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Explainer: What's Behind High Court Hearing on Cost-of-Living Adjustments?

The governor and Legislature decided COLA payments to retired state workers could be suspended. What will the Supreme Court have to say on that score?

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Lawyers for the Christie administration are headed back before the state Supreme Court next week for oral arguments in a case involving the health of the $72 billion pension fund. At issue: Can cost-of-living adjustments for retired public workers be suspended? Gov. Chris Christie and Democratic lawmakers thought they knew the answer in 2011, when that was one of several changes made to employee and retiree benefits.

The administration is hoping that the court will hand it another victory, as it did last year in a case involving state contributions to the grossly underfunded public-employee pension system.

The justices are scheduled to hear oral arguments in the cost-of-living adjustment case on Monday at 10 a.m. in Trenton.

What’s at stake? The pension-reform legislation, known as Chapter 78, that was adopted in 2011 increased employee contributions to the pension system, increased their healthcare contributions, and hiked the retirement age. It also committed the state to a schedule of ramped-up state pension contributions over a seven-year term, and it suspended the cost-of-living adjustments for retirees’ pension benefits until the overall pension system is put in better shape.

Christie and lawmakers estimated those changes would save the state a total of $120 billion stretched out over three decades.

But a group of retired workers has since challenged the suspension of the cost-of-living adjustments, arguing the increases are a “non-forfeitable right” on par with a retired worker’s overall pension and cannot be taken away. And the case has now made it all up way up to the Supreme Court.

If the high court takes the side of the retired workers, it could reduce the overall projected savings from Chapter 78 by as much as $70 billion. An outcome that favors the retired workers would also put a further strain on a pension system that is already underfunded by an estimated $40 billion. A report issued earlier this year by Moody’s Investors Service, a top Wall Street credit-rating agency, said losing the case could add as much as $13 billion to the pension system’s unfunded liability.

Prior Supreme Court case: The case going before the Supreme Court next week is actually the second major legal challenge that stemmed from the 2011 reform law. The earlier case arose after Christie decided in 2014 to break off from the state payment schedule that was spelled out in Chapter 78 to help close a major revenue shortfall at the time without hiking taxes or making cuts to other programs.

Christie’s decision upset public workers -- who have been abiding by their own requirement to make increased pension contributions since 2011 -- and their unions sued the state in an effort to require Christie’s administration to stick to the funding promises made in Chapter 78. Though the worker unions won a lower court ruling, the Supreme Court decided last June that under the state constitution the Christie administration could not be compelled by the courts to abide by the 2011 funding commitments.

That’s because the constitution requires a balanced budget, and making the heftier payments spelled out in Chapter 78 without additional cuts or tax hikes would have created a deficit. The constitution also prohibits the state from taking on an obligation that’s larger than 1 percent of the total state budget, which was $32.8 billion at the time, without voter approval. And the state pension payment required under Chapter 78 during the last fiscal year would have been $2.25 billion, though Christie’s administration ultimately put in less than $1 billion after winning the court case.

Legal arguments in the COLA case:The issue that’s now before the court is whether retired workers have a specific right to the cost-of-living adjustments as a component of a pension that generally is considered under a 1997 state law to be a “non-forfeitable right,” or whether the adjustments are a separate benefit that’s subject to change even if pensions themselves are considered non-forfeitable. Before the cost-of-living adjustments were frozen, a retiree’s pension benefits would be increased at the rate of inflation measured by the Consumer Price Index.

The retired workers who have brought the case to the high court have argued that pensions and the cost-of-living adjustments cannot be separated, but Christie administration officials have maintained that the two are entirely distinct. The state’s legal briefs also make the case that lifting the cost-of-living adjustment freeze would bring the entire pension system, which funds the retirements of more than 770,000 current and retired employees, closer to insolvency.

An appeals court ruled in favor of the retired workers in 2014, and the Supreme Court agreed to take up the case last July, several weeks after it issued the ruling in the case involving the state pension contributions that Chapter 78 called for.

And though Democratic legislative leaders signed onto the pension-funding case last year on the side of the workers unions, this year they are not taking an active role in the cost-of-living adjustment case. In fact, Senate President Stephen Sweeney (D-Gloucester) said in a recent interview that he agrees with the Christie administration’s stance on the issue.

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