Christopher Burgos v. State of New Jersey (075736)
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Opinion
SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interest of brevity, portions of any opinion may not have been summarized.)
Burgos v. State of New Jersey (A-55-14) (075736)
Argued May 6, 2015 – Decided June 9, 2015
LaVECCHIA, J., writing for a majority of the Court.
In this appeal the Court considers whether a 2011 statutory enactment that requires the State to make certain annual contributions to public pension funds created an enforceable contract that is entitled to constitutional protection.
The State’s public pension systems are defined-benefit plans, which guarantee participants a calculable amount of benefits payable upon retirement based on the participant’s salary and time spent in the pension system. The benefits are paid using revenues received from employee contributions, public employer (i.e., State) contributions, and investment returns. Under the statutes governing the pensions systems, the Legislature has required the State to contribute not only the present value of the actual benefits that active pension members earned in the current year, but also the amounts necessary to amortize the systems’ unfunded liabilities over a period of years. The combination of these amounts is known as the annually required contribution (ARC).
In 2011, with the enactment of L. 2011, c. 78 (Chapter 78), the Legislature added language explicitly declaring that each member of the State’s pension systems “shall have a contractual right to the annual required contribution amount” and the failure of the State to make the required contribution “shall be deemed to be an impairment of the contractual right.” A separate statutory provision, enacted earlier, required the State to increase its ARC beginning with fiscal year 2012 (FY12) over the course of seven years at increments of 1/7 of the ARC per year, until the contribution covered the full ARC.
The State made the required contributions in FY12 and FY13, and the Appropriations Act signed into law for FY14 included the required contributions of 3/7 of the ARC. In February 2014, the Governor released the FY15 proposed budget, which also included funding to satisfy the State’s required payment (i.e., 4/7 of the ARC). On May 20, 2014, the Governor issued Executive Order 156, which reduced the State payments into the pension systems for FY14, explaining that the reduction was due to a severe and unanticipated revenue shortfall. Instead of paying the required 3/7 of the ARC contribution, which totaled $1.582 billion, the State made a total contribution of $696 million for FY14. The next day, citing new information that placed the State’s projected revenue at less than previous projections, the State Treasurer announced that the proposed budget for FY15 was being revised to reduce the amount that would be contributed to pension systems. The revised FY15 budget thus advanced would include a total contribution of $681 million, reflecting $1.57 billion less than what was required.
In response, plaintiffs – individuals and unions acting on behalf of hundreds of thousands of New Jersey State public employees – filed complaints alleging statutory violations, impairment of contractual rights under the New Jersey and United States Constitutions, violations of substantive and procedural due process under both Constitutions, a violation of plaintiffs’ Equal Protection rights, promissory estoppel, and violations of the New Jersey Civil Rights Act. Plaintiffs sought injunctive and mandamus relief for both FY14 and FY15. The trial court consolidated plaintiffs’ claims into one action.
With respect to the budgetary action involving the then-imminently concluding FY14, the Law Division upheld the Governor’s determination not to make the required FY14 ARC payment, declaring the action lawfully within the Executive’s emergency powers and reasonable and necessary under the Contracts Clauses of the New Jersey and United States Constitutions. The court held that plaintiffs’ claims for FY15 were not ripe because the Legislature had not yet passed a FY15 Appropriations Bill. When the Legislature passed its FY15 Appropriations Bill, it included the full 4/7ths required ARC, or $2.25 billion. This was financed, in part, by companion bills establishing new taxes whose projected revenue streams were incorporated into the Legislature’s anticipated revenue for FY15. On June 30, 2014, Governor Christie exercised his line-item veto authority deleting, among other items, $1.57 billion of the State’s required pension payment from the Appropriations Act. In his line-item veto message, Governor Christie stated that he opposed raising taxes to pay for the budget deficit, that he eliminated the new revenues projected for new taxes as presented by the Legislature, and cited his constitutional responsibility to deliver a balanced budget as the reason for reducing the State’s FY15 contribution. The Legislature did not take action to override the line-item veto. Therefore, the 2015 Appropriations Act became law, subject to the line-item veto changes.
Plaintiffs filed amended complaints in the Law Division. The State responded by filing a motion to dismiss, and plaintiffs, in turn, filed a motion for summary judgment. Plaintiffs argued that, in enacting Chapter 78, the State undertook a contractual obligation to make the ARC payment to the pension system and that the State’s failure to make the full FY15 ARC payment constituted an impairment of that contract in violation of the Contracts Clauses of the State and Federal Constitutions. Plaintiffs requested that the court require the Legislature and the executive branch to adopt an appropriations act consistent with the contractual obligations outlined in Chapter 78.
The State asserted that Chapter 78 could not create a valid contract right because it violated the Appropriations and Debt Limitation Clauses and the line-item veto provision of the New Jersey Constitution. Even assuming, but not conceding, that an enforceable contract right was created, the State maintained that it did not substantially impair that contract right. Further, again assuming but not conceding that substantial impairment occurred, the State submitted that its decision was reasonable and served a legitimate public purpose.
The trial court issued a detailed and comprehensive opinion on February 23, 2015, that granted summary judgment to plaintiffs on their impairment-of-contract claims and denied defendants’ motion to dismiss. The court accepted the argument that Chapter 78 created a contract and that the State’s failure to appropriate the full value of ARC in the FY15 Appropriations Act substantially impaired plaintiffs’ rights under the contract. In so finding, the court rejected arguments that Chapter 78 was unenforceable as violative of the Debt Limitation Clause, the Appropriations Clause, and the gubernatorial line-item veto power. The court did not order a specific appropriation, but rather determined to give the other branches an opportunity to act in accordance with the court’s decree.
The State filed a motion for leave to appeal to the Appellate Division, and shortly thereafter, moved for direct certification to this Court. The motion was unopposed. On April 6, 2015, this Court issued an order granting direct certification, establishing a briefing schedule, and setting the matter down for oral argument on May 6, 2015.
HELD: Chapter 78 does not create a legally enforceable contract that is entitled to constitutional protection.
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SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interest of brevity, portions of any opinion may not have been summarized.)
Burgos v. State of New Jersey (A-55-14) (075736)
Argued May 6, 2015 – Decided June 9, 2015
LaVECCHIA, J., writing for a majority of the Court.
In this appeal the Court considers whether a 2011 statutory enactment that requires the State to make certain annual contributions to public pension funds created an enforceable contract that is entitled to constitutional protection.
The State’s public pension systems are defined-benefit plans, which guarantee participants a calculable amount of benefits payable upon retirement based on the participant’s salary and time spent in the pension system. The benefits are paid using revenues received from employee contributions, public employer (i.e., State) contributions, and investment returns. Under the statutes governing the pensions systems, the Legislature has required the State to contribute not only the present value of the actual benefits that active pension members earned in the current year, but also the amounts necessary to amortize the systems’ unfunded liabilities over a period of years. The combination of these amounts is known as the annually required contribution (ARC).
In 2011, with the enactment of L. 2011, c. 78 (Chapter 78), the Legislature added language explicitly declaring that each member of the State’s pension systems “shall have a contractual right to the annual required contribution amount” and the failure of the State to make the required contribution “shall be deemed to be an impairment of the contractual right.” A separate statutory provision, enacted earlier, required the State to increase its ARC beginning with fiscal year 2012 (FY12) over the course of seven years at increments of 1/7 of the ARC per year, until the contribution covered the full ARC.
The State made the required contributions in FY12 and FY13, and the Appropriations Act signed into law for FY14 included the required contributions of 3/7 of the ARC. In February 2014, the Governor released the FY15 proposed budget, which also included funding to satisfy the State’s required payment (i.e., 4/7 of the ARC). On May 20, 2014, the Governor issued Executive Order 156, which reduced the State payments into the pension systems for FY14, explaining that the reduction was due to a severe and unanticipated revenue shortfall. Instead of paying the required 3/7 of the ARC contribution, which totaled $1.582 billion, the State made a total contribution of $696 million for FY14. The next day, citing new information that placed the State’s projected revenue at less than previous projections, the State Treasurer announced that the proposed budget for FY15 was being revised to reduce the amount that would be contributed to pension systems. The revised FY15 budget thus advanced would include a total contribution of $681 million, reflecting $1.57 billion less than what was required.
In response, plaintiffs – individuals and unions acting on behalf of hundreds of thousands of New Jersey State public employees – filed complaints alleging statutory violations, impairment of contractual rights under the New Jersey and United States Constitutions, violations of substantive and procedural due process under both Constitutions, a violation of plaintiffs’ Equal Protection rights, promissory estoppel, and violations of the New Jersey Civil Rights Act. Plaintiffs sought injunctive and mandamus relief for both FY14 and FY15. The trial court consolidated plaintiffs’ claims into one action.
With respect to the budgetary action involving the then-imminently concluding FY14, the Law Division upheld the Governor’s determination not to make the required FY14 ARC payment, declaring the action lawfully within the Executive’s emergency powers and reasonable and necessary under the Contracts Clauses of the New Jersey and United States Constitutions. The court held that plaintiffs’ claims for FY15 were not ripe because the Legislature had not yet passed a FY15 Appropriations Bill. When the Legislature passed its FY15 Appropriations Bill, it included the full 4/7ths required ARC, or $2.25 billion. This was financed, in part, by companion bills establishing new taxes whose projected revenue streams were incorporated into the Legislature’s anticipated revenue for FY15. On June 30, 2014, Governor Christie exercised his line-item veto authority deleting, among other items, $1.57 billion of the State’s required pension payment from the Appropriations Act. In his line-item veto message, Governor Christie stated that he opposed raising taxes to pay for the budget deficit, that he eliminated the new revenues projected for new taxes as presented by the Legislature, and cited his constitutional responsibility to deliver a balanced budget as the reason for reducing the State’s FY15 contribution. The Legislature did not take action to override the line-item veto. Therefore, the 2015 Appropriations Act became law, subject to the line-item veto changes.
Plaintiffs filed amended complaints in the Law Division. The State responded by filing a motion to dismiss, and plaintiffs, in turn, filed a motion for summary judgment. Plaintiffs argued that, in enacting Chapter 78, the State undertook a contractual obligation to make the ARC payment to the pension system and that the State’s failure to make the full FY15 ARC payment constituted an impairment of that contract in violation of the Contracts Clauses of the State and Federal Constitutions. Plaintiffs requested that the court require the Legislature and the executive branch to adopt an appropriations act consistent with the contractual obligations outlined in Chapter 78.
The State asserted that Chapter 78 could not create a valid contract right because it violated the Appropriations and Debt Limitation Clauses and the line-item veto provision of the New Jersey Constitution. Even assuming, but not conceding, that an enforceable contract right was created, the State maintained that it did not substantially impair that contract right. Further, again assuming but not conceding that substantial impairment occurred, the State submitted that its decision was reasonable and served a legitimate public purpose.
The trial court issued a detailed and comprehensive opinion on February 23, 2015, that granted summary judgment to plaintiffs on their impairment-of-contract claims and denied defendants’ motion to dismiss. The court accepted the argument that Chapter 78 created a contract and that the State’s failure to appropriate the full value of ARC in the FY15 Appropriations Act substantially impaired plaintiffs’ rights under the contract. In so finding, the court rejected arguments that Chapter 78 was unenforceable as violative of the Debt Limitation Clause, the Appropriations Clause, and the gubernatorial line-item veto power. The court did not order a specific appropriation, but rather determined to give the other branches an opportunity to act in accordance with the court’s decree.
The State filed a motion for leave to appeal to the Appellate Division, and shortly thereafter, moved for direct certification to this Court. The motion was unopposed. On April 6, 2015, this Court issued an order granting direct certification, establishing a briefing schedule, and setting the matter down for oral argument on May 6, 2015.
HELD: Chapter 78 does not create a legally enforceable contract that is entitled to constitutional protection. The Debt Limitation Clause of the State Constitution interdicts the creation, in this manner, of a legally binding enforceable contract compelling multi-year financial payments in the sizable amounts called for by the statute.
1. No analysis of this matter fairly can commence without initially recognizing the promises made on the State’s part toward meeting the scheduled payments to reduce the unfunded liability of the pension systems. Plaintiffs emphasize the many statements praising the bipartisan legislative endeavor and referring to the legislative achievement as a contract. The Court does not question the good intentions of those participating in the enactment of Chapter 78 or that they intended to create a contractual arrangement to address future payment into the funds to promote the fiscal health of the retirement systems. But a strictly legal question is before the Court. That, and that alone, is what must be resolved in this matter of great public importance to members of the public pension systems and citizens throughout the State. (pp. 21-23)
2. Both the New Jersey and Federal Constitutions prohibit the passage of laws impairing the obligation of contracts. Legislation unconstitutionally impairs a contract when it: (1) substantially impairs a contractual relationship; (2) lacks a significant and legitimate public purpose; and (3) is based on unreasonable conditions and unrelated to appropriate governmental objectives. The premise for performing a contract impairment analysis is the existence of a valid enforceable contract under state law. When a contractual relationship is purportedly created through a statute’s enactment, two questions must be addressed in analyzing whether a contract was successfully formed: (1) did the Legislature speak with sufficient clarity to evince intent to create a contract right; and (2) did state law grant the Legislature the authority to enter into the binding and enforceable contract. (pp. 23-26)
2 3. Here, the Legislature and Governor clearly expressed an intent that Chapter 78 create a “contract right” to timely and recurring ARC payments to reduce the unfunded liability of the pension funds. But, that conclusion does not address the question of authority to do so. The essential question that must be answered is whether legislative authority could be exercised through Chapter 78 to create a legally binding, enforceable contract compelling future State appropriations to pay down the unfunded liability. In making such a determination, it is generally recognized that state law governs the existence of a valid contract, even for impairment claims under the Federal Contracts Clause. The Court therefore turns to New Jersey law that pertains to the legal enforceability of the purported statutory contractual right to Chapter 78’s required annual pension payments. (pp. 26-30)
4. The Debt Limitation Clause of the New Jersey Constitution provides that the Legislature may not create “a debt or debts, liability or liabilities of the State” that exceed one percent of the amount appropriated in a given fiscal year unless “submitted to the people at a general election and approved by a majority . . . of the voters of the State voting thereon.” N.J. Const. art. VIII, § 2, ¶ 3. The animating principle applied by the Court in its decisions regarding the Debt Limitation Clause is that the State cannot by contract or statute create a binding and legally enforceable financial obligation above a certain amount that applies year to year without voter approval. Such long-term financial arrangements require voter approval to be enforced; or, such financial promises otherwise avoid the Debt Limitation Clause’s interdiction by being regarded as expressions of intent to provide the funding, but they must be subjected to the annual appropriation process for fulfillment in whole, in part, or not at all. (pp. 30-33)
5. In Lonegan v. State (Lonegan II), 176 N.J. 2 (2003), the Court confronted a broad challenge to the validity of fourteen New Jersey statutes authorizing contract or appropriations-backed debt. The Court found that the statutory financing mechanisms did not violate the Debt Limitation Clause because payments on contract or appropriations- backed debt are necessarily left to the Legislature’s discretion to appropriate and the State is not legally bound to make such payments. Among other things, Lonegan II recognized that the variety of financing mechanisms employed today were unheard of when the Debt Limitation Clause was adopted, and noted the difficulty in differentiating among acceptable and unacceptable types of twenty-first century appropriations-backed debt. In this matter, the trial court based its Debt Limitation Clause analysis on a misperception of the flexibility that was discussed in Lonegan II. The Lonegan II decision acknowledged the need for flexibility in modern financing, and adjusted for the same in the performance of a Debt Limitation Clause analysis by reducing the prohibited conduct to an easily understood principle: so long as the State’s full faith and credit is not pledged and a legally enforceable financial obligation, above a certain amount and lasting year to year, is not created, without voter approval, no Debt Limitation Clause violation ensues. As applied in the circumstances presented in Lonegan II, if a financial obligation is made dependent on securing an appropriation from year to year, then parties are apprised of the element of risk and no constitutional debt limitation violation arises. (pp. 33-37)
6. Plaintiffs assert that Chapter 78 does not implicate the Debt Limitation Clause because that Clause’s language and intent is to prevent the State from creating new debts or liabilities, not to prevent it from paying overdue ordinary expenses. The Debt Limitation Clause is clearly written to have wide sweep, covering “debts” or “liabilities” created “in any manner,” thereby reaching various forms of financial arrangements. Nothing about that language supports that traditional borrowing scenarios were the only intended prohibited transactions. The Debt Limitation Clause’s prohibition against incurring of future debt or liability is vital and it is broad – sufficiently broad to reach long-term financial obligations addressing so-called operating expenses. In combination, the Debt Limitation Clause and the Appropriations Clause of the New Jersey Constitution interdict the Legislature from creating a debt or liability, in any manner, in excess of a certain amount that binds the State to appropriate funds in future fiscal years. (pp. 37-42)
7. Under the Appropriations Clause, the power and authority to appropriate funds is vested in the Legislature. N.J. Const. art. VIII, § 2, ¶ 2. The Clause has three requirements: (1) all withdrawals of money from the State Treasury must be accomplished through legislative appropriation; (2) the Legislature must provide for that appropriation in one law covering only that fiscal year; and (3) the budget created by the appropriations law must be balanced. Because the power and authority to appropriate funds lie solely and exclusively with the legislative branch of government, there can be no redress in the courts to overcome either the Legislature’s action or refusal to take action pursuant to its constitutional power over State appropriations. The Appropriations Clause firmly interdicts the expenditure of state monies through separate statutes not otherwise related to or integrated with the general appropriation act governing the state budget for a given fiscal year. Given the Legislature’s inherent power to disregard prior fiscal enactments, the Court cannot compel the Legislature to appropriate in accordance with other
3 statutes that are not incorporated into the general appropriation act. In circumstances where legislation sought to bind future legislatures in a manner that implicated both the Debt Limitation and Appropriations Clauses, this Court was careful to note that the legislation survived those Clauses because the Legislature retained its constitutionally enshrined power to annually appropriate funds as necessary for the fiscal health of the State. No such reservation of power can be found in Chapter 78. (pp. 42-49)
8. Applying those principles here, the Legislature and Governor were without power, acting without voter approval, to transgress the Debt Limitation Clause and the corresponding Appropriations and other budget clauses of the State Constitution. The Legislature and Governor, as well as the many interested parties involved in the legislative process, may have included contractual words in Chapter 78, but those words, no matter their clarity, could not create an enforceable contract of the type asserted. Voter approval is required to render this a legally enforceable contractual agreement compelling appropriations of this size covering succeeding fiscal years; otherwise, this agreement is enforceable only as an agreement that is subject to appropriation, which under the Appropriations Clause renders it subject to the annual budgetary appropriations process. In that process, the payment may not be compelled by the Judiciary. The Legislature’s strong expression of intent remains clear in Chapter 78, but it does not bind future legislatures or governors in a manner that strips discretionary functions concerning appropriations that the State Constitution leaves to the legislative and executive branches. (pp. 49-53)
9. Because of the importance of maintaining the soundness of the pension funds, the loss of public trust due to the broken promises made through Chapter 78’s enactment is staggering. The Court recognizes that the present level of the pension systems’ funding is of increasing concern. But this is a constitutional controversy that has been brought to the Judiciary’s doorstep, and the Court’s obligation is to enforce the State Constitution’s limitations on legislative power. The State Constitution simply does not permit Chapter 78’s payment provisions to have any more binding effect than that of a contract that is subject to appropriation. To be clear, the Court emphasizes that it is not declaring Chapter 78 unconstitutional. Chapter 78 remains in effect, as interpreted, unless the Legislature chooses to modify it. There is therefore no need to address severability or the mutuality of obligations and the Court leaves those considerations for the political branches. The Court also emphasizes that its analysis does not conflate the issue of the State’s obligation to pay pension benefits with the issue whether Chapter 78 legally binds the State annually to make the scheduled payments into the pension systems. The Court’s holding is, simply, that Chapter 78 cannot constitutionally create a legally binding, enforceable obligation on the State to annually appropriate funds as Chapter 78 purports to require. (pp. 53-61)
10. That the State must get its financial house in order is plain. The need is compelling in respect of the State’s ability to honor its compensation commitment to retired employees. But the Court cannot resolve that need in place of the political branches. They will have to deal with one another to forge a solution to the tenuous financial status of New Jersey’s pension funding in a way that comports with the strictures of our Constitution. The Debt Limitation Clause and the Appropriations Clause envisioned no role for the Judiciary in the annual budget-making process and prevent it from having to perform the unseemly role of deciding in that process whether a failure to fully fund a statutory program, including one labeled a contract, was reasonable and necessary. A Contracts Clause analysis would require annual incursions by the Judiciary into second-guessing spending priorities and perhaps even revenue-raising considerations in recurring years. Under the Debt Limitation Clause and the Appropriations Clause, the responsibility for the budget process remains squarely with the Legislature and Executive, the branches accountable to the voters through the electoral process. This is not an occasion for the Judiciary to act on the other branches’ behalf. (pp. 61-68)
The judgment of the Law Division is REVERSED.
