The “California rule” for public-employee pensions: is it good constitutional law?

February 4, 2014

This is the second of a series of posts about the “California rule” for the constitutional protection of public-employee pensions, which I introduced in yesterday’s post. You can read that post for an introduction to the issue if you’re unfamiliar with it, but the short version is that in California (and some other states), the courts give constitutional protection not only to the amount of public employees’ pensions that has been earned by past service, but also to employees’ right to keep earning a pension based on rules that are at least as generous for as long as they stay employed. I argue that protecting pensions accrued based on past work is reasonable; protecting the current rules into the future is far less so. In today’s post, I lay out what California courts have held, and discuss whether this constitutional doctrine is consistent with federal constitutional law.

*     *     *

The California rule was created in 1955, when the California Supreme Court considered a challenge to a 1951 city charter amendment in Allen v. City of Long Beach (Cal. 1955). The amendment raised the amount of employees’ retirement contributions from 2% to 10%. It changed the pension from a fluctuating amount (based on the salary attached to the retiree’s previous position at the moment pension payments are made) to a fixed amount (based on the retiree’s salary around the time of his retirement). And it required extra contributions from employees who had returned from military service.

The Court held that the amendment unconstitutionally impaired the contract rights of the employees who were adversely affected. In doing so, it stated a test that would be often repeated in public employee pension cases:

An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. Such modifications must be reasonable . . . . To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

In this case, there were no comparable new advantages, nor was there any evidence that the changes were related to the integrity of the pension system.

The increase in contributions from 2% to 10% was purely prospective, so—though the Court didn’t say so explicitly—California doctrine protects not only pension amounts already accrued but also the right to earn pension benefits on terms no worse than those in effect at the time one was hired.

This rule remains in effect: as the California Supreme Court has since summarized, “By entering public service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent to those then offered by the employer.” In other words, one has “the primary right to receive any vested pension benefits upon retirement, as well as the collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those then offered.” The doctrine that “future pension benefits vest as they are proratedly earned”—which we’ve seen in Maryland—is emphatically not the law in California.

Similarly:

  • In Abbott v. City of San Diego (Cal. App. 1958), the San Diego city charter was amended to increase police and firefighters’ contributions from 6% to 8%, among other changes. The California Court of Appeal held, on an Allen-like logic, that these prospective increases were unconstitutional because they weren’t accompanied by commensurate benefits.
  • In Wisley v. City of San Diego (Cal. App. 1961), the San Diego city charter was amended over a period of years to increase employee pension contributions from 1% to 2%, then 4%, then 8%. This was similarly struck down as unconstitutional because not accompanied by commensurate benefits.
  • And in City of Downey v. Board of Administration (Cal. App. 1975), the Court of Appeal examined a similar increase in employee contributions, and ruled that these prospective increases were constitutional because, in this case, they were accompanied by benefits—an increase in overall retirement benefits.

The same logic applies to other prospective changes, like cost-of-living adjustments to pension benefits to be earned from future service. In Pasadena Police Officers Ass’n v. City of Pasadena (Cal. App. 1983), the California Court of Appeal considered a challenge to a 1981 charter amendment placing a 2% cap on the rate of increase of police and firefighters’ cost of living allowance. An unlimited COLA had been introduced for all retirees (past and future) in 1969; employees who had retired since 1969 were exempted from the 1981 cap, but those who had retired before 1969 weren’t. Active employees could choose an option that, in essence, amounted to making the cap prospective only. The court held that the amendment unconstitutionally impaired the contract rights of both active employees and pre-1969 retirees.

As to active employees, the court had little trouble finding, based on Allen, that the cap was unconstitutional because it reduced the pension that would be earned under the previous rules—both what had already been earned and what would be earned later—and was not accompanied by any comparable new advantages.

As to the pre-1969 retirees, it’s true that they worked their entire career with no expectation of a COLA, which was only introduced in 1969. “Thus, they had no vested contractual right, based on the contract in effect during their employment, to continuation of the COLA benefit.” But the retirees formed a new contract with the state in 1969 when they elected to switch to pensions with COLAs; and the 1981 amendments impaired this new contract.

Substantially the same issue came up several years later, in United Firefighters of Los Angeles City v. City of Los Angeles (Cal. App. 1989), the case discussed in yesterday’s post. In that case, the California Court of Appeal considered a challenge under the state and federal contract clauses to charter amendment H, a 1982 amendment to the L.A. city charter that placed a 3% cap on (previously uncapped) cost-of-living adjustments to police and firefighters’ pension benefits. The amendment operated only prospectively, “to future years of service credited toward retirement.” Unsurprisingly, given Allen and Pasadena Police Officers, the court held that the amendment unconstitutionally impaired the plaintiffs’ “vested contractual pension rights.” In the court’s view, the COLA cap had no relation to the goals of a pension system (it reduced retirees’ economic security rather than enhancing it); any unsustainability in the pension system came from the government’s history of underfunding rather than from the recent history of high inflation rates; and the city’s desire to “enhance [its] ability to predict and plan for long-range . . . budgeting and financing” could also be fulfilled by, for instance, levying “a separate ad valorem property tax specifically to meet the pension system funding requirements.” Thus, the city couldn’t show that its modifications were reasonable; nor could it show comparable new advantages, since the change to the pension system was merely disadvantageous on its face.

