Proposed Pension Initiative Threatens the California Rule

Commentary

Proposed Pension Initiative Threatens the California Rule

California unions have taken issue with a proposed statewide pension reform initiative that would give voters “the power to approve or reject compensation and retirement benefits of government employees.” Public employee unions do not like the initiative and are particularly concerned about its potential to overturn the “California Rule.”

The California Rule is a 1955 California court creation that forbids the reduction of pension benefits for current government employees unless the reduction is accompanied by an offsetting increase in benefits. A consequence of the California Rule is that pension benefits for public employees can never be decreased, even if the costs of the pension benefits are unsustainable. Thus, the California Rule limits pension reform efforts to future employees-those who haven’t been hired yet.

The California Rule is predicated on the Contract Clauses of the U.S. Constitution and California’s state Constitution, both of which forbid California from passing laws impairing the obligation of contracts. Although the legal presumption is that statutes do not form contracts, California courts have decided the state’s pension laws do amount to contracts between the state and public employees.

Granting contractual protection to pension benefits a worker has already earned is appropriate. The newly proposed statewide initiative is unmistakably clear on this point stating, “Nothing in this section shall be interpreted to reduce the retirement benefits earned by government employees for work performed.”

Future pension changes, for work yet to be performed, are different matter. Employees do not have contractual rights to pension benefits they have not earned yet. The United States Supreme Court has held future public employee benefits, as well as any other condition of employment, can be changed. California courts follow this line of reasoning for most facets of employee compensation- employees’ salaries can be reduced, their working conditions can change, and they can be terminated-yet the state’s courts have given unearned pension benefits untouchable, sacred status.

Putting the legal issues aside, the proposed pension reform initiative makes sense from a policy perspective. California’s state and local pensions have billions of dollars in unfunded liabilities so pension reform is unavoidable. If a state worker is 30 years-old and decades away from retirement, policymakers should be able to reform the pension benefits that worker will receive 35 years from now.

And since California citizens will be required to pay for the growing pension obligations, either through increased taxes or decreased services, permitting residents to vote on pension increases is reasonable.