The case is Carver v. Nassau County Interim Finance Authority, decided on September 20. The wage freeze forced the County to breach the collective bargaining agreement with certain police unions, who sued under federal and state law. The district court had jurisdiction over the lawsuit because it raised a federal constitutional claim, but it ruled on the state law claim without addressing the federal claim.
Yes, federal courts have authority to resolve state law claims. You can bring federal and state claims in the same lawsuit. The federal court has discretion to decide the state law claim, but that discretion is not unbridled. "Abuse of discretion" arguments are hard to win in the Court of Appeals, but this one prevails.
If the state law claim involves an unresolved issue that the state courts are better equipped to handle, then the federal court should not hear the case. The Court of Appeals (Korman [D.J.], Carney and Pooler) applies that rule here, sending the case back to the district court to take up the federal claim only.
the construction of the provision of the NIFA Act at issue raises an unresolved issue of state law – the interpretation of a poorly drawn statute – that should be resolved by the New York state courts because the manner in which the statute is construed implicates significant state interests. As we have previously observed, “[w]here a pendent state claim turns on novel or unresolved questions of state law, especially where those questions concern the state’s interest in the administration of its government, principles of federalism and comity may dictate that these questions be left for decision by the state courts.”Who knows? Maybe the plaintiffs will still win the case in federal court under the federal claim. Or maybe the state court will rule in their favor. That day is far off into the future, though. For now, the plaintiffs' victory is yanked away from them.