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IA-07-04
ARBITRATION IN THE MATTER OF CITY OF TIGARD AND TIGARD POLICE OFFICERS' ASSOCIATION. IA-07-04.
 
PRELIMINARY STATEMENT
 
The hearing in the above-mentioned arbitration was held on November 4, 2004, 2003 at 8935 S.W. Burnham Street in Tigard, Oregon. During the hearing each side of the dispute was given the opportunity to present evidence through both exhibits and direct testimony. The witnesses put forth by both parties were subject to cross-examination. The record of this case was closed upon agreement by both parties that post-hearing briefs were to be submitted by December 10, 2004.
 
STATEMENT OF THE ISSUE
 
Which of the Last Best Offers submitted by the Parties should be implemented?
 
WITNESSES
 
For the City:
 
1. Thomas Kramer, attorney in private practice
 
2. William Monahan, City Manager for the City of Tigard
 
3. Craig Prosser, Finance Director for the City of Tigard
 
4. Alan Orr, Assistant Chief of Police
 
For the Union:
 
1. Will Aicheson, attorney in private practice
 
2. Patricia Thomas, certified public accountant
 
3. Gary Pickering, Police Officer for the City of Tigard
 
4. Michelle McMahan, Community Service Officer for the City of Tigard
 
5. Michael Mills, SEIU Local President
 
6. Larry Scruggs, Jr., Police Officer for the City of Tigard
 
7. Dana Bennett, Senior Research Assistant
 
RELEVANT CONTRACT PROVISIONS
 
ORS 243.746(4) Where there is no agreement between the parties, or where there is an agreement but the parties have begun negotiations or discussions looking to a new agreement or amendment of the existing agreement, unresolved mandatory subjects submitted to the arbitrator in the parties' last best offer packages shall be decided by the arbitrator. Arbitrators shall base their findings and opinions on these criteria giving first priority to paragraph (a) of this subsection and secondary priority to subsections (b) to (h) of this subsection as follows:
 
(a) The interest and welfare of the public.
 
(b) The reasonable financial ability of the unit of government to meet the costs of the proposed contract giving due consideration and weight to the other services, provided by, and other priorities of, the unit of government as determined by the governing body. A reasonable operating reserve against future contingencies, which does not include funds in contemplation of settlement of the labor dispute, shall not be considered as available toward a settlement.
 
(c) The ability of the unit of government to attract and retain qualified personnel at the wage and benefit levels provided.
 
(d) The overall compensation presently received by the employees, including direct wage compensation, vacations, holidays and other paid excused time, pensions, insurance, benefits, and all other direct or indirect monetary benefits received.
 
(e) Comparisons of the overall compensation of other employees performing similar services with the same or other employees in comparable communities. As used in this subsection, "comparable" is limited to communities of the same or nearest population range within Oregon. Notwithstanding the provisions of the subsection, the following additional definitions of "comparable" apply in the situations described as follows:
 
(A) For any city with a population of more than 325,000, "comparable" includes comparison to out-of-state cities of the same or similar size;
 
(B) For counties with a population of more than 400,000, "comparable" includes comparison to out-of-state counties of the same or similar size; and
 
(C) For the State of Oregon, "comparable" includes comparison to other states.
 
(f) The CPI-AII Cities Index, commonly known as the cost of living.
 
(g) The stipulations of the parties.
 
(h) Such other factors, consistent with subsections (a) to (g) of this section as are traditionally taken into consideration in the determination of wages, hours, and other terms and conditions of employment. However, the arbitrator shall not use such other factors, if in the judgment of the arbitrator, the factors in subsection (a) to (g) of this section provide sufficient evidence for an award.
 
EVIDENCE PRESENTED
 
William Aicheson, a labor attorney and author representing clients in the Western United States, testified that recruitment for police officers has become a problem for many law enforcement agencies. Health insurance is a major item of interest for many law enforcement personnel even though they tend to use it less than other occupations because of their tendency to be younger and in better physical shape. Such employees are also less likely to use such insurance since they benefit from more liberal disability presumptions contained in various state workers compensation statutes. Aicheson understands a VEBA (voluntary employees' beneficiary association) was offered to the Association during mediation but he believes that the membership must ratify such a program before it can be implemented.
 
