New Jersey Allowed To Freeze Pension COLAs

For many years, public sector retirees in New Jersey received cost of living adjustments to their pensions. The COLAs were thought to be protected by a New Jersey statute making pension benefits non-forfeitable.

As part of Governor Chris Christie’s pension reform efforts, the New Jersey Legislature in 2011 suspended future COLAs, freezing the cost-of-living adjustment at the 2011 level for current and future qualifying retirees.

A group of retirees sued the State, alleging that the State’s actions violated their contractual, statutory, and constitutional rights. A divided New Jersey Supreme Court turned away their lawsuit.

The Court found that the key legal issue was whether the change in the law “results in the substantial impairment of a contractual relationship and, if so, then reviews whether the impairment nevertheless is reasonable and necessary to serve an important public purpose. The first step in that analysis involves three inquiries: (1) whether a contractual right exists in the first instance; (2) whether a change in the law impairs that right; and (3) whether the defined impairment is substantial.”

The Court found that there was no contract protecting the COLA. After analyzing the State’s pension statutes, the Court found that the Legislature “distinguished between pension retirement benefits and pension adjustment benefits within the same sentence. That suggests that the Legislature considered the pension benefit and the cost-of-living adjustment distinct. Without the substantive COLA provisions incorporated into the laws governing the retirement system or fund, there is insufficient evidence to show that making COLAs a liability of the system or fund made them a part of the benefits program.

“This is not an ordinary statutory interpretation case, so our task here is not to determine which textually based argument is more likely than not the actual intent of the Legislature. To find a statutory contract that would have the effect of restricting subsequent legislative action on the subject, we must find unmistakable evidence of legislative intent to create a non-forfeitable right to COLAs. Fairly viewed, the parties’ many arguments are reasonable. Plaintiffs forcefully argue that although medical benefits were expressly excluded from the non-forfeitable right, COLAs were not. The State offers equally persuasive reasons to conclude that the Legislature did not intend to include COLAs as part of the non-forfeitable right: COLAs (substantively provided for in the PAA) are not found in ‘the laws governing the retirement system or fund’ and the Legislature had an independent reason for excluding medical benefits.

“Based on our review of 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, we find plaintiff retirees’ arguments insufficient. The plain language of the non-forfeitable-right statute does not surely embrace COLAs, as it must. To succeed, the plaintiffs needed to demonstrate that the legislative intent to render future COLAs part of the non-forfeitable right conferred by the statutes was unmistakable. From a textual standpoint, that high standard simply is not met here.”

Berg v. Christie, 2016 WL 3189778 (N.J. 2016).

Note: All four of Governor Christie’s appointees to the New Jersey Supreme Court joined in the majority opinion of the Court.