George Skelton

But some believe the contracts clause doesn’t prevent the state from changing costly retirement plans.
By George Skelton Capitol Journal
November 14, 2011

From Sacramento– In Philadelphia, 224 years ago, some men tucked these words into the nation’s new Constitution: “No state shall … pass any … law impairing the obligation of contracts…”

Those words, squeezed into a very long sentence in Article 1, Section 10, listing powers denied the states, became known as the “contracts clause.” And it is playing havoc with modern-day public pension reformers, including Gov. Jerry Brown.

As widely interpreted — most importantly by the courts (or so we laymen are told) — the clause means that pensions promised state and local government workers on the day they were hired cannot be reduced without giving them a new compensating benefit.

In other words, some kid walks into a state office seeking a junior clerk job. He lands it. That constitutes a contract. The new hire is entitled to the pension benefit then in effect if he sticks around long enough to collect it — even if the subject of retirement perks never was discussed, as it surely would not have been.

“Employees are entitled to benefits in place during their employment,” asserts the California Public Employees’ Retirement System in a recent report.

“Promised benefits may be increased during employment, but not decreased, absent the employees’ consent…. The courts have established that this rule prevents not only a reduction in the benefits that have already been earned, but also a reduction in the benefits that a member is eligible to earn during future service.”

That’s a jaw-dropper, I suspect, for most private-sector workers. They don’t enjoy such constitutional protection. They’re covered by a federal law that basically guards only the pension benefits they’ve already earned.

As too many of us know, there has been an epidemic of private pension butcheries in the last decade. Companies simply have announced that they’re freezing benefits. Employees will get what they’ve accrued — what they’re vested in — but will earn no more in the future.

The company’s new retirement plan will be a 401(k), where the financial risk is borne by the employee rather than the employer. Forget what, if anything, the worker was told when hired. The world has changed.

Naturally, this has created a great deal of pension envy among the vast majority of voters who don’t work for a state or local government.

And it’s at the heart of voter demands for public pension reform — with plenty of legitimate justification: The future liabilities of public pension systems are underfunded by hundreds of billions of dollars.

The deficit-ridden budgets of state and local governments need immediate relief from the escalating cost of pension contributions for current employees. And the long-term fiscal health of these governments requires a significant reduction in retirement benefits for future hires.

A poll in March by the Public Policy Institute of California showed that 74% of likely voters favored eliminating pensions and adopting 401(k)-type systems for new workers. And 57% thought pension plans should be reduced for current employees.

But the current employees’ protection in the U.S. Constitution is fortified by a similar clause in the California Constitution: “A … law impairing the obligation of contracts may not be passed.”

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