NJ Supreme Court Rules No Contractual Right to COLA

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The New Jersey Supreme Court ruling in the long awaited cost of living adjustment or ‘COLA’ was released June 9 with the Court siding with the State against several public sector unions, including NJPSA, and a group of retired prosecutors.   The case examined whether a 1997 law that guaranteed public employees a ‘non-forfeitable’ right to a certain pension benefit included a yearly cost-of-living adjustment (COLA) to that pension for retired public-sector workers.   Today’s ruling represents the next chapter in long term litigation which began after enactment of legislation in 2011 that suspended the COLA benefit for retirees.

The Argument

The case came to the Court via 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 P.L.2011, c.78 (Chapter 78), which suspended COLA, did not apply to employees hired after enactment of the 1997 law and before 2010.  Today’s ruling overturns that decision.

The 1997 law stated, “a 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 hinged on whether the term “benefits program” was meant to include COLAs. Plaintiffs argued that the Legislature only explicitly excluded health benefits, suggesting everything else is applied under the law.

Chapter 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.

Today’s Supreme Court Opinion

Specifically, the majority opinion in Richard W. Berg v. Hon. Christopher J. Christie (074612)
(Mercer County and Statewide)
found that the 1997 statute did not create a contractual right, as the  Legislature’s intent to limit the subsequent exercise of legislative power was not clear or unequivocal as to the both the creation of a contract as well as the terms of the contractual obligation.   Rather,’ proof of unequivocal intent to create a non-forfeitable right to yet-unreceived COLAs was lacking.’  As such, the Legislature retained its ‘inherent sovereign right’ to act in its best judgment of the public interest and to pass legislation suspending further COLAs (e.g. Chapter 78).

The majority’s decision began by tracing the history of COLAs for retirees across several pieces of legislation – culminating in the ‘non-forfeitable right’ statute which tied the COLA to the rate of inflation, P.L. 1997., c113 (1997 law).  The opinion then went on to address what happened in 2011, with enactment of P.L. 2011, c.78 (Chapter 78) ultimately determining that to create a contractual right that ‘surrenders the power of future elected representatives to cut back’ would require ‘only the clearest expression of statutory language and evidence of legislative intent.’ Spina v. Consolidated Police and Firemen’s Fund Commission, 41 N.J. 391 (1964).  Such a ‘clear indication’ was lacking under the 1997 law.

The Court similarly rejected equitable arguments that focused on the reliance of employees on the availability of a non-forfeitable-right when they retired.  Rather, the Court found that because the language of the non-forfeitable-right statute does not guarantee COLAs, it necessarily follows that the retirees could not have reasonably relied on the statute’s terms for purposes of a claim in equity.’

Prior Decisions

The 6-1 ruling is the second challenge of Chapter 78 to reach the state’s highest court (a June 2015 opinion in Burgos v. State, 222 NJ 175 found 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).  A freeze on COLAs was among the main components of Chapter 78, saving about $17.5 billion.

A loss for the state could have increased the state’s unfunded pension liability by some 33 percent and may have led to a credit downgrade, Moody’s Investor Service said in January. Such a ruling would have pushed the unfunded pension liability from an estimated $40 billion to $53 billion – more than an entire year’s revenue, Moody’s said at the time.

Not Without Detractors

The majority opinion was not without detractors with Supreme Court Justice Albin starting his opinion with, ‘Sometimes a plainly written statute is just a plainly written statute…. I do not agree with the majority that the pension statutes at issue, which guarantee retired public employees a cost-of-living adjustment (COLA), lack clarity or are susceptible to two interpretations.’


Richard W. Berg v. Hon. Christopher J. Christie(074612) (Mercer County and Statewide)

NJPSA Statement