Explainer: How Do State Budgets Manage to Avoid Spending Required By Law?

Two provisions of NJ constitution provide loopholes that allow – and actually ‘require’ -- lawmakers to circumvent mandates

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New Jersey’s counties and municipalities are forced by law to make employer contributions into the public-employee pension system. Police officers, firefighters, teachers and other government workers also have to put a percentage of their earnings into the pension system.

But state government, which oversees the management of the pension system, is not required to make an annual payment despite a law passed in 2011 that lays out a schedule of specific contributions.

The reason why — which was just upheld by the New Jersey Supreme Court in a major pension-fund ruling handed down last week – lies in the construction of the state constitution, which was last redrawn in 1947.

Separate clauses in the constitution dictate how much the state can take on in annual debt that’s not directly approved by voters and limit spending in a given fiscal year to the amount of money that will be raised by the state during that fiscal year.

It’s those two clauses that allow lawmakers each year to pass budgets without the full funding that is required by state law for items like the Homestead property tax relief program and the state’s school-funding act.

The 2011 pension-funding laws — which attempted to correct years of underfunding of the pension system by establishing specific state payments as a contractual right of public workers — is just the latest statute to be impacted by the constitution’s strict language.

Debt-limitation clause: This component of the constitution is designed to prevent the current Legislature from overextending future generations by pushing off too much debt into the years and decades ahead. Lawmakers are only allowed to take on long-term obligations that equal up to 1 percent of the annual state budget – which currently totals about $33 billion – unless the issue is approved by voters.

State Supreme Court decisions have reinforced that debt taken on by affiliated agencies like the New Jersey Economic Development Authority is not truly state debt, but an obligation that is always “subject to appropriation” each year by the Legislature.

Appropriations clause: This is the other major section of the constitution that plays a role in how the state budget comes together each year, and it’s the one that includes the requirement that every budget be balanced when enacted at the start of each fiscal year. That means each July 1 the projected state spending approved by the Legislature must line up perfectly with the revenues that the executive branch projects the state will take in.

Although the Supreme Court has found borrowing by state-affiliated agencies doesn’t violate the state constitution, it ruled in 2004 that those agencies cannot use their borrowing powers to generate revenue for the annual budget.

Impact on state laws: Lawmakers for years have passed statutes that seem to mandate a specific level of spending each year on items like property tax relief and school funding. But because no Legislature can bind a future one to set spending without voter approval and no budget can be enacted without being balanced, the constitution’s clauses take precedence over those statutes.

That means lawmakers each year have to decide how much they want to spend on a specific item even if state law seems to dictate otherwise.

Even in cases like school funding, where the Supreme Court has had longstanding involvement due to another section of the constitution, the justices have only stepped in to enforce parts of the school-funding law that are linked to schools in the poorest communities.

Importance of Supreme Court’s pension-funding decision: The language that lawmakers added into the 2011 pension-funding law seeking to make state pension contributions a contractual right of the employees was intended to overcome the constitutional hurdles. That’s because contracts the state enters into also generally have protections that are covered by both the state and federal constitutions.

But the Supreme Court’s 5-2 majority opinion said that even though Gov. Chris Christie and lawmakers said they were making the pension payments a contractual right of the employees, Christie’s administration was correct in later arguing after the state couldn’t come up with the money to make the promised contributions and that lawmakers in 2011 didn’t have the authority to grant contractual rights that would bind future lawmakers to specific pension contributions.

Just as the court has found state borrowing issues that are not backed by voters are “subject to appropriation,” it also said the pension contributions, including the $2.25 billion payment pledged in the 2011 law for the current fiscal year, are also subject to the annual state budget process.

And other components of the pension-funding law, including those that required employees to contribute more towards their pensions and health coverage, were not overturned, as well, because the state constitution applies to state appropriations, not to the contributions that are made by workers, the court ruling said.