Whether one sees New Jersey Governor Chris Christie as confronting or punting, it’s hard to deny he knows a crisis when he sees one. The State Supreme Court sees one as well. On June 9, the Court ruled 5-2 that Christie was within bounds in delaying two years of contributions, nearly $2.5 billion, to the state’s chronically underfunded public-employee pension system. The ruling, a clear blow to the unions who brought forth the suit, for now averts a fiscal calamity. Critics claim that Christie, expected shortly to enter the Republican presidential race, broke a law he signed in 2011, passing the buck to his successors. Supporters counter that the ruling gives the legislature breathing room to fix a condition resulting from years of excessive union contract demands. The latter is a familiar story in other states, too.
For several years, state employee pension systems have threatened to become a national fiscal black hole. In a report issued a year ago, Standard & Poor’s calculated that in 2012 the 50-state average of the fair market value of pension assets, which cover a good many local government employees (especially teachers), amounted to only 70.9 percent of long-term liabilities. The median was 65.8 percent. This is a dangerous situation. Pension experts generally agree that the minimum threshold for a healthy system is 80 percent; the benchmark for “critical status” in private-sector retirement plans insured by Pension Benefit Guaranty Corporation is 65 percent. The five lowest-ranking states in the Standard & Poor’s survey were funded at well below 60 percent. Illinois, profiled by National Legal and Policy Center only a few weeks ago, had the nation’s worst-funded system at 40.4 percent. Rhode Island, whose situation NLPC analyzed in December 2013, was funded at 58.1 percent. In each case, the state had taken steps to shore up its system, only to be challenged in court by public-sector unions. In Illinois, labor organizations persuaded the State Supreme Court to invalidate reforms enacted by the legislature late in 2013. In Rhode Island, the unions coaxed an out-of-court settlement from state officials, effectively winning back a sizable portion of benefits lost through 2011 reform legislation. “Pension reform” is an irresistible idea – until the political battles begin.
The Standard & Poor’s study estimated the 2012 funding level for New Jersey at 64.5 percent, somewhere in the lower-middle part of the pack. A separate study by Morningstar put the state’s figure that year at 65.4 percent, down from 73.2 percent in 2008 and 67.5 percent in 2011. Taken together, by any reasonable measure, the state’s 10 pension plans – seven covering state employees and three covering local employees – are borderline critical. New Jersey officials, from Governor Christie on down, know this. That’s why these past few years they have been scrambling to close a funding gap that has been hovering around $40 billion, or $5,000 per resident.
Chris Christie was elected governor in November 2009 largely on the basis of his calls for pension reform. And reform in New Jersey was overdue. Each year starting in 1997, in fact, the State had failed to make its full required annual contributions, effectively diminishing the overall asset-to-liability percentage. Public-sector unions drove this practice. According to the U.S. Census Bureau’s Current Population Survey, 58.9 percent of state and local government employees in New Jersey in 2011 belonged to a union. That put the state in the top 10 among all 50 states, New York having the highest figure at 72.2 percent. That kind of percentage (or “union density”) gives New Jersey unions huge clout in negotiating contracts, making full contributions almost impossible within state constitution balanced budget requirements. As for raising taxes to make up the difference, that most likely would be highly unpopular and counterproductive. Severe budget cuts, especially for police, fire protection, education and other basic local services, likewise would be a tough sell.
Union collective bargaining has inflated, and often wildly, the cost of state and local government in New Jersey. Back in December 2009, the last full month in office for Governor Christie’s predecessor, Jon Corzine, the State of New Jersey’s Commission of Investigation issued a lengthy report that exposed a widespread pattern of padded wages, salaries and benefits. The study, titled, “The Beat Goes On: Waste and Abuse in Local Government Employee Compensation and Benefits,” summarized the situation: “At a time of economic distress unprecedented since the Great Depression – with government budgets depleted and austerity the theme of the day even in the private sector – the gravy train continues to roll without impediment for select groups of employees on the public payroll.” Among other findings, the report noted:
- “Inconsistent, non-existent and/or inadequate restrictions or caps on the accrual and cashing-in of unused accumulated sick, vacation and other leave at retirement, a phenomenon that enables select local government employees to collect, in addition to generous pensions, lump-sum payouts sometimes ranging well into the six figures and in amounts larger than the equivalent of a full year’s salary.”
