The opinion
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5973-11T4
A-6002-11T4
A-0632-12T1
RICHARD W. BERG, ROBERT J. BRASS,
THOMAS CANNAVO, MELAINE B. CAMPBELL, APPROVED FOR PUBLICATION
LARRY ROBERT ETZWEILER, KATHY FLICKER,
June 26, 2014
ARNOLD GOLDEN, CHARLES GRINELL, TONI
A. HENDRICKSEN, HAROLD KASSELMAN, APPELLATE DIVISION
SUSAN LOTHIAN, STEPHEN H. MONSON,
MARTIN C. MOONEY, SR., BRIAN MULHOLLAND,
CHARLES OUSLANDER, ANNE C. PASKOW,
SHARYN PEIFFER, SAMUEL REAL, JR.,
GREGORY J. SAKOWICZ, SUSAN W. SCIACCA,
WILLIAM H. SCHMIDT, FRED SCHWANWEDE,
JOHN J. SMITH, DEBRA STONE, SHERI TANNE,
and JACK L. WEINBERG,
Plaintiffs-Appellants,
and
NEW JERSEY EDUCATION ASSOCIATION,
NEW JERSEY STATE POLICEMEN'S BENEVOLENT
ASSOCIATION, INC., COMMUNICATIONS WORKERS
OF AMERCA, AFL-CIO, NEW JERSEY FRATERNAL
ORDER OF POLICE, NEW JERSEY STATE
FIREFIGHTERS' MUTUAL BENEVOLENT
ASSOCIATION, PROFESSIONAL FIREFIGHTERS
ASSOCIATION OF NEW JERSEY, AMERICAN
FEDERATION OF STATE, COUNTY AND MUNICIPAL
EMPLOYEES, COUNCIL 1, AFL-CIO, AMERICAN
FEDERATION OF STATE, COUNTY AND MUNICIPAL
EMPLOYEES, COUNCIL 73, AFL-CIO, AMERICAN
FEDERATION OF TEACHERS NEW JERSEY STATE
FEDERATION, AFL-CIO, INTERNATIONAL
FEDERATION OF PROFESSIONAL AND TECHNICAL
EMPLOYEES, AFL-CIO, LOCAL 194,
INTERNATIONAL FEDERATION OF PROFESSIONAL
AND TECHNICAL EMPLOYEES, AFL-CIO, LOCAL
195, INTERNATIONAL FEDERATION OF
PROFESSIONAL AND TECHNICAL EMPLOYEES,
AFL-CIO, LOCAL 200, PROBATION ASSOCIATION
OF NEW JERSEY, NEWARK FIREFIGHTERS UNION,
MORRIS COUNCIL NOS. 6 AND 6A, NJCSA,
IFPTE, ALF-CIO, JERSEY CITY POLICE
OFFICERS BENEVOLENT ASSOCIATION, CAMDEN
COUNTY COUNCIL #10, INTERNATIONAL
BROTHERHOOD OF TEAMSTERS LOCAL 97,
BELLEVILLE PBA LOCAL 28, NEW JERSEY
ASSOCIATION OF SCHOOL ADMINISTRATORS, NEW
JERSEY PRINCIPALS AND SUPERVISORS
ASSOCIATION, NEW JERSEY ASSOCIATION OF
SCHOOL BUSINESS OFFICIALS, NEW JERSEY
RETIREES' EDUCATION ASSOCIATION,
TRANSPORT WORKERS UNION LOCAL 225, NEW
JERSEY SUPERIOR OFFICERS LAW ENFORCEMENT
ASSOCIATION, ATLANTIC CITY WHITE COLLAR
PROFESSIONAL ASSOCIATION, INTERNATIONAL
BROTHERHOOD OF ELECTRICAL WORKERS LOCAL
210, ATLANTIC CITY SUPERIOR OFFICERS
ASSOCIATION, PETER BURKHALTER, DEE
TRUCHON, GEORGE O'BRIEN, THOMAS TEVLIN,
ROBERT BROWER, ROSEMARIE JANKOWSKI, IRIS
J. ELLIOTT, KENNETH D. KING, FRANK ELMER
HICKS, WILLIAM A. PARKER, BRAD FAIRCHILD,
DWIGHT COVALESKI, ANTHONY F. WIENERS,
GARY SOUSS, WILLIAM LAVIN, CHARLES WEST,
MARIAN LEZGUS, MELANIE HAFDELIN, STEVEN
ENGRAVALLE, CINDY BARR-RAGUE, DOMINICK
MARINO, JOHN J. GEROW, JANET S. ZYNROZ,
ALFRED CRESCI, RAE C. ROEDER, MARYANN
PIUNNO SMITH, MARYANN MESICS, DENNIS
REITER, ANTHONY MISKOWSKI, VINCENT
KAIGHN, WILLIAM S. BAUER, JR., MICHAEL
CALABRESE, and DEBORAH JACOBS,
Plaintiffs/Intervenors-Appellants,
v.
HON. CHRISTOPHER J. CHRISTIE, HON. KIM
GUADAGNO, SECRETARY OF STATE OF THE
STATE OF NEW JERSEY, DIRECTOR, DIVISION
OF PENSIONS, BOARD OF TRUSTEES, PUBLIC
EMPLOYEES' RETIREMENT SYSTEM, TREASURER,
STATE OF NEW JERSEY and STATE OF NEW
2 A-5973-11T4
JERSEY,
Defendants-Respondents.
__________________________________________
MICHAEL DeLUCIA, PATRICIA DeLUCIA,
ROBERT C. BROWN and ANNE K. BROWN,
Plaintiffs-Appellants,
v.
STATE OF NEW JERSEY, DEPARTMENT
OF THE TREASURY, DIVISION OF
PENSIONS AND BENEFITS,
Defendants-Respondents.
___________________________________________
Argued January 28, 20141 – Decided June 26, 2014
Before Judges Reisner, Alvarez and Carroll.
On appeal from the Superior Court of New Jersey,
Law Division, Mercer County, Docket Nos. L-2996-
11 and L-1354-12.
Daniel Louis Grossman argued the cause for
appellants Berg, Brass, Cannavo, Campbell,
Etzweiler, Flicker, Golden, Grinell, Hendricksen,
Kasselman, Lothian, Monson, Mooney, Mulholland,
Paskow, Peiffer, Real, Sakowicz, Sciacca,
Schmidt, Schwanwede, Smith, Stone, Tanne, and
Weinberg in A-5973-11.
Charles Ouslander, appellant, argued the cause
pro se in A-5973-11.
Kenneth I. Nowak, Ira W. Mintz and David I. Fox
argued the cause for appellants in A-6002-11
(Zazzali, Fagella, Nowak, Kleinbaum & Friedman,
1
After oral argument, we directed supplemental briefing, which
was completed on February 25, 2014.
3 A-5973-11T4
P.C., attorneys for appellants New Jersey
Education Association, New Jersey Retirees'
Education Association, New Jersey State
Policemen's Benevolent Association, Inc.,
American Federation of State, County and
Municipal Employees, Council 1, AFL-CIO,
Belleville PBA Local 28, George O'Brien,
Rosemarie Jankowski, Iris J. Elliott, William A.
Parker, Anthony Wieners, Gary Souss, Marian
Lezgus, and Melanie Hafdelin; Weissman & Mintz,
L.L.C., attorneys for appellants Communications
Workers of America, AFL-CIO, American Federation
of State, County and Municipal Employees, Council
73, International Federation of Professional and
Technical Engineers, AFL-CIO & CLC, Local 194,
International Federation of Professional and
Technical Engineers, AFL-CIO & CLC, Local 200,
Peter Burkhalter, Dee Truchon, Rae C. Roeder,
Maryann Piunno Smith, Maryann Mesics, Dennis
Reiter, Anthony Miskowski, Vincent Kaighn,
William S. Bauer, Jr., Michael Calabrese, and
Deborah Jacobs; Fox and Fox, L.L.P., attorneys
for appellants New Jersey State Firefighters'
Mutual Benevolent Association of New Jersey,
Probation Association of New Jersey, Newark
Firefighters Union Morris Council Nos. 6 and 6A,
NJCSA, IFPTE, AFL-CIO, Thomas Tevlin, Robert
Brower, Brad Fairchild, Dwight Covaleski, William
Lavin, and Charles West; Markowitz and Richman,
attorneys for appellant New Jersey Fraternal
Order of Police; Mets Schiro & McGovern, L.L.P.,
attorneys for appellants Professional Firefighters
Association of New Jersey, American Federation of
Teachers New Jersey Federation, AFL-CIO,
International Brotherhood of Teamsters Local 97,
Dominick Marino, and John Gerow; Oxfeld Cohen,
P.C., attorneys for appellant International
Federation of Professional and Technical
Engineers, AFL-CIO & CLC, Local 195; Detzky &
Hunter, L.L.C., attorneys for appellant Jersey
City Police Officers Benevolent Association;
Spear Wilderman, P.C., attorneys for appellant
Camden County Council #10; Robert M. Schwartz,
attorney for appellants New Jersey Principals and
Supervisors Association, Janet S. Zynroz, and
Alfred Cresci; O'Brien, Belland & Bushinsky,
4 A-5973-11T4
L.L.C., attorneys for appellants Transport
Workers Union Local 225, New Jersey Superior
Officers Law Enforcement Association, Atlantic
City White Collar Professional Association,
International Brotherhood of Electrical Workers
Local 210, and Atlantic City Superior Officers
Association; Maria M. Lepore, attorney for
appellants New Jersey Association of School
Administrators, Kenneth D. King, and Steven
Engravalle; and Lindabury, McCormick, Estabrook &
Cooper, P.C., attorneys for appellants New Jersey
Association of School Business Officials, Frank
Elmer Hicks, and Cindy Barr-Rague; Mr. Nowak, Mr.
Mintz, Edward M. Suarez, Jr., Steven P. Weissman,
Matthew D. Aremen, Mr. Fox, Craig S. Gumpel,
James M. Mets, Kevin P. McGovern, Arnold Shep
Cohen, Stephen B. Hunter, James Katz, Mr. Schwartz,
Kevin Jarvis, Ms. Lepore, and Paul E. Griggs, on
the joint briefs).
