Analysis: $74 Billion In Future Pension Payments At Stake in Lawsuit

Mark J. Magyar | May 12, 2014 | Budget
Appellate Division ruling in COLA case also could set precedent on state’s obligation to make pension payments

While Gov. Chris Christie considers pushing off June’s pension payment to close an $807 million budget gap, a state appeals court is weighing a lawsuit challenging the elimination of cost-of-living increases for retirees that would not only add $74 billion to future pension costs, but could set a precedent that would require the state to make all future pension payments on time.

The Attorney General’s Office and the state’s public employee unions and retirees are awaiting a decision by an Appellate Division panel in the case of Berg, et al, v. Christie that is based on a 1997 law signed by Republican Gov. Christine Todd Whitman that made pensions a nonforfeitable, contractual right for public employees.

The key issue in the case is whether governors and legislatures can pass laws establishing contractual obligations requiring their successors to spend money out of future budgets, or whether the debt limitation and appropriations clauses of the New Jersey Constitution establish the primacy of the annual budget bill over all other state laws and make such guarantees essentially worthless.

In Berg v. Christie, 26 former deputy and assistant attorney-generals are challenging a provision of the 2011 pension and health benefits overhaul that eliminated cost-of-living adjustments (COLAs) for them and for 300,000 other retirees.

While former Attorney General Zulima Farber and the nonpartisan Office of Legislative Services issued advisory opinions in 2006 warning the Special Legislative Committee on Public Employee Benefits Reform that cutting retirement benefits would violate contractual protections in both the federal and New Jersey constitutions, Superior Court Judge Douglas H. Hurd sided with the Christie administration at the trial court level in the Berg case.

If the Appellate Division panel upholds the contractual obligation of the 1997 Whitman law and rules that it applies to cost-of-living increases, it would wipe out 60 percent of the projected savings — a whopping $74 billion over 30 years — in the 2011 pension and health benefit overhaul pushed through by Christie and Senate President Stephen Sweeney (D-Gloucester), and would add tens of billions of dollars to future pension payments.

If the court sides with Judge Hurd, that $74 billion would come out of the pockets of retired and current teachers, police, firefighters, and state, county, and municipal employees who expected state and local governments to fulfill their pension commitments.

Changing the Rules

“It’s one thing to change the rules in the middle of the game, it’s another to change the score after the game’s over, and that’s what the state did when it eliminated the COLAs,” said Charles Ouslander, one of the plaintiffs in the Berg case. “There are 300,000-plus retirees who were relying on receiving cost-of-living increases to keep up with inflation who will not receive them for at least 30 years, if this law stays in place. If we win, these retirees would be entitled not only to future COLAs, but back payment for past COLAs.

“A reversal of Judge Hurd’s decision by the appellate court would not only protect pensioners’ contractual rights to receive their full pension benefits, but would also insure that the state keeps its contractual obligation to properly fund the pension system, based on the 2011 law signed by Governor Christie,” Ouslander added.

That’s because the contractual right at the core of Berg v. Christie is similar to the contractual obligation that Christie and Sweeney included in the 2011 pension law that requires the state to make the annual contributions required to ramp up to the full actuarially required pension payments over a seven-year period from Fiscal Year 2012 to Fiscal Year 2018.

It is all or part of the FY14 payment of $1.558 billion that is due by June 30 that the Christie administration is considering pushing off into July to fill an $807 million budget deficit that developed last month when income tax revenues came in much lower than expected in April.
The Berg case and the acknowledgement by Christie and Treasurer Andrew Sidamon-Eristoff that they are considering pushing off the pension payment come less than three years after Christie and Sweeney proudly shared a podium at Trenton’s War Memorial to announce that their bipartisan bill has put the state’s pension system on the road to solvency after 15 years of skipped payments by previous governors and legislatures.

That declaration of victory, stamped by Christie’s avowal that retirees 20 years from now would thank him for saving their pensions, now appears premature, as the state’s pension crisis — far from being resolved — has emerged once again as a major fiscal flashpoint:

  • Declaring that soaring pension, retiree health benefits, and debt service costs were eating up 94 percent of the annual increase in revenues, Christie warned that New Jersey could follow Detroit into bankruptcy and threatened to take unilateral action unless the Democratic-controlled Legislature required public employees to pay more toward their pensions and health benefits.
  • With the full backing of Democrats, Sweeney, an Ironworkers union leader who put his political career on the line to pass the pension bill, threatened to shut down the state government if Christie did not make the scheduled pension payment.
  • Christie changed the state’s pension formula in order to retroactively cut the FY14 pension payment by $93.7 million to help fill an earlier budget gap in March and to save $147 million in FY15. His secret action angered the Legislature’s Democratic budget chairmen.
  • Standard and Poor’s and Fitch Ratings downgraded the state’s credit rating in April, and Moody’s was equally critical, based partly on the state’s failure to solve its long-term structural imbalance, the reliance on “one shot” revenues such as the retroactive pension cut, and the fact that the seven-year ramp-up to actuarial funding would actually increase the state’s unfunded pension liability to $54 billion by FY18.
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  • Even if Christie is able to make this year’s $1.558 billion pension payment and squeak through next year’s $2.25 billion cost, lawmakers and policy experts increasingly doubt the governor’s ability to make the $4.8 billion payment that would be due three years from now and still meet all of the state’s other fiscal obligations.
  • And that doesn’t even include the possibility that a decision by the Appellate Division could further complicate the pension debate.

