JUNE 9, 2015
TRENTON, N.J. (AP)
New Jersey's top court sided with Gov. Chris Christie on
Tuesday, giving him a major victory in a fight with public worker unions over
pension funds and sparing a new state budget crisis.
The state Supreme Court overturned a lower-court judge's
order that told the Republican governor and the Democrat-controlled Legislature
to work out a way to increase pension contributions for the current fiscal
year, which ends June 30.
In a 5-2 ruling, the court said there wasn't an enforceable
contract to force the full payment, as unions had argued there was.
"That the State must get its financial house in order
is plain," Justice Jaynee LaVecchia wrote in the majority opinion.
"The need is compelling in respect of the State's ability to honor its
compensation commitment to retired employees.
But this Court cannot resolve
that need in place of the political branches. They will have to deal with one
another to forge a solution to the tenuous financial status of New Jersey's
pension funding in a way that comports with the strictures of our
Constitution."
Christie's administration had argued the pension law clashed
with the appropriations and debt limitations clauses in the state constitution,
saying that creating a contractual right to pension funding would bind the
hands of future lawmakers and burden New Jerseyans with debt without their
consent.
The court said Tuesday that the state cannot be bound to future
payments without voter approval.
"Although plaintiffs correctly assert that a promise
was made by the legislative and executive branches when enacting (the law), and
morally their argument is unassailable, we conclude that (the law) could not create
the type of legally enforceable contract that plaintiffs argue," according
to the decision.
She noted that the state is obligated to pay individual
retirees their pensions. That's not in danger this year, but unions say the
funds could start going insolvent within the next decade.
Justice Barry Albin dissented and was joined by Chief
Justice Stuart Rabner.
"The decision unfairly requires public workers to
uphold their end of the law's bargain — increased weekly deductions from their
paychecks to fund their future pensions — while allowing the State to slip from
its binding commitment to make commensurate contributions," Albin wrote.
"Thus, public workers continue to pay into a system on its way to
insolvency."
One of Christie's signature achievements as governor has
been a 2011 deal on pensions for public workers. Employees had to pay more and
the government was locked into making up for years of skipped or reduced
contributions.
The state agreed to escalating payments over seven years.
Retirees saw their cost-of-living increases suspended, while current workers
had their retirement ages raised as part of the deal.
Last year, state tax revenue unexpectedly came in short of
projections, setting off a budget scramble.
Christie, who is considering seeking the Republican
presidential nomination, solved it by reducing the planned contributions by
more than $2.5 billion over the fiscal 2014 and 2015 budgets. Most of that
amount — nearly $1.6 billion — is for the current fiscal year. Christie's
administration says it intends to put about $200 million in unexpected revenue
and nearly $100 million in money that was budgeted this year but is not being
spent toward pensions by June 30.
His budget proposal for the fiscal year 2016, which starts
July 1, calls for a record $1.3 billion contribution. But even that amount is
less than half the $3.1 billion called for in the 2011 deal.
The governor says he has a new plan to reduce health benefit
costs and use the savings to stabilize pension funds — but over a longer time.
Current workers would also have their defined benefit plans frozen and replaced
with 401(k)-style plans.
In court arguments and filings, Christie's lawyers were in
the unusual position of arguing that the pension overhaul the governor signed
was unconstitutional — or at least it was the way the unions that were suing
were interpreting it. An attorney general's office lawyer arguing the case said
the escalating contributions were "aspirational," a notion that state
Senate President Steve Sweeney disputes.
Christie's lawyer also warned that if the court ruled
against the administration, it could be setting itself up for getting dragged
into many future budget disagreements. The court agreed with that warning in
LaVecchia's opinion.
While the court fight over pensions is likely over — unless
unions find a way to appeal to the U.S. Supreme Court — pensions are still a
major political and fiscal issue in New Jersey.
In a statement Tuesday, Assembly Speaker Vincent Prieto, a
Democrat, said the Legislature would adopt a budget this month that will
"choose the path of responsibility" and fully fund pension
obligations.
Last year, it passed a budget that did and included a tax
increase for high earners. Christie used a line-item veto to reduce pension
contributions and eliminate the tax increase. The same situation could play out
this year.
Hetty Rosenberg, president of Communication Workers of
America in New Jersey, said her members would continue to fight for pension
funding.
