CWA Conference Saving Our Pensions and Our Increments

1. CWA ConferenceSaving Our Pensions and Our Increments December 1, 2015

2. Our Increments • As of July 1, 2015 State stopped paying increments. • First time since CWA began representing State workers in 1981. • In 1981, when State would not pay increments CWA went to PERC on an application for interim relief. • Key Standards for granting Interim Relief: • Likelihood of Success on the Merits • Irreparable Harm

3. Increments • Is there a Likelihood of Success on the Merits if an employer stops paying automatic increments after contract expiration? • Following Contract Expiration what is the Employer’s obligation? • Maintain the Status Quo as to terms and conditions of employment

4. Increments • Prior to unilaterally changing the status quo an employer must negotiate in good faith. • Once impasse is reached on all issues, the employer can file a notice of impasse with PERC. • A mediator is appointed. • Then a fact finder, who issues a report with non-binding recommendations. • The parties must then negotiate over the implementation of the fact finder’s recommendations. • Only after exhausting all those procedures can an employer implement its last best offer.

5. Increments • Key Question: Are increments part of the “status quo” or does the obligation to pay them expire when the contract expires? • The PERC Designee found that: The status quo for State workers “included a salary structure which provided for the payment of increments upon the passage of additional periods of service measured by assigned anniversary dates. The employees involved herein have successfully completed that additional period of service. Their proper placement on the salary guide which remains in effect requires that they move up one step and receive the appropriate salary increment.”

6. Increments • If increments are not paid is there irreparable harm? • What is Irreparable Harm? • Cannot be fixed by money • Can the failure to pay increments be fixed by money? • The PERC Designee found that more is at stake than the mere loss of money. • “The unilateral withholding of increments by the employer introduced illegal economic coercion into the negotiations process. The implication of such action is that if the employees agree to the employer’s position, they get their increments immediately . . . .”

7. Increments • For over three decades that was the Law. • In 2013 in a case involving a PBA Local and the County of Atlantic PERC reversed 30+ years of precedent. • No Accident! • Christie installed Kelly Hatfield as chair and packed the Commission with pro-management appointments • In Atlantic County PERC reasoned that changed economic realties, namely the 2% cap on property tax increases, justified a reversal of long-standing decades of precedent.

8. Increments • After Atlantic County, unions knew could not go to PERC for interim relief or on an unfair practice charge. • What other option does a union have if can’t go to PERC? • Can we file a grievance and allege violation of the contract even after contract expiration?

9. Increments • That’s what the union did in Bridgewater when the township withheld increments after contract expiration. • Union filed a grievance and submitted the grievance to arbitration. • Bridgewater filed with PERC to restrain arbitration. • What is the basis for PERC restraining arbitration?

10. Increments • The grievance must involve an illegal subject of negotiations. • Test: • Does subject intimately and directly affect terms and conditions of employment? • Is the subject preempted by statute or regulation? • Would negotiations significantly interfere with the determination of government policy? • Examples of illegal subject – layoffs, subcontracting.

11. Increments • To restrain arbitration of a grievance alleging a failure to pay increments PERC would have to find that an agreement to pay increments is illegal. • How could it be “illegal” for an employer and a union to agree that following contract expiration increments will continue to be paid? • If during term of contract an employer failed to pay increments in violation of contract could we grieve and arbitrate that dispute? • Should it matter that the failure to pay increments occurs after contract expiration?

12. Increments • In BridgewaterPERC restrained arbitration of the grievance alleging that the employer violated the contract when it did not pay increments. • According to PERC a union and employer cannot enter into an enforceable agreement to continue paying increments after contract expiration.

13. What have we done to protect our Increments? • CWA has challenged the failure to pay increments by filing a grievance and by joining with other unions in bringing a lawsuit in court. • CWA will also be filing an unfair practice charge. • State has asked PERC to restrain arbitration of our grievance. • And of course the State is relying exclusively on PERC’s decisions in Atlantic County and Bridgewater.