It is his understanding that some law enforcement agencies have put into place contribution caps on the employee/employer medical premiums. In making benefit and/or pay comparisons with other agencies, Aicheson believes there is a correlation between the size of an employee's compensation package and the population of the jurisdiction being served. When making wage and benefit comparisons the proximity to the jurisdiction should also be taken into consideration. As an example, since the law enforcement agencies for Portland and Tigard work closely together, a comparison between the two at some level would be appropriate.
 
Patricia Thomas, a certified public accountant with fifteen years of experience, has performed a number of efficiency audits over the years including several for local public agencies. It is her understanding that a budget is just an estimation of future income and expenses while audits are more definitive. Thomas has examined five years worth of budget data and audit information for the City of Tigard (A-20, 22 & 23). She believes the City's revenue projections are underestimated. In the past they have consistently exceeded actual expenditures. The fact that there are residual funds at the end of the year was no real surprise to her since most city budgets tend to be fairly conservative when developing revenue forecasts.
 
Greg Pickering, a police officer for the Tigard, testified as to the level of cooperation his employer has with neighboring law enforcement departments including the City of Portland. Because of their proximity and the fact that crime often crosses jurisdictional and geographic lines, they regularly support each other in a number of investigative and preventative law enforcement functions.
 
Michelle McMahan is both a community service officer and secretary for the Association. She also serves as a representative on an insurance committee composed of both city management and labor personnel. Although she regularly participated in the committee's meetings, if an item came up for discussion she felt was a collective bargaining issue, McMahan would not participate further in the discussion. She went through several details of the existing benefit and welfare exhibits (Assoc. 21 & 23)
 
Michael Mills, a senior engineering technician and SEIU local president, testified that even though his members are also employees of the City, he does not expect them to have the exact same benefit package as the Association. In the past, it has actually been the City's bargaining position not to match contract provisions with the Association given what it cites are the different job responsibilities covered by the respective bargaining units. As an example, Mills noted one occasion where the SEIU tried to negotiate a longevity pay plan similar to the Association's but the City refused for this very reason. For Mills, as long as the health plans are the same, he does not really care how each is paid for. If the Association were to secure a particular benefit, his SEIU membership would probably ask for the same. In the past Mills was a member of an insurance committee where the VEBA concept was discussed. His group currently has the VEBA as part of its medical benefit program.
 
Thomas Kramer, an attorney in private practice with the same law firm as representing the City in the present action, specializes in benefit plans and ERISA. It is his belief the VEBA plan presented by the City is legal. The program does not necessarily need to be voluntary. It is his opinion that an arbitration award in favor of instituting such a program would fulfill the "voluntary" IRS prerequisite.
 
Larry Scruggs Jr., a police officer with the City, has represented the Association over the years in contract talks including the most recent set of negotiations. He is not aware of the Association ever requesting a VEBA. He never even saw a proposal along those lines until the City presented it for the first time during mediation. He did survey his membership, but there was not much interest in participating in A VEBA program. Scruggs believes the lack of interest may largely be due to the relatively young age of the Association's membership. To this day he is still not quite sure how it works.
 
Overall Scruggs believes the most recent set of contract negotiations with the City were a failure. The City appeared to show little interest in addressing certain bargaining unit concerns including such items as overtime and seniority. He acknowledged that the Association did agree to an insurance cap back in 2001, but only in conjunction with what the membership saw was a good wage package. It is also his belief the intent of that Agreement was to create a 95/5 split, although such language was never formally incorporated into the Agreement.
 
Dana Bennett, a senior research analyst for the law firm representing the Association, testified that the purpose of comparables is to determine whether or not a particular group is above or below market. In putting her comparisons together she relied on local market data since police officers are more likely to relocate to and from nearby jurisdictions than those more geographically remote. She agrees there is a high correlation between the size of a jurisdiction and the amount of compensation earned by its employees.
 
William Monahan, Tigard's city manager for the last ten years, testified that the City is not taking the position that it is unable to pay for the package presented by the Association. He does believe though that the level of services being provided to its citizens will be difficult to maintain if the Association's proposal is adopted. As an example, with the recent electoral defeat of a revenue proposal, the City is already facing the possibility of having to cut back on the number of hours the library is open. Monahan believes the community is looking to maintain a median level of services and he tries to budget accordingly. As part of the planning process, a committee made up of private citizens and members of the city council reviews the budget before it is approved.
 