"It's of course extremely disappointing that the
Supreme Court didn't decide the law was
exactly what the law said. It's just one obstacle," she said. "We
will win, there is no way we will ever, ever give up this fight."
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SYLLABUS
(This syllabus is not part of the opinion
of the Court. It has been prepared
by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved
by the Supreme
Court. Please note that, in the interest
of brevity, portions
of any opinion may not have been summarized.)
Burgos v. State of New Jersey
(A-55-14) (075736)
Argued May 6, 2015 – Decided June 9, 2015
LaVECCHIA,
J., writing for a majority
of the Court.
In this appeal
the Court considers
whether a 2011 statutory enactment that requires
the State to make certain annual contributions to public pension funds created
an enforceable contract that is entitled to constitutional protection.
The State’s
public pension systems are defined-benefit plans,
which guarantee participants a calculable amount of benefits
payable upon retirement based on the participant’s salary and time spent in the pension system. The benefits are paid using
revenues received from employee contributions, public employer (i.e.,
State) contributions, and investment returns. Under
the statutes governing the pensions
systems, the Legislature has required
the State to contribute not only the present value of the actual benefits that active pension
members earned in the current
year, but also the amounts
necessary to amortize
the systems’ unfunded liabilities over a period of years. The combination of these amounts
is known as the annually required contribution (ARC).
In 2011, with the enactment
of L. 2011,
c. 78 (Chapter 78), the Legislature added language
explicitly declaring
that each member of the State’s pension
systems “shall have a contractual right to the annual required contribution amount”
and the failure
of the State to make the required
contribution “shall be deemed
to be an impairment of the contractual right.” A separate statutory provision, enacted earlier,
required the State to increase its ARC beginning with fiscal year 2012 (FY12) over the course of seven years at increments of 1/7 of the
ARC per year, until the contribution covered the full ARC.
The State made the required contributions in FY12 and FY13,
and the Appropriations Act signed into law for FY14 included
the required contributions of 3/7 of
the
ARC. In February 2014, the Governor
released the FY15 proposed budget,
which also included funding
to satisfy the State’s required payment (i.e.,
4/7 of the ARC). On May 20, 2014,
the Governor issued Executive Order 156, which reduced the State payments into the pension systems
for FY14, explaining that the reduction was due to a severe and unanticipated revenue shortfall. Instead of paying the required 3/7 of the ARC contribution, which totaled
$1.582 billion, the State made a total contribution of
$696 million
for FY14. The next day, citing new information that placed the State’s projected revenue
at less than previous
projections, the State Treasurer announced that the proposed budget for FY15 was being revised to reduce the amount
that would be contributed to pension
systems. The revised
FY15 budget thus advanced would include a total contribution of $681 million,
reflecting $1.57 billion less than what was required.
In response,
plaintiffs – individuals and unions acting
on behalf of hundreds
of thousands of New Jersey State public employees
– filed complaints alleging
statutory violations, impairment of contractual rights under the New Jersey and United States
Constitutions, violations of substantive and procedural due process
under both Constitutions, a violation
of plaintiffs’ Equal Protection rights, promissory estoppel, and violations of the New Jersey Civil Rights Act. Plaintiffs sought injunctive and
mandamus relief for both FY14 and FY15.
The trial court consolidated plaintiffs’ claims
into one action.
With respect to the budgetary action
involving the then-imminently concluding FY14, the Law Division upheld the Governor’s determination not to make the required
FY14 ARC payment,
declaring the action
lawfully within
the Executive’s emergency powers
and reasonable and necessary
under the Contracts Clauses
of the New Jersey and United States Constitutions. The court held that plaintiffs’ claims for FY15 were not ripe because
the
Legislature
had not yet
passed a FY15 Appropriations Bill.
When
the Legislature passed
its FY15 Appropriations Bill, it included the full 4/7ths required ARC, or $2.25 billion.
This was financed, in part, by companion bills establishing new taxes
whose projected revenue streams were incorporated into the Legislature’s anticipated revenue
for FY15. On June 30, 2014, Governor Christie exercised
his line-item veto authority deleting,
among other items, $1.57 billion
of the State’s required pension payment
from the Appropriations Act.
In his line-item
veto message, Governor
Christie stated that he opposed raising taxes
to pay for the budget
deficit, that he eliminated the new revenues projected for new taxes as presented
by the Legislature, and cited his constitutional responsibility to deliver
a balanced budget as the reason for reducing the State’s
FY15 contribution. The Legislature did not take action to override the line-item veto.
