Notes From Babel

Pension Voodoo: How Courts Render Constitutional Provisions Meaningless

with 20 comments

Last week, California Attorney General candidate John Eastman made an exciting promise that, if elected, he would tackle the state’s crippling unfunded pension liability problem by considering a challenge on the constitutional validity of such pension contracts.  Now, this comes as little surprise to me since, as a former student of and legal assistant to Eastman at Chapman Law, I have learned to look first at just such grounds for making legal challenges.  What is exciting about the promise is not that it presents a novel approach to the problem.  In fact, Orange County asserted this very argument against the Association of Orange County Deputy Sheriffs (“AOCDS”)—after paying for expensive legal analyses by several law firms the year before—in County of Orange v. AOCDS, Los Angeles Superior Court Case No. BC389758.  Instead, what is exciting is the prospect of having an Attorney General that would care about the meaning of these provisions as well.  In fact, as explained below, our state’s constitutional proscriptions against compensation for work already rendered have been gutted in part due to former attorney general opinions undermining the applicability of those proscriptions.

The California Constitution is quite clear that neither the Legislature nor any local government body may pay extra compensation for work already rendered.  Article IV, section 17 provides:

The Legislature has no power to grant, or to authorize a city, county, or other public body to grant, extra compensation or extra allowance to a public officer, public employee, or contractor after service has been rendered or a contract has been entered into and performed in whole or in part, or to authorize the payment of a claim against the State or a city, county, or other public body under an agreement made without authority of law.

And Article XI, section 10 similarly provides:

A local government body may not grant extra compensation or extra allowance to a public officer, public employee, or contractor after service has been rendered or a contract has been entered into and performed in whole or in part, or pay a claim under an agreement made without authority of law.

Article IV, section 17 and Article XI, section 10 have their roots in contract law principles.  These principles are straightforward: If you offer to give me a couple of blintzes to paint your fence, and I agree, I cannot quit halfway and demand you also give me a plate of corn muffins before I finish.  This is the concept of pre-existing duty.  That is, even if you agreed to give me the corn muffins just so you wouldn’t be left with a half-painted fence, I could never give you anything I wasn’t already bound to give you, since I already owed you a fully painted fence.  If I wanted to enforce your promise to give me the corn muffins, I’d have to do something extra, like paint your chicken coop.  The same thing happens if I’ve already completed the work.  That is, once I finish the fence and collect my well-earned blintzes, I’ve got no business demanding the corn muffins as some kind of bonus.

California’s constitution simply takes these contract principles one step further:  not only is an agreement invalid which purports to give more money for work already done or agreed upon, such an agreement is illegal.  In other words, contract principles won’t stop you from giving me the plate of corn muffins—they just say that no judge could ever make you.  But our constitution affirmatively forbids our state and local government from doling out free corn muffins.

With that in mind, we must next understand what sort of “compensation” pension benefits are.  “Pension annuities * * * are in the nature of compensation for the services previously rendered for which full and adequate compensation was not received at the time of the rendition of such services. They are in effect pay withheld to induce long-continued and faithful services.”  Kern v. City of Long Beach, 29 Cal. 2d 848, 852 (1947).  That is, although pension is compensation paid “after service has been rendered,” it is not extra compensation made illegal under Article IV, section 17 or Article XI, section 10.

“Extra compensation is compensation over and above that fixed by contract for the work agreed to be done. It would appear in the legal or equitable sense, being in the nature of a gratuity.” Gordon H. Ball. Inc. v. State of California, 26 Cal. App. 3d 162.  “He is not fully compensated upon receiving his salary payments because, in addition, he has then earned certain pensions benefits, the payment of which is to be made at a future date.”  Miller v. State of California, 18 Cal. 3d 808, 816 (1977).

This concept is sensible enough:  pensions are simply a payout of the portions that had been withheld from an employee’s paychecks.

However, subsequent case law developments rendered the concept muddled and unmoored from common sense.  In Nelson v. City of Los Angeles, 21 Cal. App. 3d 916 (1972), the Second Appellate District relied on case law dating before the enactment of Article XI, section 10, and held that “pensionable status includes the right not only to pensions as they exist at the time retirement is granted but also to increases in pensions.”  Why?  Because “the right to future increases in pension benefits is inherent in pensionable status.”

Still not satisfied?  Let’s try the next case to try to expand the reasoning behind why pensions should be excluded from the constitutional prohibition against extra compensation.  Relying on Nelson 25 years later, the Third Appellate District in American River Fire Protection District v. Brennan, 58 Cal. App. 4th 20, 28 (1997) explained that

The rationale for this rule is “that an increase in pension benefits payable to a retired public employee or his widow on pensionable status is paid as the result of rights incident to that status and not as a matter of increased compensation or allowance.”

