act (Act) to address the City’s financial crises. See N.Y. Pub.

Auth. Law § 3850-a (McKinney Supp. 2006). To explain

passage of the Act, the legislature stated,

It is hereby found and declared that the city [of Buffalo]

is in a state of fiscal crisis, and that the welfare of the

inhabitants of the city is seriously threatened. The city

4a

budget must be balanced and economic recovery en-

hanced. Actions should be undertaken which preserve

essential services to city residents, while also ensuring

that taxes remain affordable. Actions contrary to these

two essential goals jeopardize the city’s long-term fiscal

health and impede economic growth for the city, the

region, and the state.

See 2003 N.Y. Sess. Laws Ch. 122 § 5695 (McKinney)

(emphasis added); see also N.Y. Pub. Auth. Law § 3850-a

(McKinney Supp. 2006) (setting forth legislative declaration

of need for state intervention).

The aim of the Act is to have Buffalo achieve fiscal

stability by 2007-08. See N.Y. Pub. Auth. Law § 3857(1)

(McKinney Supp. 2006). To attain that goal, the Act created _

the Buffalo Fiscal Authority, a public benefit corporation. See

id. § 3852(1). Central to the Act is a requirement that the City

submit financial plans each year over a four year period to the

Buffalo Fiscal Authority for approval. See id. §§ 3856 &

3857. Under the terms of the Act, the Board is to review,

approve, and monitor implementation of the City’s financial

plans to ensure that the City is abiding by the fiscal limita-

tions and benchmarks imposed by the Act. See id. §§ 3856-

59. The Act also provides a means by which the Board may

modify the financial plans to bring them into compliance with

the Board’s strictures. /d. § 3857. If Buffalo fails or refuses to

modify its financial plans, the Board may take corrective

steps on its own. /d. § 3857(2), 3858(2). In particular, the

Board may impose a wage and/or hiring freeze upon a finding

that such a freeze is “essential to the adoption or maintenance

of a city budget or a financial plan” that is in compliance with

the Act. Jd. § 3858(2)(c)(i).

C. Imposition of the Wage Freeze

On October 21, 2003 the Buffalo Fiscal Authority ap-

proved the City’s first four-year financial plan under the Act.

Sa

Prior to the submission of the plan, the Board had already

ordered the City to institute a hiring freeze and had also

instructed the City to exclude from the plan wage increases

that were not contractually required. The City approved a tax

increase for its 2004-05 budget and planned for another tax

increase in the last year of the four-year plan; together the

city tax increases amounted to $6.3 million.

Six months later, in reviewing how the plan’s implementa-

tion was proceeding, the Board realized the plan no longer

complied with the Act. The BFSA discovered that for the

2004-05 fiscal year Buffalo projected a budget gap $20

million greater than the $30 million gap previously estimated.

The Board was further troubled by the estimate that the

projected City budget gap for the next four years would

exceed $250 million.

As a result of these concerns, on April 21, 2004 the Buffalo

Fiscal Authority invoked its wage freeze power and deter-

mined “that a wage freeze, with respect to the City and all

Covered Organizations, is essential to the maintenance of the

Revised Financial Plan and to the adoption and maintenance

of future budgets and financial plans that are in compliance

with the Act.” The Board further resolved that “effective

immediately, there shall be a freeze with respect to all wages

. . . for all employees of the City [which] shall apply to

prevent and prohibit any increase in wage rates.” The wage

freeze took effect that day, and effectively prohibited mem-

bers of the plaintiff unions from enjoying a two percent wage

increase that the unions had negotiated as part of their labor

contracts with the City.

D. Prior Proceedings

Following the imposition of the wage freeze, plaintiffs

filed suit against the Board on June 17, 2004 in the district

court, seeking a judgment declaring the wage freeze un-

constitutional under the Contracts and Takings Clauses, and

6a

seeking an injunction to bar the wage freeze’s enforcement.

On February 28, 2005 the parties filed cross-motions for

summary judgment. After full briefing and oral argument, the

district court denied plaintiffs’ motion and granted summary

judgment in favor of the defendants. It held that as a matter

of law the wage freeze offended neither the Contracts or

Takings Clauses of the Constitution. From the district court’s

judgment, plaintiffs appeal. .

DISCUSSION

1. Standard of Review

Our standard of review here is well known. We review the

grant of summary judgment de novo, Virgin Atlantic Airways

Ltd. v. British Airways PLC, 257 F.3d 256, 262 (2d Cir. 2001),

viewing the facts in the light most favorable to plaintiffs and

resolving all factual ambiguities in their favor, Cioffi v. Averill

Park Cent. Sch. Dist. Bd. of Educ., 444 F.3d 158, 162 (2d

Cir. 2006). Under this standard, we are only to “determine

whether there is a genuine issue for trial.” Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 249 (1986). With this in mind, we

turn to plaintiffs’ claims.

ll. Contracts Clause

We begin with that part of the appeal relating to the Con-

tracts Clause, a provision of the Constitution that even prior

to its adoption was at the center of heated discourse. After 11

states had ratified the Constitution, James Madison lamented

privately to Thomas Jefferson that the articles relating to

treaties, paper money, and contracts “created more enemies

than all the errors in the System positive & negative put

together.” Akhil Reed Amar, America’s Constitution: A Biog-

raphy 124 (Random House 2005) (quoting letter from James

Madison to Thomas Jefferson, Oct. 17, 1788, in Madison,

Papers, \1:297).

7a

Our attention turns to this clause, which provides that no

state shall pass any law “impairing the Obligation of Con-

tracts.” U.S. Const. art. 1, § 10. Although facially absolute,

the Contracts Clause’s prohibition “is not the Draconian

provision that its words might seem to imply.” Allied Struc-

tural Steel Co. v. Spannaus (Spannaus), 438 U.S. 234, 240

(1978). It does not trump the police power of a state to protect

the general welfare of its citizens, a power which is “para-

mount to any rights under contracts between individuals.” /d.

at 241; see also W.B. Worthen Co. v. Thomas, 292 U.S. 426,

433 (1934) (“[L]iteralism in the construction of the contract

clause . . . would make it destructive of the pubic interest

by depriving the State of its prerogative of self-protection.”).

Rather, courts must accommodate the Contract Clause with

the inherent police power of the state “to safeguard the vital

interests of its people.” Home Bldg. & Loan Ass'n v. Blaisdell

(Blaisdell), 290 U.S. 398, 434 (1934); see also Energy

Reserves Group, Inc. v. Kan. Power & Light Co., 459 U.S.

400, 410 (1983); Sanitation & Recycling Indus., Inc. v. City

of New York, 107 F.3d 985, 992-93 (2d Cir. 1997). Thus, state

laws that impair an obligation under a contract do not nec-

essarily give rise to a viable Contracts Clause claim, see U.S.

Trust Co. v. New Jersey, 431 U.S. 1, 16 (1977).

To determine if a law trenches impermissibly on contract

rights, we pose three questions to be answered in succession:

(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 accom-

plish this purpose reasonable and necessary. Energy Reserves

Group, 459 U.S. at 411-13; Sanitation & Recycling Indus.,

107 F.3d at 993. We also consider the level of deference to

give to a legislature’s determination that a law was reasonable

and necessary. We address each of these questions.

8a

A. Substantial Impairment and Legitimate Public Purpose

We discuss questions (1) and (2) together. First, we agree

with the district court that the wage freeze substantially

impairs the unions’ labor contracts with Buffalo. To assess

whether an impairment is substantial, we look at “the extent

to which reasonable expectations under the contract have

been disrupted.” Sanitation & Recycling Indus., 107 F.3d at

993. Contract provisions that set forth the levels at which

union employees are to be compensated are the most

important elements of a labor contract. The promise to pay a

sum certain constitutes not only the primary inducement for

employees to enter into a labor contract, but also the central

provision upon which it can be said they reasonably rely.

With that in mind, we may safely state the wage freeze so

disrupts the reasonable expectations of Buffalo’s municipal

school district workers that the freeze substantially impairs

the workers’ contracts with the City. See Ass’n of Surrogates

and Sup. Ct. Reporters v. New York (Surrogates), 940 F.2d

766, 772 (2d Cir. 1991) (noting that a statute affecting tim-

ing of payment of salary substantially impaired public em-

ployees’ contract).

Second, we next ask if the legislature had a legitimate

public purpose in passing the Act and providing for a wage

freeze. When a state law constitutes substantial impairment,

the state must show a significant and legitimate public pur-

pose behind the law. See Energy Reserves Group, 459 U.S. at

411-12; Sanitation & Recycling Indus., 107 F.3d at 993. A

legitimate public purpose is one “aimed at remedying an im-

portant general social or economic problem rather than pro-

viding a benefit to special interests.” Sanitation & Recycling

Indus., 107 F.3d at 993. And as discussed in a moment, the

purpose may not be simply the financial benefit of the

sovereign.

The New York legislature had a legitimate public purpose

in passing the Act and its wage freeze power. It is not

9a

disputed that Buffalo was suffering at the time, and continues

to suffer, a fiscal crisis. The state legislature passed the Act to

address specifically the City’s financial problems. See N.Y.

Pub. Auth. Law § 3850-a (McKinney Supp. 2006) (declaring

that “the city of Buffalo is facing a severe fiscal crisis, and

that the crisis cannot be resolved absent assistance from the

state”). This is not a case in which the Act and wage freeze

were passed “for the mere advantage of particular individu-

als,” Blaisdell, 290 U.S. at 445; rather, the legislature passed

the law “for the protection of a basic interest of society,” id.

Further, courts have often held that the legislative interest in

addressing a fiscal emergency is a legitimate public interest.

See, e.g., id. at 444-48 (statute impairing mortgages found to

be constitutional in light of depression era exigencies); /n re

Subway-Surface Supervisors Ass'n v. New York City Transit

Auth. (Subway-Surface), 44 N.Y .2d 101, 112-14 (1978) (stat-

ute freezing municipal wages held to be constitutional given

fiscal emergency afflicting New York City). We find no rea-

son in the instant case to reach a conclusion contrary to that

reached in the cited cases.

B. Reasonableness and Necessity

That a contract-impairing law has a legitimate public

purpose does not mean there is no Contracts Clause violation.

The impairment must also be one where the means chosen are

reasonable and necessary to meet the stated legitimate public

purpose. U.S. Trust Co., 431 U.S. at 22-23; see Sanitation &

Recycling Indus., 107 F.3d at 993 (“A law that works sub-

stantial impairment of contractual relations must be specifi-

cally tailored to meet the societal ill it is supposedly designed

to ameliorate.”). If it is not, then the law offends the Contracts

Clause.

Unless the state itself is a party to the contract, courts

usually defer to a legislature's determination as to whether

a particular law was reasonable and necessary. See Energy

Reserves, 459 U.S. at 412-13. In this appeal, the parties

10a

committed the majority of their arguments in their briefs

to discussing the appropriate level of deference our court

owes to the legislature here. Therefore, before we can answer

the third question of reasonableness and necessity, we first

address the issue of deference.

1. Kinds of Deference

Since Dartmouth College v. Woodward, 17 U.S. (4 Wheat.)

518 (1819), it has been familiar law that the Contracts Clause

applies to public contracts as well as to private contracts. /d.

at 694 (recognizing that salary contracts of public officers are

entitled to Contracts Clause protection) (Marshall, C.J.); see

U.S. Trust Co., 431 U.S. at 17. However, in analyzing public

contracts courts use a different approach than that employed

in analyzing private ones. When a law impairs a private

contract, substantial deference is accorded, see Sal Tinnerello

& Sons, Inc. v. Town of Stonington, 141 F.3d 46, 54 (2d Cir.

1998), to the legislature’s “judgment[s] as to the necessity

and reasonableness of a particular measure,” U.S. Trust Co.,

431 U.S. at 23. Public contracts are examined through a more

discerning lens. When the state itself is a party to a contract,

“complete deference to a legislative assessment of reason-

ableness and necessity is not appropriate because the [s]tate’s

self-interest is at stake.” Jd. at 26. When a state’s legislation is

self-serving and impairs the obligations of its own contracts,

courts are less deferential to the state’s assessment of reason-

ableness and necessity. Condell v. Bress, 983 F.2d 415, 418

(2d Cir. 1993).

The parties disagree with respect to what level of deference

we should apply. Plaintiffs argue that we owe little deference

to the state’s decision because the Act is, in their view, self-

serving to the state, while defendants insist we owe sub-

stantial deference to the legislative judgment. Of particular

significance in the case at hand is the absence of a contract to

which New York State is a party. Defendants contend that

substantial deference is due because New York State is not a

lla

party to the contracts that are being impaired, that is, the state

did not impair the obligations of its own contracts. /d. at 418.

Plaintiffs concede that their contracts are with the City of

Buffalo and that no state contracts or obligations run to them

or to the City. But, they assert, that absence of a state contract

does not preclude heightened scrutiny. The plaintiff unions

urge us to focus on the alleged self-serving nature of the

Act and the wage freeze. They argue that a less deferential

standard applies because the wage freeze is in plaintiffs’

view, self-serving insofar as it may save the state money by

reducing future aid the state may feel obliged to give to the

City.

Our initial comment is that the presence or absence of a

State as a party to the contract is not determinative of the

deference issue. Defendants ignore that a public contract is in

fact being impaired albeit through state rather than local law.

Were we to adopt defendants’ reading, state legislatures could

delegate to an agency the power to impair a public contract of

a government subdivision that the subdivision itself would

have more difficulty impairing. Lawmakers could fashion

the powers delegated to the agency in a manner to insulate

the agency’s actions from constitutional attack. We decline

to open such an end-run around Contracts Clause law. The

better rule therefore calls for focusing on whether the contract-

impairing law is self-serving, where existence of a state con-

tract is some indicia of self-interest, but the absence of a state

contract does not lead to the converse conclusion.

In other words, the absence of a contract with the state does

not mean we thereby believe the wage freeze cannot be self-

serving to the state. To the contrary, it can be. But, in the end,

we do not think this is the sort of case in which the state

legislature “welches” on its obligations as a matter of “politi-

cal expediency,” see Surrogates, 940 F.2d at 773; Guido

Calabresi, Retroactivitv: Paramount Powers & Contractual

“aanges, 71 Yale L.J. 1191, 1201-02 (1962), but rather, the

12a

state was genuinely acting for the public good, see Blaisdell,

290 U.S. at 445; Calabresi, 71 Yale L.J. at 1202. For the

purposes of this appeal, we need not resolve what level of

deference to apply. Instead, we will assume that the lower

level of deference applies because, as discussed below, the

wage freeze is reasonable and necessary even under the less

deferential standard.

2. What Does Less Deference Mean?

As stated above, assuming the state’s legislation was self-

serving to the state, we are less deferential to the state’s

assessment of reasonableness and necessity than we would be

in a situation involving purely private contracts, but what

does giving less deference to the legislature actually mean?

We hasten to point out that less deference does not imply no

deference. See Local Div. 589, Amalgamated Transit Union v.

Massachusetts, 666 F.2d 618, 643 (ist Cir. 1981) (Breyer, J.)

(“[W]here economic or social legislation is at issue, some

deference to the legislature’s judgment is surely called for.”);

Subway-Surface, 44 N.Y.2d at 112 (noting that “the statement

of the principle [in U.S. Trust Co.] implies that some defer-

ence at least is appropriate”). Relatedly, we agree with the

First Circuit that U.S. Trust Co. does not require courts to

reexamine all of the factors underlying the legislation at issue

and to make a de novo determination whether another alterna-

tive would have constituted a better statutory solution to a

given problem. See Local Div. 589, 666 F.2d at 642. Nor is

the heightened scrutiny to be applied as exacting as that

commonly understood as strict scrutiny. Such a high level of

judicial scrutiny of the legislature’s actions would harken a

dangerous return to the days of Lochner v. New York, 198

U.S. 45 (1905), overruled, see DayBrite Lighting, Inc. v.

Missouri, 342 U.S. 421 (1952), in which courts would act as

superlegislatures, overturning laws as unconstitutional when

they “believe[d] the legislature [ ] acted unwisely,” Ferguson

v. Skrupa, 372 U.S. 726, 730 (1963); see Peick v. Pension

13a

Benefit Guar. Corp., 724 F.2d 1247, 1265 (7th Cir. 1983)

(“The danger of heightened scrutiny, and the reason it has

been as sparingly applied since its heyday in the Lochner era,

is that it can easily mask the imposition by a court of a

philosophical and economic straightjacket on the legislature.”);

see also Laurence H. Tribe, Constitutional Choices 182 (1985)

(equating heightened scrutiny under the Contracts Clause as

backdoor to Lochner-type jurisprudence). The Lochner doc-

trine, of course, “has long since been discarded.” Skrupa, 372

U.S. at 730.

Ultimately, for impairment to be reasonable and necessary

under Jess deference scrutiny, 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 impair-

ment when an evident and more moderate course would serve

its purpose equally well,” nor (3) act unreasonably “in light

of the surrounding circumstances,” U.S. Trust Co., 431 U.S.

at 30-31.

3. The Wage Freeze is Reasonable and Necessary

With the above standard in mind, we hold the wage freeze

was reasonable and necessary. The legislature and Board did

not treat the wage freeze on par with other policy alternatives.

According to the Act, the Buffalo Fiscal Authority was em-

powered to enact the wage freeze provision only if it was

essential to maintenance of the City’s budget. N.Y. Pub. Auth.

Law § 3858(2)(c) (McKinney Supp. 2006). We read this to

mean the wage freeze must have been a last resort measure.

Indeed the Board imposed the freeze only after other alterna-

tives had been considered and tried. The Board first instituted

a hiring freeze pursuant to its powers under the Act. More-

over, the City had already taken other more drastic measures

including school closings and layoffs; in the four years prior

to the wage freeze Buffalo eliminated 800 teaching and 250

teaching assistant positions. Only after these more drastic

l4a

steps were taken and a finding that the freeze was essential

was made, did the BFSA institute the wage freeze.

This discussion dovetails with the second question of

whether a more moderate course was available to remedy the

fiscal crisis. As noted, the alternatives to the wage freeze

consisted of elimination of more municipal jobs and school

closures, alternatives which clearly are more drastic than a

temporary wage freeze. Thus, in light of the surrounding cir-

cumstances, we cannot say the state or the Buffalo Fiscal

Authority acted unreasonably.

The temporary and prospective nature of the wage freeze

underscores further its reasonableness. The Supreme Court

instructs that the extent of the impairment is “a relevant factor

in determining its reasonableness.” U.S. Trust Co., 431 U.S.

at 27. Here the impairment is relatively minimal. Under the

terms of the Act, the temporary wage freeze must be revisited

by the Board on an on-going basis to assure the freeze’s

continued necessity. N.Y. Pub. Auth. Law § 3858(2)(d) (Mc-

Kinney Supp. 2006). Further, the wage freeze operates

prospectively. In this respect the present facts are dissimilar

to U.S. Trust Co., a case that represents the paradigm of the

type of protection that the Contracts Clause was designed to

offer: protection “to those who invested money, time and

effort against loss of their investment through explicit repu-

diation.” Local Div. 589, 666 F.2d at 642 (discussing U.S.

Trust Co.). The impairment here does not affect past salary

due for labor already rendered or money invested. It only

suspends temporarily the two percent increase in salary for

services fo be rendered.

In sum, the prospective and temporary quality of the wage

freeze convinces us of its reasonableness. See Blaisdell, 290

U.S. at 447 (finding temporary nature of an impairment to be

probative of reasonableness) accord Spannaus, 438 U.S. at

242-43; Subway-Surface, 44 N.Y .2d at 112-14 (attaching sig-

nificance to the prospective characteristic of a law impairing

15a

public contracts); cf Energy Reserves Group, 459 U.S. at

418-19 (finding as probative the temporary aspect of an

impairing regulation in a private contract case).

The unions argue the wage freeze was unnecessary because

other alternatives existed. Namely, taxes could have been

raised or other programs and services could have been

eliminated or burdened. We cannot adopt this position for at

least three reasons. First, it is always the case that to meet a

fiscal emergency taxes conceivably may be raised. It cannot

be the case, however, that a legislature’s only response to a

fiscal emergency is to raise taxes. Also, defendants have

shown that Buffalo had already increased City taxes to meet

its fiscal needs, and it is reasonable to believe that any addi-

tional increase would have further exacerbated Buffalo’s

financial condition. Second, even if the state could have

raised its taxes, appellants have not shown how any monies

so raised would flow to Buffalo. Finally, on the undisputed

facts of this case, we find no need to second-guess the wis-

dom of picking the wage freeze over other policy alternatives,

especially those that appcar more Draconian, such as further

layoffs or elimination of essential services. See Blaisdell, 290

U.S. at 447-48 (“Whether the legislation is wise or unwise as

a matter of policy is a question with which we are not con-

cered.”); Local Div. 589, 666 F.2d at 643 (noting that the

court could have balanced alternatives to impairment, but

concluding that “[a]nswering these sorts of questions .. . is a

task far better suited to legislators than to judges”); see also

Sal Tinnerello & Sons, 141 F.3d at 54 (“[I]t is not the prov-

ince of this Court to substitute its judgement for that of ...a

legislative body.”’).

4. Present Case Distinguishable From Surrogates and

Condell

We pause here to discuss why, contrary to the plaintiffs’

assertions, this case is distinguishable from Association of

Surrogates & Supreme Court Reporters v. New York and

16a

Condell v. Bress. In Surrogates, New York State had alleg-

edly impaired the labor contracts of certain judicial employ-

ees by instituting a payroll lag in which payment of their

salaries would be delayed. Surrogates, 940 F.2d at 769.

Condell involved a similar payroll lag that affected employ-

ees of the state executive branch. Condell, 983 F.2d at 417.

Applying heightened Contracts Clause scrutiny, we held both

payroll lag provisions unreasonable and unnecessary. See

Condell, 983 F.2d at 418, 419-20; Surrogates, 940 F.2d 773-

74.

The facts and circumstances of those cases nonetheless are

dissimilar to those present here. In those cases we found the

legislature’s justifications of reasonableness and necessity to

be dubious at best. That there was an emergency or dire need

justifying the impairment was in doubt in those cases. See,

e.g., Surrogates, 940 F.2d at 773 (assuming for argument

sake only that expansion of the judiciary is an important

public purpose but holding payroll lag not to be necessary to

achieving that goal); Condell, 983 F.2d at 420 (implying that

a fiscal crisis could be grave enough where a state might

constitutionally impose a payroll lag but finding that the case

before the court did not present such an emergency). For

example, in Surrogates the state wanted to hire more judicial

employees to help reduce the courts’ back-log of cases. Sur-

rogates, 940 F.2d 768-69. To fund this endeavor it instituted

the payroll lag, rather than raise taxes to fund the additional

service. /d. at 773. We determined that the lawmakers had

impaired the state employees’ contracts improperly, in part,

on the basis of this political expediency. See id.; Condell, 983

F.2d at 420.

Here, no one questions the existence of a very real fiscal

emergency in Buffalo. Additionally, as noted, there is no

evidence in the record of an ill-motive of political expediency

or unjustified welching. Contracts Clause cases involve in-

dividual inquiries, for no two cases are necessarily alike. See

17a

Blaisdell, 290 U.S. at 430 (“Every case must be determined

upon its own circumstances.”). In the present case, we are

comfortable that the wage freeze is reasonable and necessary

to remedy the fiscal instability of Buffalo.

We point out that while the facts of Surrogates and Condell

are inapposite, we find the New York state case, In re

Subway-Surface Supervisors Association v. New York City

Transit Authority, to be persuasive and relevant. In Subway-

Surface, the New York Court of Appeals upheld the con-

stitutionality of the New York State Financial Emergency Act

for the City of New York, a state law which, like the wage

freeze here, suspended wage increases of municipal workers.

44 N.Y.2d at 107-08. At the time, New York City was in the

midst of a financial emergency, and to address the emer-

gency, the state froze New York City municipal wages. /d.

We find the instant case similar, especially because the fact of

an emergency is not contested. Our holding can be summaz-

rized simply: An emergency exists in Buffalo that furnishes a

proper occasion for the state and BFSA to impose a wage

freeze to “protect the vital interests of the community,” and

the existence of the emergency “cannot be regarded as a

subterfuge or as lacking in adequate basis.” Blaisdell, 290

U.S. at 444. Nor can the wage freeze be regarded as unrea-

sonable or unnecessary to achieve the important public pur-

pose of stabilizing Buffalo’s fiscal position.

Ill. Takings Clause .

Plaintiffs appeal also the district court’s denial of their

Takings Clause claim. While we hold that no takings viola-

tion has occurred, we do so on different grounds than those

relied on by the district court.

A. Physical Taking or Regulatory Taking

The Takings Clause of the Fifth Amendment provides that

no “private property shall be taken for public use, without just

18a

compensation.” U.S. Const. amend. V. The clause applies to

the states through the Fourteenth Amendment. See Kelo v.

New London, _ U.S. _, 125S. Ct. 2655, 2658 n.1 (2005).

The law recognizes two species of takings: physical takings

and regulatory takings. See Meriden Trust & Safe Deposit Co.

v. FDIC, 62 F.3d 449, 454 (2d Cir. 1995). Physical takings .

(or physical invasion or appropriation cases) occur when the

government physically takes possession of an interest in prop-

erty for some public purpose. Tahoe-Sierra Pres. Council v.

Tahoe Reg’! Planning Agency, 535 U.S. 302, 321 (2002). The

fact of a taking is fairly obvious in physical takings cases: for

example, the government might occupy or take over a lease-

hold interest for its own purposes, see United States v. Gen.

Motors Corp., 323 U.S. 373, 375, 380 (1945), or the govern-

ment might take over a part of a rooftop of an apartment

building so that cable access may be brought to residences

within, see Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419, 421 (1982). But when the government acts in a

regulatory capacity, such as when it bans certain uses of

private property, see Village of Euclid v. Ambler Realty Co.,

272 U.S. 365, 384-85 (1926), or limits the rent a landlord

may charge tenants, see Fed. Home Loan Mortgage Corp. v.

New York State Div. of Hous. & Cmty. Renewal, 83 F.3d 45,

47-48 (2d Cir. 1996), or prohibits landlords from evicting

tenants for refusing to pay higher rents, see Block v. Hirsh,

256 U.S. 135, 154 (1921), the question of whether a taking

has occurred is more complex, Tahoe-Sierra Pres. Council,

535 U.S. at 323. Such cases are considered regulatory takings

because they do not involve a categorical assumption of

property. See id. The gravamen of a regulatory taking claim is

that the state regulation gocs too far and in essence “effects a

taking.” Meriden Trust & Safe Deposit Co., 62 F.3d at 454.

The district court analyzed the wage freeze as a physical

taking. We believe this was in error. The wage freeze “does

not present the ‘classic taking’ in which the government

19a

directly appropriates private property for its own use.”

Eastern Enters. v. Apfel, 524 U.S. 498, 522 (1998). Rather,

the interference with appellants’ contractual right to a wage

increase “arises from [a] public program adjusting the bene-

fits and burdens of economic life to promote the common

good.” Penn Cent. Transp. Co. v. City of New York, 438 U.S.

104, 124 (1978). The freeze therefore falls into the category

of a regulatory, not physical, taking, and should have been

analyzed as such. See Connolly v. Pension Benefit Guar.

Corp., 475 U.S. 211, 224-25 (1986) (analyzing Takings Clause

case involving “taking” of contracts rights under regulatory

takings jurisprudence); see also Tahoe-Sierra Pres. Council,

535 U.S. at 323-24 (noting that physical invasion line of cases

is inapplicable to regulatory takings analysis).

B. Protectable Property

In adjudging whether the Act constituted an unconstitu-

tional taking, we take a moment here to ask the threshold

question of whether a protectable property interest is even at

stake. Although the Supreme Court has held that valid con-

tracts constitute property under the Takings Clause, Lynch v.

United States, 292 U.S. 571, 579 (1934), this is neither a

blanket nor absolute rule, see Connolly, 475 U.S. at 224

(“[T]he fact that legislation disregards or destroys existing

contractual nghts does not always transform the regulation

into an illegal taking [but] [t}his is not to say that contractual

rights are never property rights ... .””), and further it is a rule

that has been called into question, Pro-Eco, Inc. v. Bd. of

Comm'rs, 57 F.3d 505, 510 n.2 (7th Cir. 1995) (“We read

Connolly . . . as effectively overruling, if it had not already

been overruled, Lynch v. United States, 292 U.S. 57]

[(1934)].”): see also Ohio Student Loan Comm'n v. Cavazos,

900 F.2d 894, 900-02 (6th Cir. 1990) (distinguishing Lynch

and holding that contract rights are not property); Peick, 724

F.2d 1247, 1274-76 (noting distinction between “property

rights” which are protected under Takings Clause and “con-

20a

tract mghts” which are not necessarily protected). Our mis-

givings, however, need not detain us. We will assume for

purposes of this appeal that the wage increase provisions of

appellants’ contracts constitute property under the Takings

Clause.

