N.J. Supreme Court Finds Chapter 78 Did Not Create an Enforceable Contract Right

06.29.2015

By: Joseph M. Hannon

In Burgos v. State of New Jersey, the New Jersey Supreme Court held that the 2011 pension and health benefit reform statute, known as Chapter 78, did not create an enforceable contract that was binding on the State to make the pension payments required by that legislation. The decision is the result of multiple actions filed by individuals and unions, on behalf of New Jersey State employees, after the fiscal year 2015 budget included contributions that were less than 1.57 billion dollars that Chapter 78 required.  The Law Division accepted the Unions’ argument that Chapter 78 created a contractual right to the payment and failure to do so was an impairment of that contract.  The Supreme Court reversed. The plain language of Chapter 78 set forth a clear statement that the failure to make the required pension contributions results in a contractual impairment.  Although the Supreme Court recognized the good intentions of the legislature in passing Chapter 78, the Court simultaneously rejected the legislature’s authority to do so.  The Court’s rationale was largely based upon two clauses within the New Jersey Constitution. First, the Debt Limitation Clause of the New Jersey Constitution prohibited such action.  The intention of Chapter 78 could not set aside the broad, clear language contained in the Debt Limitation Clause.  In sum, this provision limits the amount of debt or liability the Legislature may incur on a year to year basis without a vote of public.  The Court found that the contributions required by Chapter 78 surpassed the permissible boundaries of the Debt Limitation Clause and therefore would require a vote of the public in order to pass constitutional muster. Second, the Court reasoned that the mandates of Chapter 78 failed to meet the requirements of the Appropriations Clause of the New Jersey Constitution.  The Court reasoned that the legislature retains the power to annually appropriate funds as necessary.  The required contribution in Chapter 78 did not retain the legislature’s authority to annually appropriate such funds. These two constitutional clauses were the linchpin in the Court’s decision to uphold the State’s failure to make the required Chapter 78 contributions.  While the Court explained the legal rationale for its decision, it also highlighted the practical imports of its decision as well, among which was the damage to the public trust.  In addition, the Court recognized the significant difficulties facing the pension system.  However, rather than fashion a judicial remedy, the Court called upon the public noting “it is the people’s responsibility to hold the elective branches of government responsible for their judgment and for their exercise of constitutional powers.” The Court’s decision in Burgos negated the required State contributions of Chapter 78 to the pension system.  The issue of how to fund the depleted public employee pension system will continue to be at the forefront of future public debate. For more information, or if you have any questions, please contact Joseph M. Hannon, Esq., at 973.535.7105, jhannon@genovaburns.com, or Jennifer Roselle Esq., at 973.646-3324, jroselle@genovaburns.com.

Tags: GeneralEmployee Benefits