Public policy implications of California Rule for pensions

At the Volokh Conspiracy, a legal blog now housed at the Washington Post, Sasha Volokh has been writing about the California Rule and public pensions. Volokh’s brief description of the rule is:

. . . in California (and some other states), the courts give constitutional protection not only to the amount of public employees’ pensions that has been earned by past service, but also to employees’ right to keep earning a pension based on rules that are at least as generous for as long as they stay employed.

(I wrote about the California Rule — which is followed in Washington — here.)

Volokh’s first post sets up the issue, the second asks if it is good constitutional law, the third asks if public employees are well served by it, and the fourth asks if it’s fixable.

I recommend all four posts to readers interested in this issue; I particularly liked the third and fourth. From the third:

The main problem with the California rule is that it distorts the mix between pensions, on the one hand, and salaries (and all other benefits) on the other. It gives some employees a different compensation package than they’d otherwise prefer, and it makes it harder for states with unfunded pension issues to put their finances in order.

Volokh writes that

Salaries of public officials aren’t protected by the Contract Clause, even if a salary reduction will have an indirect effect on the amount of one’s pension. Existing statutory cost-of-living increases to salaries can be revoked as to future contractual terms, but existing cost-of-living increases to pensions can’t. Tenure in office isn’t protected either . . . .

Only the pension rules that apply to employees have a special status.

He notes two possible effects of the California Rule:

Even when the terms of a job become more advantageous, governments may hesitate before offering more generous pension rules, since that generosity will become a liability in hard times. . . .

Rather than depressing pensions because, once granted, they’re harder to withdraw, the California rule could actually increase pensions. Perhaps the fact that pensions are protected actually makes it easier for governments to credibly promise generous pensions to their employees, knowing that (outside of a cataclysmic event like municipal bankruptcy) later generations won’t be able to undo the terms. The California rule might thus exacerbate the deficit-spending-like bias toward generous pensions that would already exist.

In the fourth post, Volokh discusses several possible fixes: (1) a flexible definition of benefits, (2) short-term contracts, (3) state constitutional amendment, (4) changing state caselaw, (5) privatization, and (6) defined-contribution pensions. That last, he notes, “would make many of these issues moot.”

As readers know, the Washington Supreme Court heard arguments in October on the public pension gain-sharing and cost-of-living adjustment cases (more here and here). Moves by the Legislature to reform these programs were challenged, despite the fact that the legislation creating these benefits explicitly said they were not contractual rights. No word yet on when the Court will rule in these cases.