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Retroactivity refers to any part of a contract agreement made effective as of some earlier date, usually to the day in which a new contract would have taken effect if an agreement had been reached on or before the final day of a previous contract. That is, retroactive salary increases are paid as if an agreement had been reached earlier than it was in fact reached.
Pennsylvania school boards rarely have difficulty in agreeing to retroactive salary payments if an agreement on a new contract can be reached during the same budget year when the prior contract was scheduled to expire. For example, if a contract that was scheduled to expire during August, 2009 can be renegotiated by June, 2110, the new contracts costs will be paid out of the current year’s budget. If, however, no agreement is reached until the next fiscal year, the necessity of adding retroactive salary payments to the contracts second-year costs may push a district above its Act 1 tax ceiling. Pennsylvania districts must balance their budgets annually.
Suppose that total teacher salary costs in the final year of a contract total exactly $10,000,000. After a long negotiation that extends a year longer than anticipated, the board and union agree on a contract with annual pay increases costing an additional $500,000/year for the duration of the contract and applied retroactively. The district’s payroll liability for Year 1 (now past) increased to $10,500,000, but only $10,000,000 was paid out to teachers during that year. During the second (now current) contract year, the district must raise $1,500,000 in new revenue -- $500,000 to cover the retroactive raise, a second $500,000 to allow for the fact that the new second-year base costs have risen by that amount, and a third $500,000 for a new second-year raise.
This explains why boards often resist retroactive pay agreements. Union negotiators insist, however, that a board’s refusal to consider retroactive pay agreements creates an incentive for boards to prolong negotiations as a way of putting pressure on the union to avoid the loss of any pay raise during what had been expected to be the first year of a new contract.
Note that failure to include retroactivity may work to the advantage of a union when the issue is healthcare cost-shifting. This is because districts are obliged to maintain existing healthcare coverage in place while negotiations are underway.
In short, each side would like new benefits to begin as soon as possible and new costs to be postponed as long as possible.