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After Christie Vetoes, Pension Battle Heads Back To Court

christie
Credit: Governor's Office/Tim Larsen
Gov. Chris Christie

The battle over the adequacy of pension funding in the Fiscal Year 2015 state budget won’t end with Gov. Chris Christie’s expected vetoes of the $1.1 billion in tax increases passed yesterday by the Democratic-controlled Legislature and his elimination of the pension payments those taxes were designed to fund.

That fight shifts next week to the state courts, where a pair of Superior Court judges will decide whether the state must redo its FY15 budget to find the $1.5 billion needed to make the pension payment required by a 2010 law and whether that payment will have to increase to cover the elimination of billions of dollars in cost-of-living increases that an appeals court yesterday declared to be a contractual right of retirees.

Since talks between Christie and Democratic leaders on a negotiated budget broke down last week, the governor and the Legislature have been following a preordained partisan script that allows both sides to make political points to their respective constituencies on taxes, pension funding, and spending priorities.

Both sides know, however, that the end result will be the enactment by June 30 of the budget that Christie wants -- without tax increases on millionaires or corporations, without funding for women’s health clinics and an expanded Earned Income Tax Credit for the working poor. It will, however, cut pension funding cut to $681 million, thus driving up the state’s unfunded pension liability.

Democrats, who passed the budget by a 24-16 party-line vote in the Senate and a 48-31 tally in the Assembly yesterday, know they lack the two-thirds majority needed to override Christie’s vetoes -- although they may call for override votes as a political exercise in order to drive home their belief that millionaires and corporations should pay more, and that the state should keep its pension payment obligations.

The question of whether the state will indeed make the $2.25 billion in payments required over the next year under a 2010 law mandating the state ramp up to full actuarially required funding of its pension obligation will head back to the courtroom of Superior Court Judge Mary C. Jacobson.

On Wednesday, Jacobson declined to order the state to make the required FY14 payment of $1.6 billion because of the immediate fiscal emergency created when state revenues plummeted in April. But she stated that the 2011 pension law did create a contractual obligation for the state to make the required pension payments. She said she would not rule on whether the state must make the $2.25 billion payment required in FY15 until that case is “ripe.”

That issue becomes “ripe” on Tuesday, when the FY15 budget goes into effect with just $681 million set aside for pensions. New Jersey Education Association President Wendell Steinhauer said “enforcing that contractual right” established by Jacobson “will be the cornerstone of our litigation going forward” to compel Christie and the Legislature to find the revenue or spending cuts needed to restore the full pension payment during the upcoming fiscal year.

In addition, Steinhauer noted that the public employee unions “won a major victory” yesterday when an Appellate Division panel ruled in a second case that the cost-of-living increases for retirees eliminated in the 2011 pension law are also a contractual obligation of the state.

The appeals panel ordered that case sent back to the Superior Court level for a full trial that union leaders hope will lead to a restoration of three years of cost-of-living cuts and the full restoration of future cost-of-living increases – a decision that would cost the state $74 billion of the total $122 billion in savings anticipated over the next 30 years as a result of the 2011 pension law.

The impact of the state court rulings on consecutive days upholding the contractual rights of pensioners to receive cost-of-living increases and to have their pensions funded on an actuarially required basis by the state government is significant: It will dramatically limit the ability of Christie to propose wide-ranging pension reductions when he issues his promised comprehensive plan to cut pension and retiree healthcare costs.

The rulings also could set a precedent for courts in other states to protect the pension rights and cost-of-living benefits of their retirees, said Charles Ouslander, a retired deputy attorney-general who served as a pro se plaintiff in the case. Ouslander noted that Colorado’s public employee unions cited a New Jersey case in their arguments in a similar cost-of-living increase case before the Colorado Supreme Court earlier this month.

“A lot of other states have said COLAs (cost-of-living adjustments) are not part of a contractual benefit,” Ouslander noted. “This is a very important ruling.”

Senate President Stephen Sweeney (D-Gloucester), who put his political career on the line by teaming with Christie to pass the 2011 pension law over public employee union opposition, hopes that Jacobson will order the governor and the Legislature to come up with the additional $1.5 billion needed to fund the actuarially required payment of $2.25 billion this year.

But Sweeney also is expected to follow up Christie’s vetoes by calling for passage of legislation this year and next year to put a constitutional amendment for a millionaire’s tax on the November 2015 ballot to free up the revenue needed to resume the ramp-up to actuarially required funding of the state government’s pension system, which currently has a $38 billion unfunded liability for retired teachers and state employees.

The $34.1 billion budget and tax bills passed by the Legislature yesterday built on the tax package Sweeney proposed last Wednesday, but with important modifications pushed by Assembly Speaker Vincent Prieto (D-Hudson) the following day.