    Berg v. Christie is just the latest in a series of cases in New Jersey and in states across the nation that have been filed by unions and retirees over the past seven years challenging the right of cash-strapped state governments to put off pension payments, cut cost-of-living increases, and make other changes in pension benefits. But concerns about protecting the pensions of future retirees go back well before the state fiscal crises precipitated by the Great Recession of 2007-2009.

    It was John Loos, lobbyist and political director for the Communications Workers of America, the state government’s largest union with more than 35,000 members, who negotiated the provision in the 1997 pension law that established pensions as a non-forfeitable right in exchange for the union’s support for a controversial pension bond issue that Gov. Whitman had proposed.

    “We wanted the ‘non-forfeitable right’ language for pensions added to the state constitution, but we settled for getting the language added to the statute, along with a one-half percent reduction in our members’ pension contributions,” Loos recalled. “We hired our own actuary and we came to the conclusion at the national level that if this went through, the pension system would be 100 percent funded for the first time.”

    Hetty Rosenstein, now the CWA district director, fervently opposed the pension bond issue, which enabled Whitman to continue to forgo contributions to the pension system, as her predecessor, Democrat Jim Florio, had done, and as her successors would do. In fact, Republican Gov. Donald DiFrancesco not only made no pension payment, but pushed through an unfunded 9 percent increase in pension payments.

    Growing Pension Crisis

    It wasn’t until Democrat Jon Corzine took office in 2006 that the growing pension crisis attracted any attention. Corzine raised the retirement age from 55 to 62 and increased employee pension contributions from 5.0 percent to 5.5 percent, but did not go after COLAs or any benefits that were being received by current retirees because of the Farber and OLS opinions holding that to do so would violate their contractual rights under the federal and state constitutions. Corzine also made a pair of $1 billion pension payments in 2007 and 2008 that were twice as much as his four predecessors had contributed in the previous decade.

    When the state failed to make pension payments in 2009 and 2010 after state revenues plummeted in the wake of the Great Recession, the New Jersey Education Association and the other state unions filed suit asserting that the 1997 Whitman law establishing pensions as a “non-forfeitable right” required the state to make annual pension payments sufficient to ensure the fiscal health of the pension system, whose unfunded liability was soaring. The courts ruled that pensions were indeed a contractual right, but that it was up to the state to decide when and how to pay for them.

    It was in response to that NJEA lawsuit that the 2011 pension law sponsored by Sweeney and signed by Christie was amended to fortify the contractual rights language of the 1997 Whitman pension law by making payment of the state’s scheduled pension contributions a contractual right for retirees, and giving each retiree the right to immediately sue the state if Christie or future governors failed to make the required payments on time.

    However, the Sweeney bill also was raising the retirement age to 65, cutting pensions by 3 percent a year for those taking early retirement, and increasing pension payments from 8.5 percent of salary to 10 percent for police and firefighters (who are allowed to retire after 20 years) and phasing in an increase from 5.5 percent to 7.5 percent for teachers and other non-uniformed government workers.

    These changes were projected to save $48 billion over 30 years, but the bulk of the savings — $74 billion over three decades — were to come from the elimination of cost-of-living increases for all retirees until their pension systems were 80 percent funded, which could take 30 years or more.

    Loos, now retired, went in to testify against the legislation, and recalled that his face turned red when he told Sweeney, “You have a lot of nerve promising people a contractual right to funding when in the very same bill you’re abrogating their contractual right to benefits.”

    A Challenge by the Unions

    In NJEA v. Christie, the state’s unions challenged the increases in pension contributions, the elimination of the COLAs, and other changes, including increases in employee contributions for healthcare coverage that were mandated by law as part of an unprecedented four-year suspension of collective bargaining on health issues at the state and local government levels.

    Superior Court Judge Mary Jacobson, the Mercer County assignment judge, upheld all of the provisions of the Sweeney bill, except for the COLA issues, which she consolidated into the Berg v. Christie lawsuit that was before Judge Hurd.

    The rulings by Jacobson and Hurd are in line with those in most states over the past five years, with the notable exception of Arizona, where pension rights are specifically protected in the state constitution — which is what Loos had hoped to achieve back in 1997 — and in Colorado, where an appeals court overturned a trial judge who had granted a summary judgment for the state in a case similar to Berg involving the contractual rights of pensioners to receive COLAs.

    NJEA Communications Director Steve Wollmer said the union did not appeal the Jacobson ruling on the increased pension contributions, but did join Ouslander, who has filed his own briefs as a pro se plaintiff, and the other 25 former lawyers from the attorney general’s office in appealing the COLA decision.

    Lawyers for the unions believe the COLA case is stronger because it is an actual reduction in a benefit that current retirees have been receiving.

    Loos, meanwhile, formed his own nonprofit advocacy organization, NJ Retired Public Employees, and has his eye squarely on the issue of whether the state will make the required $1.558 billion payment by June 30.

    “With Christie making comments that everything is on the table, it’s going to be hard for the courts not to obligate the state to make this payment,” Loos said. ‘Someone is going to be in court on this the day after they don’t make the required contribution, and the intent of the legislation is very clear.”