C. Regulatory Taking

Regulatory takings analysis requires an intensive ad hoc

inquiry into the circumstances of each particular case. See

Connolly, 475 U.S. at 224. We weigh three factors to deter-

mine whether the interference with property rises to the level

of a taking: “(1) the economic impact of the regulation on the

claimant; (2) the extent to which the regulation has interfered

with distinct investment-backed expectations; and (3) the

character of the governmental action.” /d. at 224-25. In con-

sidering these factors, we are not persuaded that plaintiffs

have met the heavy burden necessary to establish a regulatory

taking. Keystone Bituminous Coal Ass'n v. DeBenedictis, 480

U.S. 470, 493 (1987).

First, the severity of the economic impact of the freeze and

the extent to which it interferes with appellants’ investment-

backed expectations are relatively small. The wage freeze

is temporary and operates only during a control period. See

N.Y. Pub. Auth. Law § 3858(2)(d) (McKinney Supp. 2006).

What is more, this is not a case in which a law abrogates an

entire contract. The freeze affects only a small increase in

wages. As such plaintiffs continue to receive the same salary

they had been recciving prior to the freeze’s enactment. The

freeze’s prospective nature demonstrates also its limited eco-

nomic impact and interference with appellants’ investment-

backed expectations. It does not affect wages for which

services and labor have already been rendered.

Second, the nature of the state’s action is uncharacteristic

of a regulatory taking. The wage freeze is a negative restric-

tion rather than an affirmative exploitation by the state.

2la

Nothing is affirmatively taken by the government. Instead the

government annuls something—namely, the appellants’ con-

tractual right to a wage increase. The freeze is in this respect

like a temporary cap on how much plaintiffs may charge for

their services. See Fed. Home Loan Mortgage Corp., 83 F.3d

at 48 (upholding rent stabilization as not a taking); Garelick

v. Sullivan, 987 F.2d 913, 916 (2d Cir. 1993) (upholding price

regulations that limit how much medical providers may charge

Medicare patients).

Ultimately, and third, the temporary suspension of plain-

tiffs’ wage increase arises from a public program that un-

doubtedly burdens the plaintiffs in order to promote the

common good. Connolly, 475 U.S. at 225. Equally true is that

the public program to help Buffalo obtain fiscal stability is

one which the state had a right to initiate and regulate. We

recognize the possibility that the net effect of the wage freeze

may well be to take from Peter to pay Paul, but such burden

shifting does not, without more, amount to a regulatory tak-

ing. See id. at 223 (“Given the propriety of the governmental

power to regulate, it cannot be said that the Takings Clause is

violated whenever the legislation requires one person to use

his or her assets for the benefit of another.’’).

CONCLUSION

Accordingly, for the foregoing reasons, the state law con-

stitutes neither a Contracts Clause nor Takings Clause viola-

tion. We therefore affirm the district court’s order granting

summary judgment in favor of defendants and denying sum-

mary judgment to plaintiffs.

22a

APPENDIX B

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK

04-CV-457S

BUFFALO TEACHERS FEDERATION, BUFFALO EDUCATIONAL

SUPPORT TEAM-NEA/NY, TRANSPORTATION AIDES OF

BUFFALO, NEA/NY, SUBSTITUTES UNITED/BUFFALO-

NEA/NY, BUFFALO COUNCIL OF SUPERVISORS AND

ADMINISTRATORS, AFSCME LOCAL 264, PROFESSIONAL,

CLERICAL AND TECHNICAL EMPLOYEES’ ASSOCIATION

AND LOCAL 409 INTERNATIONAL UNION OF OPERATING

ENGINEERS,

Plaintiffs,

¥.

RICHARD TOBE, THOMAS E. BAKER, ALAIR TOWNSEND,

H. CARL MCCALL, JOHN J. FASO, JOEL A. GIAMBRA,

MAYOR ANTHONY MASIELLO, RICHARD A. STENHOUSE

AND ROBERT G. WILMERS, in their official capacities as

directors/members of the Buffalo Fiscal Stability Authority,

Defendants.

DECISION AND ORDER

], INTRODUCTION

On July 3, 2003, the legislature of the State of New York

created the Buffalo Fiscal Stability Authority (“the Control

Board’) to stabilize and improve the city of Buffalo’s failing

financial health.’ One of the powers the legislature vested in

' The Buffalo Fiscal Stability Authority Act created the Buffalo Fiscal

Stability Authority. To avoid confusion, this Court will refer to the Buffalo

23a

the Control Board is the discretion to freeze wages. On April

21, 2004, the Control Board exercised that discretion and

enacted a Wage Freeze Resolution, which for purposes of this

case, had the effect of eliminating contractual salary increases

that Plaintiffs had negotiated with the city of Buffalo school

district.

Plaintiffs filed suit in this court challenging the Buffalo

Fiscal Stability Authority Act (the “BFSA”) and the Wage

Freeze Resolution as violative of the Contract and Takings

Clauses of the United States Constitution. Presently before

me are the parties’ competing Motions for Summary Judg-

ment.” Having reviewed the motion papers and the applicable

law, | find that the Wage Freeze Resolution is not unconstitu-

tional. Rather, the state has acted properly within its police

power to address the city of Buffalo’s dire financial situation.

The Wage Freeze Resolution is a reasonable and necessary

means to remedy the city’s economic inviability and secure

the welfare of its residents. It serves the ultimate goal of

restoring the city’s fiscal independence. Accordingly, Plain-

tiffs’ motion will be denied and Defendants’ motion will be

granted.

Fiscal Stability Authority Act as the “BFSA” and the Buffalo Fiscal

Stability Authority as “the Control Board” throughout this decision.

* In support of their Motion for Summary Judgment, Plaintiffs filed the

following documents: a memorandum of law, a Rule 56 Statement of Un-

disputed Facts, with appendix, and a reply memorandum of law. In oppo-

sition, Defendants filed a memorandum of law with exhibits.

In support of their Motion for Summary Judgment, Defendants filed

the following: a memorandum of law, a Rule 56 Statement of Undisputed

Facts, the Declaration of Dorothy A. Johnson, with attached exhibits, and

a reply memorandum of law. In opposition, Plaintiffs filed a memoran-

dum of law and a response to Defendants’ Rule 56 Statement of Undis-

puted Facts,

24a

Il. BACKGROUND .

A. The Parties and the Collective Bargaining Agreements

Plaintiffs are employee organizations that serve as the

exclusive bargaining representatives for their respective em-

ployee units. (Plaintiffs’ Rule 56 Statement of Undisputed

Facts (“Plaintiffs’ Statement”), 4 1; Defendants’ Rule 56

Statement of Undisputed Facts (“Defendants’ Statement’),

| 1-8.) Defendants are directors/members of the Control

Board, which is a public benefit corporation. (Defendants’

Statement, 4] 9, 10.)

Each Plaintiff employee organization is a party to a collec-

tive bargaining agreement with the city of Buffalo school

district. (Plaintiffs’ Statement, § 2; Defendants’ Statement,

qf] 1-8; 11, 13, 15, 17, 19, 21, 23, 25.) These agreements pro-

vide for periodic step increases and/or other types of salary

increases, such as longevity payments, to be paid to the cov-

ered employees.* (Plaintiffs’ Statement, 9 3-4; Defendants’

Statement, {| 27, 29.) On average, the covered employees are

contractually entitled to receive salary increases of roughly

2% per year. (Plaintiffs’ Statement, 4] 5.)

* Plaintiffs represent individuals employed by the city of Buffalo school

district in the following capacities: teachers; certain teachers’ aides and

health care aides; bus aides; substitute teachers; principals, assistant prin-

cipals, directors, supervisors, project administrators and assistant superin-

tendents; service center employees, cook managers and cafeteria employ-

ees; professional, clerical and technical personnel; and engineering per-

sonnel. (Defendants’ Statement, {¥ 1-8.)

* This Court notes that the agreements between Plaintiffs and the school

district have all expired and that successor agreements have not been

entered. (Defendants’ Statement, {9 13-26.) Hlowever, under New York’s

Civil Service Law, the terms of the expired agreements remain in force

until new agreements are reached. See N.Y. Civ. SERV. LAW § 209-a(1)(e)

(McKinney 1999); Ass'n of Surrogates & Supreme Court Reporters v.

State of New York, S88 N.E.2d $1, 53 (N.Y. 1992).

25a

B. The City of Buffalo’s Fiscal Crisis

In May of 2003, the Speaker of the New York State As-

sembly requested that the State Comptroller’s Office conduct

a review of the city of Buffalo’s finances. (Defendants’ State-

ment, § 58; Johnson Declaration, Exhibit D.) This review was

intended to assist lawmakers in determining whether the city

would need financial assistance from the state to close current

and future budget gaps. (Defendants’ Statement, §] 59; Johnson

Decl., Exhibit C, p. 1.)

The State Comptroller’s ensuing report detailed the city of

Buffalo’s desperate fiscal straits. (Johnson Decl., Exhibit C.)

Among others, the State Comptroller made the following

findings:

e The city of Buffalo had been operating with a struc-

tural deficit for several years, and was only able to

fund its operations with increasing state aid and the

use of its reserves. (Johnson Decl., Exhibit C, p. 1.)

e The city of Buffalo’s budget increases since 1997-

1998 were funded through increasing state aid, which

grew from $67 million in 1997-1998 to $123 million

in the city’s 2002-2003 fiscal year. (Johnson Decl.,

_ Exhibit C, p. 12.)

e The city had a combined deficit for the fiscal years

2000-2001 and 2001- 2002 of $23.8 million, and the

2002-2003 budget as initially adopted was balanced

only by exhausting the city’s reserves. (Johnson Decl.,

Exhibit C, pp. 1, 12.)

e The city of Buffalo’s estimated budget deficit for

2002-2003 was $7.5 million. The city also faced a

2004-2005 estimated budget deficit ranging from $30-

$48 million up to $60-$78 million, depending on the

Board of Education’s budget. The city faced increased

estimated deficits of $76-$107 and $93-$127 million

26a

in 2005-2006 and 2006-2007, respectively. (Johnson

Decl., Exhibit C, pp. 1-2, 12, 20-22.)

The State Comptroller concluded that due to these continu-

ing and serious structural imbalances, the city of Buffalo was

not in a position to rectify its budget on its own. (Defendants’

Statement, 4] 62; Johnson Decl., Exhibit C, pp. 2, 30.) He also

concluded that a new approach must be adopted by the city to

restore its fiscal integrity. (Johnson Decl., Exhibit C, p. 30.)

In the State Comptroller's view, it was incumbent upon the

city to adopt financial plans and practices that would bring its

recurring expenses in line with its recurring revenue. (John-

son Decl., Exhibit C, p. 30.) To that end, one of the State

Comptroller’s recommendations was that the state legislature

create a control board to oversee and administer Buffalo’s

finances “to ensure that effective long-term restructuring

takes place in Buffalo.” (Defendants’ Statement, § 60; John-

son Decl., Exhibit C, p. 2.) The State Comptroller also recom-

mended that the control board be given the power to freeze

wages in the event of a declared fiscal crisis. (Johnson Decl.,

Exhibit C, p. 31.) The state legislature accepted both recom-

mendations.

C. Enactment of the BFSA

On July 3, 2003, the New York State legislature enacted

the BFSA. See N.Y. PUB. AUTH. LAW § 3850, et seq.

(McKinney Supp. 2005). As indicated in the legislative decla-

ration of need, the impetus of the BFSA was the city of

Buffalo’s crumbling finances, as evidenced in the State

Comptroller’s report:

The Icgislature hereby finds and declares that the city of

Buffalo is facing a severe fiscal crisis, and that the crisis

cannot be resolved absent assistance from the state. The

legislature finds that the city has repeatedly relied on

annual extraordinary increases in state aid to balance its

budget, and that the state cannot continue to take such

27a

extraordinary actions on the city’s behalf. The legislature

further finds and declares the maintenance of a balanced

budget by the city of Buffalo is a matter of overriding

state concern, requiring the legislature to intervene to

provide a means whereby: the longterm fiscal stability of

the city will be assured, the confidence of investors in

the city’s bonds and notes is preserved, and the economy

of both the region and the state as a whole is protected.

N.Y. PUB. AUTH. LAW § 3850-a.

In general, the BFSA requires the Control Board to monitor

the city of Buffalo’s financial plans on an ongoing basis to

ensure that the city is adhering to the detailed fiscal require-

ments set forth in the BFSA. (Defendants’ Statement, 4] 56.)

For example, the BFSA requires that the city prepare and

submit to the Control Board a four-year (2004-2007) financial

plan demonstrating, among other things, that annual operating

expenses will not exceed annual operating revenues. N.Y.

PuB. AUTH. LAW § 3857(1). The goal is for the city to

steadily balance its budget gaps with less and less outside

financial assistance until it can independently balance its

budget in 2008-2009. N.Y. PuB. AUTH. LAW § 3857(1).

The city’s financial plans must be approved by the Control

Board. N.Y. PuB. AUTH. LAW §§ 3858(2)(a). The BFSA pro-

vides a mechanism by which the Control Board may review

and modify the city’s financial plans. N.Y. PUB. AUTH. LAW

§ 3857. If the city fails to modify its financial plans or fails to

demonstrate that it is closing its budget gaps according to the

requirements of the BFSA, the Control Board is vested with

the authority to act to ensure that the city takes all necessary

corrective actions. N.Y. PUB. AUTH. LAW §§ 3857(2), 3858(2).

For example, the BFSA specifically authorizes the Control

Board to impose a “wage and/or hiring freeze” upon a finding

that such a freeze is “essential to the adoption or maintenance

of a city budget or a financial plan that is in compliance with

28a

[the BFSA].” N.Y. PuB. AUTH. LAW § 3858(2)(c)(i). The

BFSA specifically provides that

the [Control Board] shall be empowered to order that all

increases in salary or wages of employees of the city and

the employees of covered organizations which will take

effect after the date of the order pursuant to collective

bargaining agreements, other analogous contracts, or in-

terest arbitration awards, now in existence or hereafter

entered into, requiring such salary or wage increases as

of any date thereafter are suspended.

