California’s Pension Crisis Takes Another Step Toward Populist Revolt as Courts Refuse to Help

As I pointed out in an op-ed in the Sacramento Bee last year, one of the reasons runaway public employee pensions poses such a different problem is because California’s courts have steadfastly undone voters’ efforts to make it easier.  At least three provisions of the California Constitution, for example, make retroactive pension agreements void ab initio.  Yet, the Second District Court of Appeal out of Los Angeles last week brushed aside each of these important citizen taxpayer protections to side instead with the public employee union.  (Full opinion here.)  As I explain below, California taxpayers have done what they’re supposed to:  they enshrined prohibitions in their state constitution to avoid amassing large public debts.  It is instead our elected officials—such as Jerry Brown, who empowered public employees to unionize—and our judges who have failed our state.  Indeed, despite recently proposing an aggressive budget, Governor Brown still refuses to go after low-hanging fruit when it comes to pension reform.

The Court of Appeal’s recent blow to taxpayers and their constitutional protections thus takes California another step decidedly closer to a populist uprising that will lead us either to another wave of initiative amendments, or to revolt.

Basic Facts in Orange County v. Association of Orange County Deputy Sheriffs

The basic underlying facts of the Orange County pension case are straightforward.  The Orange County Board of Supervisors approved an amended AOCDS contract in December 2001 that increased union members’ pension from a “2% at 50” formula to a “3% at 50” formula.  This allowed members to receive on retirement the product of 3% of their last year’s salary, times their total number of years worked.  Thus, with the stroke of a pen, the County instantly accrued approximately $100 million of additional, unfunded pension liability.  This liability was based on years the union members had already worked, and they were required neither to make additional contributions nor to perform additional work in exchange for their 50% increase in pension benefits for those years.

The two provisions of the California Constitution at issue in the Orange County lawsuit are the prohibition on indebtedness and the prohibition on compensation for work already performed.  However, the Second District Court of Appeal refused to enforce either of these important constitutional limitations.  The court provided scarce rationale for its decision, instead relying on prior cases—which as previously explained, provided even less rationale for their decisions.

To understand the significance and the deliberateness of the court’s refusal to apply the law, a brief history of the three constitutional provisions will be helpful.

History and Purpose of California’s Prohibition on Debt and Retroactive Compensation

First, the debt limitation at article XVI, section 18 prohibits any state or local government from “incur[ring] any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose.”  This basic restriction was included in the original state constitution in 1879 in consideration of the turnpike, canal, and railroad boom of the 1820s and ‘30s, the Panic of 1837, and the subsequent surge of tax increases adopted to pay state debts accrued during the boom.  Prior to 1840, no states had adopted constitutional debt limitations and, as a result, dangerous debts accumulated during the transportation boom of the first half of that century.  In New York, which had accumulated the highest debt in the nation (due in large part to financing the Erie Canal), the chair of the Constitutional Convention of 1846 warned: “unless some check was placed upon this dangerous power to contract debt, representative government could not long endure.”

The debt limitation was Californians’ response to the demonstrated problems facing local governance.  Nor were they alone.  Between 1840 and 1855, 19 states enacted constitutional debt limitations.  In New York, which had accumulated the highest debt in the nation (due in large part to financing the Erie Canal), the chair of the Constitutional Convention of 1846 warned: “unless some check was placed upon this dangerous power to contract debt, representative government could not long endure.”  Thus, to prevent another destructive cycle of hasty overinvestment—followed by decades of indebtedness—Californians have, from the moment of statehood, forced their municipalities to operate within their financial means.  As the California Supreme Court acknowledged in the 1896 case of McBean v. City of Fresno,

[T]he framers had in mind the great and ever-growing evil to which the municipalities of the state were subjected by the creation of a debt in one year, which debt was not, and was not expected to be, paid out of the revenues of that year, but was carried on into succeeding years, increasing like a rolling snowball as it went, until the burden of it became almost unbearable upon the taxpayers. It was to prevent this abuse that the constitutional provision was enacted.

Following a debate on whether and how much to cap municipal debt—e.g., at 2% or 5%—the idea of caps were ultimately abandoned in favor of submitting large public works proposals to the people for a two-thirds vote, along with a “sinking fund” for paying back the principal sum within twenty years of contracting the debt.