By now, you’re probably ready to throw your hands up.  Courts don’t seem interested in providing any actual explanation for these holdings.  This is judicial sleight of hand that is sometimes employed to reach a result without actually providing a rationale.  In essence, both Nelson and American River held that, although pensions are compensation, extra pension benefits paid to retired public employees are not unconstitutional “extra compensation” because pension benefits are rights.  Well, duh.

Besides, this proves too much.  If an increase in pension benefits is not “extra compensation” because the pensionee has a “right” to that increase, this raises the question:  what gave rise to that right?  It was not based on the pensionee’s labor—if that were the case, there would be an ascertainable formula, probably in the pension statutes operative at the time of the pensionee’s employment, or in the memorandum of understanding.  No, instead, the “right” is triggered by something wholly outside the scope of the pensionee’s labor, indeed, outside the scope of the relationship between the public employee and the public altogether.  There is some kind of pension voodoo happening here.

Judicial voodoo is incredibly frustrating for lawyers who, after having been enticed at the promise of learning the “rationale for the rule,” are disappointed to find that the court fails to appreciate the difference between rationales and restatements of the rule.  A restatement is all Nelson provided, and American River saw fit to simply give a restatement of Nelson.  This makes for an unpersuasive judicial opinion and, accordingly, weak precedent.

Indeed, there is no judicial force behind such naked assertions.  The process of issuing a judicial opinion does not create law apart from underlying substance.  The rational discourse of judges is implicitly designed to facilitate the finding of “right reason.”  Lord Bracton’s notion that the king is the law and is not under it was rejected in favor of a system in which man and his institutions are under law as expressed through right reason.  Instead, as Lord Coke said, the king “is under God and the Law.”  Neither the king nor our courts are our “gods on earth.”  Thus, where a court makes no appeal to “right reason,” its opinions are so much sound and fury signifying nothing.

Of course, courts themselves impose this rule on members of the bar.  “We treat a point not supported by reasoned argument and citations to authority as waived.”  Cal West Nurseries, Inc. v. Superior Court, 129 Cal. App. 4th 1170, 1174 (2005) (citing Jones v. Superior Court, 26 Cal. App. 4th 92, 99 (1998)).  “We need not consider an argument for which no authority is furnished.”  Horowitz v. Noble, 79 Cal. App. 3d 120, 139 (1978); Dabney v. Dabney, 104 Cal. App. 4th 379 (2002).  “Where a point is merely asserted by [appellant] without any argument of or authority for the proposition, it is deemed to be without foundation and requires no discussion by the reviewing court.”  Atchley v. City of Fresno, 151 Cal. App. 3d 635, 647 (1984).  If courts don’t buy assertions without a supporting rationale, why should anyone else?

Nonetheless, California’s courts have provided some helpful language for those who would challenge windfall pension benefits.  “[A] public pension system is subject to the implied qualification that the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.”   Miller v. State of California, 18 Cal. 3d 808, 816 (1977) (quoting Wallace v. City of Fresno, 42 Cal. 2d 180, 183 (1954)).

In short, the law governing pension benefits is a paradigm of uncertainty.  In granting the AOCDS’s motion for judgment on the pleadings in County of Orange v. AOCDS, the LA Superior Court relied on American River’s sweeping conclusion that section 10 of Article XI does not apply to pensions at all.  That court did not see fit to look behind the superficial treatment of “pension” compensation as mystically separate from other compensation, over which a rich and articulate body of law exists (the subject of a follow-up post).  Nor did the court find any trouble with the holding in Miller and Wallace that an “employee does not have a right to any fixed or definite benefits.”  This has become an area of law where a decision might go whatever way the winds happen to be blowing.  A scary prospect.

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Written by Tim Kowal

February 12, 2010 at 12:08 am

20 Responses

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  1. Tim,

    it’s been a long time!

    I appreciate your thorough analysis of the issue, both the particulars and the general implications for constitutional law. Your third-to-last paragraph is especially useful.

    I have one question. You claim that certain developments in case law have “rendered the concept muddled and unmoored from common sense” (“unmoored” is an excellent verb by the way, and I will most definitely be biting it). I understand your complaint that the courts have created a right with no rationale save for restatements of the created right. However, might there indeed exist a common sense rationale for the right?

    To wit, let’s say Worker A has a pension contracted at 50% of X (where X is whatever formula is used to determine the base salary on which the pension payments are calculated), and when Worker A retires at the end of this year, 50% of X works out to $50,000/year. What happens to Worker A 2 years from now when, entirely beyond his control, the economy descends into hyper-inflation, and the relative value of $50,000/year drops precipitously? Would this not be a valid, perhaps even morally imperative, justification for a modifaction of the pension?