Robert T. Lougy, Assistant Attorney General, argued
the cause for respondents in A-5973-11 and in A-
6002-11 (John J. Hoffman, Acting Attorney
General, attorney; Mr. Lougy, of counsel; Jean P.
Reilly, Deputy Attorney General, and Diane J.
Weeden, Deputy Attorney General, on the briefs).
Robert C. Brown argued the cause for appellants
in A-0632-12.
Diane J. Weeden, Deputy Attorney General, argued
the cause for respondents in A-0632-12 (John J.
Hoffman, Acting Attorney General, attorney;
Robert T. Lougy, Assistant Attorney General, of
counsel; Jean P. Reilly, Deputy Attorney General,
and Ms. Weeden, on the briefs).
The opinion of the court was delivered by
REISNER, P.J.A.D.
In these appeals, which we have consolidated for purposes
of this opinion, several groups of public-employee plaintiffs
challenge the constitutionality of N.J.S.A. 43:3B-2 (Chapter
5 A-5973-11T4
78), a 2011 statute that suspended the payment of cost of living
increases (COLAs) to current and future retirees receiving
pensions from each of the State's public pension funds. See L.
2011, c. 78, § 25. The trial court dismissed the complaints on
summary judgment. For the reasons that follow, we affirm the
grant of summary judgment in DeLucia v. State of New Jersey, A-
0632-12. We reverse the grant of summary judgment in Berg and
New Jersey Education Association v. Christie (Berg), A-5973-11
and A-6002-11, and we remand Berg to the trial court for further
proceedings required to address plaintiffs' Contract Clause
claims under the New Jersey Constitution.
I
The State pension systems have been addressed at length in
a number of recent opinions. See, e.g., Teamsters Local 97 v.
State, 434 N.J. Super. 393, 407-25 (App. Div. 2014); N.J. Educ.
Ass'n v. State, 412 N.J. Super. 192, 214-15 (App. Div.), certif.
denied, 202 N.J. 347 (2010). Nonetheless, for the sake of
clarity, we find it necessary to review the history in detail,
since "[t]he legal issues must be viewed realistically against
the story of these pension plans." Spina v. Consol. Police &
Firemen's Pension Fund Comm'n, 41 N.J. 391, 393 (1964).
Likewise, because this litigation has been conducted in several
6 A-5973-11T4
different courts, we discuss its procedural history in greater
detail than we otherwise might.
THE PENSION SYSTEMS
Resolution of this appeal requires a review of the
statutory framework and history surrounding the: 1) State-
administered retirement systems; 2) Pension Adjustment Act,
N.J.S.A. 43:3B-1 to -10; and 3) non-forfeitable rights statute,
N.J.S.A. 43:3C-9.5. We will discuss that framework here.
A. The State-Administered Retirement Systems
Plaintiffs in Berg are a group of twenty-six retired
attorneys who are currently receiving pension benefits through
the Public Employees' Retirement System (PERS), N.J.S.A. 43:15A-
1 to -141. PERS was established in 1954, L. 1954, c. 84, and is
the largest of the State-administered retirement systems.
N.J.S.A. 52:18A-108(c). The intervenors in Berg are retired and
active vested members in the three largest state-administered
defined benefit retirement systems: 1) PERS; 2) the Police and
Firemen's Retirement System (PFRS), established in 1944, L.
1944, c. 253, under N.J.S.A. 43:16A-1 to -16.2; and 3) the
Teachers' Pension and Annuity Fund (TPAF), reorganized in 1955,
under N.J.S.A. 18A:66-1 to -93. The DeLucia plaintiffs are
retired members of PFRS.
7 A-5973-11T4
PERS, PFRS, and TPAF are governed by separate boards of
trustees. N.J.S.A. 43:15A-17 (PERS); N.J.S.A. 43:16A-13 (PFRS);
and N.J.S.A. 18A:66-56 (TPAF). The day-to-day administration of
the retirement systems is conducted by the Department of the
Treasury, Division of Pensions and Benefits. N.J.S.A. 52:18A-95
to -100 (Division of Pensions); N.J.S.A. 43:15A-18 (PERS);
N.J.S.A. 43:16A-13 (PFRS); N.J.S.A. 18A:66-57 (TPAF). Employees
are vested in these systems after having obtained ten years of
service credit. N.J.S.A. 43:15A-38 (PERS); N.J.S.A. 43:16A-11.2
(PFRS); N.J.S.A. 18A:66-36 (TPAF).
The State-administered retirement systems are funded by:
1) contributions from employees' wages; 2) contributions from
the State, as the employer; and 3) the return earned on invested
assets. N.J.S.A. 43:15A-24 (PERS); N.J.S.A. 43:16A-15 (PFRS);
N.J.S.A. 18A:66-18 (TPAF). See also N.J. Educ. Ass'n, supra,
412 N.J. Super. at 214-15 (describing TPAF statutory funding and
contribution scheme). Employees' contributions to the systems
are set by statute as a percentage of salary. N.J.S.A. 43:15A-
25 (PERS); N.J.S.A. 43:16A-15 (PFRS); N.J.S.A. 18A:66-29 (TPAF).
The State's contributions are computed by actuaries, who
act as technical advisors to the board of trustees, based on an
annual valuation of the assets and the fund liabilities.
N.J.S.A. 43:15A-24 (PERS); N.J.S.A. 43:16A-16 (PFRS); N.J.S.A.
8 A-5973-11T4
18A:66-16 (TPAF). See Passaic v. Consol. Police Pension Fund
Comm'n, 18 N.J. 137, 140-41 (1955) (explaining in simple terms
the theory of pension funding and the actuary's role). As the
Division of Pensions explained in its Employers' Pension and
Benefits Administration Manual (EPBAM), in the State pension
systems the employer is essentially "responsible for filling the
gap between the funds needed to meet the retirement system
obligations and those available from employee contributions
and investment earnings on system assets." Employers'
Pension and Benefits Administration Manual (EPBAM),
http://www.nj.gov/treasury/pensions/epbam/pensions/funding1.htm
(last visited June 12, 2014).2
The State is statutorily required to contribute, to each
system or fund, both a "normal contribution," which includes
basic retirement allowances and COLAs as determined by the board
of trustees in consultation with the system's or fund's actuary,
and an accrued liability contribution. N.J.S.A. 43:3C-
9.5(c)(1). "The amount of the State's annually required
contributions shall be included in all annual appropriations
acts as a dedicated line item," N.J.S.A. 43:3C-9.5(c)(1), and
2
Because the appellate record consists only of materials
submitted to the trial court, R. 2:5-4, internet citations in
this opinion are to materials that were either the subject of
stipulations in the trial court or to public documents of which
we can take judicial notice. See N.J.R.E. 201.
9 A-5973-11T4
the Legislature "shall make an appropriation sufficient to
provide for the obligations of the State." N.J.S.A. 43:15A-37
(PERS); N.J.S.A. 18A:66-33 (TPAF). Commencing July 1, 2011, the
State's contribution
shall be made in full each year to each
system or fund in the manner and at the time
provided by law. The contribution shall be
computed by actuaries for each system or
fund based on an annual valuation of the
assets and liabilities of the system or fund
pursuant to consistent and generally
accepted actuarial standards and shall
include the normal contribution and the
unfunded accrued liability contribution.
The State with regard to its obligations
funded through the annual appropriations act
shall be in compliance with this requirement
provided the State makes a payment, to each
State-administered retirement system or
fund, of at least 1/7th of the full
contribution, as computed by the actuaries,
in the State fiscal year commencing July 1,
2011 and a payment in each subsequent fiscal
year that increases by at least an
additional 1/7th until payment of the full
contribution is made in the seventh fiscal
year and thereafter.
[N.J.S.A. 43:3C-14.]
The money in the pension funds is held in trust for the
exclusive use of the members or their beneficiaries. N.J.S.A.
43:3C-9.1.
B. The Pension Adjustment Act
In 1958, at approximately the same time that PERS, PFRS,
and TPAF were established, the Pension Adjustment Act, N.J.S.A.
10 A-5973-11T4
43:3B-1 to -10, was adopted. L. 1958, c. 143. The Act provided
for limited modest increases, based on a fixed adjustment, to
the first $480 of the retirement allowances of state employees
(including members of PERS, PFRS, and TPAF), who had retired
before 1952, that is, prior to the advent of Social Security
coverage for public employees. L. 1958, c. 143. The State, as
employer, bore the cost of the adjustments (except TPAF), which
were, as initially enacted, to be made on a "pay-as-you-go"
basis and were subject to appropriation by the Legislature. L.
1958, c. 143. The Sponsor's Statement to the bill explained:
This bill is intended to meet in some
part the situation that exists for certain
former public employees who, having retired
on pensions based on the salary levels of
many years ago, now face varying degrees of
hardship because of serious increases in the
cost of living since their retirement. Some
of these retired employees have in fact been
obliged to seek old age assistance, and it
is expected that this bill will provide an
alternative for them on a more dignified,
even-handed basis. There is no attempt in
this bill to suggest the general need for a
cost-of-living index, or an escalator
clause, for pension or retirement systems.
The great majority of New Jersey's public
employees have been covered under the
Federal Old Age and Survivors' Insurance
program in recent years, and the benefits
payable under this program have tended to
increase with increases in the cost of
living, thus the problem may not be as
severe in the future.
A cut-off point, beyond which no
adjustment of pension would be made, is, of
11 A-5973-11T4
necessity, arbitrary, but, in this bill, the
factors have been continued to a date low
enough, 1951 (13% increase in the basic
amount), to represent liberal treatment of
the meaning of "hardship." No increase is
provided in those cases where the ratio of
increase would be so small that the average
taxpayer usually must adjust to it in his
own personal way; in fact, an extension of
the schedule of increases into this area
would involve the State in administrative
costs utterly disproportionate to the
benefits that would result.
[Sponsor's Statement to Assembly Bill No.
367, at 4-5 (March 24, 1958) (emphasis
added).]
In 1961, the Act was amended to increase the retirement
allowance by applying an increased percentage adjustment to the
first $600 in benefits, and by adding employees who had retired
in 1952, 1953 and 1954. L. 1961, c. 144. The Sponsor's
Statement explained:
The adjustment formula is intended to
overcome the loss of real income by a
retired person as a result of constantly
rising prices. . . .
