The Judiciary and Fiscal Crises: An Institutional Critique

Abstract

Scholars have long debated the role for courts with respect to governmental action that responds to crisis. Most of the crises analyzed, however, are exogenous to the political process; the courts’ role in response to politically endogenous crises has received less attention. We evaluate the role of the judiciary in a subset of those endogenous crises: the judicial treatment of governmental efforts to resolve the crisis facing underfunded public pensions. Assessing institutional competence schematically with reference to an institution’s democratic accountability and fact-finding ability, we argue that, where institutions function properly, judicial intervention in politically endogenous economic crises should be close to nonexistent. But when they must occur — and, consistent with doctrines of justiciability, some adjudication of governmental action in the fiscal context will be inevitable — we argue that such intervention should respect the judiciary’s comparative institutional incompetence by treading lightly, constitutionally speaking: where the relevant law allows discretion, and where a non-constitutional determination is possible, courts addressing the state’s fiscal policy-making apparatus should avoid constitutional pronouncements entirely.

After developing a preliminary framework for assessing this decision rule, we apply it to a hard case (where the statute and contract is silent as to whether executory pension contracts are subject to constitutional protection against modification) and an easy case (where there is a reservation of rights for that very modification). Unfortunately, courts have erred in both the hard and easy cases; our framework explains why the law is not only consistent with our decision rule, but why comparative institutional competence compels the result. In both the easy and the hard cases, the point is not to promote or demote the interests of a single class or faction active within the fiscal policy-making process — whether bondholders, public unions, taxpayers, or the government — but to locate that policy-making process within the most democratically responsive and empirically competent institutions. With this framework, we evaluate the recent effort of the San Jose Superior Court to address these issues. We conclude that the court got the easy case exactly wrong.

Keywords: public employee pensions, California Rule, Contracts Clause