NEW YORK, May 9 (Reuters) - New Jersey's highest court on Tuesday cleared the way for Gov. Chris Christie to cut $1.57 billion from state pension funding, bolstering the Republican's presidential hopes but still leaving the state with fiscal struggles ahead.
The stakes were high for Christie, who has trailed in polls behind rivals such as Wisconsin Governor Scott Walker, a fellow Republican. Christie is battling to improve his record on the economy in New Jersey, where he has come under fire for his handling of the state's sluggish recovery, as well as a scandal around the 2013 George Washington Bridge closure, which saw a former ally plead guilty to federal charges.
"This will be a much-celebrated victory after a year and a half of bad headlines," said Tim Albrecht, a Des Moines, Iowa, Republican strategist. "The question is, will a lone victory be enough or will Chris Christie be able to parlay this into something bigger."
Christie, who has not announced his candidacy for the Republican nominee but has started a political action committee, said in a statement that the court's decision was an "important victory" for taxpayers.
Bill Kilberg, a labor lawyer in Washington DC and Christie supporter said the decision would give donors "renewed confidence that he's the serious candidate we all knew that he was."
The court, in reversing a lower court ruling, said while it lamented the "staggering" loss of public trust resulting from broken promises, the pension payment at issue was not a contractual obligation entitled to constitutional protection.
Christie cut a state contribution to the public pension system last year because of a revenue shortfall. The state's pension system has about $83 billion of unfunded liabilities and was funded at only about 44 percent in fiscal 2014.
Public sector unions sued the administration, and on Feb. 23, Superior Court Judge Mary Jacobson sided with them, finding that a 2011 pension reform law, signed by Christie, explicitly created a contractual right that the state make its pension contribution. The state appealed to New Jersey's highest court and the Supreme Court heard arguments in May.
"That the State must get its financial house in order is plain," wrote Justice Jaynee LaVecchia in the Supreme Court's opinion. "The need is compelling in respect of the State's ability to honor its compensation commitment to retired employees. But this Court cannot resolve that need in place of the political branches."
Philip Fischer, a municipal research strategist at Bank of America Merrill Lynch, said the court essentially ruled that New Jersey's pension contribution was so large it violated the state constitution's debt limitation clause.
"It takes the heat off the pension issue at least for a little while and allows the legislature and the unions to go back and figure out a way to fund pensions consistent with the debt limitation in the constitution," he said.
The Supreme Court voted to reverse the lower court ruling by five votes to two.
Justice Barry Albin, one of the dissenters, said the decision "unfairly requires public workers to uphold their end of the law's bargain ... while allowing the State to slip from its binding commitment."
Unions said the decision was a blow and vowed to fight. The New Jersey director of the Communication Workers of America, the largest union representing state workers, Hetty Rosenstein, said the union would have to try to change the constitution.
"It is devastating to all public employees, retirees, taxpayers, and families," said Wendell Steinhauer, president of the New Jersey Education Association, a teachers' union.
The New Jersey high court's ruling could be appealed in federal court, said James Spiotto, managing director of Chapman Strategic Advisors in Chicago. However, he noted, the U.S. Supreme Court has consistently ruled municipalities and states must abide by constitutional debt limits and balanced budget provisions. They cannot affirm contractual obligations that violate debt limits or which are not authorized, or are not sustainable or affordable.
(Reporting by Jon Stempel, Megan Davies, Luciana Lopez, Jessica DiNapoli, Jennifer Ablan, Karen Pierog, Hilary Russ; writing by Megan Davies and Hilary Russ; Editing by Nick Zieminski)