JUSTICE ALBIN, dissenting, joined by CHIEF JUSTICE RABNER, believes that public workers have protectable contractual rights under the United States Constitution -- as the Legislature and Governor intended in enacting Chapter 78. He expresses the view that Chapter 78 is a binding contract on the State that cannot be nullified without offending the Federal Constitution’s Contracts Clause.
JUSTICES PATTERSON, FERNANDEZ-VINA, and SOLOMON and JUDGE CUFF (temporarily assigned), join in JUSTICE LaVECCHIA’s opinion. JUSTICE ALBIN filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER joins.
4 SUPREME COURT OF NEW JERSEY A-55 September Term 2014 075736
CHRISTOPHER BURGOS, Individually and as President of the State Troopers Fraternal Association of New Jersey; JAMES KIERNAN, Individually and as President of State Troopers Non- Commissioned Officers Association of New Jersey State, Inc.; STEPHEN STERNIK, Individually and as President of State Troopers Superior Association of New Jersey; STATE TROOPERS FRATERNAL ASSOCIATION OF NEW JERSEY, on behalf of all its present and retired members; STATE TROOPERS NON-COMMISSIONED OFFICERS ASSOCIATION OF NEW JERSEY, INC., on behalf of all its present and retired members; and STATE TROOPERS SUPERIOR OFFICERS ASSOCIATION OF NEW JERSEY, on behalf of all its present and retired members,
Plaintiffs-Respondents,
v.
STATE OF NEW JERSEY; CHRISTOPHER CHRISTIE, Governor of the State of New Jersey; ANDREW SIDAMON- ERISTOFF, Treasurer of the State of New Jersey; NEW JERSEY STATE SENATE; and NEW JERSEY STATE GENERAL ASSEMBLY,
Defendants-Appellants,
1 and
COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO; PROFESSIONAL FIREFIGHTERS ASSOCIATION OF NEW JERSEY, IAFF, AFL-CIO; NEW JERSEY FRATERNAL ORDER OF POLICE; AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, COUNCIL 73; AMERICAN FEDERATION OF TEACHERS NEW JERSEY STATE FEDERATION, AFL-CIO; INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, AFL-CIO & CLC, LOCAL 195; HEALTH PROFESSIONAL AND ALLIED EMPLOYEES, AFT, AFL-CIO; NEW JERSEY STATE AFL-CIO; SANDRA P. COHEN; MICHAEL A. JUSTINIANO; DOMINICK MARINO; DONNA CHIERA; DIANE CAMERON; and RUSSELL LEAK,
CHRIS CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
and
NEW JERSEY EDUCATION ASSOCIATION; NEW JERSEY STATE POLICEMEN’S BENEVOLENT ASSOCIATION, INC.; NEW JERSEY STATE FIREFIGHTERS’ MUTUAL
2 BENEVOLENT ASSOCIATION; AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, COUNCIL 1, AFL- CIO; CHRISTINE SAMPSON-CLARK; HEIDI OLSON; PATRICIA PROVNICK; KEITH DUNN; PATRICK COLLIGAN; MARC KOVAR; TIM DEUTSCH; KYLE HUGHES; JOHN E. MURPHY, JR.; LANCE P. LOPEZ, SR.; THE NEW JERSEY PRINCIPALS AND SUPERVISORS ASSOCIATION; JANET S. ZYMROZ; JOHN C. ALFIERI, JR.; HOPE GRANT; and ROSARIO CAPACCIO,
STATE OF NEW JERSEY; CHRISTOPHER J. CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
PROBATION ASSOCIATION OF NEW JERSEY, PROFESSIONAL CASE- RELATED UNIT; PROBATION ASSOCIATION OF NEW JERSEY, PROFESSIONAL SUPERVISORS UNION; DWIGHT COVALESKIE; GAVIN CUMMINGS; and ELLEN CRIBBIN,
3 STATE OF NEW JERSEY; CHRISTOPHER J. CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
Defendants-Appellants.
On appeal from the Superior Court, Law Division, Mercer County.
Jean P. Reilly, Assistant Attorney General, argued the cause for appellants (John J. Hoffman, Acting Attorney General, attorney; Ms. Reilly, John P. Bender, Assistant Attorney General, Gabriel I. Chacon, and David M. Reap, Deputy Attorneys General on the briefs).
Steven P. Weissman and Kenneth I. Nowak argued the cause for respondents (Weissman & Mintz, attorneys for Communications Workers of America, AFL-CIO, American Federation of State, County, and Municipal Employees, Council 73, American Federation of Teachers New Jersey State Federation, AFL-CIO, Health Professional and Allied Employees, AFT, AFL- CIO, New Jersey State AFL-CIO, Sandra P. Cohen, Michael A. Justiniano, Diane Cameron, and Donna Chiera; Zazzali, Fagella, Nowak, Kleinbaum & Friedman, attorneys for New Jersey Education Association, New Jersey State Policemen’s Benevolent Association, Inc., American Federation of State, County, and Municipal Employees, Council 1, AFL-CIO, Christine Sampson-Clark, Heidi Olsen, Patricia Provnick, Keith Dunn, Patrick Colligan, Marc Kovar, and Lance P. Lopez, Sr.; Mets Schiro & McGovern, attorneys for Professional Firefighters Association of New Jersey, IAFF, AFL-CIO, American Federation
4 of Teachers New Jersey Federation, AFL-CIO, and Dominick Marino; Markowitz and Richman, attorneys for New Jersey Fraternal Order of Police and Russell Leak; Oxfeld Cohen, attorneys for International Federation of Professional and Technical Engineers, AFL- CIO & CLC, and Local 195; Craig S. Gumpel, attorney for New Jersey State Firefighters’ Mutual Benevolent Association, Edwin Donnelly, Tim Deutsch, Kyle Hughes, and John E. Murphy, Jr.; Robert M. Schwartz, attorney for New Jersey Principals and Supervisors Association, Janet S. Zymroz, John C. Alfieri, Jr., Hope Grant, and Rosario Capaccio; and Fox & Fox, attorneys for Probation Association of New Jersey, Professional Case-Related Unit, Probation Association of New Jersey, Professional Supervisors Union, Dwight Covaleski, Gavin Cummins, and Ellen Cribbin; Mr. Weissman, Mr. Nowak, Ira W. Mintz, Edward M. Suarez, Jr., Adam M. Gordon, Justin Schwam, Flavio L. Komuves, and Annmarie Pinarski, on the brief).
Michael A. Bukosky argued the cause for respondents Christopher Burgos, James Kiernan, Stephen Sternik, State Troopers Fraternal Association of New Jersey, State Troopers Non-Commissioned Officers Association of New Jersey, Inc., and State Troopers Superior Officers Association of New Jersey (Loccke, Correia & Bukosky, attorneys; Mr. Bukosky and Cory M. Sargeant, on the brief).
Robert D. Klausner, a member of the Florida bar, argued the cause for amici curiae Boards of Trustees of the Retirement Systems (Bennet D. Zurofsky, attorney; Mr. Klausner and Mr. Zurofsky, on the brief).
Leon J. Sokol argued the cause for amici curiae Senate President Stephen M. Sweeney and General Assembly Speaker Vincent Prieto (Sokol Behot, attorneys; Mr. Sokol and Scott E. Rekant, on the brief).
5 James Katz submitted a brief on behalf of amicus curiae New Jersey Citizen Action (Spear Wilderman, attorneys).
JUSTICE LaVECCHIA delivered the opinion of the Court.
In 1997, with enactment of Chapter 113 of the Laws of New
Jersey, the Legislature granted to members of the public pension
funds a “non-forfeitable right to receive benefits,” a right
defined to mean that benefits could not be reduced once the
right to them had attached. See N.J.S.A. 43:3C-9.5(a)-(b). The
individual members of the public pension systems, by their
public service, earned this delayed part of their compensation.
See ibid. That those men and women must be paid their pension
benefits when due is not in question in this matter.
In 2011, with enactment of Chapter 78, L. 2011, c. 78, the
Legislature amended N.J.S.A. 43:3C-9.5(c). Chapter 78’s
amendment to subsection (c) introduced contractual terms in
connection with the State’s payment of its annual required
contribution to the various pension funds. The contractual
terminology creates an expectation that the State would
contribute timely, annually scheduled, required payments to the
pension funds, thereby addressing the alarming current unfunded
accrued liability and restoring the various funds to fiscally
sound levels.
6 Plaintiffs brought this action because the prior Fiscal
Year (FY) 2014 and current FY 2015 Appropriations Acts did not
provide sufficient funding to meet the amounts called for under
Chapter 78’s payment schedule. Plaintiffs argue that Chapter 78
created an enforceable contract that is entitled to
constitutional protection against impairment. Notwithstanding
the State’s willing participation in Chapter 78’s enactment, it
argues that the budgetary and debt limiting clauses of the State
Constitution conflict with any binding agreement created by
Chapter 78’s language. We granted the State’s motion for direct
certification to resolve the important questions raised by this
apparent clash of constitutional provisions.
Although plaintiffs correctly assert that a promise was
made by the legislative and executive branches when enacting
Chapter 78, and morally their argument is unassailable, we
conclude that Chapter 78 could not create the type of legally
enforceable contract that plaintiffs argue, and the trial court
found, is entitled to protection under the Contracts Clauses of
either the State or Federal Constitutions. The Debt Limitation
Clause of the State Constitution interdicts the creation, in
this manner, of a legally binding enforceable contract
compelling multi-year financial payments in the sizable amounts
called for by Chapter 78.
7 No matter how well-intentioned the government actors and no
matter how worthy the cause to be advanced by Chapter 78, the
Debt Limitation Clause speaks directly to this situation and, in
pertinent part, commands:
The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, which together with any previous debts or liabilities shall exceed at any time one per centum of the total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law for some single object or work distinctly specified therein. . . . [N]o such law shall take effect until it shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon.
[N.J. Const. art. VIII, § 2, ¶ 3.]
The purpose to be achieved by the Debt Limitation Clause
dovetails with the Framers’ intent for a fiscally responsible
annual budget process. Efforts to dedicate monies through
legislative acts other than the annual appropriations act have
no binding effect. They are read as impliedly suspended when
contradicted by the budgetary judgment of the presently
constituted Legislature acting in concert with the Governor in
their constitutionally prescribed budget formation roles. Those
debt limitation and appropriations-related constitutional
clauses conflict with the contractual language of Chapter 78 and
thwart plaintiffs’ impairment claims.
8 We therefore hold that the Legislature and Governor were
without authority to enact an enforceable and legally binding
long-term financial agreement through this statute. Chapter
78’s contractual language creates, at best, the equivalent of
appropriations-backed debt that is accompanied by a strong
legislative expression of intent to provide future funding. The
legislative use of contractual terms in Chapter 78, when
referring to the required schedule of recurring payments of the
State’s annual required contribution to the State public pension
systems, does not create an enforceable long-term financial
contract that can co-exist with the limitations of the Debt
Limitation Clause and the related Appropriations Clause of the
State Constitution. So long as Chapter 78 exists in its present
statutory form, each year’s appropriations act will reflect the
present legislative and executive judgment as to the budgetary
priority of this pressing need for which those branches will be
answerable to the public and to the financial marketplace. It
is not the place of this Court to dictate that judgment, for the
Constitution has left such budgetary and political questions to
the other two branches.
I.
A.
The Division of Pensions and Benefits, part of the
Department of the Treasury, administers the State public pension
9 systems. They include the Police and Firemen’s Retirement
System, N.J.S.A. 43:16A-1 to -68; the Public Employees’
Retirement System, N.J.S.A. 43:15A-1 to -161; the Teachers’
Pension and Annuity Fund, N.J.S.A. 18A:66-1 to -93; the State
Police Retirement System, N.J.S.A. 53:5A-1 to -47; the
Consolidated Police and Firemen’s Pension Fund, N.J.S.A. 43:16-1
to -21; the Judicial Retirement System, N.J.S.A. 43:6A-1 to -47;
and the Prison Officers’ Pension Fund, N.J.S.A. 43:7-7 to -27.
For background purposes, those systems are defined-benefit
plans, which guarantee participants a discernible amount of
benefits to be paid upon retirement based on the particular
participant’s salary and time spent in the pension system.
The benefits are paid using revenues received from employee
contributions, public employer (i.e., State) contributions, and
investment returns. Under the amendments to the statutes
governing the State’s pension systems that lie at the heart of
this matter, the Legislature has required the State to make a
full annually required contribution (ARC) to the pension
systems. The ARC equals the sum of the statutorily required
annual normal contribution (ANC) and the annual unfunded accrued
actuarial liability contribution (UAAL).
The ANC represents the present value of the actual benefits
that active pension members earned in the current year. It is
the actuarially calculated amount necessary to fund the pension
10 benefits accrued in and for that year of service by active
participants in the State pension systems.
The UAAL represents the necessary payment required to
amortize the systems’ unfunded liability over a specified period
of years. The unfunded liability is the excess of the systems’
actuarial liability above the actuarial value of the systems’
assets on hand. The actuarial liability represents what it
would cost to pay pension benefits to active and retired
employees for the duration of their retirement. Thus, the UAAL
payments constitute planned amounts that will amortize the
actuarially calculated sum of monies that represents the gap
between the pension systems’ actuarial value of assets and the
present value of all current actuarial liabilities as to both
active and retired members.
On June 28, 2011, the New Jersey Legislature enacted
Chapter 78, section 26 of which amended N.J.S.A. 43:3C-9.5(c),
addressing the responsibility of State employers to contribute
to the above-mentioned pension systems. Prior to the amendment,
subsection (c) of the statute provided:
The State shall make an annual normal contribution and an annual unfunded accrued liability contribution to each system or fund pursuant to standard actuarial practices authorized by law, unless both of the following conditions are met: (1) there is no existing unfunded accrued liability contribution due to the system or fund at the close of the valuation period applicable to
11 the upcoming fiscal year; and (2) there are excess valuation assets in excess of the actuarial accrued liability of the system or fund at the close of the valuation period applicable to the upcoming fiscal year.
[L. 1997, c. 113, § 5.]
Chapter 78 substantially changed N.J.S.A. 43:3C-9.5(c).
The State remains required to make ANC and UAAL payments subject
to the exceptions outlined in the above pre-amendment language,
but Chapter 78 added important language that is the subject of
this matter. N.J.S.A. 43:3C-9.5(c) now reads, in relevant part:
(1) The State and all other applicable employers shall make their annual normal contribution to each system or fund . . . . The State and all other applicable employers shall also make their annual unfunded accrued liability contribution . . . . The annual normal contribution plus the annual unfunded accrued liability contribution shall together be the annual required contribution, provided, however, that for the State, [N.J.S.A. 43:3C- 14] shall apply with regard to the State’s annual required contribution. The amount of the State’s annually required contributions shall be included in all annual appropriations acts as a dedicated line item.
(2) Each member of the [State’s pension systems] . . . shall have a contractual right to the annual required contribution amount being made by 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 . . . . 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. . . .
12 [L. 2011, c. 78, § 26 (codified at N.J.S.A. 43:3C-9.5(c)) (emphasis added).]
N.J.S.A. 43:3C-14, referred to in subsection (c)(1) above,
required the State, “[c]ommencing July 1, 2011,” to make its
contribution “in full each year to each system or fund in the
manner and at the time provided by law.” That section, enacted
previously on March 22, 2010, as Chapter 1 of the Laws of 2010,
did not require the State to begin paying 100 percent of its
required ANC and UAAL contributions (i.e., the ARC) immediately
on July 1, 2011. Instead, Chapter 1 provided for an incremental
rise in the payments the State was required to make to the
pension funds:
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.]
Specifically, beginning with FY 2012, the State would be in
compliance by contributing at least 1/7th of the ARC
contribution in that fiscal year, and in ensuing years, 2/7ths
of the ARC in FY13, 3/7ths in FY14, 4/7ths in FY15, 5/7ths in
13 FY16, 6/7ths in FY17, and a full payment in FY18. See N.J.S.A.
43:3C-14. Thus, for example, although the full ARC payment for
FY15 amounted to $3.937 billion, Chapter 1 required the State
only to contribute $2.25 billion, which is 4/7ths of the full
ARC payment.
In combination, Chapter 78 and Chapter 1 require the State
to contribute the entire ARC amount owed to pension systems
every year by dedicating that amount as a line item in each
year’s appropriations act. Importantly, Chapter 78 added
language explicitly declaring the existence of a contractual
right in pension-system members and setting forth that State
employers’ failure to comply with the full-contribution
requirement is “deemed to be an impairment” of that right as to
each member that either members or the trustees of the Funds
themselves could enforce.
B.
The State made its required contributions in FY12 and FY13.
On June 30, 2013, the Governor signed into law the FY14
Appropriations Act, which included an appropriation for the
State’s full required contribution (3/7ths of its ARC) for that
fiscal year.
Thereafter, in February 2014, Governor Christie released
the FY15 proposed budget, which also included $2.25 billion to
satisfy the State’s required 4/7ths ARC payment.
14 However, on May 20, 2014, the Governor issued Executive
Order 156, which reduced State payments into the pension systems
for FY14, explaining that said action was due to a severe and
unanticipated revenue shortfall. The required 3/7ths ARC
contribution totaled $1.582 billion for FY14, which represented
the sum of a $298 million ANC and a $1.284 billion UAAL.