. . . .
The Pension Increase Act of 1958 now
provides for increases to persons retired
prior to January 1, 1952. This date marked
the point where the Inadequate Pensions
Committee formula showed a loss of at least
10% in purchasing power due to inflation
after retirement. Since 1958 the cost of
living has continued to rise and the fixed
incomes of retired public employees have
been reduced still further in purchasing
power. The present bill applies the
12 A-5973-11T4
committee formula to correct this . . . .
This adjustment preserves the principle that
no increase should be provided unless the
loss of purchasing power is at least 10%.
[Sponsor's Statement to Assembly Bill No.
559, at 3-4 (May 1, 1961).]
In 1964, the statute was amended to apply the percentage
adjustment to the first $900 in retirement allowance. L. 1964,
c. 198, § 1. Then Governor Hughes confirmed that the "program
extends only to those who retired prior to 1955 and prior to the
advent of Social Security coverage." Governor's Statement upon
Signing Assembly Bill No. 610, L. 1964, c. 198 (Oct. 13, 1964).
The first major revision to the Act was made in 1969, when
the Act was amended to: 1) grant adjustments or COLAs to all
eligible retirants of state-administered pension systems, not
just those who retired before 1955; and 2) provide adjustments
based on an amount equal to one-half of the percentage of the
change in the Consumer Price Index (CPI), not a fixed formula.
L. 1969, c. 169, § 1. See Brown v. Twp. of Old Bridge, 319 N.J.
Super. 476, 511 (App. Div.) (increases in annual COLAs are
calculated by reference to CPI to protect retirees from
increased inflation), certif. denied, 162 N.J. 131 (1999). The
Sponsor's Statement explained:
This bill will help protect retired
public employees against excessive loss of
purchasing power caused by inflation. The
bill is partially based on existing
13 A-5973-11T4
legislation which provides for fixed
increases to certain public pensioners.
This bill does the following:
1. It provides that those who retired prior
to 1955 (prior to . . . Social Security
coverage . . .) will receive an increase in
accordance with the changes in the cost of
living appropriate to their calendar year of
retirement as such percentage of increase
will be applied to the full allowance of the
retirant rather than to any part of that
allowance.
2. It permits adjustments for most retirants
effective, July 1, 1970 if funds are
appropriated to provide for such increases.
3. It requires the Director of the Division
of Pensions to review the increase in the
cost of living based on the Consumer Price
Index issued by the United States Department
of Labor and to include in his appropriation
request . . . amounts sufficient to increase
the retirement allowances or pensions of
eligible retirants by 1/2 of the percentum
of change in the index.
4. The legislation contemplates an annual
review of the index and permits adjustments
upwards or downwards, as the case may be, in
order to maintain the purchasing power of
the retired public employee.
[Sponsor's Statement to Assembly Bill No.
292, at 6-7 (Jan. 27, 1969) (emphasis
added).]
From 1982 to 1991, the State retirement systems grew
dramatically, and the growth in assets and the return on
retirement investments far outpaced the growth in benefit
payments from the retirement systems. Sponsor's Statement to
14 A-5973-11T4
Senate Bill No. 540, at 28 (March 12, 1992), (L. 1992, c. 41).
During that period pension adjustments were enhanced, and the
Act was amended to: 1) expand COLAs to include survivors, L.
1971, c. 139; 2) reduce the lag time for updating the CPI
adjustment, L. 1975, c. 375; 3) increase the percentage of
adjustment from 50% to 60% of the CPI, L. 1977, c. 306; and 4)
provide for payment for the entire month in which the retirant
dies, L. 1993, c. 335.
From 1987 to 1990, the Act was amended, with regard to
funding, to: 1) provide that COLAs were to be prefunded by
employers, rather than on a pay-as-you-go basis; and 2) that
COLA payments shall be paid by the retirement system and funded
as employer obligations by the same method provided by law for
funding of employer obligations for the basic retirement
benefits. N.J.S.A. 43:3B-4a (TPAF); N.J.S.A. 43:3B-4.2 (PFRS);
N.J.S.A. 43:3B-4.3 (PERS).3 As the Division of Pensions stated
in the EPBAM: "An employer's contribution to one of the State's
defined benefit plans covers not only the cost of basic
pension allowances, but also future cost-of-living adjustments
(COLA)." EPBAM, http://www.nj.gov/treasury/pensions/epbam/
3
The laws governing the state-administered retirement systems
were amended in conformance with the funding provisions.
N.J.S.A. 43:15A-24.1 (PERS); N.J.S.A. 43:16A-15.6 (PFRS);
N.J.S.A. 18A:66-18.1 (TPAF).
15 A-5973-11T4
pensions/funding1.htm (last visited June 12, 2014). The
Sponsor's Statement to the PERS bill, L. 1990, c. 6, explained:
The bill provides for adequate reserve
funding for pension adjustment benefits for
all members of [PERS] . . . for retirees and
their dependents for which the State is
required to pay the premiums. At present,
these benefits are paid for on a current
basis by the State and other employers. The
liability for these benefits for active and
retired members is growing rapidly. If
steps are not taken soon to recognize and
provide reserve funding for this liability,
a severe fiscal crisis could develop in the
future requiring payment of these benefits
out of the current operating budgets of the
State and local employers. Reserve funding
of these liabilities can also provide
savings through investment earnings.
The bill provides that pension
adjustment benefits for all PERS members,
and beneficiaries and post-retirement health
care benefits for qualified, retired State
employees and their dependents shall be paid
by the retirement system. The liability for
pension adjustment benefits will be funded
as employer obligations of the State and
local employers participating in the
retirement system.
[Sponsor's Statement to Senate Bill No. 665,
at 3 (March 8, 1990).]
The Senate Revenue, Finance and Appropriations Committee's
Statement set forth that the bill provided for the "recognition
of . . . (COLA) payments as a liability of the PERS system."
Committee's Statement to Senate Bill No. 665, at 1 (Feb. 5,
1990). See also Governor's Statement upon Signing Senate Bill
16 A-5973-11T4
No. 2602, L. 1989, c. 204 (Dec. 19, 1989) (prefunding mechanism
will result in substantial savings to urban municipalities).
C. The Genesis of the Current Pension Dispute
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. As described in then Governor Corzine's
February 24, 2008, Budget Summary presented to the Legislature:
The seeds of this problem were sown in
the mid-1990s, when New Jersey sold pension
bonds and revalued its pension investments
(from their original "book" value to their
current market value). These tactics
enabled the State to avoid making its normal
appropriations into the system, thus
relinquishing those resources to support
other programs. The pension funds were
invested in the stock market and, initially,
produced a sizeable balance. That balance
provided a convenient rationalization for
two things: 1) the elimination of State and
local government contributions (i.e.,
pension "holidays") totaling an estimated $8
billion over seven years; and 2) an
expansion of benefits through changes in the
calculation of pension benefit payments.
From fiscal 1997 through 2005, no
appropriations were made to . . . (PERS),
the State's largest system. Similarly, from
fiscal 2000 through 2005, no appropriations
were provided to the next largest system
. . . (TPAF).
Beginning in fiscal 2000, however, the
value of the State's pension investments
declined precipitously due to the stock
market crash, resulting in an asset loss of
approximately $20 billion (24%) by the end
17 A-5973-11T4
of fiscal 2002. Income tax receipts over
this same period also were adversely
affected. However, instead of instituting
deep program cuts to re-align budget
expenses with available revenues, the State
shorted the pension system by substituting
excess pension assets in place of the normal
cash appropriation. The Benefit Enhancement
Fund, which was originally created to
support some of the aforementioned benefit
expansions, was also tapped for this
purpose.
This combination of asset losses and
increased benefits triggered a rapid and
steady increase in the system's unfunded
liability (i.e., degree to which the
actuarially-determined obligations exceed
the value of pension assets). From fiscal
2004 to the present, the unfunded liability
more than doubled, from $12 billion to
approximately $25 billion, of which $16.6
billion represents the State's liability.
[FY 2009 Budget In Brief, Executive Summary,
at 19.]
D. The Non-forfeitable Right Statute
In 1997, the Legislature introduced a bill, signed into law
on June 5, 1997, conforming the administration of certain State-
administered retirement systems, including PERS, PFRS, and TPAF,
to federal Internal Revenue Code requirements; however, the bill
also established "certain non-forfeitable" pension rights. L.
1997, c. 113, § 2.4 Significant to this appeal, the law provided
4
As further discussed in Part III of this opinion, the 1997
statute followed an investigation by the Internal Revenue
Service, aimed at requiring the State to repay sums removed from
(continued)
18 A-5973-11T4
that vested members "shall have a non-forfeitable right to
receive benefits as provided under the laws governing the
retirement system or fund upon the attainment of five years of
service credit in the retirement system or fund . . . ."
N.J.S.A. 43:3C-9.5(b). "[A] 'non-forfeitable right to receive
benefits' means that the benefits program, for any employee for
whom the right has attached, cannot be reduced. The provisions
of this section shall not apply to post-retirement medical
benefits which are provided pursuant to law." N.J.S.A. 43:3C-
9.5(a). Nonetheless, N.J.S.A. 43:3C-9.5(e) provided:
Except as expressly provided herein and only
to the extent so expressly provided, nothing
in this act shall be deemed to (1) limit the
right of the State to alter, modify or amend
such retirement systems and funds, or (2)
create in any member a right in the corpus
or management of a retirement system or
pension fund . . . .
The Senate Budget and Appropriations Committee's Statement
to L. 1997, c. 113 explained:
The bill also provides that a vested
member of a retirement system or fund listed
in the bill will have non-forfeitable right
to receive benefits as provided under the
laws governing the retirement system or fund
upon the attainment of five years of service
credit in the system or fund or on the date
(continued)
the pension funds. The statute was intended to ensure that the
pension funds would continue to qualify for favorable federal
tax treatment.
19 A-5973-11T4
of the enactment of the bill, whichever is
later. However, this provision of the bill
will not apply to postretirement medical
benefits which are provided pursuant to law.
