NJ Supreme Court permits State to not completely fund pensions based on NJ Constitution Burgos v. State of New Jersey

NJ Supreme Court permits State to not completely fund pensions based on NJ Constitution

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. 2 

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.  

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.  

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.

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.  

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.  

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.  

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.  

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.

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.

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.