2014 Government Regulations & Business Summit
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Many U.S. states and cities have approved measures to help fix poorly funded public pensions. Now courts will decide if they are legal or not.
Most efforts would affect the benefits of new hires. But some changes – such as one approved in San Jose, Calif., this month and Rhode Island last fall – would apply to plans of current government workers.
Public-sector unions are suing to block them, arguing that it is illegal to change the pension benefits for current workers.
In some states, such as Illinois and New York, a specific constitutional provision protects public-employee pensions from reduction. In other states, such as Ohio, courts have held that the government is free to change the benefits at any time before retirement.
California has played an important role in the development of law on public pensions. Historically, both federal and state courts considered pension benefits provided to government employees to be mere “gratuities” that could be amended or withdrawn at any time. In the early 20th century, however, several state courts began to characterize public pensions not as gifts, but as a form of deferred compensation.
California courts went well-beyond this level of protection. Under what has come to be known as the California rule, pension benefits are treated as contractual in nature, and can’t be reduced once an employee has begun working for the state.
Given this high level of protection, it wasn’t surprising that representatives of city workers filed suit challenging the changes almost immediately after the initiative in San Jose passed. The case will almost surely proceed to the California Supreme Court. Under the California rule, the changes indeed appear to be legally impermissible.
But the state’s courts owe it to the residents of California to revisit their prior decisions regarding public-pension benefits.
Generally speaking, when legislatures or city councils adopt statutes or ordinances, these laws aren’t considered to have created contracts. Instead, legislative enactments are considered to be current policy positions that can be amended by future legislatures. The U.S. Supreme Court has held that for a statute to create a contract, the legislature’s intent to form such a contract must be unmistakable.