Therefore, the 2015 Appropriations Act became
law, subject to the line-item
veto changes.
Plaintiffs filed amended
complaints in the Law Division. The State responded by filing
a motion to dismiss, and plaintiffs, in turn, filed a motion for summary
judgment. Plaintiffs argued that, in enacting Chapter
78, the State undertook a contractual obligation to make the ARC payment
to the pension system and that the State’s failure to
make the full FY15 ARC payment
constituted an impairment of that contract in violation of the Contracts Clauses
of the State and Federal Constitutions. Plaintiffs requested that the court require
the Legislature and the executive branch
to adopt an appropriations act consistent with the contractual obligations outlined in Chapter
78.
The State asserted that Chapter
78 could not create a valid contract
right because it violated
the Appropriations and Debt Limitation Clauses
and the line-item veto provision
of the New Jersey Constitution. Even assuming, but not conceding, that an enforceable contract right was created,
the State maintained that it did not substantially impair
that contract right. Further,
again assuming but not conceding that substantial impairment occurred, the State submitted that its decision
was reasonable and served
a legitimate public purpose.
The trial court issued a detailed and comprehensive opinion
on February 23, 2015, that granted summary judgment to plaintiffs on their impairment-of-contract claims
and denied defendants’ motion
to dismiss. The court accepted the argument that Chapter
78 created a contract and that the State’s
failure to appropriate the full value of ARC in the FY15 Appropriations Act substantially impaired plaintiffs’ rights under the contract. In so finding,
the court rejected arguments that Chapter
78 was unenforceable as violative
of the Debt Limitation Clause, the Appropriations Clause, and the gubernatorial line-item veto power.
The court did not order a specific
appropriation, but rather determined to give the other branches
an opportunity to act in accordance with the court’s
decree.
The State filed a motion
for leave to appeal to the Appellate Division, and shortly
thereafter, moved for direct certification to this Court.
The motion was unopposed. On April 6, 2015, this Court issued an order granting direct certification, establishing a briefing
schedule, and setting
the matter down for oral argument
on May 6, 2015.
HELD:
Chapter 78
does not create
a legally 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 sizable amounts called
for by the statute.
1.
No analysis of this matter fairly can commence
without initially recognizing the promises
made on the State’s part toward meeting the scheduled
payments to reduce
the unfunded liability of the pension
systems. Plaintiffs emphasize the many statements praising
the bipartisan legislative endeavor and referring
to the legislative achievement as a contract. The Court does not question the good intentions of those participating in the enactment of Chapter 78 or that they intended
to create a contractual arrangement to address
future payment into the funds
to promote
the fiscal health
of the retirement systems. But a strictly legal question is before the Court. That, and that alone, is what must be resolved
in this matter of great public importance to members
of the public pension
systems and citizens throughout the State. (pp. 21-23)
2.
Both the New Jersey and Federal Constitutions prohibit
the passage of laws impairing
the obligation of contracts. Legislation unconstitutionally impairs a contract
when it: (1) substantially impairs
a contractual relationship; (2) lacks a significant and legitimate public purpose; and (3) is based
on unreasonable conditions and unrelated to appropriate governmental objectives. The premise for performing a contract
impairment analysis is the existence
of a valid enforceable contract under
state law. When a contractual relationship is purportedly created
through a statute’s enactment, two questions must be addressed in analyzing whether a contract
was successfully formed: (1) did the Legislature speak with sufficient clarity to evince intent
to create a contract
right; and (2) did state law grant the Legislature the authority to enter into the binding
and enforceable contract.
(pp. 23-26)
3.
Here, the Legislature and Governor clearly
expressed an intent that Chapter
78 create a “contract
right” to timely and recurring
ARC payments to reduce the unfunded
liability of the pension
funds. But, that conclusion does not address the question
of authority to do so. The essential question
that must be answered is whether
legislative authority
could be exercised through
Chapter 78 to create
a legally binding, enforceable contract compelling future State appropriations to pay down the unfunded
liability. In making such a determination, it is generally
recognized that state law governs
the existence of a valid
contract, even for impairment claims under the Federal
Contracts Clause.
The Court therefore turns to New Jersey
law that pertains
to the legal enforceability of the purported statutory contractual right to Chapter 78’s required
annual pension payments.
(pp. 26-30)
4.