    In my example, I am assuming that the original spirit of the formula X is to accommodate the uncertainty of the distant future when the worker will retire so as to ensure that the pension payments will provide the expected financial security. (Granted, such formulas are shamelessly exploited by our public employees unions, and this exploitation is one of the main drivers of our insane spending defecits, but that is besides constitutional point we are examining here.)

    I suppose this contingency could be covered in the contract by somehow tying the pension payments to inflation– do you know if this is a common practice? Regardless, considering that such a legitimate problem with a contracted pension plan would only arise under extradordinary circumstances, does the very possibility suggest there is some justification, unique to pensions, for such after-the-fact contract modifications?

    Though I don’t think private contractors are under any legal obligation to make such modifications (are they?), they may do so if they feel like it, correct? That being so, am I correct that the articles of the constitution place an additional restriction on government contracts, a restriction that is uniquely problematic to pensions?

    Man, my head hurts when I try to think like you lawyers! But I am a committed fighter in the war against the scourge of public employee unions, and I want to make sure I’m thinking clearly about these issues…

    Mason Boyer

    February 13, 2010 at 2:14 am

  2. Hey Mason, I thought that was you! Thanks for your great comments.

    I’ve only started delving seriously into these issues in the past several weeks. But OC Supe John Moorlach’s office has been accommodating at providing documents informally (i.e., rather than having to serve Brown Act requests), and http://www.pensiontsunami.com is an invaluable resource. One gets the distinct sense that we are reaching a tipping point in public sentiment on these issues.

    To your question: Let’s start with “rights” talk. While there may exist a “common sense rationale”—or perhaps even a moral rationale—for giving pensioners extra pension to adjust for inflation or cost of living or what have you, there is no rationale for suggesting there is a “right” to this extra compensation. Rights may come from a few difference places—God, nature, the constitution, statute, contract. Rights, like matter, cannot be created out of thin air, no matter how that air may resonate with the hot rhetoric of union bosses. The word “rights” has force because it has deep philosophical origins. It is often irresponsibly used without any reverence to what it truly means. In short, we do not have a “right” to things simply on the basis that we need them, or that another has a Christian duty to offer them.

    I would next point out that, perhaps without having realized it, you make an excellent argument against defined benefit pensions. If public employees were instead on the same system as the rest of us, they would contribute to their own defined contribution retirement plans. Their contributions, if prudently invested, would roughly fluctuate with the market to offset inflation and give them a healthy return on which they could retire. The rest of us know about taking a hit due to market forces given the tumultuous last couple of years. Public employees would have to be subject to similar instability. C’est la vie. There’s no reason why one class of people should have to rely on the market and a privileged class should just be able to take more from the first class in order that they can have the pension they always dreamed of and a 100% guarantee of it to boot. Peace of mind is a benefit, too. Why should a government lackey have more of it than me, and at my expense?

    Now, the unions could negotiate for a different structure of pension payouts as you suggest. But the way they’re currently structured, they appear to more than offset the possibility of dilution through inflation or cost of living. For one thing, under a 3% at 50 plan, Deputy Bob can retire at age 50 at 90% of his last year’s pay. That’s asinine to begin with. But if Deputy Bob fears that everlasting gobstopper of a retirement won’t satisfy him in the future, the structure permits him to “double dip” and take another government job—and then retire with a second pension.

    But back to the constitutional question: remember, Article IV section 17 and Article XI section 10 merely purport to extend the same kind of contract principles that apply to us lowly folks in the private sphere to those in the public. That is, if a private sector retiree was struggling under his retirement fund, would he have a “right” to a boost from his former employer? Of course not. And nor do public employees—despite our confused courts’ mistreatment of the word.

    Tim Kowal

    February 13, 2010 at 9:35 am

    • thanks for the thorough response.

      first, to make clear where I’m coming at this from: I am generally anti-union, and I think public sector unions in particular are fundamentally the enemies of the people. My specific focus is on teacher’s unions and how they have destroyed education America. but, I always try very hard to understand my opposition, and I work extra hard to discern any “truthfulness” (in the dialectic sense) that may reside in the antithesis.

      also, on the matter of rights, I was using that word loosely in my previous comment, and I realized incorrectly before I posted my comment, but it was like one in the morning and thinking about unions for more than 10 minutes at a time makes my head spin.

      in trying to formulate a rational justification for the exception to the constitutional articles, I did inadvertently stumble upon a good argument against entering into such pension plans in the first place, but am I correct that there are no constitutional provisions that would preclude such plans being created at the point of contract?

      all this being said, I see one small remaining “problem” that the unions might make hay of: though the constitutional provisions are clearly intended tom protect taxpayers from politicians who love nothing more than to spread around other peoples’ money, the articles nonetheless place a restriction on government employers that does not exist for private employers, and that’s just not fair!