Instead of paying that amount, the State made a total FY14
contribution of $696 million, which is explained as representing
a 7/7ths payment of the FY14 ANC calculation and 0/7ths payment
of the required FY14 UAAL calculation.
The next day, the State Treasurer announced that the
proposed budget for FY15 was being revised to reduce the amount
that would be contributed to pension systems. The Treasurer
cited new information that placed the State’s projected revenue
for FY15 at about $1.7 billion less than previous projections.
The revised FY15 budget thus advanced would include a total ARC
contribution of $681 million, reflecting $1.57 billion less than
the State’s required ARC contribution.
In response, plaintiffs -- individuals and unions acting on
behalf of hundreds of thousands of New Jersey State public
employees1 -- filed complaints alleging statutory violations,
1 Plaintiffs consist principally of Christopher Burgos, James Kiernan, Stephen Sternik, State Troopers Fraternal Association of New Jersey, State Troopers Non-Commissioned Officers Association of New Jersey, and State Troopers Superior Officers 15 impairment of contractual rights under the New Jersey and United
States Constitutions, violations of substantive and procedural
due process under both Constitutions, a violation of plaintiffs’
Equal Protection rights, promissory estoppel, and violations of
the New Jersey Civil Rights Act. Plaintiffs sought injunctive
and mandamus relief for both FY14 and FY15. The trial court
consolidated plaintiffs’ claims against defendants into one
action.
With respect to the budgetary action involving the then-
imminently concluding FY14, the Law Division upheld the
Governor’s determination not to make the required FY14 ARC
payment, declaring the action lawfully within the Executive’s
emergency powers and reasonable and necessary under the
Contracts Clauses of the New Jersey and United States
Constitutions. The court held that plaintiffs’ claims for FY15
were not ripe because the Legislature had not yet passed a FY15
Appropriations Bill, but that plaintiffs were free to challenge
the FY15 bill once the Legislature passed it.
Association of New Jersey, as well as Communications Workers of America, New Jersey Education Association, New Jersey Fraternal Order of Police, Professional Firefighters Association of New Jersey, International Federation of Professional and Technical Engineers, New Jersey State Firefighters, and Probation Association of New Jersey.
16 When the Legislature passed its FY15 Appropriations Bill on
June 26, 2014, the bill included a $2.25 billion appropriation
(the full 4/7ths required ARC). The FY15 Appropriations Bill
that the Legislature sent to the Governor was financed in part
by companion bills establishing new taxes whose projected
revenue streams were incorporated into the Legislature’s
anticipated revenue for FY15.2
On June 30, 2014, Governor Christie exercised his line-item
veto authority in respect of the Legislature’s passed FY15
Appropriations Bill, deleting, among other budgetary items,
$1.57 billion of the State’s required pension payment from the
approved parts of the FY15 Appropriations Act. In his line-item
veto message, Governor Christie stated that he opposed raising
taxes to pay for the budget deficit, eliminated the new revenues
projected for new taxes as presented by the Legislature, and
cited his constitutional responsibility to deliver a balanced
budget as the reason for reducing the State’s FY15 contribution.
Subsequently, on July 11, 2014, the Governor issued absolute
vetoes on the separate companion bills that had established the
2 Specifically, the Legislature passed bills establishing new taxes colloquially referred to as a “corporate business tax surcharge” and a “millionaire’s tax.” Assemb. 3484, 216th Leg. (June 26, 2014); Assemb. 3485, 216th Leg. (June 26, 2014).
17 new tax revenue that the Legislature had included in its FY15
Appropriations Bill.
The Legislature did not take action to override the line-
item veto. Therefore, the 2015 Appropriations Act became law,
subject to the line-item veto changes. Under the FY15
Appropriations Act, the State will make in the course of FY15 a
$681 million pension contribution, an amount that is represented
to constitute 7/7ths of the FY15 ANC and 0/7ths of the UAAL
calculation.
Plaintiffs filed amended complaints in the Law Division.
The State responded by filing a motion to dismiss, and
plaintiffs, in turn, filed a motion for summary judgment.
Plaintiffs argued that, in enacting Chapter 78, the State
undertook a contractual obligation to make the ARC payment to
the pension system and that the State’s failure to make the full
FY15 ARC payment constituted an impairment of that contract in
violation of the Contracts Clauses of the State and Federal
Constitutions. According to plaintiffs, the contractual right
contained in Chapter 78 did not implicate the Debt Limitation
Clause, did not violate the Appropriations Clause, and could not
be abrogated by the Governor’s exercise of his line-item veto
power. Plaintiffs’ prayer for relief requested that the court
require the Legislature and the executive branch to adopt an
18 appropriations act consistent with the contractual obligations
outlined in Chapter 78.
In its motion to dismiss and in opposition to plaintiffs’
motion for summary judgment, the State asserted that Chapter 78
could not create a valid contract right because it violated the
Appropriations and Debt Limitation Clauses and the line-item
veto provision of the New Jersey Constitution. Even assuming,
but not conceding, that an enforceable contract right was
created, the State maintained that it did not substantially
impair that contract right because (1) plaintiffs were not
without remedy in the form of a breach of contract action and
(2) the non-payment of the 4/7ths UAAL did not materially impact
the health of the pension systems or result in the non-payment
of benefits to retirees. Further, again assuming but not
conceding that substantial impairment occurred, the State
submitted that its decision was reasonable and served a
legitimate public purpose. The State also raised arguments
based on sovereign immunity and the non-justiciability of
political questions.
On February 23, 2015, the trial court issued a detailed and
comprehensive opinion that granted summary judgment to
plaintiffs on their impairment-of-contract claims, granted
plaintiffs’ application for declaratory judgment, and denied
defendants’ motion to dismiss plaintiffs’ claims. The trial
19 court accepted plaintiffs’ argument that Chapter 78 created a
contract and that the State’s failure to appropriate the full
value of the ARC in the FY15 Appropriations Act substantially
impaired plaintiffs’ rights under that contract. Thus, the
court concluded that plaintiffs stated cognizable claims under
both the Federal and State Contracts Clauses. In so finding,
the court rejected arguments that Chapter 78 was unenforceable
as violative of the Debt Limitation Clause, the Appropriations
Clause, and the gubernatorial line-item veto power. The court
did not order a specific appropriation. Instead, the court
determined “to give the other branches an opportunity to act in
accordance with the court’s decree.” The trial court declined
to reach the remainder of plaintiffs’ claims.
On March 13, 2015, the State filed a motion for leave to
appeal to the Appellate Division. Shortly thereafter, the State
filed a motion seeking direct certification to the Court. The
motion was unopposed. On April 6, 2015, this Court issued an
order granting direct certification, establishing a briefing
schedule, and setting the matter down for oral argument on May
6, 2015. This Court subsequently granted New Jersey Citizen
Action’s motion to appear as amicus curiae, as well as the
motion of Senate President Stephen M. Sweeney and General
Assembly Speaker Vincent Prieto to participate as amicus curiae.
The New Jersey Retirement System Boards of Trustees also
20 participate as amici curiae pursuant to the trial court’s
November 2014 order granting them such status.
II.
The parties’ arguments before this Court are refined
versions of their arguments before the trial court. We address
them as part of our substantive analysis of the instant
controversy.
That said, no analysis of this matter fairly can commence
without initially recognizing the promises made on the State’s
part toward meeting the scheduled payments to reduce the
unfunded liability. Plaintiffs and amici highlight those
promises. They emphasize the many statements –- statements made
as part of the legislative process and to the public before and
after Chapter 78 was enacted –- praising the bipartisan
legislative endeavor and referring to the legislative
achievement as a contract.
Most certainly, a litany of public statements indicate
State officials’ satisfaction in respect of Chapter 78’s
passage. A 2011 joint statement from the Governor and the
leaders of the various legislative factions declared that “[t]he
legislation [(i.e., Chapter 78)] . . . saves the public pension
system for current and future retirees . . . . We all fully
support this legislation and will work together to assure its
21 passage by both houses of the Legislature and enactment into law
. . . .” Press Release, Office of the Governor, Statement from
Governor Chris Christie, Senate President Stephen Sweeney,
Assembly Speaker Sheila Oliver, Senate Minority Leader Thomas
Kean, Jr. and Assembly Minority Leader Alex DeCroce (June 15,
2011), available at
http://www.state.nj.us/governor/news/news/552011/approved/201106
15c.html. Chapter 78 was called “bold” and the product of
“cooperation, bipartisanship and compromise.” Press Release,
Office of the Governor, Governor Christie Signs into Law Bold,
Bipartisan Pension and Health Benefits Reform (June 28, 2011),
available at
http://www.state.nj.us/governor/news/news/552011/approved/201106
28B.html.
Likewise, there is no question that the participants in the
legislative process referred to Chapter 78 as creating a
contract. See NJ Citizen Action Joins Pension Lawsuit,
Politicker NJ (Apr. 28, 2015),
http://politickernj.com/2015/04/nj-citizen-action-joins-pension-
lawsuit/ (quoting Governor’s remarks at 2011 appearance: “Th[e
pension payment] schedule is codified into the legislation we
have right now and makes it a contractual right of the folks in
the pension system to have those payments made.”); Mark J.
Magyar, Sweeney Urges Pension Funding Overhaul to Reduce Impact
22 on State Budget, NJ Spotlight (Oct. 28, 2014),
http://www.njspotlight.com/stories/14/10/28/sweeney-urges-
pension-funding-overhaul-to-save-nj-s-troubled-plagued-system/
(noting legislative leader’s assertion that Chapter 78’s
language expresses clear legislative intent to create
contractual obligation).
We do not question the good intentions of those
participating in the enactment of Chapter 78 or that they
intended to create a contractual arrangement that addressed
future payments into the funds of the several public pension
systems to promote the fiscal health of those funds. But a
strictly legal question is now before us. That, and that alone,
is what must be resolved in this matter of great public
importance to members of the public pension systems and citizens
throughout the State.
Both the New Jersey and Federal Constitutions prohibit the
passage of laws impairing the obligation of contracts. U.S.
Const. art. I, § 10, cl. 1 (“No State shall . . . pass any . . .
Law impairing the Obligation of Contracts . . . .”); N.J. Const.
art. IV, § 7, ¶ 3 (“The Legislature shall not pass any . . . law
impairing the obligation of contracts, or depriving a party of
any remedy for enforcing a contract which existed when the
contract was made.”). This Court has recognized that the
23 Federal and State Contracts Clauses provide “‘parallel
guarantees.’” Fid. Union Trust Co. v. N.J. Highway Auth., 85
N.J. 277, 299 (1981) (quoting P. T. & L. Constr. Co. v. Comm’r,
60 N.J. 308, 313 (1972)); see also In re Pub. Serv. Elec. & Gas
Co.’s Rate Unbundling, 330 N.J. Super. 65, 92 (App. Div. 2000)
(noting coextensive protection provided under both
clauses), aff’d o.b., 167 N.J. 377, 382, 395, cert. denied, 534
U.S. 813, 122 S. Ct. 37, 151 L. Ed. 2d 11 (2001).
“Legislation unconstitutionally impairs a contract when it
(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.
Co. of Salem v. N.J. Prop.-Liab. Ins. Guar. Ass’n, 215 N.J. 522,
546-47 (2013) (alterations in original) (quoting State Farm Mut.
Auto. Ins. Co. v. State, 124 N.J. 32, 64 (1991)); see also U.S.
Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 25, 97 S. Ct. 1505,
1519, 52 L. Ed. 2d 92, 112 (1977) (“[A]n impairment may be
constitutional if it is reasonable and necessary to serve an
important public purpose.”).
Under the Contracts Clause of either the State or Federal
Constitution, the premise for performing a contract impairment
analysis is the existence of a valid enforceable contract under
state law. Thus, the first step in the substantial impairment
24 analysis is, necessarily, to determine “‘whether there is a
contractual relationship.’” N.J. Educ. Ass’n v. State (NJEA),
412 N.J. Super. 192, 205 (App. Div.) (quoting Gen. Motors Corp.
v. Romein, 503 U.S. 181, 186, 112 S. Ct. 1105, 1109, 117 L. Ed.
2d 328, 337 (1992)), certif. denied, 202 N.J. 347 (2010). When
a contractual relationship is purportedly created through a
statute’s enactment, two questions may be distilled and must be
addressed in analyzing whether a contract was successfully
formed:
(1) did the Legislature speak with sufficient clarity to
evince intent to create a contract right, see, e.g.,
San Diego Police Officers’ Ass’n v. San Diego City
Emps.’ Ret. Sys., 568 F.3d 725, 737 (9th Cir. 2009)
(stating that in Contracts Clause analysis, state
statutes “must evince a clear and unmistakable
indication” of legislature’s intent to form
contractual relationship before they may be read to
create contract); Parker v. Wakelin, 123 F.3d 1, 5
(1st Cir. 1997) (requiring “a clear indication that
the legislature intends to bind itself in a
contractual manner” to create contract rights); and
(2) did state law grant to the Legislature the authority to
enter into the binding and enforceable contract in
question, see, e.g., Indiana ex rel. Anderson v. Brand,
25 303 U.S. 95, 100, 58 S. Ct. 443, 446, 82 L. Ed. 685, 691
(1938) (explaining that in Federal Contracts Clause
claims court must evaluate validity of contract under
state law); San Diego Police Officers’ Ass’n, supra, 568
F.3d at 737 (explaining that in Federal Contracts Clause
claims “federal courts look to state law to determine
the existence of a contract” before using federal
principles in conducting Contracts Clause analysis).
C.
On the question of clarity of expression to exhibit
sufficient intent to create a contract, the United States
Supreme Court has instructed courts adjudicating Federal
Contracts Clause claims not to presume that a statute creates
private contract rights unless “some clear indication”
establishes the intent to do so. Nat’l R.R. Passenger Corp. v.
Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 465-66, 105
S. Ct. 1441, 1451, 84 L. Ed. 2d 432, 446 (1985). Our state
jurisprudence reflects that federal law requirement.
In Spina v. Consolidated Police & Firemen’s Pension Fund
Commission, 41 N.J. 391, 405 (1964), on which plaintiffs rely,
this Court said that a statute may be construed as creating a
contract when the Legislature’s intent to create a contractual
commitment is “so plainly expressed that one cannot doubt the
individual legislator understood and intended it.” Similarly,
26 in NJEA, supra, the Appellate Division recognized that clarity
of language is necessary if a statute is to be regarded as
having been intended to create contractual rights “because the
effect of such authorization is to surrender the fundamental
legislative prerogative of statutory revision and amendment and
to restrict the legislative authority of succeeding
legislatures.” 412 N.J. Super. at 206-07 (citations omitted).
Here the Legislature certainly spoke with clarity and used
terminology that plainly expressed its intent to create
contractual rights. Chapter 78 expressly references a
“contractual right” to the method of ARC payment three times,
and the statute denotes the State’s failure to make the ARC
payment an “impairment,” which invokes the language of the State
and Federal Constitutions’ Contracts Clauses. See U.S. Const.
art. I, § 10, cl. 1; N.J. Const. art. IV, § 7, ¶ 3; N.J.S.A.
43:3C-9.5(c)(2). Such language markedly contrasts with that of
other pension statutes that New Jersey courts previously have
determined did not create a contract with attendant contractual
rights. See, e.g., Spina, supra, 41 N.J. at 399 (“‘[T]he common
council or other governing body shall include in any tax levy a
sum sufficient to meet the requirements of said fund . . . .’”
(emphasis added) (quoting L. 1920, c. 160)); NJEA, supra, 412
N.J. Super. at 199 (“‘[T]he Legislature shall make an
appropriation sufficient to provide for the obligations of the
27 State’ . . . .” (emphasis added) (quoting N.J.S.A. 18A:66-33)).
Where the statutory language in Spina and NJEA was implicit, at
most, in expressing any intention to contractually commit either
municipalities in Spina or the State in NJEA to a payment
obligation, Chapter 78’s repetitious use of the phrase
“contractual right” and inclusion of the word “impairment” to
describe the State’s failure to perform its payment obligation
plainly expresses legislative intent to create a contract right.
See Spina, supra, 41 N.J. at 405.
We conclude that the Legislature and Governor clearly
expressed an intent that Chapter 78 create a “contract right” to
timely and recurring ARC payments to reduce the unfunded
liability of the pension funds to safe levels. But, that
conclusion does not address the question of authority to do so.3
The essential question that must be answered is whether
legislative authority could be exercised through Chapter 78 to
create a legally binding, enforceable contract compelling future
3 Although Spina recognized that the Legislature can create a contract through clear language, that case dealt with a statute purporting to bind municipalities. Spina, supra, 41 N.J. at 395, 399. Municipalities are not subject to the Debt Limitation and Appropriations Clauses, and so Spina does not address the issue at the heart of this case: the State’s authority to form the clearly intended contract in Chapter 78 in light of those constitutional provisions. Therefore, Spina is not of further assistance beyond the threshold principle that the Legislature must speak with clarity to form a contract through legislative enactment.
28 State appropriations to pay down the unfunded liability.4
Indeed, although the Legislature clearly may express its intent
to contract, that body’s actions must comport with the
Constitution. See, e.g., U.S. Trust Co., supra, 431 U.S. at 23,
97 S. Ct. at 1518, 52 L. Ed. 2d at 110 (noting reserved-powers
doctrine limits State’s authority to enter into contract
relinquishing “an essential attribute of its sovereignty”); Gen.
Assembly v. Byrne, 90 N.J. 376, 391 (1982) (“The Legislature
cannot pass an act that allows it to violate the
Constitution.”).
In making that determination, it is generally recognized
that state law governs the existence of a valid contract, even
for impairment claims under the Federal Contracts Clause. See,
e.g., Brand, supra, 303 U.S. at 100-09, 58 S. Ct. at 446-50, 82
L. Ed. at 690-95 (applying Indiana law to determine “existence
4 Entirely distinct from this question is the issue addressed in the recent decision of the Supreme Court of Illinois. Heaton v. Quinn (In re Pension Reform Litig.), ___ N.E.2d ___ (Ill. 2015) (slip op. at 19). In that case, the court addressed the reduction of benefits in violation of the state constitution’s pension protection clause, which provides: “Membership in any pension or retirement system of the State . . . shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” Ill. Const. art XIII, § 5; Heaton, supra, ___ N.E.2d at ___ (slip op. at 2-3). The Illinois lawmakers clearly created a substantive constitutional right to benefits that could not be diminished, and diminution in benefits was the issue before the court, Heaton, supra, ___ N.E.2d at ___ (slip op. at 19). The Illinois Supreme Court was not addressing a purported right to a specific funding scheme.
29 and nature” of contract); Appleby v. City of New York, 271 U.S.
364, 380, 46 S. Ct. 569, 573, 70 L. Ed. 992, 999 (1926)
(explaining that “construction and effect” of contract was to be
determined from “the law of the state”); Tron v. Condello, 427
F. Supp. 1175, 1186 (S.D.N.Y. 1976) (“[W]e must look to the law
of New York at the time plaintiff’s alleged contractual rights
were created to see exactly what provisions are protected
against impairment.”). We therefore turn to New Jersey law that
pertains to the legal enforceability of the purported statutory
contractual right to Chapter 78’s required annual pension
payments.