Back in 2001 the City formed a health plan committee. To date the committee has been an effective communication vehicle and has also been able to identify alternatives to hold costs in check. It is his understanding that committee members from the Association, abstain if a discussion turns to a mandatory subject of bargaining. The City has pushed to have benefits be the same for all of its employees. Besides it being cheaper to administer one plan, having identical plans in place also promotes comity. Monahan detailed what she believes are the differences between the existing benefit plans and those being proposed.
 
Alan Orr, the City's Assistant Police Chief, represented management in the most recent contract negotiations. One of his responsibilities is to monitor his department's budget. Although he is not aware of any major budgetary limitation, he does not agree with all the budget decisions that have been made by the City. In his opinion there is a need to upgrade or replace existing equipment in the Department. His training budget has already been cut in half. As to the difficulty in recruiting, his department has received over two hundred applications for the two to three vacant positions it needed to fill. (Assoc. 21 & 22)
 
Orr is a member of the insurance committee along with another representative from the SEIU, two from the Association, and others from management. The committee has been looking at different insurance alternatives. Although the Association abstains from voting on any of these issues, a couple of meetings were held where VEBA was discussed. Orr personally likes the concept because it allows an individual to put money aside to bridge the time between when one retires from the Department and when social security begins. Employees can also set money aside for future health care needs on a tax-free basis. Although the VEBA was not offered during the current negotiations with the Association, it was pushed for inclusion by the SEIU.
 
Craig Prosser, the City's Finance Director, oversees the financial aspects of the City's operation including putting its budget together. Although the City is currently in good fiscal shape, he is concerned about its financial future. The City has been trying to increase the fees it charges citizens for services wherever possible in an attempt to increase revenue. As part of the approval process, a budget presentation was prepared and presented to the City council (City 9). For the near future he anticipates expenses growing at a faster rate than revenues. He expects this trend to continue and the City's ending fund balance being exhausted by 2007-08. Present City budget concerns include but are not limited to the ongoing PERS litigation, the timing and outcome of future negotiations, and the costs associated with operating the library. It is his belief that benefits will continue to require a larger and larger percentage of future expenditures. It is possible to move money from the capital to the operating account.
 
On cross-examination Prosser acknowledged that the present budget shows income exceeding expenditures. To his knowledge every audit performed has confirmed that the City's revenue exceeded expenditures. He acknowledged that the City could come up with the additional $16,000 estimated cost for the Association's proposal without any layoffs by reducing some maintenance line items. He is not sure though if he could pay for it without a reduction in overall services. In order to show the voting public that the City has its costs under control Prosser is hoping to secure a three-year contract with the Association.
 
POSITION OF THE PARTIES
 
It is the City's position that it should prevail given that the Association's proposal has the greatest divergence from the status quo. As the party seeking the greatest change, the burden of persuasion rests with the Association. If it falls short in putting forth a justification for the changes, then the City's proposal should prevail. Although the City is introducing the VEBA concept, it is being done to offset the increase in the deductible. The Association on the other hand is seeking to alter the current 90/10 contribution ratio, eliminate both the cap provision and the reopener as well as and place the Association on a different bargaining cycle than the SEIU. The premium cap requirement is not a new concept. The parties during its last negotiations agreed to the change. The Association now wants to retroactively extend its 90% formula to the older plan forcing the City to incur the additional cost.
 
The City believes its proposal best meets the statutory requirements of ORS 243.746(4) in promoting the interest and welfare of the public. It believes the public would be best served if the Association were to have the same obligations in regards to the benefit plans as everyone who works for the City, represented and no represented alike. If employees had different benefit programs, there would be a negative effect on employee morale to the public's detriment. It is in the public's best interest to keep medical costs under control. As to the City's ability to pay, one must consider whether or not it will have to take funds from other governmental departments to pay for a particular proposal. Although it is not raising an ability to pay defense, the City does have legitimate future revenue and expenditure concerns.
 
Despite the Association's contentions to the contrary, the turnover in the department has not been due to employee displeasure with the wage and benefit package. For those vacancies that have occurred, recruitment has not been a problem as evidenced by the number of applications received for the three vacancies which have opened up during the past year. The Association's survey alleging that a number of its members are looking to leave is unreliable without further verification. An earlier arbitration decision supports the City's ongoing contention that neither retention nor recruitment is a problem for the City.
 
