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Thursday, June 9, 2016

NJ Supreme Court Allows COLA Pension Freeze

LaVECCHIA, J., writing for a majority of the Court. In this appeal, the Court considers whether the 2011 suspension of State pension cost-of-living adjustments (COLAs), L. 2011, c. 78, contravened a term of the contract right granted under the earlier enacted “non-forfeitable right” statute, L. 1997, c. 113 (presently codified as N.J.S.A. 43:3C-9.5).

The Pension Adjustment Act (PAA) started the modern legislative provision of COLAs for public sector retirees. The PAA’s initial reach was limited, granting adjustments only to those who retired before 1952, among other restrictions. COLAs were subject to annual appropriation by the Legislature and thus funded on a pay-as-yougo basis. As the cost of living rose, retirees who retired after 1952 watched their fixed incomes drop in real terms. 

The Legislature responded in the 1960s with a series of amendments to the COLA formula, culminating in 1969, when the Legislature expanded COLAs to cover all eligible retirees, and linked the COLA formula to the consumer price index (CPI). Over time, the Legislature took a series of steps to shift COLAs to a prefunded basis, recognizing that the pay-as-you-go funding scheme was fiscally untenable. 

In 1997, the Legislature enacted the non-forfeitable-right statute. L. 1997, c. 113, § 5 (Chapter 113). 

Then, in 2011, as a part of comprehensive pension reform legislation, Chapter 78 suspended further COLAs, freezing the cost-of-living adjustment at the 2011 level for current and future qualifying retirees. L. 2011, c. 78, § 25. 

The suspension of State pension COLAs led to the complaint that commenced this action. Retired government employees filed a complaint against various State defendants, alleging that plaintiffs had contractual, statutory, and constitutional rights to COLAs and seeking numerous forms of relief. A group of state and local employees and their labor unions (Intervenors) were granted leave to intervene and file a complant. On the State’s motion, the trial court dismissed the two actions in their entirety. The court found Chapter 78 to be constitutional without examining or resolving the non-forfeitable-right statute. The court viewed the Debt Limitation Clause and the Appropriations Clause of the New Jersey Constitution as, in and of themselves, reserving to the Legislature the ability to make changes to the pension statutes. Plaintiffs and Intervenors filed separate notices of appeal, which the Appellate Division consolidated. In a published opinion, the Appellate Division reversed the trial court’s dismissal of the complaints, concluding that Chapter 113 created a protectable contract right that included COLAs. 436 N.J. Super. 220 (App. Div. 2014). 

The panel remanded for a contract-impairment analysis, which the trial court had not reached. The panel rejected plaintiffs’ other arguments and found that certain of their claims were properly dismissed. Plaintiff Charles Ouslander, a retired prosecutor, filed a petition for certification, and the State filed a crosspetition from the Appellate Division’s judgment. The Court granted both applications. 222 N.J. 311 (2015). HELD: To construe a statute as creating a contractual right, the Legislature’s intent to limit the subsequent exercise of legislative power must be clearly and unequivocally expressed concerning both the creation of a contract as well as the terms of the contractual obligation. In this instance, proof of unequivocal intent to create a non-forfeitable right to yet-unreceived COLAs is lacking. 

The Legislature retained its inherent sovereign right to act in its best judgment of the public interest and to pass legislation suspending further COLAs. 
1. The question before the Court is whether there is a contractual right to continued increased adjustment of public pension benefits. To find a contract created by statute means that the Legislature binds itself to a policy choice and surrenders the power of future elected representatives to cut back on that choice. Because the effect of finding a 2 statutory contract is so severe, only the clearest expression of statutory language and evidence of legislative intent for such creation will do. In Spina v. Consolidated Police and Firemen’s Fund Commission, 41 N.J. 391 (1964), the Court explained that a contractual restriction on future legislative action “should be so plainly expressed that one cannot doubt the individual legislator understood and intended it.” That standard has remained the benchmark in New Jersey for determining whether a contract has been created by statute. See Burgos v. State, 222 N.J. 175, 195 (2015), cert. denied, 136 S. Ct. 1156 (2016). State and federal courts across the country also have applied their variants of the “clear indication” standard in cases like this one -- legislative suspension or reduction of COLAs. In sum, courts historically have adhered to the clear indication standard, and it applies in this appeal. (pp. 18-25) 

