Some laws are made by the legislature. Others are established by the courts. One legal doctrine that is almost exclusively the product of the courts is the doctrine of public-sector “vesting,” as applied to pension and, now perhaps, retiree health programs.

Based on long-established rules by California courts, public pensions “vest” when an employee is hired. After that, a pension can only improve. Reductions in benefits are generally permissible only if each and every participant in the pension system receives an offsetting benefit.

This approach differs from vesting in the private sector under the Employee Retirement Income Security Act, under which benefits earned by an employee based on service are vested but plans may be changed prospectively. By contrast, the conventional wisdom in the public sector has been that changes to pension plans can be made only for new employees. The problem is that the savings attributable to changes for new employees are incredibly small in the short-term, and much of the unfunded liability we must now pay for is due to plan improvements made over the last decade for current employees.

The impetus behind these court-created protections was well-intentioned, but the logic behind them wasn’t necessarily well considered. The problems caused by these rules, which cropped up many years later, were certainly unforeseeable. It is increasingly clear that unless California courts revisit cases decided half a century ago or more, local governments will be decimated by increasing pension costs and, perhaps, retiree health obligations they can’t even come close to funding.

This may sound like the plea of some conservative business group asserting that “judicial activism” is interfering with the bottom line. But public agencies are in a different position. Their job is to serve the public. Whether you like the government or hate it, we need government hospitals, roads, police, firefighters, parks, recreation center, schools, after-school programs, and so on. Increasing pension and retiree health costs are eroding those services at an alarming rate. Increasing numbers of local agencies are declaring fiscal emergencies and considering bankruptcy. While it’s important to protect the interests of public works, we cannot ignore the basic mission of government: to protect the public.

Many cases relating to vesting of pensions are working their way through the courts, and some early results have been promising. But the decisions in those cases haven’t gone to the core of the problem – that is, the legal framework for analyzing the “vesting” of pension benefits in California came during an era when none of the problems we face now were understood.

For good reason, changes in court-developed legal doctrine occur slowly. The doctrine of stare decisis – the principle that judges are generally obligated to respect precedents established by previous decisions – doesn’t mean blind adherence to outdated thinking. California law locking in unaffordable pension programs is based on little legal analysis and is inconsistent with the practices of the private sector, the federal sector, and many states. In the end, it will likely destroy the stability for public employees that it was intended to create.

The crisis we face is not the fault of the courts or, for that matter, the unions (which generally didn’t even exist when California vesting doctrines were created). Much of the problem comes from the effects of the Great Recession and California’s restrictions on the ability to tax. Further, the state’s largest pension provider, CalPERS, has been wildly uncooperative in attempts to make necessary structural corrections to address pension funding problems – problems it had a large hand in creating. But it will be hard, if not impossible, to argue for more taxation as long as public pensions rage out of control, and the only short-term way to address the costs of these pensions is for employees and employers to share the costs. As the newest wave of pension repair measures reaches the courts, it will be important for the courts to revisit the fundamentals of the vesting rules they created.

For further information, please contact:

Jon Holtzman

Jon Holtzman