State Contends in Court That Christie’s 2011 Pension Reform Is Unconstitutional

Meir Rinde | January 16, 2015 | Politics
Lawyers enter ironic argument while asking judge to dismiss union lawsuit that state must fully fund public employee retirement funds

Superior Court Judge Mary Jacobson
In an ironic turn of events for the Christie administration, the state is contending in Superior Court that legislation considered the governor’s signature achievement — the 2011 pension reform law — may be barred by the state constitution and might itself be illegal.

The argument presented in court Thursday is that New Jersey’s constitution bars legislators from approving large financial liabilities without specific approval by voters, and that they cannot force future lawmakers to spend money.

Superior Court Judge Mary Jacobson is presiding over the lawsuit lodged by state employee unions fighting Gov. Chris Christie’s decision last spring to cut $2.4 billion in mandated pension contributions over two years.

The daylong hearing concluded without a ruling.

Jacobson heard arguments yesterday from Christie administration lawyers as well as attorneys for unions and pension fund trustees who filed a companion lawsuit last month.

The unions want to force the state to make the mandated $2.4 billion in payments to the state’s pension funds or else roll back the legislation that was imposed on them by the governor and state Legislature amid major protests.

Christie cut the legally required 2014 payment to the retiree pension funds from $1.58 billion to $691 million, and has budgeted only $681 million of the $2.24 billion required this year in response to last year’s drop in income tax payments. By doing so, the state boosted its unfunded pension liability — the amount the state owes current and future retirees if they should all retire today — to more than $40 billion for fiscal 2016.

The pension trustees want the court to force the state to make up for the reduced payments or throw out the entire bipartisan 2011 pension reform law. That legislation, which was ostensibly going to solve the continuing pension crisis, was supposed to save $121 billion over 30 years. It does so by unilaterally eliminating cost-of-living adjustments for current and future retirees, which led the unions to file suit.

Jacobson last year rejected the union’s demand for the reversal of Christie’s initial $900 million cut, noting it was an emergency measure caused by a “staggering shortfall.” But she also ruled that the law did create a contractual obligation for the state to make the pension payments, which were supposed to ramp up over seven years to full actuarially required funding of the pension system by fiscal year 2018.

If Jacobson issues the summary judgment the unions are asking for, Christie and the Legislature might have to come up with more than two billions dollars in additional pension contributions in the fiscal year 2016 budget. Attorney Michael Bukosky, who represents the State Troopers Fraternal Organization said after the hearing that the plaintiffs want to see mandated payments start even sooner.

“I would imagine she would ask us to propose a remedy,” Bukosky said of the judge. “You could ask for the governor just to write a check. That’s probably outside the realm of possibility. We could also indicate that we should start getting payments toward the pension system, and if that reduces payments to other contracts, well, then the governor has to start making choices.”

An enforceable contract

In arguing that Christie was not permitted to make less than the full scheduled contribution for unfunded liabilities, the unions’ attorneys are depending on what even the judge called unusually strong language in the pension law.

The law, called Chapter 78, says the pension funds “shall have a contractual right to the annual required contribution amount.” The governor, as well as the Legislature that failed to override his veto of the pension funding last June, are now in breach of contract, the attorneys argue.

“The pension system depends on a continual flow of money. That is the very purpose of Chapter 78, to do away with the erratic — the nonexistent — contributions that have been made in the past,” said attorney Robert Nowak, who represents the New Jersey Education Association.

Political leaders knew “that there would be temptations to walk away from the covenants in that statute,” Robert Klausner, a lawyer for the pension funds, told the judge. “So the Legislature and the governor intentionally clad it with constitutional protections. It was specifically designed as an enforceable vehicle.”

They also say Christie’s payment cut was unfair because the law’s cost-saving measures are still in effect. Those sections require workers to contribute more to their pensions and eliminate retiree cost-of-living increases until the pension funds are sufficiently restored.

Despite Jacobson’s earlier ruling that the law did create a contractual right to payment for the pension funds, Assistant Attorney General Jean Reilly continued to argue that that part of the law was, essentially, illegal.

That’s in part because the debt limitation clause of the state constitution bars the state from taking on large financial liabilities unless they are approved by voters, she said. In addition, the Legislature may not require lawmakers to spend money in the future, and the governor has the power to veto spending if he thinks the state can’t afford it or if the veto is necessary to avoid harm to the state.

Jacobson pressed Reilly to explain why those rules trump contractual rights, which are protected by clauses of the U.S. and New Jersey constitutions.

“It just seems to me… you really trivialized the contracts clause, and you seem to push it aside as if it is meaningless. I can’t afford to do that. I’m trying to figure out what it means,” the judge said.

“While the Legislature may have unequivocally intended to create a contractual right, it mattered not that they termed it a ‘contract,’ because every contract that the state enters into, no matter what it’s for, is subject to appropriation,” Reilly argued.

An imminent order to pay?

Much of the hearing focused on whether it was “reasonable and necessary” for Christie to bypass the contractual right so he could legally reduce the pension payments. Jacobson and the attorneys waded into the particulars of the budgetary process, debating whether enough money could have been raised or found to make the payments.

For example, the attorneys for the unions and the pension trustees said the administration could have made more of an effort to find additional revenue or savings before the state budget was approved last year. Jacobson said the governor could have accepted the Legislature’s proposed three-year tax increase on millionaires.

Reilly responded that it was too late in the fiscal year to find unspent monies, or to arrange cuts to municipal aid or other allocations, and said the governor has long believed that a millionaires tax would ultimately hurt the state treasury by inducing wealthy taxpayers to leave the state, reducing tax collections in the long term. She also said past tax hikes on millionaires have not raised as much money as projected.

The discussion of the budget highlights one difference between the decision Jacobson must make now and the order she issued in June. She did not require Christie to immediately restore the canceled pension payment amount last year, ruling that the cut was justified on the basis of fiscal emergency in the wake of an unexpected nosedive in state income tax collections.

The question now is whether the second part of the cut, affecting the current fiscal year 2015 budget, will be allowed to stand, and what will happen next year. Christie will deliver his budget for fiscal 2016 toward the end of February and reveal how much he intends to put toward the state’s next set of pension payments.

A commission he established is also expected to issue recommendations soon to address the pension crisis.

Jacobson appeared to favor the unions’ case. At one point she suggested that Christie’s cut had actually hurt the state, rather than protecting it from harm as Reilly argued, by allowing its unfunded pension liability to grow and prompting a series of downgrades by credit-rating agencies. The state has seen eight downgrades by Moody’s, Fitch, and Standard & Poor’s during Christie’s tenure, raising its borrowing costs.

The judge’s options include ordering the state to make additional pension contributions for the current 2015 fiscal year, ordering a full payment for fiscal 2016, which starts July 1, or holding a full trial. She could also reject the two lawsuits, though that appears unlikely. She did not say when she would issue a ruling.

Editor’s note: This story was edited after it was originally published.