The Three Words That Made Pensions Untouchable

The Three Words That Made Pensions Untouchable

Photo by Sam Hodgson

City Councilman Carl DeMaio and Mayor Jerry Sanders.

 

As it stands in California law, on the day municipal workers start their jobs, their pension benefits can only go up, not down.

This legal principle has been a bedrock behind the city of San Diego’s decade-long pension drama. Despite a growing pension debt that has dominated the city’s political discourse, reforms have focused on new employees, not the retirees or current workers who are owed the bill.

It’s one reason why the June pension initiative, Proposition B, stuck new workers with 401(k)s, yet did nothing to guarantee San Diego’s existing pension debt would be cut.

This legal principle is important, foundational even, to how California governments do business. And, according to a fascinating new article in the Iowa Law Review, it all goes back to three words in a 1917 California Supreme Court decision about benefits for a police widow.

At issue in that 1917 decision was the legal status of pensions. Are they bonuses granted to employees after their service to the government? Workers’ property akin to their houses or other possessions? Or part of their employment contracts?

The 1917 decision didn’t make a definitive call. Instead it used the three words, “in a sense,” to link pensions to unbreakable contracts for the first time. In the 95 years since that initial decision, courts in California and other states have expanded on that three-word phrase to the point where we are now with pensions. The article calls the legal principle the “California Rule.”

The article’s author, University of Minnesota law professor Amy B. Monahan, argues the California Rule is off the mark. She contends the state’s court system improperly infringed on legislative power and the pension rule doesn’t fit with both contract and economic theory. Her review of case law found the state Legislature never said pensions were untouchable.

“California courts have put in place a highly restrictive legal rule that binds the legislature without the court ever finding clear and unambiguous evidence of legislative intent to create a contract,” Monahan wrote (emphasis in original).

I recommend reading Monahan’s entire article. But if you would rather belong to the Voice-of-San-Diego-Reads-55-Page-Law-Review-Articles-So-You-Don’t-Have-To Club, she makes one point that addresses the pension funding challenges faced by San Diego and other governments.

Monahan says the law should allow governments to make prospective changes to current employee pensions. In other words, she believes California courts should reverse their position and give governments the right to cut pension benefits for the time current employees haven’t yet worked.

This change would give governments the chance to face their existing pension problems head-on by addressing the debt owed to current workers without infringing on employees’ contractual rights. These kinds of pension cuts, she contends, could even benefit workers. In the face of mounting budget pressures, she says, government employees might prefer pension cuts to salary freezes or layoffs.

In short, Monahan concludes making current pensions untouchable is both bad law and bad policy.

As noted by public finance columnist Girard Miller, courts might have a chance to weigh in again on the California Rule after pension ballot measures passed here and in San Jose earlier this month. San Jose’s measure addressed the California Rule more directly by forcing current employees to pay much more toward their pensions than they do now or accept a new plan with lower benefits.

Miller also says that the overwhelming election results in favor of pension reform in San Diego and San Jose means it makes sense for unions in California to make deals:

Taking a page from Machiavelli’s playbook written centuries ago, enlightened union leaders and their political surrogates should now see that it’s time to offer up enough reforms to placate the voters and avoid judicial decisions that take them back to the 1950s. They risk irreversible losses in all-out wars on multiple fronts. And the Governor’s proposed tax increase will likely be dead on arrival this November without pension reform, even if it means more draconian cuts in state spending and public education.

♦♦♦

Frequent readers of my blog know my affinity for Miller’s writing and his even-handed perspective on pension issues. Miller announced last week that he’ll no longer be writing columns for Governing magazine because he’s taking a job as chief investment officer for the Orange County retirement system. It’s worth highlighting again his great piece that takes on a dozen common claims about pensions. I called it: The Mother of All Pension Fact Checks.

Liam Dillon is a news reporter for Voice of San Diego. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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Liam Dillon

Liam Dillon

Liam Dillon is senior reporter and assistant editor for Voice of San Diego. He leads VOSD’s investigations and writes about how regular people interact with local government. What should he write about next? Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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21 comments
Steve Koffroth
Steve Koffroth subscriber

Only one problem with this argument - No contract would be spared the ax... So every contractor would also be put at risk too... Even republicans don;t want that...

skoffroth
skoffroth

Only one problem with this argument - No contract would be spared the ax... So every contractor would also be put at risk too... Even republicans don;t want that...

Chris Brewster
Chris Brewster subscribermember

Fox News likes to say it is fair and balanced, which is much argued, but most mainstream news outlets seem to want people to view them as such. You don’t have to strive for that obviously, but if you don’t you may end up looking like you are pushing a given ideology and avoiding balance because it is hard to achieve. That is a concern of mine, for I wish to see VOSD survive and thrive as an alternative source of insight into the news of the day that is thought provoking, but not perceived as slanted. And for the record, I haven’t noticed any clear ideological slant to VOSD. Rather, the editorial direction seems to allow slants of news in accordance with the individual evaluations and world views of the writers. That is normally viewed as opinion.

