Why New Jersey Does Not Have to Fund Pensions

According to the state’s latest legal brief in the pension payment case it is because the budget process that allowed the retirement system to go broke should not be messed with.

Some excerpts from that brief ranging from fun facts to specious reasonings follow:


However, in April 2014 the State received final payments of Gross Income Taxes (“GIT”) that were dramatically lower than anticipated. This resulted in a staggering revenue shortfall of $1.045 billion and required the State to make less than the statutorily-required 3/7ths pension payment in order to enable the State to meet critical needs. The April 2014 shortfall was largely attributable to taxpayers’ efforts to avoid increased federal income and capital gains taxes. GIT collections from the top 400 income earners in New Jersey typically comprise almost 10% of the GIT revenue the State receives. The tax avoidance behavior of these 400 taxpayers therefore has a dramatic effect on the State’s revenue.

For FY14, the State made 7/7ths of its normal cost payment ($696 million) and 0/7ths of its UAAL payment.

Thus, the Governor vetoed the Legislature’s proposed millionaires’ tax for FY15, explaining that increasing taxes on “highly productive taxpayers … will only serve to drive them
out in search of states with lower tax burdens. ” The Legislature chose not to override the veto. The iterative process, wherein each Branch exercises its judgment and discretion as to what sound fiscal policy is, worked as onstitutionally designed.

The Governor’s options in FY15 were few and unpalatable as he tried to rectify the perceived gap in the Appropriations Bill between appropriations and reasonably expected revenues.

defaulting on the State’s debt service payments, which totaled $2.7 billion and comprised 8.4% of the FY15 budget, “would negatively impact the State in several ways.”

It was infeasible, and perhaps even dangerous, for the Governor to reduce appropriations for State Aid, which totals $13.4 billion and comprises 41.2% of the State budget. State Aid appropriations are made to or on behalf of local units of government, including counties, municipalities, and school districts, to assist them in carrying out their responsibilities. $11.9 billion of the State Aid is for school funding, and, of that amount, $9 billion provides direct aid to schools. If the Governor made across-the-board cuts to State Aid, he risked putting 647 school districts, 566 municipalities, and 21 counties in the position where they would be unable to meet the ongoing costs of operation for the upcoming year.

the same is true with respect to Grants-in-Aid, which total $9.8 billion and comprise 30.1% of the State budget. Grants-in-Aid appropriations are for programs and services that third-parties provide to vulnerable.and needy populations on behalf of the State. For example, Medicaid, the Tuition Aid Grant Program, the Senior and Disabled Property Tax Freeze•, and funding for State colleges and universities are all Grants-in-Aid. Medicaid alone has 1.4 million recipients, and any reduction in appropriations would have “serious negative consequences” for the vulnerable populations that depend on Grants- in-Aid. Id.

the Governor likewise could not reduce appropriations for Direct State Services. Direct State Services, which total $6. 58 billion and comprise 21% of the FY15 State budget, support the operation of State government and the services and programs the State provides directly.  Persons with developmental disabilities, prisoners, children, veterans, the elderly, and the mentally or physically ill are among those who benefit from Direct State Services. Accommodating unseen cuts would have a disruptive effect on these vulnerable populations. Moreover, it is unclear where additional cuts would come from; operating funds provided to agencies “have been held constant for a significant number of years despite inflation and growing needs.”

it was not feasible to cut appropriations for Capital Purposes, which totaled $114 million and comprised 0.4% of the FY15 State budget. The vast majority of these funds were “supported by constitutional dedications.” Constitutionally dedicated funds can only be appropriated for their voter-approved purpose.

Finally, the decision to reduce the State’s pension contribution was a “last resort” and represented the “least undesirable” option.  The State decided to make 7/7ths of its normal cost payment (i.e., $681 million), instead of the 4/7ths normal cost payment ($389 million) that Chapter 1 requires. In this. way, the State will cover the employers’ contribution towards all additional pension benefits that active State employees are expected to accrue in FY15. What the State is unable to make is its 4/7ths UAAL contribution of $1.86 billion. Therefore, the State will not be paying down in FY15 the unfunded liability that has accrued over many years.

With the FY16 budget process already underway and a June 30th deadline looming, this Court’s review of the decision below cannot wait until the trial court determines the quantum of attorneys’ fees to be awarded to Plaintiffs’ bevy of lawyers.