It is the City's position that the overall compensation package received by the employees is comprehensive and generous. Its proposal is supported by comparables of like jurisdictions. Statutory changes have shifted geographic considerations away from being of prime importance. Just because a jurisdiction is within the same geographic region does not make it a good comparator. It believes the 50% above and 50% below methodology is the appropriate one to use. Participative premiums are not unique. Other jurisdictions also have them even though there may be different thresholds of employee contributions. The parties have had a hard cap in place for the last three years. It is not appropriate to focus only on the insurance benefit part of the package. The statute requires a review of the entire package.
 
The City believes its CPI proposal is also the most appropriate. Over the years, members of the Association have actually seen an increase in their standard of living. Even using a worst case scenario, the members have enough of a cushion to balance off any increases associated with medical insurance. Should it be necessary, a reopener is already in place to address concerns associated with possible future insurance increases. The Association's proposal calling for only a two-year term is also inconsistent with the best interest and welfare of the public. Their proposal would put the next contract negotiations out of sync with the City's other labor agreement.
 
The City believes several other points raised by the Association including the legality of the VEBA and the propriety of not introducing that particular proposal until mediation are simply meant to be distractions. Proposing VEBA for the first time during mediation did not constitute bad faith bargaining.
 
The Association believes even if one were to use the figures put forth by management, the cost difference between its proposal and that of the City would still be well within the latter's ability to pay. The City admits this fact but relies on an unsubstantiated concern about the inability to meet this obligation at some point in the future. The City has been unable to identify any potential layoffs or cut in other programs should the arbitrator choose the Association's proposal. Contrary to its current position and similar representations it has made in the past, the City continues to bring in more revenue than it spends. In the present proceeding it has once again simply pushed the projected shortfalls further into the future.
 
Turnover and retention have and will continue to be problem areas for the City. The cost of training replacements for those who leave and the importance of having qualified personnel on the force should be taken into consideration when evaluating both proposals. There is a nationwide shortage of qualified law enforcement personnel. Approximately two-thirds of the officers in small departments leave within five years. Nearly half of the City's police force is considering leaving and about twenty percent of them actually have applications out. The fact that there has been no turnover during the past year is due more to the efforts of the Association than the City.
 
As to the overall amount of compensation being received by an employee, the City has overstated the worth of the wage, pension, health and welfare contributions. When measuring the dollar value of the total package one should consider the benefit received by the employee and not the cost paid by the employer. By example, the City has a higher deductible than the market average.
 
In looking at comparables, the City's inclusion of Grant Pass, Medford and/or Bend in their survey is inappropriate. These jurisdictions are too remote geographically. The City's police force has very little interaction with those departments as opposed to those bordering it in the metropolitan Portland area. While the City's methodology and data are slanted to support some predetermined result, the Association uses comparisons with an equal amount of large and small populations. The City uses eleven cities, eight of which are smaller in size. It is noteworthy that five out the eleven could not use Tigard for a comparison if they in turn chose to use the same methodology for their surveys. The comparisons used by the Association on the other hand show its members trailing in both pay and benefits. Only two of the twelve jurisdictions used in its survey have a hard premium cap.
 
Internal comparisons with other City bargaining unit employees would also not be appropriate. In the past the City has taken the position with another union that comparisons would not be acceptable given the difference in the job content of those being represented. Any argument based on what may have been discussed and/or agreed to in the insurance committee is not even relevant since the Association never gave its committee members the authority to negotiate on behalf of the rest of the membership.
 
When considering the two cost of living proposals, the question is which proposal would maintain the current spending power of the employees. One should evaluate the proposal in regards to the future and not, as the City promotes, the historical performance of the index. The City has failed to take into consideration those increases based other factors. The Association's and not the City's proposal does a better job in keeping pace with the cost-of-living.
 
The Association believes that there will indeed be changes to the status quo. In respect to wages, the City proposes reducing the minimum formula or changing the effective date. The second change is in the contract term where the parties have historically alternated between a two and three year Agreements. The City seeks to break that pattern with its current three-year proposal. The third area of change to the status quo by the City deals with payment of health premium. The Association believes the current system, although ratified by its members during last negotiations, has evolved into a program that is neither workable, fair, or serves the welfare of the public. It has led to high turnover and low morale in the workforce.
 