The bill also requires the State to make an
annual normal contribution and an annual
unfunded accrued liability contribution to
each system and fund except under two
circumstances set forth in the bill.
The bill will not preclude the
forfeiture, suspension or reduction of
benefits for dishonorable service. In
addition, the right to receive benefits will
not be deemed to: (1) limit the right of
the State to alter, modify or amend the
retirement systems, other than the
abovementioned benefits for members who have
attained 10 years of service, or (2) create
in any member a right in the corpus or
management of a retirement system.
[Committee's Statement to Senate Bill No.
1119, at 1-2 (April 17, 1997).]
With regard to the fiscal impact of L. 1997, c. 113, the
Senate Budget and Appropriations Committee set forth that:
As amended, the bill establishes a
"nonforfeitable" right to certain pension
benefits after five years of service credit
for vested employees. The fiscal impact of
this provision, if any, cannot be calculated
because any impact would only occur as the
result of future statutory changes in
pension benefits which cannot be foreseen.
[Committee's Statement to Senate Bill No.
1119, at 2 (April 17, 1997).]
In 2010, the Legislature introduced Senate Bill Nos. 2, 3,
and 4, which were passed and signed into law on March 22, 2010.
The "bills implemented some of the recommendations of the Joint
20 A-5973-11T4
Legislative Committee on Public Employee Benefits Reform, Final
Report (Dec. 1, 2006) (Final Report) . . . ." See Paterson
Police PBA Local 1 v. City of Paterson, 433 N.J. Super. 416,
419-21 (App. Div. 2013) (describing history of bills and
provisions of Final Report). The Final Report was created to
identify "proposals that will terminate abuses of the pension
systems and control the cost of providing public employee
retirement, health care and other benefits." Final Report,
supra, at 1. The Committee found that as of 2006, New Jersey's
retirement systems had an $18 billion unfunded liability. Ibid.
The main contributors to that liability were: 1) "State and
local government employer pension 'holidays' totaling $8 billion
over seven years; [2)] [N]egative investment returns resulting
in a $20 billion loss; [3)] Costly pension benefit enhancements
and early retirement incentive programs; and [4)] Continuous
increases in enrollment." Ibid.
Relevant to this appeal, Senate No. 2, enacted at L. 2010,
c. 1, § 29, and codified as amended at N.J.S.A. 43:3C-9.5(b),
removed public employees who had become vested members of the
State-administered retirement systems on or after May 21, 2010
(the bill's effective date), from the "non-forfeitable right"
provision. Under this provision new members of the State-
administered retirement systems do not have a non-forfeitable
21 A-5973-11T4
right to receive retirement benefits upon the attainment of five
years of service credit. N.J.S.A. 43:3C-9.5(b).
The Sponsor's Statement to L. 2010, c. 1, explained that:
This section implements Recommendation
7 of the Joint Legislative Committee on
Public Employee Benefits Reform set forth in
the final report dated December 1, 2006.
The committee recommended "the repeal on a
prospective basis for new employees of
N.J.S.A. 43:3C-9.5 . . . because the
Legislature should not be permanently and
inextricably bound by an action of a prior
session of the Legislature."
The bill would remove public employees
who become members after the bill's
effective date of the [PERS, PFRS, and TPAF]
. . . from the law that provides vested
members with a non-forfeitable right to
receive benefits, as provided under the laws
governing the retirement system or fund,
upon the attainment of five years of service
credit in the retirement system or fund.
[Sponsor's Statement to Senate Bill No. 2,
at 74 (Feb. 8, 2010).]
Significantly, Recommendation 7 of the Joint Committee's
Final Report, upon which the Legislature relied, provided:
In a legal opinion to the Joint Committee,
Peter J. Kelly, Principal Counsel, the
Office of Legislative Services (OLS),
explained that "legislation that has the
effect of detrimentally altering the
retirement benefits of active members of
State-administered retirement systems who
have accrued at least five years of service
credit, or of retired members, would be
unconstitutional as violative of the federal
and State constitutional proscription
against impairment of the obligation of
22 A-5973-11T4
contract." . . . Similarly, in a legal
opinion for New Jersey’s Treasurer, Bradley
Abelow, the Office of the Attorney General
advised that "N.J.S.A. 43:3C-9.5 created
legally enforceable rights in vested members
of the state pension systems to the benefits
programs of those systems" and consequently
under "the State and Federal Constitutions,
the Legislature may not enact laws which
substantially impair those rights, except in
the narrow circumstances recognized by state
and federal courts."
. . . .
Repeal of N.J.S.A. 43:3C-9.5 should be
prospective only, that is, it should apply
to those employed after the repeal. The OLS
legal opinion pointed out that because the
statute "created a contractual right for the
members to whom it is applicable, any
subsequent amendment or repeal thereof would
not extinguish the rights conferred on those
members."
· RECOMMENDED ACTION
The Joint Committee recommends the
repeal on a prospective basis for new
employees of N.J.S.A. 43:3C-9.5, which
provides members of the State-administered
retirement systems with a non-forfeitable
right to receive in retirement the benefits
provided by statute at the time a member of
a retirement system attains five years of
service credit. . . . [T]he Legislature
should not be permanently and inextricably
bound by an action of a prior session of the
Legislature.
[Final Report, supra, at 77-79 (emphasis added).]
In its Final Report the Committee concluded that:
Detrimentally altering the retirement
benefits of active members of the retirement
23 A-5973-11T4
systems who have accrued at least five years
of service credit, or of retired members,
would be unconstitutional as an impairment
of contract based on a legal opinion
provided by the nonpartisan Office of
Legislative Services and similar legal
advice prepared by the Office of the
Attorney General for the State Treasurer.
[Id. at 1 (emphasis added).]
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. L. 2011, c. 78, § 25 (codified as amended at N.J.S.A.
43:3B-2(a)). The statute provides that commencing on June 28,
2011,
no further adjustments to the monthly
retirement allowance or pension originally
granted to any retirant and the pension or
survivorship benefit granted to any
beneficiary shall be made in accordance with
the provisions of P.L.1958, c.143 (C.43:3B-1
et seq.), unless the adjustment is
reactivated as permitted by law. This
provision shall not reduce the monthly
retirement benefit that a retirant or a
beneficiary is receiving on the effective
date of P.L.2011, c.78 when the benefit
includes an adjustment granted prior to that
effective date.
[N.J.S.A. 43:3B-2(a).]
Under Chapter 78, the newly-created pension committees,
which are comprised of both labor and state appointees, have the
discretionary authority to reactivate COLAs when the individual
24 A-5973-11T4
pension funds attain the "targeted funded ratio," that is,
seventy-five percent funding in "State fiscal year 2012, and
increased in each fiscal year thereafter by equal increments for
seven years, until the ratio reaches 80 percent at which it
shall remain for all subsequent fiscal years." N.J.S.A. 43:3C-
16. See N.J.S.A. 43:15A-17 (PERS pension committee); N.J.S.A.
43:16A-13 (PFRS pension committee); N.J.S.A. 18A:66-56 (TPAF
pension committee). The Sponsor's Statement explained:
The committees of these systems will
have the authority to reactivate the cost of
living adjustment on pensions and modify the
basis for the calculation of the cost of
living adjustment and set the duration and
extent of the activation. A committee must
give priority consideration to the
reactivation of the cost of living
adjustment.
. . . .
Under the bill, the automatic cost-of-living
adjustment will no longer be provided to
current and future retirees and
beneficiaries, unless it is reactivated as
permitted by the bill.
[Sponsor's Statement to Senate Bill No.
2937, at 119-20 (June 13, 2011).]
The Division of Pensions and Benefits estimated that the
total State savings attributable to the
changes to employee contributions for
pensions and health care and to pension
benefit and actuarial changes, such as
elimination of the retiree COLA for the
State-administered retirement systems, will
be $45,689,111 in FY 2012, $114,768,000 in
25 A-5973-11T4
FY 2013, and $203,442,676 in FY 2014. The
fiscal impact in FY 2012 resulting from the
pension reform changes are estimates and are
subject to change.
[Fiscal Note to Senate, No. 2937, 214th Leg.
(N.J. June 28, 2011).]
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). At the end of fiscal 2010, the
State's plans' combined AVA funded level was just 56 percent."
Governor's Statement upon Signing Senate Bill No. 2937, L. 2011,
c. 78 (June 28, 2011).
These reforms protect the pension system for
retirees, increasing the funded ratio of the
combined state and local systems from the
current 62% to more than 88% over the next
thirty years. By 2041, this will reduce
total pension underfunding to $37 billion.
Without these critical reforms, the unfunded
liability across the pension systems would
have skyrocketed to $183 billion, resulting
in a massive impact on state and local
budgets.
[Ibid.]
As part of the political compromise that produced its
passage, Chapter 78 also amended the non-forfeitable right
statute to provide that members of the State-administered
pension systems have a contractual right to the annual required
contribution made by the employer or any other public entity.
26 A-5973-11T4
L. 2011, c. 78, § 26, codified at N.J.S.A. 43:3C-9.5(c)(2). The
statute was also amended to provide that any rights reserved to
the State under N.J.S.A. 43:3C-9.5(e) to modify or amend the
retirement systems "shall not diminish the contractual rights of
employees established by subsections a, b, and c of this
section." Ibid. (emphasis added).
N.J.S.A. 43:3C-9.5 (emphasis added), currently provides:
a. For purposes of this section, a "non-
forfeitable right to receive benefits" means
that the benefits program, for any employee
for whom the right has attached, cannot be
reduced. The provisions of this section
shall not apply to post-retirement medical
benefits which are provided pursuant to law.
b. Vested members . . . shall have a non-
forfeitable right to receive benefits as
provided under the laws governing the
retirement system or fund upon the
attainment of five years of service credit
in the retirement system or fund or on the
effective date of this act, whichever is
later. This subsection shall not be
applicable to a person who becomes a member
of these systems or funds on or after the
effective date [May 21, 2010] of P.L.2010,
c.1 . . . .
c. (1) The State and all other applicable
employers shall make their annual normal
contribution to each system or fund as
determined by the applicable board of
trustees in consultation with the system's
or fund's actuary . . . .