The trial court fabricated a constitutional entitlement to pension funding for State employees. The court achieved this result by imbuing the Legislature with the power to amend the State Constitution by statute. By manufacturing a constitutional right of this sort, the trial court also necessarily precludes all future Legislatures from exercising their inherent power under the Appropriations Clause to modify prior fiscal enactments.

Similarly, the court’s contrivance of a constitutional right to pension funding insulates that funding from all future Governors’ constitutional power to line-item veto appropriations. The trial court’s decision thus effects a wholesale reordering of the State’s Constitutional structure based upon a mere legislative enactment.

The trial court attempted to evade NJEA I by declaring that the Appropriations and Debt Limitation language in NJEA I was merely dicta. That is simply wrong. Textually, the pronouncement is an integral part of the court’s holding: the court used the phrase “in conclusion”; the court said the right was “foreclosed by” and then used a colon; and the Court then listed four independent reasons, of which the fiscal Clauses of the Constitution were one.

The trial court’s ruling that a statutory right to an annual line-item appropriation can be binding and legally enforceable without running afoul of the Appropriations Clause is contrary to practice and precedent, upends the appropriations process, and returns New Jersey to the dysfunctional state of fiscal affairs the Framers of the 1947 Constitution remedied.

The Legislature is thus powerless to re-direct the manner in which this constitutionally-dedicated revenue stream may be used. Notably, however, no requirement exists that the Legislature must appropriate the lottery funds annually or in any prescribed amount. Similarly, the Constitution provides that all taxes levied on personal income must be used “exclusively for the purpose of reducing or offsetting property taxes.” While the constitutional provision precludes expenditures for all but the enumerated purposes, it nevertheless leaves the precise distribution formula subject to legislative modification in the annual appropriations act.

But worse, the court, in holding that Chapter 78 created an enforceable right to an annual line-item appropriation of an actuarially-prescribed amount, elevated Chapter 78 above voter-approved constitutionally-dedicated funds. And worse still, the court made Chapter 78 co-equal with voter-approved GO Bonds by mandating that, if existing revenue streams were not sufficient to satisfy Chapter 78’s mandate, then the State should work to find other means of raising revenue.

The Trial Court’s Ruling Thrusts the State Back into a pre-1947, Dysfunctional Fiscal Era Wherein Earmarked Funds Crippled the Legislature’s Ability to Deal with Pressing Societal Needs.

Chief among those abuses was the system of statutorily created dedicated accounts that earmarked funds for specific uses. Those statutes created a series of lockboxes that crippled legislative attempts to deal with the State’s fiscal affairs in a rational, orderly way. The Framers of the 1947 Constitution considered these statutorily-dedicated funds to be “the greatest single evil in the administration of the finances of the State” because they “place restrictions upon the Legislature in the expenditure of State moneys” and prevent the “assigning of money to State activities on the basis of proved needs.” Such a system is “incompatible and irreconcilable with a thorough budget system and seriously impairs the desired effectiveness of the budgetary control of expenditures.”

The trial court attempted to use the Supreme Court’s decision in Abbott v. Burke to justify its refutation of the Appropriations Clause in this case. But Abbott XXI is inapposite, and the trial court’s reliance on it is misplaced.

The trial court’s ruling that a statutory right to an annual line-item appropriation can be binding and legally enforceable without derogating the Governor’s constitutional veto power ignores the history and purpose of the Veto Clause, incorrectly frames the issue, and applies the wrong test.

An unbroken line of Supreme Court cases spanning a century makes indisputable the conclusion that the “constitutional debt limitation clause prohibits one Legislature from incurring debts which subsequent Legislatures would be obliged to pay, without prior approval by public referendum.”

The trial court repeatedly intones that it must harmonize the Appropriation, Veto, and Debt Limitation Clauses with the Contracts Clause. In the final analysis, however, the court simply determined that the Contracts Clause should “trump” the other three Clauses.

The Contracts Clause only inferentially, and indirectly involves appropriations. The Appropriations, Veto, and Debt Limitation Clauses, conversely, are finely tuned and crafted, addressing with specificity how the annual budget process works and the respective fiscal powers of each of the elected Branches.  Here, the trial court’s decision allows a general clause of the Constitution, which only indirectly involves appropriations, to undermine the fiscal Clauses, all of which describe with specificity the powers and limits of the elected Branches with regard to appropriations. The court’s decision runs afoul of the canons of constitutional construction.

when the Supreme Court has been faced with the situation where a contract appears to mandate future appropriations and thus be at odds with the Debt Limitation Clause, the Court has solved the problem by finding the contractual right to be non- binding on the Legislature.