The most important change was Prieto’s insistence that Democrats pass a “pure millionaire’s tax” that increases the top bracket from 8.97 percent to 10.75 percent only on income above $1 million – and not include a “half-millionaire’s tax” bracket of 10.25 percent on income between $500,000 and $1 million, as suggested by Sweeney. The millionaire’s tax would expire after three years -- enabling the state to catch up on its pension payments -- and would raise $723.5 million in FY15, according to the nonpartisan Office of Legislative Services.

The second Democratic tax bill, suggested by Sweeney, would raise $389 million by imposing a 15 percent surcharge for one year on the corporate income tax, which would hike the effective tax on profits over $100,000 from 9 percent to 10.35 percent.

Tax revenue from the millionaire’s tax and the corporate income tax surcharge account for more than $1.1 billion of the $1.4 billion increase in Christie’s most recent $32.7 billion budget plan, and Christie is expected to veto both bills.

Democrats also included a series of revenue revisions and program changes in the $34.1 billion budget bill they passed -- most of which are expected to fall victim to Christie’s line-item veto power.

Christie has repeatedly refused to restore a 20 percent cut in the income eligibility level he made in 2010 to the Earned Income Tax Credit for the working poor unless Democrats agree to his proposal for an income tax cut. The Democrats’ $56 million restoration of the full EITC is included in the millionaire’s tax bill that Christie will veto.

Christie, who is antiabortion, also will once again veto the $7.4 million for women’s health and family-planning clinics that would draw down more than $66 million in federal matching funds. With Christie’s next veto, New Jersey will have given up the opportunity to draw down more than $330 million in federal matching funds for just $37 million in state appropriations in the governor's five years in office.

Democrats also included $20 million in additional funding for cancer research, doubling the $10 million that Christie cut from the program. It also includes $13.2 million in additional funding for community providers of services to the developmentally disabled; $12.5 million in additional funding for nursing homes; $5 million more for legal services for the poor; $2.2 million extra for services for victims of domestic violence; and $1.6 million for additional tuition assistance for low-income students.

Ironically, the Democratic budget is balanced with a $176 million increase in projected state income tax revenues that represents the full difference between the Christie administration’s final $13.988 billion revenue estimate and OLS’s higher projection. Meanwhile, they chose not to use OLS' sales tax projection, which is $169 million lower than the Christie administration's estimate.

The $176 million increase in projected revenues is ironic, coming on the heels of persistent Democratic criticism of the Christie administration for overestimating revenues. Furthermore, the three bond agencies cited the Christie administration’s three-year failure to meet overly optimistic revenue projections in announcing their decisions to cut the state’s credit rating in April and May.

Christie, who has the sole power to certify revenues, could attack the Democrats for hypocrisy and red-line the $176 million increase in projected income tax collections, or he could quietly accept the increased revenue estimate and add it to the state’s $300 million surplus, which the bond agencies consider dangerously low.

While Christie can use his veto power to kill tax increases and to eliminate or reduce specific programs, he cannot restore taxes or programs knocked out of the budget by Democrats. Therefore, Christie will not be able to do anything about the Democrats’ decisions to cut a $35 million tax on e-cigarettes and a $70 million increase in sales tax revenues that would have been generated by charging businesses in the state’s Urban Enterprise Zone Program the full 7 percent sales tax on their purchases, rather than the 3.5 percent UEZ sales tax rate that they have been paying.

Both taxes were included in Christie’s original February budget plan, but their elimination has been a priority of Republican as well as Democratic legislators.

Yesterday’s legislative debate was a rerun of three years of Democratic vs. Republican debates over the need to raise taxes or cut spending, and over whether tax increases on the wealthy and corporations are an issue of tax fairness or an ill-conceived policy that will drive high-income taxpayers and corporations to leave the state.

“We stand at a watershed moment in New Jersey’s history, where we can either propose real solutions to tough problems or we can point fingers and continue to dig a financial hole that one day may be too deep to climb out of,” said Senate Budget Committee Chairman Paul Sarlo (D-Bergen) chairman of the Senate Budget and Appropriations Committee. “By approving this budget, we chose to make the difficult choices and in a responsible way. The governor has repeatedly created budget deficits and has caused the state's credit rating to be downgraded six times. This budget restores our fiscal integrity.”

Sen. Anthony Bucco (R-Morris), the ranking Republican on Sarlo’s budget panel, disagreed. “With the budget presented today, we are pivoting backwards,” Bucco warned. “We are reverting to the old-failed policies of the past. Increasing taxes and the failure to recognize that we have a spending problem and not a revenue problem, will have a negative impact our economy and all of our residents."

“Today’s budget sends the wrong message to those who live and do business in our state. It says ‘you need to pay even more’ while many of them are still making less,” Bucco said. “The most important relief taxpayers can count on is that the governor still has ink in his red pen and is ready to use it.”

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