III.
The Debt Limitation Clause of the New Jersey Constitution,
in full, provides:
The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, which together with any previous debts or liabilities shall exceed at any time one per centum of the total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law for some single object or work distinctly specified therein. Regardless of any limitation relating to taxation in this Constitution, such law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls due, and also to pay and discharge the principal thereof within thirty-five years from the time it is contracted; and the law
30 shall not be repealed until such debt or liability and the interest thereon are fully paid and discharged. Except as hereinafter provided, no such law shall take effect until it shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon. [N.J. Const. art. VIII, § 2, ¶ 3.] It is unnecessary to recount yet again the historical
origins of the Debt Limitation Clause. That has been done, well
and thoroughly, numerous times before, most recently by this
Court in Lonegan v. State (Lonegan I), 174 N.J. 435, 443-45, 464
(2002). See also, e.g., Lonegan v. State (Lonegan II), 176 N.J.
2, 14 (2003) (“The Debt Limitation Clause was adopted in 1844
because of concerns about binding obligations imposed on future
generations of taxpayers and because of unchecked speculation by
the state.”); Clayton v. Kervick, 52 N.J. 138, 146-47 (1968)
(discussing historical context of Debt Limitation Clause’s
adoption); McCutcheon v. State Bldg. Auth., 13 N.J. 46, 67-68
(1953) (Jacobs, J., dissenting) (same), overruled by Enourato v.
N.J. Bldg. Auth., 90 N.J. 396, 410 (1982). Those cases indicate
that in drafting the Debt Limitation Clause, the Framers
intended to empower the people of the State by giving them the
final word in respect of creating financial commitments that
might impair the State’s fiscal health and have inter-
generational repercussions. See Lonegan I, supra, 174 N.J. at
464 (“The framers believed that future generations of taxpayers
31 should not have to pay for their generation’s mistakes.”);
Spadoro v. Whitman, 150 N.J. 2, 12-13 (1997) (Handler, J.,
concurring in part and dissenting in part) (explaining that Debt
Limitation Clause serves the “broad and fundamentally important
purpose of not binding future majorities to the financial
policies of current majorities”).
Similarly, on several occasions this Court has canvassed
the development of its Debt Limitation Clause jurisprudence and,
again, Lonegan I, supra, represents the most recent of those
discussions. 174 N.J. at 445-52; see also, e.g., id. at 475-93
(Stein, J., concurring in part and dissenting in part)
(discussing in detail Debt Limitation Clause jurisprudence); In
re Loans of N.J. Prop. Liab. Ins. Guar. Ass’n, 124 N.J. 69, 75-
77 (1991) (recounting this Court’s cases involving Debt
Limitation Clause). The decisions in Lonegan I and Lonegan II
distilled the animating principle applied throughout those
decisions: the State cannot by contract or statute create a
binding and legally enforceable financial obligation above a
certain amount that applies year to year without voter approval.
See Lonegan II, supra, 176 N.J. at 13-14; Lonegan I, supra, 174
N.J. at 462-63. Such long-term financial arrangements require
voter approval to be enforced; or, such financial promises
otherwise avoid the Debt Limitation Clause’s interdiction by
being regarded as expressions of intent to provide the funding,
32 but they must be subjected to the annual appropriation process
for fulfillment in whole, in part, or not at all. See Lonegan
II, supra, 176 N.J. at 14-15 (“When contract or appropriations-
backed debt is issued, . . . the State does not pledge its full
faith and credit and is not legally bound to make payment on
that debt.”); Lonegan I, supra, 174 N.J. at 462-63.
In Lonegan II, supra, this Court confronted “a broad
challenge to the validity of fourteen New Jersey statutes
authorizing contract or appropriations-backed debt.” 176 N.J.
at 4. The plaintiffs argued that the “subject to appropriation”
qualification contained in the statutes authorizing financial
obligations was meaningless because the State’s failure to
appropriate funds to make the particular bond payments would
negatively affect the State’s credit and access to financial
markets; thus, according to the plaintiffs, appropriations-
backed financial obligations were effectively “full faith and
credit bonds” requiring voter approval to pass muster under the
Debt Limitation Clause. See id. at 10-11.
This Court rejected the plaintiffs’ challenge, noting that,
“[u]nder our case law, only debt that is legally enforceable
against the State is subject to the Debt Limitation Clause.”
Id. at 13. The Court continued: “By its terms, . . . the
Clause as written requires voter approval only when the State is
legally required to make payment on the debt it has incurred.”
33 Id. at 14. Therefore, the various statutory financing
mechanisms at issue in Lonegan II did not violate the Debt
Limitation Clause: because payments on contract or
appropriations-backed debt are necessarily left to the
Legislature’s discretion to appropriate, the State is not
legally bound to make such payments. See id. at 14-15 (citing
Enourato, supra, 90 N.J. at 410; N.J. Sports & Exposition Auth.
v. McCrane, 61 N.J. 1, 14, appeal dismissed, 409 U.S. 943, 93 S.
Ct. 270, 34 L. Ed. 2d 215 (1972)).
The Lonegan II Court recognized that, at the time the Debt
Limitation Clause was adopted, “[t]he variety of financing
mechanisms employed in both the private and the public sectors
today were unheard of,” id. at 14; indeed, “the variety of
functions assumed by the government since the 1800s, and the
sophisticated means now used to finance those functions, make it
difficult if not impossible to differentiate among acceptable
and unacceptable types of twenty-first century appropriations-
backed debt under a nineteenth-century paradigm,” id. at 15
(citations omitted). The trial court in this matter interpreted
that expression as exhibiting this Court’s “willingness to find
a contemporary, workable interpretation of the Clause to
accommodate fiscal realities in the [twenty-first] century,” and
as evidencing the Court’s “flexible approach” when confronted
with legislation implicating the strictures of the Clause. The
34 trial court determined that that flexibility allowed Chapter 78
to bind the State in the manner intended by the Legislature.
However, the trial court based its Debt Limitation Clause
analysis on a fundamental misperception of the flexibility that
was discussed in Lonegan II. In Lonegan II, we recognized
flexibility in the manner in which financing is structured,
noting that many types of financing used today were not in use
in 1844 (i.e., sale and leaseback agreements). See id. at 14-
15. The Lonegan II decision acknowledged the need for
flexibility in modern financing, and adjusted for same in the
performance of a Debt Limitation Clause analysis by reducing the
prohibited conduct to an easily understood principle: so long
as the State’s full faith and credit is not pledged and a
legally enforceable financial obligation, above a certain amount
and lasting year to year, is not created, without voter
approval, no Debt Limitation Clause violation ensues. See id.
at 13-15. As applied in the circumstances presented in Lonegan
II, if a financial obligation is made dependent on securing an
appropriation from year to year, then parties are apprised of
the element of risk and no constitutional debt limitation
violation arises. What matters is not what the financing scheme
is called, but rather how it operates.
Lonegan II thus requires a court confronted with a Debt
Limitation Clause issue to drill down to determine if a
35 purported debt or liability, created in any manner, establishes
an impermissible legally enforceable obligation binding the
State and compelling the appropriation of monies in future
years. The trial court’s analysis in this matter found Lonegan
II’s reference to flexibility to encompass a permissive approach
to modern financing methods tied only to the identified,
evolving public good that the modern form of financing will
serve. That reading is inconsistent with Lonegan II’s analysis
and holding, as well as the jurisprudence it synthesized. In
sum, the atmosphere of flexibility that the Lonegan II analysis
exudes cannot be divorced from the Debt Limitation Clause’s
stark directives, the Lonegan II Court’s clear statements
concerning the import of the Clause, or other of this Court’s
decisions assessing the Clause’s restrictions. See, e.g.,
Enourato, supra, 90 N.J. at 410 (noting Debt Limitation Clause
not implicated where State not legally obligated to make
appropriations); City of Camden v. Byrne, 82 N.J. 133, 152
(1980) (“The obligations created by the various statutes under
which the several plaintiffs in this action claim entitlement,
if directly enforceable as appropriations, would constitute
debts incurred by the Legislature contrary to the terms and
intent of the constitutional debt limitation clause.”); City of
Passaic v. Consol. Police & Firemen’s Pension Fund Comm’n, 18
N.J. 137, 147 (1955) (holding legislation “provid[ing] that the
36 State shall annually contribute” to pension fund did not create
debt (emphasis added)).
To the extent plaintiffs argue that Chapter 78 does not
implicate the Debt Limitation Clause, we pause to address the
assertion that the Clause’s language and intent is “to prevent
the State from creating new debts or liabilities, not to prevent
it from paying for overdue ordinary expenses,” like Chapter 78’s
“payment plan,” which does not include borrowing, principal, or
interest, and is “contingent on the exact amount actually owed.”
In support, plaintiffs rely on cases that are cited as
distinguishing between ordinary expenses of government and
borrowing, specifically Bulman v. McCrane, 64 N.J. 105, 117-18
(1973), and minority views expressed by separately writing
Justices as supporting the distinction we are asked to embrace.
(Citing Spadoro, supra, 150 N.J. at 10-11; Lance v. McGreevey,
180 N.J. 590, 603 (2004); Lonegan v. State, 341 N.J. Super. 465,
487-88 (App. Div. 2001)). The trial court resorted to a
“borrowing only” interpretation of the Debt Limitation Clause to
conclude that the Clause’s interdiction did not apply to the
instant contractual language.
The approaches to the Debt Limitation Clause maintained by
plaintiffs and utilized by the trial court are belied by the
Clause’s language and application in prior case law.
37 First, we need only look to the plain language of the Debt
Limitation Clause to discern that its prohibition is broad. It
is clearly written to have wide sweep, covering “debts” or
“liabilities” created “in any manner,” thereby reaching various
forms of financial arrangements. The Framers underscored their
broad intent through the inclusion of the “in any manner”
language. Nothing about that language supports that traditional
borrowing scenarios were the only intended prohibited
transactions. That interpretation would render meaningless the
“debt” or “liability” language, which has added dimension due to
the inclusion of the “created in any manner” language. We do
not support interpretations that render statutory language as
surplusage or meaningless, and we certainly do not do so in the
case of constitutional interdictions. See Innes v. Innes, 117
N.J. 496, 509 (1990) (noting “well-established canon[] of
statutory interpretation” that “avoid[s] constructions that
render any part of a statute inoperative, superfluous, or
meaningless” (citations omitted)); Kervick v. Bontempo, 29 N.J.
469, 480 (1959) (“The Constitution was made to serve and protect
the people of the State and all of its language must be sensibly
construed with that uppermost in mind.”); Gangemi v. Berry, 25
N.J. 1, 10 (1957) (“[I]t is to be presumed that the words
employed have been carefully measured and weighed to convey a
38 certain and definite meaning, with as little as possible left to
implication.”).
Second, if only borrowing invoked the Clause’s prohibition,
this Court would not have engaged in Debt Limitation Clause
analyses in prior decisions addressing settings that clearly did
not involve traditional borrowing or debt instruments. Rather,
many forms of promises to pay in statutory as well as in
contractual settings that did not involve traditional borrowing
have invoked Debt Limitation Clause analyses. See, e.g.,
Bulman, supra, 64 N.J. at 117-18 (holding long-term lease did
not create present debt within meaning of Debt Limitation Clause
because rent installments were subject to appropriation); City
of Passaic, supra, 18 N.J. at 144, 147 (holding statutory
requirement that State shall contribute annually to pension
funds did not violate Debt Limitation Clause because “present
legislation merely provides that the State shall annually
contribute to the fund”).
Those analyses were necessary because the Clause’s
animating principle is to prevent well-meaning state actors from
presently binding the State to enforceable future financial
obligations over a certain amount -- one percent of the annual
appropriations act -- unless voter approval has been secured.
Otherwise any such promises to pay must be subjected to the
39 appropriations process.5 That simple yet definite dividing line
between transactions that avoid a Debt Limitation Clause
transgression and those that do not is the common theme to the
Clause’s jurisprudence.6 The Clause’s plain language directs
voter approval for long-term liabilities or debt in excess of
5 Thus, this Court’s case law has found reason to conclude that the Debt Limitation Clause is not violated when the State indicates that it is not bound to expend state monies or has erected structural barriers through the use of independent agencies (or dedicated streams of non-General Fund revenue) that prevent the financial obligation from being enforceable and made an obligatory expenditure under the annual appropriations act. See, e.g., N.J. Sports & Exposition Auth., supra, 61 N.J. at 11 (statute empowering New Jersey Sports and Exposition Authority to issue bonds to finance construction of Meadowlands Complex provided that bonds issued were “under no circumstances debts of the State,” and bonds themselves were required to carry statement that “the State . . . is [not] obligated to pay . . . [the bonds’] principal or interest and that neither the faith and credit nor the taxing power of the State . . . is pledged to the payment of the principal of or the interest on such bonds” (citation and internal quotation marks omitted)); N.J. Tpk. Auth. v. Parsons, 3 N.J. 235, 242 (1949) (legislation authorizing New Jersey Turnpike Authority to issue bonds to finance construction of Turnpike stated “bonds . . . shall be payable solely from . . . tolls and revenues of all or any part of the turnpike project . . . .”).
6 Because we find no ambiguity in the Debt Limitation Clause or in this Court’s case law interpreting it, we find unpersuasive out-of-state case law interpreting the debt limitation clauses of other state constitutions to be limited to borrowing only, notwithstanding the trial court’s use of such cases in reaching its conclusion. See, e.g., Village of Chefornak v. Hooper Bay Constr. Co., 758 P.2d 1266, 1270 (Alaska 1988); Rochlin v. State, 540 P.2d 643, 648 (Ariz. 1975); State ex rel. Wittler v. Yelle, 399 P.2d 319, 324-25 (Wash. 1965); Columbia Cnty. v. Bd. of Trs., 116 N.W.2d 142, 153 (Wis. 1962).
40 the Clause’s threshold prohibitory amount. Moreover, it
established parameters for the incurring of any interest
obligation and set a thirty-five year duration for full payment
of any long-term obligation.
The Debt Limitation Clause’s prohibition against the
incurring of future debt or liability is vital and it is broad -
- sufficiently broad to reach long-term financial obligations
addressing so-called operating expenses. Despite plaintiffs’
argument to the contrary, the holding of Lance v. McGreevey,
supra, 180 N.J. at 596-99, does not exempt “operating expenses”
from the Clause’s prohibition against entering into long-term
binding and enforceable financing arrangements crossing fiscal
years. Lance stands for the proposition that long-term
financial arrangements seeking to bind future Legislatures to
make specific annual appropriations cannot be reconciled with
the Constitution’s commands in respect of legislative financing,
even when those arrangements are proposed for the unorthodox
purpose of funding “operating expenses” of government. See
ibid. In short, neither the fact that Chapter 78 seeks to
correct the failure of previous administrations to properly fund
the pension systems nor plaintiffs’ designation of the Chapter
78 funding mechanism as an “operating expense” of government
remove Chapter 78 from the Debt Limitation Clause’s purview.
41 Third, as this Court’s decisions reflect, the Clause was
intended by the Framers to play a coordinate role with the
Appropriations Clause of the State Constitution. In
combination, the Debt Limitation Clause and the Appropriations
Clause of the New Jersey Constitution interdict the Legislature
from creating a debt or liability, in any manner, in excess of a
certain amount that binds the State to appropriate funds in
future fiscal years. A consistent line of cases from our Court
holds that the Appropriations Clause operates to render
purported dedications of monies as line items in forthcoming
appropriations acts as mere expressions of intent to pay. Thus,
a “debt” or “liability” that is subject to appropriation through
the annual appropriations process violates neither the Debt
Limitation Clause nor the Appropriations Clause. Examination of
our prior precedent reveals the case law’s consistency on these
subjects.
The Appropriations Clause of the New Jersey Constitution
mandates that:
No money shall be drawn from the State treasury but for appropriations made by law. All moneys for the support of the State government and for all other State purposes as far as can be ascertained or reasonably foreseen, shall be provided for in one general appropriation law covering one and the same fiscal year; except that when a change in the fiscal year is made, necessary provision may
42 be made to effect the transition. No general appropriation law or other law appropriating money for any State purpose shall be enacted if the appropriation contained therein, together with all prior appropriations made for the same fiscal period, shall exceed the total amount of revenue on hand and anticipated which will be available to meet such appropriations during such fiscal period, as certified by the Governor. [N.J. Const. art. VIII, § 2, ¶ 2.]
Under this Clause, the power and authority to appropriate
funds is vested in the Legislature. See City of E. Orange v.
Palmer, 52 N.J. 329, 337 (1968). The Clause has three
requirements. One, all withdrawals of money from the State
Treasury must be accomplished through legislative appropriation.
Karcher v. Kean, 97 N.J. 483, 488 (1984). Two, the Legislature
must provide for that appropriation “‘in one general
appropriation law covering one and the same fiscal year.’”
Ibid. (quoting N.J. Const. art. VIII, § 2, ¶ 2). And three, the
budget created by the appropriations law must be balanced; the
State cannot “adopt[] an annual budget in which expenditures
exceed revenues.” Lance, supra, 180 N.J. at 596.
The legislative authority to appropriate is subject to a
system of checks and balances. Karcher, supra, 97 N.J. at 489.
The Governor is authorized by statute to “examine and consider
all requests for appropriations” and to “formulate . . . budget
recommendations” to submit to the Legislature. N.J.S.A. 52:27B-
43 20. More importantly, the Governor is constitutionally
empowered to reject any item or items contained in an
appropriations bill through the exercise of a selective veto
(the line-item veto power). N.J. Const. art. V, § 1, ¶ 15.
That veto may be overridden by a two-thirds vote of both the
Senate and General Assembly. Ibid. When the Legislature does
not reenact itemized appropriations by overriding the Governor’s
line-item vetoes, that action is regarded as intentional and
advertent, and any earlier statutes purporting to appropriate
future monies “must be deemed to be suspended by adoption of the
later appropriation acts.” City of Camden, supra, 82 N.J. at
154 (citations omitted).
The significance of the Appropriations Clause, and its
related budgetary provisions, has long been recognized. “The
constitutional requirement of a unitary general appropriations
law . . . is the center beam of the state’s fiscal structure.”
Karcher, supra, 97 N.J. at 488. The constitutional provision
“was intended to eliminate uncoordinated spending on the state
level and to overcome the inefficiency, confusion and abuses
which had surrounded the practice of using separate and
different budgets, appropriations, and fiscal years within State
government.” City of Camden, supra, 82 N.J. at 146-47 (citation
omitted).
