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The Fall of Pacific Grove – Conclusion: The "California Rule" Cannot Stand

In this series, relying on official records of CalPERS and the City of Pacific Grove, I have shown how those two agencies and the unions worked as one to destroy the ability of cities like Pacific Grove from providing minimal government services. But the Supreme Court of California is the great enabler and protector of pension rights for public employees; rights that contradict a democratic form of government.

If there is not a change in the so-called “California Rule,” created by the Supreme Court of California and followed by 12 other states, most California cities and counties will become insolvent, like Pacific Grove and Sonoma County. How soon it happens to other public agencies (with defined benefit programs) depends on the relative viability of their tax base. Carmel can last for decades as long as it can tax tourists without a material decline in tourism. The city of Monterey is less viable, and cities like Marina and Seaside less viable still. Pacific Grove and Sonoma county have no chance to lift themselves out of insolvency unless the California Rule is changed by something like the Reed Initiative or a reversal by the California Supreme Court (the Florida Supreme Court reversed the rule in 2011).

What is the California Rule?

I believe that most states hold that government employees have a “vested right” in the pensions that have already been earned (subject to various emergency powers). Private employees and social security members do not even have that degree of vesting, but in the 12 states that follow the California Rule, a public agency cannot reduce the size of pensions for future pension accruals (accruals for work not yet performed).

The California Supreme court summarized the California Rule in the case of Betts v. Bd. of Admin….(1978), decided by the infamous Bird court. Several scholars have soundly criticized the opinion as nothing more than improper legislation by the court, but it is important to understand why that is true.

The California Rule is based on the legal theory that a statute, like an ordinance or a city charter, that has set out a pension right in the statute or charter, did so with the intention to create a vested right, not only as to pensions earned, but also as to future accruals. That “contract” is then said to be protected by the “contract clauses” of the State and Federal constitution.

But in every case where a California court has enunciated the California Rule, it has omitted any factual inquiry into legislative intent. No scholar has found a single California opinion applying the rule, where there was a showing that the legislation from which the contract was derived was based on a legislative history confirming that a vested right to future accruals was intended. The court just made it up. The Court was and is a major beneficiary of the Betts decision and the California Rule.

In establishing the rule, there was no inquiry by the court into the state “debt limit” set forth in Art. XVI, Sec. 18 of the Constitution. Nor was State Govt. Code 7507 requiring the legislative body to analyze the actuarial impact of a pension increase on the future costs of the new benefit applied. That was because the court is not a legislative body. But if it is going to legislate, it should act like a legislature and not destroy public agencies like Pacific Grove, without the consent of its citizens and without an inquiry into the factual basis and the consequences of its decisions. Citizens can trump legislative acts by its right to a referendum, but the California Rule deprived the citizens of that right. A courageous court would analyze the California Rule, make the legal inquiry of whether it is legally possible to create a vested right to future pension accruals (in a democracy), and if so, was that intent set forth in the legislation at issue.

Legislation by Collusive Law Suits

Public Agency attorneys, like city and county attorneys, can indirectly legislate pension and medical benefits by collusive or thrown law suits. In my opinion, that happened to Pacific Grove just last year. Citizens qualified an initiative to limit pension contributions by the city to 10% of salaries. The city attorney and the unions opposed the initiative, but the city council adopted it as its own ordinance. The police unions sued claiming it possessed a “vested right” to future pension accruals. Pacific Grove is a charter city. It did not have a provision in its charter, or a statute that created a pension, so there was no way that the California Rule could apply. But in its so-called defense of the law suit, the city simply raised no defense to the claimed vested right, so it lost by default. In Pacific Grove, the only pension rights ever granted were by term contracts, called MOUs. All scholars of the California Rule agree that vested rights to future accruals cannot be created by short-term contracts. The process of inadequately defending pension law suits occurs over and over in California and coincides with the purchase by public agencies of “as requested” legal and expert opinions.

Recently, the California Supreme Court held that it was possible for union employees to claim an “implied” contractual right to retiree health benefits arising from a county statute like an ordinance. The court said that the existence of such an implied right would be very difficult to prove. But within days, retirees filed law suits claiming such rights. The law suits were defended by public agency attorneys appointed by employees of public agencies who would themselves be entitled to the claimed implied benefits so long as the public agency lost the suit. And, lo and behold, they lost and the union employees won. Billions of dollars of new deficits will flow from the Supreme Court decision.

Creating new benefits by the failure to properly defend claims of vested pension and health benefits is only possible because of the California Rule as applied to both pension and health benefits.

A Final Thought

Historically, only dictators–including royalty and religious leaders–held unlimited vested rights that destroyed the rights of the majority of citizens. Such rights are inconsistent with a democracy. Because of the California Rule, unions, CalPERS, city and county managers and attorneys have the unfettered power to destroy the public agencies that they represent and deprive citizens of the right to the form of government that they would choose. Government unions, city managers, city attorneys, and municipal legislative bodies, empowered by the dictatorial California Rule have destroyed the once-excellent school system, our roads, parks, water supply, services for the poor and aged, cultural services, and safety services, and imposed a burden of out-of-control debt on citizens who were not even of an age to vote (even the unborn) at the time that the debts were created.

In every election for pension reform in the past decade, about 75% of voters have voted for pension reform. In most instances the courts then held the reform invalid as a violation of the California Rule. Municipal services have been and will continue to be demolished at a rapid rate. Blogs etc. about how unfair it all is don’t seem effective. Action is required. Bi-partisan single-issue pension reform PACs must be formed throughout the state for the election of legislators who will sponsor an initiative that reverses the California Rule, no matter what. The remedy of recall and even impeachment should be on the table. A democracy is at stake. It must be restored.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.