In a much-anticipated ruling, the New Jersey Supreme Court today reversed a Superior Court decision handed down in February 2015 that found that the state’s failure to comply with the 2011 pension and health care reform law impaired the contractual rights of public employees. In the 5-2 ruling, the state Supreme Court sided with the Christie administration over the public employee unions who sought relief from the court.

“Today’s Supreme Court decision relieves the state from making the scheduled payments under Chapter 78, but it does not absolve the state from the obligation to resolve a problem that can eventually break the financial stability of New Jersey,” said Dr. Lawrence S. Feinsod, NJSBA executive director.

“We need a solution that encompasses pension benefits, active employee health benefits and post-retirement medical benefits—one that does not adversely affect education programs or local property taxpayers,” he continued. “The public trust demands development of a well-thought-out, workable long-term solution to New Jersey’s pension-deficit issue.”

In its June 9 decision, the court held that “Chapter 78 does not create a legal enforceable contract that is entitled to constitutional protection. The Debt Limitation Clause of the State Constitution interdicts the creation, in this manner, of a legally binding enforceable contract compelling multi-year financial payments in the sizeable amounts called for by statute.”

Chapter 78 refers to the 2011 law that overhauled public employee pension and health care benefits.  That measure called for the state’s public workers to increase their contributions to their retirement and health care costs, in exchange for the governor making timely and recurring payments to reduce the unfunded liability of the public pension funds.  While the governor made the full actuarially required contribution (ARC) in the two fiscal years immediately following the enactment of Chapter 78, the payment was significantly reduced in fiscal year 2014 due to a severe, unanticipated revenue shortfall.  The governor then reduced the payment to the pension fund to approximately $680 million for fiscal year 2015 after deleting over $1.5 billion from that year’s Appropriations Act.  That amount fell far short of the $2.7 billion required under a 2010 law that directed the state to steadily increase its payments to the pension funds by 1/7 of the ARC over the course of a seven-year period until reaching the full ARC.

Contributions a Contractual Right? The question before the court was whether the failure of the state to make the ARC in fiscal year 2015 constituted a violation of the contractual rights of employees. Chapter 78 included a provision that members of the pensions systems “have a contractual right to the annual required contribution amount being made by the member’s employer or by any other public entity,” and that the failure of the state to make the ARC “shall be deemed to be an impairment of the contractual right of each employee.”  The plaintiffs in the case, primarily New Jersey’s public employee unions, argued that, in enacting Chapter 78, the state undertook a contractual obligation to make the payment. They further argued that failure to make the required 2015 payment constituted an impairment of that contract under the Contracts Clauses of both the state and federal constitutions, and thus requested that the court compel the Legislature and the executive branch to appropriate enough funds to adopt an appropriations act consistent with the obligations established under Chapter 78.  The state countered that Chapter 78 could not create a valid contract because it violated the Appropriations and Debt Limitations Clauses of the New Jersey Constitution, as well as line-item veto power of the governor.

While stopping short of declaring Chapter 78 entirely unconstitutional, the Supreme Court held that the law “cannot constitutionally create a legally binding, enforceable obligation on the state to annually appropriate funds as Chapter 78 purports to require.”  While acknowledging that the state must get its financial house in order, the court determined that the state constitution “envisioned no role for the Judiciary in the annual budget-making process,” the responsibility of which “remains squarely with the Legislature and Executive, the branches accountable to the voters through the electoral process.”

Now that the court has ruled on this matter and returned it to the purview of the Legislature and the governor, is unclear what will happen next. It is likely that the public unions will continue to argue for the state to fully fund the pension system, but so far the Legislature and governor have been unable to come to a consensus on whether or how to accomplish that task.