N.Y. PuB. AUTH. LAW § 3858(2)(c)(i).

The BFSA further provides that the frozen wages shall not

be paid retroactively:

no retroactive pay adjustments of any kind shall accrue

or be deemed to accrue during the period of wage freeze,

and no such additional amounts shall be paid at the time

a wage freeze is lifted, or at any time thereafter.

N.Y. PuB. AUTH. LAW § 3858(2)(c)(iii).

D. Implementation of the Wage Freeze

On October 21, 2003, the Control Board approved a four-

year financial plan for the city. (Johnson Decl., Exh. A.) The

Control Board continued to review and monitor the economic

conditions of the city and the viability of the four-year plan as

it is required to do under the BFSA. (Johnson Decl., Exh. A.)

In doing so, the Control Board discovered that the immediate

financial plan was out of balance, and that the city was pro-

jecting multiple increases in recurring expenditures, primarily

related to personnel costs. (Johnson Decl., Exh. A.) Specifi-

cally, the Control Board determined that the city was pro-

jecting an increase in the 2004-2005 budget gap of more than

$20 million above the $26 million gap projected in the finan-

cial plan, and that the projected cumulative gap over the next

29a

financial plan would exceed $250 million. (Johnson Decl.,

Exh. A.)

Consequently, on April 21, 2004, the Control Board en-

acted Resolution No. 04-35, otherwise known as the Wage

Freeze Resolution. (Defendants’ Statement, 4 37; Johnson

Decl., Exh. A.) This resolution was enacted based on the

Control Board’s finding that a wage freeze was “essential

to the maintenance of the Revised Financial Plan and to the

adoption and maintenance of future financial plans and budg-

ets that are now in compliance with the [BFSA].” (Johnson

Decl., Exh. A.) In pertinent part, the Control Board resolved

as follows:

RESOLVED AND ORDERED, that a wage freeze, with

respect to the City and all Covered Organizations, is

essential to the maintenance of the Revised Financial

Plan and to the adoption and maintenance of future

budgets and financial plans that are in compliance with

the Act; and be it further

RESOLVED AND ORDERED, that effective immedi-

ately, there shall be a freeze with respect to all wages,

wage rates, and salary amounts for all employees of the

City and all Nonexempt Covered Organizations, to the

full extent authorized by the Act (the “Wage Freeze’),

and be it further

RESOLVED AND ORDERED, that this Wage Freeze

shall apply to prevent and prohibit any increase in wage

rates, wages or salarics for any employee of the City or

a Nonexempt Covered Organization, including, but not

limited to, any increased payments for holiday and vaca-

tion differentials, shift differentials, salary adjustments

according to plan and step-ups or increments; and in-

cluding increases in wage rates, wages or salaries

pursuant to any plan or schedule for advancement or

promotion; and including any increases in wage rates,

30a

wages or salaries provided for under collective bargain-

ing agreements, interest arbitration awards, employment

agreements, or discretionary increases to non-repre-

sented employees, provided that such suspended salary

or wage increase shall not be considered as part of com-

pensation or final compensation or annual salary earned

or earnable for the purpose of computing the pension

base of any retirement allowances; and be it further

ORDERED AND RESOLVED, that the foregoing Wage

Freeze shall apply to prevent and prohibit any increase

in wage rates, wages or salaries that is scheduled to

commence or otherwise take effect on or after the

effective date of the Wage Freeze, notwithstanding that

(a) the increase was bargained for, provided for in an

existing collective bargaining agreement, or otherwise

planned prior to the effective date of the Wage Freeze,

and/or; (b) the increase is designated as retroactive, or

otherwise purports to relate to work performed prior to

the effective date of the Wage Freeze.

The wage freeze took effect immediately, on April 21,

2004. (Johnson Decl., Exh. A.)

E. Procedural History

On June 17, 2004, Plaintiffs commenced this action by

filing a Complaint in the United States District Court for the

Western District of New York. Defendants filed their Answer

on July 27, 2004. On February 28, 2005, the parties filed

Cross-Motions for Summary Judgment. After full briefing on

the motions, this Court held oral argument on May 24, 2005,

and reserved decision at that time.

Ill. DISCUSSION

A. Summary Judgment Standard

Rule 56 of the Federal Rules of Civil Procedure provides

that summary judgment is warranted where the “pleadings,

3la

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving

party is entitled to judgment as a matter of law.” FED. R. CIv.

P. 56(c). A “genuine issue” exists “if the evidence is such that

a reasonable jury could return a verdict for the non-moving

party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,

106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). A fact is

“material” if it “might affect the outcome of the suit under

governing law.” /d.

In deciding a motion for summary judgment, the evidence

and the inferences drawn from the evidence must be “viewed

in the light most favorable to the party opposing the motion.”

Addickes v. S.H. Kress and Co., 398 U.S. 144, 158-59, 90

S. Ct. 1598, 1609, 26 L.Ed.2d 142 (1970). “Only when rea-

sonable minds could not differ as to the import of evidence is

summary judgment proper.” Bryant v. Maffucci, 923 F.2d

979, 982 (2d Cir. 1991). The function of the court is not

“to weigh the evidence and determine the truth of the matter

but to determine whether there is a genuine issue for trial.”

Anderson, 477 U.S. at 249.

B. Nature of Plaintiffs’ Challenge

Plaintiffs’ Complaint contains two causes of action under

42 U.S.C. § 1983. First, Plaintiffs assert that the State of New

York, acting by and through the Defendants, has impaired

their contractual rights by imposing the wage freeze in

violation of the Contract Clause of the United States Consti-

tution. See U.S. Const. art. I, § 10, cl. 1. Second, Plaintiffs

contend that the state, acting by and through Defendants, has

taken their private property without just compensation in

violation of the Takings Clause of the Constitution. See U.S.

CONST. amend. V.

Generally, a legislative Act may be challenged in two

ways: (1) by establishing that it is wholly or facially, uncon-

32a

stitutional or (2) by demonstrating that it is unconstitutional

as applied in a particular way or as applied to a particular

person or group. Here, Plaintiffs are limited to “as applied”

challenges. This is because the BFSA itself does not diminish

or eliminate Plaintiffs’ contractual rights, nor does it alter or

affect i any way Plaintiffs’ collective bargaining agreements

with the city of Buffalo school district.” Thus, the BFSA,

standing on its own, does not substantially impair Plaintiffs’

contractual rights. See Cranley v. Nat'l Life Ins. Co. of Vt.,

144 F.Supp.2d 291, 302 (D.Vt. 2001) (rejecting a facial

challenge to a state statute under the Contract Clause where

the statute itself did not affect the plaintiffs’ contractual rights).

Similarly, the enactment of the BFSA, in and of itself, has not

deprived Plaintiffs of any property. It is only the Control

Board’s exercise of its remedial authority that arguably impli-

cates the taking of a property interest. As such, any facial

challenge to the BFSA under the Takings Clause would also

fail.

Counsel argued at length about the true nature of Plaintiffs’

challenge in this case. (See, e.g., Tr. at 7-33°). Plaintiffs main-

tain that they are challenging both the BFSA and the Wage

Freeze Resolution. They challenge the BFSA in the sense that

it is the source of the Control Board’s authority to freeze

wages, but they ultimately challenge the Wage Freeze Reso-

lution because it is the act that caused them injury.

Defendants interpret Plaintiffs’ Complaint as challenging

only the Control Board’s decision to impose the wage freeze,

to the exclusion of a constitutional challenge to the Control

Board’s authority to do so. Defendants’ conclusion in this re-

gard is supported by the text of the Complaint. For example,

* At oral argument, Plaintiffs’ counsel conceded that “the [BFSA] did

nothing to our clients. The statute was not self-executing ... .” (Tr. at 21.)

* Referring to the transcript of the oral argument before this Court on

May 24, 2005.

33a

the very first paragraph of the Complaint characterizes this

action as a “challenge [to] a recently-adopted resolution by

the Buffalo Fiscal Stability Authority (“BFSA”)—Resolution

No. 04-35.” (Complaint, 4 1.) In the second paragraph, Plain-

tiffs identify the Wage Freeze Resolution, not the BFSA,

as impairing their rights under the Contract and Takings

Clauses. (Complaint, {| 2.) In fact, Plaintiffs’ prayers for relief

seek (1) a declaration that the Wage Freeze Resolution

violates the Contract and Takings Clauses, (2) a declaration

that the Wage Freeze Resolution is unconstitutional and all

actions taken pursuant to it are void ab initio, and (3) an

Order enjoining Defendants from further implementing the

Wage Freeze Resolution. (Complaint, p. 12 (emphasis added).)

As such, Defendants argue that this Court should not reach

the constitutional issues presented by Plaintiffs. ’

As Plaintiffs’ counsel conceded at oral argument, the Com-

plaint could indeed have been more artfully drafted to make

clear the nature of Plaintiffs’ constitutional claims and theo-

ries. (Tr. at 10, 11.) However, this Court will not exalt form

over substance in this important case, and finds that Plain-

” Defendants also argue that this Court should not entertain Plaintiff's

challenge to the BFSA because the Attorney General of the State of New

York was not properly notified that this action involves a constitutional

chalenge to a state statute. Without commenting on whether notification

was mitially proper, this Court notes that the State Attorney General failed

to intervene or otherwise involve himself in this case even after the

Honorable Leslie G. Foschio, the United States Magistrate Judge assigned

to this case, filed a Certification of Action Challenging the Constitutional-

ity of a New York State Statute pursuant to 28 U.S.C. § 2403(b). By this

Certification, notice was given that “Plaintiffs request for declaratory re-

lief may also draw into question New York State’s legislation creating and

authorizing the [Control Board] to adopt the Wage Freeze Resolution.”

(Certification of Action, Docket No. 20, p. 1-2.) Accordingly, due to his

inaction after the issuance of this Certification, this Court concludes that

the State Attorney General would have declined to appear even if he had

been notified of the nature of this action sooner. As such, Defendants have

suffered no prejudice on this basis.

34a

tiffs’ Complaint meets the minimum requirements of notice

pleading under Rule &(a) of the Federal Rules of Civil Proce-

dure. See FED. R. Civ. P. 8(a) (requiring only “a short and

plain statement of the claim showing that the pleader is enti-

tled to relief”). Given the history and nature of this litigation,

it would be a veiled fiction to conclude that Defendants were

unaware that Plaintiffs intended to challenge the constitu-

tionality of the state’s action. Moreover, the parties have pre-

sented complete written and oral arguments on the constitu-

tional issues. As such, this Court detects no prejudice to

Defendants by entertaining Plaintiffs’ constitutional challenge

and will therefore proceed accordingly.

C. Contract Clause

The Contract Clause bars states from passing any “Law

impairing the Obligation of Contracts.” U.S. CONST. art. I,

§ 10, cl. 1. However, this prohibition is not absolute. See, e.g.,

United States Trust Co. v. New Jersey, 431 U.S. 1, 21, 97

S.Ct. 1505, 1517, 52 L.Ed.2d 92 (1977) (“Although the Con-

tract Clause appears literally to proscribe any impairment,

this court [has] observed that the prohibition is not an abso-

lute one and is not to be read with literal exactness like a

mathematical formula.” (quotation omitted)); Sanitation &

Recycling Indus. v. City of New York, 107 F.3d 985, 992-93

(2d Cir. 1997) (Contract Clause limits the power of the state

to abridge contractual relationships, but is not an absolute

bar).

The Supreme Court has interpreted the Contract Clause as

preserving “the inherent police power of the State ‘to safe-

guard the vital interests of its people.”” Energy Reserves

Group, Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410,

103 S.Ct. 697, 74 L.Ed.2d 569 (1983) (quoting Home Bldg. &

Loan Ass'n v. Blaisdell, 290 U.S. 398, 434, 54 S.Ct. 231, 78

L.Ed. 413 (1934)); see also United States Trust, 431 U.S. at

21; Sanitation & Recycling Indus., 107 F.3d at 993 (“Contract

Clause must be accommodated to the police power a state

35a

exercises to protects its citizens”). The police power is de-

scribed as “an exercise of the sovereign right of the Govern-

ment to protect the lives, health, morals, comfort and general

welfare of the people, [which] is paramount to any rights

under contracts between individuals.” Allied Structural Steel

Co. v. Spannaus, 438 U.S. 234, 241, 98 S.Ct. 2716, 2721, 57

L.Ed.2d 727 (1978).

It is well settled that not all state impairments of contracts

violate the Contract Clause; rather “the Clause is not violated

unless the impairment is a substantial one.” Sal Tinnerello &

Sons, Inc. v. Town of Stonington, 141 F.3d 46, 52 (2d Cir.

1998) (citing Gen. Motors Corp. v. Romein, 503 U.S. 181,

186, 112 S.Ct. 1105, 1109-10, 117 L.Ed.2d 328 (1992)). This

circuit employs a three-part test to determine whether a piece

of legislation violates the Contract Clause:

(1) whether the contractual impairment is in fact sub-

stantial; if so, (2) whether the law serves a significant

public purpose, such as remedying a general social or

economic problem; and, if such a public purpose is dem-

onstrated, (3) whether the means chosen to accomplish

this purpose are reasonable and appropriate.

Tinnerello, 141 F.3d at 52-53 (quoting Sanitation & Recy-

cling Indus., 107 F.3d at 993); see also Cranley, 144

F.Supp.2d at 302.

1. Substantial Impairment

The first step is to determine whether the state law at issue

has resulted in an impairment that is substantial. “The pri-

mary consideration in determining whether the impairment ts

substantial is the extent to which reasonable expectations

under the contract have been disrupted.” Sanitation & Recy-

cling Indus., 107 F.2d at 993 (citing Energy Reserves, 459

U.S. at 411).

Here, Plaintiffs argue that the elimination of their contrac-

tual rights to annual salary increases of roughly 2% per year

36a

for an indeterminate amount of time constitutes a substantial

impairment. Defendants do not persuasively challenge this

assertion.® Indeed, lesser impairments in a similar context

have been found by the circuit court to be substantial impair-

ments. See, e.g., Condell v. Bress, 983 F.2d 415, 417-19 (2d

Cir. 1993) (indefinite postponement of five days’ pay under a

lag payroll system found to be substantial impairment); Ass'n

of Surrogates & Supreme Court Reporters v. State of New

York, 940 F.2d 766, 772 (2d Cir. 1991) (indefinite postpone-

ment of ten days’ pay under a lag payroll system found to be

substantial impairment). This is because

[t]he affected employees have surely relied on full pay-

checks to pay for such essentials as food and housing.