14. Increments • Four State law enforcement unions and CWA are in court claiming that under the Civil Service State Compensation Plan increments must continue to be paid after contract expiration. • Argument was heard before Judge Jacobson on October 13, 2015. • Not surprisingly, State argues that PERC has exclusive jurisdiction. • Money for increments is in State budget.

15. Increments • On October 28, 2015 the Appellate Court heard argument in the Atlantic County and Bridgewater cases. • CWA is amicus in both cases • We are hoping for a decision before the end of the year. • In the meantime, we have asked PERC not to rule on the State’s request to restrain arbitration until the Appellate Court rules. • We will also ask Judge Jacobson to wait for the Appellate Court’s decision.

16. Our Pensions • Before reviewing the last 18 months of litigation over our pensions, lets review some basics about pensions. • What is a pension? • What is our objective with respect to the pension system?

17. What is a Pension? • It is deferred compensation for services rendered. • If it was a 401K, rather than a defined benefit, employee would be entitled to a percentage of pay. • If 5% and earn $50,000 employer pays into account $2,500 a year. • Money is due the year it was earned. • But in 401K – a defined contribution plan – you get out what is in account when ready to retire. • If invested money in stocks and market crashes, then retirement compromised.

18. What is a Pension? • Just because we have a defined benefit plan, Employer must still pay into the pension system, on an annual basis, the amount necessary to fund the benefits earned that year. • How do we know how much the employer must contribute? • Actuaries figure this out and tell the employer how much to put in each year. • Depends on how much employees earn, how long they live, how long they work, how much money the system earns from its investments, how much employees contribute

19. How are pensions funded? • If the actuaries get it right and if the employer listens to the actuaries then each year enough money is put into the system to pay for the benefits earned by employees that year. • The cost of the benefits earned that year is the Normal Cost

20. Consequences of Not Paying Normal Cost when Due • If the employer does not pay the Normal Cost what happens? • Must pay the Normal Cost in a future year. • Meanwhile what other losses does the pension system suffer? • Lost investment income.

21. Consequences of Not Paying • The unpaid Normal Cost and the lost investment income become an Unfunded Accrued Liabilitythat has to be paid in future years along with the Normal Cost. • But the contributions are owed because employees worked and deferred some of their compensation so they could receive the compensation in the form of a pension upon retirement • The Unfunded Accrued Liability is what the employer owes because it did not make the payments for work performed that year

22. So how did we get into this mess? • The State stopped putting in enough money to cover the Normal Cost • Same as if an employer did not make its contribution to an employee’s 401K • 20 years ago the pension system was essentially 100% funded • Now PERS is less than 50% funded • PERS, TPAF and PFRS will run out of money in 2027 – 12 years from now • What happened?

23. Governor Whitman Happened!! • Recall that she ran against Florio in 1993 • Florio was ahead in the polls even though State workers were fed up with him • Florio threated to layoff 10,000 workers unless we agreed to pay 25% for healthcare and agree to deep wage cuts • Florio was the first Governor to suggest that the pension system could be cash cow for funding State government • But he had also increased the income and sales taxes

24. Whitman • As the race tightened Whitman, a moderate Republican, promised to cut income and corporate business taxes • Ended up beating Florio by less than1% - 25,000 votes • Whitman’s tax cut promise has haunted public workers ever since

25. Whitman’s Legacy • Knew that to deliver on promise of tax cuts had to come up with over a billion in lost revenue • During transition Whitman hired actuaries to figure out how to lower the State’s pension payments • Changed the method of valuing assets • Changed the funding method • Manipulated actuarial assumptions • Result was that the money saved from the reducing contributions to the pension system equated to the reduction in revenue caused by tax cuts – almost $4 billion over five years

26. Unions saw the Writing on the Wall • Whitman’s plan was to raid the pension system to pay for her tax cuts • That is precisely what she did • CWA and NJEA understood this and did not stand idly by • Went into federal court

