As it stands in California law, on the day municipal workers start their jobs, their pension benefits can only go up, not down.
This legal principle has been a bedrock behind the city of San Diego’s decade-long pension drama. Despite a growing pension debt that has dominated the city’s political discourse, reforms have focused on new employees, not the retirees or current workers who are owed the bill.
It’s one reason why the June pension initiative, Proposition B, stuck new workers with 401(k)s, yet did nothing to guarantee San Diego’s existing pension debt would be cut.
This legal principle is important, foundational even, to how California governments do business. And, according to a fascinating new article in the Iowa Law Review, it all goes back to three words in a 1917 California Supreme Court decision about benefits for a police widow.
At issue in that 1917 decision was the legal status of pensions. Are they bonuses granted to employees after their service to the government? Workers’ property akin to their houses or other possessions? Or part of their employment contracts?
The 1917 decision didn’t make a definitive call. Instead it used the three words, “in a sense,” to link pensions to unbreakable contracts for the first time. In the 95 years since that initial decision, courts in California and other states have expanded on that three-word phrase to the point where we are now with pensions. The article calls the legal principle the “California Rule.”
The article’s author, University of Minnesota law professor Amy B. Monahan, argues the California Rule is off the mark. She contends the state’s court system improperly infringed on legislative power and the pension rule doesn’t fit with both contract and economic theory. Her review of case law found the state Legislature never said pensions were untouchable.
“California courts have put in place a highly restrictive legal rule that binds the legislature without the court ever finding clear and unambiguous evidence of legislative intent to create a contract,” Monahan wrote (emphasis in original).
I recommend reading Monahan’s entire article. But if you would rather belong to the Voice-of-San-Diego-Reads-55-Page-Law-Review-Articles-So-You-Don’t-Have-To Club, she makes one point that addresses the pension funding challenges faced by San Diego and other governments.
Monahan says the law should allow governments to make prospective changes to current employee pensions. In other words, she believes California courts should reverse their position and give governments the right to cut pension benefits for the time current employees haven’t yet worked.
This change would give governments the chance to face their existing pension problems head-on by addressing the debt owed to current workers without infringing on employees’ contractual rights. These kinds of pension cuts, she contends, could even benefit workers. In the face of mounting budget pressures, she says, government employees might prefer pension cuts to salary freezes or layoffs.
In short, Monahan concludes making current pensions untouchable is both bad law and bad policy.
As noted by public finance columnist Girard Miller, courts might have a chance to weigh in again on the California Rule after pension ballot measures passed here and in San Jose earlier this month. San Jose’s measure addressed the California Rule more directly by forcing current employees to pay much more toward their pensions than they do now or accept a new plan with lower benefits.
Miller also says that the overwhelming election results in favor of pension reform in San Diego and San Jose means it makes sense for unions in California to make deals:
Taking a page from Machiavelli’s playbook written centuries ago, enlightened union leaders and their political surrogates should now see that it’s time to offer up enough reforms to placate the voters and avoid judicial decisions that take them back to the 1950s. They risk irreversible losses in all-out wars on multiple fronts. And the Governor’s proposed tax increase will likely be dead on arrival this November without pension reform, even if it means more draconian cuts in state spending and public education.
Frequent readers of my blog know my affinity for Miller’s writing and his even-handed perspective on pension issues. Miller announced last week that he’ll no longer be writing columns for Governing magazine because he’s taking a job as chief investment officer for the Orange County retirement system. It’s worth highlighting again his great piece that takes on a dozen common claims about pensions. I called it: The Mother of All Pension Fact Checks.
Liam Dillon is a news reporter for Voice of San Diego. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?
Please contact him directly at email@example.com or 619.550.5663.
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