44 Equally, this Court has recognized the Judiciary’s “absence
of authority” for any role in the budgetary process. Karcher,
supra, 97 N.J. at 490 (citations omitted); see also Fitzgerald
v. Palmer, 47 N.J. 106, 108 (1966) (citing Appropriations Clause
in holding that even if court imposed payment obligation on
State, courts “could not enforce a judgment”). Because “the
power and authority to appropriate funds lie solely and
exclusively with the legislative branch of government,” City of
Camden, supra, 82 N.J. at 148 (citations omitted); see also
Commc’ns Workers of Am. v. Florio, 130 N.J. 439, 451 (1992)
(reaffirming Court’s “commitment to that fundamental
constitutional principle”), “[t]here can be no redress in the
courts to overcome either the Legislature’s action or refusal to
take action pursuant to its constitutional power over state
appropriations,” City of Camden, supra, 82 N.J. at 149, 149-50
(citations omitted) (declining to find that statutes purporting
to dedicate funds for local government uses constituted
enforceable legislative appropriations); see also N.J. Div. of
Youth & Family Servs. v. D.C., 118 N.J. 388, 399-400, 402 (1990)
(following City of Camden in holding that Court could not order
appropriation for payment to appointed counsel for indigent
parents in termination-of-parental-rights actions, and adding
specific rejection of argument that such power existed because
45 appointment scheme constituted taking without just
compensation).
In City of Camden, supra, several municipalities and
counties brought actions against State officials, arguing that
certain State revenues should have been appropriated for their
use as provided in various statutes. 82 N.J. at 141-45.
However, the appropriations act for that fiscal year failed to
include an appropriation of said funds. See ibid. This Court
held that the Appropriations Clause “firmly interdicts the
expenditure of state monies through separate statutes not
otherwise related to or integrated with the general
appropriation act governing the state budget for a given fiscal
year.” Id. at 146 (emphasis added). Therefore, the laws at
issue (1) “d[id] not constitute legislative appropriations in
and of themselves” but instead “purport[ed] to ‘dedicate’ state
revenues for a particular purpose,” (2) were not properly
“included within a single appropriation law encompassing one
fiscal year,” and (3) could not “serve . . . as valid authority
for the withdrawal of monies from the State treasury” under the
Appropriations Clause. See id. at 145-47. Given the
Legislature’s “inherent power to disregard prior fiscal
enactments,” id. at 147, the Court held that it could not compel
the Legislature to appropriate in accordance with those
statutes, see id. at 150.
46 Further, the Court explained that to find otherwise -- to
enforce the statutes as legislative appropriations -- would
undermine the Appropriations Clause requirement that
appropriations “be incorporated into a single balanced budget in
which current expenditures must be met by current revenues.”
Id. at 151. Rather, the Appropriations Clause is intended to be
“an effective barrier to any judicial or executive attempts to
give independent effect as appropriations to miscellaneous
statutes calling for the disbursement of state revenues.” Ibid.
Moreover, the Court in City of Camden underscored that
“[t]he constitutional fulcrum [wa]s not shifted by attempts to
characterize the several statutes as creating ‘substantive
rights.’” Id. at 148. In fact, the Court noted that even if
the statutes conferred substantive rights to the funds, it would
“in no way diminish[] the Legislature’s constitutional control
over the state fisc.” Ibid.; see also Lonegan II, supra, 176
N.J. at 18 (noting that State may enter into lease agreement but
it “is not legally bound to make the rental payments and can opt
not to do so”); Enourato, supra, 90 N.J. at 410 (noting that
although New Jersey Building Authority Act “contemplates that
the State will make the necessary appropriations [for
contractual lease payments] . . . , the State is under no legal
obligation to do so” (citation omitted)).
47 The analysis and holding in Enourato presents, perhaps, the
paradigmatic example of the effect of the intersection of the
Debt Limitation and Appropriations Clauses. In Enourato, supra,
the Legislature enacted the New Jersey Building Authority Act
(Act), which authorized the New Jersey Building Authority
(Authority) to issue bonds to finance the construction and
operation of State offices. 90 N.J. at 399. The Authority’s
bonds were to be repaid from rents received from State agencies
that leased the Authority’s facilities. Id. at 402. “In fact,
the rental fees [we]re calculated to satisfy the Authority’s
obligations on its bonds and notes.” Ibid. In addition to the
bonds, which “state[d] on their face that they shall not create
any indebtedness, liability or obligation of the State,” id. at
399 (citation omitted), the Act declared that payment of rent to
the Authority was “‘subject to and dependent upon appropriations
being made from time to time by the Legislature for that
purpose,’” id. at 402 (quoting N.J.S.A. 52:18A-78.22).
The Court held that
[t]he Authority’s bonds and notes are not a debt or liability of the State. They state on their face that the State does not pledge its faith and credit to their payment. Although the Act not only contemplates that the State will make the necessary appropriations but also seeks to ensure this result, the State is under no legal obligation to do so. . . .
Nor does the liability of the State on its lease agreements with the Authority create
48 any debt of the State. Both the statute and the lease make clear that all rent payments from the State are subject to legislative appropriations.
[Id. at 410 (citations omitted).]
Thus, in circumstances where legislation sought to bind
future Legislatures in a manner that implicated both the Debt
Limitation and Appropriations Clauses, this Court was careful to
note that the legislation survived those Clauses because the
Legislature retained its constitutionally enshrined power to
annually appropriate funds as necessary for the fiscal health of
the State. No such reservation of power can be found in Chapter
78.
Applying those principles here, Chapter 78’s purported
creation of an enforceable long-term financial contractual
obligation, payable by the State through dedicated line items in
ensuing annual appropriations acts, falls squarely within the
sights of the Debt Limitation Clause and all that that Clause is
intended to prohibit. The Debt Limitation Clause precludes such
action precisely to save the State from itself –- itself being
the presently positioned, albeit well-intentioned legislators
and Governor, who were not given permission to fiscally bind, by
contract or otherwise, future taxpayers, legislators, and
governors tasked with evaluating on an annual basis the
49 appropriations spending for the fiscal year in issue, unless
voter approval was obtained.
The Legislature and Governor were without power, acting
without voter approval, to transgress the Debt Limitation Clause
and, similarly, the corresponding Appropriations and other
budget clauses of the State Constitution. See Behnke v. N.J.
Highway Auth., 13 N.J. 14, 24 (1953) (“A state constitution,
unlike the Federal Constitution, is not a grant but a limitation
of legislative power. The State Legislature exercises a portion
of the sovereign power residing in the people, subject to the
limitation imposed by the Federal Constitution and its own
organic law . . . .”); see also City of Camden, supra, 82 N.J.
at 146 (noting that Appropriations Clause “cannot in any sense
be regarded as merely providing governmental ‘housekeeping
details,’ necessary and important but not truly vital”).
The Legislature and Governor, as well as the many
interested parties involved in the legislative process, may have
included contractual words in Chapter 78, but those words, no
matter their clarity, could not create an enforceable contract
of the type asserted. The Debt Limitation Clause barred it.
The amount of monies that Chapter 78 purports to contractually
require the State annually to dedicate to pay down the unfunded
liability of the various pension funds -- for example, the
amount required in FY15 -- substantially exceeds the limits
50 annually allowed under the Debt Limitation Clause. In light of
the Debt Limitation Clause’s constitutional command, we hold
that the contract rights set forth in Chapter 78 did not create
a legally binding financial contract enforceable against the
State.
Voter approval is required to render this a legally
enforceable contractual agreement compelling appropriations of
this size covering succeeding fiscal years; otherwise, this
agreement is enforceable only as an agreement that is subject to
appropriation, which under the Appropriations Clause renders it
subject to the annual budgetary appropriations process. In that
process, the payment may not be compelled by the Judiciary. See
City of Camden, supra, 82 N.J. at 147-49 (addressing statutes
purporting to create dedications of monies in future fiscal
years); Enourato, supra, 90 N.J. at 402, 410 (addressing
contracts promising to pay monies in future fiscal years).
At bottom, this matter concerns a statute. Contrary to
what plaintiffs argued to this Court, this statute is not
immutable. To restore their fiscal health, Chapter 78 set a
schedule for payments into the pension funds that is capable of
being revisited and evaluated in the political budgetary process
against competing fiscal demands, as Appropriations Clause case
law demands. This is City of Camden v. Byrne dressed in new
clothing. Despite its trappings, Chapter 78 cannot
51 constitutionally dedicate future amounts of monies, in excess of
Debt Limitation Clause limits, without voter approval. Absent
compliance with the Debt Limitation Clause requirement of voter
approval, Chapter 78’s contractual language does not work an
evasion of the rigors of the annual appropriations process. We
conclude that Chapter 78 must be interpreted constitutionally to
be an obligation that is subject to appropriation.
In sum, Chapter 78 collides with state constitutional
provisions; the Debt Limitation Clause, the Appropriations
Clause, and related budgetary constitutional provisions prevail.
Those constitutional provisions establish the Constitution’s
prescribed way in which State government is to work. The
Legislature was without power to alter that annual budget-
setting scheme. Inclusion of contract words in Chapter 78 does
not alter that outcome. This is not a clash between a
“constitutional contract right,” as the trial court and
plaintiffs denominate it, and the Debt Limitation and
Appropriations Clauses. There simply is no legally enforceable
financial obligation imposed on the State by virtue of Chapter
78’s enactment. That interpretation reconciles the present
statute’s desired funding mechanism with the constitutional
provisions that define the State’s annual budget process.
Indeed, the Legislature’s strong expression of intent remains
clear in Chapter 78, but it does not bind future legislatures or
52 governors in a manner that strips discretionary functions
concerning appropriations that our Constitution leaves to the
legislative and executive branches.
Because of the importance of maintaining the soundness of
the pension funds, the loss of public trust due to the broken
promises made though Chapter 78’s enactment is staggering. We
recognize that the present level of the pension systems’ funding
is of increasing concern, as does the dissent.7 But this
constitutional controversy has been brought to the Judiciary’s
doorstep, and our obligation is to enforce the State
Constitution’s limitations on legislative power. The hyperbole
of the dissent is no replacement for legal precedent, and it
does not nullify state constitutional law interdicting the
formation of the so-called binding contractual right asserted by
plaintiffs. Our State Constitution compels the declaration that
there is no valid contractual right under Chapter 78 that
provides the basis for a contract impairment analysis under
either the State or Federal Constitutions.
7 The concern that the pension systems are underfunded and placed at risk does not license casting aside the Constitution’s protections against financial ruin with the serenity embraced by the dissent. Our paramount obligation is to enforce the Constitution’s prohibitions evenhandedly, whenever they apply, notwithstanding the mutual and legitimately widespread interest in seeing the fiscal health of the funds restored to safe levels.
53 IV.
We briefly pause to address views expressed in the dissent.
First, we note that even the dissent acknowledges that any
Federal Contracts Clause analysis begins with a determination
whether a binding contractual obligation has been created. See
post ___ (slip op. at 29). And, whether legislative action
creates a valid contract under state law goes beyond a
determination of clear intent to enter into a contract; it
includes the authority of a legislature to enter into the
contract under the law of the state. See Appleby, supra, 271
U.S. at 380, 46 S. Ct. at 573, 70 L. Ed. at 999 (explaining, in
Federal Contracts Clause analysis, that “construction and
effect” of contract at issue depended on “the extent of the
power of the State and city” under New York law to deed property
under navigable waters to private persons). Thus, the
impediment that the dissent seeks to ignore -- the State
Constitutional interdiction against authorizing the Legislature
to enter into a contract of the binding nature that plaintiffs
argue and the dissent would find -- cannot be avoided.8 It is
8 Although federal courts independently evaluate whether a valid contract exists, that inquiry generally is recognized to turn on state law and the United States Supreme Court accords “great weight” to a state’s highest court on this issue. See Brand, supra, 303 U.S. at 100, 58 S. Ct. at 446, 82 L. Ed. at 691. In Brand, supra, the United States Supreme Court held that Indiana law permitted formation of teacher contracts for an “indefinite period,” see id. at 105, 58 S. Ct. at 448, 82 L. Ed. at 693, but 54 the necessary first hurdle no matter how much one might prefer
to avoid it.
In postulating that the constitutional restrictions of the
Debt Limitation Clause do not pertain to Chapter 78, the dissent
picks selectively from language in certain prior Debt Limitation
Clause cases. See, e.g., post at ___, ___, ___ (slip op. at 17,
19, 21). The dissent’s effort to find the Debt Limitation
Clause inapplicable to the asserted financial obligation at
issue demonstrates the thinness of its analysis. The argument
mounted by the dissent is irreconcilable with our Debt
Limitation Clause jurisprudence.
The dissent’s logic breaks down under scrutiny because it
does not -- and cannot -- account for the uniform line of
reasoning in this Court’s decisions regarding the Debt
Limitation Clause and its impact on legislative attempts to
create legally enforceable financial obligations to which the
State is bound year to year. That reasoning was summed up in
in that case the Indiana Supreme Court invalidated such contracts based on its belief that the legislature, in general, could not contract to cede its power to change governmental policy in the future, Indiana ex rel. Anderson v. Brand, 5 N.E.2d 531, 532-33 (Ind. 1937). Unlike the present case, the Indiana Supreme Court did not rely on an express, specific provision in its state constitution restricting legislative power to enter into the contract at issue. Ibid. The dissent points to no federal case in which a court held that the Contracts Clause allows the creation of a contract that is interdicted by a distinct restriction on legislative power in a state constitution. 55 the most contemporary majority opinion on the subject, Lonegan
II, supra, where we said that “debt that is legally enforceable
against the State is subject to the Debt Limitation Clause,” 176
N.J. at 13, and further reinforced that, “[b]y its terms, . . .
the Clause as written requires voter approval only when the
State is legally required to make payment on the debt it has
incurred,” id. at 14. Our State’s constitutional case law has
held true to this essential principle, and that principle
defeats the dissent’s position in this matter. See Lonegan I,
supra, 174 N.J. at 446 (reaffirming that Debt Limitation Clause
applies whenever State is legally obligated to have Legislature
make payments of certain magnitude over successive fiscal
years); In re Loans of N.J. Prop. Liab. Ins. Guar. Ass’n, supra,
124 N.J. at 77 (noting that loan can avoid transgressing debt
clause by rendering it contingent on whether “Legislature will
vote the necessary appropriation”); Enourato, supra, 90 N.J. at
410 (affirming that Debt Limitation Clause prohibition avoided
if State not legally obligated to make appropriations for
contractual leaseholds); Bulman, supra, 64 N.J. at 117-18
(holding long-term lease did not violate debt clause because
rent installments were annually subject to appropriation);
Holster v. Bd. of Trs., 59 N.J. 60, 72-73 (1971) (holding that
statute purporting to require State funding was, in fact,
subject to appropriation; thus, statute did not violate Debt
56 Limitation Clause). Despite the rhetoric, the emotional
references to the charged situation in which this financial
issue has arisen, and the modifiers used by the dissent to
undermine our mere present application of long-standing Debt
Limitation Clause principles of law, the dissent’s argument
gains no greater substance. Try as it might to interpret Debt
Limitation Clause case law as governing only a narrow category
of obligation, the dissent simply cannot wish away this Court’s
longstanding precedent.
Moreover, the dissent’s suggestion that pension commitments
are exempt from the Debt Limitation Clause does not withstand
scrutiny. No case holds that because a statute relates to
pensions for public servants it somehow evades the Debt
Limitation Clause case holdings. As noted earlier, it is of no
moment whether a matter relates to pensions or is labeled one
that involves the overused term of “ordinary operating expense”;
the label does not control the analysis. What matters is not
what the financing scheme is called, but the manner in which it
operates. See supra at ___ (slip op. at 35). Thus, contrary to
the dissent’s assertion, the subject statute in City of Passaic
did not survive Debt Limitation Clause analysis because the
State’s required annual contribution was “an ‘ordinary
government operating expense.’” See post at ___ (slip op. at
57 17) (quoting dissent in Spadoro, supra, 150 N.J. at 11).9
Instead, as this Court has made clear in numerous cases
interpreting and applying the City of Passaic holding, the
statute at issue there was permissible under the Debt Limitation
Clause because the payment it required was one that was subject
to legislative appropriation; for that reason, it did not create
an impermissible binding financial obligation enforceable
against the State. See Holster, supra, 59 N.J. at 71
(describing “point” of City of Passaic to be “that a projected
or anticipated future legislative appropriation is not a present
debt or liability,” as “[a] future legislature is not bound to
make the appropriation”); State ex rel. McLean v. Lanza, 27 N.J.
516, 525-26 (1958) (referring to statutorily required
contribution in City of Passaic as “a truly ‘voluntary
appropriation’” outside Debt Limitation Clause’s scope).
In the end, this case turns on the legality, under State
constitutional principles, of the Legislature’s attempt to
create a contract in this matter. Because the dissent
misconstrues the import of Debt Limitation Clause jurisprudence,
it fails to appreciate that the Clause bars the Legislature from
9 It bears adding that, although the dissent in this matter relies on the dissents in Spadoro and in Lonegan II, dissenting opinions are not binding authority. See In re Civil Commitment of W.X.C., 204 N.J. 179, 194-95 (2010).
58 creating a binding obligation in Chapter 78. By virtue of that
failure, the dissent inexplicably maintains that Chapter 78
creates some form of federal substantive constitutional right.
See post at ___, ___ (slip op. at 25-26, 33).
The only reconfiguration at work in the consideration of
this matter takes place as part of the dissent’s view of what
contracts may constitutionally be created. In its attempt to
support its basic proposition -- that in order for the
Legislature to create a valid, enforceable legislative contract
in a statute, all that is necessary is a clear and unambiguous
expression of intent on the part of the Legislature -- the
dissent relies entirely on this Court’s holding in Spina, supra.
See post at ___ (slip op. at 10-12). In the dissent, Spina is
elevated to a status never before conferred on it in any prior
opinion: the seminal case regarding the “conditions” for a
binding public contract. See post at ___ (slip op. at 12).
Notwithstanding the dissent’s characterization of this Court’s
holding in Spina, that opinion contains no suggestion that the
Court intended it to serve as a comprehensive guide for the
creation of a contract. Instead, the Court addressed conditions
relevant to the factual context of that case; it did not create
a roadmap setting forth all the conditions that would be, per
se, sufficient to create a valid contract. Moreover, the
dissent’s reference to the Appellate Division’s application of
59 the “test in Spina” in NJEA, post at ___ (slip op. at 11),
ignores the panel’s enumeration of multiple bases for finding
“no constitutionally-protected contract right to systematic
funding,” most significantly the fact that such a finding would
offend the Appropriations and Debt Limitation Clauses of our
State Constitution. NJEA, supra, 412 N.J. Super. at 216-17.
In sum, the State Constitution simply does not permit
Chapter 78’s payment provisions to have any more binding effect
than that of a contract that is subject to appropriation. As it
informed us at argument and in its brief, the State fully
understands the limits imposed by the fiscal clauses. The State
makes, for example, all multi-year collective negotiations
agreements and leases expressly subject to appropriation, as
well as other contract types identified in its briefing,
including payment of claims and judgments under the Tort Claims
Act and the Contractual Liability Act. See N.J.S.A. 59:12-1;
N.J.S.A. 59:13-9.10 Those essential and practical measures by
the State are ignored by the dissent in its perception of how
state government presently conducts its business. It would seem
that it is not the majority’s but the dissent’s view that would
have “far-reaching, negative consequences,” post at ___ (slip
10The State also referenced contracts for the purchase of goods and services that the Division of Purchase and Property enters into and contracts for the rental of property. 60 op. at 6), for the conduct of state government had it been the
one to prevail in this matter.