- “Provisions that enable local public employees to collect cash for unused leave annually while employed, thus effectively circumventing any caps that may exist locally on the redemption of accrued leave at retirement.”
- “Costly allocation of various forms of so-called ‘terminal leave,’ including arrangements that allow local public employees to stay on the public payroll, using up accrued sick time and other leave at full salary and benefits, occupying a position without showing up for work – in some case for up to a year – prior to retirement.”
The Executive Summary noted the following abuses of public trust:
Camden. One of the poorest cities in the entire nation, not just New Jersey, Camden, right across the Delaware River from Philadelphia, treats its workers very well. Between 2004 and 2008, 20 city employees received combined cash benefit payouts of more than $2.3 million, or about $115,000 per worker, when they left their jobs.
Rockaway Township (Morris County). Five employees during 2005-08 received a combined $780,000 in payments – more than $155,000 apiece – for cashing out their unused holidays and other accumulated time.
Harrison (Hudson County). A small commuter municipality across the river from New York City, the Town of Harrison was unusually generous to 23 public employees who had retired during the previous six years. The workers collected $1.8 million in combined payouts for unused sick and vacation leave – the equivalent of more than half of the average annual town tax bill.
Examples of state and local government excess include: a contract clause negotiated by police unions in several municipalities that have enabled members to collect $25,000 or more a year via “extra duty” pay at construction and utility repair sites, regardless of whether they had performed work; $30 million annually in New Jersey Turnpike Authority costs attributable to mandatory union featherbedding clauses; and, in a not at all atypical case cited by Governor Christie himself in 2010, a 49-year-old retiree who had paid $124,000 toward his pension and health care plans, and by law, is due to receive $3.8 million worth of long-term retirement payouts.
This situation was many years in the making. And while administrations in both parties usually preferred passivity to confrontation when it came to dealing with the unions, Chris Christie’s immediate predecessor, Jon Corzine, went the extra mile. The former Goldman Sachs executive was an outright union advocate. At a 2009 public employee rally in Trenton, the state capital, he declared: “We will fight for a fair contract.” The scene was surreal. Here was a sitting governor, whose job it is to lead negotiations on behalf of his state, inspiring his opponents to demand more at the bargaining table.
Aside from his views, Corzine may have had an ulterior motive for holding such a position. As Union Corruption Update noted on two occasions (here and here), he had what appeared to be a conflict of interest. During April 2002-August 2004, while serving as a U.S. senator from New Jersey, he lived with Carla Katz, president of Communications Workers of America (CWA) Local 1034, which represented close to 10,000 state employees, plus thousands more private-sector employees. In 2005, the romance over, Corzine was running for governor. Unfortunately, local media revealed that he had loaned Katz $470,000 a few years earlier through a company he controlled, so she could buy her estranged husband’s home. After their breakup, Corzine converted the loan to a gift. Katz, meanwhile, had her own ethical problems. An internal review by the CWA national board concluded that Katz extensively misappropriated union funds, a finding that led to her dismissal. Governor Corzine had to fight in court to prevent the divulging of his e-mail exchanges with Katz during contract negotiations. He prevailed, but his credibility was damaged. A strong re-election challenge was inevitable.
And the challenge came soon enough, in 2009, from Republican Chris Christie, who had served as a U.S. Attorney under President George W. Bush. Christie campaigned for getting pension, health plan and other public employee costs under control. Raising taxes wasn’t an option. The state already had the highest, or close to the highest, income, property and corporate taxes of any state, triggering a sizable degree of outmigration; Corzine oddly claimed outmigration “is a by-product of prosperity, not decline.” Christie, having won the Republican nomination in the June primary with 55 percent of the vote, defeated Corzine in the November general election by 49 percent to 45 percent.
As governor, Christie quickly got to work. On February 11, 2010, he addressed both houses of the legislature, declaring New Jersey to be on “the edge of bankruptcy.” To reduce an estimated $2.2 billion deficit, he proposed broad powers to reduce subsidies for local school districts, higher education, hospital care and NJ Transit. “I take no joy in having to make these decisions,” he said. “I know these judgments will affect fellow New Jerseyans and will hurt. This is not a happy moment. However, what choices do we have left?” He emphasized, with respect to elementary and secondary education, that budget cuts would not affect funding for classroom instruction. He also urged lawmakers to strengthen an already proposed set of pension and other benefit controls. Governor Christie understood from the outset that none of this would go over well with public-sector unions, especially the Communications Workers of America, the American Federation of State, County and Municipal Employees (AFSCME), the National Education Association and the American Federation of Teachers. He knew as well that convincing the legislature would be an uphill battle; Democrats held a majority in the Assembly and Senate.
