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

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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