Here, with respect to FY15, the court subverted a budgetary decision that the political branches made over eight months ago. In Lance v. McGreevey, 180 N.J. 590 (2004), another case involving the constitutionality of budget decisions, the Supreme Court heard oral argument on July 22nd of 2004 and issued its decision on July 26th of that year. The Court gave “prospective effect only” to its holding, because requiring “significant revisions to, if not a complete overhaul of, the current fiscal year’s budget” would result in a “great” “disruption to the State.” The Supreme Court reached that conclusion despite the fact that there were still eleven months remaining in the fiscal year. The same rationale applies with even greater force here, as the trial court issued its opinion with only four months and five days remaining in this fiscal year.

As discussed extensively above, the contractual right in Chapter 78 is void as against public policy. Hence, the federal Contracts Clause never comes into play.Even assuming for the sake of argument, however, that the State’s action did trespass upon a valid contract right, the most that trespass would amount to is a breach of contract, not an impairment of contract cognizable under the federal Contracts Clause.

the evidence in the record established that if the State returns in the future to “a regular annual payment schedule” that includes “full ARC payments,” the deferral of the 4/7ths UAAL payment “will not materially impact the health or stability of the pension systems.” Stated differently, the State’s decision not to remit the entirety of the ARC in FY15 does not,. in itself, “appreciably grow the UAAL.” “With or without a contribution” in FY14 and FY15 “the UAAL would have continued to grow for several more years before it began to decrease.”  Finally, the decision not to remit the UAAL payment in FY15 does “not affect the State’s ability to pay benefits currently.”

Perhaps some would not fault the court below for attempting to resolve by judicial decree a problem that has perplexed the elected Branches of government for more than a decade. But settled principles of law must govern this case. The simple fact, as the Supreme Court has repeatedly instructed, is that this field is one where the Judiciary should stay its hand. First, the Supreme Court has repeatedly refrained from taking any action that “would interfere with essential government functions.”  Here, the judiciary’s interference in the budget process is manifest. The lower court ordered the State Executive Defendants to work with the Legislature, a non-party to this litigation, to find a way to remit the statutorily-required FY15 payment and even went so far as to suggest that the payment must be made even if it requires the State to find other means of raising revenue. Moreover, by ordering the State Executive Defendants to work with the Legislature, but not ordering the Legislature to work with the State Executive Defendants, the court has impermissibly placed its thumb on the scale of negotiations between the two political Branches. Further, the court issued its FY15 directive with only four months and five days left in the fiscal year, a time when options are few and highly disruptive.

In short, under the framework the trial court has constructed, the Contracts Clause will be allowed to trump the fiscal Clauses of the Constitution, and the elected Branches will need a judicial imprimatur whenever they exercise their constitutionally-granted powers in a way that infringes upon a statutorily-created right.

3 responses to this post.

  1. Posted by George on April 11, 2015 at 4:25 pm

    The experts at Wikipedia seem to think government contracts can be modified under the contracts clause of the US constitution.

    Modification of Government Contracts[edit]

    In United States Trust Co. v. New Jersey 431 U.S. 1 (1977), the Supreme Court held that a higher level of scrutiny was needed for situations where laws modified the government’s own contractual obligations. In this case, New Jersey had issued bonds to finance the World Trade Center and had contractually promised the bondholders that the collateral would not be used to finance money-losing rail operations. Later, New Jersey attempted to modify law to allow financing of railway operations, and the bondholders successfully sued to prevent this from happening.[22]



  2. Posted by Anonymous on April 13, 2015 at 7:30 pm

    It’s important to note that while pensions are currently a non forfeitable right not so clear about COLA and no doubt it excludes health benefits. That’s the State’s ace in the whole if all court rulings go against them they could, due to fiscal constraints, unilaterally implement draconian premium share for all retirees health benefits. In fact, my best guess right now, the Supreme Court will probably offer up a “split decision” on the constitutionality of the ARC funding ruling against the State for pensions and for the State on health benefits with a COLA


  3. Posted by Anonymous on April 13, 2015 at 8:11 pm

    Retrospectively maybe but prospectively (FY16) without open consideration for all solutions? Also, can the courts selectively enforce a contract when one or more sections of the contract are deemed unenforceable?


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