Many have undoubtedly committed themselves to per-

sonal long-term obligations such as mortgages, credit

cards, car payments, and the like—obligations which

might go unpaid in the months that the lag payroll has its

immediate impact.

Surrogates, 940 F.2d at 772.

The Wage Freeze Resolution in the instant case impacts

affected employees in the same manner. Plaintiffs’ contracts

call for 2% annual salary increases. Certainly a vast majority

of Plaintiffs reasonably relied on receiving salary increases

when making financial decisions, particularly whether to enter

long-term financial commitments. Accordingly, this Court

finds that the permanent cancellation of Plaintiffs’ 2% annual

salary increases is an impairment of contract that is substan-

tial. This, of course, does not end the inquiry. The more

difficult question is whether this substantial impairment is

*This Court is not persuaded by Defendant’s argument that a sub-

stantial impairment has not occurred because the wage freeze in this case

is prospective. Such was also the case in Condell v. Bress, 983 F.2d 415,

417-19 (2d Cir. 1993) and Ass'n of Surrogates & Supreme Court Report-

ers v. State of New York, 940 F.2d 766, 772 (2d Cir. 1991).

37a

constitutionally permissible. See Surrogates, 940 F.2d at 771

(“finding an impairment of contract is merely a threshold

step toward resolving the more difficult question whether that

impairment is permitted under the Constitution” (internal

quotation and citation omitted)).

2. Significant Social or Economic Purpose

The next inquiry tests the validity of the legislative pur-

pose. To pass constitutional muster, the law at issue must

have a “legitimate public purpose” and should be aimed at

remedying an important “general social or economic prob-

lem.” Energy Reserves, 459 U.S. at 411.

The parties offer somewhat different viewpoints on the

purpose of the BFSA and by extension, the Wage Freeze

Resolution. Plaintiffs contend that while the BFSA may have

been primarily aimed at solving the city of Buffalo’s fiscal

crisis, it was also enacted to decrease or eliminate the amount

of extraordinary financial aid the state had been providing to

the city of Buffalo.’ Defendants counter that the state enacted

the BFSA not out of a desire to lessen its contributions to the

city, but rather, to provide the city a framework within which

it could work to regain its financial independence.

This Court is not persuaded by Plaintiffs’ suggestion that

part of the state’s motivation in enacting the BFSA was to

save itself money. In Plaintiffs’ view, the state made a con-

scious decision to provide for a wage freeze so that it would

not have to remit further aid to the city to cover the cost of the

contractual salary increases. Plaintiffs seize on the legisla-

ture’s finding that “the city has repeatedly relied on annual

extraordinary increases in state aid to balance its budget, and

” At oral argument, however, Plaintiffs’ counsel appeared to concede

that the BFSA was enacted to address the city of Buffalo's fiscal crisis.

(See Tr. at 56 (“the [BFSA] as a whole is certainly devoted mostly to the

interest of the citizens of Buffalo.~): Tr. at 88 (conceding that the impetus

of the BFSA was the financial crisis in the city of Buffalo).)

38a

that the state cannot continue to take such extraordinary

actions on the city’s behalf,” N.Y. PuB. AUTH. LAW § 3850-a,

as dispositive evidence that the state’s motivation in enacting

the BFSA was, at least in part, financial. This legislative

finding, however, cannot be considered in isolation. It comes

in the context of the state’s concern that one of its major

municipalities is unable to balance its own budget. Read as

such, this statement is not indicative of an underlying motiva-

tion to save money. Plaintiffs’ narrow interpretation is simply

not supported by the text of the BFSA, nor the legislative

findings in support thereof.

A fair reading of the BFSA demonstrates that the state’s

motivation for enacting the BFSA was to rectify the city’s

inability to manage its own finances. For example, the state

provided a detailed framework with very specific parameters

and deadlines for the city of Buffalo to follow in order to get

back on its feet and regain fiscal independence; it did not

simply cease sending financial assistance to the city, which it

could have done at any time. To the contrary, the BFSA

contemplates and provides for continuing state aid to the city.

See, e.g., N.Y. PUB. AUTH. LAW §§ 3857, 3861.

Moreover, the legislative declaration of need for state inter-

vention indicates that the city of Buffalo is facing “a severe

fiscal crisis, and that the crisis cannot be resolved absent

assistance from the state.” N.Y. PUB. AUTH. LAW § 3850-a.

The reference to “assistance” can surely be read as suggesting

financial assistance, as Plaintiffs would advocate, but reading

the BFSA in its totality, it is more reasonable that the term

“assistance” be read broadly. The BFSA on its face, ivr ex-

ample, provides assistance in the form of a detailed financial

recovery plan and an oversight commission—the Control

Board. In fact, the legislature specifically found that

maintenance of a balanced budget by the city of Buffalo

is a matter of overriding state concern, requiring the leg-

islature to intervene to provide a means whereby: the

39a

long-term fiscal stability of the city will be assured, the

confidence of investors in the city’s bonds and notes is

preserved, and the economy of both the region and the

state as a whole is protected.

N.Y. PuB. AUTH. LAW § 3850-a. As such, the purpose of the

BFSA was to provide assistance to the city of Buffalo in the

form of long-term solutions to the rampant budgetary prob-

lems that threatened the city’s fiscal viability and endangered

the welfare of its residents. This Court is convinced that the

reason for the state’s intervention was to assist the city in

ameliorating and solving its financial crisis, not to simply

reduce future state expenditures.

The historical and statutory notes underlying the enactment

of the BFSA, the pertinent portion of which is set out in the

margin, also supports this Court’s conclusion.” It is clear

' The historical and statutory notes provide, in relevant part, as

follows:

Legislative findings. The legislature hereby finds and declares that a

condition of fiscal difficulty has existed for several years in the city

of Buffalo, as a result of a weakened economy, population declines,

and job losses. In recent months, the city’s fiscal condition has been

further weakened by the impact of the national economic recession,

which has had a greater negative impact in Buffalo than in many

other areas of the state. These factors have led to a structural imbal-

ance between revenues and expenditures which, when combined

with the city’s limited ability to increase taxes on its residents, has

resulted in a downgrade of Buffalo’s bonds by independent bond

rating services,

It is hereby found and declared that the city is in a state of fiscal

crisis, and that the welfare of the inhabitants of the city is seriously

threatened. The city budget must be balanced and economic recov-

ery enhanced. Actions should be undertaken which preserve essen-

tial services to city residents, while also ensuring that taxes remain

affordable. Actions contrary to these two essential goals jeopardize

the city’s long-term fiscal health and impede economic growth for

the city, the region, and the state.

40a

that the thrust of the state’s concern was with rebuilding the

city of Buffalo’s economic foundation. See 2003 N.Y. LAws

Ch. 122, S. 5695 (McKinney’s). The legislature recognized

the city’s weakened economy and the fact that the city was in

a state of fiscal crisis. See id. It therefore determined that the

correct remedy would be a combination of enhanced budget-

ary discipline and short-term budgetary relief as set out in the

BFSA, thus the imposition of the financial plan requirement

and outside oversight. See N.Y. PUB. AUTH. LAW §§ 3856,

3857. The Wage Freeze Resolution itself is a direct response

to the city’s continued inability to properly manage its finan-

cial affairs and follow the approved four-year plan. (Johnson

Decl., Exh. A.)

In sum, this Court finds that the BFSA and Wage Freeze

Resolution have a legitimate public purpose, that being the

stabilization of the city of Buffalo’s budgetary problems and

the resurrection of its fiscal independence. The purpose is not

to save the state money. This Court further finds that the

BFSA and Wage Freeze Resolution are aimed at remedying

an important social problem, that being the economic invi-

ability of the city and the threatened welfare of the city’s

residents. /d. The state is therefore acting within the proper

scope of its police power. See Energy Reserves, 459 U.S. at

412 (“The requirement of a legitimate public purpose guaran-

tees that the State is exercising its police power. . . .”’).

3. Reasonable and Necessary Means

Having found the existence of a substantial impairment and

a legitimate legislative purpose, the state’s action can with-

It is, therefore, further found and declared that a combination of en-

hanced budgetary discipline and short-term budgetary discipline and

short-term budgetary relief is necessary to assist the city in returning

to fiscal and economic stability, while ensuring adequate funding for

the provision of essential services and for the maintenance, expan-

sion, and rebuilding of the infrastructure of the city.

2003 N.Y. LAWS Ch. 122, S. 5695 (McKinney’s).

4la

stand scrutiny “only if it is ‘reasonable and necessary’” to

serve the purposes of the BFSA. Surrogates, 940 F.2d at 772

(quoting United States Trust Co., 431 U.S. at 25); see also

Sanitation & Recycling Indus., 107 F.3d at 302. The law must

be “specifically tailored to meet the societal ill it is suppos-

edly designed to ameliorate.” Sanitation & Recycling Indus.,

107 F.3d at 302 (citing Spannaus, 438 U.S. at 243). Deter-

mining whether the means are reasonable and necessary is a

difficult task, which must be “resolved by balancing the

contractual rights of the individual against ‘the essential

attributes of sovereign power necessarily reserved by the

States to safeguard the welfare of their citizens.”” Surrogates,

940 F.2d at 771 (quoting Home Building & Loan, 290 U.S. at

435 (internal quotation and citation omitted)). An important

component of conducting this inquiry is identifying the scope

of deference due the state’s action.

In the ordinary course involving private contracts, courts

“defer to legislative judgment as to the necessity and reason-

ableness of a particular measure.” United States Trust, 431

U.S. at 23. However, in cases where the state is self-interested

and seeks to avoid or impair its own contractual obligations,

deference to legislative judgment as to reasonableness and

necessity is not appropriate:

The Contract Clause is not an absolute bar to subsequent

modification of a State’s own financial obligations. As

with laws impairing, the obligations of private contracts,

an impairment may be constitutional if it is reasonable

and necessary te serve an important public purpose. In

applying this standard, however, complete deference to

a legislative assessment of reasonableness and necessity

is not appropriate because the State’s self-interest is at-

stake. A governmental entity can always find a use for

extra money, especially when taxes do not have to be

raised. If a State could reduce its financial obligations

whenever it wanted to spend the money for what it re-

42a

garded as an important public purpose, the Contract

Clause would provide no protection at all.

Id. at 26; see also County of Suffolk v. Long Island Lighting

Co., 14 F.Supp.2d 260, 268 (E.D.N.Y. 1998) (“where the

state seeks to evade its financial contractual obligations, the

Supreme Court has indicated that the courts must apply some-

thing higher than the rational basis standard”) (citing United

States Trust, 431 U.S. at 26).

Plaintiffs argue that this Court should not defer to the state

legislature in this case because the state’s self-interest is at

stake. They rest their argument on the Second Circuit’s

decisions in Surrogates and Condell. In Surrogates, the court

faced a challenge to a lag payroll system enacted by the New

York state legislature to fund the creation of new judgeships

and court positions in the state’s Unified Court System. At

that time, New York was facing a fiscal crisis. To save money

and to help finance the new positions, the legislature enacted

a law imposing a lag payroll system for nonjudicial employ-

ees of the Unified Court System. The effect of the lag pay-

roll was to delay payment of the affected employees’ salaries

until two weeks after the salaries were earned. Prior to this

system, employees were paid their bi-weekly salaries imme-

diately after the two weeks were worked. The ten days’ pay

that was withheld under the system was eventually payable to

the employees at the termination of their employment with

the state at the rate of pay applicable to them on the date of

their separation.

The affected employees challenged the lag payroll system

under the Contract Clause. In considering the plaintiffs’ chal-

lenge, the court eschewed the deference typically afforded

legislative judgment because it found that the lag payroll

system was self-serving. See Surrogates, 940 F.2d at 771. In

particular, the court found that the legislation was self-serving

because it “impairs obligations of its own contracts.” Surro-

gates, 940 F.2d at 771 (emphasis in original). Applying

43a

heightened scrutiny, the court found that the lag payroll sys-

tem was not necessary to achieve the state’s goal of expand-

ing the court system. See id. at 773.

It cannot be said that a lag payroll for only judicial

employees was essential in order to finance the expan-

sion of the court system. The state could have shifted the

seven million dollars from another government program,

or it could have raised taxes. We recognize that neither

alternative would have been popular among politician-

legislators, but that is precisely the reasons that the con-

ract clause exists—as a ‘constitutional check on state

legislation.’

Id. (quoting Spannaus, 438 U.S. at 241).

In essence, the court found that the existence of available

alternatives to impairing the state’s own contracts, albeit not

as appealing, rendered the lag payroll system unconstitu-

tional. See Surrogates, 940 F.2d at 774 (“The contract clause,

if it is to mean anything, must prohibit New York from

dishonoring its existing contractual obligations when other

policy alternatives are available.”). The Court reiterated the

Supreme Court’s admonition that ‘‘a State is not completely

free to consider impairing the obligations of its own contracts

on par with other policy alternatives.” United States Trust,

431 US. at 30-31; see Surrogates, 940 F.2d at 773.

Approximately a year and a half later, the Second Circuit

decided Condell. In Condell, the court was again faced with a

lag payroll measure enacted by the State of New York, this

one imposing a one week lag payroll on executive branch

employees. The five days’ of withheld salary was payable to

the employees at the termination of their employment with

the state, as it was in Surrogates.

The impetus of this system was a budget deficit estimated

to be $1.005 billion in November 1990. The Governor had

made public his desire to eliminate the budget deficit without

44a

issuing Tax and Revenue Anticipation Notes, levying new

taxes, raising rates on existing taxes or laying off additional

executive branch employees. These options were considered,

but rejected as unwise fiscal policy. The expected bounty from

the lagged wages was $128 million. Following Surrogates,

the court again found that the state was self-interested and

struck down the legislation as unconstitutional under the Con-

tract Clause because alternatives to the lag payroll measure

were available. See Condell, 983 F.2d at 420.

Defendants argue that this case is distinguishable from

Surrogates and Condell, and this Court agrees. Unlike the

case at bar, Surrogates and Condell undisputedly involve

self-serving legislation. Self-serving legislation, as the cases

describe it, consists of two principal components: a direct

financial benefit to the state, and the abrogation of the state’s

own contracts. See United States Trust, 431 U.S. at 25-26;

Surrogates, 940 F.2d at 771-73, Condell, 983 F.2d at 418; see

also McDermott v. Cuomo, No. 91-CV-57, 1992 WL 133900

(N.D.N.Y. June 11, 2002). In Surrogates, the state’s purpose

in enacting the lag payroll system was to gain a direct

financial benefit of upwards of $7 million to devote to court

expansion; in Condell, the state’s purpose was to raise an

estimated $128 million to apply to deficit reduction. In both

cases, the state blatantly and directly impaired its own con-

tractual obligations to raise revenue.

