N.J. contribution ruling called "double-edged sword'

The New Jersey Supreme Court's ruling that allowed the state to renege on a pension funding promise is seen as “a double-edged sword” by ratings agencies.

The ruling June 9 provides short-term stability and gives the state some breathing room to get its financial house in order. But if legislators don't institute long-term solutions, the ruling will only end up worsening the state's situation, the agencies said.

The high court supported Gov. Chris Christie's withholding of payments to the New Jersey Pension Fund for the fiscal year ending June 30, saying the governor's backing out on a promise didn't violate the state constitution.

In a 5-2 vote, the court reversed a February ruling by state Superior Court Judge Mary Jacobson in Trenton, who said the governor had violated the law when he announced he would withhold $1.57 billion in promised payments to the $79.2 billion Trenton-based pension fund. Mr. Christie was sued by more than a dozen unions, seeking to restore the full payment.

If the Supreme Court had ruled against Mr. Christie, the state Legislature and the governor would have been hard-pressed to come up with the extra money quickly. Mr. Christie has repeatedly said he wouldn't raise taxes to help finance the pension fund.

“This decision is an important victory not only for our taxpayers who simply cannot afford these unsustainably high costs, but for limited, constitutional government that recognizes the proper role of the executive and legislative branches of government,” Mr. Christie said in a prepared statement.

“This is a disappointing decision for the teachers, firefighters, police officers and thousands of other public workers in New Jersey who have devoted their lives to serving others and don't ask for much in return, just the modest retirement promised to them,” said Bailey Childers, executive director of the National Public Pension Coalition, in a prepared statement. Coalition members include public-sector unions.

A statement from Standard & Poor's called the ruling a “double-edged sword. While it averts a potential liquidity crunch, it may do so at the expense of the state's liability position, which has steadily deteriorated over several years.”

The court's decision “provides the state with more time to address its pension liabilities, and potentially some additional leverage in negotiations with labor unions,” the S&P statement said. “However, if this window of time does not produce a solution to pension and other post-retirement liabilities, budget and credit pressure will accelerate and the state's rating could be vulnerable to further downgrade.”

New Jersey's general obligation debt is rated A with a stable outlook. The state's rating is the second worst among states tracked by Standard & Poor's. Only Illinois, with an A- rating and a negative outlook is worse.

“This decision stabilizes the state's fiscal 2015 financial position ... and preserves the state's expected budget flexibility for fiscal 2016,” said Baye Larsen, vice president and lead analyst for New Jersey at Moody's Investors Service, in a statement. “However, long term, this reinforces the state's ongoing reliance on one-time budget solutions and will perpetuate large structural imbalances and a rapidly increasing pension burden.”

The state Supreme Court's ruling focused on Mr. Christie's withholding the money for the pension fund based on a law he signed in 2011. This law represented an agreement with the state Legislature, offering guaranteed state payments to the pension fund in return for changes in the pension system. These changes included raising the retirement age for certain public employees and requiring employees to contribute more to the pension fund.

Mr. Christie had promised a $2.25 billion contribution for the current fiscal year, but he announced in May 2014 that the state would contribute only $681 million. He also used his line-item veto in late June 2014 to reject an attempt by the Legislature to put the whole $2.25 billion into the budget for the fiscal year ending June 30, 2015.

Mr. Christie argued in court that he had the right to reduce the payment based on his exercising a line-item veto in the budget that, according to the state constitution, must be balanced each year.

In the June 9 ruling, the Supreme Court addressed arguments by the various unions that said their pension rights are protected by a section of state law called Chapter 78. This section says, in part, that participants have a “contractual right to the annual required contribution amount” by the state. If the state doesn't make this required amount, it's “an impairment” of the contractual right, the law says.

But the court ruled that “Chapter 78 does not create a legally enforceable contract that is entitled to constitutional protection.” The state constitution prevents the creation of “a legally binding enforceable contract compelling multiyear financial payments in the sizable amounts called for by the statute,” the ruling stated.

While the court said it recognized that “the state must get its financial house in order,” the opinion added, “the court cannot resolve that need in place of the political branches. ... This is not an occasion for the judiciary to act on the other branches' behalf.”

This is the second time Mr. Christie has prevailed in a legal dispute over withholding money from the New Jersey Pension Fund. In May 2014, Mr. Christie issued an executive order saying he would cut a state payment to the pension fund for the fiscal year ended June 30, 2014.

Mr. Christie reduced the payment to $696 million from a promised $1.58 billion, citing a shortfall in overall state receipts. Ms. Jacobson, the Superior Court judge, upheld his decision, saying he had the legal right in an emergency to make sure the state achieved a balanced budget.

There's still another pension challenge pending. Many of the unions that sued the governor over the fiscal 2014 and fiscal 2015 pension payments also are suing over pension funding for the fiscal year ending June 30, 2016.

The unions said the governor's decision to contribute $1.3 billion to the pension fund was far less than the promised amount of $3.1 billion based on the 2011 legislation.

Ms. Jacobson, who has ruled on the fiscal 2014 and fiscal 2015 challenges by the unions, said in May that she would delay hearing the case until the StateSupreme Court had issued its opinion. In this latest case, the unions are using a similar argument that was dismissed by the Supreme Court on last week, that Chapter 78 represents a contract for guaranteeing payments to the pension system.