Reimagining pensions provided during at-will employment as a series of contracts as opposed to a single contract would additionally end several anomalies causing ripple effects in the state’s jurisprudence. It would align government pension benefits with other employment benefits. It would unite public pension contracts with private law contracts. It would unify the regulation of pensions in the public and private sector by providing all employees with an equal degree of protection. Likewise, a daily contract view would bring coherence to California’s constitutional contract jurisprudence, bridge the gap between federal and state methodologies under the Contract Clause, and ally California constitutional pension law with the growing trend in other states. It would additionally be consistent with the California Supreme Court’s renewed emphasis on enforcing pension promises only if they correspond to compensation for work performed.
Scholars, including myself, have pointed out the inefficiency and incoherence of the court’s current approach. This essay focuses on what has been left unsaid or at least under-emphasized. It has two main contributions. First, the essay calibrates the rise of California’s public pension contract doctrine from a contract perspective by focusing on the idea of contract duration. This background context isolates Allen v. City of Long Beach—the seminal case that created the key contours of the California Rule—as an aberration in California’s pension law lineage. It describes how the court veered off course in Allen to unwittingly spawn the single contract concept requiring consideration for prospective changes.
Second, this essay offers a corrective on substantive and procedural grounds. Substantively, it proposes that promises paid for daily (and not career-long) performances are consistent with the pre-Allen decisional history of public pension law. Being unmoored from Allen’s single contract concept and unburdened by its offset element would enable the supreme court to resume the right route and return to traditional contract and constitutional law principles. It would also allow state and local governments to shelter in a safe harbor from the ongoing budgetary storm.
Procedurally, the analysis underscores the lack of intermediate (or any) appeal in California’s public pension controversies as a factor contributing to the error in Allen. Most pension-reform cases reached the supreme court through an extraordinary writ of mandamus. This original remedy has the benefit of providing immediate and final relief. But, as illustrated through the ill-conceived making of the California Rule, it poses substantial risks to the rule of law. These costs include a lack of reflection from lower courts without the consensus-building quality usually embedded in judge-made law. Lower court consideration may have supplied the requisite compass to correctly chart new directions in the state’s constitutional pension law. The California experience also provides a cautionary tale for other state legislatures deciding whether to grant direct appeals (or initial actions) to their state’s top court to immediately adjudicate challenges to government pension legislation.
I. Background
California was once in the vanguard of public pension protection. At the turn of the century, the California Supreme Court led the country by leaning into contract law for the first time. Conceived as contracts (and not gratuities), the court elevated pensions into the constitutional pantheon of rights and erected a barrier to pension reform under the Contract Clause of the state and U.S. Constitutions. The Contract Clause bars states from passing any “Law impairing the Obligation of Contracts.”
The inspiration for picturing pensions as protected contracts and not unprotected gratuities was prompted by the ban on gifts to public sector workers. Avoiding a more moderate solution through applicable concepts of equity, the supreme court boldly solved its dilemma by moving from one extreme to the other. The mythical idiom of Scylla and Charybdis cautions that choosing to navigate between two hazards leads inevitably to disaster.
But in the exploding economy of early twentieth-century California, the danger was far in the distance. After all, born of gold fever, the state was just fifty years young. And the question remained whether the supreme court would advance only a portion of contract law or swallow all of it. The court’s decisions, however, soon demonstrated that it intended to digest the conception of contract in its entirety. That pensions would absorb a full-blown contract identity is evidenced by the Supreme Court of California’s determination about when a pension contract was formed. Following (although not reciting) fundamental rules of employment contracts, it settled on the first day of work.
Later decisions confirm that mapping pension benefits onto a contract construct would be easier said than done. Ironically, though, the risk was not in the Supreme Court of California’s initial commitment to contract law, but in its later deviation from contract law’s central tenets. The path not taken has made all the difference.
Specifically, in Allen v. Long Beach, the supreme court corrupted basic contract and employment law principles by invalidating legislation that reduced the pension benefits of at-will government employees for work not yet performed. Moreover, the mistake appears to have been inadvertent because the court did not expressly rule (or explain why) prospective benefits could not be changed. The legal effect of the holding locked in the level of pension benefits from the first day of work. (The Allen decision even went all in on the error by indicating that benefit levels could increase but not decrease throughout an employee’s career.)