The BFSA and Wage Freeze Resolution, however, involve

neither a direct financial benefit to the state, nor a direct

abrogation of the state’s own contracts. Because of this, the

BFSA and Wage Freeze Resolution are not self-serving like

the legislation considered in Surrogates and Condell. As pre-

viously discussed herein at length, the state legislature did not

enact this legislation as a money saving measure. Its purpose,

rather, was to stabilize the city of Buffalo’s budgetary prob-

lems and resurrect its fiscal independence.

45a

It is undisputed that no direct revenue to the state is gener-

ated by the wage freeze. Plaintiffs’ nonetheless contend that

the state gains a benefit by not having to provide the city with

additional financial assistance to cover the cost of Plaintiffs’

wage increases. This argument is purely theoretical. At first

blush, it is obvious that the city of Buffalo is the entity that

immediately benefits by not having to pay the cost of the

salary increases. After all, it is the city, not the state, that is

party to the underlying contracts and responsible for making

payment. More important, there is no evidence supporting

Plaintiffs argument that there is a direct correlation between

the cost of Plaintiffs’ salary increases and the amount of addi-

tional assistance the state would have to provide to the city.

That is, if the cost of Plaintiffs’ salary increases is “x,” there

is no evidence that the city would require corresponding state

aid in the amount of “x” to cover those salary increases.

A myriad number of factors play into the city’s need for

financial assistance from the state. Plaintiffs have presented

no evidence that the city would require additional state aid for

the specific purpose of paying Plaintiffs’ salary increases. As

such, Plaintiffs have not demonstrated that the implementa-

tion of their salary increases would necessarily increase the

city’s need from the state.

Plaintiffs’ theory contains an additional flaw. Plaintiffs

concede that the state has no legal duty to provide financial

assistance to the city. (Tr. at 36.) Indeed, there is complete

agreement that the state’s past aid to the city of Buffalo has

not come as the result of any legal compulsion. While Plain-

tiffs argue that the state may have a moral or political motiva-

tion to assist the city, the fact remains that t%ere is no legal

requirement that it do so. In the absence of such a require-

ment, it cannot be said that the state gains anything from the

wage freeze. For if there is no duty to provide funds in the

first place, the state receives nothing from a_ possible

reduction in the amount of its benevolent giving. At the end

46a

of the day, the state does not receive a direct financial benefit

as a result of the wage freeze.

As to the second component, Surrogates and Condell in-

volved the state directly abrogating its own contracts. It

relieved itself of a financial obligation by reneging on its

promise to pay its employees immediately upon the comple-

tion of their work. The state was, in essence, forcibly borrow-

ing money directly from the affected employees to fund court

expansion and debt reduction. The Second Circuit specifically

emphasized that the reason that state action in both cases was

impermissible was because the state had violated its own

contract. See, e.g., Surrogates, 940 F.2d at 771 (lag payroll

system was self-serving because it “impairs obligations of its

own contracts” (emphasis in original)); see also McDermott,

1992 WL 133900, at *2 -*5 (lag payroll system struck down

where state was impairing its own contracts). In stark con-

trast, the state here is not a party to the contracts at issue and

gains nothing from the implementation of the wage freeze.

The contracts are between Plaintiffs and the city of Buffalo’s

school district. The state is therefore not impairing its own

contract. There is no redistribution of funds from Plaintiffs to

the state as there was in Surrogates and Condell.

Accordingly, this Court finds that this case falls outside of

Surrogates and Condell because it does not involve “self-

serving” legislation. While this finding insulates the legis-

lation in this case from the “searching analysis” performed in

Surrogates and Condell, it does not comp'etely answer the

question of how much deference should be paid to the

legislature’s action.

As stated previously, when private contracts are at issue,

courts ordinarily “defer to legislative judgment as to the

necessity and reasonableness of a particular measure.” United

States Trust, 431 U.S. at 23. And when the state impairs its

own contracts for its own financial gain, courts review the act

with more searching scrutiny, but nonetheless afford the state

47a

“some” deference. See United States Trust, 431 U.S. at 26;

Long Island Lighting Co., 14 F.Supp.2d at 268; see also

Baltimore Teachers Union, Am. Fed. of Teachers Local 340,

AFL-CIO v. Mayor & City Council of Baltimore, 6 F.3d 1012,

1019 and n. 10 (4th Cir. 1993) (discussing United States Trust

and concluding that “some” deference remains due to self-

serving legislative policy decisions). This case falls some-

where in between.

In this Court’s view, this case presents circumstances closer

to the impairment of a private contract than to self-serving

impairment of a public contract. The State is impairing a

contract that it is not a party to, yet the contract is a public

contract. Accordingly, this Court will not completely defer to

the state legislature’s determinations, but will afford the legis-

lature more than “some” deference.

In judging whether the state’s determinations in this case

are reasonable and necessary, this Court is mindful that “the

inherent police power of the State ‘to safeguard the vital in-

terests of its people’ must be preserved. Energy Reserves,

459 U.S. at 410 (quoting Home Bldg. & Loan, 290 U.S. at

434). As the Second Circuit has noted, the “Contract Clause

must be accommodated to the police power a state exercises

to protect its citizens.” Sanitation & Recycling Indus., 107

F.3d at 993. The intersection of the state’s police power and

the protections of the Contract Clause therefore presents

difficult terrain. It requires a carcful balancing of the contrac-

tual rights of the individual with the state’s inherent power to

ensure the welfare of its citizenry. See Spannaus, 438 U.S. at

241; see also Home Building & Loan, 290 U.S. at 435;

Surrogates, 940 F.2d at 77).

This Court first finds that the state’s enactment of the

BFSA and imposition of the wage freeze resolution is reason-

able. Under the BFSA, a wage freeze can only be imposed

under certain circumstances and for a limited duration. First,

a wage freeze can only be imposed during a “control period.”

48a

N.Y. Pus. AUTH. LAW § 3858(2). A “control period” consists

of that period of time when the city is working toward com-

pliance with the requirements of the BFSA. See N.Y. Pus.

AUTH. LAW §§ 3851(10), 3858(1). The Control Board is not

authorized to impose a wage freeze while serving in an

advisory capacity. See N.Y. PUB. AUTH. LAW §§ 3851(1),

3858(2). Second, a wage freeze can only be imposed if the

Control Board finds that it is “essential to the adoption or

maintenance of a city budget or a financial plan [under the

BFSA].” N.Y. PuB. AUTH. LAW § 3858(2)(c). Absent such a

finding, no wage freeze can be imposed. Third, any imposi-

tion of a wage freeze must be periodically reviewed by the

Control Board. N.Y. PUB. AUTH. LAW § 3858(2)(d). Finally,

the wage freeze will only remain in place until the Control

Board determines that the fiscal crisis warranting the wage

freeze has abated. N.Y. PUB. AUTH. LAW § 3858(2)(d).

Further, this Court finds that the BFSA and Wage Freeze

Resolution are necessary to address the city of Buffalo’s

financial predicament. It is undisputed that the city of Buffalo

was drowning year after year in a fiscal crisis. Plaintiffs have

not challenged any of the findings regarding the city’s on-

going financial predicament. Plaintiffs nonetheless argue that

imposition of the wage freeze is not necessary because the

state has other alternatives. Again. Plaintiffs rely on Surro-

gates and Condell.

Again, however, these cases are distinguishable. In Surro-

gates and Condell, the Second Circuit applied searching scru-

tiny when determining whether the state’s decision to impair

its Own contracts was necessary. This level of scrutiny

applied, of course, because the state was acting in its own

self-interest. Under heightened scrutiny, the court looked to

whether the state had exhausted all of its available alterna-

tives, no matter how politically unpopular, before resorting to

abrogating or modifying its own contracts. Because the state

had not done so, the Court found that the impairment of its

49a

own contracts was not necessary or essential to achieve its

stated goals.

Such heightened level of scrutiny does not apply in this

case because the state, as discussed above, is not acting in its

own self-interest. Under the circumstances presented here,

where the state is validly exercising its police power, the level

of searching scrutiny performed in Surrogates and Condell

does not apply. Rather, this Court affords considerable defer-

ence (less than complete deference, but greater than some

deference) to the state’s decision that a wage freeze is neces-

sary to achieve the goals of the BFSA. In doing so, this Court

finds that the wage freeze is both reasonable and necessary to

remedy the dire financial situation facing the city of Buffalo.

At bottom, this Court finds that the state validly exercised its

legitimate police power by specifically tailoring this legisla-

tion to the social ill it was designed to ameliorate. See

Sanitation & Recycling Indus., 107 F.3d at 302. As such, no

violation of the Contract Clause has occurred."

D. Takings Clause

The Takings Clause of the Fifth Amendment provides that

“nor shall private property be taken for public use, without

just compensation.” U.S. CONST. amend. V. This clause ts

made applicable to the states through the Fourteenth Amend-

ment. See Kelo v. City of New London, Connecticut, — US.

__, 125 S.Ct. 2655, 2658 n. 1, L.Ed.2d — (2005) (citing

B.R. Co. v. Chicago, 166 U.S. 226, 17 S.Ct. 581, 41 L.Ed.

979 (1897)). The Takings Clause imposes two conditions on a

state’s authority to take private property: “the taking must be

' This Court notes, as did Defendants, that the constitutionality of

similar wage freezes has been upheld in other jurisdictions. See, e.g.,

Baltimore Teachers Union, Am. Fed. of Teachers Local 340, AFL-CIO v.

Mayor & City Council of Baltimore, 6 F.3d 1012 (4th Cir, 1993); Subway

Surface Supervisors Ass'n. v. New York City Transit Auth., 375 N.E.2d

384 (N.Y. 1978).

50a

for a public use and just compensation must be paid to the

owner.” Brown v. Legal Found. of Wash., 538 U.S. 216, 231,

123 S.Ct. 1406, 1417, 155 L.Ed.2d 376 (2003) (internal

quotations omitted); see First English Evangelical Lutheran

Church of Glendale v. County of Los Angeles, 482 U.S. 304,

314, 107 S.Ct. 2378, 96 L.Ed.2d 250 (1987) (Takings Clause

“does not prohibit the taking of private property, but instead

places a condition on the exercise of that power”). The

purpose of the Takings Clause is to prevent the government

“from forcing some people alone to bear public burdens

which, in all fairness and justice, should be borne by the

public as a whole.’” Armstrong v. United States, 364 U.S. 40,

49, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960); see also Mejia v.

City of New York, No. 01 Civ. 3381, 2004 WL 2884407, at *4

(S.D.N.Y. Dec. 10, 2004) (citing Armstrong).

Generally speaking, there are two types of takings. The

quintessential taking is one where “a direct government ap-

propriation or physical invasion of private property” occurs.

Lingle v. Chevron U.S.A., Inc., __ U.S. __, 125 S.Ct. 2074,

2081, _.L.Ed.2d (2005); see Palazzolo v. Rhode Island,

533 U.S. 606, 617, 121 S.Ct. 2448, 2457, 150 L.Ed.2d 592

(2001) (“The clearest sort of taking occurs when the govern-

ment encroaches upon or occupies private land for its own

proposed use.”); see also Tahoe-Sierra Pres. Council, Inc. v.

Tahoe Reg'l Planning Agency, 535 U.S. 302, 321-323, 122

S.Ct. 1465, 152 L.Ed.2d 517 (2002) (describing the Supreme

Court’s jurisprudence involving physical takings to be “as old

as the Republic”).

The other type of taking is one first recognized in Pennsyl-

vania Coal Co. v. Mahon, 260 U.S. 393, 43 S.Ct. 158, 67

L.Ed. 322 (1922), where “the Court recognized that there will

be instances when government actions do not encroach upon

or occupy the property yet still affect and limit its use to such

an €xten? that a taking occurs.” Palazzolo, 533 U.S. at 617

(discussveg Pennsylvania Coal). This type of taking is com-

Sla

monly referred to as a “regulatory taking.” “Regulatory tak-

ings are based on the principle that ‘while property may be

regulated to a certain extent, if a regulation goes too far it will

be recognized as a taking.”” Ganci v. New York City Transit

Auth., No. 04 Civ. 1346, 2005 WL 850915, at *4 (S.D.NLY.

April 13, 2005) (citing Pennsylvania Coal, 260 U.S. at 415).

To establish a violation of the Takings Clause, Plaintiffs

must first demonstrate that they possess a property interest

that is protected by the constitution. See Mejia, 2004 WL

2884407, at *4 (citing Ruckelshaus v. Monsanto Co., 467

U.S. 986, 1000-01, 104 S.Ct. 2862, 81 L.Ed.2d 815 (1984)).

Second, they must establish that the government deprived

them of that interest for pubtic purposes. See Ganci, 2005 WL

850915, at *4. Third, Plaintiffs must prove that the govern-

ment did no »rovide just compensation. See id.

Here, Plaintiffs argue that the first type of taking has oc-

curred, that is a physical taking. In fact, Plaintiffs expressly

deny that the state’s action constitutes a regulatory taking,

and this Court offers no opinion on that issue.'* (See, e.g.,

Plaintiffs’ Memorandum of Law in Opposition to Defen-

dants’ Motion for Summary Judgment, p. 14 (“this is not a

‘regulatory takings’ case . . . it is rather a ‘categorical takings’

case”); Tr. at 78 (indicating that no regulatory taking has oc-

curred).

The first and third inquiries present no problem. The Su-

preme Court has stated that contract rights are a form of

property for purposes of the Takings Clause. United States

Trust, 431 U.S. at 19 n. 16 (“Contract rights are a form of

property and as such may be taken for a public purpose

" For the sake of completeness, this Court notes that Defendants argue

that Plaintiffs’ Takings claim should be analyzed under the “regulatory

takings” line of authority. However, because Plaintiffs have made clear

that they are not asserting a regulatory taking claim, that line of authority

iS not instructive here.