2. With the standard established, the Court turns to the statutes at issue in this appeal, beginning with a close examination of the non-forfeitable-right statute, L. 1997, c. 113, § 5. Using the Public Employees’ Retirement System as an example, the Court examines the statutes of the individual retirement systems or funds to understand the benefits purportedly provided non-forfeitable protection. The relevant statutes define each system or fund as the means for providing the retirement allowance and other benefits under the provisions of that system’s enabling act; they do not include reference to benefits authorized to be paid via other statutes or acts. Because the individual systems and funds define benefits as those made available only pursuant to their respective acts, the State urges the Court to find that COLAs are not part of the protected non-forfeitable right. The State notes that COLAs are not provided through the enabling acts or laws governing the specific retirement systems or funds, but rather are authorized and are provided by way of separate legislation -- the Pension Adjustment Act, N.J.S.A. 43:3B-1 to -10. Contrarily, plaintiffs argue that by using the term “benefits program” in the non-forfeitable-right statute, the Legislature melded the base pension benefit to the COLA. Because the Legislature specifically excluded medical benefits from the non-forfeitable right but did not exclude COLAs, plaintiffs think it unmistakable that COLAs fall under the umbrella of the benefits program. (pp. 25-35) 

3. This is not an ordinary statutory interpretation case. The Court’s task is not to determine which textually based argument is more likely than not the actual intent of the Legislature. Rather, to find a statutory contract that would have the effect of restricting subsequent legislative action on the subject, the Court must find unmistakable evidence of legislative intent to create a non-forfeitable right to COLAs. Fairly viewed, the parties’ many arguments are reasonable. 

However, based on the substantive provisions of the retirement systems’ or funds’ laws referenced in the non-forfeitable-right statute, which detail the benefits receiving protection, and the absence of COLAs from those provisions, plaintiffs’ arguments are insufficient. The plain language of the non-forfeitable-right statute does not surely embrace COLAS, as it must to satisfy Spina. To succeed, plaintiffs needed to demonstrate that the legislative intent to render future COLAs part of the non-forfeitable right conferred by Chapter 113 was unmistakable. From a textual standpoint, that high standard simply is not met here. (pp. 36-37) 4. 

Plaintiffs argue that legislative history reveals the unmistakable legislative intent to include COLAs under the protection of the non-forfeitable-right statute. But if there is ambiguity requiring resort to legislative history, one is already outside the realm of unmistakable clarity needed to find a statutory contract right. In this setting, any ambiguity spells failure for claims that the Legislature created a contractual right to COLAs. Even if the Court were to look at legislative history, evidence of such unmistakable intent is wanting there. Plaintiffs also contend that the history of COLAs supports the reasonable expectation that they were part and parcel of the singular pension benefit provided on a monthly basis to retirees or their beneficiaries. However, the history of COLAs in New Jersey shows that the Legislature granted COLAs as periodic exercises of legislative discretion separate and apart from the base pension. Therefore, the additional extrinsic evidence offered by plaintiffs does not further the argument that the Legislature acted with the required intent to include COLAs under the non-forfeitable-right statute. (pp. 38-46) 5. 

Finally, the Court rejects the alternative argument, raised by petitioner Ouslander, that equity prevents the State from terminating COLAs for those employees who retired prior to the enactment of Chapter 78. Because the language of the non-forfeitable-right statute does not guarantee COLAs, it necessarily follows that the retirees could not reasonably rely on the statute’s terms for purposes of a claim in equity. Petitioner’s due process claims are unavailing for similar reasons. Those claims depend on the existence of a vested right; the continued receipt of COLAs cannot be categorized in that way based on the current text of the non-forfeitable-right statute. (pp. 46-49)

(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.)