Much of the debate over California pension reform centers around whether or not the pension benefits of current employees can and/or should be restructured. The legislation that looks likely to pass soon would mostly leave current employees' benefits untouched, making it weaker than Gov. Jerry Brown's original proposal, as well as recent pensions reforms in San Diego and San Jose.
The current bill does call for making all state and local employees contribute half of the total normal cost of their pensions (see #s 16, 37-40, 45). Some pension reform advocates have heralded these provisions, but CalPERS reportedly thinks that they only amount to a local option. On his website, the Governor says that state workers are already "paying for 50 percent of normal costs of their pension benefits," and that what the bill does is empower local governments to break through bargaining impasses and reach the 50-50 cost sharing goal. But in other interviews, Brown seemed to concede the point that the legislation barely affected active employees' benefits, while leaving open the possibility that he might revisit that approach if it comes to look more legally viable.
Anyway, the changes to current employees' pensions are modest at most, but unions may still sue, as they did over the San Jose and San Diego measures. If they do, California state government is in luck, for there exists a ready-at-hand defense of changing benefits for current employees, published fairly recently in the Iowa Law Review by University of Minnesota law professor Amy Monahan. (Cliff's notes are here). Through 54 pages of dense legal analysis dissecting almost a century of California public pension law, Monahan finds that legal protections on pension benefits should be rolled back because their original justification was flawed. (Apologies in advance for the length of this post, but the issue is complicated.)
It's known as the "California rule": "pension statutes not only create a contract between the state and its employees but also...the contract is formed as of the first day of employment and is of open duration, thereby protecting both past and future pension accruals." It also protects current employee contribution rates, which is what is at issue in the current legislation. California courts originally developed the doctrine, then 12 other states adopted it. (For discussions of pension protections in the 37 other states, see here and here.)
The California rule is grounded in the notion that a law can create a contract. In cases in which governments have negotiated benefit structures with employees, there's no question that an employer cannot change them unilaterally (i.e. through the legislative process). But what about when they are enshrined in a state or local statute?
According to the Supreme Court, laws can create contracts, but there needs to be "clear and unambiguous evidence" that the legislature intended to do so, and thereby deliberately bind itself. Without this evidence, the legal presumption is that a contractual right does not exist.
Monahan finds that California courts never identified the legislative intent to create a contract in the case of pensions. The California Rule therefore errs, because it breaks with traditional contract clause analysis and also infringes on the separation of powers. Legislatures should possess the basic freedom to change their minds about pension benefits, but, under the California Rule, this freedom judges have denied them.
There is one other crucial flaw. Despite often describing pensions as a form of deferred compensation, California courts never clarified why pensions deserve different legal protections than other forms of compensation. Even though an employee has not yet performed the work for which future retirements will compensate him, even though his salary is not guaranteed, nor even the job itself, his pension somehow is.
This "create[s] economic inefficiency" because while it's legal to fire someone or reduce their salary or other benefits in future years, pension benefits cannot be reduced without "comparable new advantages." (Judges, of course, get to decide what qualifies as a "comparable new advantage.")
And what, exactly, does it protect? Obviously, if a government can't afford pension benefits, and can't reduce them, then it will simply be forced to cut compensation on some other end.
The California Rule has been settled law for half a century, but it's wrong. Where to go with this? "[C]ourts owe it to the residents of California to revisit their prior decisions regarding public-pension benefits."
Thanks to San Jose mayor Chuck Reed and possibly Jerry Brown and the California Legislature, courts will now have their chance.