52a

provided that just compensation is paid.”); Lynch v. United

States, 292 U.S. 571, 579, 545 S.Ct. 840, 843, 78 L.Ed. 1434

(1934) (finding that valid contracts are property within the

meaning of the Takings Clause). Accordingly, for purposes of

this stage of the analysis, this Court iinds that as to the first

inquiry, Plaintiffs’ contractual rights to salary increases war-

rant constitutional protection. Moreover, as to the third in-

quiry, it is agreed that Plaintiffs have not received any com-

pensation related to the wage freeze.

The second inquiry is whether the state has taken Plain-

tiffs’ property for its own proposed use. This is where Plain-

tiffs’ physical taking claim fails. Just compensation is re-

quired when the government directly acquires private prop-

erty for a public purpose. Brown, 538 U.S at 233. Here, as

discussed at length above, the state has not itself taken any

private property for a public purpose.

Physical takings cases involve the government directly ap-

propriating private property for its own use. See, e.g., Loretto

v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 102

S.Ct. 3164, 73 L.Ed.2d 868 (1982) (Government appropria-

tion of rooftop to provide cable television access constituted a

taking); United States v. Pewee Coal Co., 341 U.S. 114, 71

S.Ct. 670, 95 L.Ed. 809 (1951) (Government’s seizure and

operation of a coal mine to prevent national strike of coal

miners effected a taking); United States v. Causby, 328 U.S.

256, 66 S.Ct. 1062, 90 L.Ed. 1206 (1946) (Government’s use

of private airspace to approach government airport required

compensation), United States v. Gen. Motors Corp., 323 U.S.

373, 65 S.Ct. 357, 89 L.Ed.311 (1945) (Government’s occu-

pation of private warehouse effected a taking).

Plaintiffs argue that the state enacted the BFSA and im-

posed the wage freeze in order to eliminate the need for it to

provide the city of Buffalo with extraordinary financial aid.

To that end, Plaintiffs argue that the state, through the Control

Board, has permanently taken their contract rights for the

53a

public purpose of reducing the amount of state aid that must

be paid to the city of Buffalo. This Court has already rejected

this line of argument in the context of Plaintiffs’ Contract

Clause claim. There simply is no evidence in the record

supporting the claim that the state made a purposeful decision

to take Plaintiffs’ salary increases to offset future aid to the

city. Here, the state has not directly appropriated property for

its own use.

Finally, Plaintiffs have not provided this Court with any

cases holding that a wage freeze constitutes an unconstitu-

tional physical taking under the Takings Clause, and this

Court’s research did not reveal any. Indeed, none of the

principal cases relied upon by the parties presented Takings

claims or otherwise applied a Takings analysis to wage modi-

fication legislation.

Accordingly, this Court finds that the state has not appro-

priated or physically taken Plaintiffs’ property to fulfill a

public purpose. Therefore, no violation of the Fifth Amend-

ment has occurred. Lingle, 125 S.Ct. at 2081 (describing the

“classic taking” as one where “the government directly

appropriates private property”); Palazzolo, 533 U.S. at 617

(“The clearest sort of taking occurs when the government

encroaches upon or occupies private land for its own

proposed use.”).

IV. CONCLUSION

For the reasons discussed above, this Court finds that the

BFSA and the Wage Freeze Resolution are not unconstitu-

tional as either violative of the Contracts Clause or the Tak-

ings Clause. Rather, this Court finds that the state has acted

properly within its police power to address a significant social

and economic problem—the city of Buffalo’s dire financial

situation. Accordingly, Plaintiffs’ motion will be denied and

Defendants’ motion will be granted.

54a

V. ORDERS

IT HEREBY IS ORDERED, that Plaintiffs’ Motion for

Summary Judgment (Docket No. 22) is DENIED.

FURTHER, that Defendants’ Motion for Summary Judg-

ment (Docket No. 23) is GRANTED.

FURTHER, that the Clerk of the Court is directed to close

this case.

SO ORDERED.

Dated: August 18, 2005

Buffalo, New York

/s/ William M. Skretny

WILLIAM M. SKRETNY

United States District Judge

5Sa

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

[Filed NOV 27, 2006]

Thurgood Marshall U.S. Court House

40 Foley Square

New York 10007

Docket Number 05-4744-cv

DC Docket Number: 04-cv-457

DC: WDNY (BUFFALO)

DC Judge: Honorable William Skretny

BUFFALO TEACHERS FEDERATION,

Vv.

TOBE,

At a stated term of the United States Court of Appeals for

the Second Circuit, held at the Daniel Patrick Moynihan

United States Courthouse, 500 Pearl Street, in the City of

New York, on the 27th day of November two thousand six.

Buffalo Teachers Federation, Buffalo Educational Support

Team NEA/NY, Transportation Aides of Buffalo, NEA/NY,

Substitutes United Buffalo NEA/NY, Buffalo Council of

Supervisors and Administrators, AFSCME Local 264, Profes-

sional Clerical and Technical Employees’ Association and

Local 409 International Union Operating Engineers,

Plaintiffs-Appeilants,

v.

Richard Tobe, Thomas FE. Baker, Alair Townsend, H. Carl

McCall, John J. Faso, Joel A. Giambra, Mayor Anthony

56a

Masiello, Richard A. Stenhouse, Roger G. Wilmers, in their

official ca[p]acities as directors/members of the Buffalo Fiscal

and George E. Pataki,

Defendants-Appellees.

A petition for panel rehearing and a petition for rehearing en

banc having been filed herein by the appellant Appellant

Buffalo Teachers Federation, et al. Upon consideration by the

panel that decided the appeal, it is Ordered that said petition

for rehearing is DENIED.

It is further noted that the petition for rehearing en banc has

been transmitted to the judges for the court in regular active

service and to any other judge that heard the appeal and that

no such judge has requested that a vote be taken thereon.

For the Court,

Thomas Asreen, Acting Clerk

By: [Illegible]

Motion Staff Attorney

S7a

APPENDIX D

TITLE 2—BUFFALO FISCAL STABILITY AUTHORITY

Section

3850.

3850-a.

3851.

3852.

3853.

3854.

3855.

3856.

3857.

3857-a.

3858.

3859.

3860.

3861.

3862.

3863.

3864.

3865.

3866.

3866-a.

3867.

3868.

3869.

3870.

3871.

3872.

3873.

Short title. |

Legislative declaration of need for state intervention.

Definitions.

Buffalo fiscal stability authority.

Administration of the authority.

General powers of the authority.

Assistance to the authority; employees of the au-

thority.

City fiscal year two thousand three—two thousand

four budget modification and four-year financial

plan.

City financial plans.

Efficiency incentive grants.

Control period.

Advisory period.

Additional provisions.

Declaration of need for financing assistance to the

city.

Bonds, notes or other obligations of the authority.

Remedies of bondholders.

Intercept of city tax revenues, school district tax

revenues and state aid revenues.

Resources of the authority.

Agreement with the state.

Agreement with the county.

Agreement with the city.

Bonds, notes or other obligations legal for invest-

ment and deposit.

Tax exemption.

Actions against the autority.

Audits.

Effect of inconsistent provisions.

Separability; construction.

58a

Historical and Statutory Notes

L.2003, c. 122 legislation

L.2003, c. 122, § 1, provides:

Ҥ 1. Legislative findings. The legislature hereby finds and

declares that a condition of fiscal difficulty has existed for

several years in the city of Buffalo, as a result of a weakened

economy, population declines, and job losses. In recent

months, the city’s fiscal condition has been further weakened

by the impact of the national economic recession, which has

had a greater negative impact in Buffalo than in many other

areas of the state. These factors have led to a structural

imbalance between revenues and expenditures which, when

combined with the city’s limited ability to increase taxes on

its residents, has resulted in a downgrade of Buffalo’s bonds

by independent bond rating services.

“It is hereby found and declared that the city is in a state of

fiscal crisis, and that the welfare of the inhabitants of the city

is seriously threatened. The city budget must be balanced and

economic recovery enhanced. Actions should be undertaken

which preserve essential services to city residents, while also

ensuring that taxes remain affordable. Actions contrary to

these two essential goals jeopardize the city’s long-term fiscal

health and impede economic growth for the city, the region,

and the state.

“It is, therefore, further found and declared that a combina-

tion of enhanced budgetary discipline and short-term bud-

getary relief is necessary to assist the city in returning to

fiscal and economic stability, while ensuring adequate fund-

ing for the provision of essential services and for the mainte-

nance, expansion, and rebuilding of the infrastructure of the

city. lf the city financial plan incorporates the annual targets

required by this act for .recurring cost-saving measures, the

Buffalo fiscal stability authority shall make savings available

to the city through a restructuring of a portion of the city’s

59a

outstanding debt, and/or through limited borrowing for oper-

ating costs, in either case, secured by an intercept of sales tax

net collections as well as state aid.

“It is hereby further found and declared that a control and

advisory finance authority should be established to oversee

the city’s budget, financial and capital plans; to issue bonds,

notes or other obligations to achieve budgetary savings through

debt restructuring; to finance short-term cash flow or capital

needs; and, if necessary, to develop financial plans on behalf

of the city if the city is unwilling or unable to take the

required steps toward fiscal stability.

“Based upon the fiscal crisis in the city of Buffalo, the

legislature through this act creates a Buffalo fiscal stability

authority with certain control, advisory and borrowing pow-

ers, and imposes on the city of Buffalo certain requirements

as to budgetary operations and fiscal management, including

minimum annual requirements to produce recurring budget

Savings in increasing amounts over the next four years. The

agreements for financial and budgetary discipline between the

authority and the city shall be for such period as is necessary

under the standards set forth in this act to restore the city of

Buffalo to fiscal integrity, with a control or advisory role for

the authority continuing until June 30, 2037.”

§ 3850. Short title

This title shall be known and may be cited as the “Buffalo

fiscal stability authority act.”

§ 3850-a. Legislative declaration of need for state

intervention

The legislature hereby finds and declares that the city of

Buffalo is facing a severe fiscal crisis, and that the crisis

cannot be resolved absent assistance from the state. The

legislature finds that the city has repeatedly relicd on annual

extraordinary increases in state aid to balance its budget, and

60a

that the state cannot continue to take such extraordinary

actions on the city’s behalf. The legislature further finds and

declares that maintenance of a balanced budget by the city of

Buffalo is a matter of overriding state concern, requiring the

legislature to intervene to provide a means whereby: the long-

term fiscal stability of the city will be assured, the confidence

of investors in the city’s bonds and notes is preserved, and the

economy of both the region and the state as a whole is

protected.

§ 3851. Definitions

For the purposes of this title, unless the context otherwise

requires: 1. “Advisory period” means that period no earlier

than July first, two thousand six, after which the authority has

determined that (a) for each of the three immediately pre-

ceding city fiscal years, the city has adopted and adhered to

budgets covering all expenditures, other than capital items,

the results of which did not show a deficit, without the use

of any authority assistance, as provided for under section

thirty-eight hundred fifty-seven of this title, when reported in

accordance with generally accepted accounting principles and

(b) the comptroller and the state comptroller jointly certify

that securities were sold by the city during the immediately

preceding city fiscal year in the general public market and

that there is a substantial likelihood that such securities can be

sold by the city in the general public market from such date

through the end of the next succeeding city fiscal year in

amounts that will satisfy substantially all of the capital and

cash flow requirements of the city during that period in accor-

dance with the financial plan then in existence. The joint

certification made by the comptroller and the state comptrol-

ler shall be based on their separate written determinations

which may take into account a report and opinion of an

independent expert in the marketing of securities selected by

the authority as well as other information available to the

comptrollers. Once begun, an advisory period shall continue

6la

through June thirtieth, two thousand thirty-seven unless a

control period is imposed.

2. “Authority” or “Buffalo fiscal stability authority” or

“BFSA” means the public benefit corporation created by this

title.

3. “BFSA assistance” means: (a) the amount of debt ser-

vice savings in a given city fiscal year generated from the

proceeds of bonds, notes or other obligations made available

to or for the benefit of the city or any covered organization as

determined by the authority; or (b) the proceeds of any deficit

financing authorized by the authority, or some combination

thereof pursuant to the provisions of section thirty-eight hun-

dred fifty-seven of this title. Such assistance shall be made

available only upon a declaration of need by the city pursuant

to section thirty-eight hundred sixty-one of this title and the

approval of the BFSA board.

4. “Bonds, notes or other obligations” means bonds, notes

and other evidences of indebtedness, issued or incurred by the

authority.

5. “Chief fiscal officer” means the chief fiscal officer of

the city as defined in section 2.00 of the local finance law.

6. “City” means the city of Buffalo.

7. “City charter” means the city government law of the

city of Buffalo, as amended.

8. “City tax revenues” means the portion of the county's

“net collections’, as defined in section twelve hundred sixty-

two of the tax law, payable to the city under the agreement

among the county, the city and the cities of Lackawanna and

Tonawanda entered into pursuant to the authority of sub-

division (c) of section twelve hundred sixty-two of the tax

law. In the event that the city imposes sales and compensat-

ing use taxes pursuant to the authority of section twelve

62a

hundred ten of the tax law, “city tax revenues” shall also

include net collections from such city taxes.

9. “Comptrolier” means the comptroller of the city.

10. “Control period” means that period of time from the

effective date of this title, continuing until the authority deter-

mines that conditions have been met as provided in sub-

division one of this section and the city qualifies for the onset

of an advisory period. A control period may be reimposed as

determined by the authority in accordance with section thirty-

eight hundred fifty-eight of this title.

11. “Council” means the city council of the city of

Buffalo.

12. “County” means the county of Erie.

13. “Covered organization” means the city school district,

the joint schools construction board of the city, as described

in chapter six hundred five of the laws of two thousand, as

amended, and the Buffalo municipal housing authority and

any governmental agency, public authority or public benefit

corporation which receives or may receive moneys directly,

indirectly or contingently from the city, but excluding the

authority and (a) any other governmental agency, public

authority or public benefit corporation specifically exempted

from the provisions of this title by order of the authority upon

application of such agency, public authority, or corporation to

the authority or on the authority’s own motion upon a finding

by the authority that such exemption does not materially

affect the ability of the city to adopt and maintain a budget

pursuant to the provisions of this title, or (b) any state public

authority defined in section two hundred one of the civil

service law, unless specifically named above; provided, how-

ever, that the authority may terminate any exemption granted

by order of the authority pursuant to this subdivision upon a

determination that the circumstances upon which such ex-

emption was granted are no longer applicable.

63a

14. “Director of the budget” means the director of the

budget of the state.

