The New Jersey Supreme Court is expected to release its decision on whether public workers have a contractual right to annual increases in their pension benefits after retiring – which could add billions of dollars to New Jersey’s unfunded pension liability. The Court heard oral argument on the matter back in March which examined whether a 1997 law that guarantees public employees a ‘non-forfeitable’ right to a certain pension benefit includes a yearly cost-of-living adjustment (COLA) to that pension for retired public-sector workers. Stay tuned as the opinion is released.
The State is asking the Supreme Court to overturn an Appellate Division ruling in Berg v. Christie that found a 1997 statute created a non-forfeitable right to a COLAs such that the pension reform legislation, more formally known as Chapter 78, which suspended COLA, does not apply to employees hired after enactment of the 1997 law and before 2010.
The 1997 law states, “non-forfeitable right to receive benefits’ means that the benefits program, for any employee for whom the right has attached, cannot be reduced.” Much of the plaintiff’s case hinges on whether the term “benefits program” is meant to include COLAs. Plaintiff’s argue that the Legislature only explicitly excluded health benefits, suggesting everything else is applied under the law.
Why it matters? As you may recall, P.L. 2011, c.78, sought to eliminate COLAs for all employees until respective pension funds reached 80 percent funding AND a committee established under the law approved the return of COLA for members because the fund could sustain the renewed conferral of the COLA benefit. The police and fire pension system is the closest to reaching the 80 percent, invoking a need for the internal committee to consider the issue in the near future. In comparison, several of the other funds, including the Teachers Pensions and Annuity Fund (TPAF), under which school leaders are provided a pension benefit, are far from reaching that 80 percent threshold. As such, thousands of retirees have ceased receiving COLAs since enactment of Chapter 78.
Plaintiffs are urging the Court to affirm the appellate ruling, arguing the Legislature purposefully sought to include COLA in what is considered a guaranteed pension benefit. Primary plaintiffs are 26 government retired government attorneys affected by the elimination of the COLA benefit. Several public sector employee groups, including NJPSA, filed a separate suit that the Court consolidated as part of the March 14 hearing and which are expected to be decided June 9.
The case comes down to whether the Legislature and Gov. Chris Christie had the legal authority to do away with retirees’ COLAs, which are tied to the rate of inflation. A freeze on COLAs was among the key components of the state’s landmark 2011 pension reform law, saving about $17.5 billion.
Supreme Court Consideration
The opinion to be released tomorrow will essentially determine if the COLA portion of Chapter 78–which guaranteed that the state would fully fund financially troubled pension plans in exchange for an increase in contributions from public-sector workers and a COLA freeze–is enforceable. However, the State could ultimately show that suspending the COLAs was part of a reasonable solution to save the historically underfunded pension systems from dire financial straits, according to the court.
In a published opinion in the lower court, Appellate Division Judges Susan Reisner, Carmen Alvarez and Harry Carroll found COLAs were a non-forfeitable right because of the legislation enacted in 1997 that declared COLAs a contractual right. The State unsuccessfully argued on appeal in that the term “benefits” in the non-forfeitable rights clause didn’t cover COLAs, and that a reading of the statutory language to include COLAs would conflict with other state law expressly allowing the state to decrease or even revoke such payments. Both the state and the plaintiffs appealed to the Supreme Court.
“The history of the pension statutes, including amendments to the Pension Adjustment Act, 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,” the opinion said.
But, the NJ Supreme Court, in a divided ruling in June of last year in Burgos v. Christie, sided against public-sector employees in a related matter, ruling that the State’s required payment under Chapter 78 was subject to the appropriations process and that barring a public referendum, the Legislature could not legally bind future legislatures with a mandatory payment schedule. The Burgos decision also found that Chapter 78 violated the ‘Debt Limitations Clause’ of the NJ Constitution, absent voter approval. The US Supreme Court declined to hear the Burgos case last month.
The pension funds currently have an unfunded liability of about $89 billion, and Moody’s Investors Services has told the state that if the court rules in favor of the Berg plaintiffs, it could expand the unfunded liability by about $13 billion or some 33 percent.
NJPSA will keep you posted as the opinion is released.