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

Sasha Volokh has a new article on 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.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.