Court: State Can Reduce Pension Payments.Now What?
In a 5-2 decision, the New Jersey Supreme Court said that the State can ignore the section of Chapter 78 P.L. 2011 that requires it to contribute $2.25 billion to the state retirement systems in the 2015 fiscal year, which ends on June 30, 2015, and instead make a smaller contribution of $681 million. The State had been sued by a coalition of unions and associations representing over 800,000 public employees, including educators, state employees, municipal employees, state troopers and police and firemen.
While the Court did not find that the law was unconstitutional, as Governor Christie, in an about face, had argued, the majority opinion said that the Appropriations Clause and the Debt Limitation Clause of the New Jersey Constitution barred the State from creating “a legally binding, enforceable obligation on the state to annually appropriate funds as Chapter 78 purports to require.” It said that “Voter approval is required to render this a legally enforceable contractual agreement compelling appropriations of this size covering succeeding fiscal years.” At the same time, the opinion, written by Justice Jaynee LaVecchia, called the “loss of public trust due to the broken promises made through Chapter 78's enactment” as “staggering.”
In a dissenting opinion, Justice Barry Albin wrote “The decision unfairly requires public workers to uphold their end of the law’s bargain - increased weekly deductions from their paychecks to fund their future pensions - while allowing the state to slip from its binding commitment to make commensurate contributions.” Further, he wrote “The Legislature could not have contemplated that the compromise reached by passage of Chapter 78 would result in only public workers holding the bag. I conclude that the contractual rights of public workers, guaranteed by Chapter 78, have been substantially impaired in violation of the federal Constitution.” He was joined in his dissenting opinion by Chief Justice Stuart Rabner.
Under Chapter 78, the State was to make seven annual payments to the pension system, starting with a payment of 1/7 th of the actuary’s recommendation in fiscal year 2012, 2/7 th of the actuary’s recommendation in fiscal year 2013 and increasing by 1/7 th in each succeeding year until the full actuary’s recommendation was made after seven years. The State made its full payment in the first two years, but in fiscal year 2014, it cut its payment because of a shortfall in the budget. The public employee groups sued the State and, although Superior Court Judge Mary Jacobson ruled that they had a contractual right to have the full 2014 contribution made, she allowed the State to reduce its payment because the decision was rendered in late June and the State would not have had time to raise the revenue necessary to meet the full 2014 obligation. In her decision, however, she said that the State would have to meet the requirements of Chapter 78 in future years. It was this opinion that was challenged in the Supreme Court by the Governor, who now claimed that the law was unconstitutional, even though he signed it into law in 2011 claiming that it had fixed the pension system funding problem and had trumpeted the law in his travels around the country.
The Democratic legislature has passed a 2016 budget which includes a $3.1 billion pension contribution, which is 5/7 ths of the actuary’s recommendation and meets the obligations of Chapter 78. It calls for a tax increase on income above $1 million and a one year 15% surcharge on the corporate business tax.
The Governor has proposed a pension contribution of $1.3 billion in his proposed 2016 budget. It is expected that he will use his line item veto power to reduce the $3.1 billion proposed by the Legislature to his $1.3 billion budgetary contribution.
Several of the groups who lost the lawsuit against the Governor in the New Jersey Supreme Court are considering appealing to the United States Supreme Court.
The Report of the New Jersey Pension and Health Benefit Study Commission issued in February calling for a freeze of the defined benefit plan and the establishment of a cash balance plan as well as health coverage cuts is still around, although the Democratic legislature has shown no interest in it.
A few months ago, a trial balloon was floated by the administration to revamp the seven-year schedule of Chapter 78 to ten years. It drew negative reaction from Democratic members of the Legislature. Is it a possible compromise in bringing the funding levels of the system up to the actuary’s recommendation?
Will the 2017 gubernatorial election bring new ideas toward funding the retirement systems? Maybe, maybe not. The topic is certain to be debated at length during the campaign.