(2) Each member of [PERS, PFRS, TPAF,
and other retirement systems] . . . shall
have a contractual right to the annual
required contribution amount being made by
27 A-5973-11T4
the member's employer or by any other public
entity. The contractual right to the annual
required contribution means that the
employer or other public entity shall make
the annual required contribution on a timely
basis to help ensure that the retirement
system is securely funded and that the
retirement benefits to which the members are
entitled by statute and in consideration for
their public service and in compensation for
their work will be paid upon retirement.
The failure of the State or any other public
employer to make the annually required
contribution shall be deemed to be an
impairment of the contractual right of each
employee. The Superior Court, Law Division
shall have jurisdiction over any action
brought by a member of any system or fund or
any board of trustees to enforce the
contractual right set forth in this
subsection. The State and other public
employers shall submit to the jurisdiction
of the Superior Court . . . and shall not
assert sovereign immunity in such an action.
If a member or board prevails in litigation
to enforce the contractual right set forth
in this subsection, the court may award that
party their reasonable attorney's fees.
d. This act shall not be construed to
preclude forfeiture, suspension or reduction
in benefits for dishonorable service.
e. Except as expressly provided herein and
only to the extent so expressly provided,
nothing in this act shall be deemed to (1)
limit the right of the State to alter,
modify or amend such retirement systems and
funds, or (2) create in any member a right
in the corpus or management of a retirement
system or pension fund. The rights reserved
to the State in this subsection shall not
diminish the contractual rights of employees
established by subsections a., b., and c. of
this section.
28 A-5973-11T4
In their complaint, the Berg intervenors asserted that from
2006 to 2011 the unfunded liability of the retirement systems
increased as follows: PERS increased from $2.6 billion to an
estimated $15.6 billion; TPAF increased from $5.8 billion to
$31.2 billion; and PFRS increased from $3.5 billion to $11
billion. During that same period the funding ratios decreased.
The State does not contest those allegations, which are
consistent with the actuarial reports in the record.
Intervenors allege that the increase in unfunded liabilities and
the decrease in funded ratios of the TPAF, PERS and PFRS are
attributable in significant part to the reduced contributions
from the State and local employers.
In the 2014 budget, the Legislature appropriated a $1.676
billion payment for the pension systems, consistent with the
funding formula set forth in the 2010 pension amendments.
N.J.S.A. 43:3C-14, L. 2010, c. 1, § 38. However, by Executive
Order 156 (May 20, 2014), the Governor reduced the State's
pension contribution by ordering the State Treasurer to freeze
expenditures.5 The Executive order was issued in response to
what the Governor characterized as an $875 million shortfall in
5
The validity of the Executive Order is not before us, and our
opinion is not intended to address that issue.
29 A-5973-11T4
expected State tax revenues and a total revenue gap of
approximately $1.3 billion.
PROCEDURAL HISTORY
On July 26, 2011, plaintiffs, Richard W. Berg and twenty-
five other retired government attorneys (plaintiffs), filed a
notice of claim in accordance with the statutory notice
requirement of the Contractual Liability Act (CLA), N.J.S.A.
59:13-5, asserting that they had contractual, statutory, and
constitutional rights to COLAs.
On December 2, 2011, plaintiffs filed a complaint, Berg v.
Christie, MER-L-2996-11, against the Governor, the Secretary of
State, the Director of the Division of Pensions (Director), the
Board of Trustees of PERS, the State Treasurer, and the State
(collectively defendants), challenging the constitutionality and
enforceability of the suspension of their COLAs under Chapter
78. 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). They sought a judgment
declaring Chapter 78 unconstitutional, a permanent injunction,
monetary damages, and attorneys' fees and costs.
30 A-5973-11T4
On February 2, 2012, defendants filed a Rule 4:6-2(e)
motion to dismiss for failure to state a claim upon which relief
can be granted. Plaintiffs filed a cross-motion for summary
judgment. Plaintiffs and defendants filed joint stipulations,
including a stipulation that reports cited by defendants in
their brief were admitted into evidence with the consent of the
parties. As a result, the motion to dismiss was converted into
a summary judgment motion. R. 4:6-2.
On April 16, 2012, intervenors, a group of state and local
active and retired employees and the labor organizations that
represented them, filed a motion on short notice to intervene,
on the COLA issue only.6 By order issued on May 2, 2012, the
trial court granted the motion for intervention pursuant to Rule
4:33-2. On May 8, 2012, intervenors filed a complaint in
intervention, asserting claims of violation of the Contract
6
On April 11, 2012, intervenors filed a separate "declaratory
judgment and class action" complaint in state court, New Jersey
Education Association v. State of New Jersey, MER-L-0771-12,
against the State, the Governor, and the State Treasurer,
challenging several provisions of Chapter 78, including
suspension of the COLAs. Assignment Judge Mary Jacobson stayed
the proceedings in New Jersey Education Association, MER-L-0771-
12, pending decision in Berg.
Previously, on November 17, 2011, intervenors had also
filed a complaint in federal district court. N.J. Educ. Ass'n
v. State, Civ. No. 11-5024 (D.N.J. March 5, 2012). On March 5,
2012, United States District Court Judge Anne Thompson dismissed
the federal complaint on sovereign immunity grounds under the
Eleventh Amendment to the United States Constitution.
31 A-5973-11T4
Clause (count one), violation of Due Process (count two), and
equitable estoppel.
On May 25, 2012, a Law Division judge conducted oral
argument on the motions, and issued a brief oral decision
granting defendants' motion for summary judgment. The judge
found that the suspension of COLAs under Chapter 78 was
constitutional because, under the Debt Limitation and
Appropriations Clauses, the Legislature retained continuing
authority to amend the pension systems. The judge did not
decide plaintiffs' Contract Clause, and other claims.7 On June
20, 2012, the judge issued an amended order dismissing
plaintiffs' complaints.8
II
On an appeal from a summary judgment order, our review is
de novo, and we owe no deference to the trial court's legal
interpretations. See Perez v. Professionally Green, LLC, 215
7
Nor did the judge at any point certify the case as a class
action. In fact, the plaintiffs in Berg emphasize, in their
reply brief, that theirs is not a class action.
8
On August 24, 2012, intervenors filed an amended complaint in
New Jersey Education Ass'n, MER-L-771-12, deleting their COLA
claims, class allegations, and damages claims. In October 2012,
defendants filed a motion to dismiss in that case. On February
21, 2013, Judge Jacobson issued a well-reasoned decision
granting defendants' motion to dismiss intervenors' amended
complaint.
32 A-5973-11T4
N.J. 388, 398-99 (2013). We agree with the Berg plaintiffs9 that
the trial court erred in premising its decision on the Debt
Limitation and Appropriations Clauses of the New Jersey
Constitution. The Appropriations Clause, N.J. Const. art. VIII,
§ 2, ¶ 2, requires "that the State's finances be conducted on
the basis of a single fiscal year covered by a single balanced
budget." N.J. Educ. Ass'n, supra, 412 N.J. Super. at 216. The
clause generally bars the courts from ordering the Legislature
to appropriate funds. City of Camden v. Byrne, 82 N.J. 133, 149
(1980). The Debt Limitation Clause, N.J. Const. art. VIII, § 2,
¶ 3, prohibits "'one Legislature from incurring debts which
subsequent Legislatures would be obliged to pay, without prior
approval by public referendum.'" City of Camden, supra, 82 N.J.
at 152 (citation omitted).
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. Compare N.J.S.A. 43:3B-4.1 with N.J.S.A.
43:3B-4a. During the years that the State skipped making its
9
We refer to the original plaintiffs and the intervenors,
collectively, as "the Berg plaintiffs."
33 A-5973-11T4
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. N.J. Educ. Ass'n,
supra, 412 N.J. Super. at 215 n.14. Hence, COLAs can be paid
currently without the need for any legislative appropriation.
Consequently, neither the Appropriations Clause nor the Debt
Limitations Clause is currently implicated here, where the issue
is payment to retirees from the pension funds rather than
payment by the Legislature into the funds. See City of Camden,
supra, 82 N.J. at 148-53; N.J. Educ. Ass'n, supra, 412 N.J.
Super. at 215 (noting the "clear distinction between the right
to receive pension benefits and the funding method adopted by
the Legislature to assure that monies are available for the
payment of such benefits.")
It may be argued that if the pension funds are not restored
to fiscal health, at some point the money will run out and an
appropriation will be needed to restore the funds' solvency. A
lawsuit aimed at requiring such an appropriation would implicate
both the Appropriations Clause and the Debt Limitation Clause.
See N.J. Educ. Ass'n, supra, 412 N.J. Super. at 216. However,
we conclude that in this lawsuit, such a potential eventuality
34 A-5973-11T4
does not trigger either clause. See Passaic, supra, 18 N.J. at
147 (finding no violation of the Debt Limitation Clause in the
creation of a pension fund to which State law provides the State
"shall" contribute); Enourato v. N.J. Bldg. Auth., 90 N.J. 396,
402-03, 410 (1982) (holding that contracts subject to
legislative appropriation do not violate the Debt Limitation
Clause, but recognizing that the State's failure to honor its
financial commitments may affect its bond rating).
Nor can we agree with the trial court's conclusion that
N.J.S.A. 43:3C-9.5(e) defeats plaintiffs' contract claim.
Subsection (e) reserves to the Legislature the "right to alter,
modify or amend" the retirement systems, "[e]xcept as expressly
provided herein . . . ." Ibid. (emphasis added). Reading
section 9.5 as a whole, the emphasized phrase clearly refers to
the rights created in sections 9.5(a) and (b), which are
exceptions to the reserved right to alter, modify or amend the
retirement systems. Thus, section 9.5 gives retired or vested
members a non-forfeitable right to their pension benefits as
described in subsections (a) and (b), while subsection (e)
allows the State to modify the pension systems as to employees
or retirees to whom subsection (b) does not apply.
