June 26, 2014 04:00 PM UTC

New Jersey Appeals Court: Public Pension COLA Benefits Are Contractual Obligations.

• 3 Comments
• by: PolDancer

From NJ.com:

"NJ court: Retired public workers have a contract right to cost-of-living adjustments."

"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."

"Today's ruling, Ouslander 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.'"

NJ.com citing the Appellate Court Decision:

“'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.'”

"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.'"

http://www.nj.com/politics/index.ssf/2014/06/nj_court_retired_public_workers_have_a_contract_right_to_cost-of-living_adjustments.html

From an earlier NewJerseySpotlight.com article:

“'It’s one thing to change the rules in the middle of the game, it’s another to change the score after the game’s over, and that’s what the state did when it eliminated the COLAs,' said Charles Ouslander, one of the plaintiffs in the Berg case."

"'A reversal of Judge Hurd's decision by the appellate court would not only protect pensioners' contractual rights to receive their full pension benefits, but would also insure that the state keeps its contractual obligation to properly fund the pension system, based on the 2011 law signed by Governor Christie,' Ouslander added."

http://www.njspotlight.com/stories/14/05/12/74-billion-in-future-pension-payments-at-stake-in-lawsuit/?p=all

From NorthNewJersey.com:

"The court decided these payments constituted a contractual right, making it far more difficult for the Christie administration to argue that they can be suspended.  The case, which was brought by the unions, will now be heard again.  A lower court will decide whether the state’s decision to break the contract and stop paying the cost of living amounts was 'reasonable and necessary to serve an important public purpose.'  Over time, pension increases from cost of living increases can make up a substantial portion of a pension fund’s overall responsibility.  John Bury, an accountant who blogs about pensions, said that over the last two years, COLA payouts would have increased New Jersey's obligations by about $500 million."

http://www.northjersey.com/news/court-cost-of-living-increases-are-a-contractual-right-for-retired-nj-public-employees-on-pensions-1.1042085

An earlier article from the public pension blog of actuary John Bury:

“Now fast forward to Colorado 2010 where the state cut back COLAs and brought on this morass of litigation.  Would the Knicks be able to do the same thing to (the private sector contract of) Tom Riker . . .?  What if they wanted to spend that money for other purposes that they considered more significant and legitimate and it was reasonable and necessary to reduce his payments?  Could the Knicks get away with that?  And if they did would anyone ever sign another contract with them?  Then why should Colorado?”

http://burypensions.wordpress.com/2012/10/14/defining-whats-legal-for-colorado-retirees-and-tom-riker/#comment-4718

Link to New Jersey Appellate Court Decision:

https://burypensions.files.wordpress.com/2014/06/berg-decision.pdf

Excerpts from the New Jersey Appellate Court Decision:

"We reverse the grant of summary judgment in Berg and New Jersey Education Association v. Christie . . . and we remand Berg to the trial court for further proceedings required to address plaintiffs' Contract Clause claims under the New Jersey Constitution."

Cited by the Appellate Court:

"Beginning in the mid-1990's, a series of Executive and Legislative policy decisions — which the State later characterized as short-sighted — resulted in underfunding of the pension systems."

(My comment: The Colorado Legislature has not paid its full Colorado PERA pension system actuarially required contribution for the last twelve years.  Former Colorado PERA Executive Director Meredith Williams, February 23, 2012:

"We've had a significant problem over the years, in that . . . contributions, payments by [PERA] employers into PERA have been kind of the last thing in the budget building process, and we have not made the required payments.  Unfortunately, in our line of work, where we're involved in compounding shortfalls grow, particularly when the shortfalls continue year after year after year.")

New Jersey Appellate Court Decision:

"In 2011, however, the Legislature made significant changes to public employee pension and health care benefits, including the suspension of automatic COLAs for current and future retirees."

"In a press release accompanying the bill, the Governor stated that 'pension funds are considered to be adequately funded if their AVA funded ratio is at or above 80% [the federal standard for ‘at-risk’ funds.]"