And what goes for increases in contribution rates and limitations in cost-of-living adjustments naturally goes just as well for the outright elimination of the pension system. In Legislature v. Eu (Cal. 1991), the California Supreme Court considered a challenge to Proposition 140, “The Political Reform Act of 1990,” a California constitutional amendment adopted by initiative. The amendment, among other things, ended the accrual of any pension or retirement benefits (aside from Social Security) for any state legislators serving after its effective date. As to legislators first taking office after the effective date of the amendment, the Court found no constitutional violation, since these legislators had “acquired no vested or protectable right to a continuation of the pension system in operation prior to their employment.” However, as to incumbent legislators, the Court found that the pension restrictions violated the federal Contract Clause. The reduction in benefits wasn’t matched by any “comparable new advantages,” since the pension system was entirely terminated going forward.

*     *     *

Let’s go back to our question from yesterday’s post: are state pension statutes properly treated as contracts? Recall the federal doctrine: a statute isn’t treated as a contract unless “the language and circumstances evince a legislative intent to create private rights of a contractual nature enforceable against the State.” Some cases express this even more strongly: the state’s intent to contract must be “expressed in terms too plain to be mistaken.”

Generally, this language is absent, so there’s no contract, just a revocable benefit. Thus, if a state had a Social Security-like scheme, it should be able to abolish it without running afoul of the Contract Clause, and the same is true of the future existence of current government jobs and the level of government salaries. If one could find explicit language promising people such benefits, that would be one thing; but absent such language, freezing the benefits in place constitutionally would deprive the state government of flexibility and prevent it from structuring its operations as it sees fit.

Some California cases do examine the language of statutes to find such an intent, but this isn’t the norm. Should the California courts’ determination that pension obligations are contractual receive federal deference for Contract Clause purposes?

As to the basic question of whether a contract exists—as opposed to the pension’s just being an entirely revocable gratuity—the answer seems fairly easy (though some places do come out the other way). It makes good sense to defer to California’s doctrine that pension statutes form a contract—even without analyzing the language of the statute—because pensions are a form of deferred compensation. Government employees take their jobs in reliance on the full compensation package, from current salary to fringe benefits to pensions. The statute itself isn’t an offer—you can’t just get a government job by accepting. Nor does it form a unilateral contract—you can’t accept by showing up and working. Rather, once one goes through the traditional job offer and acceptance process, the statute defining the benefits, like an employee handbook, forms part of the terms of the deal. Thus, “the circumstances” of the statutory enactment “evince a legislative intent” to be bound. Perhaps one might even say the intent is unmistakable, even though it’s entirely implicit.

We can safely conclude that a contract not only exists but also covers at least the services performed so far. The government owes the employee for whatever work has been completed. Overdue salaries are owed, as is accrued vacation time . . . and the pension one has accrued so far. This much should clearly be within the bounds of federal deference.

What about the more extensive rights protected by the California rule—the “collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those offered” when one was hired? I’ll argue in a later post that this rule is a bad idea. But it should probably still be within the bounds of federal deference. Nothing prevents a government from explicitly promising crazy benefits to its employees, and the idea that one is entitled to the continuation of current pension rules is hardly the craziest of ideas, since it’s plausible that one could rely on it in planning one’s future career and foregoing investment in other lines of work. In that sense, perhaps any state judicial doctrine defining the terms and conditions of employment deserves federal deference.

Or one could adopt a slightly more moderate view. It’s true that pensions are given a treatment that other benefits don’t get—so, on a blank slate, it’s not clear why anyone would think he was entitled to have such terms preserved for the future. But even if few would have thought that was the deal in 1955, everyone could reasonably interpret that to be the deal today in jurisdictions where the California rule is in effect. So even if the California rule would have been outside the bounds of federal deference when Allen v. City of Long Beach was decided in 1955, it may be within the bounds of deference today. On this view, perhaps any judicial doctrine defining the terms and conditions of employment, even if wrong at first, becomes worthy of federal deference after enough time has passed (perhaps when the time for certiorari has expired).

But ultimately, how we resolve this question isn’t that important, because California has its own Contract Clause, and nothing stops California constitutional law from being more protective of pensions than federal constitutional law. (The rule about “comparable new advantages,” which isn’t a matter of contract interpretation on which federal doctrine defers to state law, is perhaps an example of a doctrine that derives from state constitutional law.)

It’s true that California cases are often sloppy about the exact basis of their Contract Clause rulings. Some cases don’t bother mentioning that the question is one of constitutional law; some don’t say which constitutional provision they’re addressing; some only mention the federal Constitution; and some cite the federal and California rules simultaneously. One of the seminal California cases, Kern v. City of Long Beach (Cal. 1947), mentions the words “Constitution” and “constitutionally” without saying which constitution is meant, but it does specifically cite the California constitution in a different context, and also cites some federal Contract Clause cases. But behind this sloppiness, it’s possible that, implicitly, any holding that’s stricter than required by the federal Contract Clause is actually a holding of state constitutional law. If push came to shove, California courts could always clarify that their special willingness to find a contractual relationship, as well as the super-protective rule regarding what the contract covers, comes from California’s own clause.

In the next post, I’ll discuss the policy reasons why I think the California rule is a bad idea.

Sasha Volokh lives in Atlanta with his wife and three kids, and is an associate professor at Emory Law School. He has written numerous articles and commentaries on law and economics, privatization, antitrust, prisons, constitutional law, regulation, torts, and legal history.
Comments
Show Comments
Most Read National

national

volokh-conspiracy

Success! Check your inbox for details.

See all newsletters