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New Jersey Education Association v. State

March 4, 2010

NEW JERSEY EDUCATION ASSOCIATION, FRED AUG, JACQUI GREADINGTON, MARTHA LIEBMAN, DIANE SWAIM, AND SUSAN WINTERMUTE, PLAINTIFFS-APPELLANTS,
v.
STATE OF NEW JERSEY, JOHN MCCORMAC, FORMER TREASURER OF THE STATE OF NEW JERSEY, INDIVIDUALLY AND OFFICIALLY, BRADLEY ABELOW, FORMER TREASURER OF THE STATE OF NEW JERSEY, INDIVIDUALLY AND OFFICIALLY, THE NEW JERSEY STATE SENATE, AS A BODY POLITIC OF THE STATE OF NEW JERSEY, AND THE NEW JERSEY STATE GENERAL ASSEMBLY, AS A BODY POLITIC OF THE STATE OF NEW JERSEY, DEFENDANTS-RESPONDENTS.



On appeal from Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-81-04.

The opinion of the court was delivered by: Parrillo, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued December 15, 2009

Before Judges Parrillo, Lihotz and Ashrafi.

Plaintiffs, the New Jersey Education Association (NJEA) and certain of its active and retired members, brought this action to redress shortfalls in the State's statutorily-mandated contributions to the Teachers' Pension and Annuity Fund (TPAF) for fiscal years (FY)*fn1 2004 through 2007. The Law Division ruled, as a matter of law, that the State was contractually obligated to plaintiffs for full funding of TPAF, but that, as a matter of fact, plaintiffs failed to show that the Legislature's funding gaps substantially impaired TPAF's ability to pay benefits for the next thirty years, so as to violate the Contract Clauses of the State and Federal constitutions. Accordingly, the Law Division dismissed the complaint, and plaintiffs now appeal. We affirm, finding that TPAF members, although entitled by law to the receipt of vested benefits upon retirement, possess no constitutionally-protected contract right to the particular level, manner or method of State funding provided in the statute.

Since its inception in 1919, TPAF has had the purpose of funding retirement benefits to public education workers. Upon retirement, benefits paid are based upon the retiree's final average salary and total years of service, rather than upon contribution or return on investments. See N.J.S.A. 18A:66-44.

TPAF is governed by a statutory scheme enacted in 1967 known as the "Teachers' Pension and Annuity Fund Law." L. 1967, c. 271; N.J.S.A. 18A:66-1 to -93, -3 (hereinafter TPAF Act). TPAF subsumed prior state pension funds for education workers and subjected them to this statutory regime. N.J.S.A. 18A:66-3 to -93. TPAF is governed by a seven-member board of trustees, N.J.S.A. 18A:66-56, with the Attorney General serving as its "legal adviser." N.J.S.A. 18A:66-57. Its "technical advisor" is an actuary selected by a committee consisting of the Treasurer, directors of three Treasury divisions (Pensions and Benefits, Investment, and the Office of Management and Budget), and members of the boards of trustees of TPAF and the other State pension systems. N.J.S.A. 18A:66-57; N.J.S.A. 43:4B-1. The day-to-day administration of TPAF is carried out by the Division of Pensions and Benefits. N.J.S.A. 18A:66-57. As of June 30, 2006, the date of the most recent data available in this matter, TPAF had 140,831 active contributing members. In FY 2006, TPAF paid pensions totaling $2,075,424,405 to 62,212 service retirees; $57,324,718 to 2,447 disability retirees; and $78,099,815 to 3,955 beneficiaries and dependents.

TPAF is comprised of eight separate operating funds.

N.J.S.A. 18A:66-16. Its funding comes from three sources: (1) contributions from employee wages; (2) contributions from the general revenue of the State; and (3) the return earned by these contributions when invested in the fund. N.J.S.A. 18A:66-18. As to the former, for FY 2004-2007, active TPAF members were required to contribute 5% of their compensation to TPAF.*fn2 The employee contribution rate may be reduced in the event TPAF has assets in excess of its liabilities. N.J.S.A. 18A:66-18(b).