In closing, to be clear, we are not declaring Chapter 78
unconstitutional, contrary to the dissent’s suggestion that the
majority is “striking down,” “voiding,” or “invalidating” that
statute. Chapter 78 remains in effect, as interpreted, unless
the Legislature chooses to modify it. There is no need to
address severability or the mutuality of obligations. Those
considerations are for the political branches. Finally, it
bears emphasis that the parade of horribles on which the dissent
is focused is premised on the dark prediction that pension
members’ benefits will go unpaid in the future. Again, contrary
to the dissent’s attempt to conflate those issues, that question
of the State’s obligation to pay benefits is not before this
Court. Our holding is, simply, that Chapter 78 cannot
constitutionally create a legally binding, enforceable
obligation on the State to annually appropriate funds as Chapter
78 purports to require.
That the State must get its financial house in order is
plain. The need is compelling in respect of the State’s ability
to honor its compensation commitment to retired employees.11 But
11We reiterate that there is no question that individual members of the public pension systems are entitled to this delayed part 61 this Court cannot resolve that need in place of the political
branches. They will have to deal with one another to forge a
solution to the tenuous financial status of New Jersey’s pension
funding in a way that comports with the strictures of our
Constitution.
The Debt Limitation Clause and the Appropriations Clause
envisioned the absence of the Judiciary from the annual budget-
making process and prevent it from having to perform the
unseemly role of deciding in that process whether a failure to
fully fund a statutory program, including one labeled a
contract, was reasonable and necessary. If we had been required
to engage in a contract impairment analysis, the third prong to
that analysis -- whether the State’s action that substantially
impaired the contract “is reasonable and necessary to serve an
important public purpose,” U.S. Trust Co., supra, 431 U.S. at
25, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112 -- would have
required annual incursions by the Judiciary into second-guessing
spending priorities and perhaps even revenue-raising
considerations in recurring years.
of their compensation upon retirement, but, as stated at the outset, that is not in question in the instant matter before this Court. That said, the State repeatedly asserted at oral argument that it is not walking away from its obligations to the pension systems and to pay benefits due to retirees. 62 The enactment of an appropriations act prior to the June 30
close of the fiscal year is the culmination of a budget process
that entails several months of analysis, hearings in the Senate
and Assembly, and negotiation of a final budget, as described in
this record in the Certifications of State Treasurer Andrew P.
Sidamon-Eristoff and Director of the Division of Budget and
Accounting, Department of the Treasury, Charlene M. Holzbaur.
Were the Court to undertake a contract impairment analysis, that
process would constitute only the first of two steps in the
appropriations process. In any fiscal year in which the payment
mandated by Chapter 78 was not made in full, the second step
could be judicial review of the appropriations determined by the
Legislature and Executive.
In each of those years, the State would be required to
present the argument that it makes before this Court to justify
its reduced pension payment in FY15: that the Legislature’s
decision not to appropriate the full pension payment is
reasonable and necessary so that the State may serve essential
public needs, justifying the contract impairment for purposes of
the Federal and State Contracts Clauses. See U.S. Trust Co.,
supra, 431 U.S. at 25, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112;
Farmers Mut. Fire Ins. Co. of Salem, supra, 215 N.J. at 546-47.
Parties in plaintiffs’ position, seeking to challenge the
reduced payment, would counter that the Legislature improperly
63 placed competing fiscal considerations ahead of pension payments
required by Chapter 78. In short, the propriety of the budget
priorities of the Legislature and Executive would be litigated.
To resolve those arguments, a trial court would be required
to determine whether the Legislature properly balanced competing
budget priorities, a determination likely followed by appellate
review on that issue. The Judiciary could not fairly assess
those priorities without reviewing the information and analysis
on which the Legislature and Executive based the determinations
leading to the Appropriations Act -- a protracted undertaking
that would essentially reproduce the elaborate budgeting process
undertaken in step one.12 The determination to prioritize one
appropriation decision above another is best left to the
marketplace evaluators and the electorate, to whom the State
must answer on such comparative evaluations of fiscal
priorities.
Plaintiffs contend that the remedy imposed by the trial
court does not intrude on powers exclusively granted to the
Legislature and Executive because it is not an order directing a
12Review of the FY15 Appropriations Act reveals that the Legislature made decisions among many competing priorities. In addition to public employee pension contributions, the State’s annual budget included appropriations that encompassed: education aid programs, school construction debt, municipal aid, Medicaid, adult prison and juvenile facilities, human services institutions, property tax relief, and State employee salary programs. See generally L. 2014, c. 14. 64 specific appropriation but, instead, a mere declaratory judgment
representative of the court’s intent to afford the other
branches an opportunity to act “in accordance with the court’s
decree.” That argument presents a distinction without a
difference. If a trial or appellate court determines that the
Legislature’s substantial impairment of a contract is not
“reasonable and necessary to serve an important public purpose,”
U.S. Trust Co., supra, 431 U.S. at 25, 97 S. Ct. at 1519, 52 L.
Ed. 2d at 112, it necessarily makes two critical determinations.
First, the court decides that the Legislature’s budgeting
priorities were misplaced for the fiscal year in question,
violating the Contracts Clause. Second, the court directs that
the budgeting priorities for that fiscal year be reordered and
revised in order that the pension payment be increased. The
absence of an order directing a specific appropriation is of no
moment; the judicial remedy compels the Legislature and
Executive to exercise their constitutional authority in a manner
prescribed by the court, not the manner that they choose.
Ultimately, the Contracts Clause reasonable-and-necessary
analysis implicated in this case would require the Judiciary to
exercise authority that is exclusively granted to the political
branches. N.J. Const. art. VIII, § 2, ¶ 2; N.J. Const. art. V,
§ 1, ¶ 15; see also City of Camden, supra, 82 N.J. at 158;
Karcher, supra, 97 N.J. at 489-90. In this setting, the
65 application of a Contracts Clause analysis by the Judiciary
would cause a violation of our Constitution’s separation-of-
powers principles. See N.J. Const. art. III, ¶ 1 (providing
that no branch of government may “exercise any of the powers
properly belonging to either of the others, except as expressly
provided in this Constitution”).
The practical impact of a Contracts Clause analysis in this
case underscores the wisdom of the fiscal clauses. In denying
the Legislature and Executive the authority to enter into
contracts that violate the Debt Limitation Clause, the
Appropriations Clause, and the line-item veto power of the
Governor, the Framers ensured that State appropriations would be
determined annually by the citizens’ elected representatives, on
the basis of revenue anticipated in a given fiscal year. By
virtue of the constraints imposed by those provisions, the State
is simply not authorized to enter into the financially binding
contract contemplated by Chapter 78, and the Judiciary is not
called upon to reassess the fiscal determinations of its
coordinate branches. The responsibility for the budget process
remains squarely where the Framers placed it: on the
Legislature and Executive, accountable to the voters through the
electoral process. Ultimately, it is the people’s
responsibility to hold the elective branches of government
responsible for their judgment and for their exercise of
66 constitutional powers. This is not an occasion for us to act on
the other branches’ behalf.
Moreover, although the trial court did not reach the issue,
we similarly decline to wade into the murky waters of an equal
protection analysis in respect of the Legislature’s and
Executive’s decision to appropriate for one purpose over another
where subject-to-appropriation liabilities or debts are
concerned. An equal protection analysis as to such decisions
inevitably leads to the same quagmire as a reasonable-and-
necessary analysis, and as we have explained, in this matter the
Judiciary is ill-suited to enter into the political decision
making that accompanies the balancing of competing spending
Our conclusion that no enforceable contract was created
here because the Debt Limitation Clause prohibited the
Legislature and Governor from binding the State to an
enforceable contract of this nature eliminates the need to
engage further in a contract impairment analysis.13
13Although we do not engage in a Federal Contracts Clause analysis, we note only that the dissent’s reliance on United States Trust Co., supra, as support for its sought-after result here is misplaced. 431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92. That case did not involve a finding of contract impairment in the face of constitutional interdiction against contract creation. That case did not involve an appropriations-backed contract. Rather, the offending statute diverted dedicated New York/New Jersey Port Authority toll revenue, thereby materially increasing the risk contractually accepted by bondholders. Id. 67 That conclusion resolves both the federal, as well as any
state, constitutional contract impairment claim.
VI.
The judgment of the trial court is reversed.
JUSTICES PATTERSON, FERNANDEZ-VINA, and SOLOMON and JUDGE CUFF (temporarily assigned), join in JUSTICE LaVECCHIA’s opinion. JUSTICE ALBIN filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER joins.
at 3-4, 9-14, 97 S. Ct. at 1508, 1511-13, 52 L. Ed. 2d at 97-98, 101-04. Thus, the case did not involve any of the state constitutional provisions at issue in this matter. 68 SUPREME COURT OF NEW JERSEY A-55 September Term 2014 075736
CHRISTOPHER BURGOS, Individually and as President of the State Troopers Fraternal Association of New Jersey; JAMES KIERNAN, Individually and as President of State Troopers Non- Commissioned Officers Association of New Jersey State, Inc.; STEPHEN STERNIK, Individually and as President of State Troopers Superior Association of New Jersey; STATE TROOPERS FRATERNAL ASSOCIATION OF NEW JERSEY, on behalf of all its present and retired members; STATE TROOPERS NON-COMMISSIONED OFFICERS ASSOCIATION OF NEW JERSEY, INC., on behalf of all its present and retired members; and STATE TROOPERS SUPERIOR OFFICERS ASSOCIATION OF NEW JERSEY, on behalf of all its present and retired members,
STATE OF NEW JERSEY; CHRISTOPHER CHRISTIE, Governor of the State of New Jersey; ANDREW SIDAMON- ERISTOFF, Treasurer of the State of New Jersey; NEW JERSEY STATE SENATE; and NEW
1 JERSEY STATE GENERAL ASSEMBLY,
COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO; PROFESSIONAL FIREFIGHTERS ASSOCIATION OF NEW JERSEY, IAFF, AFL-CIO; NEW JERSEY FRATERNAL ORDER OF POLICE; AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, COUNCIL 73; AMERICAN FEDERATION OF TEACHERS NEW JERSEY STATE FEDERATION, AFL-CIO; INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, AFL-CIO & CLC, LOCAL 195; HEALTH PROFESSIONAL AND ALLIED EMPLOYEES, AFT, AFL-CIO; NEW JERSEY STATE AFL-CIO; SANDRA P. COHEN; MICHAEL A. JUSTINIANO; DOMINICK MARINO; DONNA CHIERA; DIANE CAMERON; and RUSSELL LEAK,
CHRIS CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
2 and
NEW JERSEY EDUCATION ASSOCIATION; NEW JERSEY STATE POLICEMEN’S BENEVOLENT ASSOCIATION, INC.; NEW JERSEY STATE FIREFIGHTERS’ MUTUAL BENEVOLENT ASSOCIATION; AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, COUNCIL 1, AFL- CIO; CHRISTINE SAMPSON-CLARK; HEIDI OLSON; PATRICIA PROVNICK; KEITH DUNN; PATRICK COLLIGAN; MARC KOVAR; TIM DEUTSCH; KYLE HUGHES; JOHN E. MURPHY, JR.; LANCE P. LOPEZ, SR.; THE NEW JERSEY PRINCIPALS AND SUPERVISORS ASSOCIATION; JANET S. ZYMROZ; JOHN C. ALFIERI, JR.; HOPE GRANT; and ROSARIO CAPACCIO,
STATE OF NEW JERSEY; CHRISTOPHER J. CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
PROBATION ASSOCIATION OF NEW JERSEY, PROFESSIONAL CASE- RELATED UNIT; PROBATION ASSOCIATION OF NEW JERSEY,
3 PROFESSIONAL SUPERVISORS UNION; DWIGHT COVALESKIE; GAVIN CUMMINGS; and ELLEN CRIBBIN,
STATE OF NEW JERSEY; CHRISTOPHER J. CHRISTIE, as Governor of the State of New Jersey; NEW JERSEY DEPARTMENT OF THE TREASURY; and ANDREW P. SIDAMON-ERISTOFF, Treasurer, State of New Jersey,
JUSTICE ALBIN dissenting.
Today, the majority strikes down a law -- Chapter 78, L.
2011, c. 78 -- vaunted by the Governor and Legislature as the
solution to the State’s pension crisis. The decision strikes
down the promise made to hundreds of thousands of public workers
by the political branches of government that deferred wages
earned for years of service would be funded during their
retirement. The decision unfairly requires public workers to
uphold their end of the law’s bargain -- increased weekly
deductions from their paychecks to fund their future pensions --
while allowing the State to slip from its binding commitment to
make commensurate contributions. Thus, public workers continue
to pay into a system on its way to insolvency.
4 The Governor and Legislature cannot walk away from the
contractual commitments they signed into law in Chapter 78.
Their failure to make the required payments into the pension
fund constitutes an impairment of their contract with public
workers. The United States Constitution is the supreme law of
the land, U.S. Const. art. VI, cl. 2, and prohibits any state
from passing a law impairing a contract -- even its own
contract. The Federal Contracts Clause, U.S. Const. art I, §
10, cl. 1, restricts New Jersey from eviscerating the pre-
existing contractual rights of public workers, notwithstanding
provisions of its own Constitution.
The Governor and Legislature have the sovereign power to
enter into contracts. Chapter 78 meets the very conditions set
by this Court for the establishment of a binding public
contract. See Spina v. Consol. Police & Firemen’s Pension Fund
Comm’n, 41 N.J. 391, 404-05 (1964). Despite the legislative
enactment of a public contract satisfying the test in Spina, the
majority announces that those rights belonging to public workers
are unenforceable under the New Jersey State Constitution’s Debt
Limitation Clause, N.J. Const. art. VIII, § 2, ¶ 3, and
Appropriations Clause, N.J. Const. art. VIII, § 2, ¶2.
Never before, until today, has the Debt Limitation Clause
been applied to the ordinary operating expenses of government,
such as deferred compensation earned by public workers and
5 payable as pension benefits. Indeed, this Court previously held
that a statute requiring the State to make annual contributions
to a pension fund is not a debt within the intendment of the
Debt Limitation Clause. See City of Passaic v. Consol. Police &
Firemen’s Pension Fund Comm’n, 18 N.J. 137, 147 (1955).
Moreover, this Court has held that the Appropriations Clause
cannot stand as a barrier to the enforcement of constitutional
rights. In short, the majority’s contention that the Governor
and Legislature’s contract with public workers is unenforceable
under state law has no contemporary legal support.
Even if enforcement of the contractual rights embedded in
Chapter 78 were barred by the majority’s interpretation of the
New Jersey Constitution’s Debt Limitation and Appropriations
Clauses, those rights would be enforceable under the Federal
Constitution’s Contracts Clause, which was intended to prevent
precisely what occurred here -- a State destroying a contract of
its own making. Rights protected by the Federal Constitution
cannot be defeated by a novel interpretation or reconfiguration
of state contract law.
The majority’s decision will have far-reaching, negative
consequences. The majority has declared that it will not
enforce a statute intended to stem decades of political
dysfunction that has resulted in the balancing of budgets on the
backs of public workers. The majority has concluded that it
6 will not uphold any law that the Governor and Legislature pass
that is intended to bind the political branches to funding a
pension system on which public workers relied when entering
public service. The majority states that the rights
contractually promised by the Legislature require voter
approval. However, the Federal Contracts Clause was expected to
protect contractual rights from majority rule.
The majority’s cheery assurance that “there is no question
that individual members of the public pension systems are
entitled to [the] delayed part of their compensation upon
retirement,” ante at __-__ (slip op. at 61-62 n.11), runs
counter to its constitutional analysis that the political
branches cannot be compelled to fund the pension system. The
dismal logic of the majority’s decision is that the political
branches, in accordance with the State Constitution, can let the
pension fund run dry and leave public service workers pauperized
in their retirement.
The public workers, now left without an enforceable legal
right to funding of wages they have earned, are not strangers to
us. They are the police officers who protect our citizens and
neighborhoods from violent crime; the firefighters who enter
burning homes to save lives and salvage property; the teachers
who educate our children; the prosecutors, public defenders, and
judges, and their staffs, who operate our system of justice; the
7 crews who pave our roads and recycle our waste; and the myriad
other workers who, in their unheralded ways, improve the quality
of life for almost nine million people in New Jersey and allow
State and local governments to operate.
Unlike the majority, I believe public workers have
protectable contractual rights under the United States
Constitution -- as the Legislature and Governor intended in
enacting Chapter 78. Chapter 78 was not an aspirational or
moral promise, but a solemn contract, which, once made, is
binding on the State and cannot be nullified without offending
the Federal Constitution’s Contracts Clause. I therefore
respectfully dissent.
The current pension crisis is the backdrop to the
constitutional issues before us. A brief historical primer is
necessary to give those issues context.
Public workers enter into the career service with a
promise, engraved in statute, that part of their wages will be
deferred until their retirement. Public employees have earned
their present and deferred wages by their labor. To fund the
pension system, deductions are made from each employee’s
paycheck, and the State and municipalities are statutorily
required to make their contributions.
8 For decades, the State has been mandated by statute to
“make annual [contributions to the pension system] . . .
pursuant to standard actuarial practices.” L. 1997, c. 113, §
5; see N.J. Educ. Ass’n v. State (NJEA), 412 N.J. Super. 192,
195-96 (App. Div.), certif. denied, 202 N.J. 347 (2010). Since
1997, our pension laws have assured public workers that they
“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). The “‘non-
forfeitable right to receive benefits’ 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 “non-forfeitable right” to receive one’s deferred wages
is a hollow right if there is insufficient money in the pension
fund to pay those wages. Public workers have never been given a
holiday from making their contributions into the pension system.
However, from 1997 through 2012, the State failed to pay its
full annual required contribution. Indeed, over that period,
the State paid less than ten percent of its statutorily required
contribution into the pension system. Truth & Consequence:
Status Report of the N.J. Pension & Health Benefit Study
Commission 6-8 (Sept. 25, 2014). Successive legislatures and
administrations balanced yearly budgets while shortchanging the
9 fund necessary to make good the deferred compensation owed to
public workers. The State’s yearly neglect to pay its
statutorily mandated contribution into the pension fund has
brought us to the current crisis.
In enacting Chapter 78, the Legislature took direction from
this Court’s language in Spina, supra, 41 N.J. at 405, and the
Appellate Division’s language in NJEA, supra, 412 N.J. Super. at
213.
In Spina, this Court spelled out how the Legislature could
make a binding public contract. In that case, firefighters and
police officers brought suit, alleging that a 1944 legislative
enactment increasing the age at which they could retire and
receive pension benefits violated their contractual rights set
in a 1920 law. Spina, supra, 41 N.J. at 393. This Court
determined that the 1920 law did not create a contractual right
to receive benefits at the ages set in that law. Id. at 400.
It came to that conclusion because the 1920 law did not use
sufficiently explicit language to suggest that the Legislature
intended to confer a contractual right. Ibid. The Court noted,
“Not a word smacks of an intent to require or to permit one.”
Ibid. The Court recognized that “the general approach in our
State [is] that the terms and conditions of public service in
office or employment rest in legislative policy rather than
10 contractual obligation.” Ibid. (emphasis added). Nevertheless,
the Court acknowledged that the Legislature had the power to
create binding “public contracts” that restricted its policy
choices. Id. at 405. The Court stated: “The responsibility
for creating public contracts is the Legislature’s. A
commitment of that kind should be so plainly expressed that one
cannot doubt the individual legislator understood and intended
it.”1 Ibid.
