The California Supreme Court Surprisingly Upheld Pension Reform Last Month

But it still reaffirmed the validity of the "California rule".


I've got a post up elsewhere on the Reason site, about two recent pension-related Contract Clause decisions from the California Supreme Court, Cal Fire and Alameda County. Here's a snippet:

The Contract Clause of the U.S. Constitution is fairly accommodating to state legislatures that try to alter the obligations of contracts, including the contractually vested rights associated with state and local public employee pension benefits. But states generally have their own constitutional contract clauses—and state supreme courts are the supreme arbiters of what their own constitutions require. Some states go even further and have extra constitutional provisions specifically protecting public employee pensions; but regardless of the precise wording, state supreme courts that are disposed to grant public employee pensions constitutional protection have plenty of ways to do so.

California, for instance, along with some other states, like Arizona and Illinois, has long been known for its strict "California rule," which provides some of the strongest legal protections for public employee pensions in the nation. Like most other states, California interprets the terms of public employee compensation, as laid out in public employment statutes, as contracts. Then—unlike many other states—it interprets those contracts as though they not only protect the benefits already earned but also guarantee at least as generous terms for the entire duration of one's employment.

Thus, if an employee started working for the state when the employee pension contribution rate was 5 percent, a hypothetical statute raising that contribution rate to 10 percent several years later would count as an impairment of the state's contractual obligation. Likewise, if the annual cost-of-living increase for retirees was 5 percent when the employee was hired and a later statute lowered it to 3 percent.

Under the California rule, if a later statute makes the terms of employment more attractive, then that new arrangement becomes the new standard, which is protected against deterioration for the employee's entire working life with the state (and for the duration of retirement as well). Once such deterioration is shown, California courts have routinely demanded that the state provide compensating advantages to affected employees before upholding the pension reform; a mere fiscal crisis isn't enough. (There were exceptions, as described in a previous article, but that was the general rule.)

Then, in 2016, a strange thing happened. . . .

Actually, several strange things happened, mostly in 2019 and last month (July 2020). As they say, Read The Whole Thing.

You can find my other articles on antitrust, privatization, and public-employee pensions here.