Appellate Division Panel Rules That Retirees Have Contract Right to COLA

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A New Jersey Appellate Court ruled June 26 that New Jersey’s public employee retirees have a contract right to yearly cost of living or ‘COLA’ increases in their pension benefits, and those adjustments are part of the state’s benefits package. The ruling does not reinstitute the COLA.  Rather, it remands the case to the trial court to develop a record on the impairment of contact claim. 

Stating that, "As previously discussed,… N.J.S.A. 43:3B-9.5 created a contractual right to pension benefits, and hence the State could not diminish vested pension benefits unless it could satisfy the constitutional standards under which the State may impair the obligation of a contract,” Presiding Appellate Division Judge Susan Reisner found that current retirees had a contractual right to COLA.

 “The history of the pension statutes … convinces us that COLAs are such an integral part of the pension system that the Legislature must have intended that they be included as part of the non-forfeitable right guaranteed in 1997,” Judge Reisner wrote for the three-judge panel.


In 2011 the State enacted P.L.2011, c.78, which among other changes froze any future COLA until an individual pension fund, of which the Teachers' Pension and Annuity Fund (TPAF), reached eight percent (80%) viability (the rate at which rating’s agencies deem a deems a public pension systems "adequately funded").  At that point, a committee comprised of both State officials and organizations representing individuals would decide whether to reinstate COLA for an individual fund.  That law was quickly challenged by a myriad of public employee unions and representatives,  including NJPSA, as well as the group’s individual members.   The groups argued that freezing the COLAs was unconstitutional.  This case, Berg v. Christie, stems from that challenge.

Globally the funds have approximately fifty-seven percent (57%) funded ratio, although certain funds are in a much better position that others – namely those with local government contribution as those entities did not take payment ‘vacations’ as the State has since 1990. 

Recent action by the Administration to short the 3/7th and 4/7th payments required under P.L.2011, 78 further exacerbates the funds’ viability leading to an even longer period within which COLAs would be frozen.  But, the panel rejected the Administration’s argument that paying out the yearly increases would have an impermissible effect on the budget.

“There is no dispute that, at the current time, there are sufficient funds in the pension systems to pay COLAs to current retirees,” the judge wrote. “Moreover, pensions are neither funded by appropriations on a pay-as-you-go basis, in the way that COLAs used to be, nor is their payment contingent on the making of a current appropriation."

The panel also noted that, "During the years that the State skipped making its pension contributions, the pension systems continued paying COLAs to retirees.  In fact, the court noted that in 2010, the State assured the court that the pension systems were capable of paying out benefits for the next thirty years, despite the State's failure to make its contributions to the funds."

However, Reisner’s panel did not order that the COLAs be paid out from the pension funds. Rather, the panel remanded the matter to the lower court to determine whether the COLA freeze is onerous enough that it violates retirees’ contracts, as well as any new issues.

For the state to be able to break the COLA requirement, it must now show that the harm to retirees is not "substantial," that the government is breaking its agreement for a "reasonable public purpose," and that the freeze is related to "appropriate governmental objectives."

There was some words of caution for the State as to their responsibility going forward.

“But to a very great extent, the strength of the pension systems rests on policy choices made by the other two branches of government, and on their political will to preserve the systems and satisfy prior commitments made to public employees and retirees.”

And those cautionary words also resonate with Wall Street.  Over the last several cycles the investment houses have down-graded New Jersey’s bond rating in light of the ongoing pension issue.

But, Judge Reisner was careful to draw the line on where the court’s responsibility and authority ends. 

“It is not the courts' role to run the pension systems,” Reisner wrote. “Our responsibility is to interpret and apply the constitution in light of the evidence, and we will do so.

Dueling or Dual Cases?

Interestingly, the day prior, Assignment Judge Mary Jacobson, in a separate case related to the recent Administration decision to not make this year’s 3/7 payment, ruled that the current year’s pension payment cut could be justified by the State’s dire financial emergency. Nonetheless, Judge Jacobsen recognized that by doing so, the Administration was substantially impairing workers’ contract rights under the same 2011 pension overhaul he signed. That battle is likely to extend into the coming months.

Litigation will continue in both cases.