Until lately, there was little anyone could do about it. But in
two of the states with the biggest pension problems, New Jersey and
Illinois, recent reforms allow lawsuits to seek to compel full
"The newest generation of pension reform says we're creating an
enforceable obligation," said James Spiotto, a managing director at
Chapman Strategic Advisors in Chicago. "That hasn't really been
tested yet because it's so new."
The first test comes this week in a New Jersey court, where public
sector unions are trying to block Governor Chris Christie's move to
slash pension contributions to close a huge budget shortfall. An
initial hearing is set for Wednesday.
States and cities that repeatedly short-changed their retirement
systems exacerbated shortfalls, though the failure to kick in enough
money is not the only reason for big public pension gaps. Poor
investment returns during the recession and, in some cases, overly
generous benefit packages also contributed.
"If public employees can't stop this kind of thing under legislation
designed to let them stop it, then it would make one very, very
dubious about the future of defined benefit public pension plans in
the United States," said Sean Anderson, who lectures about employee
benefit plans at the University of Illinois College of Law.
New Jersey's Democratic legislative leaders worked with Christie, a
possible 2016 Republican presidential candidate, to craft the 2011
pension reform. It mandated annual increases in the state's pension
contribution to make up for years of skimping, with a target for
reaching the full actuarially required contribution of $4.8 billion
in fiscal 2018.
Although the state had been on track to meet the new requirements
even as revenue projections proved to be overly optimistic for three
years, the challenge became more acute this year after April
personal income tax collections fell far short of the mark.
Christie's administration had to lower expected revenues by $2.75
billion through fiscal 2015.
Rather than raise taxes or pull funding from education or social
programs, Christie slashed $904 million from this year's pension
contribution. Then he directed the legislature to cut $1.57 billion
from next year's budget, too.
But a clause in the 2011 reform made state pension contributions a
contractual obligation and gave plan participants the right to sue
if it's not met.
The Christie administration has asked the court to throw the case
out, arguing the plan is not at immediate risk of collapse and it
would be improper for the court to intervene in a fiscal emergency.
David Rousseau, a former state treasurer now with the research group
New Jersey Policy Perspective, said there is a conflict between a
balanced budget, a contractual right to sue, and the constitutional
provision that limits elected officials' ability to burden future
lawmakers and administrations with expenditures that weren't
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"So maybe the 2011 law isn't worth the paper it was printed on," he
said. "We don't know if it's a guarantee yet until the court
Wednesday's hearing in New Jersey Superior Court in
Trenton comes just five days before state lawmakers must approve
next year's budget.
If the union suit succeeds, it would make Christie's task of closing
the budget hole far more challenging, Rousseau said.
Most states and U.S. territories are now current on their
obligations. In 2012, a median 99.6 percent paid their annual
pension costs, including previously unpaid balances, according to
data from Richard Ciccarone, head of Merritt Research Services in
New Jersey's annual pension costs should be making up about 13
percent of its general fund expenditures, Ciccarone said. That's
compared to a median of 5 percent for what all states and
territories should be paying.
The New Jersey system is 64.5 percent funded, compared with 87
percent for neighboring New York.
This is not the first time that unions have sued over New Jersey's
failing to meet its pension-funding obligations. Previous efforts
failed, but they predated the explicit right to sue included in the
A similar clause is included in Illinois' pension reform enacted
this year. A court challenge has put those reforms on hold, but
Illinois pension officials are monitoring the New Jersey pension
contribution case, said Dave Urbanek, a spokesman for the Teachers'
Retirement System in Illinois. (Reporting by Hilary Russ; Additional
reporting by Karen Pierog; Editing by Leslie Adler)
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