The Appellate Division in NJEA, supra, looked to the test
in Spina in resolving the issue before it. See 412 N.J. Super.
at 207-15. In NJEA, certain active and retired members of the
New Jersey Education Association, as well as the Association,
brought a lawsuit seeking redress for the State’s failure to
make its statutorily mandated contributions to the Teachers’
Pension and Annuity Fund for fiscal years 2004 through 2007.
1I disagree with the majority that the Spina Court intended this quoted language to apply only to laws passed by the Legislature creating public contracts enforceable against municipalities and not against the State. While it is true that the focus in Spina was the 1920 law that required municipalities to fund the pension system, the Court’s opinion noted that under legislation in 1944, the “State agreed to contribute $1,000,000 annually” to the pension fund and under legislation in 1952, the State agreed to pay one-third of the “amount needed to achieve actuarial solvency” in the then unfunded deficit. Id. at 396-97. Therefore, the Spina Court undoubtedly recognized that in the realm of pension funding, under its ruling, the legislative creation of contractual rights would bind the State, not just municipalities.
11 Id. at 192, 195-96. The Appellate Division ultimately concluded
that although the public employees who contributed to the
Teachers’ Pension Fund were “entitled by law to the receipt of
vested benefits upon retirement,” they did not possess a
“constitutionally-protected contract right to the particular
level, manner or method of State funding provided in the
statute.” Id. at 196. The appellate panel reached that
conclusion because the statutory language did not “clearly and
unequivocally express an explicit enforceable legislative
commitment” to create a contractual right in the manner required
by Spina. Id. at 213. Referring to Spina, the panel found it
far from clear that the “‘individual legislator[]’ . . . would
have ‘understood and intended’” to create a contractual
obligation to fund the pension system. Id. at 214 (quoting
Spina, supra, 41 N.J. at 405).
In Chapter 78, enacted on June 28, 2011, the Legislature
intended to satisfy the conditions for a binding public contract
required in Spina and NJEA. Both the Legislature and Governor
lauded Chapter 78 as the answer to the irresponsible
underfunding of the pension system in previous years.
The language in Chapter 78 clearly establishes the intent
of the Legislature and Governor to create an enforceable
contractual right to funding of the pension system -- a point
12 not disputed by the majority. N.J.S.A. 43:3C-9.5(c) in relevant
part reads:
(1) The State and all other applicable employers shall make their annual normal contribution to each system or fund . . . . The amount of the State’s annually required contributions shall be included in all annual appropriations acts as a dedicated line item.
(2) Each member of the [State’s pension systems] . . . shall have a contractual right to the annual required contribution amount being made by 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 . . . . 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, Law Division and shall not assert sovereign immunity in such an action.
[L. 2011, c. 78, § 26 (codified at N.J.S.A. 43:3C-9.5(c)) (emphasis added).]
The contractual language here is “so plainly expressed that one
cannot doubt the individual legislator understood and intended
it.” See Spina, supra, 41 N.J. at 405.
Chapter 78’s enactment represented a historic compromise.
Public workers would pay more into the pension fund through
increased deductions from their paychecks, and the State would 13 do what it was always required to do -- pay its fair share into
the fund to insure its solvency. The State’s intention to enter
into a solemn, binding contract with its employees is clear not
only from the plain language of the statute, but also from the
Governor’s various public statements. At a Town Hall appearance
just days before Chapter 78’s enactment, the Governor stated
that the new law “makes it a contractual right of the folks in
the pension system to have those payments made. We’re further
locking ourselves [into] making those payments along those
schedule[s].” See NJ Citizen Action Joins Pension Lawsuit,
http://politickernj.com/2015/04/nj-citizen-action-joins-pension-
lawsuit/ (quoting Governor’s remarks at 2011 appearance). At
the signing of Chapter 78, the Governor stated, “The reforms
that we sign today . . . are an assurance to the hard working
men and women in government all across New Jersey that when the
time comes for them to retire their pension will be there for
them to collect[.]” Press Release, Office of the Governor,
Governor Christie Signs Bipartisan Pension & Health Benefits
Reform Bill (June 28, 2011), available at
http://www.state.nj.us/governor/news/news/552011/approved/201106
28c.html.
No doubt, many public workers took the legislation at its
word, and arranged their lives based on the contractual
14 guarantees in Chapter 78. Some may have remained in the career
service and others joined it based on the seemingly ironclad
contractual language in the legislation.
Chapter 78, like any legislative enactment, was clothed
with a presumption of constitutionality. See Lewis v. Harris,
188 N.J. 415, 459 (2006). That presumption could only be
overcome by a showing that Chapter 78’s “repugnancy to the
Constitution [was] clear beyond a reasonable doubt.” See ibid.
(internal quotation marks and citation omitted). This
jurisprudential canon required that Chapter 78 be read in a way
that strongly favored its validity.
Two years after Chapter 78 was signed into law, and the
public fanfare over its passage, the State reneged on making its
statutorily required payments into the pension system. In an
about-face, the State claimed that the portion of the law
mandating that it make its annual required contribution to the
pension fund violates the Debt Limitation Clause and the
Appropriations Clause of the New Jersey Constitution while
insisting on the validity of that portion of the law mandating
increased deductions from public employees’ paychecks. The
State argued that the law passed by the Legislature and signed
by the Governor was unconstitutional beyond a reasonable doubt.
The majority essentially adopts this argument and submits that
the State’s contractual obligation is unenforceable under the
15 State Constitution.
However, until today’s decision, our jurisprudence, Spina
in particular, signaled that a public contract is enforceable
under the New Jersey Constitution. State law cannot be
reconfigured and then used as an instrument to undermine the
Federal Constitution, which protects against state-legislative
impairment of contractual rights. The Contracts Clause of the
Federal Constitution forbids the State from doing precisely what
occurred here. The State cannot enter into a public contract
when to do so benefits it, and then legislatively impair that
contract when abiding by the contract no longer suits it.
Before turning to federal law, a review of our state-law
jurisprudence will show that the majority has mistakenly
concluded that Chapter 78 violates the Debt Limitation Clause
and Appropriations Clause of the New Jersey Constitution and is
therefore unenforceable.
In striking down Chapter 78, the majority construes the
State Constitution’s Debt Limitation Clause in an unprecedented
way that is at odds with the intent, history, and jurisprudence
of the Clause. The majority also eviscerates Spina’s protection
of public contractual rights.
The Debt Limitation Clause provides in relevant part that
16 [t]he Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, which together with any previous debts or liabilities shall exceed at any time one per centum of the total amount appropriated by the general appropriation law for that fiscal year[.]
This Court has previously determined that the State’s
statutorily required pension contributions are not a debt within
the intendment of the Clause. In City of Passaic, supra, the
Court held that a statute requiring the State to annually
contribute to a pension fund for a period of thirty years did
not violate the Debt Limitation Clause. 18 N.J. at 144, 147.
The Court “reject[ed] the argument that the statutory provision
requiring the State to contribute to the fund constitute[d] the
creation of a state debt contrary to [the Debt Limitation
Clause].” Id. at 147. The Court wrote that “[n]o debt has been
created here, but rather present legislation merely provides
that the State shall annually contribute to the fund.” Ibid.
Implicit in the Court’s decision was a recognition that the
State’s annual contributions did not constitute a debt because
such a payment is an “ordinary government operating expense.”
See Spadoro v. Whitman, 150 N.J. 2, 11 (1997) (Handler, J.,
concurring in part and dissenting in part) (citing City of
Passaic, supra, 18 N.J. 137).
17 In Spadoro, Justice Handler expressed that “[t]he provision
of pensions for public employees is simply a part of the State’s
obligation to compensate its employees, and is clearly a regular
function of government and an ordinary government operating
expense,” and therefore is not a debt. See id. at 11.2
The drafters of the Debt Limitation Clause surely did not
intend that paying public workers for the work they are
presently performing is a debt. The Framers of New Jersey’s
1844 Constitution adopted the Debt Limitation Clause to check
speculative investments by the state and, as such, to restrict
the current Legislature from placing on future generations of
taxpayers binding financial obligations. Lonegan v. State
(Lonegan II), 176 N.J. 2, 14 (2003). The Debt Limitation Clause
“was enacted originally to ‘protect against the type of
2 In Spadoro, supra, the issue was whether the Debt Limitation Clause was violated by a statute providing for the issuance of $2.7 billion in bonds by a state authority that would be “used to pay the State’s obligations for the unfunded accrued liability of several state pension systems.” 150 N.J. at 2-4 (Handler, J., concurring in part and dissenting in part). The Court did not reach the merits of the case because it deemed the issue to be moot. Id. at 2. Justice Handler wrote a separate concurring and dissenting opinion, which concluded that the Debt Limitation Clause was violated by the State’s borrowing of money to pay off its pension obligations. Id. at 4, 10-11 (Handler, J., concurring in part and dissenting in part). Importantly, Justice Handler noted that a statute requiring the State to make annual pension contributions was not a debt under the Clause. Id. at 11.
18 financial debacle experienced’ by other states that had borrowed
without restraint during the 1830s.” Ibid. (emphasis added)
(quoting Lonegan v. State (Lonegan I), 174 N.J. 435, 443-44
(2002)). States engaged in heavy borrowing, speculating in
western lands and risky capital projects that led to a number of
states defaulting on their obligations. Lonegan I, supra, 174
N.J. at 444. Even though New Jersey had not defaulted on its
loans, it sought to prevent financial catastrophe by adopting
one of the country’s first debt limitation clauses. Ibid.
Thus, “the Clause prohibits one Legislature from incurring debts
that subsequent Legislatures would be obliged to pay, without
prior approval by public referendum.” Id. at 444-45 (internal
quotations marks omitted). The Framers, however, did not intend
the Debt Limitation Clause to prevent the State from funding
ordinary, “essential[,] and appropriate governmental functions.”
See Lonegan II, supra, 176 N.J. at 14.
The pension owed to public workers is a form of deferred
compensation for the service they perform and therefore is part
of their accrued salary. Chapter 78 requires the State to make
its contribution to the pension fund so that the deferred
compensation earned by public workers will be available when
they retire. See Corvelli v. Bd. of Trs., 130 N.J. 539, 552
(1992) (noting that “prevailing view” is that pensions are
deferred compensation); Masse v. Bd. of Trs., 87 N.J. 252, 260
19 (1981) (“Th[e] legislative intent that the governmental pension
constitutes compensation for services rendered over a period of
time has been accorded substantial judicial recognition.”).
The State’s withholding of monies from a public worker’s
pension is no different than the State’s withholding part of the
worker’s salary. The Debt Limitation Clause was ratified to
address a much different scenario than obligating the State to
pay the ordinary operating expenses of government, which include
placing a public worker’s deferred wages into a pension fund.
Significantly, no member of the Court, in either the
majority or dissenting opinions in Lonegan II, supra, expressed
a view that requiring the State to pay the ordinary operating
expenses of running the government would be disallowed by the
Debt Limitation Clause. See 176 N.J. at 19. The dissenting
Justices who were inclined to give an expansive reading to the
Debt Limitation Clause in cases involving appropriations-backed
debt would have excluded from the Clause’s reach “labor
agreements, leases, and any other arrangement or transaction
that does not require the State’s contractual borrowing of
funds.” Id. at 24 (Long, Verniero, and Zazzali, JJ.,
dissenting). This viewpoint was well within the mainstream
understanding of the Debt Limitation Clause.
Other states have concluded that mandated contributions to
a pension fund do not constitute a debt for purposes of their
20 debt limitation clauses. See, e.g., Rochlin v. State, 540 P.2d
643, 648 (Ariz. 1975) (concluding that unfunded liability of
pension is not debt under State Constitution’s debt limitations
sections); State ex rel. Wittler v. Yelle, 399 P.2d 319, 320-21,
324-25 (Wash. 1965) (holding that statutes increasing payment to
pension fund did not violate state’s debt limitation clauses
because “debt” is defined as “borrowed money and [does] not
warrant obligations for the payment of the current expenses of
the state government such as services rendered and materials
furnished”); Booth v. Sims, 456 S.E.2d 167, 176 (W. Va. 1994)
(noting longstanding principle that “pension systems do not
involve the creation of an unconstitutional debt” under state’s
debt limitation clause).
Last, in Lonegan II, supra, the Court interpreted narrowly
the “shall not, in any manner, create a debt” language of the
Debt Limitation Clause to exclude “appropriations-backed” debt
from the constraints of the Clause. 176 N.J. at 18-21. Yet,
here the majority reads the “in any manner” language expansively
to disallow payment of the ordinary operating expenses of
government through Chapter 78. See ante at __-__ (slip op. at
37-42). The “in any manner” language should not be elastic when
applied to capital projects but unbendable when applied to human
capital.
In summary, the majority’s voiding of Chapter 78 based on
21 the Debt Limitation Clause cannot be squared with the intent of
the Clause or this Court’s jurisprudence.
Contrary to the majority’s assertions, our State
Constitution’s Appropriations Clause, N.J. Const. art. VIII, §
2, ¶ 2, does not compel the invalidation of Chapter 78. The
Appropriations Clause provides, in pertinent part: “All moneys
for the support of the State government and for all other State
purposes as far as can be ascertained or reasonably foreseen,
shall be provided for in one general appropriation law covering
one and the same fiscal year . . . .” N.J. Const. art. VIII, §
2, ¶ 2. I do not quarrel with the notion that the Legislature
can pass a law funding a project one year, and repeal the
project’s funding the next year. City of Camden v. Byrne, 82
N.J. 133, 154-55 (1980). The Legislature ultimately is
responsible for setting the State’s social policy and needs
against available resources in producing a balanced budget. Id.
at 148. However, as we stated in Spina, supra, the Legislature
can limit its own policy choices by entering into a clear,
unequivocal binding public contract. 41 N.J. at 404-05; see
also Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 97-104, 58
S. Ct. 443, 444-48, 82 L. Ed. 685, 689-93 (1938).
The State knows how to draft a contract to limit its
financial obligation. Many state contracts include language
22 that the contractual terms are subject to appropriation by the
Legislature. On the other hand, the State knows how to draft a
binding public contract. In Spina, this Court set forth the
conditions for the making of an enforceable legislative
contract. The majority’s reading of the Appropriations Clause
renders Spina a nullity. It also runs afoul of the Federal
Contracts Clause. If the enforceability of a contract depends
on the willingness of the Legislature to appropriate money in
any particular year, then, by the majority’s logic, no contract
is enforceable. That conclusion will come as a great surprise
to many who count on the good faith and credit of the State in
honoring its contractual commitments. The Appropriations Clause
cannot stand as a barrier to the enforcement of federal or state
constitutional rights, including contractual rights. See Brand,
supra, 303 U.S. at 97-104, 58 S. Ct. at 444-48, 82 L. Ed. at
689-93; see also Abbott v. Burke (Abbott XXI), 206 N.J. 332,
363-64 (2011); N.J. Div. of Youth & Family Servs. v. D.C., 118
N.J. 388, 399-400 (1990).
In Missouri v. Jenkins, the United States Supreme Court
held that the Supremacy Clause empowers federal courts to compel
states to fulfill their constitutional obligations even if
state-law provisions limit the means of appropriating funds to
do so. 495 U.S. 33, 52-58, 110 S. Ct. 1651, 1663-67, 109 L. Ed.
2d 31, 55-58 (1990). In that vein, a state’s claim to a lack of
23 available funding cannot excuse a state’s constitutional non-
compliance with minimal living and health standards for those
kept in detention facilities. See, e.g., Hamm v. DeKalb Cnty.,
774 F.2d 1567, 1573 (11th Cir. 1985) (“[S]tate’s interest in
limiting the cost of detention . . . will justify neither the
complete denial of [food, living space, and medical care] nor
the provision of those necessities below some minimally adequate
level.”), cert. denied, 475 U.S. 1096, 106 S. Ct. 1492, 89 L.
Ed. 2d 894 (1986); Battle v. Anderson, 594 F.2d 786, 792 (10th
Cir. 1979) (“[C]onstitutional treatment of human beings confined
to penal institutions . . . is not dependent upon the
willingness or the financial ability of the state to provide
decent penitentiaries.” (Internal quotation marks omitted));
Newman v. Alabama, 559 F.2d 283, 286 (5th Cir. 1977)
(“[C]ompliance with constitutional standards may not be
frustrated by legislative inaction or failure to provide the
necessary funds[.]”), cert. denied, 438 U.S. 915, 98 S. Ct.
3144, 57 L. Ed. 2d 1160 (1978).
In Abbott XXI, supra, we rejected the State’s argument that
the appropriation power vested in the Legislature required this
Court to defer to the Legislature’s funding decisions that
violated the rights of certain school children to a thorough and
efficient education. 206 N.J. at 363-64. Simply stated, we
held that the Legislature could not suspend a constitutional
24 right through a shortfall of appropriation. Ibid. In that
case, we found that the State had underfunded its own school-aid
formula and, by doing so, had visited substantial harm on the
school children protected by our State Constitution. Ibid. The
point made in Abbott XXI, and in other cases, is that the
Appropriations Clause must bow to certain constitutional rights,
and particularly to federal rights that have a privileged status
under the Supremacy Clause. In Chapter 78, the Legislature
acknowledged that a violation of its funding commitment would
constitute a contractual impairment, enforceable in Superior
Court where presumably the public workers would invoke the
Federal Contracts Clause. See N.J.S.A. 43:3C-9.5(c)(2). As in
Abbott XXI, here too the State is not funding its own formula in
violation of the Constitution.
Accordingly, the Appropriations Clause is not a bar to the
enforcement of Chapter 78. The majority reminds us that “the
State fully understands the limits imposed by the fiscal
clauses.” Ante at __-__ (slip op. at 60). That being so, the
State must have known that Chapter 78 was in compliance with
those clauses when passed by the Legislature and signed by the
Governor.
Even if the majority were correct about its interpretation
25 of the Debt Limitation and Appropriations Clauses, state law
must bow to rights, such as contractual rights, protected by the
United States Constitution. Article VI, Clause 2 of the Federal
Constitution, known as the Supremacy Clause, provides: “This
Constitution, and the Laws of the United States . . . shall be
the supreme Law of the Land; and the Judges in every State shall
be bound thereby, any Thing in the Constitution or Laws of any
State to the Contrary notwithstanding.” (Emphasis added). The
Federal Contracts Clause forbids precisely what the State did in
this case -- legislatively impairing the contractual rights
conferred on public workers by Chapter 78.
Article I, Section X, Clause 1 of the United States
Constitution holds that “[n]o State shall . . . pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligation of
Contracts . . . .”3 The Governor and Legislature have the
sovereign authority to enter into contracts. Indeed, the
“[g]overnment’s practical capacity to make contracts” is an
integral part “of the essence of sovereignty itself.” United
States v. Winstar Corp., 518 U.S. 839, 884, 116 S. Ct. 2432,
3 The New Jersey Constitution’s Contracts Clause mirrors the Federal Contracts Clause. It provides: “The Legislature shall not pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or depriving a party of any remedy for enforcing a contract which existed when the contract was made.” N.J. Const. art. IV, § 7, ¶ 3.
