Public-safety pension reform wins big in Arizona!

I know you've all been following Prop. 124 in Arizona, which just won in a landslide (70-30) on Tuesday. Prop. 124 is a state constitutional amendment whose sole purpose is to make one particular statute constitutional; that statute is S.B. 1428, a pension reform affecting public-safety employees in Arizona. (The Reason Foundation, which I worked for in the 1990s and for which I occasionally write policy pieces and blog posts, helped to get the S.B. 1428 deal hammered out and passed.) I have a piece about it today on Reason's blog.

The whole constitutional problem in Arizona stems from the Arizona Supreme Court's unreasonable interpretation of the Arizona constitution's Contract Clause and Pension Clause. Arizona isn't alone in its Contract Clause interpretation: Illinois follows the same doctrine, and in fact that particular doctrine is called the "California Rule", which I've written about in the past. In states like Arizona, though, the California Rule (which is just an interpretation of the Contract Clause) is overlaid on an even stricter interpretation of their Pension Clause, which makes pension modifications with retroactive components well-nigh impossible. Prop. 124 fixes the problem by amending the Arizona constitution for just this one statute only.

Here are some excerpts from my blog post. (My full list of recent Reason work is here; this also includes various pieces on privatization, antitrust, and regulation.)

One could certainly sympathize (as I do) with a strong rule against abrogating contracts, and believe (as I do) that the current three-part Contract Clause test is too forgiving of governmental abridgments of contracts. (The Takings Clause requires fair compensation whenever property is taken, always, without exception, even when there's a really good reason and exigent circumstances. Why not the same rule when governments want to abrogate their contracts?) But even if one holds these views, one could still argue that prospective changes in pensions, which retain all the benefits accrued so far, can never be an impairment of a pension benefit.

For instance, consider a hypothetical employee hired 10 years ago qualifying for the now-closed EORP defined benefit pension plan. If he retires today, his benefits will be equal to 40% of his salary (assuming the 4% benefit multiplier in effect for the EORP plan at the time, times years served). But suppose he doesn't retire today, and instead works for many more years (accumulating, roughly, 4% of final salary for each additional year he works, up to a maximum of 80% of his average yearly salary). If the formula were changed after the tenth year, but only applied to his later earnings-so the first ten years' 40% continued to be calculated under the original rules-it seems difficult to say that any benefits have been impaired. Some states, for instance Maryland, follow this sensible approach, under which any pension changes are constitutional as long as they operate only on benefits to be earned in the future. (Under this interpretation, retired judges like Fields and Lankford would be entitled to all the old rules, but current employees wouldn't be entitled to the old rules on their new earnings.)

Consider the consequences of the opposite rule-one that would say you're entitled to pension formulas that existed on the day you were hired. Everyone agrees that public employees don't have a constitutional right to the continuation of their starting salary; the legislature can reduce public salaries down to minimum wage if they so choose. They don't have a constitutional right to the quality of the working conditions that they experienced on day one; the legislature can steadily make their jobs more and more miserable, within the constraints of federal workplace regulation. They don't have a constitutional right to the continued existence of their own job positions; the legislature can abolish those without notice. They don't even have a constitutional right to continue working in their existing positions; any existing civil service protections can be abolished by the legislature. But God forbid the legislature should make any unfavorable prospective change in public employees' pension calculation formulas: those are vested rights.

It thus seems to make little sense to interpret the "benefits" protected under the Pension Clause to include not only benefits based on work already done, but also the prospect of future benefits based on the rules that existed when one was hired. And yet, this is exactly what the Arizona Supreme Court held-similarly to many other states that use the so-called "California Rule." (I have written about the California Rule in this recent blog post and this recent policy study.) The court held that an employee has "a right in the existing formula by which his benefits are calculated as of the time he began employment and any beneficial modifications made during the course of his employment." (In doing so, it explicitly noted that the Arizona Pension Clause is worded more broadly than parallel clauses in other state constitutions-including in Michigan, whose Pension Clause, quoted above, states merely that "accrued financial benefits" are a contractual obligation.)

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Looking forward, what does this whole experience portend for the future? This particular problem (the funding of public-safety employee pensions) has been solved for the moment in this particular state, but of course this one-time constitutional carveout will have no legal effect on other pension reforms or outside of Arizona.

Politically, though, this could prove to be meaningful, especially if S.B. 1428 is also challenged and upheld under Arizona's Contract Clause. Now we know that there's a constituency for meaningful pension reform, and that reforms can be politically feasible even if they include some retroactive changes.

In states that only have a Contract Clause similar to Arizona's-and that don't have a Pension Clause, at least not one that has been interpreted Arizona-and-Illinois-style-the way forward is procedurally easy. Just reach the proper political compromise, and the legislature can simply enact the corresponding statute.

But in states with a Pension Clause like Arizona's and Illinois', any future reform along these lines will have to involve constitutional change, either in the text of the state constitution or in the state Supreme Court's interpretation. Could Arizona's experience make state Supreme Courts more likely to rethink their Pension Clause doctrine? Maybe-Supreme Court justices don't like to see their work overruled by constitutional amendment; courts, in the long run, follow election returns; and union-friendly justices might realize that their strict Pension Clause interpretations aren't always pro-worker. But that's all very hypothetical: maybe justices could instead retain their strict Pension Clause doctrine, on the theory that the people can easily make one-time exceptions as needed.

Fortunately, state constitutions tend to be much easier to amend than the federal constitution. So a series of one-time carveouts in different states for different reforms, while moderately cumbersome, isn't unimaginable. My hope is that, though the political will for a broader change didn't exist this time, voters will eventually approve a broader constitutional reform-one that would explicitly fold Pension Clause protections into Contract Clause doctrine, treating the state's pension promises on a par with its other contractual obligations.

As they say, read the whole thing.