Christie and several leading Democrats, led by State Senator Stephen Sweeney (a union leader himself – with the Iron Workers), though often clashing, eventually came to terms. The result was Chapter 78. Signed by the governor on June 28, 2011, the legislation ostensibly laid the foundation for long-run actuarial soundness in the pension system. Among key features, Chapter 78 did the following: eliminated automatic cost-of-living increases for public-sector workers; increased required employee contributions from 5.5 percent to 6.5 percent, with an additional 1 percent to be phased in over seven years; and raised the minimum retirement age for new workers from 62 to 65. In return, the law promised, “Members of the public-pension systems shall have a contractual right to the annual required contribution amount being made by the member’s employer or by another public entity.” Moreover, the law said that contributions must be made “on a timely basis.” The state’s public sector unions were nonplussed, but boxed in politically. There was a growing and widespread view across the state that union demands had contributed heavily to this emergency. A Quinnipac poll released in February 2011 showed that two-thirds of New Jersey voters supported lowering pension payouts. The poll mirrored growing sentiment around the nation that public-sector unions were draining public coffers. The unions, for the time being, preferred a wait-and-see approach.
By shepherding Chapter 78 into being, Christie showed doubters that he could stand firm and look out for the interests of the average New Jersey resident. And his profile had gone national. He was now a leading figure in his party, winning the coveted keynote speaker slot at the 2012 Republican Party convention in Tampa. During his speech, he announced that his administration had fixed his state’s pension system, in the process providing a model for reform throughout the nation. Observers dubbed the turnaround the “Jersey comeback.” Months later, following the coastline devastation wrought by Hurricane Sandy, he fought for, and got, extensive federal emergency aid. Many speculated that if the corpulent governor could shed some pounds, he might become a top-tier candidate for president.
Christie, in fact, did lose quite a bit of weight. Unfortunately, rightly or wrongly, he also lost quite a bit of political capital. In January 2014, two months after his re-election, he suddenly found himself in the midst of a scandal. Back during Monday morning rush hour on September 9, 2013, he allegedly had given an order to subordinates to close several eastbound lanes and toll booths on the New Jersey side of the George Washington Bridge in retaliation for Fort Lee Democratic Mayor Mark Sokolich not endorsing him. The resulting gridlock, created under the guise of a “traffic study,” created a public emergency that lasted until that Friday when the bridge operator, the Port Authority of New York and New Jersey, ordered the facility opened. Federal prosecutors opened an investigation. One of the accused, David Wildstein, eventually pleaded guilty. The feds also would charge two other individuals, Bridget Kelly, who until her firing had been Christie’s deputy chief of staff, and Port Authority Deputy Director Bill Baroni. A probe by the law firm of Gibson, Dunn & Crutcher, prepared at Christie’s behest and released in March 2014, cleared the governor of all wrongdoing. Yet opinion polls of New Jersey voters revealed a widespread view that he had advance knowledge of the lane closings and possibly even ordered them. None of this was directly related to pension reform; all of it seriously hindered Christie’s ability to achieve it.
It was the worst possible time to have a fiscal emergency, and an emergency was happening once again. Tax revenues had fallen way behind state forecasts. While the State of New Jersey made its required pension contributions for fiscal years 2012 and 2013, Gov. Christie, announced that the state would be unable to meet its Chapter 78 commitment for fiscal year 2014. He used his line-item veto authority to reduce a planned two-year contribution of nearly $3.85 billion to around $1.38 billion. “We will not make the payments that apply to the sins of the past,” he stated at a press conference last May. “We’re still digging out of problems two decades in the making.” The composite pension contribution for fiscal 2014 was $696 million, way short of the required $1.58 million, and would cover active employees but not retirees. For fiscal year 2015, Christie used his authority to reduce the State contribution to only $681 million of the required $2.25 billion.