The Debt Limitation Clause of the New Jersey Constitution provides that the Legislature may not create
“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.”
N.J. Const.
art. VIII, § 2, ¶ 3. The animating
principle applied by the Court in its decisions regarding the Debt Limitation Clause is that the State cannot by contract or statute
create a binding
and legally enforceable financial obligation above a certain
amount that applies year to year without
voter approval. Such long-term financial arrangements require voter approval
to be enforced; or, such financial
promises otherwise
avoid the Debt Limitation Clause’s
interdiction by being regarded
as expressions of intent to provide
the funding, but they must be subjected to the annual appropriation process for fulfillment in whole,
in part, or not at all. (pp. 30-33)
5.
In Lonegan v. State (Lonegan II), 176 N.J. 2 (2003),
the Court confronted a broad challenge to the validity
of fourteen
New Jersey statutes
authorizing contract
or appropriations-backed debt.
The Court found that the statutory financing mechanisms did not violate
the Debt Limitation Clause
because payments on contract or appropriations- backed debt are necessarily left to the Legislature’s discretion to appropriate and the State is not legally bound to make such payments.
Among other things,
Lonegan II recognized that the variety
of financing mechanisms employed today were unheard
of when the Debt Limitation Clause was adopted,
and noted the difficulty in differentiating among acceptable and unacceptable types of twenty-first century appropriations-backed debt. In this matter, the trial court based its Debt Limitation Clause analysis on a misperception of the flexibility that was discussed in Lonegan
II. The Lonegan II decision acknowledged the need for flexibility in modern financing, and adjusted for the same in the performance of a Debt Limitation Clause analysis
by reducing the prohibited conduct to an easily understood principle: so long as
the State’s full faith and credit is not pledged and a legally
enforceable financial
obligation, above a certain
amount and lasting year to year, is not created,
without voter approval, no Debt Limitation Clause violation ensues. As applied in the circumstances presented
in Lonegan II, if a financial obligation is made dependent on securing an appropriation from year to year, then parties
are apprised of the element
of risk and no constitutional debt limitation violation
arises. (pp. 33-37)
6.
Plaintiffs assert that Chapter 78 does not implicate
the Debt Limitation Clause because
that Clause’s language and intent
is to prevent the State
from creating new debts or liabilities, not to prevent it from paying overdue ordinary expenses. The Debt Limitation Clause is clearly
written to have wide sweep, covering
“debts” or “liabilities” created
“in any manner,”
thereby reaching
various forms of financial arrangements. Nothing about that language supports
that traditional borrowing
scenarios were the only intended prohibited transactions. The Debt
Limitation Clause’s prohibition against incurring
of future debt or liability is vital and it is broad – sufficiently broad to reach long-term financial obligations addressing so-called operating expenses. In combination, the Debt Limitation Clause
and the Appropriations Clause of the New Jersey Constitution interdict
the Legislature from creating a debt or liability, in any manner, in excess
of a certain amount that binds the State to appropriate funds in future fiscal
years. (pp. 37-42)
7.
Under the Appropriations Clause, the power and authority to appropriate funds is vested in the Legislature. N.J. Const.
art. VIII, § 2, ¶ 2. The Clause
has three requirements: (1) all withdrawals of money from the State Treasury must be accomplished through legislative appropriation; (2) the Legislature must provide
for that appropriation in one law covering only that fiscal
year; and (3) the budget
created by the appropriations law must be balanced. Because the power
and authority to appropriate funds lie solely and exclusively with the legislative branch of government, there can be no redress
in the courts to overcome
either the Legislature’s action or refusal to take action pursuant to its constitutional power over State appropriations. The Appropriations Clause firmly
interdicts the expenditure of state monies through separate
statutes not otherwise related
to or integrated with the general appropriation act governing
the state budget for a given fiscal
year. Given the Legislature’s inherent power to disregard prior fiscal enactments, the Court cannot
compel the Legislature to appropriate in accordance with other
statutes that are not incorporated into the general appropriation act. In circumstances where legislation sought to
bind
future legislatures
in a manner that implicated both the Debt Limitation and Appropriations Clauses,
this Court was careful
to note that the legislation survived those Clauses
because the Legislature retained its constitutionally enshrined
power to annually appropriate funds as necessary for the fiscal health of the State.
No such reservation of power can be found in Chapter 78. (pp. 42-49)
8.