15. “Financeable costs” or “costs” means costs to finance

(a) amounts necessary to accomplish a refunding, repayment

or restructuring of a portion of the city’s outstanding indebt-

edness or that of any covered organization, (b) cash flow

needs of the city or any covered organization, (c) any object

or purpose of the city or any covered organization, for which

a period of probable usefulness is prescribed in section 11.00

of the local finance law, including the costs of any prelimi-

nary studies, surveys, maps, plans, estimates and hearings,

(d) amounts necessary to finance a portion of the operating

costs of the city or any covered organization as provided in

section thirty-eight hundred fifty- seven of this title, to the

extent approved by the authority, or (e) incidental costs,

including, but not limited to, legal fees, printing or engraving,

publication of notices, taking of title, apportionment of costs,

and capitalized interest, insurance premiums, costs related to

items authorized in subdivisions seven through nine of

section thirty-eight hundred fifty-four of this title or any

underwriting or other costs incurred in connection with the

financing thereof; provided however that, to the maximum

extent practicable, all financeable costs shall not adversely

affect the requirements of subdivision two of section thirty-

eight hundred sixty-nine of this title.

16. “Financial plan” means the financial plan of the city

and the covered organizations to be developed pursuant to

section thirty-eight hundred fifty-seven of this title, as from

time to time amended.

17. “Major operating funds” means the city general fund,

the board of education general fund, the city enterprise funds,

the board of education special project funds, together with

any other funds of the city or a covered organization from

time to time designated by the authority.

64a

18. “Mayor” means the mayor of the city.

19. “Presiding officer” means the presiding officer of the

council elected pursuant to the rules of the council.

20. “Projected gap” means the excess, if any, of annual

aggregate projected expenditures over annual aggregate pro-

jected revenues for the major operating funds in each year of

a financial plan as determined by the city and certified by the

authority. For purposes of determining the projected gap in

each fiscal year, annual aggregate projected revenues shall

not include the amount of BFSA assistance expected to be

available for such fiscal year.

2i. “Revenues” means revenues of the authority consisting

of city tax revenues, school district tax revenues, state aid

revenues, and all other aid, rents, fees, charges, gifts, pay-

ments and other income and receipts paid or payable to the

authority or a trustee for the account of the authority, to the

extent such amounts are pledged to bondholders.

22. “State” means the state of New York.

23. “State aid” means: all general purpose local govern-

ment aid; emergency financial assistance to certain cities;

emergency financiai assistance to eligible municipalities; sup-

plemental municipal aid; and any successor type of aid and

any new aid appropriated by the state as local government

assistance for the benefit of the city.

24. “State aid revenues” means state aid paid by the state

comptroller to the authority pursuant to this title.

25. “State comptroller” means the comptroller of the state.

26. “School district tax revenues” means the portion of the

county’s “net collections,” as defined in section twelve hun-

dred sixty-two of the tax law, payable to the city’s dependent

school district by the county pursuant to the authority of sub-

division (a) of section twelve hundred sixty-two of the tax

law.

65a

27. “Cash flow borrowings” means:

(a) notes issued by the authority on behalf of the city,

the city’s dependent school district or any other covered or-

ganization, the proceeds of which are used to address tempo-

rary cash flow needs of the city, the city’s dependent school

district or the applicable covered organization; and

(b) bonds, notes and other obligations issued by the

authority to refund notes of the authority described in para-

graph (a) of this subdivision.

28. “Obligations of the city” means bonds, notes and other

evidences of indebtedness issued or incurred by the city.

§ 3852. Buffalo fiscal stability authority

1. There is hereby created the Buffalo fiscal stability au-

thority. The authority shall be a corporate governmental

agency and instrumentality of the state constituting a public

benefit corporation.

2. The authority shall conduct meetings as often as deem-

ed necessary to accomplish its purposes, but not less than

quarterly during a control period, and annually during an

advisory period.

3. The authority shall continue until its control, advisory or

other responsibilities, and its liabilities have been met or

otherwise discharged, which in no event shall be later than

June thirtieth, two thousand thirty-seven. Upon the termina-

tion of the authority, all of its property and assets shall pass to

and be vested in the city.

§ 3858. Control period

1. A control period shall begin as of the effective date of

this title and may be reimposed during an advisory period if

the authority determines at any time that a fiscal crisis is

imminent or that any of the following events has occurred or

that there is a substantial likelihood and imminence of such

66a

occurrence: (a) the city shall have failed to adopt a balanced

budget, financial plan or budget modification as required by

sections thirty-eight hundred fifty-six and thirty-eight hun-

dred fifty-seven of this title, (b) the city shall have failed to

pay the principal of or interest on any of its bonds or notes

when due, (c) the city shall have incurred an operating deficit

of one percent or more in the aggregate results of operations

of any major fund of the city or a covered organization during

its fiscal year assuming all revenues and expenditures are

reported in accordance with generally accepted accounting

principles, subject to the provisions of this title, (d) the chief

fiscal officer’s certification at any time, at the request of the

authority or on the chief fiscal officer’s initiative, which

certification shall be made from time to time as promptly as

circumstances warrant and reported to the authority, that on

the basis of facts existing at such time such officer could not

make the certification described in subdivision one of section

thirty-eight hundred fifty-one of this title, or (e) the city shall

have violated any provision of this title. A control period

shall terminate when the authority has determined that the

city qualifies for the onset of an advisory period as provided

under subdivision one of section thirty-eight hundred fifty-

one of this title. After onset of an advisory period, the author-

ity shall annually consider paragraphs (a) through (e) of this

subdivision and determine whether, in its judgment, any of

the events described in such paragraphs have occurred and

the authority shall publish each such determination. Any

certification made by the chief fiscal officer hereunder shall

be based on such officer’s written determination which shall

take into account a report and opinion of an independent ex-

pert in the marketing of municipal securities selected by the

authority, and the opinion of such expert and any other

information taken into account shall be made public when

delivered to the authority. Notwithstanding any part of the

foregoing to the contrary, in no event shall any control period

continue beyond June thirtieth, two thousand thirty-seven.

67a

2. In carrying out the purposes of this title during any

control period, the authority:

(a) shall approve or disapprove the financial plan and

the financial plan modifications of the city, as provided in

sections thirty-eight hundred fifty-six and thirty-eight hun-

dred fifty-seven of this title, and shall formulate and adopt its

own modifications to the financial plan, as necessary; such

modifications shall become effective upon their adoption by

the authority;

(b) may set a maximum level of spending for any pro-

posed budget of any covered organization;

(c) may impose a wage and/or hiring freeze: (1) During

a control period, upon a finding by the authority that a wage

and/or hiring freeze is essential to the adoption or mainte-

nance of a city budget or a financial plan that is in compliance

with this title, the authority shall be empowered to order that

all increases in salary or wages of employees of the city and

employees of covered organizations which will take effect

after the date of the order pursuant to collective bargaining

agreements, other analogous contracts or interest arbitration

awards, now in existence or hereafter entered into, requiring

such salary or wage increases as of any date thereafter are

suspended. Such order may also provide that all increased

payments for holiday and vacation differentials, shift differ-

entials, salary adjustments according to plan and step-ups

or increments for employees of the city and employees of

covered organizations which will take effect after the date of

the order pursuant to collective bargaining agreements, other

analogous contracts or interest arbitration awards requiring

such increased payments as of any date thereafter are, in the

same manner, suspended. For the purposes of computing the

pension base of retirement allowances, any suspended salary

or wage increases and any other suspended payments shall

not be considered as part of compensation or final compensa-

tion or of annual salary earned or earnable.

68a

(ii) Notwithstanding the provisions of subparagraph

(i) of this paragraph, this subdivision shall not be applicable

to employees of the city or employees of a covered organiza-

tion subject to a collective bargaining agreement or an em-

ployee of the city or a covered organization not subject to a

collective bargaining agreement where the collective bargain-

ing representative or such unrepresented employee has agreed

to a deferment of salary or wage increase, by an instrument in

writing which has been certified by the authority as being an

acceptable and appropriate contribution toward alleviating the

fiscal crisis of the city. Any such agreement to a deferral

of salary or wage increase may provide that for the purposes

of computing the pension base of retirement allowances, any

deferred salary or wage increase may be considered as part of

compensation or final compensation or of annual salary

earned or earnable;

(i111) Notwithstanding the provisions of subparagraphs

(i) and (ii) of this paragraph, no retroactive pay adjustments

of any kind shall accrue or be deemed to accrue during the

period of wage freeze, and no such additional amounts shall

be paid at the time a wage freeze is lifted, or at any time

thereafter.

(d) shall periodically evaluate the suspension of salary

or wage increases or suspensions of other increased payments

or benefits, and may, if it finds that the fiscal crisis, in the

sole judgment of the authority has abated, terminate such

suspensions;

(e) shall review and approve or disapprove any collec-

tive bargaining agreement to be entered into by the city or

any covered organization, or purporting to bind, the city or

any covered organization. Prior to entering into any collec-

tive bargaining agreement, the city or any covered organiza-

tion shall submit a copy of such collective bargaining agree-

ment to the authority, accompanied by an analysis of the

projected costs of such-agreement and a certification that

69a

execution of the agreement will be in accordance with the

financial plan. Such submission shall be in such form and

include such additional information as the authority may

prescribe. The authority shall promptly review the terms of

such collective bargaining agreement and the supporting

information in order to determine compliance with the finan-

cial plan, and shall disapprove any collective bargaining

agreement which, in its judgment, would be inconsistent with

the financial plan. No collective bargaining agreement bind-

ing, or purporting to bind, the city or any covered organiza-

tion after the effective date of this title shall be valid and

binding upon the city or any covered organization unless first

approved by resolution of the authority.

(f) shall act jointly with the city in selecting members of

any interest arbitration panel. Notwithstanding any other

evidence presented by the city, the covered organization or

any recognized employee organization, the arbitration panel

must, prior to issuing any final decision, provide the authority

with the opportunity to present evidence regarding the fiscal

condition of the city;

(g) shall take any action necessary in order to imple-

ment the financial plan should the city or any covered

organization have failed to comply with any material action

necessary to fulfill the plan, provided, however, the authority

shall provide seven (7) days notice of its determination that

the city or any covered organization has not complied prior to

taking any such action.

(h) may review and approve or disapprove contracts or

other obligations binding or purporting to bind the city or any

covered organization;

(i) shall, with respect to any proposed borrowing by or

on behalf of the city or any covered organization on or after

July first, two thousand three, review the terms of and com-

ment, within thirty days after notification by the city or cov-

70a

ered organization of a proposed borrowing, on the prudence

of each proposed issuance of bonds or notes to be issued by

the city or covered organization and no such borrowing shall

be made unless first reviewed, commented upon and ap-

proved by the authority. The authority shall comment within

thirty days after notification by the city or covered organiza-

tion of a proposed borrowing to the mayor, the comptroller,

the council, the director of the budget and the state comptrol-

ler and indicate approval or disapproval of the proposed bor-

rowing. Notwithstanding the foregoing, neither the city nor

any covered organization shall be prohibited from issuing

bonds or notes to pay outstanding bonds or notes; and, pro-

vided further, the first issuance of debt pursuant to chapter six

hundred five of the laws of two thousand, as amended, shall

be excluded from this requirement;

(j) may review the operation, management, efficiency

and productivity of the city and any covered organizations as

the authority may determine, and make reports thereon; ex-

amine the potential to enhance the revenue of the city or any

covered organization; audit compliance with the financial

plan in such areas as the authority may determine; recom-

mend to the city and the covered organizations such measures

relating to their operations, management, efficiency and pro-

ductivity as the authority deems appropriate to reduce costs,

enhance revenue, and improve services so as to advance the

purposes of this title;

(k) may require the city to undertake certain actions to

advance serious and in-depth exploration of a merger of ser-

vices with the county, including identification and analysis of

options; development of a detailed fiscal and programmatic

plan; identification of city, county, and state impediments;

and fostering of informed public debate;

(/) may review and approve or disapprove the terms of

any proposed settlement of claims against the city or any

covered organization in excess of fifty thousand dollars;

Tla

(m) may obtain from the city, the covered organizations,

comptroller, and the state comptroller, as appropriate, all

information required pursuant to this section, and such other

financial statements and projections, budgetary data and in-

formation, and management reports and materials as the

authority deems necessary or desirable to accomplish the

purposes of this title; and inspect, copy and audit such books

and records of the city and the covered organizations as the

authority deems necessary or desirable to accomplish the

purposes of this title;

(n) may perform such audits and reviews of the city and

any agency thereof and any covered organizations as it deems

necessary; and

(0) may issue, from time to time and to the extent it

deems necessary or desirable in order to accomplish the pur-

poses of this title, to the appropriate official of the city and

each covered organization, such orders necessary to accom-

plish the purposes of this title, including, but not limited to, -

timely and satisfactory implementation of an approved finan-

cial plan. Any order so issued shall be binding upon the

official to whom it was issued and failure to comply with

such order shall subject the official to the penaltics described

in subdivision three of this section.

3. (a) During any control period (1) no officer or employee

of the city or of any of the covered organizations shall make

or authorize an obligation or other liability in excess of the

amount available therefor under the financial plan as then in

effect; (11) no officer or employee of the city or of any of the

covered organizations shall involve the city or any of the

covered organizations in any contract or other obligation or

liability for the payment of money for any purpose required to

be approved by the authority unless such contract has been so

approved and unless such contract or obligation or liability is

in compliance with the approved financial plan as then in

effect.

72a

(b) No officer or employee of the city or any of the

covered organizations shall take any action in violation of any

valid order of the authority or shall fail or refuse to take any

action required by any such order or shall prepare, present or

certify any information (including any projections or esti-

mates) or report to the authority or any of its agents that is

false or misleading, or, upon learning that any such informa-

tion is false or misleading, shall fail promptly to advise the

authority or its agents thereof.

(c) In addition to any penalty or liability under any other

law, any officer or employee of the city or any of the covered

organizations who shall violate paragraph (a) or (b) of this

subdivision shall be subject to appropriate administrative

discipline, including, when circumstances warrant, suspen-

sion from duty without pay or removal from office by order

of either the governor or the mayor; and any officer or em-

ployees of the city or any of the covered organizations who

shall knowingly and willfully violate paragraph (a) or (b) of

this subdivision shall, upon conviction, be guilty of a mis-

demeanor.

(d) In the case of a violation of paragraph (a) or (b) of

this subdivision by an officer or employee of the city or of a

covered organization, the mayor or the chief executive officer

of such covered organization shall immediately report to the

authority all pertinent facts together with a statement of the

action taken thereon.