A group of public-employee unions, unwilling to wait for an unhappy ending, went to court to secure an order for full contributions. The Christie administration’s partial contributions, the plaintiffs claimed, not only violated Chapter 78, but also the Contracts Clause of the U.S. Constitution (Article I, Section 10), which stipulates that no State shall pass any law impairing the obligation of contracts. The New Jersey Constitution has an equivalent provision. The Christie administration, said the unions, had pulled a bait-and-switch. The administration responded that any and all contractual obligations spelled out by the 2011 law has to adhere to the state constitution’s Debt Limitations Clause and Appropriations Clause. In February of this year, New Jersey Superior Court Judge Mary Jacobson ruled on behalf of the unions, ordering the state to make a $1.57 billion back payment by the end of June. “The New Jersey legislature,” she wrote this time around, “deliberately and unequivocally created contractual rights for public employees for seven years of increasing state payments.” The ruling was something of a surprise, as Judge Jacobson last summer upheld the constitutionality of Chapter 78. On the defensive, the Christie administration appealed to the New Jersey Supreme Court. Given the urgency of the situation, a ruling would not be long in coming.
On June 9, the announcement came. By a 5-to-2 margin, the Court overturned the lower court ruling, concluding that the state constitution took precedence over the 2011 law. On the surface, the Court admitted, Chapter 78 created an enforceable contractual right. Yet its obligations upon the State were prohibited by the constitution’s Debt Limitations and Appropriations (i.e., balanced-budget) Clauses. In her majority opinion, Justice Jaynee LaVecchia wrote: “(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.”
Governor Christie praised the ruling as “an important victory not only for our taxpayers who simply cannot afford these unsustainably high costs, but for limited, constitutional government that recognizes the proper role of the executive and legislative branches of government.” This was a political as well as policy victory. The decision reinforced Christie’s reputation as a fighter. And it spared his administration the unenviable task of revising the state’s fiscal 2016 budget, which sets aside about $1.3 billion for pension contributions, far less than the $3.1 billion required by Chapter 78. But nobody is in the clear yet. The State of New Jersey during the Christie years has suffered a combined nine credit rating downgrades. Even nonpartisan observers know that the New Jersey Supreme Court decision merely gives the legislature extra time to come up with an alternate long-term plan. Dan Solender, municipal portfolio manager for the Jersey City-based Lord Abbett & Co., explained: “It’s good they don’t have to come up with the cash right now, but it’s bad because it pushes it further into the future. It’s not a solution. It’s just a continuation of the issue, and so more uncertainty.” Standard & Poor’s, in a prepared statement, said the ruling “is not a reason for celebration from a credit standpoint.” The state’s credit rating “could be vulnerable to further downgrade.” The union plaintiffs, needless to say, aren’t in a negotiating mood. They called the ruling “devastating” and “indefensible,” claiming that they, and not Governor Christie, had upheld their end of the deal. Wendell Steinhauer, president of the New Jersey Education Association, explained things this way: “The only beneficiary of this ruling is Governor Christie, who can continue to deceive New Jersey residents into believing that his budgets have been balanced.”
Christie may be feeling relieved, but he knows he has little room for error. He reportedly wants further givebacks from the unions. His pension and health benefits commission this past February issued a report recommending that the state freeze existing pension plans, align employee benefits with private-sector plans, and move current employees toward a defined-benefit/defined contribution hybrid plan. Union leaders and their supporters in the legislature are dead set against this. Testing the governor’s resolve, Assembly Speaker Vincent Prieto, D-Hudson, several weeks before the State Supreme Court ruling filed an amicus brief against the administration accusing the governor of ignoring the content and intent of Chapter 78. He and other Democrats are sending him a budget for fiscal year 2016 with the required pension payments anyway. The governor almost assuredly will respond with his veto pen.
In a statement immediately following the Supreme Court ruling, Christie said: “In light of today’s decision, I urge all interested parties to come back to the table and partner with me to finally solve this problem once and for all.” Such appeals are going to be a tough sell to the unions and their political allies. At least one union, in fact, the State Troopers Fraternal Association of New Jersey, already has announced plans to appeal the decision to the U.S. Supreme Court. Win or lose, union officials will press further demands. It has been the realization of their demands, more than anything else, that led to this crisis.