Applying those principles here, the Legislature and Governor
were without power, acting without
voter approval, to transgress the Debt Limitation Clause and the corresponding Appropriations and other budget clauses of the State Constitution. The Legislature and Governor, as well as the many interested parties
involved in the legislative process, may have included
contractual words in Chapter
78, but those words,
no matter their clarity,
could not create
an enforceable contract of the type asserted. Voter approval
is required to render
this a legally enforceable contractual agreement compelling appropriations of this size covering succeeding fiscal years; otherwise, this agreement is enforceable only as an agreement that is subject
to appropriation, which under the Appropriations Clause renders
it subject to the annual budgetary appropriations process. In that process,
the payment may not be compelled by the Judiciary. The Legislature’s strong
expression of intent
remains clear in Chapter
78, but it does not bind future legislatures or governors
in a manner that strips discretionary functions concerning appropriations that the State Constitution leaves to the legislative and executive branches. (pp. 49-53)
9.
Because of
the importance of maintaining the soundness
of the pension funds, the loss of public
trust due to the broken promises
made through Chapter 78’s enactment
is staggering. The Court recognizes that the present
level of the pension systems’ funding
is of increasing concern.
But this is a constitutional controversy that has been brought to the Judiciary’s doorstep,
and the Court’s obligation is to enforce the State
Constitution’s limitations on legislative power. The State
Constitution simply does not permit Chapter
78’s payment provisions to have any more binding effect than that of a contract
that is subject to appropriation. To be clear, the Court emphasizes that it is not declaring Chapter 78 unconstitutional. Chapter 78 remains
in effect, as interpreted, unless the Legislature chooses to modify it. There is therefore
no need to address severability or the mutuality
of obligations and the Court leaves those considerations for the political branches. The Court also emphasizes that its analysis
does not conflate the issue of the State’s obligation to pay pension
benefits with the issue whether Chapter
78 legally binds the State annually to make the scheduled
payments into the pension systems. The Court’s
holding is, simply,
that Chapter 78 cannot constitutionally create a legally
binding, enforceable obligation on the State to annually
appropriate funds as Chapter 78 purports to require. (pp. 53-61)
10.
That the State
must get its financial
house in order is plain. The need is compelling in respect
of the State’s ability to honor its compensation commitment to retired employees. But the Court cannot resolve
that need in place of the political
branches. They will have to deal with one another to forge a solution
to the tenuous
financial status of New Jersey’s pension
funding in a way that comports with the strictures of our Constitution. The Debt Limitation Clause and the Appropriations Clause envisioned no role for the Judiciary in the annual budget-making process and prevent it from having
to perform the unseemly role of deciding in that process whether a failure
to fully fund a statutory program,
including one labeled a contract,
was reasonable and necessary. A Contracts Clause analysis would require annual incursions by the Judiciary into second-guessing spending
priorities and perhaps even
revenue-raising
considerations in recurring
years. Under the Debt Limitation Clause and the Appropriations Clause, the responsibility for the budget
process remains
squarely with the Legislature and Executive, the branches accountable to the voters through the electoral
process. This is
not
an occasion for the Judiciary to act on the other
branches’ behalf.
(pp. 61-68).
The judgment of the Law Division is REVERSED.
JUSTICE ALBIN, dissenting, joined by CHIEF JUSTICE RABNER, believes that public workers have protectable contractual rights under the United States Constitution -- as the Legislature and Governor intended in enacting Chapter 78. He expresses the view that Chapter 78 is a binding contract on the State that cannot be nullified without offending the Federal Constitution’s Contracts Clause.
JUSTICES PATTERSON, FERNANDEZ-VINA, and SOLOMON and JUDGE CUFF (temporarily assigned), join in JUSTICE LaVECCHIA’s opinion. JUSTICE ALBIN filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER joins.
JUSTICE ALBIN, dissenting, joined by CHIEF JUSTICE RABNER, believes that public workers have protectable contractual rights under the United States Constitution -- as the Legislature and Governor intended in enacting Chapter 78. He expresses the view that Chapter 78 is a binding contract on the State that cannot be nullified without offending the Federal Constitution’s Contracts Clause.
JUSTICES PATTERSON, FERNANDEZ-VINA, and SOLOMON and JUDGE CUFF (temporarily assigned), join in JUSTICE LaVECCHIA’s opinion. JUSTICE ALBIN filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER joins.