OLS: Christie Cannot Invoke ‘State of Emergency’ To Cut Pensions

Mark J. Magyar | March 17, 2014 | Budget, Politics
New Jersey and other states barred from declaring bankruptcy to escape pension debts, as Detroit did

Credit: Governor's Office/Tim Larsen
Despite his threat to take “extreme measures” to control rising pension costs, Gov. Chris Christie does not have the power to declare a fiscal “state of emergency” to make unilateral changes to the pension system, nor does New Jersey have the ability, like Detroit, to declare bankruptcy to get out from under its pension obligations, according to state and national authorities.

Christie warned during his annual State of the State address in January that the $600 million annual increase in state pension payments required through Fiscal Year 2018 as part of a seven-year ramp-up to the actuarially required funding level was crowding out spending on education, transportation, and other policy priorities.

The governor grudgingly budgeted the $2.25 billion pension payment required for next year only after Senate President Stephen Sweeney (D-Gloucester) threatened to shut down state government if he failed to do so.

Following his Budget Message last month, Christie warned that he had “significant powers” to rework the pension system on his own. The not-so-veiled threat was aimed at the Democratic Legislature, suggesting that if it did not pass measures to further cut pension costs, presumably by requiring further concessions from the public employee unions, Christie would act on his own.

But a review by the nonpartisan Office of Legislative Services concluded that the governor’s powers under the Disaster Control Act do not give him the authority to carry out his threat because no imminent fiscal emergency exists, according to a Senate Democratic memo and an OLS analysis obtained by NJ Spotlight.

Further, Christie and other governors do not have the power to declare bankruptcy to get out from under contractual obligations for pensions and retiree health benefits — as Wall Street financiers have been privately urging for years — because states, as constitutional sovereigns with taxing authority, are not covered by bankruptcy laws, the
National Governors Association and the National Conference of State Legislatures have concluded.

Christie’s threat aroused loud protests from the state’s unions and sent legislators scurrying to the law books.

“With the governor threatening to unilaterally make changes to the pension system but not explaining how or what he intends to do, the Office of Legislative Services engaged in extensive discussions and review of state laws to determine any possible way the governor could act by Executive Order,” according to a Senate Democratic memo issued by Sweeney and Executive Director Kevin Drennan on March 13 that was obtained by NJ Spotlight, along with an accompanying OLS report.

“OLS’s conclusion is that he does not have any power to unilaterally make any changes because the state’s pension laws are all set by statute, including the reforms that continue to restore financial stability to the pension system,” the memo continued.

“The governor can’t try to claim that the pension system’s finances are in such dire straits to constitute an emergency because OLS believes that the pension system is not in any state of emergency,” the memo said.

Still Standing Firm

So far, Christie has not contended that the pension system is in danger of faltering on its obligations to retirees now or in the immediate future, but that soaring pension, retiree healthcare and debt costs are preventing him from increasing spending on other state needs. That condition falls short of the state of emergency required for the governor to invoke executive powers under the Disaster Control Act under OLS’s reading of the statute.

In an August 2013 analysis provided to Senate Democrats, the OLS noted that the governor’s authority under the statute “is not unlimited.” Further, the governor’s power to issue executive orders “must stem from either executive authority under the State Constitution or an act of the Legislature.” It also noted that “case law has established standards for, and placed restrictions upon, the exercise of this power.”

Christie has invoked the Disaster Control Act twice previously. The Appellate Division of Superior Court upheld Christie’s 2010 executive order freezing state school aid on the basis that he had the constitutional authority to do so, “but did not address the Governor’s assertion in the executive order that his actions were justified under the Disaster Control Act.”

Nevertheless, the Appellate Division struck down Christie’s 2010 executive order that sought to extend the state’s statutory “pay-to-play” ban on campaign contributions by those doing business with state and local governments to public employee unions. The court agreed with the contention made by the Communications Workers of America in its lawsuit that Christie’s executive order “impaired the Legislature’s lawmaking ability in violation of the separation of powers.” If the Legislature wanted to ban campaign contributions by public sector unions, the court said, it would have done so.

Similarly, if the Legislature wanted to require higher pension payments or a higher retirement age for state workers, it had the power to do so when it passed the 2011 pension law that Sweeney sponsored and Christie signed.

