The New Jersey Supreme Court sided with Gov. Chris Christie in his effort to cut pension funding, a move that credit analysts say provides the state short-term budget flexibility while risking long-term financial burdens.
The Garden State's highest court reversed a lower court ruling Tuesday, upholding the Republican governor's veto of $1.57 billion of pension contributions from the 2015 budget.
The ruling means the state's already low pension funding levels will remain that way. New Jersey only made 28% percent of its required pension payment in 2013, the lowest among states, according to data from Loop Capital Markets.
In the case, several public employee unions argued that a 2011 law signed by Christie implementing a scheduled ramp-up of the state's pension funding over seven years created a contractual right for the money to be earmarked for employee pensions.
"That the State must get its financial house in order is plain," wrote Supreme Court Justice Jaynee LaVecchia on behalf of the majority in the 5-2 decision. "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."
Standard & Poor's and Moody's Investors Service said the state's already deteriorated pension liability profile will likely suffer.
The decision does provide increased budget flexibility, said S&P analyst John Sugden.
"But if the past is any indicator, flexibility around pension payments does not bode well for New Jersey's liability position and is a key contributor to the state's current pension funding situation and deterioration in credit quality," he said.
"Long term, this reinforces the state's ongoing reliance on one-time budget solutions and will perpetuate large structural imbalances and a rapidly increasing pension burden," said Baye Larsen, Moody's vice president and lead analyst for New Jersey.
S&P rates New Jersey A with a stable outlook. Moody's Investors Service cut New Jersey to A2 from A1 in April citing the state's budget imbalance and pension funding shortfall. Fitch Ratings assigns its A rating and negative outlook.
"This decision is an important victory not only for our taxpayers who simply cannot afford these unsustainably high costs, but for limited, constitutional government that recognizes the proper role of the executive and legislative branches of government," Christie said in a statement.
"It is time to move forward and work together to find a tangible, long-term solution to make our pension system and public employee health benefit costs affordable and sustainable for generations to come," he 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."
But leaders of the unions that made the 2011 deal with Christie say he's an unreliable negotiating partner.
"I have spoken to my members and they are very disappointed and have lost trust in their government and the judiciary," said Wendell Steinhauer, president of the New Jersey Education Association.
Christopher Burgos, president of the State Troopers Fraternal Association of New Jersey, said an appeal to the U.S. Supreme Court is already being planned.
"I would warn anyone doing business or intending to do business with the State of New Jersey to be wary, with this majority decision giving the State an out if they don't want to fulfill a contract," said Burgos, who was the lead plaintiff against the state. "This majority decision also flies in the face of other pension payment cases throughout the nation."
The New Jersey Pension and Health Benefit Study Commission released a Feb. 24 report proposing freezing pension benefits for current state employees and shifting them to a new cash balance defined benefit plan.
Christie announced support for the proposal during his budget address that day, saying that closing the pension-funding gap without reforms would require increasing the sales tax to 10% or hiking the income tax by 29%.
The New Jersey Education Association previously expressed openness to supporting key concepts in the commission's report.
No longer.
"That report can sit on the shelf and collect dust," Steinhauer said after the June 9 court ruling.
Chief Justice Stuart Rabner and Justice Barry Albin both dissented.
"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," Albin wrote. "Thus, public workers continue to pay into a system on its way to insolvency."
New Jersey Assembly Speaker Vincent Prieto said in response to the ruling that the Democratic-led legislature will fully fund pension payments in its 2016 budget. The legislature included pension obligations last year along with a tax increase on high-earners that was vetoed by Christie.
"We've always intended to fully fund our obligations, just as we did last year," said Prieto in a statement. "The governor chose last year to be fiscally irresponsible and to further weaken our economy. For the sake of New Jersey's taxpayers and its economy, I hope he chooses a different course this year."
The Supreme Court decision comes nearly four months after Superior Court Judge Mary Jacobson ruled on Feb. 23 that public union employees were entitled to the funding Christie slashed from the 2015 budget.
Christie had appealed Jacobson's ruling, arguing that parts of the 2011 pension law were unconstitutional and that he was not bound to make scheduled payments when a state is facing fiscal stress. The $1.57 billion Christie vetoed from the current budget was enough to fully fund New Jersey's actuarial liability for the year.
Assistant Attorney General Jean Reilly told the justices during May 6 oral arguments that allowing the pension payments to proceed would put the state in "a fiscal stranglehold" with the contribution schedules in the law "unsustainable." She argued that the state was not obligated to follow the 2011 law since it was not voter-approved.
Jacobson had ruled in June 2015 that Christie could adjust pension payments for fiscal 2014 because state had few financial options in a short time frame to balance its budget, but added that a "different analysis could very well be required for fiscal year 2015." Christie cut $884 million in pension payments to balance the 2014 fiscal year budget.
The nonpartisan Volcker Alliance released a report Monday criticizing New Jersey's budget practices, saying the state relies too much on "short-term maneuvers to balance its budget including debt restructuring and "inconsistent management of revenue collection."
