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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

Californias impairment of contracts clause (Cal. Const., art. I, 9) is the basis for the states
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 Californias 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
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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.
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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 Fedn 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 Assn, 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 electorates 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
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initiatives language so as to effectuate the electorates 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 commonsense 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 VEAs purpose is to
establish a mechanism the voters 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 VEAs 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
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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 VEAs 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 VEAs 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 drafters 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
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seems to be contemplated. Under this interpretation, Californias 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 Constitutions Equal Protection Clause or under any of
the States 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 VEAs 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 Constitutions 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. Californias 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
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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
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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.

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.

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