27. Lawsuit against Whitman • 1995 – CWA and NJEA file complaint in federal court alleging that changes to pension laws under Governor Whitman would result in the underfunding of the pension system in violation of contractual right to a soundly funded pension system • As early as 1995 argued that there was a contractual right to funding • Eventually settled the litigation in 1997

28. 1997 Settlement of Whitman Litigation • Pension Obligation Bond Act and Settlement of CWA and NJEA lawsuit • Legislation created “Non-forfeitable” right to pension benefits andrequired the State to make an annual normal contribution and an annual unfunded liability contribution • A non-forfeitable right is defined to mean that the benefits program cannot be reduced for any employee for whom the right has attached

29. What happened after settlement? • 1997-2010 State paid between 0% and 10% of required contribution, with exception of 2007 and 2008 when Corzine contributed about 50% of what was owed • 2010 – Legislature passed - Chapter 1 - requiring the State, beginning in FY 2012, to make the full annual required contribution as computed by the systems’ actuaries, but permitted a phase in of 1/7 per year.

30. NJEA Court Decision • March 4, 2010– 18 days before Chapter 1 was enacted, the Appellate Division issued its decision in a Pension Funding case brought by NJEA • The appellate court found: • 1. There is a contractual right to the receipt of pension benefits • 2. But no corresponding contractual right to funding.

31. Chapter 78 – June 27, 2011 • Grand Bargain struck between Governor and Legislature – Touted by Christie as greatest bipartisan legislative accomplishment • Chapter 78 is enacted in response to the NJEA decision • 1. Chapter 78 suspended COLAs to retirees until certain threshold funding ratios were met • 2. Increased employee contributions from 5.5% to 7.5% for civilian employees and from 8.5% to 10% for police and fire • 3. Created a contractual right to the payment of the annual required contribution

32. Chapter 78 • We wrote the strongest possible statutory language • But recognized the risks • Knew only guarantee to secure funding would be a constitutional amendment • Not a political option at the time • Initially appeared to work

33. Chapter 78 Created a Contractual Right to Funding • Each member “shall have a contractual right to the annual required contribution amount being made by the member’s employer or by any other public entity. The contractual right to the annual required contribution means that the employer or other public entity shall make the annual required contribution on a timely basis to help ensure that the retirement system is securely funded and that the retirement benefits to which the members are entitled by statute and in consideration for their public service and in compensation for their work will be paid upon retirement.”

34. Funding Post Chapter 78 • FY 2013 (July 1, 2012- June 30, 2013)State put in 1/7 of Annual Required Contribution • FY 2014 – 2/7 appropriated and paid • FY 2015 – 3/7 appropriated - $1.58 billion - but May 2014 reduced to $661 million • FY 2016 – 4/7 to be appropriated - $2.25 billion – line item vetoed $1.57 billion and paid $681 million • Legislature presented Governor with balanced budget that fully funded pension system and increased taxes on millionaires and on corporations

35. Unions Filed Lawsuit June 2014 • June 2014, filed complaint in Superior Court, Mercer County – Judge Mary Jacobson, Assignment Judge • Unions alleged that the unmistakable intent of the Legislature and the Governor was to create a contractual right to funding. • Contractual rights are protected by the Contract Clause– a provision of the NJ Constitution, which provides: “The Legislature shall pass no law impairing the obligation of contract.”

36. Christie Argued • There is no contractual right to pension funding because the Legislature and the Governor did not have the power to create such a contractual right. • Two other constitutional provisions prevent the formation of a contractual right to funding – the Debt Limitation Clauseand the Appropriations Clause

37. Governor’s Legal Arguments • Governor argued that Chapter 78 was void from the start. • Debt Limitation Clause of NJ Constitution requires that bonds, loans, other debts be submitted to the voters for approval. • Governor argued that the requirement that State pay its annual required pension contribution creates a debt and under the Debt Limitation Clause • Debt Limitation Clause provides, in part, that the Legislature shall not “create . . . a debt . . . or liability” unless it is submitted to the voters for approval.