We have considered the additional contentions raised by the
Berg plaintiffs, and we conclude that, to a large extent, they
35 A-5973-11T4
are recycling arguments that were litigated and decided
adversely to the intervenor-plaintiffs in the prior state and
federal lawsuits noted in section I of this opinion. Those
arguments were properly addressed and rejected by Judge Mary
Jacobson, New Jersey Education Association v. State, No. L-0771-
12 (Law Div. June 13, 2013), and Judge Anne Thompson, New Jersey
Education Association v. State, Civ. No. 11-5024 (D.N.J. March
5, 2012). With respect to the State's Eleventh Amendment
immunity, we add that the State may not "be forced to entertain
in its own courts suits from which it was immune in federal
court . . . ." Howlett v. Rose, 496 U.S. 356, 365, 110 S. Ct.
2430, 2437, 110 L. Ed. 2d 332, 346 (1990); see also Alden v.
Maine, 527 U.S. 706, 748, 119 S. Ct. 2240, 2263, 144 L. Ed. 2d
636, 673-74 (1999). Because the State has sovereign immunity
with respect to plaintiffs' federal causes of action,
plaintiffs' federal Contract Clause claims were properly
dismissed.10 See Allen v. Fauver, 167 N.J. 69, 75 (2001). With
the exception of their State Contract Clause claims (discussed
10
As discussed later in this opinion, because the Contract
Clauses in the State and Federal Constitutions are construed the
same way, dismissal of the federal claim has no impact on the
legal analysis of plaintiffs' state Contract Clause cause of
action. See Fid. Union Trust Co. v. N.J. Highway Auth., 85 N.J.
277, 299 (1981) (discussing parallel construction of Federal and
State Contract Clause).
36 A-5973-11T4
in section III, infra), the Berg plaintiffs' arguments are
without sufficient merit to warrant further discussion in a
written opinion. R. 2:11-3(e)(1)(E).
Turning to the DeLucia case, plaintiffs are former law
enforcement officers who were wounded in the line of duty and
retired on disability pensions paid by the Police and Firemen's
Retirement System (PFRS)11 In an effort to differentiate
themselves from the Berg plaintiffs, they filed a separate
lawsuit, raising claims based on the Victims' Rights Amendment,
N.J. Const. art. I, ¶ 22; the Crime Victim's Bill of Rights,
N.J.S.A. 52:4B-34 to -38; and the tax-exemption and non-
assignability provision of the PFRS statute, N.J.S.A. 43:16A-17.
In an oral opinion issued on August 24, 2012, the trial court
dismissed their complaint.
While we are not unsympathetic to the DeLucia plaintiffs
and the sacrifices they made during their law enforcement
careers, the statutory and constitutional provisions they cite
are irrelevant to the issue of their entitlement to a pension or
a COLA. Without relying on N.J.S.A. 43:3C-9.5, these plaintiffs
also argue more generally that a COLA represents deferred
compensation which the State cannot deny them. These and
related arguments were properly rejected by the trial court.
11
The former officers' wives are co-plaintiffs.
37 A-5973-11T4
Plaintiffs' appellate arguments do not merit further discussion
here. R. 2:11-3(e)(1)(E).12
Hence, we turn to the contract issue.
III
A. The Existence of a Contractual Right
Plaintiffs claim that the following language gives vested
or retired employees a contractual right to receive not only
basic pension benefits but COLAs:
a. For purposes of this section, a "non-
forfeitable right to receive benefits" means
that the benefits program, for any employee
for whom the right has attached, cannot be
reduced. The provisions of this section
shall not apply to post-retirement medical
benefits which are provided pursuant to law.
b. Vested members of [PERS, PFRS, TPAF, and
other retirement systems], upon the
attainment of five years of service credit
in the retirement system or fund or on the
date of enactment of this bill, whichever is
later, shall have a non-forfeitable right to
receive benefits as provided under the laws
governing the retirement system or fund upon
the attainment of five years of service
credit in the retirement system or fund or
on the effective date of this act, whichever
is later.
[N.J.S.A. 43:3C-9.5(a) and (b).]
12
We reach the same conclusion with respect to the separate
argument raised by pro se plaintiff Ouslander in the Berg case.
He seeks to differentiate himself from the remaining plaintiffs,
by claiming promissory estoppel based on having taken early
retirement. That argument is likewise unconvincing and warrants
no further discussion here. R. 2:11-3(e)(1)(E).
38 A-5973-11T4
We begin with some basic principles of statutory
interpretation. In construing any legislation, we attempt to
determine and effectuate the intent of the Legislature. Allen
v. V & A Bros., Inc., 208 N.J. 114, 127 (2011). We first
consider the statute's plain language, but "[w]hen 'the
Legislature's intent cannot be derived from the words that it
has chosen[,]' a court may use extrinsic tools such as
legislative history, legal commentary, sponsors' statements, or
a Governor's press release." Nini v. Mercer Cnty. Cmty. Coll.,
202 N.J. 98, 108 (2010) (citations omitted). Indeed,
"[s]tatutes cannot be read in a vacuum void of relevant
historical and policy considerations and related legislation."
Borough of Matawan v. Monmouth Cnty. Bd. of Taxation, 51 N.J.
291, 299 (1968).
Because pension legislation is remedial in nature, it
should generally be liberally construed in favor of the
employee. Klumb v. Bd. of Educ. of the Manalapan-Englishtown
Reg'l High Sch. Dist., 199 N.J. 14, 34 (2009). However, in this
case, the principle is in tension with the general rule that
statutes are not to be construed as creating contracts.
Because the primary role of the Legislature is to enact
statutes, not to create contracts, our courts are generally
reluctant to imply a contract created by legislation. N.J.
39 A-5973-11T4
Educ. Ass'n, 412 N.J. Super. at 206. That reluctance extends to
the State's pension funds. The concept was explored at length
in Spina, supra, 41 N.J. at 403-04, which involved a pension
crisis arising from a combination of overly generous benefits
and inadequate funding. In upholding the Legislature's power to
increase the retirement age and years-of-service requirement,
the Court declined to characterize the pension right as
contractual.13
In these circumstances, it seems idle
to sum up either the public's or the
employee's contribution in one crisp word.
We have no doubt that pension benefits are
not a gratuity within the constitutional ban
against the donation of public moneys. . . .
And we think the employee has a property
interest in an existing fund which the State
could not simply confiscate. Whether the
interest thus secured from arbitrary action
is limited to the employee's own
contribution or extends to the entire fund
and whether it becomes still more secure
upon retirement, we need not say. . . . The
usual situation, as in the case before us,
is a fund that cannot meet all of the
present and future demands upon it. And the
question is whether the Legislature is free
to rewrite the formula for the good of all
who have contributed.
[Spina, supra, 41 N.J. at 402 (citations
omitted) (emphasis added).]
13
The Court noted that during the 1947 Constitutional
Convention, the drafters rejected language conferring on public
employees a contractual right to pension benefits. Id. at 400
n.3; see N.J. Educ. Ass'n, supra, 412 N.J. Super. at 294-95.
40 A-5973-11T4
The Court further observed that the contract approach to
pension benefits was likely to hamper the Legislature's ability
to deal with funding crises affecting the pension fund:
The difficulty with the contract
approach is that it cannot withstand the
pressures upon it.
If the contractual obligation of the
public employer is really to equal the
expectations of all of the rank-and-file
members, it must include a guaranty by the
employer of the solvency of the fund. . . .
. . . .
Moreover, even as to the disposition of the
fund itself, the contract concept is
cumbersome. What happens if the plan is
unsound, so that little or nothing will
remain for those presently contributing? .
. . As a practical matter, legislative
intervention is the only sensible approach.
. . . True the needed power in the
Legislature to revise a plan without the
consent of the parties to the "contract"
could be said to be "implied," but it seems
odd to say the State may unilaterally
rewrite its own contract . . . . We think
it more accurate to acknowledge the
inadequacy of the contractual concept.
[Id. at 403-04.]
Mindful of our required hesitancy to infer legislative
contracts, and the practical difficulties the Court described in
Spina, we nonetheless find that the non-forfeitable rights
statute enacted in 1997 created a contractual right. Based on
our review of the legislative history of the Act, we conclude
41 A-5973-11T4
that the creation of a contractual right to pension benefits
stemmed from concerns raised by public employee unions after the
State, through 1994 legislation, re-valued pension fund assets,
L. 1994, c. 62, and later skipped making contributions to the
pension funds.
During a May 20, 1996 legislative hearing on the State's
public pension systems, then-State Treasurer Bryan Clymer
insisted that the pension systems were fiscally sound, despite
concerns expressed by public employee unions. Public Hearing
Before Senate State Management, Investment and Financial
Institutions Committee (May 20, 1996) (Pension Hearing). He
stated:
Public employee and teacher unions opposed
pension reform, and are now suing me
personally in Federal court in an attempt to
overturn the reform. Their argument is that
we are underfunding the retirement systems
and, in the near future, contributions will
rise dramatically. This, they claim, will
result in voter and taxpayer outcry for a
reduction in pension benefits.
[Pension Hearing at 3-4.]
In response, a union representative challenged Clymer to
support S-1132, a recently-introduced bill that would guarantee
public employees a contractual right to their pension benefits:
We believe that S-1132 achieves the level of
security that most public employees are
entitled to and that Treasurer Clymer
maintains they have. If the pension funds
42 A-5973-11T4
are as secure as the Treasurer and his
actuary maintain, he should have no problem
signing off on S-1132. This bill simply
affirms that vested members of the various
public retirement systems have a contractual
property right to a secure and financially
sound retirement system and the benefits
provided by that system.
[Pension Hearing at 53.]
The hearing was chaired by Senator Peter Inverso,14 the
principal sponsor of S-1119, which was eventually adopted as the
1997 non-forfeiture legislation. Senator Inverso introduced S-
1119 on May 9, 1996, two weeks before the hearing. Unlike S-
1132, the bill the unions supported, S-1119 originally did not
contain a contractual rights provision.
The original sponsor's statement, as well as the language
of the original bill, made clear that its purpose was "to
conform the administration of the [pension systems] to federal
Internal Revenue Code requirements in order to maintain the
qualified status of these retirement systems and pension funds."
Sponsor's Statement to Senate Bill No. 1119, at 4 (May 9, 1996).
The bill stemmed from an investigation by the Internal Revenue
Service based on allegations that the State had illegally
diverted pension funds to other uses. The lawsuit had been
14
Senator Inverso noted during the hearing that he was a
certified public accountant.