New Jersey’s Constitution does not include a “fiscal emergency” provision, unlike California, which added one through a 2005 ballot initiative. But even California’s provision simply empowers the governor to declare a fiscal emergency and order the legislature into special session to address the crisis, the OLS noted.

Detroit’s bankruptcy has heightened assertions among Wall Street financiers and conservative activists that state governments like Illinois, California, and New Jersey with large unfunded pension and retiree healthcare liabilities should declare bankruptcy to get out from under their contractual obligations.

With Detroit facing $9.5 billion in unfunded pension and retiree healthcare liabilities with only $2 billion in assets, the judge in the Detroit case ruled that city workers’ pensions were not fully protected despite a constitutional guarantee in the Michigan Constitution that is stronger than any similar guarantee in place in New Jersey. The city’s emergency manager last month recommended 34 percent cuts in the pensions of general retirees and 10 percent cuts for police and fire retirees as part of Detroit’s bankruptcy restructuring plan.

It was the specter of the looming Detroit pension cuts that aroused such strong instant opposition to Christie’s unspecified threat to use extreme measures to scale back the massive increases in annual state pension contributions required to make up for more than 15 years of underfunding by Democratic and Republican governors and legislatures alike.

Wall Street financiers were pushing behind-the-scenes for New Jersey to consider bankruptcy as an option to get out from under its pension obligations as far back as the 2009 campaign. Conservative academics made a renewed national push in 2010, and a prospective New Jersey Democratic gubernatorial candidate was getting similar advice during 2012 before deciding not to run.

However, both the National Governors Association and the National Conference of State Legislatures noted that unlike cities like Detroit, “bankruptcy is not a legal option for states, as constitutionally recognized sovereigns” that are bound by constitutional or statutory requirements to balance their budgets, and furthermore, have the authority to raise taxes if they need to do so.

While some members of Congress have quietly considered giving states the ability to declare bankruptcy to get out from under pension requirements, the NGA, NCSL and nine other national associations of state finance officers, pension fund administrators, and county and municipal officials are adamantly opposed to any such legislation.

“Any federal law allowing states to declare bankruptcy would increase interest rates, rattle investors and markets, raise the costs for state government, create more volatility and uncertainty in financial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution,” the 11 organizations declared in a joint leadership letter to Congress issued in 2011.

Unlike state governments, cities like Detroit are “political subdivisions, public agencies, or instrumentalities of the state” that created them, and state governments can pass individual laws giving their municipalities the right to seek protection under Chapter IX of the U.S. Bankruptcy Code if they are unable to meet their debts.

The key point of dispute in Christie’s disagreement with Sweeney, other Democratic legislative leaders and public employee union officials is their contention that the 2011 pension law — which Christie previously touted as his proudest bipartisan accomplishment — has put New Jersey’s pension system on the road to solvency.

While Democrats and union leaders acknowledge that it is difficult to increase the state’s pension contribution by up to $600 million a year each year until Fiscal Year 2018, they assert that Christie knew that when he agreed to the deal. Once the state ramps up to the full actuarially required payment that year, they say, future increases in pension costs will be in line with other annual budget increases.

By agreeing to make the $2.25 billion payment called for in Fiscal Year 2015 in his February budget speech, Christie has sharply limited his options, analysts concur.

Christie could threaten to shut down the government by refusing to sign a budget bill unless the Democratic-controlled Legislature agrees to another pension overhaul, but Democratic leaders have already ruled out further state worker concessions. Furthermore, Sweeney beat Christie to the punch by already threatening a government shutdown if Christie failed to make the full pension payment required.

Christie’s power to directly pressure the state’s public employee unions is limited by the fact that the state government already has contracts in place with the union that run through 2015, and the state cannot reopen those contracts for renegotiation without the union’s agreement.

If the governor wanted to play political hardball, he could threaten to use his line-item veto authority to force layoffs in July unless the unions agree to further concessions. But the unions would undoubtedly refuse, and the maneuver could very well backfire on the politically weakened governor, even though he has touted the elimination of 6,000 state government jobs during his first four years on the job as a positive accomplishment during his town hall meetings over the past month.

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