A corollary condition of the first-day-until-forever freeze on benefit reductions required the government to offer a comparable new advantage as extra consideration for any subsequent change. This additional quid pro quo was deemed necessary because the court viewed the exchange of pension benefits for performance through the continuum of a single contract. Because a solitary agreement takes time to complete, an employer is prevented from revoking the promise until it can be accepted.
A minority view of employment at will compels an offset before any adverse change and has been defended on policy grounds. California, however, has never adopted this position. Indeed, the supreme court did not acknowledge its additional benefit mandate on contract grounds at all (and has never offered an explanation). Rather, the court contrived the legal requirement in Allen by oversimplifying a previous decision’s factual judgment. In particular, Allen relied on Wallace v. City of Fresno to determine whether the pension reform was valid. Wallace had characterized Packer v. Board of Retirement of Los Angeles County Peace Officers’ Retirement System as validating reforms that provide a new benefit to offset any reduction. But Packer merely applied Kern v. City of Long Beach’s instruction that pension benefits remaining after reform be reasonable. The supreme court in Packer emphasized that the legislature could have given greater benefits under certain circumstances and that the reform left the pension “substantially unchanged.” Therefore, by sanctioning Wallace’s overstatement, the Allen court hardened facts into law and added the offset element to the California Rule. Allen’s simple missteps manifested in Legislature v. Eu to the ongoing overt and egregious error.
While the California Supreme Court (like the state itself) has long been an anthem to individualism and nonconformity, its typical groundbreaking decisions have had a basis in law and sound policy. Allen had neither. The contract paradigm previously adopted by the court did not compel the conclusion of a career-long rather than multiple daily contract periods. Nor did its Contract Clause jurisprudence. And the court ignored the sound instruction in its public pension precedent to read legislation before finding that statutory terms amount a contract. In fact, early opinions determining the contract-upon-hiring edict were matters of statutory interpretation (and not interpretation of the Contract Clause). Besides, based on common sense and separation of powers, California (like many states) follows federal law in interpreting statutes with a presumption against recognizing a legally enforceable agreement. By disregarding its own directive and applicable canon of construction, the supreme court contorted constitutional law and usurped legislative power.
II. Pensions as Daily Contracts
By perceiving pension benefits as part of long-standing rules of employment, complete with customary time frames for work performed each day, the Supreme Court of California could return pension law to its contractual roots. As a result, the court could stop rowing against the current of constitutional, contract, and employment law.
A contract-a-day outlook would settle the ongoing identity crisis of government pensions, not to mention the related pension debt crisis wreaking havoc throughout the state (and country). Notably, re-envisioning public pensions via an employment-at-will lens would undertake a reformation rather than a revolution. As argued above, the California Supreme Court’s opinion in Allen occurred on the wrong side of precedent and extant law. Overturning the Allen anomaly would re-establish pensions along the prism of contract in line with past practice. It would additionally (and simultaneously) unify various areas of state law. A series of contracts approach would equalize the safety of public and private sector employee benefits as well.
It is unfortunate that one (apparently accidental) decision distorted the contract story of the California Rule of public pension protection. The popularity of the rule in other jurisdictions stems from the contract narrative. State courts adopted California law on the limited grounds that pensions could achieve the status of contract. Most jurisdictions did not endorse the perverse restriction on prospective legislative changes. To be sure, at least states that appeared to track California’s career-long caricature of contract-at-will have retreated from that view. Only a few states continue to guarantee future (versus past) accruals at the inception of employment.
Accordingly, the California Supreme Court should no longer perpetuate the error in contract duration by continuing to founder on the rock of Allen. Rather, for employees who have not yet retired, the court should resume its contract journey and return to the conventional series of contracts approach as work is performed. For retirees and their beneficiaries, Allen and progeny should continue to be good law. Fulfilling retirement requirements is a condition precedent to the promise to pay future benefits infinitum. Satisfaction of the career completion condition would guarantee a uniform level of benefits during retirement subject to the usual government justifications for modifications. Fully embracing long-standing principles of contract allows for a reasonable accommodation of retirement security and legislative power.
III. Procedure and Remedy
The second suggestion impacting the future of public pensions moves from substance to procedure (and remedy). Virtually all the major decisions creating the California Rule lacked the advantage of an intermediate appellate decision. The Supreme Court of California heard public pension cases as matters of first impression or on appeal directly from the trial court. The supreme court adopted an appellate decision per curiam in the one exception. The novelty of the issue, along with an absence of sustained analysis from below, no doubt contributed to the present pension contract conundrum.
