A recent study estimated that state public pension plans are underfunded by $4.7 trillion (yes, that’s a “T”). Ten states have plans in which less than 30-percent of benefit obligations are funded, and only three states have plans that are funded sufficiently for 50 percent or more of their participants. In a recent court case that may have significant repercussions for those states with the greatest unfunded public pension plan liabilities, the New Jersey Supreme Court ruled that the actions of Governor Chris Christie’s executive office, which prevented more than $3 billion (yes, that’s a “B”) of statutorily-mandated remedial payments from being made to the pension systems in fiscal years 2014 and 2015 were lawful, and did not unconstitutionally impair the contract rights of plan participants and their unions. Burgos v. State of New Jersey, Case No. A-55-14 (075736) (June 9, 2015).

Unfunded Liability Crisis. Due to huge unfunded liabilities in New Jersey’s defined-benefit pension systems (such unfunded liabilities were estimated by the N.J. AFL-CIO at the time to be about $50 billion), the Legislature enacted pension reform laws in 2011 designed to, among other things, increase the amounts contributed by the State to the plans each year. Under these statutes, the State annually is required to make contributions for not only the present value of the actual benefits the active pension members would earn in the then-current fiscal year, but also amounts that, when accumulated, are necessary to amortize the systems’ unfunded liabilities over a seven-year period. (The current contributions and the catch-up amounts, when combined, became known as the annually required contribution, “the ARC.”) Beginning in fiscal year 2012 (FY12), and continuing for seven years thereafter, the ARCs were to be gradually increased so as to eventually cover the systems’ liabilities. The State made the required ARC payments for FY12 and FY13, in full.

Failure to Pay the Full ARCs in FY14 and FY15. The ARC for FY14 was to be $1.582 billion, and the appropriations law signed by the Governor covered the full amount. However, in May 2014, Governor Christie, citing a severe and unanticipated revenue shortfall, issued Executive Order 156, which reduced the State payments to the pension systems. The State made a contribution of $696 million to the systems in FY14, but did not pay the “unfunded accrued actuarial liability contribution” portion of the ARC designated to help catch up on the unfunded liabilities.

Shortly thereafter, also in May 2014, the State Treasurer announced a planned revision to the proposed budget for FY15 then being discussed with the Legislature, so as to cut the State’s contributions to the systems, to a total amount of $681 million, or $1.57 billion less than the mandated ARC. In disregard of this announcement, when the Legislature passed its FY15 Appropriations Bill and sent it to the Governor, it included a $2.2 billion payment to the pension plans, as required by the mandated ARC. Governor Christie then exercised his line-item veto authority, deleting $1.57 billion from the pension system contribution. The Legislature took no action to override the line-item veto.

The Claims. In Burgos, various unions representing current and retired State employees and the unions’ respective officials, filed suit on myriad grounds, challenging the Governor’s actions under New Jersey statutes and various State and federal Constitutional provisions. All the claims were fundamentally premised on one provision of the State’s pension reform laws, L. 2011, c. 78 (“Chapter 78”), wherein the Legislature declared that each member of the New Jersey pension systems “shall have a contractual right to the annual required contribution amount … The failure of the State or any other public employer to make the annually required contribution shall be deemed to be an impairment of the contractual right of each employee.” Chapter 78, § 26 (codified at N.J.S.A. 43:3C-9.5(c)) (emphasis added).
The primary claims in Burgos were that the State’s failure to make the full ARC payments in the two fiscal years unconstitutionally impaired the plan participants’ contract rights created by Chapter 78, under both the New Jersey and U.S. Constitutions. The trial court ruled in the plaintiffs’ favor on their impairment of contract claims.

The Supreme Court Approves the Governor’s Actions. The New Jersey Supreme Court (5-2) ruled against the plaintiffs, holding that the Chapter 78 language quoted above did not create (and could not have constitutionally created) an effective contract requiring payment of the full ARC amounts in FY14 and FY15.

The Supreme Court reasoned that Chapter 78’s broad language – providing that pension system members “shall have a contractual right to the annual required contribution amount” – could not have constitutionally given the members a contractual right to payment of the full ARCs, insofar as the required payments to the pensions system were subject to the Debt Limitations Clause (N.J. Const. art. VIII, § 2, ¶ 3) and the Appropriations Clause (N.J. Const. art. VIII, § 2, ¶ 2) of the New Jersey Constitution, The former – barring the Legislature from creating “a debt or debts, liability or liabilities of the State” that exceed one percent of the amount appropriated in a given fiscal year unless “submitted to the people at a general election and approved by a majority … of the voters of the State voting thereon” – would be violated if the plaintiffs’ position were accepted, as their contention would allow the 2011 Legislature to impose substantial financial obligations on future Legislatures. The latter – which permits only one Legislative appropriation for all State expenses for a fiscal year, and does not allow for the expenditure of State monies through separate statutes – gives the Legislature the inherent power to disregard prior fiscal enactments. Again, if the plaintiffs’ position were accepted, the New Jersey Supreme Court reasoned, the 2011 Legislature’s financial commitments would be imposed on subsequent legislative sessions.

Interestingly, the Court stated expressly that the participants in the plans continue to hold a contractual right to their benefits in the pension plans, but Chapter 78 may not constitutionally bestow on them an enforceable contractual right to the ARC contribution schedule created in the 2011 pension reform legislation.