38. Judge Jacobson’s February 23, 2015 Ruling • Pensions are deferred compensation for services already rendered. • Court held that Chapter 78 did not “create a debt.” • Chapter 78 is a payment plan to pay off an existing debt. • No new debt as been created. • The Unfunded Accrued Liability is money already owed.

39. February 23 Decision • Court found that Chapter 78 did not require that the State borrow money to make pension payments. • Chapter 78 simply required an annual appropriation to pay the required pension contribution. • Absent borrowing money, no debt has been created.

40. Feb. 23 Decision The Court concludes: “In short, the court cannot allow the State to simply walk away from its financial obligations, especially when those obligations were of the State’s own creation.”

41. Following the Trial Court’s Decision • On February 24 – the day after the court issued its decision – the Governor gave his budget address. • Governor recommended a payment of $1.3 billion. • The ARC required to be paid by Chapter 78 was $3.1 billion. • $1.8 billion short • Governor requested that NJ Supreme Court take case and reverse Judge Jacobson

42. Supreme Court’s Decision • Court reversed Judge Jacobson’s decision that Chapter 78 created a binding contract requiring the State to make its annual contribution to the pension systems. • 5-2 decision • Five member majority – Justices LaVecchia, Paterson, Solomon, Fernandez Vina and Judge Cuff • Two members dissented – Chief Justice Rabner and Justice Albin

43. Majority Recognized Intent to Create Contract • “We conclude that the Legislature and Governor clearly expressed an intent that Chapter 78 create a “contract right” to timely and recurring ARC payments to reduce the unfunded liability of the pension funds to safe levels.”

44. But Majority Held: • Chapter 78’s requirement that the State make annual contributions to the pension systems as determined by actuaries creates a debt that violates the State Constitution Debt Limitation Clause because it was not submitted to the voters for approval. • Also violates the State Constitution’s Appropriations Clause which vests in the Legislature the authority to construct an annual balanced budget without any constraints, other than those imposed by the Constitution and voter approved debt.

45. Key Question Unanswered • Are our non-forfeitable rights to pension benefits enforceable? • Currently, for all employees hired prior to 2010, the pension benefit program they were entitled to after five years of service, assuming they vested with ten years of service, cannot be reduced. • Employees hired after 2010 vest after 10 years and are entitled to the benefits they earned during each year of their employment based on the benefit program in effect.

46. Non-forfeitable Rights • The Attorney General agrees that public employees have an enforceable contractual right to their pension benefits. • That means that if the pension funds run dry, pension benefits will have to be paid from general treasury funds. • The current annual cost of pension benefits to retirees in TPAF, State PERS and State PFRS is $8 billion.

47. Court’s Response to Non-Forfeitable Rights Issue • “In 1997, with enactment of Chapter 113 of the Laws of New Jersey, the Legislature granted to members of the public pension funds a “non-forfeitable right to receive benefits,” a right defined to mean that benefits could not be reduced once the right to them had attached. The individual members of the public pension systems, by their public service, earned this delayed part of their compensation. That those men and women must be paid their pension benefits when due is not in question in this matter.”

48. Why did the Majority evade this issue? • Could not on the one hand say that there is a constitutionally-protected contractual right to pension benefits and on the other hand hold that there is no enforceable contractual right to the funding of those benefits by the State. • If cannot bind a future legislature to appropriate $4 billion to fund pension benefits, how can a future legislature be bound to appropriate $8 billion to pay benefits when funds are bankrupt?

49. What did the Dissenting Justices say? • The United States Constitution is the supreme law of the land and the Contract Clause prohibits a State from impairing its contractual obligations • Never before has the Debt Limitations Clause been applied to the ordinary operating expenses of government, such as deferred compensation earned by public workers payable as pension benefits. • “The dismal logic of the majority’s decision is that the political branches, in accordance with the State Constitution, can let the pension fund run dry and leave public service workers pauperized in their retirement.”

50. Dissent • “The non-forfeitable right to receive one’s deferred wages is a hollow right if there is insufficient money in the pension fund to pay those wages.”