The California Rule for public pensions: illegal or just knuckleheaded?

San Jose Mayor Chuck Reed’s pension reform initiative is off for 2014, but there has always been some question as to whether it was even necessary.

Reed took aim at the notorious “California Rule,” a state constitutional doctrine which prevents government employers in California from making prospective changes to current employees’ pensions. While everyone agrees that benefits earned for work already performed should not be reduced, and that government employers have free rein over benefits for future employees, under California law, current employees’ benefits cannot be reduced, not even for work they have not yet performed. You can reduce a worker’s pay, furlough him, restructure his health benefits, modify his working conditions in any number of ways, lay him off, but his pension cannot be touched without providing some “comparable advantage.”

Illinois and New York also provide employees with a contractual right to future accruals, but through specific clauses in their state constitutions. The California Rule was developed by state court judges. Of course, sometimes judges make mistakes.

Leading pension law scholar Amy Monahan has argued that the case law behind the California Rule has flaws which could prove susceptible to legal challenge.

According to Monahan, courts never identified evidence that state and local legislatures, when they established their retirement systems, intended to guarantee that all terms would remain in place during employees’ career and retirement. Judges appear to have construed a contract where one does not exist, which is a problem, because that “improperly infringes on legislative power”:

A state law does not normally create contractual rights, but “merely declares a policy to be pursued until the legislature shall ordain otherwise.”…As the Supreme Court has explained “to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body.”

Monahan also believes that judges never provided a compelling legal justification for why pensions should be given more protection than all other elements of compensation, which can most certainly be altered on a going forward basis. Gross economic inefficiency in policymaking (layoffs instead of pension modifications) has resulted from this act of judicial fiat.

In sum, according to Monahan, “pension benefits that have already been earned through services rendered to the state should be protected against impairment, but that it is hard to find legal justification for protecting the rate of future benefit accrual.” Monahan has no illusions about how difficult a legal challenge would be, but the fact remains that the California Rule is bad policy and bad law.

Mayor Reed links to Monahan’s critique of the California Rule on his Pension Reform Act of 2014 site, and has characterized his initiative as an attempt to “clarify what exactly is authorized by the California Constitution.” He is open to the possibility of California Rule reform through litigation. But while a legal challenge may be theoretically possible, Reed has essentially offered to take the lead because no government employer has yet stepped forward to (1) attempt to modify pension benefits in a manner contrary to the California Rule (2) take up the burden of years of litigation against CalPERS.

A recent Federalist Society white paper argues that such an employer would lose nonetheless. The author, Alexander Volokh, claims that there is nothing per se illegal about the California Rule.

Volokh agrees with everything Monhan says about the economic inefficiency of the California Rule, but he considers it legally acceptable. It’s bad policy, but good law.

Volokh frames the question as should federal courts intervene over state courts’ interpretation of contract law, or defer to them? Volokh finds no basis for Federal interference. If state courts have elected to endow contractual rights on future pension accruals, that’s their business. Yes, California Rule jurisprudence has been “often sloppy,” but the principle is sound.

Volokh seems to view the matter as one of federalism and state preference. He suggests that California pension reformers consider a campaign to place anti-California Rule judges on the state’s supreme court. Were they to succeed, and those judges came to reject the California Rule, that, too, would be a legally acceptable outcome.

As for whether a contract exists, Volokh applies a different, weaker standard than Monahan’s. He asks whether an employee would believe his contractual rights violated were his pension benefits altered without comparable advantage. Given that the California Rule has been a settled question for fifty years, Volokh believes that this would not be an unreasonable belief for the employee to hold. Even though, presumably, there needs to be two parties to make a contract, Volokh seems to place less weight than Monahan on whether legislatures intended to create a contractual right to future accruals. Volokh is generally less concerned than Monahan that the California Rule unjustly overrides state and local legislatures’ authority.

Strangely, Volokh claims to have been unaware of Reed’s initiative while writing his paper. But he goes so far as to argue that not even a constitutional amendment, along the lines of what Reed has proposed, would pass muster. Future employees’ future accruals could be subject to change, but current employees’ would remain sacrosanct. (In 1990, California voters passed an initiative that ended the accrual of pension benefits for state legislators, but courts ruled that it could only apply to legislators taking office after the amendment went into effect, not incumbents.)

Because Volokh and Monahan arrive at their rival conclusions through somewhat different paths, it is difficult to determine who is right on strictly legal grounds. But the Volokh paper makes it much more difficult to make the case for a legal approach to California Rule reform. Anyone attempting to follow out Monahan’s roadmap repeal would be forced to fight off attacks from CalPERS attorneys such as “Even the conservative Federalist society claims that…”

There’s law, policy and politics. California Rule reform is necessary for policy reasons, but the solution must be political, because a legal approach is at least as unpromising, and even to pursue reform through litigation would require a degree of political will that might as well be directed towards a political process.

Comments (4) Add yours ↓
  1. pvine

    So, in your opinion, what is the “political solution” to the California Rule, given the fact that pension-friendly Democrats control the legislative and executive branches and all members of the judicial branch are members of CalPERS?

    February 13, 2014 Reply
    • SkippingDog

      The political solution would be to propose and pass a voter initiative to amend the California Constitution sufficiently to remove the “California Rule” precedent requiring an equal benefit in exchange for the impairment of such contract relationships between public employees and their employer. But, since the non-impairment and non-interference with contracts is a central pillar of conservative ideology, taking such a step with regard to the contracts of public employees creates a conundrum.

      February 14, 2014 Reply

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