(My comment: Note that in the 2010 Colorado bill taking the PERA pension COLA benefits of Colorado PERA pensioners, SB10-001, the Colorado Legislature proposes to take Colorado PERA pension benefits until a 100 percent actuarial funded ratio is achieved.  This lofty and unnecessary level of funding has occurred in only two fiscal years during Colorado PERA's 83 years of existence.

From: PERA Shareholders Meeting Fall 2006 document:

“Note that PERA was over 100% funded in only two years of our 75 year history.”

http://www.copera.org/pdf/Shareholder/ShareholderPresentation06.pdf.

The ratings firm Fitch Ratings deems public pension systems "adequately funded" at an 80 percent funded ratio.  Thus, the Colorado Legislature's bill, SB10-001, constitutes not simply a taking of contracted public pension benefits, but an outrageous taking of public pension benefits.

From, Meredith Williams, CAFR Summary to Members, 2002, December 5/21 (REV 6/03):

“PERA directs its efforts at keeping the funding ratio, [AFR, the ratio of actuarial assets to accrued liabilities] for the three divisional retirement funds at a minimum of 80 percent.  A funding ratio over 80 percent is considered good.”

http://www.copera.org/pdf/5/5-21-02.pdf

From, PERA Shareholders Meeting Presentation, Fall, 2005 document:

“Note that PERA’s funded status was lower 30 years ago than it is now.  You may recall that there was no perceived 'crisis' in PERA’s funded status in 1975.”

“What the PERA Board and staff would like is for the funded status curve to be flat or stable at around 80 percent.  Why?  Because not all benefits are due and payable today or tomorrow . . . PERA can weather the ups and downs in the markets.”

http://www.copera.org/pdf/Shareholder/ShareholderPresentation05.pdf)

New Jersey Appellate Court Decision:

"Plaintiffs alleged the suspension constituted a breach of express and implied contract (counts one and two), violated the Contract and Due Process Clauses of the Federal and State Constitutions (counts three, four, and six), and violated their state civil rights (count five)."

(My comment: Public pension legal scholar Professor Amy Monahan notes that the Denver District Court's initial decision in the case, Justus v. State, was surprising in light of Colorado public pension case precedent:

"The (Denver District) court’s ruling is surprising both because the court appeared to break from earlier Colorado decisions that found pension benefits to be contractually protected prior to retirement and because the change could be characterized as a retroactive change to benefits, which is the type of change that invites the most scrutiny under a contract clause analysis."

Professor Monahan on the public pension legal doctrine, the "California Rule" (embraced by Colorado courts):

“The (Denver District) court’s ruling is surprising both because the court broke from the previously endorsed California Rule, under which it is clear that detrimental changes to the benefits of current employees are only permissible where they are offset with comparable new advantages, and because the change at issue is one that could be characterized as a retroactive change to benefits, which is the type of change that invites the most scrutiny under a contract clause analysis.”

https://www.dropbox.com/s/cvzed3lmwt8t8v2/Understanding%20Pension%20Reform.pdf

Meredith Williams, Colorado PERA Executive Director: “The AG’s opinion states that when a PERA member retires and begins receiving pension benefits such member’s pension rights have fully vested and such pension benefits may not be reduced.”)

New Jersey Appellate Court Decision:

"There is no dispute that, at the current time, there are sufficient funds in the pension systems to pay COLAs to current retirees.  Moreover, pensions are neither funded by appropriations on a pay-as-you-go basis, in the way that COLAs used to be, nor is their payment contingent on the making of a current appropriation."

(My comment: Note that the Colorado Legislature struck the "ad hoc" PERA COLA language from Colorado law in 1993.  Since that time, the Colorado PERA pension statutes have provided an "automatic" pension COLA benefit that may not be diminished by the Legislature for pensioners who have fully-vested contracts.)

New Jersey Appellate Court Decision:

"During the years that the State skipped making its pension contributions, the pension systems continued paying COLAs to retirees.  In fact, in 2010, the State assured this court that the pension systems were capable of paying out benefits for the next thirty years, despite the State's failure to make its contributions to the funds."