43 A-5973-11T4
settled on March 21, 1996, with the State agreeing to restore
the funds to the pension system.
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. The actuary urged, "it is critical that this
Legislature guarantee the benefits that employees have earned"
and argued that the Legislature should accomplish that goal by
providing a contractual right to the benefits. Pension Hearing
at 68-69.
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.
[Pension Hearing at 69.]
Senator Inverso indicated that he was prepared to negotiate with
the "administration" (presumably, the Executive Branch) on that
point. Pension Hearing at 70.
44 A-5973-11T4
On April 17, 1997, Senate Bill No. 1119, was amended by the
Senate Budget and Appropriations Committee to add the non-
forfeiture provision.15 The Committee Statement to the bill
reiterated its purpose to ensure that the pension systems
conformed to Internal Revenue Code requirements. However, the
Statement also recited that, with the exception of medical
benefits, the bill amendments
[p]rovide a vested member of a system or
fund listed in the bill with a non-
forfeitable right to receive benefits as
provided under the laws governing the
retirement system or fund in effect on the
date of attainment of five years of service
credit in the system or fund by the member.
[Committee's Statement to Senate Bill No.
1119, at 2 (April 17, 1997).]
Nothing in the Statement suggested that COLAs, as opposed to
medical benefits, were to be excluded from the non-forfeitable
rights provision. The Statement also noted that the bill
required the State "to make annual normal contributions and
annual unfunded accrued liability contributions to each
retirement system or fund except under two circumstances set
forth in the bill." Ibid.
15
At that time, Senator Inverso was the Vice-Chair of the
Committee. See APPROPRIATIONS HANDBOOK FY 1997-98,
http://www.state.nj.us/treasury/omb/publications/98approp/pdf/as
ection.pdf (last visited June 12, 2014).
45 A-5973-11T4
In a recent case, the State conceded that retirees have a
contractual right to the basic pension benefit they began
receiving upon retirement. N.J. Educ. Ass'n, supra, 412 N.J.
Super. at 215. N.J. Educ. Ass'n involved a challenge by members
of the Teachers' Pension and Annuity Fund to the State's method
of funding the pension system. We affirmed the dismissal of the
lawsuit, "finding that TPAF members, although entitled by law to
the receipt of vested benefits upon retirement, possess no
constitutionally-protected contract right to the particular
level, manner or method of State funding provided in the
statute." Id. at 196. Although the contractual right to vested
benefits on retirement was not directly at issue in N.J. Educ.
Ass'n, we recognized the "non-forfeitable rights" language of
N.J.S.A. 43:3C-9.5:
The general statutes recognize that
vested members have "a non-forfeitable right
to receive benefits," which they define as
"mean[ing] that the benefits program, for
any employee for whom the right has
attached, cannot be reduced." N.J.S.A.
43:3C-9.5(a), (b). However, they also
reserve the State's right to alter the
"retirement systems and funds," and they
deny that members have rights in the pension
funds themselves . . . .
[Id. at 200.]
We also acknowledged the State's concession that section 9.5
created contract rights:
46 A-5973-11T4
The fact that plaintiffs have no
constitutionally-protected vested contract
right in systematic funding of TPAF does not
mean that the pension statutes confer no
rights at all. There is a clear distinction
between the right to receive pension
benefits and the funding method adopted by
the Legislature to assure that monies are
available for the payment of such benefits.
As to the former, N.J.S.A. 43:3C-9.5(b)
provides that members "shall have a non-
forfeitable right to receive benefits as
provided under the laws governing the
retirement system or fund upon the
attainment of five years of service credit
in the retirement system or fund. . . ."
(emphasis added). The "non-forfeitable
right" means "that the benefits program, for
any employee for whom the right has
attached, cannot be reduced." N.J.S.A.
43:3C-9.5(a). The essence of the right,
acknowledged by the Attorney General, is the
receipt of promised funds upon retirement,
presumably at the rate fixed by law when
such benefits were conferred. Indeed, the
Attorney General concedes that in granting a
non-forfeitable right to receive benefits,
"the Legislature intended to create
enforceable contractual rights."
[Id. at 215 (first emphasis in original,
second emphasis added) (footnote omitted).]
We noted that "[a]s to this non-forfeitable right" both
parties agreed that TPAF would "continue to have enough assets
[to pay pension benefits] for at least the next thirty years . .
. ." Id. at 215 n.14. Hence, there had been "no impairment —
much less a substantial one — of plaintiffs' non-forfeitable
right to receive accrued pension benefits." Ibid. We
concluded, however, that one Legislature could not bind a future
47 A-5973-11T4
Legislature to make an appropriation for the pension fund,
without running afoul of the Appropriations Clause. Id. at 216.
In N.J. Educ. Ass'n, the State's position on the contract
question was consistent with opinions previously issued by the
Office of the Attorney General and the Office of Legislative
Services. 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.
Based on the foregoing, we begin from the premise that the
"non-forfeitable rights" clause created a contractual right to
receive, upon retirement, pension benefits at the rates in
effect at the time the employee attained five years of service
or at the time the non-forfeitable rights statute was passed,
whichever was later. The issue in this case is whether, in
enacting the non-forfeitable rights clause, the Legislature
intended that cost of living increases be included in that
contractual right.
The State argues that because COLAs are controlled by the
Pension Adjustment Act, while each individual pension system or
retirement plan is governed by its own separate legislation, the
term "benefits" in the non-forfeitable rights clause should be
48 A-5973-11T4
interpreted as applying only to the benefits provided by each
separate pension/retirement system and not to COLAs.
The history of the pension statutes, including amendments
to the Pension Adjustment Act, 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, N.J.S.A. 43:3C-9.5, guaranteed in 1997. 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. See N.J.S.A. 43:16A-15.6 (L.
1989, c. 204, § 7); N.J.S.A. 43:16A-15.7 (L. 1991, c. 511, § 3);
N.J.S.A. 43:15A-24.1 (L. 1990, c. 6, § 2). As plaintiff
Ouslander points out, the Committee's Statement to Senate Bill
No. 665, which was eventually codified at N.J.S.A. 43:15A-24.1,
explains that the bill "provides that the COLA payment would be
recognized as a liability of the system in the same manner as
other retirement benefits are now liabilities." Committee's
Statement to Senate Bill No. 665, at 1 (Feb. 5, 1990). Hence,
49 A-5973-11T4
we reject the State's argument that the reference, in section
9.5(b), to a retiree's non-forfeitable entitlement "to receive
benefits as provided under the laws governing the retirement
system or fund" refers only to benefits under the basic pension
funds and not to COLAs.16 We conclude that the laws governing
COLAs are part of the laws governing the retirement systems or
funds.
The State also contends that when the non-forfeitable
rights statute, N.J.S.A. 43:3C-9.5, was enacted, the Pension
Adjustment Act, N.J.S.A. 43:3B-2, explicitly provided that COLAs
could be decreased, revoked, or repealed "as otherwise provided
in this act." Consequently, the State argues, the Legislature
would not logically have intended to include COLAs in the non-
16
Plaintiffs argue that, in other contexts, including the
valuation of assets during a divorce, and calculation of a
disability-retired police officer's compensation for purposes of
N.J.S.A. 40A:14-154, courts have recognized COLAs as an integral
part of a retiree's pension. See Hayden v. Hayden, 284 N.J.
Super. 418, 423 (App. Div. 1995); Brown, supra, 319 N.J. Super.
at 511-12. The State relies on another matrimonial case, Moore
v. Moore, 114 N.J. 147, 163 (1989), for the proposition that
COLAs are "contingent on state appropriation." The argument is
unpersuasive. The quoted language referred to an expert report
written in 1982, id. at 152, when COLAs were still funded on a
pay-as-you-go basis. Further, Moore was decided on February 15,
1989. The PFRS statute, the source of the husband's pension in
that case, was amended on December 20, 1989, to provide that
COLAs were to be funded and paid for in the same manner as
regular pension benefits. See N.J.S.A. 43:16A-15.6; L. 1989 c.
204, § 7.
50 A-5973-11T4
forfeitable rights provision because, as defined in section 2 of
the Pension Adjustment Act, COLAs were always subject to change
by amendment to the Adjustment Act, and the Legislature should
not be deemed to have repealed section 2 by implication. The
State thus argues that the non-forfeitable rights in N.J.S.A.
43:3C-9.5 cannot be read to impliedly repeal N.J.S.A. 43:3B-2,
and the State remained free to change future COLA rates by
amending the Pension Adjustment Act.
We conclude this argument is based on a misreading of
subsection 3B-2, which reads in pertinent part:
The monthly retirement allowance or pension
originally granted to any retirant . . .
shall be adjusted in accordance with the
provisions of this act provided, however,
that:
. . . .
Pension adjustments shall not be paid to
retirants or beneficiaries who are not
receiving their regular, full, monthly
retirement allowances, pensions or
survivorship benefits. The adjustment
granted under the provisions of this act
shall be effective only on the first day of
a month, shall be paid in monthly
installments, and shall not be decreased,
increased, revoked or repealed except as
otherwise provided in this act. No
adjustment shall be due to a retirant or a
beneficiary unless it constitutes a payment
for an entire month; provided, however, that
an adjustment shall be payable for the
entire month in which the retirant or
beneficiary dies.
51 A-5973-11T4
[N.J.S.A. 43:3B-2 (emphasis added).]
We read the highlighted language, on which the State
relies, as language of limitation. Specifically, the language
limits changes in previously-granted COLAs to those specific
situations allowed by the Pension Adjustment Act. For example,
N.J.S.A. 43:3B-3 sets forth the formula for calculating COLAs
each year. Other provisions address the voluntary waiver of a
right to increased retirement allowances, N.J.S.A. 43:3B-6, the
cessation of payments if monies are not appropriated, N.J.S.A.
43:3B-5,17 and the termination of COLA benefits if the
Legislature provides for a "blanket increase in original
retirement allowances." N.J.S.A. 43:3B-8. In context, we read
section 2 as limiting the extent to which a COLA that was
already awarded could be reduced, increased or revoked. Nothing
in its language suggests that the Legislature could not, in
separate legislation, contractually guarantee the right to
receive a COLA. Hence, N.J.S.A. 43:3B-2 and N.J.S.A. 43:3C-9.5
are compatible and, contrary to the State's argument, the latter
does not implicitly "repeal" the former.
