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  • Mort Reinhart
  • Cost-of-Living Appeal Heard by New Jersey Supreme Court

    On March 14, 2016, the New Jersey Supreme Court heard arguments for and against the restoration of the retirement system cost-of-living (COLA) feature which had been “suspended” by the passage of Chapter 78 in 2011. There is no timetable for a decision by the Court.

    Earlier, an Appellate Division court had found that the suspension of the COLA violated the provision of a 1997 law, which had (1) established a “non-forfeitable” right to receive benefits (pensions) and (2) specifically stated that the benefits could “not be reduced.” Clearly, the appellate court determined, the COLA is part of the benefit and it cannot be reduced. 

    This is the decision that is being challenged by the State in the New Jersey Supreme Court and is the basis for the March 14 arguments. It is being argued for retirees by a coalition of employee unions and associations who were successful in their advocacy before the appellate court.

    The suspension of the COLA was at the heart of the State’s savings anticipated by the changes attributed Chapter 78. At the time of the passage of the law, the State proclaimed that the changes would save the State (and the pension system) between $120 and $130 billion dollars over the next 30 years. The largest portion of that savings was the “suspension” (elimination?) of the COLA. According to statements by State executives, the savings from the COLA action would be responsible for about 60% ($72 billion) of the savings. In other words, should the court find that the COLA is a part of the benefit protected by the 1997 law, the State will be forced to find more funding in the upcoming years to meet its obligations to the retirement system.

    When reviewing those numbers, one has to wonder if the so-called “suspension” of the COLA was ever seriously contemplated. How would the projected savings over 30 years ever be accomplished if the “suspension” was lifted before those years passed?

    While a Supreme Court decision upholding the appellate court’s determination that the COLA is an integral part of the “benefit” would place an additional burden on the State, it has to be viewed in the larger picture of the additional burden that Chapter 78 has placed upon the educational and other public employees of New Jersey: 

    ....Since 2011, these employees have increased their contributions each year to the pension system so that by 2018 they will be contributing 36.3% more annually (5.5% to 7.5%) to support it;  

    ....Since 2011, all active employees have been mandated by the law to pay anywhere from 1.5% of salary to 35% of the premium (whichever is greater) for their health benefits. Prior to this law, contributions by participants to their health plans were determined by bargained contracts;  

    ....Since 2011, new education and public employees are being enrolled in an entirely new (lower) series of pension benefits, ones far inferior to the benefits of those who were already in the system prior to Chapter 78;

    ....Since 2011, the much maligned paid health benefits for retirees with 25 or more years of pension credit have been eliminated for anyone who did not have 20 years of credit in the retirement system on June 28, 2011. Now anyone retiring after 25 years who did not have the 20 years on June 28, 2011 will pay a portion of the retired health care cost, which can be as much as 35% of the premium.

    The impact of Chapter 78 on the purchasing power of educational and public employees has been devastating. For many employees, take home pay today, with the additional cost of pensions and health benefits, is smaller than it was in 2011. 

    For retirees, for whom the COLA battle is being fought, the impact of the cessation of the annual adjustment is a serious matter. The purchasing power of their pensions, which have been frozen since 2011, have diminished, with inflation rising 5.9% since 2011. For those who do not qualify for State paid health benefits, the spiraling cost of their health benefits, in general, and prescription drugs, in particular, is taking more and more of their pension dollars. It is particularly acute for those who are retired ten or more years because their retirement incomes are based on lower salaries than those in recent years. With the increase in life spans, these older retirees face another fifteen or twenty years without the prospect of any pension increase. It is these folks who thought that the COLA provision of the retirement system would prevent their purchasing power from being eroded by inflation. The passage of Chapter 78 has destroyed that expectation. For all retirees, those retired years ago and those recently retired, the decision by the Supreme Court will have a profound impact.