(My comment: August 11, 2009, Colorado PERA Board Trustee Casebolt assures PERA retirees present at Colorado PERA Denver meeting of the PERA “Listening Tour”: “PERA faces no immediate danger of being unable to pay benefits, in fact, PERA can pay benefits for many years to come, based on our current funding and our benefit structure coupled with over $30 billion in assets, at present market value.”

http://www.copera.org/pera/about/listeningtour.htm.)

New Jersey Appellate Court Decision:

"Because pension legislation is remedial in nature, it should generally be liberally construed in favor of the employee."

(My comment: November 17, 1975, Colorado Supreme Court in Taylor v. PERA: “As was noted in Endsley v. Public Employees Retirement Association . . . (1974) ambiguities appearing in statutes regulating pension and retirement funds are construed favorably toward the employee.”

http://scholar.google.com/scholar_case?case=11856628789716288634&q=Taylor+v.PERA&hl=en&as_sdt=2,6

August 14, 1984 Colorado Attorney General Duane Woodard in an Opinion of the Attorney General: “In resolving this question, I am guided by the cardinal principle that ambiguities in statutes regulating pension and retirement funds are to be construed in favor of the employee"

http://www.coloradoattorneygeneral.gov/ag_opinions/1984/no_84_14_ag_alpha_no_pa_pe_aganf_august_14_1984)

New Jersey Appellate Court Decision:

"During the May 20, 1996 hearing, a union-retained actuary explained the employees' concern that, as a result of skipping pension payments, the State would eventually find itself facing a need to make a much larger contribution in the future, would balk at such a large expenditure, and would instead try to cut benefits."

"Senator Inverso responded: I feel strongly that the same protections and rights that are accorded . . . under an ERISA [Employee Retirement Income Security Act] standard to people in the private sector, should be accorded to people in the public sector, the governmental sector; that once they have their pensions established as at a point in time with regard to vesting it, that you cannot go back retroactively and change what has been earned, what has been accrued, what has been vested in."

"In a recent case, the State conceded that retirees have a contractual right to the basic pension benefit they began receiving upon retirement."

(My comment: December 16, 2009, Colorado PERA officials in written testimony to the Joint Budget Committee: “The General Assembly cannot decrease the COLA [absent actuarial necessity] because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.”

http://www.kentlambert.com/Files/PERA_JBC_Hearing_Responses-12-16-2009_Final.pdf)

New Jersey Appellate Court Decision:

"As previously discussed, both opinions advised that N.J.S.A. 43:3B-9.5 created a contractual right to pension benefits, and hence the State could not diminish vested pension benefits unless it could satisfy the constitutional standards under which the State may impair the obligation of a contract."

(My comment: "Indeed, the National Association of State Retirement Administrators issued a recent study that showed that, on average, pension costs represent only about 3 percent of total state and local government expenditures. In Colorado, state and local government expenditures to fund retirement benefits totaled only 2.16 percent.”

http://www.copera.org/pera/about/issues.htm#42611.)

New Jersey Appellate Court Decision:

"As previously discussed, while COLAs were originally funded by annual appropriations, and could be denied if the Legislature failed to make an appropriation, N.J.S.A. 43:3B-5, that system was abandoned decades ago."

"Instead, through amendments adopted in the late 1980's and early 1990's, COLAs are funded in the same way that the regular pension benefits are funded, and COLAs are payable from each of the applicable pension funds."

(My comment: As we have seen, HB 93-1324 struck the former “ad hoc” COLA language from Colorado law. The language stricken in the bill: “(2) Cost of living increases in retirement benefits and survivor benefits shall be made only upon approval by the general assembly.”  This fact was recognized by the Colorado Court of Appeals.