During the 1996 Pension Hearing, the participants discussed
the basic pension benefits and COLAs as part of the same system.
17
This section was rendered obsolete when the pension statutes
were amended to provide for pre-funding of COLAs instead of
funding on a pay-as-you-go basis through annual appropriations.
52 A-5973-11T4
See, e.g., Pension Hearing at 55. 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. That is where the sensitivity of
the cost is going to come in." Pension Hearing at 2, 77.
Moreover, in section 9.5(a), the Legislature specifically
excepted health benefits from the non-forfeitable right it
created. Given the historical context in which the section was
enacted, we conclude that if the Legislature also intended to
except COLAs, it would have specifically so stated. In
construing a statutory provision that contains a specific
exception, "'doubts should be resolved in favor of the general
provision rather than the exceptions.'" Prado v. State, 186
N.J. 413, 426-27 (2006) (citation omitted).
The approach taken in the non-forfeitable rights statute
enacted in 1997, was also consistent with ERISA, which has been
construed as including COLAs, but not health benefits, as part
of the accrued benefit to which an employee is entitled on
53 A-5973-11T4
retirement and which cannot, absent very limited circumstances,
be decreased after the employee retires. See 29 U.S.C.A. §
1054(g)(1); Williams v. Rohm & Haas Pension Plan, 497 F.3d 710,
713 (7th Cir. 2007), cert. denied, 552 U.S. 1276 (2008).18 "'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 . . . .'" Williams, supra, 497 F.3d
at 713 (citation omitted, second and third alterations in
original).
For all of these reasons, we conclude that the non-
forfeitable right provision, which creates a contractual right
to receive pension benefits, applies to COLAs. In the next
section, we address the constitutional implications of that
conclusion.19
18
That approach may also have reflected Senator Inverso's
observation, at the Pension Hearing, that the right to public
pension benefits should be protected in the way private pension
benefits are protected under ERISA. See Pension Hearing at 69.
19
We have intentionally refrained from addressing the scope of
the class entitled to protection under section 9.5. As
previously noted, a class has not been certified in this case,
and the record contains minimal information about the individual
plaintiffs. Those employed between 1997 and 2010 gave the State
the benefit of their labor in exchange for the contractual
protection section 9.5 provided, and those who retired during
that time presumably did so in reliance on having contractually-
guaranteed COLA benefits in retirement. The parties have not
(continued)
54 A-5973-11T4
B. The State and Federal Contract Clauses
As we recently recognized, while the State and Federal
Constitutions protect legislative impairment of the obligations
of contracts, that protection is not absolute:
The Federal and State Constitutions prohibit
the passage of any "law impairing the
obligation of contracts." U.S. Const. art.
I, § 10, cl. 1; N.J. Const. art. IV, § 7, ¶
3. "The two clauses are applied
coextensively and provide the same
protection." N.J. Educ. Ass'n v. State, 412
N.J. Super. 192, 205 (App. Div.) (citation
and internal quotation marks omitted),
certif. denied, 202 N.J. 347 (2010). In
addressing a claim for violation of the
Contract Clause, the threshold inquiry is
whether the law "operated as a substantial
impairment of a contractual relationship."
Allied Structural Steel Co. v. Spannaus, 438
U.S. 234, 244, 98 S. Ct. 2716, 2722, 57 L.
Ed. 2d 727, 736 (1978). In making that
determination courts inquire whether: 1)
"there is a contractual relationship"; 2)
the "change in law impairs that contractual
relationship"; and 3) "the impairment is
substantial." Gen. Motors Corp. v. Romein,
503 U.S. 181, 186, 112 S. Ct. 1105, 1109,
117 L. Ed. 2d 328, 337 (1992). If the state
law constitutes a substantial impairment, it
may nonetheless "be constitutional if it is
reasonable and necessary to serve an
important public purpose." U.S. Trust Co.
v. New Jersey, 431 U.S. 1, 25, 97 S. Ct.
1505, 1519, 52 L. Ed. 2d 92, 112 (1977).
(continued)
briefed, and we have not addressed, whether the necessary
elements for the formation of a contract exist with respect to
employees who retired before section 9.5 was enacted, and who
had since July 1, 1970, been receiving COLAs. L. 1969, c. 169.
That issue may be raised on remand.
55 A-5973-11T4
[Teamsters Local 97, supra, 434 N.J. Super.
at 425.]
See also Farmers Mut. Fire Ins. Co. v. N.J. Prop. Liab. Ins.
Guar. Ass'n, 215 N.J. 522, 546 (2013).
As we also stated in Teamsters Local 97, supra, 434 N.J.
Super. at 402-03,
the money that funds employee benefits is
not unlimited. The State's officials are
charged with the profound responsibility not
only of ensuring that the health care and
pension systems remain fiscally sound, but
also that the State remains fiscally strong
and that the burden on the State's taxpayers
does not become intolerable.
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 Contract Clause is not an absolute bar
to subsequent modification of a State's own
financial obligations. As with laws
impairing the obligations of private
contracts, an impairment may be
constitutional if it is reasonable and
necessary to serve an important public
purpose. 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
56 A-5973-11T4
important public purpose, the Contract
Clause would provide no protection at all.
[U.S. Trust Co., supra, 431 U.S. at 25-26,
97 S. Ct. at 1519, 52 L. Ed. 2d at 112
(footnote omitted).]
Further, in enacting a law that impairs contractual rights, "a
State is not free to impose a drastic impairment when an evident
and more moderate course would serve its purposes equally well."
Id. at 31, 97 S. Ct. at 1522, 52 L. Ed. 2d at 115.
As noted earlier, in evaluating a Contract Clause claim, a
court must consider whether the challenged legislation "(1)
'substantially impair[s] a contractual relationship,' (2)
'lack[s] a significant and legitimate public purpose,' and (3)
is 'based upon unreasonable conditions and . . . unrelated to
appropriate governmental objectives.'" Farmers Mut. Fire Ins.,
supra, 215 N.J. at 546 (citations omitted).
In this case, the State argues that the pension system was,
and still is, in financial difficulty that must be addressed
lest the system eventually collapse. Our Supreme Court has
acknowledged "the serious fiscal issues that confront the State
and that led to the passage of Chapter 78." DePascale v. State,
211 N.J. 40, 63 (2012). Moreover, the fiscal health of the
pension system is of importance to both current and future
retirees. Although, even without a current legislative
appropriation, there is now money in the pension funds from
57 A-5973-11T4
which to pay COLAs, unless there is a long-term financial
solution, the money in the pension funds may eventually run out.
In another context, the Court has interpreted Spina as
endorsing the State's authority to modify pension benefits when
needed to ensure the integrity of the pension fund. In
disagreeing with a County's interpretation of a statute
mandating uniform benefits for all employees, the Court stated:
While it has been held, moreover, that
pension benefits can be modified in the
interest of assuring the integrity of the
pension system despite the compensatory
aspect of their nature, it seems clear that
they cannot be rescinded unilaterally when
the underlying motivation is not
preservation of the integrity of the benefit
system but the erroneous belief that the
benefits must be discontinued.
[Gauer v. Essex Cnty. Div. of Welfare, 108
N.J. 140, 150 (1987) (citing Spina, supra,
41 N.J. at 402).]
It may be argued that the Chapter 78 legislation was part
of a reasonable, tripartite approach to the pension-funding
problem, which required some contribution from all the
stakeholders – additional pension contributions from current
employees, the resumption of normal pension contributions by the
State with additional contributions to pay down the shortfall,
and the temporary cessation of COLAs for retirees. See L. 2010,
c. 1 § 38; L. 2011, c. 78, §§ 8, 10, 15, 25. It may further be
argued that in temporarily suspending COLAs, the Legislature
58 A-5973-11T4
chose a "moderate course" rather than the more drastic step of
reducing the basic pension benefit for retirees. See U.S. Trust
Co., supra, 431 U.S. at 31, 97 S. Ct. at 1522, 52 L. Ed. 2d at
115.
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." See testimony of Senator
Sweeney (a sponsor of Senate Bill No. 2937) before the Senate
Budget and Appropriations Committee on June 16, 2011.
In a recent submission, plaintiffs further point out that
the State is proposing to renege on its promised contributions,
through an Executive Order suspending a portion of the State's
planned pension payments for this fiscal year and the next. See
Executive Order 156 (May 20, 2014). Of course, in response, the
State would no doubt contend that there were other reasons for
59 A-5973-11T4
the pension shortfall, including drastic investment losses
caused by the financial "meltdown" in the stock market, and that
it intends to make as large a contribution as it can in the
current and coming fiscal years, consistent with avoiding
another general budget crisis.
As noted below, on this record, we cannot determine which
side has the better arguments.20 Further, even if we were to
currently view the suspension of COLAs as a moderate and
reasonable step, that view might change in the future, depending
on how long the suspension lasts, how quickly the cost of living
increases, and whether, and to what extent, the State meets its
own obligations under the tripartite approach it created.
While we note these issues, we agree with intervenor-
plaintiffs and defendants, who both argue that, if we find
section 9.5 created contractual rights, we cannot fairly decide
the constitutional impairment-of-contract claim on this record.
Because the trial court did not address the contract clause
issue at all, and because a contract-impairment claim presents
20
The summary judgment record the parties created was extremely
limited, consisting of a few factual stipulations and an
agreement that several actuarial reports and similar documents
would be admitted in evidence. There were no expert depositions
or other expert analysis of the evidence. By contrast, in N.J.
Educ. Ass'n, the trial court held a four-day bench trial on the
contract impairment issue. See N.J. Educ. Ass'n, supra, 412
N.J. Super. at 201.
60 A-5973-11T4
"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. Hence, we remand
this case to the trial court for further proceedings consistent
with this opinion. If there are additional arguments the
parties wish to raise on remand concerning the impairment-of-
contracts issue, they may do so.
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. See Spina, supra, 41 N.J. at
404-05.
Affirmed in DeLucia (A-0632-12). Reversed and remanded in
Berg (A-5973-11, 6002-11).
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