Judge Rules That Christie Can Withhold $900M Payment Into Pension Funds

Hank Kalet | June 26, 2014 | Budget
Superior Court magistrate declines to issue injunction sought by public employees union, citing 'staggering budget shortfall'

Superior Court Judge Mary Jacobson
Gov. Chris Christie’s plan to cancel a $900 million payment into the state’s pension funds to help plug a hole in the current year’s budget cleared its first hurdle and appears likely to go forward, now that a Superior Court judge has ruled against issuing an injunction requested by the state’s public employee unions.

The ruling, issued Wednesday afternoon by Judge Mary Jacobson in Mercer County, dismissed the request for a preliminary injunction, finding that the governor acted within his powers given the state’s dire fiscal conditions. However, it also agreed with the unions’ contention that the 2011 pension reform law created a contractual obligation and that failing to make the payments created a hardship under the state and federal constitutions.

Jacobson said during comments from the bench that the canceled payment would lead to a “substantial impairment” for public employees by furthering a long-term actuarial shortfall, but that the state made it clear that it was necessary due to the staggering budget shortfall to protect the citizens of New Jersey.” Essentially, Jacobson said two competing claims needed to be balanced and that the fiscal emergency caused by a $1 billion shortfall had to take precedence.

Jacobson’s decision came on the eve of an expected ruling on a challenge by two dozen retired prosecutors and the state’s public employee unions to the elimination of annual cost-of-living adjustments for retired teachers, police, firefighters, and state and local government employees in the controversial 2011 pension law.

At stake in the case are $74 billion in projected savings over a 30-year period.

Jacobson also ruled that claims about the 2015 budget and pension payments were not “ripe,” because the budget had yet to be signed into law.

Union leaders, while disappointed in the ruling, viewed it as a partial victory. Jacobson did not dismiss the suit, only the request for an injunction, and she accepted the unions’ contention that the 2011 pension law created a contractual obligation to make payments into the pension system.

The current-year budget deficit, caused primarily by a $650 million drop in state income tax revenues in April, led the governor to freeze pension payments on May 20.

He issued an executive order invoking emergency budgetary powers and canceled the remaining $900 million payment into the system. He also ordered the Treasury to freeze all spending not deemed necessary to protect the health, safety and welfare of New Jersey residents and to set aside $300 million in undesignated fund balance, also known as surplus. The surplus, according to state officials, is necessary to ensure cash flow and to guard against unanticipated emergencies.

The alternatives, the governor said, would have been to cut funding to students and seniors and “put at risk those programs that I mentioned and those services that the people of the state rely upon.”

The drop in tax revenues also caused the state to cut revenue projections for 2015 by $1.7 billion to $32.7 billion. In response, the governor plans to cut a proposed $2.24 billion pension payment to about $700,000 for the fiscal year 2015 budget, which starts on July 1.

The pension cuts, which the governor called necessary to protect state finances, contradict the provisions of the 2011 pension law, which called for a phase-in to full funding by 2018 and angered the state’s public employee unions. The unions filed suit seeking an injunction against the governor’s actions and hoping to force the governor to pay more into the system this year and to reverse his 2015 cuts.

The governor praised Jacobson’s ruling on Wednesday.

“This was one of the hard choices the people of New Jersey expect me to make,” Christie said in a press release. “And I am pleased the court recognized the necessity and urgency of this decision so that we can provide key funding for our schools, our colleges, our hospitals, and other essential services. For our state’s families who are already overburdened by high taxes, raising taxes even further would not solve a problem created by decades of neglect and irresponsibility.”

Union leaders were unsure whether they would appeal — the State Troopers Fraternal Association said they planned to while other unions said they would review the decision. However, they said they were prepared to continue with the suit in an effort to prevent the governor from shorting payments in 2015.

“She found that we met the burden in terms of this being a contractual impairment, which I think is the critical issue,” she said. The upcoming fiscal year is different, said Hetty Rosenstein, state director of the Communications Workers of America. “This was a very specific and unusual circumstance at the end of the fiscal year.”

She said they would review the case and that it was likely the unions would “end up back in court for 2015.”

“This issue is going to get litigated,” she said. “We could be a lot more unhappy about not getting a preliminary injunction. We would have really liked to have it on the freezing of the money, but the overall legal issues here came through in our favor.”

Jacobson made her ruling after two hours of arguments from union and state lawyers. The unions argued that the state’s decision to maintain a surplus was a discretionary matter and that the money set aside for the surplus could have been paid into the pension system. Even if the surplus was necessary, the unions said, the state’s own figures showed that there likely would be money leftover that could be used to pay into the pensions, which is why they wanted Jacobson to order the state to freeze all spending unrelated to necessary programs, like those for seniors, the disabled and students.

The state countered by saying the surplus was necessary to ensure adequate cash flow and to protect against unforeseen circumstances, like another Superstorm Sandy. The state also argued that the governor had the authority to act under the Disaster Control and Emergency Appropriations act and that previous court precedents prevented the pension from being a contractual obligation.

Jacobson, in her ruling, said the language of the 2011 law was a direct response to a decision in 2010 in a case brought by the New Jersey Education Association seeking to force the state to make payments that found no contractual relationship and no contractual claim under the constitution.

“The Legislature and governor agreed in 2010 and 2011 to increases in contributions into the pension fund and that employees would get contractual rights to the pension payments,” she said from the bench.

However, the state fiscal crisis supersedes the contractual issues, she said. State budget officials have certified the numbers and “showed that the fiscal health of the state was threatened if debt payments were not made and the undesignated fund balance was not at least $300 million.”

The governor’s executive order, she said, was “justified by the broad social impacts that might occur and permitted the impairment of contracts” in this case. She called the governor’s action “reasonable and necessary” because of the “painfully few options available with two months left in the year.”

Jacobson said the state demonstrated that it looked for money in other budget areas and that the governor had frozen other unspent money in the budget.

In the end, she said, it was a matter of “balancing equities.”

“The facts are that no state employee is in danger of not receiving a benefit this year or for the foreseeable future,” she said. “You have to weight that against the provision of other essential services.”