Richard Epstein’s column this week asks,

How can the government best roll back pensions in ways that satisfy key economic requirements without running afoul of serious constitutional concerns?

The legal questions have arisen in several places (including Washington) and remain unsettled. Epstein:

California pension law cases, without careful analysis, have evolved to freeze minimum pension levels for all employees the moment that they take their jobs. Workers may be dismissed or demoted from their jobs, but the pension structure is said to remain inviolate as a result of two key decisions. In Kern v. City of Long Beach (1947), the California Supreme Court held that a pension could not be repealed in its entirety just before a Long Beach fireman was about to retire, which would have stranded covered workers high and dry. Fair enough. However in 1955, and without serious reflection, that rule morphed in Allen v. City of Long Beach to require that any “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

The gap between Kern and Allen is enormous, for while the former prevents the City from taking advantage of its workers, the second neuters the power of local governments to alter and amend, by wiping out all government flexibility to correct prior errors in pension program design or funding. That rigidity is exceedingly costly for two reasons: first, because of the obvious difficulties in making any once-and-for-all estimate of future pension benefits, and, second, because it creates a built-in ratchet whereby any future increase in pension benefits is permanently added to the base, without the possibility of further reduction. The upshot is a financial death spiral.

Additionally:

To be sure, the determinations of good faith are difficult to make, but it is surely better to tolerate some ambiguity at the margin than to force the City, which has multiple fiduciary obligations, to make wholesale cuts in its current programs, cuts that might include the size of its police and fire forces, the maintenance of its parks and schools, and various welfare programs. In her opinion, Judge Lucas heroically sought to confine her inquiry to “one of law, not of policy,” and thus missed the key point that the pension straight jacket has political as well as legal consequences.

All of these consequences can be avoided ex ante by holding that pension rights “vest” only for work completed. Just that position, for example, is taken in the Michigan constitution, which in Article IX, Section 24 states: “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” That definition is consistent with San Jose’s Measure B, and leaves it to another day to answer the question of whether federal bankruptcy law can force reduction in all unsecured claims, including those that are fully vested in retirees under state law (as Judge Steven Rhodes held could be done in the Detroit bankruptcy).

For more on public pension legal issues, see here and here.