Last year, after Gov. Chris Christie reneged on an agreement to contribute billions to New Jersey’s public-sector pension plan for the second straight year, state police and other unions cried foul.
After all, they had agreed after months of political push-and-pull to contribute more out of their own pockets in 2011. In exchange, Governor Christie promised to guarantee state payments to their long-underfunded retirement system, hailing it then as a national model of cooperation and reform.
On Monday, however, the United States Supreme Court declined to hear the union’s contention that the once-landmark law was a binding contract, protected by the Constitution and federal law. The high court’s action leaves in place a New Jersey Supreme Court ruling last summer that called the agreement “unenforceable” – as well as a violation of the state’s own budgetary rules.
The case had been watched closely by unions and state officials across the country, since many other states have also postponed putting money into their public-sector pension plans, using the money instead to fill more pressing gaps in cash-strapped budgets over the years.
“If state and local governments can’t make their pension contributions today, they simply can’t make their pension contributions,” says Andrew Biggs, resident scholar at the American Enterprise Institute, a conservative think tank based in Washington. “The plans’ costs have skyrocketed since the recession and many governments simply can’t afford them. So I’m worried.”
Across the country, almost 60 percent of public plans didn’t receive their full actuarial contributions, according to recent data. In 2013, this led to a $968 billion shortfall between the pensions that state and local governments promised their workers and the funds they provided to meet these future obligations, reported the Pew Charitable Trusts last July.
Low returns after the financial crisis of the late 2000s, as well as the corresponding budget crunches, have put many pensions in peril since then, the Center for Retirement Research at Boston College reported last year.
And since public plans work under much looser accounting rules than private plans, Mr. Biggs notes, even “full” funding could leave many plans short as baby boomers are set to retire en masse.
In Illinois, lawmakers allocated only 39 percent of the state’s expected pension contributions in 2014 – the lowest in the nation. States such as Kentucky, Connecticut, and Alaska each hover around 50 percent, according to Bloomberg. And large states such as California, New York, and Texas each face hundreds of billions in pension shortfalls, experts say.
In 2011, Christie worked hard to reach an “innovative” long-term deal to address New Jersey’s now $75 billion in unfunded pension liabilities, getting the state’s municipal unions to agree to contribute more.
After meeting the agreement for the first two years, however, the governor, facing budget shortfalls because of the stagnant New Jersey economy, slashed the required $1.6 billion pension contribution in 2014 to about $700 million.
In 2015, Christie cut the contribution from 2.25 billion to $681 million, and this year his budget calls for a $1.9 billion payment to the state pension fund – short of the $3.8 billion payment he and the legislature agreed to pay in the 2011 law.
"At least we tried to hold the governor to his word, which means nothing,” said Christopher Burgos, the president of the State Troopers Fraternal Association, the lead defendant in the case, on Monday. “The highest court in the land has allowed lies and deceit to prevail in this case, and once again, workers suffer at the hands of selfish union busting politics by the rich and powerful."
Like Illinois and California, state officials are considering moving future municipal workers to 401(k)-like plans rather than traditional pensions, proposals that include cuts to health benefits as well.
Still, though state governments have the option to defer funds for pension plans, the New Jersey Supreme Court last year also ruled that a contractual right to pension funding would illegally constrain the ability of future lawmakers and taxpayers to rework future debts. The state’s future liability remains the same, but the court ruled that, under New Jersey’s constitution, the state was not contractually bound to appropriate a specific amount of funds each year.
"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," the majority decision said last year.