The State's contributions, as employer, are credited to TPAF's main fund - the "contingent reserve" fund. N.J.S.A. 18A:66-18. The TPAF Act defines the amounts to be contributed and, as a basis for computing those amounts, mandates that they be determined annually, using the "tables [mortality, service, compensation or salary experience] recommended by the actuary which the board of trustees adopts," and the presumed "regular interest" rate of return on plan assets as set by the Treasurer. N.J.S.A. 18A:66-2(j), (i), -18.*fn3

For purposes of determining the State's contribution to the pension fund, the actuary is required to use the actuarial value of assets rather than the market value. This method is designed to minimize the effect of market volatility. The actuarial value is defined as:

The value of the assets to be used in the computation of the contributions provided for under this section for valuation periods shall be the value of the assets for the preceding valuation period increased by the regular interest rate, plus the net cash flow for the valuation period (the difference between the benefits and expenses paid by the system and the contributions to the system) increased by one half of the regular interest rate, plus 20% of the difference between this expected value and the full market value of the assets as of the end of the valuation period. [N.J.S.A. 18A:66-18(b).]*fn4

There are three components to the State's annual statutory contribution: a "normal contribution"; an "accrued liability contribution"; and an "additional formula normal contribution" (AFNC). TPAF's actuary computes these three components on an annual basis. N.J.S.A. 18A:66-18.

The "normal contribution" or cost component represents the pension costs of the service rendered in a given valuation year by the active TPAF member, that is the pension benefits members will accrue due to their service during the upcoming fiscal year. N.J.S.A. 18A:66-18(a); L. 1994, c. 62, § 2. For the years in question, the normal contribution computed by the TPAF actuary grew from $448,664,518 in FY 2004 to $560,691,960 in FY 2007.

The "accrued liability contribution" is an amortization payment addressing TPAF's "unfunded accrued liability", which is the amount of "the accrued liability of the retirement system" that is not "already covered by the assets of the retirement system[.]" N.J.S.A. 18A:66-18(b). If such liability exists, the actuary calculates the "accrued liability contribution[s]" needed to amortize it over thirty years. Ibid. The accrued liability component of the State's statutory contribution began in FY 2004 as $35.8 million and grew to $500.7 million in FY 2007.

The final component of the State's statutory contribution - AFNC - represents the additional benefit cost of the improved pension benefit payable to TPAF members with the enactment of L. 2001, c. 133 (Chapter 133). In 2001, the TPAF retirement benefit was enhanced by reducing the divisor for a member's years of service from sixty to fifty-five. N.J.S.A. 18A:66-5.1, -35, -37, -44, -71; L. 2001, c. 133, § 4-7, 15. The State's liability for the benefit enhancement due to the change in formula, also known as the "additional formula normal cost[,]" would be payable out of the "benefit enhancement fund" (BEF) created for that purpose. N.J.S.A. 18A:66-16, -42.2. Each year, the excess valuation assets that remained after application to the normal contribution would be credited to the BEF, until it equaled the present value of the plan's total liability for the benefit enhancement. N.J.S.A. 18A:66-18(b), -42.2. The Legislature ensured at least the initial existence of excess valuation assets by declaring TPAF's valuation assets as of June 30, 1999, to be "the full market value of the assets as of that date," which was considerably higher than their actuarial value at that time. N.J.S.A. 18A:66-18(b). For any year when the BEF lacked sufficient assets to cover the benefit enhancement, the State would be obliged to contribute the difference. N.J.S.A. 18A:66-18, -42.2. In 2001, the excess valuation assets were $1.9959 billion; by 2004 they were depleted.*fn5

The TPAF Act declares "the creation and maintenance of reserves" to pay benefits to be "obligations of the State."

N.J.S.A. 18A:66-33. It provides that the State "shall" make an annual contribution in accordance with the TPAF trustees' "itemized estimate of the amounts necessary." Ibid. The trustees, in reliance on the actuary's recommendations, must certify the contributions, "which shall be made by the State to the contingent reserve fund." N.J.S.A. 18A:66-58(b). Then, "[t]he Legislature shall make an appropriation sufficient to provide for the obligations of the State," N.J.S.A. 18A:66-33, and that the aggregate certified amount "shall" be paid into TPAF's main fund. N.J.S.A. 18A:66-18(d).

The general statutes that apply to TPAF and the other state pension systems similarly provide that the State "shall" make contributions for the current year's obligations, plus an "accrued liability contribution" to amortize the unfunded accrued obligation from prior years, if any, over a period of thirty years. N.J.S.A. 43:3C-9.5(c).

The general statutes recognize that vested members have "a non-forfeitable right to receive benefits," which they define as "mean[ing] that the benefits program, for any employee for whom the right has attached, cannot be reduced." N.J.S.A. 43:3C-9.5(a), (b). However, they also reserve the State's right to alter the "retirement systems and funds," and they deny that members have rights in the pension funds themselves:

Except as expressly provided herein and only to the extent so expressly provided, nothing in this act shall be deemed to (1) limit the right of the State to alter, modify or amend such retirement systems and funds, or (2) create in any member a right in the corpus or ...


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