26 2459, 135 L. Ed. 2d 964, 997 (1996) (internal quotation marks
omitted); see also United States v. Bekins, 304 U.S. 27, 51-52,
58 S. Ct. 811, 815-16, 82 L. Ed. 1137, 1144 (1938) (“It is of
the essence of sovereignty to be able to make contracts . . . .
The State is free to make contracts with individuals and give
consents upon which the other contracting party may rely with
respect to a particular use of governmental authority.”).
Although the Governor and Legislature have the sovereign
power to enter into contracts, “the Contract Clause limits the
power of the States to modify their own contracts” as well as
private contracts. U.S. Trust Co. of N.Y. v. New Jersey, 431
U.S. 1, 17, 97 S. Ct. 1505, 1515, 52 L. Ed. 2d 92, 106 (1977).
The Framers of the United States Constitution intended the
Contracts Clause to serve as an important restriction on the
exercise of state power. The Clause was designed to protect
“contracts from improvident majoritarian impairment.” See
Laurence H. Tribe, American Constitutional Law 613 (2d ed.
1988). Because debtors would always outnumber creditors, the
Clause protects minority rights from legislative oppression at
the hands of the majority.
The adoption of the Contracts Clause was largely the result
of “widespread dissatisfaction with the Articles of
Confederation” and “the mass of legislation enacted by various
States during our earlier national period to relieve debtors
27 from the obligation to perform contracts with their creditors.”
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 256, 98
S. Ct. 2716, 2728, 57 L. Ed. 2d 727, 744 (1978). “[T]he sole
evil at which the Contract Clause was directed was the
theretofore rampant state legislative interference with the
ability of creditors to obtain the payment or security provided
for by contract.” Id. at 257, 98 S. Ct. at 2729, 57 L. Ed. 2d
at 744. The Contracts Clause was intended to apply “to laws
which altered the obligations of contracts by effectively
relieving one party of the obligation to perform a contract
duty.” Ibid.
The first state legislative enactment struck down by the
United States Supreme Court in the early Republic involved a
violation of the Contracts Clause. Fletcher v. Peck, 10 U.S. (6
Cranch) 87, 3 L. Ed. 162 (1810). In Fletcher, a successor
Georgia legislature revoked an earlier legislative grant of
property to a person, who had conveyed it to another. Id. at
131-33, 3 L. Ed. at 176-77. Chief Justice Marshall found that
the legislative annulment was a law impairing the obligation of
contracts: “When, then, a law is in its nature a contract, when
absolute rights have vested under that contract, a repeal of the
law cannot devest those rights . . . .” Id. at 135, 3 L. Ed. at
177. Importantly, in Dartmouth College v. Woodward, the United
States Supreme Court emphasized that the Contracts Clause was
28 one of the “most important provisions in the national
constitution,” protecting fundamental property rights. 17 U.S.
(4 Wheat) 518, 624, 4 L. Ed. 629, 656 (1819) (“Bills of
attainder, ex post facto laws, and laws impairing the obligation
of contracts, are contrary to the first principles of the social
compact, and to every principle of sound legislation.”
(Internal quotation marks omitted)).
For purposes of the Contracts Clause, “a statute is itself
treated as a contract when the language and circumstances evince
a legislative intent to create private rights of a contractual
nature enforceable against the State.” U.S. Trust Co., supra,
431 U.S. at 17 n.14, 97 S. Ct. at 1515 n.14, 52 L. Ed. 2d at 106
n.14. By that standard, Chapter 78 clearly expresses a
legislative intent to convey enforceable contractual rights to
public workers. Chapter 78 provides that public employees
paying into the pension system “shall have a contractual right
to the annual required contribution amount being made by” the
State. N.J.S.A. 43:3C-9.5(c)(2) (emphasis added). That
language is not aspirational, as the State contended for the
first time at oral argument before this Court.
A finding that the State has a binding obligation under a
contract is the first step in a contract-impairment analysis
under federal law. Gen. Motors Corp. v. Romein, 503 U.S. 181,
29 186, 112 S. Ct. 1105, 1109, 117 L. Ed. 2d 328, 337 (1992). The
next step is determining whether the State substantially
impaired its contractual obligations by underfunding the pension
system. See ibid. The issue is not resolved by resort to a
mathematical formula. U.S. Trust Co., supra, 431 U.S. at 21, 97
S. Ct. at 1517, 52 L. Ed. 2d at 109. In analyzing whether the
State substantially impaired its contract with public workers, a
court must consider whether “the legitimate expectations of the
contracting parties” have been violated and whether the State
action “effectively reduced the value of substantive contract
rights.” Id. at 19 n.17, 97 S. Ct. at 1516 n.17, 52 L. Ed. 2d
at 108 n.17; see also Energy Reserves Grp. v. Kan. Power & Light
Co., 459 U.S. 400, 411, 103 S. Ct. 697, 704, 74 L. Ed. 2d 569,
580 (1983) (“Total destruction of contractual expectations is
not necessary for a finding of substantial impairment.”).
By any measure, the State’s decision to cut pension funding
by more than seventy percent constitutes a substantial
impairment of the contractual rights of public employees. Under
the formula set forth in Chapter 78, the State was required to
make a contribution of $2.25 billion to the pension fund.
Instead, the Appropriations Act for fiscal year 2015 allocated
only $.68 billion -- a shortfall of $1.57 billion. Although
public workers made their full contribution under the law, the
State paid less than thirty percent of the amount required by
30 Chapter 78. Under Chapter 78, every public worker in the
pension system has a “contractual right to the annual required
contribution” to be made by the State “on a timely basis.”
N.J.S.A. 43:3C-9.5(c)(2). Chapter 78 specifies that the State’s
failure “to make the annually required contribution shall be
deemed to be an impairment of the contractual right of each
employee.” Ibid. The Governor and Legislature -- by the
statute they passed -- understood that severe underfunding of
the pension fund would implicate a violation of the Federal
Contracts Clause.
A finding of a substantial impairment, however, does not
end the analysis. A State’s impairment of a contract “may be
important public purpose.” U.S. Trust Co., supra, 431 U.S. at
25, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112. Significantly, when
the State impairs its own contract, as here, “complete deference
to a legislative assessment of reasonableness and necessity is
not appropriate because the State’s self-interest is at stake.”
Id. at 26, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112 (emphasis
added). Although the majority has an understandable distaste
for judicial review of the State’s finances, see ante at __-__
(slip op. at 64-66), it is nevertheless the role of the courts
to protect constitutional rights -- no matter how difficult or
unpopular, see U.S. Trust Co., supra, 431 U.S. 1, 97 S. Ct.
31 1505, 52 L. Ed. 2d 92. Judicial scrutiny is necessary because
“[i]f a State could reduce its financial obligations whenever it
wanted to spend the money for what it regarded as an important
public purpose, the Contract Clause would provide no protection
at all.” Id. at 26, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112; see
also Energy Reserves Grp., supra, 459 U.S. at 412 n.14, 103 S.
Ct. at 705 n.14, 74 L. Ed. 2d at 581 n.14 (“When a State itself
enters into a contract, it cannot simply walk away from its
financial obligations.”).
In assessing whether a State’s impairment of its own
contractual obligations is reasonable and necessary, two
considerations must be kept in mind. U.S. Trust Co., supra, 431
U.S. at 29, 97 S. Ct. at 1521, 52 L. Ed. 2d at 114. First, as a
general principle, “a State is not completely free to consider
impairing the obligations of its own contracts on a par with
other policy alternatives.” Id. at 30-31, 97 S. Ct. at 1522, 52
L. Ed. 2d at 115. Second, “a State is not free to impose a
drastic impairment when an evident and more moderate course
would serve its purposes equally well.” Ibid.
Judge Jacobson -- the trial judge -- rejected the State’s
argument that its failure to fund the pension system was the
result of an unanticipated revenue shortfall. Judge Jacobson
found that “the State became aware of the alleged budget
shortfall for FY 2015 over a year before the end of the fiscal
32 year.” She determined that the failure to fund the pension
system was not “a last resort measure” but rather “the primary
target employed to address the revenue shortfall,” despite
Chapter 78’s clear intent “to prevent a return to the approach
that created the pension crisis in the first place.” According
to Judge Jacobson, “the State has continued to prioritize
payment of other State contracts above payment of the
contractual guarantee the State made with its public employees.”
She reviewed the certifications submitted by various
administration officials and concluded that none “carefully
considered” “alternative courses of action that would allow
increased payments to the [pension system].”
Based on Judge Jacobson’s findings, the State’s impairment
of the contractual rights of public workers under Chapter 78 by
the drastic underfunding of its pension obligations was not
“reasonable and necessary to serve an important public purpose.”
See id. at 25, 97 S. Ct. at 1519, 52 L. Ed. 2d at 112. Clearly,
the State’s payment of less than thirty percent of its annual
required pension contribution for fiscal year 2015 constituted a
substantial impairment of contractual rights of public employees
in violation of the Federal Contracts Clause.
For sure, reviewing fiscal decisions made by the State is
not a role that any court wants to play, but courts are the
ultimate guarantors of constitutional rights. We cannot forsake
33 the task assigned to us under the Constitution and demanded of
us by United States Trust Co., supra, 431 U.S. 1, 97 S. Ct.
1505, 52 L. Ed. 2d 92. Judge Jacobson took a judicious and
measured approach by “refer[ing] the matter back to [the]
Legislature and the Governor . . . [to] determine how best to
accomplish the remedy.”
IV.
The majority’s novel and strained interpretation of our
State Constitution cannot defeat the federal rights of public
workers in this case. The United States Supreme Court has held
that although it will “accord respectful consideration and great
weight to the views of the State’s highest court,” it will not
permit a statutory interpretation that renders a “constitutional
mandate . . . a dead letter.” Brand, supra, 303 U.S. at 100, 58
S. Ct. at 446, 82 L. Ed. at 691. Thus, the Supreme Court will
appraise for itself “the statutes of the State and the decisions
of its courts” to determine “whether a contract was made, . . .
its terms and conditions, and whether the State has, by later
legislation, impaired its obligation.” Ibid.; see also Gen.
Motors Corp., supra, 503 U.S. at 187, 112 S. Ct. at 1110, 117 L.
Ed. 2d at 337 (“The question whether a contract was made is a
federal question for purposes of Contract Clause analysis and
whether it turns on issues of general or purely local law, we
can not surrender the duty to exercise our own judgment.”
34 (Internal quotation marks and citation omitted)); Irving Trust
Co. v. Day, 314 U.S. 556, 561, 62 S. Ct. 398, 401, 86 L. Ed.
452, 457 (1942) (stating that when court “is asked to invalidate
a state statute” on ground that it violates Federal Contracts
Clause, “the existence of the contract and the nature and extent
of its obligation become federal questions . . . and for such
purposes finality cannot be accorded to the views of a state
court”).
In Brand, supra, the United States Supreme Court looked
behind the Indiana Supreme Court’s interpretation of Indiana
contract law to find a legislative impairment of a teacher’s
tenure rights. 303 U.S. at 104-05, 109, 58 S. Ct. at 448, 450,
82 L. Ed. at 693, 695. In that case, the Indiana legislature
repealed the state’s existing teacher tenure law, allowing the
discharge of a teacher who had attained tenure. Id. at 97, 58
S. Ct. at 444, 82 L. Ed. at 689. The Indiana Supreme Court held
that the teacher’s Federal Contracts Clause rights were not
impaired by the statute’s repeal because the teacher did not
have a contractual right under the tenure law. Id. at 97-98, 58
S. Ct. at 445, 82 L. Ed. at 689. The United States Supreme
Court read Indiana contract law differently, finding that the
repealed tenure law had granted tenured teachers a contractual
right to their positions for an “indefinite period.” Id. at
102, 104, 58 S. Ct. at 447-48, 82 L. Ed. at 692-93. The United
35 States Supreme Court rejected the Indiana high court’s reasoning
that the legislature’s control over “public policy . . . cannot
be contracted away by one legislature so as to create a
permanent public policy unchangeable by succeeding
legislatures.” Id. at 99, 58 S. Ct. at 445, 82 L. Ed. at 690.
The Court recognized that “a legislative enactment may contain
provisions which, when accepted as the basis of action by
individuals, become contracts between them and the State.” Id.
at 100, 58 S. Ct. at 446, 82 L. Ed. at 690-91. In concluding
that the teacher had a contractual right under the state’s
tenure law, the Court independently reviewed Indiana statutes
and the state’s court decisions. Id. at 100, 58 S. Ct. at 446,
82 L. Ed. at 691. The Court then analyzed the language of the
teacher tenure law, which repeatedly used the word “contract” to
define the relationship between the teacher and school district.
Id. at 105, 58 S. Ct. at 448, 82 L. Ed. at 693. Based on the
tenure law’s language and the Indiana Supreme Court’s previous
decisions, the Court concluded that “the teacher was . . .
assured of the possession of a binding and enforceable contract
against school districts.” Id. at 105, 58 S. Ct. at 448, 82 L.
Ed. at 693.
In enacting Chapter 78, the Legislature and Governor relied
on this Court’s holding in Spina, supra, that an enforceable
public contract could be established through legislation if it
36 were “so plainly expressed that one cannot doubt the individual
legislator understood and intended it.” See 41 N.J. at 405.
Through its unprecedented construction of the Debt Limitation
and Appropriations Clauses, the majority has rendered Spina a
dead letter.
The majority pretends that it is not “declaring Chapter 78
unconstitutional” and that “Chapter 78 remains in effect, as
interpreted, unless the Legislature chooses to modify it.” Ante
at __-__ (slip op. at 61). Words, however, matter. As a result
of the majority’s decision, the State’s contribution to the
pension system is no longer binding, but merely optional.
Finally, if the central beam of Chapter 78 is defective, as
the majority claims, then the whole statutory structure should
fall. See 2 Norman J. Singer & J.D. Shambie Singer, Sutherland
Statutory Construction § 44:7, at 622 (7th ed. 2009) (“Where the
purpose of a statute is defeated by the invalidity of part of
the act, the entire act is void.”). Chapter 78 was the product
of a historic compromise, trumpeted by the Governor and
Legislature, requiring public workers to accept greater pension
deductions from their paychecks in exchange for the State making
required annual contributions to ensure the solvency of the
pension system. Having relieved the Governor and Legislature of
the obligations they assumed by passing Chapter 78, the majority
37 keeps in place the increased payments mandated of public workers
under the law. The Legislature could not have contemplated that
the compromise reached by passage of Chapter 78 would result in
only public workers holding the bag. It is difficult to imagine
that the Legislature would have passed Chapter 78 had it
imagined today’s decision.
Notwithstanding Chapter 78’s severability clause, L. 2011,
c. 78, § 81 (stating that invalidation of one provision “shall
be severable and shall not affect the validity of other
provisions or applications of this act”), it is entirely clear
that the Legislature “designed that the enactment should stand
or fall as a unitary whole.” See State v. Lanza, 27 N.J. 516,
527 (“A severability clause ‘provides a rule of construction
which may sometimes aid in determining [the Legislature’s]
intent. But it is an aid merely; not an inexorable command.’”
(quoting Dorchy v. Kansas, 264 U.S. 286, 290, 44 S. Ct. 323,
325, 68 L. Ed. 686, 690 (1924))), appeal dismissed, 358 U.S.
333, 79 S. Ct. 351, 3 L. Ed. 2d 350 (1959). Courts must
“consider whether the invalid section served as a principal or
significant inducement to passage.” Inganamort v. Borough of
Fort Lee, 72 N.J. 412, 424 (1977). Here, there can be no doubt
that the central inducement to the passage of Chapter 78 was the
portion requiring the State to pay its fair share into the
pension system. Under Chapter 78, the State’s promise to make
38 its annual required contribution was the consideration for
public workers making greater financial sacrifices to ensure the
solvency of the pension system. Now that the majority has
relieved the State of its obligation, the mutuality that
supported the public contract embodied in Chapter 78 is gone.
The Legislature surely did not intend that just one party to the
contract -- public workers -- would be held to its terms.
Today’s outcome undoubtedly will dishearten public workers.
The majority holds that the solemn representations made to them
by their government can be dishonored. The executive branch
proposed and signed into law Chapter 78, touted it publicly, and
then -- when the bill came due -- successfully argued in court
that the law was unconstitutional.
The epilogue to the present appeal is that the pension
rights of public workers are expendable in budgeting priorities.
The majority asserts that public workers “are entitled to [the]
delayed part of their compensation upon retirement.” Ante at
__-__ (slip op. at 61-62 n.11). But the majority has not
explained how they will be paid when the pension fund is empty
and how its assurance can be squared with its inflexible
interpretation of the Debt Limitation Clause and the
Appropriations Clause, an interpretation that overthrows this
Court’s decision in Spina. If the majority is making a legally
39 binding guarantee on some future Court and some future
generation, it should say how its promise will be fulfilled. On
its present trajectory, the pension fund will become insolvent.
If that occurs, then to make good the majority’s promise, some
future Court may have to intrude into the political process and
determine funding priorities, which the majority now so strongly
condemns. I am unwilling to put off enforcement of the federal
constitutional rights of public workers to a time when some
future Court will find any feasible solution beyond reach.
The majority takes heart in the State’s representation “at
oral argument that it is not walking away from its obligations
to the pension systems and to pay benefits due to retirees.”
Ante at __-__ (slip op. at 61-62 n.11). The record does not
inspire such confidence. After all, the State has not fulfilled
its obligation to fund the pension system since 1997. Moreover,
it was the State that passed Chapter 78 one day, and argued its
unconstitutionality the next.
Chapter 78 was enacted to impose fiscal discipline on the
political branches of government. At the end of every fiscal
year since 1997, including this year, the budget has been
balanced at the expense of public workers. If the past is
prologue, the solvency of the pension system is in great peril.
The majority declares that the contractual rights conferred in
Chapter 78 must be sanctioned by voter approval -- a public
40 plebiscite. However, the Federal Contracts Clause was intended
to protect contractual rights from the whims of the majority.
I conclude that the contractual rights of public workers,
guaranteed by Chapter 78, have been substantially impaired in
violation of the Federal Constitution. I would give public
workers the relief to which they are entitled and send the
matter back to the political branches to comply with the law of
their making. I therefore respectfully dissent.
CHIEF JUSTICE RABNER joins in this opinion.
41 SUPREME COURT OF NEW JERSEY
NO. A-55 SEPTEMBER TERM 2014
ON APPEAL FROM Superior Court, Law Division, Mercer County
CHRISTOPHER BURGOS, et al.,
STATE OF NEW JERSEY, et al.,
DECIDED June 9, 2015 Chief Justice Rabner PRESIDING OPINION BY Justice LaVecchia CONCURRING/DISSENTING OPINIONS BY DISSENTING OPINION BY Justice Albin
CHECKLIST REVERSE DISSENT CHIEF JUSTICE RABNER X JUSTICE LaVECCHIA X JUSTICE ALBIN X JUSTICE PATTERSON X JUSTICE FERNANDEZ-VINA X JUSTICE SOLOMON X JUDGE CUFF (t/a) X TOTALS 5 2
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