B Chris Brewster
B Chris Brewster

Fox News likes to say it is fair and balanced, which is much argued, but most mainstream news outlets seem to want people to view them as such. You don’t have to strive for that obviously, but if you don’t you may end up looking like you are pushing a given ideology and avoiding balance because it is hard to achieve. That is a concern of mine, for I wish to see VOSD survive and thrive as an alternative source of insight into the news of the day that is thought provoking, but not perceived as slanted. And for the record, I haven’t noticed any clear ideological slant to VOSD. Rather, the editorial direction seems to allow slants of news in accordance with the individual evaluations and world views of the writers. That is normally viewed as opinion.

mlaiuppa
mlaiuppa subscriber

Just another example of the attitude in this country that hates the workers and wants to steal from those that don't have the money to defend themselves. Work long, work hard. Thank you, now we'll take that. You're on your own.

mlaiuppa
mlaiuppa

Just another example of the attitude in this country that hates the workers and wants to steal from those that don't have the money to defend themselves. Work long, work hard. Thank you, now we'll take that. You're on your own.

Jeff Sanders
Jeff Sanders subscriber

I believe that not only is changing pension benefits prospectively for current employees sensible, so is the removal of past pension increases that were applied retroactively to those years already worked. The pension received for any time on the job by a government employee would then be a combination whatever was in existence during the time of that employment. So government employees would have part of their pensions from the already generous pension benefits that existed before the people they elected gave them totally unjustified increases in benefits, part would reflect that corrupt excess, and, hopefully, part would reflect a change that made government employee pensions consistent with what most taxpayers, whose money is taken to pay for government pensions, receive for themselves.

jskdn2
jskdn2

I believe that not only is changing pension benefits prospectively for current employees sensible, so is the removal of past pension increases that were applied retroactively to those years already worked. The pension received for any time on the job by a government employee would then be a combination whatever was in existence during the time of that employment. So government employees would have part of their pensions from the already generous pension benefits that existed before the people they elected gave them totally unjustified increases in benefits, part would reflect that corrupt excess, and, hopefully, part would reflect a change that made government employee pensions consistent with what most taxpayers, whose money is taken to pay for government pensions, receive for themselves.

Lucas OConnor
Lucas OConnor subscriber

Odd that this article was only able to locate the one side of that argument.

lucasoconnor
lucasoconnor

Odd that this article was only able to locate the one side of that argument.

Liam Dillon
Liam Dillon memberadministrator

As far as your referencing the VOSD view of journalism, I think the further we get away from our lunch, the less you get what I was trying to impart to you. We seek out varying points of view all the time and make an effort to inform ourselves to the greatest extent possible. We just don't feel obligated to put "two sides" in every story just for the sake of it. The best expression of our point of view is in this article: http://pressthink.org/2011/09/if-he-said-she-said-journalism-is-irretrievably-lame-whats-better/

dillonliam
dillonliam

As far as your referencing the VOSD view of journalism, I think the further we get away from our lunch, the less you get what I was trying to impart to you. We seek out varying points of view all the time and make an effort to inform ourselves to the greatest extent possible. We just don't feel obligated to put "two sides" in every story just for the sake of it. The best expression of our point of view is in this article: http://pressthink.org/2011/09/if-he-said-she-said-journalism-is-irretrievably-lame-whats-better/

Ted Bohannon
Ted Bohannon subscriber

Oh, well, an associate professor from the University of Minnesota has declared the California Supreme Court to be wrong. Why didn't you just say so. It's settled then.

tedbohannon
tedbohannon

Oh, well, an associate professor from the University of Minnesota has declared the California Supreme Court to be wrong. Why didn't you just say so. It's settled then.

Chris Brewster
Chris Brewster subscribermember

If a state, in this case California, has determined that pensions not yet earned are contractually protected, are they a property right? Is a state’s legal determination of what is contractually protected meaningful in federal bankruptcy court? Unknown to me, but it seems clear that this latest opinion acknowledges that case law has left a legal view in California and many other states for decades of a view that pensions are contractually protected. As well, I think it important that today’s article be placed in context to the prior one.

B Chris Brewster
B Chris Brewster

If a state, in this case California, has determined that pensions not yet earned are contractually protected, are they a property right? Is a state’s legal determination of what is contractually protected meaningful in federal bankruptcy court? Unknown to me, but it seems clear that this latest opinion acknowledges that case law has left a legal view in California and many other states for decades of a view that pensions are contractually protected. As well, I think it important that today’s article be placed in context to the prior one.

ec6a7e68-bfb0-11e1-83db-47f9599e0d16
ec6a7e68-bfb0-11e1-83db-47f9599e0d16

Mr. Dillon: In earlier articles, you cited experts to opined that San Diego pension benefits were not necessarily protected under current law, or case law (i.e. that San Diego pensions could be modified). I appreciate you explaining why that is apparently wrong, but does it not call into question the "experts" who cited examples like the Rhode Island situation to suggest what could/should happen in California? I would appreciate more candor on your part in walking this back from earlier assertions. Usually, VOSD does a good job linking back to earlier articles, but not in this case. Certainly the Supreme Court of California could decide to change an earlier ruling, but as you note, the current interpretation of the law is clear, contrary to what was suggested in numerous VOSD articles. Step up.

Bob Jones
Bob Jones subscriber

It is so sweet to see DeMaio and Sanders together with pleasant expressions on their faces. On second thought, the Mayor looks a little perplexed and is that a actually a smirk on the face of DeMaio? With politicians it is quite difficult to grasp what is going on in their heads or in the boadroom, is it not?

rwj5125
rwj5125

It is so sweet to see DeMaio and Sanders together with pleasant expressions on their faces. On second thought, the Mayor looks a little perplexed and is that a actually a smirk on the face of DeMaio? With politicians it is quite difficult to grasp what is going on in their heads or in the boadroom, is it not?