The City's delay in introducing the concept of a VEBA until mediation constituted bad faith bargaining. The whole concept of the proposed VEBA should not even be entertained since the delay in increasing the wages to pay for the concept constitutes a detriment. As to bad faith, the VEBA concept was never discussed with the Association during negotiations. It was introduced for the first time at mediation and then only after it was agreed to by the SEIU. The tact of bargaining with what the Association considers is a weaker union and then seeking though arbitration to impose those same terms and conditions, violates the statutory concept of good faith bargaining. Employees have the right to be represented by a union of their own choosing.
 
DISCUSSION
 
ORS 243.746(4) places certain limits on an arbitrator when he or she is asked to decide which last best offer should prevail. It is well accepted that binding arbitration under this statute requires the arbitrator to accept in total, the last best offer proposal submitted by just one of the parties. No matter how much merit there may be with one or more individual segments in either package, an arbitrator cannot fashion his own remedy, reform, or amend the proposals. In the present case a review of the statutory language and the preponderance of the evidence supports the Association's contention that the unilateral introduction of the VEBA concept without the agreement of the bargaining unit violated Department of Treasury guidelines and was inappropriate.
 
Arbitrators should attempt to give effect to a bargaining agreement rather than discard it. Normally when faced with a choice of trying to make an agreement valid and lawful on one hand and making it unlawful on the other, the former will be used (Elkouri & Elkouri 3rd). With the VEBA being a material term in the City's proposal, their whole package comes into question if it fails to adhere to a regulatory guideline. The City does not object to the Association's contention that the VEBA was introduced for the first time at mediation or that it was not favored by the membership. In fact, testimony presented by both sides confirmed as much. Larry Scruggs Jr. for the Association and Alan Orr for the City confirmed that the VEBA concept was not tabled during negotiations but was presented to the bargaining unit for the first time during mediation. The threshold issue is not whether the delay in introducing the VEBA was an unfair labor practice, but rather if it can be construed as truly "voluntary" when an attempt is made to put it into force without the approval of the membership.
 
Although the City contends the Association was just throwing darts when it raised this point, the parties addressed the issue both with well-qualified witnesses and in their post hearing briefs. Testifying for the Association, Mr. Atchison, a well-known advocate in the labor relation's field, stated that he believed the introduction of a plan without ratification by the membership, would not meet the voluntary threshold requirement called for in the regulations governing such plans. Mr. Kramer on the other hand, an experienced ERISA and benefit counsel representing the City, testified to his belief that an arbitrator's award would comply with the Department of Treasury's regulations. Both parties went on to address the matter further in their respective post hearing briefs. In its submittal the City reaffirmed Kramer's testimony and its position that the Association's contentions of illegality and bad faith bargaining were an attempt to distract from the more relevant issues at hand and not worth any consideration. He believes that if any one of three conditions is satisfied, the VEBA would be considered voluntary. The first is that the employee does not incur a detriment as a result of membership in the VEBA. The second is that participation is agreed to in a collective bargaining agreement. The last possibility is membership in a labor organization by the plan's participants. Although Kramer believes each one was met, the evidence fails to support a case for any of these three.
 
As to the first, the City did not adequately respond to the Association's argument that the introduction of the program constituted a "detriment" to its members and thus, did not meet the statutory prerequisite. Section 1.501c(9)-2c(2) of those guidelines states in part that "an association shall be considered voluntary although membership is required of all employees, provided that the employees do not incur a detriment (for example, in the form of deductions from pay) as a result of membership in the association (emphasis added). Just what constitutes a "detriment" is vague in the regulation. Various essays, such as the work "Voluntary Employees Beneficiary Associations" by Chasin and Fonterose, only peripherally touch on a possible meaning. Black's Legal Dictionary defines "detriment" as where one has forborne some legal right he or she was entitled to exercise. In the present case, the City's proposal to move the wage increase from July 1 until October 1, 2004 is sufficient enough of an impairment to fit this definition.
 
A determination as to whether or not the bargaining unit has actually given up something in exchange for a particular proposal can often be mired in a constant exchange of proposals and counterproposal characteristic of protracted negotiations. In the present case it is very clear what the Association would lose if it accepted such a proposal. The City did not contest the Association's contention that the delay in the wage increase was being done solely for the purpose of making up for the $50 a month VEBA contribution. The wage increases have historically been given on the anniversary years of past agreements. Moving the increase up to October was something new, a cost to the membership, and clearly introduced in conjunction with the VEBA proposal.
 
