State of New Jersey could owe $13 billion to retirees if it loses Berg v. Christie

A decision from the New Jersey Supreme Court could come down at any time on a major case involving the health of the state’s public-employee pension system. The impact of the high court’s ruling will be felt at first only by retired workers, but voters statewide also have a reason to pay close attention to the outcome.

At issue before the Supreme Court right now is whether Gov. Chris Christie and lawmakers had the legal standing in 2011 to suspend annual cost-of-living adjustments that retirees enrolled in the pension system had been receiving along with their regular benefit checks.

Video of oral arguments before the NJ Supreme Court hearing 3/29/16

A loss in court by the state could heap billions more onto an unfunded pension liability that already totals at least $44 billion — adding as much as $13 billion, according to one estimate. And with a ballot question likely going before voters this fall that seeks to guarantee more substantial and regular state contributions to the pension system, the court ruling will also help determine exactly how big those future payments would have to be.

In fact, some in Trenton have begun to wonder whether it makes sense for the sponsors of the proposed amendment, including state Senate President Stephen Sweeney (D-Gloucester), to sit back and wait for the court decision to come out before putting the ballot question up for the final legislative approval that’s needed to get the issue before voters this fall. It’s already passed the Legislature once this year, in early January. 

Others want to see the proposed amendment shelved altogether, saying givebacks from employees are needed instead of more funding.

But a spokesman for Sweeney said yesterday that the Senate leader has no plans to delay a vote.

“The senate president always intended to put the amendment up for its second approval later in the fiscal year,” spokesman Richard McGrath said. “Nothing has changed.”

The annual adjustments tied to inflation were put on hold as part of a broader, bipartisan reform law known as Chapter 78. Other changes required by that law included forcing employees to contribute more toward their pensions, hiking the retirement age for state workers, and calling for the state to put more money into the pension system.

Christie, a second-term Republican, and Democratic legislative leaders estimated at the time that the changes would save a total of $120 billion over three decades. They also said it would help save a pension system that had become one of the worst-funded in the nation thanks to years of skipped state payments.

But Christie later reneged on his promise to bring the state up to full funding of the pension system within seven years, and a group of retired workers has also challenged whether the state had the authority to suspend cost-of-living adjustments since pensions in general are considered a “non-forfeitable right.” Their challenge made it all the way to the state Supreme Court last year. Oral arguments were heard by the justices last month. A decision is now expected at any time.

If the high court takes the side of the retired workers, it could add as much as $13 billion to the pension system’s unfunded liability, according to a report issued earlier this year by Moody’s Investors Service, a top Wall Street credit-rating agency. The unfunded liability, according to the state’s latest official accounting, already totals $44 billion.

That figure is important because it is used by actuaries to help determine how much the state should be putting into the pension system on an annual basis to bring it back to good health. For example, the $1.3 billion pension payment that’s scheduled to be made by the Christie administration in late June under a funding plan he put forward last year equals just 30 percent of the amount actuaries say the state should be contributing this fiscal year. 

Under the proposed constitutional amendment sponsored by Sweeney, the state would accelerate its ramp up to the full contribution calculated by actuaries, reaching full payment by the 2022 fiscal year. Sweeney has argued the constitutional guarantee is the best way to ensure the pension problem gets fixed, given the record of underfunding that’s occurred under Christie and prior governors from both parties.

And although contributions would eventually increase to over $5 billion if voters approve the amendment, Sweeney says the state will be able to afford those larger payments using normal growth in state tax collections and increased revenue that would come in if voters also approve a ballot question seeking to expand gambling into north Jersey.

But losing the case before the Supreme Court could make the state contributions grow even larger.

Sweeney, during a budget briefing held with reporters in February, said he was confident the state would win the case. And he also said nothing in the constitutional amendment will prevent the state from getting new concessions from workers in the future if necessary to keep the pension system on solid footing.

“The fiscally responsible thing to do is to get back on the payment plan,” Sweeney said.

McGrath, his spokesman, said yesterday that the Senate leader’s confidence hasn’t been shaken by the unfolding court case.

“He continues to believe that the court will support the pension-reform law suspending the COLAs in order to restore the financial solvency of the pension system,” McGrath said.

But the ballot question also has vocal opponents, including Christie and acting state Treasurer Ford Scudder. They’ve warned that the increased payments that would be required if the ballot question passes could bring on massive cuts or tax increases. Christie is also seeking a new round of employee givebacks, including freezing the current pension system and creating a retirement plan with some features of a 401(k).

Scudder cautioned lawmakers during recent testimony before legislative committees reviewing Christie’s latest budget proposal about another component of the proposed ballot question, a requirement that New Jersey make its pension contributions on a quarterly basis. That could force the state to take on as much $100 million in interest costs because the administration would have to borrow money early in each fiscal year to cover payments until enough tax revenue comes in later in the year to fully fund them, he said.

“We all want to see a fully funded pension and a comfortable retirement for our past employees, but the current proposal would spell fiscal calamity for the state,” Scudder said.

But Sweeney’s staff believes Scudder is overestimating interest costs and also downplaying the investment gains the state would enjoy by accelerating when the state dollars are put into the pension system each year.

Senate Minority Leader Tom Kean Jr. (R-Union) also aggressively opposes the proposed amendment, saying it threatens to put pension funding ahead of other priorities, such as aid for local schools and hospitals.

The pending decision before the Supreme Court just adds another layer of concern, he said yesterday.

“I think this reinforces the dramatic uncertainty, whether it be from revenues coming into the state, whether it be from a court decision that could impact this obligation,” Kean said.

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NJ Spotlight, an independent online news service on issues critical to New Jersey, makes its in-depth reporting available to NewsWorks.