Uptick in Tax Revenues Could Impact Court Fight Over Pension Payments

On eve of Supreme Court arguments, state announces tax collections may exceed projections by as much as $200M

Richard J. Hughes Justice Complex in Trenton, home of the NJ Supreme Court.
Gov. Chris Christie’s administration said yesterday that state tax collections could come in as much as $200 million above projections before the current fiscal year ends, and that the extra revenue will be added to the payment into the public-employee pension system that the state is scheduled to make in June.

That news comes just as oral arguments are being held this morning before the New Jersey Supreme Court in the high-profile pension-funding case involving the Christie administration and more than a dozen public-worker unions.

It’s unclear right now what impact the administration’s announcement will have on the court case, and a decision from the justices in Trenton is not expected to be issued immediately. But when that ruling does come, the decision will likely have far-reaching implications for the budget, the pension system and overall state finances, as well as for Christie’s political ambitions as he continues to explore a run for president in 2016.

The unions are seeking to undo the governor’s decision last year to reduce a planned $2.25 billion pension payment by nearly $1.6 billion to help solve state budget problems after tax collections at this point last year came up well short of estimates.

That shortfall scenario doesn’t seem to be playing out this year, at least according to preliminary numbers, said Christie press secretary Kevin Roberts.

“It appears that total revenue for all of fiscal year 2015 may well exceed projections, perhaps by as much as $200 million,” Roberts said.

Since the state collects a significant portion of its annual revenue from the income tax, April is always a “make or break” month for the state fiscal year, which ends June 30. More detailed tax-collection data is expected to be released by the state treasurer when he gives lawmakers an official revenue update that is scheduled right now for May 19.

If the revenue surplus holds, Roberts said, the governor will seek approval for supplemental spending to boost a pension payment currently set at $681 million.

“While a final year-end total is still dependent on other factors, the Governor believes any additional revenue from fiscal year 2015 should be added to the state’s pension contribution when the payment is made in June,” he said.

But even with an extra $200 million, Christie and lawmakers still have a long way to go to come up with the additional $1.57 billion they were ordered to provide for the pension payment for the current fiscal year in a Superior Court judge’s February ruling.

Christie appealed that decision, leading to today’s arguments before the Supreme Court.

At issue is whether the Christie administration has a constitutional obligation to live up to a law the governor signed in 2010 that committed the state to a series of increasing contributions into the pension system over a seven-year term that started in 2012.

The increased payments were designed to reverse years of underfunding by Christie, a Republican, aswell as by prior governors from both parties, that has left the pension system, which covers the retirements of an estimated 773,000 current and retired workers, deep in debt.

The larger er state contributions also won the support of Democratic legislative leaders for a 2011 reform law that forced employees to pay more toward their pensions as well.

The unions are arguing that the reform law gave the state pension contributions constitutional-contract protections, even though Christie has since reduced some of the promised payments, including for the current fiscal year, to help solve state budget problems.

“The Attorney General comes before this court in the unusual position of attacking rather than defending the State’s duly enacted laws,” the unions argued in their latest brief.

Enforcing the payment schedule would also prevent “a doomsday scenario where the pension funds will run dry and benefits must be paid out of the general treasury,” the unions’ brief said.

But Christie, after once touting the 2011 pension reforms as a landmark for New Jersey and a model for other states, is now arguing that only voters can fully guarantee a state obligation, leaving everything else “subject to appropriation” even thought the employees have no similar out clause when it comes to making their payments.

That argument also cites state constitutional grounds, hinging on a clause that prevents politicians in Trenton from promising in the short-term to do things to win votes that could prove too costly for taxpayers down the road.

And it follows a 2011 Supreme Court ruling that found the Christie administration didn’t have to fully comply with the state’s own school-funding law, only the part rooted in the constitution’s guarantee of a “thorough and efficient system of education” in every community.

“Since 1947, there has not been a single deviation from the principle that every non-voter-approved commitment to expend State funds is, no matter how or where embodied, subject to the Legislature’s constitutional appropriations power,” the Christie administration argued in its last brief.

“What they do not and cannot explain is how an impermissible binding of future Legislatures is magically rendered permissible in their view by the mere addition of contract terminology,” the brief said.

The increased state contributions at stake in the case were considered the best way to address the underfunding that has left the pension system with between $40 billion and $80 billion of debt, depending on which accounting system is
used to measure the liabilities.

The increased contributions from the state and the employees, as well as other changes approved in 2011, including suspending cost-of-living adjustments, were projected to save more than $100 billion over several decades.

But Christie, facing severe budget problems last year, decided to shortchange the $1.58 billion state payment called for under the seven-year plan by nearly $900 million.

[related]That drew an immediate lawsuit from the unions who sought enforcement of the law, which is referred to as Chapter 78 in court documents. Superior Court Judge Mary Jacobson upheld the cut in a decision released late June last year, saying it was permissible only because the state faced a fiscal emergency at the time.

Last year, Democratic leaders ushered a budget through the Legislature that funded the $2.25 billion pension contribution for the current fiscal year using revenue from a planned surcharge on corporate income, as well as an increase in the state’s top-end tax rate on personal income over $1 million.

But Christie rejected the tax increases and used the line-item veto to reduce the pension contribution due to be paid next month to $681 million. A similar fight is shaping up this year.

Christie is proposing more pension reforms, and a $1.3 billion pension contribution for the fiscal year that begins July 1 — not the $3.1 billion payment that would have to be made if the justices ultimately enforce the seven-year payment schedule.

“This funding is crucial to the future sustainability of our state’s pension system,” said Charles Wowkanech, president of the New Jersey’s AFL-CIO, one of the unions involved in the lawsuit. “This is a matter of grave importance to employees who spent their careers in public service in the belief that the deferred compensation they earned would be there for them in retirement.”