On Monday of this week, less than 24 hours before Governor Christie unveiled his budget for FY2016, Superior Court Judge Mary Jacobson, found in favor of the plaintiffs, including the NJPSA, in a lawsuit filed last May challenging the Governor’s decision to walk away from the State’s pension contribution obligations under Chapter 78. Judge Jacobson ordered the State to make an additional payment of $1.6 billion in FY2015 – this budget year – to fulfill its “contractual” obligation under Chapter 78.
Chapter 78 expressly provides that members of the public pension systems have a contractual right to enforce the State’s required annual contribution. N.J.S.A. 43:3C-9.5(C)(2). The statute provides (1) that the amount of the State’s annual required contributions be included in all annual appropriation acts as a dedicated item; (2) that the contributions be made annually on a timely basis; and (3) that the failure of the State or any other public employer to make the annually required contributions shall be deemed to be an impairment of the contractual right of each employee belonging to one of the covered pension systems. Judge Jacobson concluded that the clear intent of the statute, and its inclusion of the contractual right to enforce the State’s required annual contribution, was to insulate the required State contributions from the “vicissitudes of the political process that had placed the integrity of the funds in jeopardy.”
At the time of the adoption of Chapter 78 Governor Christie characterized the legislation as constituting “historic reforms” that would “bring to an end years of broken promises and fiscal mismanagement by securing the long-term solvency of the pension and benefit systems.” The Governor touted the legislation as “his biggest governmental victory” and a “bold” bipartisan effort to save the pension systems while also providing real, long-term fiscal stability.
The State had failed to make its full annually required contributions from 1997 to 2012, which exacerbated the annual unfunded accrued actuarial liability of each of the pension funds. N.J.S.A. 43:3C-9.5(c). The court noted that the unfunded liability of PERS increased from approximately 2.6 billion in 2004 to an estimated 16.5 billion in 2012. The unfunded liability in TPAF went from 5.8 billion in 2004 to 21.4 billion in 2012. The unfunded liability in PFRS increased from 3.6 billion in 2004 to an estimated 8.1 billion in 2012. The unfunded liability of the State PFRS increased from approximately 51.8 million in 2004 to an estimated 798 million in 2012.
The reforms adopted, which became part of the “bi-partisan” narrative of the Christie Administration, were intended to place all of the pension systems on sounder financial footing going forward. Beginning in 2012 the State was to take steps to move to fund the unfunded liability of the pension systems. The plan was to move to “full” funding in annual increments of 1/7 over the course of seven years, with full funding to be realized by 2018. But, when faced with a budget shortfall in 2014 the Governor did exactly what the legislation was intended to prevent. He backed away from the agreement that the State make its required contribution to the unfunded liability of the pension systems.
At the time – May 2014 – the Governor cited what he characterized as a fiscal emergency justifying the actions he proposed. The Christie Administration was facing a $1 billion shortfall in anticipated revenue. Judge Jacobson accepted the Governor’s contention for FY2014, but she permitted the parties to move forward with their claims for the FY2015. Notwithstanding the Governor’s “narrative” that the fiscal reforms to which he agreed signified a bi-partisan effort to place the pensions systems on a more sound fiscal footing, in the proceedings before Judge Jacobson the Christie Administration did an about-face and claimed the reforms were in fact unconstitutional.
Noting the ‘irony” in the Administration’s position, that it was now claiming that what it had previously claimed to be “historic” reforms, were in fact illegal, Judge Jacobson rejected each of the State’s claims. She concluded that Chapter 78 did not run afoul of the New Jersey Constitution.
Moreover, referring to the contractual right bestowed by Chapter 78, Judge Jacobson said that it was difficult to imagine any clearer way by which the Legislature could manifest an intention to create a contractual relationship between public employees and their employers and the contractual right to State pension contributions. She ruled that the statute provides in no uncertain terms that the right to the annually required contributions means that the employer or other public entity – the State – shall make the annual required contribution on a timely basis and that the failure of the State or any other public employer to make the annually required contributions shall be deemed to be an impairment of the contractual right of each employee. N.J.S.A.43:3C-9.5(C)(2)
Judge Jacobson’s Order requires that the Administration and the Legislature determine how and where the required State contributions are to come from. But, there is no doubt that the import of her Order is that the State cannot “simply walk away from its financial obligations,” especially when those obligations have been the State’s “own creation.”
The State has already appealed the decision. The expectation is that the appeal may go directly to the State Supreme Court given the fact that there are only four months left in the FY2015 budget cycle. However, until and unless another court “stays” Judge Jacobson’s decision, the Christie Administration will have to find an additional $1.6 billion for FY2015 in order to meet its financial obligation to the State pension systems. The decision is a clear “win” for all public employees.