      Of course, you and I know that life is not fair, and for good reason, especially in this case, but that has never stopped interest groups from making a lot of noise about it. and, sadly, the crybabies all too often get their way…

      Mason Boyer

      February 14, 2010 at 3:07 pm

      • Are you asking whether the state or municipalities could give defined contribution rather than defined benefit pension? Absolutely they could. Defined benefit pensions by their nature skirt the lines of constitutionality of the provisions against gifts, debts, and extra compensation. Defined contribution plans are vastly more reasonable, and well within legal limits.

        I wouldn’t worry about the “fairness” argument. Government actors are inherently different from private actors, as their powers to act are specifically defined by constitutions and statutes. The argument you suggest would simply turn into whether we ought to repeal certain provisions of the constitution.

        Tim Kowal

        February 14, 2010 at 3:16 pm

    • That is c’est la vie.

      Anonymous

      February 15, 2010 at 12:53 pm

  3. Tim, Sounds like you & I are on the same page…. nice to have some company (sometimes it’s a lonely place). My thoughts follow:

    A tsunami of monumental proportions (characterized by a civil war between Civil Servants and Private Sector taxpayers) is on the horizon.

    The ‘pay” alone is now higher in the Public than Private sector (per the US Gov’t BLS), so why should they CONTINUE to accrue ADDITIONAL amounts of oversized pensions & benefits ?

    At EVERY income level (yes, EVERY income level), the present value at retirement of the employer (i.e., TAXPAYER) paid-for share of the typical (non-safety) Civil Servant’s retirement package (Pension & retiree healthcare) is 2-4 TIMES that of the employer paid-for share of a comparable Private sector worker making the SAME pay, retiring at the SAME age, and having the SAME number of years of service, and, this multiple rises to 4-6 times for fireman & policeman due to their richer formula & earlier retirement age.

    For those that question this, consider the following that ONLY Civil Servants get … all VERY expensive:

    (1) Post retirement COLAs
    (2) Full retirement at 50-60 WITHOUT an actuarial reduction in payout for collecting early’
    (3) Joint & Survivor annuity payout WITHOUT a benefit cutback for the longer payout due to 2 lives covered
    (4) Richer pension formulas
    (5) Vacation & unused sick-leave payouts, and allowances are often included in “pensionable income” for the payout calculation
    (6) Pensionable income based on the single final year of pay instead of the average of the last 3 or 5
    (7) Excessive overtime stuffed into the last year of employment to unfairly “spike” the pension payout
    (8) Free or near free retiree healthcare (what Private sector worker gets this anymore?)

    ALL of this is VERY unfair to TAXPAYERS who foot 80-90% of the costs.

    WHAT is needed is CLEAR … WE need a significant reduction in the pension formula for FUTURE years of service for CURRENT (yes CURRENT) employees. Reductions ONLY for new employees will save NOTHING fore 20-30 years until they begin to retire. We’ll never make it … we’re near broke NOW.

    We also, need to either eliminate retiree healthcare or SIGNIFICANTLY increase cost-sharing from the retiree (NOBODY should be paying less than 50% of the full cost).

    Tough Love

    February 15, 2010 at 9:36 pm

  4. What goes around,comes around.

    Bob

    February 16, 2010 at 5:57 am

  5. I agree with Tough Love, except the public sector v private sector battle is NOT on the horizon, it is here right now.

    I also think the pensions are more than 2-6 times better than the private sector, more like 10-20 times better. Because when you factor in the age 50 retirements, that is 60% less work/career time than the private sector. Plus the gov employee receives sunstantially more at that early age 50.

    I would LOVE to see the AG take on the retro pension increases under a void contract legal theory. Love it!

    Johnny Blaze, Ghost Rider

    February 16, 2010 at 3:47 pm

  6. […] as I explained in a recent Sacramento Bee op-ed, many of California’s wounds are self-inflicted (such as our unfunded pension liability) and require an Attorney General who is expert in the constitution—not just the penal code—to […]

  7. […] for work already performed are illegal.  And with good reason, as I’ve explained before here and here with respect to public employee unions.  This recent op-ed on Santa Ana’s payout of […]

  8. […] magic tax, apparently. Kind of how the California Supreme Court treats pensions as a different kind of contract so as to evade the state constitution’s prohibitions on gifts, retroactive benefits, and taxes […]

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