Second, the limitation on “extra compensation” at article XI, section 10 prohibits any local government from “grant[ing] 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 . . . .”  Like the debt limitation, this prohibition also appeared in the 1879 Constitution in response to concerns about government officials exploiting their connections and influence to obtain increased compensation beyond the terms of their original contracts.  During the debates during the constitutional convention, it was expressed “[t]he trouble is not in regard to the salaries which the officers receive according to law, but as to the compensation which they receive outside of the law… [by] surreptitious methods.”  As another delegate explained:

what the people of San Francisco do want is not so much a reduction of salaries, but they want to know exactly what salary the officers are to receive. The trouble is not in regard to the salaries which the officers receive according to law, but as to the compensation which they receive outside of the law … it is this, uncertain amounts that come from commissions and other surreptitious methods whereby men get money for services not rendered. It is against these that the people rise up and cry out, and not against the regular, square, honest compensation of officers.

Later case law would cramp the constitutional ban on extra compensation by allowing charter cities to escape the ban.  Not amused, Californians in 1970 reaffirmed the prohibition by enacting the current article XI, section 10, explicitly applying the ban to all local governments and reversing prior cases holding otherwise.

The Court of Appeal’s Opinion

Though the language and purpose of these two constitutional provisions are straightforward, the court declined to enforce either of them.  The reasons provided, however, are far from satisfying.

With respect to the constitutional prohibition against incurring indebtedness, the court drew a distinction between “debt or liability,” on the one hand, and what the court refers to as “unfunded actuarial accrued liability”—better known as the $100 million of unfunded pension liability accrued the moment the County signed the 3% at 50 plan in 2001.  “Unfunded actuarial accrued liability,” the court held, is not a “debt.”  Instead, it is “an actuarial estimate projecting the impact of a change in a benefit plan.”

The County anticipated that linguistic machinations might be employed to escape the Constitution’s effect, and so offered that the definition of “indebtedness” as defined by the California Supreme Court “encompasses ‘obligations which are yet to become due as [well as] those which are already matured.’”  The court casually dismissed this authority, however, stating “[t]his unexceptional statement does not control our case.”  Instead, the court held that “[a]n unfunded liability such as a UAAL is not created at the time of the award of enhanced benefits, but occurs over years ‘and may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns….’”  Of course, this may be said about any debt that has not yet come due, as it may be discharged through accord and satisfaction, novation, forgiveness, etc.  To say this makes it other than a debt robs the word of any concretes to which it could ever apply, and nominates it for removal from our lexicon altogether.

Incidentally, yesterday I attended the annual Federalist Society Western Conference at the Reagan Library, where pension reform and this case were discussed.  When a panelist read the above quoted language from the decision making the empty distinction between “debt” and “an actuarial estimate projecting the impact of a change in a benefit plan,” the crowd of lawyers could not restrain a very loud groan.

With respect to the constitutional prohibition against extra compensation, the court was less creative.  California courts have elsewhere availed themselves of a Nuremberg Defense by citing other opinions that, without explanation, elevated pension rights to a class by itself.  However, even these cases did not stand for the proposition that Section 10—the prohibition against retroactive compensation—does not apply to pensions.  Yet, the court drew this inference anyway.

With some relief, the court explained it did not carry the burden to explain its conclusion that pensions, and only pensions, are entitled to exclusion from the important constitutional prohibition against extra compensation.  Instead, the court explained that “[i]f this creates an anomaly in the law, it is one sanctioned by the California Supreme Court.”  But this is not true.  While it is an anomaly, it was not sanctioned by the Supreme Court with respect to Section 10’s prohibition against extra compensation.  More importantly, that Supreme Court case, Miller v. California, only explains that pensions are simply another form of compensation for work previously done.  It does not lend any rationale to support to the proposition that extra pension may be paid by for work previously done.

Simply put, the court did not offer any analysis to explain its refusal to enforce the Constitution.  It merely cited other cases that conferred special status on pensions—also without any analysis for doing so.  Referring to prior cases in lieu of providing a rationale is an increasingly abused practice among judges, particularly in cases like the one here, in which those prior cases are equally empty of reason.  It is a problem Jonathan Swift described this way in Gulliver’s Travels:

It is a maxim among these lawyers that whatever has been done before, may legally be done again: and therefore they take special care to record all the decisions formerly made against common justice, and the general reason of mankind.  These, under the name of precedents, they produce as authorities to justify the most iniquitous opinions; and the judges never fail of directing accordingly.

The recent opinion in Orange County v. AOCDS is only the most recent installment in a line of pension cases that offer scant appeal to common justice and general reason, and instead seek to justify themselves merely by making reference to one another.

In closing, it is worth noting that the opinion was handed down just seven days after oral arguments on January 19.  Though I have not been able to find the transcript on the web, I am informed that the AOCDS attorney who presented oral argument before the court—herself a former court of appeal justice—pleaded with the panel something to the effect of “this case concerns pension plans just like yours and mine.”  This raises potential ethical issues and suggests the justices may have been required to recuse themselves, particularly if they are likewise beneficiaries of retroactive pensions.