The U.S. Court of Appeals for the Second Circuit on Wednesday upheld as constitutional a year-long wage freeze for all Nassau County employees, finding that the move by an independent financial oversight body did not violate the U.S. Constitution's Contract Clause.

A three-judge panel of the Manhattan-based appeals court said the 2011 decision by the Nassau County Interim Finance Authority was "clearly reasonable" and necessary to avoid more Draconian cuts in the distressed municipality, which is also one of the wealthiest counties in New York state.

A contingent of unions representing law-enforcement and civil-service employees claimed that the wage freeze reneged on an earlier collective bargaining agreement they struck with the county year earlier, which guaranteed annual pay bumps for public workers.

A state court previously jettisoned the suit's state law claims in finding that NIFA had the power to implement the wage freeze, but the plaintiffs returned to Brooklyn federal court to litigate their constitutional challenge for alleged violations of the Contract Clause, which forbids states from passing laws that impair obligations under valid contracts.

U.S. District Judge Joanna Seybert of the Eastern District of New York had ruled against the unions, holding that the freeze did not implicate the Contract Clause because it was administrative, and not legislative, in nature.

The Second Circuit panel, however, said Wednesday that while it was "plain" that the state-created oversight authority's actions nixed portions of otherwise valid contracts, NIFA was in fact operating with the "legitimate public purpose" of rescuing Nassau County's finances.

The panel noted that Nassau County had laid off hundreds of workers even before the wage freeze, as it fell into deeper financial straits. At the time, county officials had been counting millions of dollars that it had borrowed as revenue, and half of the county's overall expenditures went toward labor costs, including salaries and benefits.

State and federal mandates, meanwhile, had limited its ability to reduce expenses. and in a county that already boasted the nation's highest median property tax rate, the idea of additional taxes was unpalatable, leaving NIFA with limited options when an impending deficit crisis triggered its control in 2011.

The plaintiffs and their Stroock & Stroock & Lavan attorneys argued on appeal that the ordeal was simply a "paper crisis," caused by the imposition of new accounting standards. However, the Second Circuit found no evidence that the county's proposed budget would not lead to a major shortfall absent the revised standards.

Given the alternative of hundreds of additional layoffs and department closures, the wage freeze was both "reasonable and necessary to achieve NIFA's purported goal of fiscal soundness," the Second Circuit said in applying the court's "less deference" standard.

"In reaching this conclusion, we emphasize that '[w]hether the legislation is wise or unwise as a matter of policy is a question with which we are not concerned,'" Judge Guido Calabresi wrote on behalf of the unanimous panel, which also included Judges Raymond J. Lohier and Michael H. Park.

"Our job is simply to determine whether the wage 17 freeze was imposed in order to renege on a contract (to get out of a bad deal) or as 18 a governmental action intended to serve the public good, as the government saw it, Calabresi said.

Alan Klinger, co-managing partner at Stroock who represented the unions throughout the case, took issue with Wednesday's decision, saying that the court rejected "key components" of NIFA's argument, despite eventually ruling in its favor.

"Where the court erred was in finding the wage freeze 'reasonable and necessary' despite the fact that it was actions of the county that triggered the financial concern and ignored its own prior determination in the seminal Buffalo Teachers case that a substantial impairment should be made only as a 'last resort,' rather than a first resort," he said. "The unions are intent on pursuing the matter."

Attorneys for NIFA and the county did not immediately respond to a request for comment.

The plaintiffs were represented by Shira Scheindlin, Alan Klinger and Steven Losquadro of Stroock and Howard Wien of Koehler & Isaacs.

NIFA was represented by Christopher Gunther of Skadden, Arps, Slate, Meagher & Flom.

The case was captioned Sullivan v. Nassau County Interim Finance Authority.

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