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Changes in Teacher Pension Systems Face Legal Scrutiny

As states face continuing budget shortfalls, some lawmakers are turning their attention to modifying costly teacher pension plans, by reducing future benefits and/or requiring greater contributions from school districts and employees. Not surprisingly, education organizations and local government entities have challenged the constitutionality of these changes.

An appellate decision in New Jersey and a lawsuit filed in New Hampshire are the most recent legal developments in this area. In New Jersey, an appellate court ruled on March 4, 2010 that although teachers have the right to receive benefits upon retirement, they have no contract right to the “particular level, manner or method of State funding.” The Court further emphasized that changes to the system are within the limits of the legislature’s “sovereign power to deal with changing fiscal conditions.” In New Hampshire, the City of Concord, the County of Belknap and the Mascenic Regional School District contend that an increase in plaintiffs’ contributions to the New Hampshire Retirement System constitutes an “unfunded mandate” and contravenes Part I, Article 28-a of the state constitution.

New Jersey

In New Jersey Education Association v. State, the statewide teachers union and a number of individual plaintiffs argued that the State’s failure to fully fund the pension system according to actuarial calculations between 2004 and 2007 violated the contracts clause of the New Jersey and United States constitutions. In a 37-page opinion, the Court assessed and rejected the plaintiffs’ contractual argument.

In fiscal years 2004 and 2005, the state legislature made no appropriations to the Teachers’ Pension and Annuity Fund, and in fiscal years 2006 and 2007, contributed less than actuarial calculations required. According to the plaintiffs, these actions endangered the “fiscal soundness and integrity” of the pension system, which the State must maintain according to a pre-existing statute, and thus constituted a breach of contractual obligations.

The Court, however, dismissed the debate over “soundness” and “integrity” altogether. Relying on a number of prior state Supreme Court decisions, the court held that New Jersey, in contrast to some other states, has no constitutional guarantee to retirement benefits and no statutory language (or legislative history) that indicates the Legislature’s explicit intent to establish a contractual right. Public employees in New Jersey do have property rights in the funds in the system, but “no constitutionally protected contract right to the funding method adopted by the Legislature.” Additionally, the Court found that the Legislature’s obligations to satisfy the Appropriations and Debt Limitations Clauses, which require a balanced budget and prohibit lawmakers from passing debts onto future Legislatures, respectively, also preclude the establishment of such a contract. Lawmakers, the Court surmises, may modify funding levels in accordance with “[the Legislature’s] sovereign power to deal with changing fiscal conditions.”

New Hampshire

In a complaint filed in Merrimack County Superior Court, the municipal and school district plaintiffs challenged the constitutionality of a reduction in the State’s payments to the New Hampshire Retirement System by 5% in 2010 and 10% in 2011 as set forth in 2010-2011 budget. According to the complaint, the City of Concord, Belknap County, Mascenic Regional School District and members of their class will incur $27 million in additional costs over the next two years. The plaintiffs have asked the Court to rule that the legislation is unconstitutional, and seek an order requiring the state to contribute to the pension system at pre-2010 levels.

The plaintiffs rely on Part I, Article 28-a of the New Hampshire constitution, which prohibits the state from amending mandated programs “in such a way as to necessitate additional local expenditures…unless such programs or responsibilities are fully funded by the state or…approved…by a vote of the local legislative body of the political subdivision.”