1

LEGAL MEMORANDUM

TO: Mr. Dave Low, President, Californians for Retirement Security

FROM: Clark Kelso, Professor of Law University of the Pacific McGeorge School of Law

DATE: July 20, 2015

QUESTION PRESENTED

Whether the “Voter Empowerment Act of 2016” (the “VEA”) repeals the “California Rule” pursuant to which statutory retirement benefits to public employees may not be reduced on a prospective basis?

SHORT ANSWER

The “Voter Empowerment Act of 2016” (the “VEA”) repeals the “California Rule” by removing the constitutional prohibition on making prospective reductions to statutory retirement benefits to public employees through the use of an initiative as provided in the VEA.

ANALYSIS

I. The “California Rule” prohibits reductions to statutory retirement benefits to public employees on a prospective basis

California’s impairment of contracts clause (Cal. Const., art. I, § 9) is the basis for the state’s “vested rights doctrine,” which protects vested contract rights from impairment. For purposes of this analysis, it is convenient to consider two distinct aspects of the vested rights doctrine. First, does the doctrine protect retirement benefits that have been earned for work already performed? Second, does the doctrine protect the contractual value of retirement benefits prospectively for work that has not yet been performed? As will be seen, the answer is that California law protects against reduction both retirement benefits for work already performed and retirement benefits for work yet to be performed. The second aspect of California’s vested rights doctrine, which protects retirement benefits from prospective reduction, is generally referred to as the “California Rule.”

a. The Impairment of Contracts Clause prohibits reductions to statutory retirement benefits to public employees for work already performed

A long line of California Supreme Court decisions establishes that retroactive reductions in statutory compensation or benefits provided for public employees – i.e., reductions in

2

compensation or benefits for work already performed – violates the state constitutional impairment of contracts clause under the vested rights doctrine. Cal. Const., art. I, § 9. As explained in White v. Davis, 30 Cal.4th 528 (2003), “with regard to at least certain terms or conditions of employment that are created by statute, an employee who performs services while such a statutory provision is in effect obtains a right, protected by the contract clause, to require the public employer to comply with the prescribed condition” (30 Cal.4th at 565 (emphasis in original)).

The Court in White recognized Kern v. City of Long Beach, 29 Cal.2d 848 (1947), as the “seminal decision in this line of authority” (White, 30 Cal.4th at 565). Kern explained as follows:

“Although there may be no right to tenure [in office], public employment gives rise to certain obligations which are protected by the contract clause of the Constitution, including the right to the payment of salary which has been earned. Since a pension right is ‘an integral portion of contemplated compensation’ [citation], it cannot be destroyed, once it has vested, without impairing a contractual obligation.” (Kern, 29 Cal.2d at 853 (emphasis in original))

See also Olson v. Cory, 27 Cal.3d 532, 537-38 (1980) (“‘[P]ublic employment gives rise to certain obligations which are protected by the contract clause of the Constitution….’ [Citations.] Promised compensation is one such protected right. [Citation.] Once vested, the right to compensation cannot be eliminated without constitutionally impairing impairing the contract obligation.”).

This interpretation of the impairment of contracts clause – that compensation and benefits earned for work already performed are constitutionally protected from retroactive impairment or reduction – is consistent with definitive interpretations of the federal Contracts Clause. See Terry v. City of Berkeley, 41 Cal.2d 698, 703 (1953) (“The pension payments are in effect deferred compensation to which the pensioner becomes entitled upon the fulfillment of the terms of the contract and which may not be changed to his detriment by subsequent amendment. State of Mississippi, for use of Robertson, v. Miller, 276 U.S. 174, 179 (1928).”). As the Court noted in Legislature v. Eu, 54 Cal.3d 492 (1991), “both the federal and state contract clauses protect the vested pension rights of public officers and employees from unreasonable impairment” (id., 54 Cal.3d at 528).

b. The “California Rule” prohibits statutory pension benefits to public employees from being reduced prospectively for work yet to be performed under the same contract of employment

Unlike federal law, California law also establishes that prospective reductions in statutory pension benefits to public employees are unconstitutional – i.e., reductions that would apply to future work to be performed – unless “employees receive ‘comparable new advantages’ in return for any substantial reduction in benefits” (Legislature v. Eu, 54 Cal.3d at 529 (quoting Olson v.

3

Cory, 27 Cal.3d at 541)). In support of this rule, California courts have recognized that the pension benefits promised to a public employee when he or she first commences employment create a contractually enforceable right to continue earning those benefits in the future on the terms of the contract or their substantial equivalent. In essence, a public employment contract that promises pension benefits creates “the primary right to receive any vested pension benefits upon retirement [citation omitted], as well as the collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those then offered” (Eu, 54 Cal.3d at 528). See also Carman v. Alvord, 31 Cal.3d 318, 325 (1982) (“By entering public service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent to those then offered by the employer.”).

The “California Rule” appears to go beyond the limitations imposed by the federal Contracts Clause. Although the Supreme Court of the United States has never addressed the impact of a voter initiative such as the VEA on vested rights, several lower courts have held that prospective changes to pension benefits may not constitute a substantial impairment under the Contracts Clause. See, e.g., Buffalo Teachers Fed’n v. Tobe, 464 F.3d 362 (2d Cir. 2006) (prospective, temporary wage freeze order not a substantial impairment); Local Div. 589, Amalgamated Transit Union, AFL-CIO v. Massachusetts, 666 F.2d 618, 637 (1st Cir. 1981) (Contract Clause applicable only to retroactive changes); Md. State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353, 1360 (D.Md. 1984) (retroactive effect a prerequisite to Contract Clause claim).

II. The “Voter Empowerment Act of 2016” will be interpreted as repealing the “California Rule” by removing the constitutional prohibition on making prospective reductions to statutory pension benefits for public employees through the use of an initiative as provided in the VEA

a. The “Voter Empowerment Act of 2016” will be interpreted by examining the

plain meaning of its language in light of the overall legal context and its stated purpose

In interpreting a voter initiative, courts use the same principles of interpretation that apply to the interpretation of statutes. Robert L. v. Superior Court, 30 Cal.4th 894, 900-01 (2003). The first step is to give the words in the initiative their ordinary or plain meaning. People v. Birkett, 21 Cal.4th 226, 231 (1999). The language must also be construed in the context of the entire enactment and the overall scheme in light of the electorate’s apparent intention. Horwich v. Superior Court, 21 Cal.4th 272, 276 (1999). “Statutory language should not be interpreted in isolation, but must be construed in the context of the entire statute of which it is a part, in order to achieve harmony among the parts.” People v. Morris, 46 Cal.3d 1, 16 (1988). In ascertaining the voters’ intended goals or purposes, courts will look to materials that were actually placed before the voters. For example, in Robert L., the Court relied upon the “findings and declarations” section in the initiative to help determine the overall goal of the initiative measure. Robert L., 30 Cal.4th at 905. In summary, the courts’ “task is simply to interpret and apply the

4

initiative’s language so as to effectuate the electorate’s intent.” Hi-Voltage Wire Works, Inc. v. City of San Jose, 24 Cal.4th 537, 576 (2000).

b. The purpose of the “Voter Empowerment Act of 2016” is to provide a mechanism for voters, using the powers of initiative and referendum, to reduce the economic burden of “unsustainable compensation and retirement benefits”

The “Voter Empowerment Act of 2016” (“VEA”) contains a “Statement of Findings and Purpose” as follows:

“(a) Government has an obligation to provide essential services that protect the safety, health, welfare, and quality of life enjoyed by all Californians. Unfortunately, state and local governments face a severe financial crisis due to unsustainable compensation and retirement benefits granted to government employees by state and local politicians. Without reform, California taxpayers face a future of a massive public debt requiring the elimination or reduction of even basic essential services.

(b) Almost all of these disastrous financial decisions were made without the approval or consent of the voters.

(c) State and local politicians, government agencies, and courts have blocked common-sense efforts to address this financial crisis. Consequently, the need to empower voters and clarify their rights with respect to compensation and retirement benefits for government employees is a matter of statewide concern.

(d) Therefore, the people hereby amend the Constitution to reserve to themselves the power to approve or reject compensation and retirement benefits of government employees." (Voter Empowerment Act of 2016, § 2)

Given this language, courts are likely to conclude that the VEA has two closely-related purposes. First, subdivision (d) explicitly identifies one purpose as “reserv[ing] to [the people] the power to approve or reject compensation and retirement benefits of government employees” (VEA, § 2(d)). Second, in light of the findings in subdivisions (a) through (c), courts are likely to conclude that another purpose of the VEA is to reduce public employee compensation and retirement benefits.

These two purposes are readily combined into one overall statement that the VEA’s purpose is to establish a mechanism – the voter’s powers of initiative and referendum – for reducing public employee compensation and retirement benefits. As will be seen below, this overall purpose will be used by courts to interpret the scope of the VEA’s substantive provisions.

c. Proposed subdivision (a) of Section 23 of Article XVI of the California State Constitution will be interpreted as repealing the “California Rule” with respect to initiatives enacted pursuant to the VEA

5

The VEA proposes to amend Article XVI of the California Constitution by adding a new Section 23 (VEA, § 3). Subdivision (a) of Section 23 authorizes voters to use initiatives or referenda to control compensation and benefits provided to public employees. It provides as follows:

“(a) Voters have the right to use the power of initiative or referendum provided in Article II, to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer.” (VEA, § 3, proposed § 23(a))

This subdivision is the primary language for achieving the VEA’s overall purpose of establishing a mechanism for reducing public employee compensation and retirement benefits.

The effect of subdivision (a) cannot be understood without paying careful attention to the opening clause of the proposed Section 23, which applies to all of the VEA’s substantive provisions, including subdivision (a). That opening clause is as follows: “Sec. 23 Notwithstanding any other provision of this Constitution or any other law:” (VEA, § 3).

This type of language is used when a new provision contains or contemplates inconsistencies with existing law, and the drafter of the new provision, instead of clearly identifying the inconsistencies and resolving them explicitly, has chosen the expedient, but often confusing and ambiguous, approach of stating that all of the new provisions prevail over any other provision of existing law. See Cisneros v. Alpine Ridge Group, 508 U.S. 10, 18 (1993) (The “notwithstanding” phase “clearly signals the drafter’s intention that provisions of the ‘notwithstanding’ section override conflicting provisions of any other section.”); DGR Associates, Inc. v. United States, 94 Fed. Cl. 189, 206 (Fed.Cl. 2010) (“[U]nder the rules of statutory construction, ‘notwithstanding any other provision of the law,’ must be given the meaning of its plain language. The Supreme Court has held that Congress includes a ‘notwithstanding’ phrase to make clear its intent when one provision of a statute trumps another.”).

Putting the “notwithstanding” clause together with subdivision (a), the VEA provides as follows:

“Notwithstanding any other provision of this Constitution or any other law: (a) Voters have the right to use the power of initiative or referendum provided in Article II, to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer.” (VEA § 3, proposed § 23(a))

Giving this language a plain meaning interpretation, the VEA would appear to supersede all provisions in the California constitution as well as any other state law. Nothing in the “notwithstanding” clause or in subdivision (a) suggests any substantive or other limitations on the use of the initiative or referendum to determine the amount of and manner in which compensation and retirement benefits are provided to public employees (whether other provisions in the VEA establish any limitations is discussed below). Instead, examining just the “notwithstanding” clause and subdivision (a), unlimited use of the initiative or referendum power

6

seems to be contemplated. Under this interpretation, California’s Equal Protection Clause, Due Process Clause, Free Speech Clause, and many other fundamental rights and liberties protected by the California Constitution would be effectively repealed with respect to VEA-authorized initiatives or referendums. So interpreted, this would constitute a sweeping change in California constitutional law.

In addition, this plain meaning interpretation would authorize voter initiatives that clearly violate the federal Constitution. For example, a voter initiative enacted pursuant to proposed Section 23(a) might provide that compensation and benefits for men should be 10% higher than compensation and benefits for women in the same or comparable positions. If the “notwithstanding” language is given a literal interpretation, this proposed initiative could not be attacked as unlawful under the California Constitution’s Equal Protection Clause or under any of the State’s civil rights statutes.

A court might try to avoid this sweeping interpretation by construing the phrase “notwithstanding any other provision of this Constitution or any other law” more narrowly than its literal language suggests. The difficulty for a court will be in determining just how narrow its interpretation should be, which is precisely why utilization of “notwithstanding any other provision of law” clauses often creates confusion and ambiguity. It is a lazy drafting technique that often conceals a host of problems.

A court pursuing this interpretive strategy would probably read the “notwithstanding” clause against the backdrop of the VEA’s overall purpose to empower voters to use the initiative and referendum to reduce public employee compensation and retirement benefits. See United States v. Dixie Carriers, Inc., 627 F.2d 736, 739 (5th Cir. 1980) (interpreting ambiguous “notwithstanding” based on “Congress’ intent” in enacting the bill “to achieve a balanced and comprehensive remedial scheme”); Sanders v. County of Yuba, 247 Cal.App.2d 748, 751 (3d District, 1967) (interpreting ambiguous “notwithstanding” clause in light of “legislative intent” as evidence by “legislative history of the enactment”). This approach will avoid interpreting the “notwithstanding” language as superseding the California Constitution’s Equal Protection Clause and literally scores of other provisions in the California Constitution that do not obviously pertain to the reduction of public employee compensation and retirement benefits.

Following this interpretive strategy, a court will likely conclude that the “notwithstanding” clause is intended to supersede those provisions in the California Constitution or other laws that stand as substantial obstacles to empowering voters to reduce public employee compensation and retirement benefits, which is the core purpose of the VEA. California’s impairment of contracts clause and its interpretation in the “California Rule” are focused precisely on reduction of contract benefits and are constitutionally-based obstacles to reducing public employee retirement benefits. See Amy B. Monahan, Statutes As Contracts? The “California Rule” and Its Impact on Public Pension Reform, 97 Iowa L. Rev. 1029 (2012). Accordingly, focusing only on subdivision (a) (and not yet considering the impact of other subdivisions within the VEA), the

7

“notwithstanding” clause will be interpreted as authorizing voters to enact initiatives that reduce retirement benefits even though such reductions would otherwise violate the impairment of contracts clause and the “California Rule.” The fact that, as discussed below, three other subdivisions are clearly intended to preserve certain limited aspects of the impairment of contracts clause strongly supports this interpretation of the “notwithstanding” clause.

In summary, focusing only upon the “notwithstanding” clause and subdivision (a), it appears the VEA repeals and supersedes the impairment of contracts clause of the California Constitution and the “California Rule” at least with respect to reductions enacted by voter initiative.

d. Proposed subdivision (j) of Section 23 of Article XVI of the California State Constitution will be interpreted as limiting subdivision (a)’s repeal so that a VEA initiative may not retroactively reduce retirement benefits for work already performed

For purposes of analytic clarity, the discussion above focused attention only upon the interpretation of the “notwithstanding” clause in light of the overall purpose of the VEA and its primary substantive provision, subdivision (a). However, several other subdivisions of Section 23 establish limitations upon how Section 23 should be interpreted.

Subdivision (h) provides that “[n]othing in this section shall alter any provisions of a labor agreement in effect as of the effective date of this Act, but this Section shall apply to any successor labor agreement, renewal or extension entered into after the effective date of this Act.” This language would appear to limit the interpretation of the “notwithstanding” clause so that it does not permit retroactive changes to labor agreements that are in effect as of the effective date of the VEA.

Subdivision (i) provides that “[n]othing in this section shall be interpreted to modify or limit any disability benefits provided for government employees or death benefits for families of government employees, even if those benefits are provided as part of a retirement benefits system.” This language appears to limit the “notwithstanding” language so that disability and death benefits may not be modified or reduced.

For purposes of this memorandum, the most important provision is in subdivision (j) which provides as follows:

“(j) Nothing in this section shall be interpreted to reduce the retirement benefits earned by government employees for work performed.” (VEA § 3, proposed § 23(j))

The proper interpretation of subdivision (j) is rendered somewhat problematic given that nothing in Section 23 explicitly or even implicitly would cause a reduction in retirement benefits. After all, subdivision (a) of Section 23 merely authorizes voters to enact initiatives or referenda “to determine the amount of and manner in which compensation and retirement benefits are

8

provided to employees of a government employer” (VEA § 3, proposed § 23(a)). Subdivision (a) does not even purport to reduce retirement benefits by itself. In a literal sense, then, there is nothing that requires interpretation since nothing in Section 23 reduces retirement benefits.

This analysis would render subdivision (j) superfluous, and a court is likely to interpret subdivision (j) to avoid that result. Subdivision (j) appears to anticipate that initiatives will be used to reduce benefits, and a court will likely interpret the language in subdivision (j) as limiting the interpretation of the “notwithstanding” clause so that the “notwithstanding” clause does not result in repealing existing law that protects from reduction “retirement benefits earned by government employees for work performed.” 1 The use of the past tense in subdivision (j) – “work performed” – makes it clear that the intent of the drafters is to retain the prohibition against retroactive reductions in pension benefits. As noted above, federal law already prohibits retroactive reduction in retirement benefits earned for work already performed. Thus, this interpretation of the “notwithstanding” clause in light of subdivision (j) would ensure that the VEA is consistent with previous interpretations of the federal Contracts Clause and the traditional vested rights doctrine.

However, so interpreted, it is clear that subdivision (j) does not protect the “California Rule,” which forbids prospective reductions in retirement benefits absent the receipt of comparable new advantages, from being repealed by a voter initiative enacted pursuant to the VEA. Subdivision (j) speaks only to benefits earned for “work performed,” and it does not speak to benefits earned for “work yet to be performed.” This does not appear to be a drafting oversight. It is clear that the drafters of the VEA are aware of the difference between retroactive and prospective changes. Subdivision (h) of Section 23 expressly protects the provisions of “a labor agreement in effect as of the effective date of this Act” but then expressly makes subject to the Act “any successor labor agreement, renewal or extension entered into after the effective date of this Act” (VEA § 3, proposed § 23(h)). Since it is clear the drafters know the difference between retroactive and prospective changes to compensation and retirement benefits, subdivision (j) must be interpreted as only protecting retroactive reductions from voter initiatives enacted pursuant to subdivision (a).

In summary, while subdivision (j) appears to retain the rule against retroactive retirement benefit reductions, the language in subdivision (j) will be interpreted as overruling that portion of the “California Rule” which forbids prospective reductions in retirement benefits absent the receipt of comparable new advantages.

1 It reasonably could be argued that subdivision (j) as drafted (i.e., “[n]othing in this section”) is a limitation only upon anything in the VEA itself reducing retirement benefits earned for work performed and that subdivision (j) does not prevent an initiative from reducing retirement benefits earned for work performed. If this interpretation is correct, then the VEA repeals both the “California Rule” and the vested rights doctrine.