Remedies are often thought of from the parties’ perspective. What is the practical payoff of the litigation? How does too much or too little remedy affect incentives to sue? But as the development of the California Rule illustrates, the choice of remedies can also impact the quality of judicial decision-making in hard cases.
Without deliberation by a trial court or intermediate court of appeal (or both), the Supreme Court of California squandered the epistemic and institutional advantages of hearing public sector pension issues in the second or third instance. Appeals function both as a process for error correction as well as a process of clarifying and interpreting law. Clarity and accuracy are also signature virtues of the common law method (including the doctrine of stare decisis).
The United States Supreme Court recently championed the knowledge-building aspect of precedent in its momentous decision in Dobbs v. Jackson Women’s Health Organization. The majority recognized that relying on past decisions “restrains judicial hubris” by respecting “the judgment of those who have grappled with important questions in the past.” Whether through appeal or analogical reasoning, there is value (and validation) in repeating an idea across multiple venues. It is a tale as old as the Anglo-American legal system. Amy Coney Barrett effectively underscored the value of judicial experience this way: “Allowing an issue to be hashed out multiple times compensates for the imperfections—the very humanness—in the process of decision-making. It allows the courts to see a more complete picture before rushing to judgment.”
With an abbreviated (or no) appeal procedure in the initial contests concerning government pensions, the supreme court failed to receive the full collaborative effort of the lower court judges and their initial close study of prior cases. And by granting original actions in mandamus, the court relinquished the primary error correcting capacity of appeal. Cardozo advised that a system of appeals assures that “[t]he tide rises and falls, but the sands of error crumble.” The court lost the opportunity to contemplate the outcome adjudged and the remarks and reasons accompanying those judgments. While scholars studying vertical stare decisis often concentrate on whether and when lower courts should follow precedents set by upper courts, the shared experience in deciding legal questions cuts both ways. In a pyramidal judiciary, appellate courts can learn from trial courts too. Two (or three) heads are often better than one.
What is more, emphasizing the importance of judicial participation over time is not to forget the meaningful role of litigants and their counsel in getting the law right. Constitutional contract law in the context of public pension reform is complex. In a case of first impression, arguments may not be well-made if indeed made at all. Only over time would a complete picture emerge along a range of relatively correct possibilities. Issues have a way of airing themselves out with each successive presentation.
There are lessons here, as well, for judicial adventurers however noble the cause. When forging new rights, remember to stay small and opt for narrow grounds to abate error and its harmful consequences. Boldness makes news headlines, but modesty minimizes big mistakes. For this reason, judges usually postpone recognizing rules until they have passed through many hands (and heads) and proven effective. Evolutionary decision-making not only limits the scope of error, but also contributes to public acceptance of the law. It additionally enhances judicial integrity.
The original transformational California cases preceding Allen that considered the possibility of pensions as contracts reached just outcomes. But they could have been decided on narrower grounds. The disputes involved widows and unlucky employees whose pensions were terminated on the verge of retirement. Framing these decisions as an aversion to forfeiture, the court could have resorted to existing (and more ad hoc) principles of equity. Or, it simply could have articulated the conventional contract view.
Still, the real stretch came in Allen where the court arrested the development of contract and employee benefits law. Recall that the effect of the Allen decision was an implicit acknowledgment of a single (super) contract theory that froze future accruals from decline. Alas, by the time of Allen and its explicit endorsement in Eu thirty years later, California’s government pension law did not have behind it the moving power of a glacier. Instead, the California Rule announced was more like an earthquake that left aftershocks throughout the country and seismic shortfalls in state and local budgets.
Conclusion
Like the ship of the Argonauts, the California Rule of constitutional contract law can retain its shape, even though some of its materials get altered during the voyage. This essay provided a way for the Supreme Court of California to steer clear of doctrinal, procedural, and financial monsters to set the best course for posterity in the (once) golden state.
By concentrating on contract duration, the itinerary included overruling Allen and progeny in part for employees but adhering to Allen entirely for retirees and their beneficiaries. The travel plan also advised caution in hearing cases too soon. Discretion is the greater part of valor.
Government pensions may never again reach the same buoyancy as mid-century. But the court’s search for justice can continue, as it began, on contract grounds. Recommitting to contract will set the gold standard of public pension law. It will also allow the court to return to port unscathed.