Resources for Reformers

Overprotecting Public Employee Pensions:  The Contract Clause and the California Rule, December 2013
By Alexander Volokh, Professor of Law, Emory University

The Contract Clause, which prohibits states from making laws impairing the obligation of contracts, is commonly used to challenge state and local public pension reform efforts. Courts in California, and in other states following California’s example, follow a particularly strict rule: they hold not only that public employees are entitled to the pension they’ve accrued by their work so far, but also that they’re entitled to keep earning a pension (as long they continue in their job) according to rules that are at least as generous. Thus, in states where the California rule applies, one can’t constitutionally increase employee contribution rates or reduce cost-of-living allowances. This rule is properly viewed either as an application of the federal Contract Clause, which usually defers to state law on the threshold question of whether there’s a contract and what it covers, or as an application of a more generous state Contract Clause. Thus, there’s nothing legally invalid about the California rule. But the rule is unsound as a policy matter, insofar as it locks governments and public employees into compensation structures different than what they would otherwise negotiate, and makes it harder for states to reform their pension systems.

Statutes as Contracts? The “California Rule” and Its Impact on Public Pension Reform
By Amy B. Monahan, Professor of Law, University of Minnesota

State and local retirement plans are underfunded by trillions of dollars, at a time when many states are facing decreased revenues and increased social needs. As a result, many states are actively considering how best to address the problem of state and local pension plan underfunding given their limited resources. In many states, however, courts have held that the statutes establishing state retirement systems created contracts between the state and employees that prohibit the state from making any detrimental changes to the benefits provided to current employees within such systems, even on a prospective basis. This Article examines the development of such a rule in the California courts, a rule that has been widely influential in this area of law, as evidenced by the fact that courts in twelve other states have followed the California Supreme Court’s holdings. This Article demonstrates that by holding that benefits not yet earned are contractually protected, without explaining the basis for finding that such a contract exists, California courts have improperly infringed on legislative power and have fashioned a rule that is inconsistent with both contract and economic theory.

State Pension Litigation Update, August 2013
By Joe Luppino-Esposito, editor
State Budget Solutions

Pension Litigation Summary, April 2013
By Stuart Buck, Ph.D., J.D., Strategic Litigation Counsel and Director of Research
Laura and John Arnold Foundation

The Pension Litigation Summary (PLS) provides a centralized overview of recent pension reform litigation across the country, listing all current pension reform litigation and making hard-to-find documents available in one place for the first time. The PLS is intended to be updated quarterly to provide the public with a transparent, timely, and useful review of pension litigation.

“GASB Won’t Let Me” – A False Objection to Public Pension Reform, May 2012
By Robert M. Costrell, Professor of Education Reform and Economics, University of Arkansas

True public pension reform replaces traditional Defined Benefit (DB) plans with structures that tie benefits more closely to contributions. The rationale for structural reform includes fiscal responsibility, labor market efficiency and equity among professionals with varying career paths. Defined Contribution, Cash Balance and Hybrid plans are all proposals that tie benefits more closely to contributions to achieve these goals. In the legislative arena, such proposals face a set of objections commonly called Transition Costs – claims that structural reforms will raise employer costs in the short run, even if they lower them in the long run. Advocates for traditional pensions argue that it would be especially unwise to incur these Transition Costs in times of fiscal duress, and legislatures, with short time horizons and balanced budget requirements, are deterred by these claims from undertaking structural reform. This paper examines the most common of these claims, that structural pension reform requires an acceleration of payments to amortize the old plan’s unfunded liability.

Pension Math: How California’s Retirement Spending is Squeezing The State Budget, December 2011
By Joe Nation, Ph.D., Stanford University

This report examines the current state of California’s public employee pension systems. It examines benefit levels, accounting methods and assumptions, projected future costs, measured by contribution rates, and it outlines the likely impact of increased pension spending on California’s non-pension expenditures. It briefly examines recent proposals to tackle the pension problem, and it identifies policy options to reduce the magnitude of the problem. This project was supported in part through funding from The James Irvine Foundation and California Forward.

Public Pensions for Retirement Security, February 2011
By the Little Hoover Commission

Recommendation 1: To reduce growing pension liabilities of current public workers, state and local governments must pursue aggressive strategies on multiple fronts. The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees. State and local governments must slow down pension costs by controlling payroll growth and staffing levels.
Recommendation 2: To restore the financial health and security in California’s public pension systems, California should move to a “hybrid” retirement model. The Legislature must create pension options for state and local governments that would retain the defined-benefit formula – but at a lower level – combined with an employer-matched 401(k)-style defined-contribution plan.
Recommendation 3: To build a sustainable pension model that the public can support, the state must take immediate action to realign pension benefits and expectations.
Recommendation 4: To improve transparency and accountability, more information about pension costs must be provided regularly to the public.

Creating a New Public Pension System, January 2013
By Josh B. McGee, Ph.D., Vice President for Public Accountability Initiatives
Laura and John Arnold Foundation

This Solution Paper outlines alternatives to the current public pension system, highlighting both the source of the problems as well as effective and sustainable solutions that transcend traditional policy perspectives.

California Report – State Budget Crisis Task Force
By G. Edward DeSeve, Task Force Member, California Forward

This is a report of the State Budget Crisis Task Force prepared in collaboration with California Forward, a nonprofit, nonpartisan organization focused on improving governance and fiscal affairs in California. Task Force member Ed DeSeve led and managed the production of this report, and wrote significant parts of the report.