Overprotecting Public Employee Pensions: The Contract Clause and the California Rule
The Contract Clause of the Constitution, found in Article I, section 10, clause 1, prohibits states from passing any laws that impair its contractual obligations. What constitutes a contract is usually determined by state law. Interpreting their own states’ laws, some courts, most notably those in California, strictly prohibit the state from making changes to an employee’s current and future public pension accruals. The “California Rule,” as it is often known, was established in 1955 when the California Supreme Court held that an amendment raising retirement contributions unconstitutionally impaired the contract rights of the affected employees. Alexander Volokh argues that the California Rule is legally permissible, but should be rejected nonetheless as a matter of policy.
Volokh’s primary problem with the California Rule involves its undue emphasis on pensions, essentially locking governments and its employees into set compensations structures. While states that follow the California Rule can drastically reduce, or even revoke, salaries, those states cannot make any modification to pension contributions or cost-of-living adjustments (COLA). As a result, states under fiscal duress cannot make adjustments to pensions and instead must turn to cuts in salary, healthcare, tenure, and even job positions. In addition to shifting the burden of any changes to these other important dimensions of job security, the California Rule creates perverse incentives that may exacerbate deficit-spending and encourage existing employees to leave. Overall, the California Rule represents a major impasse to pension reform.
In closing, Volokh suggests several potential practical fixes:
1. Include flexibility in how benefits are defined in statutes.
2. Provide benefits using short-term contracts, rather than by statute.
3. Pass a state constitutional amendment abolishing the California Rule and enact statutes that entitle employees to accrued, but not future, pensions.
4. Change state judicial precedents by appointing anti-California Rule judges to state supreme courts. This would be a long-term process.
5. Privatize and outsource pensions by firing employees and hiring contractors, so that private employers will be left to cover employee pensions rather the state. Volokh acknowledges that this prescription would alleviate the problem, but would not solve structural issues.
To read the five part blog series on the California Rule by Alexander Volokh: