Sasha Volokh on the Counterproductive “California Rule” on Pension Benefits

Sasha Volokh has a new article on Reason.org well worth a read that discusses the so-called “California rule” on pensions, which basically says that California government employees acquire a right to their promised pension benefits on day one of employment, and those benefits (or more generous ones, if granted) are assumed to be protected for their entire career in government. In other words, they are seen as permanent contractual rights that cannot be changed—unless the terms are modified to bestow enhanced benefits. Policymakers are thus precluded from later deciding to enact reforms to rein in those benefits in the interest of the financial sustainability of the pension system—such as reducing cost of living adjustments or increasing contribution rates—even if on a purely prospective basis, where previously accrued benefits would be left untouched.

California’s constitution protects pension benefits is curious, as Volokh explains in the article:

Does it make sense to protect the rate of future pension accrual as a contract? If there were an explicit contractual term regarding pensions, the question would be easy; but usually there’s nothing but a statute defining pension rules.

The basic idea that a pension statute creates a contract with employees is sound: pensions are deferred compensation, and government employees take their jobs in reliance on the full compensation package, from current salary to fringe benefits to pensions. But what’s covered by this contract? Certainly whatever has been earned so far should be protected; this includes past salary and benefits, including whatever part of the pension has already been accrued. As to the more extensive rights protected by the California rule—the “collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those offered” when one was hired—it seems that this, too, should be protected in California now. Given that it’s been the law since 1955, public employees have sensibly relied on the rule in accepting employment. So it’s reasonable to consider that the future rate of pension accrual has implicitly become part of public employees’ contracts.

Nonetheless, the California rule isn’t sensible. Consider what isn’t protected. Salaries aren’t constitutionally protected, even if a salary reduction will have an indirect effect on the amount of one’s pension. Cost-of-living increases to salaries can be revoked for the future, but cost-of-living increases to pensions can’t. Tenure in office isn’t constitutionally protected either, though states can adopt civil service laws if they like. Only pension rules have a special status. But it seems strange to privilege pensions over everything else in this way.

Read the rest of the article here, where Volokh goes on to explore several potential workarounds to the “California rule,” including shifting to defined contribution plans, providing benefits via short-term contracts, amending the state constitution, and privatization.

For more, see Volokh’s December 2013 white paper on the “California rule,” published by the Federalist Society. And be sure to peruse Volokh’s other legal analyses written for Reason Foundation, which are archived here.