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NJ court: Retired public workers have a contract right to cost-of-living adjustments
Updated On: Aug 15, 2014
TRENTON — A state appeals court ruled today that New Jersey’s nearly 300,000 retired public workers have a contract right to yearly increases in their pension benefits, and those cost-of-living adjustments are part of the state’s benefits package.
But for now, the ruling keeps in place a freeze on yearly pension increases Gov. Chris Christie instituted in 2011, sending the issue back to a lower court for further review.
It was the second time this week that a state court signaled that public workers’ retirement benefits are protected by the New Jersey constitution, which generally forbids state officials from breaking any contracts.
Litigation is continuing in both cases, which could have sweeping consequences for the state budget, the troubled pension system, and the nearly $50 billion in unfunded liabilities it faces for state and local workers’ retirement plans.
In a narrow ruling that tossed out many of the retirees’ claims, an appellate court said today that lawmakers in 1997 gave retired public workers a contractual right to yearly cost-of-living adjustments in their pensions, or COLAs, to offset inflation.
“The history of the pension statutes … convinces us that COLAs are such an integral part of the pension system that the Legislature must have intended that they be included as part of the non-forfeitable right guaranteed in 1997,” Superior Court Judge Susan Reisner wrote for the three-judge panel.
The victory is an incremental one for retirees and public-worker unions, who were challenging a pension overhaul Christie signed in 2011 that froze COLAs until the strained pension system, with a 57 percent funded ratio, reached 80 percent.
“This is a significant ruling for thousands of currently retired teachers, school employees, and other public employees, who have already been severely harmed, as will all future retirees,” said Wendell Steinhauer, president of the New Jersey Education Association, one of the plaintiffs. “The court has told them they have every right to believe that cost-of-living adjustments will be a part of their pension.”
The teachers' union said the case could take several more months before a trial court rules on whether to resume the yearly pension increases. Christie's spokesman, Michael Drewniak, declined to say whether the state would appeal today's ruling to the state Supreme Court or focus instead on the next round at the trial court.
"We’re confident the courts will ultimately find the COLA suspension to be both reasonable and necessary to sustain the public pension system," Drewniak said. "Rolling back any reforms would do more harm than good at a time when we realistically need further reforms to sustain the pension system for all current and future retirees."
Charles Ouslander, a retired prosecutor who was one of the plaintiffs in the case, noted that the Republican governor once "touted the COLA freeze as a 'signature' part of his efforts to 'reform' the public pension system." But today's ruling, he said, means "those benefits cannot be withheld or denied unless the state establishes a basis to impair, i.e., break, the contract between it and pension members."
Recent moves by Christie to slash pension contributions by $2.4 billion would keep the COLAs frozen for an even longer period of time than initially expected.
"There is no dispute that, at the current time, there are sufficient funds in the pension systems to pay COLAs to current retirees."
“It is not the courts' role to run the pension systems,” Reisner wrote. “Our responsibility is to interpret and apply the constitution in light of the evidence, and we will do so.
“But to a very great extent, the strength of the pension systems rests on policy choices made by the other two branches of government, and on their political will to preserve the systems and satisfy prior commitments made to public employees and retirees.”
A large group of plaintiffs including New Jersey’s largest public-worker unions, dozens of retirees, and former law enforcement officers who were wounded on the line of duty and retired with disability pensions, argued that freezing the COLAs was unconstitutional and that Christie and lawmakers had no authority to even touch the money, which is paid out from the pension funds and not subject to yearly appropriations in the budget.
Christos M. Genes, 59, a retired police lieutenant in Hudson County, said he chose police work in 1978 instead of the private sector. "The state pension plan is all that I needed," he said. Since the 2011 freeze, he has missed out on an estimated $1,200 a year on average, he said.
“There is no dispute that, at the current time, there are sufficient funds in the pension systems to pay COLAs to current retirees,” the judge wrote, rejecting Christie’s arguments that paying out the yearly increases would have impermissible effects on the budget.
However, Reisner’s panel did not order that the COLAs be paid out from the pension funds. The judges ordered a new trial at a lower court to determine whether the COLA freeze is onerous enough that it violates retirees’ contracts, as well as any new issues.
Assemblyman Declan O'Scanlon (R-Monmouth), the Republican budget officer, said the ruling could make it even more difficult to keep up with rising pension obligations.
“The policy behind freezing this annual adjustment is to stabilize our pension system and bring it back to solvency," he said. "Reinstating COLA will have a devastating effect on the fund and put its survivability in question."
Under settled law, for the state to be able to break the COLA contract, it must show at the trial court that the harm to retirees is not "substantial," that the government is breaking its agreement for a "reasonable public purpose," and that the freeze is related to "appropriate governmental objectives."
On Wednesday, Superior Court Judge Mary Jacobson, in a separate case, ruled that Christie could cut nearly $900 million from a pension payment this year due to a financial emergency, but that by doing so, the Republican governor was substantially impairing workers’ contract rights under the same 2011 pension overhaul he signed. That battle is likely to extend into the coming months.