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State’s Top Court to Turn Attention to Public-Worker Cost-of-Living Adjustments

If court rules COLAs can’t be suspended -- as 2011 law allows -- state could be out $70 billion in projected savings over next three decades

supreme court
Members of the New Jersey Supreme Court

The New Jersey Supreme Court announced yesterday that it plans to take up another high-profile case involving a key component of Gov. Chris Christie’s signature 2011 public-employee benefits-reform law.

The high court just last month struck down a major element of that 2011 law, which increased state contributions to New Jersey’s chronically underfunded public-worker pension system.

Now, the justices have decided they will weigh in on whether annual retiree cost-of-living adjustments can be suspended, which was another key change that Christie and Democrats who control the Legislature agreed to enact in 2011. They had teamed together on a bipartisan basis to restore the health of a pension system that covers an estimated 770,000 current and retired public workers in New Jersey.

And just as last month’s court ruling had major implications for the overall health of the pension system, as well as for Christie, the outcome of this latest case should be equally, if not more, consequential.

For the pension system, the reform law known as Chapter 78 was projected to save the state a total of $120 billion over three decades. Christie’s administration has held firm to those estimates even after the state pension contributions that were pledged as part of the 2011 law have been shorted by more than $2 billion over the past two fiscal years.

Losing the legal challenge on the cost-of-living issue could eliminate more than $70 billion of the overall projected savings, which would increase an unfunded liability already measured to be at least $40 billion. It would also mean the only major component of the 2011 law on the pension side that will have survived legal challenges is increased employee contributions toward their retirements.

And for Christie, the latest case is on schedule to unfold at a bad time for a presidential hopeful who is still trying to generate widespread support among GOP voters. Judiciary officials said yesterday the Supreme Court could take up the cost-of-living adjustment case as early as this fall, which would be at the same time that the governor will be trying to build up momentum heading into the 2016 Iowa presidential caucuses and New Hampshire primary.

Losing the court case in the spotlight of the presidential election would bring more unwanted attention to the steep fiscal and economic problems the state has faced since Christie took office amid recession in early 2010.

The key to the high court’s assessment of the cost-of-living adjustment issue is whether the annual increases should be considered on par with retired workers’ nonforfeitable pension benefits or as an add-on that governors and lawmakers can take away by law.

Last year, an Appellate Division ruling agreed with 26 former assistant and deputy state attorneys-general who argued in their original lawsuit that the cost-of-living adjustments are a contractual right. That decision overturned a lower court’s ruling that found the annual increases to be a financial commitment that under the state constitution is not guaranteed, but “subject to appropriation” each year during the annual budget process.

The Supreme Court, in the decision it issued last month in the pension-contribution case, used similar logic to strike down the section of Chapter 78 that pledged the increased state pension payments as a contractual right of the employees. Only voters, the 5-2 majority opinion said, could mandate future state obligations like the $2.25 billion contribution that Chapter 78 sought for the last fiscal year, and the $3.1 billion pledged for the current fiscal year.

Christie, citing a state economy that has failed to fuel his own lofty revenue projections, instead allocated $893 million for the pension system during the past fiscal year. The $33.8 billion budget he signed into law late last month is scheduled to put $1.3 billion into the pension system during the current fiscal year.

Charles Ouslander, one of the plaintiffs in the cost-of-living adjustment case, said yesterday that last month’s court ruling essentially upheld that pensions are a nonforfeitable right of retired employees. But it was silent on the issue of whether that includes the annual increases employees earn upon their 25th month of retirement.

“The issue is whether a COLA is part and parcel of it or is it separate,” Ouslander said. “Really, it comes down to statutory interpretation.”

Christie’s office did not respond to requests for comment on the case yesterday. In the past, the governor’s press officers have maintained that suspending the annual increases is in the best long-term interest of the public employees and retirees, as well as for state taxpayers.

The court’s decision to take up the cost-of-living adjustment case comes even as trustees for three of the retirement funds that make up the state’s broader $80 billion pension system are seeking a legal judgment against the state to ensure it still lives up to the funding promises that were made in Chapter 78.

It’s also the latest test for a high court that Christie has tried hard to reshape since taking office in early 2010. After attacking landmark rulings on education funding and affordable housing as too activist, Christie has seated three Republicans on a bench that had been dominated by Democrats. He praised the June ruling on pension funding in a recent TV interview, saying it was a “conservative decision.”

Christie, meanwhile, has also been trying this year to generate support for a new round of sweeping employee-benefits changes, including freezing the current pension system and moving state workers into a new retirement plan with some features of a 401(k).

Christie’s plan, which is based on recommendations issued by a nonpartisan commission of benefits experts he impaneled last year, also involves forcing workers to accept less-generous health coverage and using the savings to pay down the current pension system’s debt. The proposal, would also shift the cost of retired teacher benefits onto local school boards after decades of the state taking on that burden.

But this time around, Democratic legislative leaders are holding firm against any new reforms that would cause employees to pay more for their benefits.

Senate President Stephen Sweeney (D-Gloucester) said earlier this week that he’s focusing his energy on lobbying the federal government to create a low-interest loan program to help states like New Jersey pay down their pension shortfalls. Under Sweeney’s plan, New Jersey would qualify for a $50 billion loan and would have 30 years to repay it at 1 percent or 2 percent interest.

And Assembly Speaker Vince Prieto (D-Hudson) has floated the idea that the seven-year state pension-contribution ramp-up that was called for in Chapter 78 could be extended by a few years, possibly five, to provide more budget flexibility in the short-term.

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