Although a VEBA may have been beneficial for some members of the bargaining unit, the loss of use of those funds for three months, can reasonably be perceived as a take away on the part of the majority of the bargaining unit. If the introduction of the VEBA been entirely gratuitous on the part of the Company instead of being solely in exchange for some concession on the membership's part, it would not be an item of concern. Although the cost of the benefit does not exactly equate to the wages lost by the Union, it does seem to fit the characterization of a reduction and change in the status quo.
 
Even if one were to argue that the implementation was cost neutral and therefore not a detriment from a cost standpoint, it is clear the membership did not wish to accept it and thus, the second condition cited by Kramer, "participation in a bargaining agreement" also is suspect. As opposed to the SEIU, which apparently ratified the concept in their negotiations according to the testimony of its president, it was never approved formally or in concept by the Association's membership. To the contrary, Scruggs testified he had surveyed his membership but that there was little interest in such a proposal. Orr, a witness for the City, testified that older employees were more likely to embrace a VEBA because it allowed them to use the funds to bridge the years until retirement. He could see why it would not be as attractive to younger people. Although it is unclear if this or the delay in the raise was the actual reason for the rejection, the City has a young department and the members had enough information to adequately consider the concept.
 
Although the Association's members did not actually vote on the VEBA proposal when it was discussed in the insurance committee, the rest of the bargaining unit appears to have had a general awareness of how the program worked. The Association also knew that the SEIU had already accepted the introduction of a VEBA during that union's last round of negotiations. Although the presentation to the membership may not have been comprehensive, the Association's members apparently felt they had enough information to respond to the survey by Scruggs. Despite working for the same employer, they choose not to go down the same path as their sister union. Although Mr. Kramer's opinion that an arbitration award would be sufficient based on membership in a bargaining unit, it is hard to fathom how forcing such an agreement on employees through the arbitration process could somehow be construed as "voluntary." Unlike the Bankruptcy Code, the Oregon statutes or the Treasury guidelines do not appear to allow for any "cram down" provision of such a proposal in an attempt to put into force a labor agreement.
 
Even though the City's last best offer must fail on a regulatory technicality, it could be still be a concern and probably a violation of ORS 243.746.4 if an arbitrator were to impose an obligation the City could not afford. Taken to an extreme, had the Union been asking for full payment of premiums with no deductible, there is little doubt that such a proposal would have been unaffordable under either budget projection. To violate this statute and possibly rule in favor of the City's proposal or ignore the Department's of Treasury's guidelines and accept the Association's last best offer would be an interesting legal question, but is one that need not be addressed in this case.
 
An examination as to affordability given the evidence presented is fairly short. At least for the next two years, Powers testified that the City could afford the Union's proposal if indeed the costs were in the range of $16,000 without initiating any layoffs or reducing other maintenance items. He noted that funds could also be transferred from the capital to the operating budget. Even if the Association's valuations are marginally underestimated, there is no evidence that implementing these proposals would have a deleterious effect on the City's ability maintaining a "mean" level of services during the term of a new two-year agreement. Thomas testified that budgets tend to be fairly conservative on the revenue side. Posser did not contest this statement and the historical record in that regard appears to bear Thomas out. Should an actual shortfall projected by Prosser develop by 2007-08, the City will be in a stronger position to argue affordability in future negotiations or if necessary, to the fact finder in a subsequent arbitration should the parties once again reach an impasse. For now though and for the reasons stated above, the Association's proposal must prevail.
 
DISCUSSION
 
Having carefully considered all evidence submitted by the parties and the relevant statutory criteria, the arbitrator selects the Tigard Police Officers Association's last best offer package as the one to succeed the Agreement which was set to have expired on June 30, 2004.
 
Dated: February 13, 2004
 
Respectfully submitted,
 
Stephen M. Biersmith
 
REPRESENTING THE PARTIES:
 
Mr. Kenneth E. Bemis, Bullard, Smith, Jernstedt & Wilson, for the City
 
Mr. Daryl S. Garrettson, Garrettson, Goldberg, Fenrich & Makler, for the Association