The Ritter Administration on Colorado's "automatic" PERA COLA:

“The essential difference between an automatic COLA and an ad hoc COLA is the legal requirement; with this core difference there is no way for the two not to be substantively different.  The legal difference in this instance is critical to the determination of whether the government is unable to avoid the surrender of resources to meet the obligation.”

http://www.gasb.org/cs/ContentServer?site=GASB&c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176157387791)

New Jersey Appellate Court Decision:

"We conclude that the laws governing COLAs are part of the laws governing the retirement systems or funds."

"Clearly the Legislature was well aware that COLAs were part of the various pension benefit plans.  In fact, in discussing the various actuarial assumptions, Robert Baus, the State's actuarial consultant, observed that the inclusion of COLAs as a pre-funded part of the pension system, instead of as a separate pay-as-you-go item, was a critical issue: 'The methodology is not driving the funding of this system.  What is driving the funding of this system is the phasing in of the COLA.'"

(My comment: Recall that in 2001, Buck Consultants provided an actuarial report to the Legislative Audit Committee of the Colorado General Assembly.  The 2001 Buck Consultants report clearly identifies the Colorado PERA 3.5 percent COLA as “automatic,” refers to “guaranteed benefits at retirement,” and the “fixed” COLA, that is “compounded annually for each year of retirement.”  The Buck Consultants report identifies the 3.5% PERA COLA as “automatic,” contrasting the PERA COLA with an “ad hoc” COLA “as approved by Legislature.”

http://www.nctr.org/pdf/coloradodcdbstudy.pdf)

Cited by the New Jersey Appellate Court:

"'In contrast [to health benefits] the COLA [is] inseparably tied to the monthly retirement benefit as a means for maintaining the real value of that benefit.  It [cannot], therefore, be said to be ancillary to the benefit . . ."

"However, consistent with constitutional principles and common sense, we cannot blindly defer to the State's own evaluation of a law's reasonableness and necessity, lest political expediency replace objective fiscal evaluation."

The New Jersey Appellate Court cites the seminal case U.S. Trust:

"In applying this standard, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake.  A governmental entity can always find a use for extra money, especially when taxes do not have to be raised.  If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all."

"On the other hand, plaintiffs contend that the State was partially responsible for the pension shortfall by skipping its pension contributions in prior years, and it should not be permitted to thus precipitate a pension crisis and then solve it at the expense of retirees.  Plaintiffs also argue that the State has taken contradictory positions about the health of the pension systems, assuring this court in N.J. Educ. Ass'n that the systems were sound enough to meet their obligations for the next thirty years despite the State's failure to make its contributions, and now telling us that 'the pension system is teetering on the brink of collapse.'"

(My comment: Colorado PERA Executive Director Greg Smith, August 11, 2009, at the Denver meeting of the Colorado PERA “Listening Tour” blames the Colorado General Assembly for the decline PERA’s actuarial funded ratio, “We have not been paid what’s called the actuarially required contribution.”  “We’ve not been receiving that full contribution in any of our divisions for many years . . . seven years to be specific.”

http://www.copera.org/pera/about/listeningtour.htm)

New Jersey Appellate Court Decision:

" . . . because a contract-impairment claim presents 'a mixed question of fact and law,' N.J. Educ. Ass'n, supra, 412 N.J. Super. at 206 n.10, a remand is required to allow all sides to create a complete evidentiary record."

"In remanding, we end with these observations.  It is not the courts' role to run the pension systems.  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."

(My comment: “Asked why states are taking the risky strategy of aiming at current retirees, Robert Klausner, a Florida attorney who specializes in public pension law, says many state officials believe they have less to lose in the courtroom by challenging pension protections than taking no action at all. ‘The belief is that if the employer [the state] prevails, it will have been worth the political risk,’ Klausner says.  ‘And if they lose, they will be no worse off than before.’  Klausner adds that legislatures are taking the politically-difficult step and letting the courts be the ‘bad guy’ if they overturn the law.”

http://www.governing.com/news/state/States-Test-Whether-Public-Pension-Benefits-Given-Can-Be-Taken-Away.html

Link to New Jersey Appellate Court Decision:

https://burypensions.files.wordpress.com/2014/06/berg-decision.pdf

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