Definitional theft as government policy? Not so fast

TAKINGS TALK

It is hard to improve on the U.S. Supreme Court's words in United States Trust Co. v. New Jersey, 431 U.S. 1, 26 (1977): "complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake. A governmental entity can always find a use for extra money." Thus, it should have come as no surprise when the 9th U.S. Circuit Court of Appeals looked askance on a definitional game played by the state of Washington. The state simply "skimmed" -- to use the vernacular -- daily interest that should have been earned by members of the state's teacher retirement fund. No problem, according to the state. As a matter of state law, the teachers had no right to daily interest and therefore had no complaint when the state simply took that interest for its own use.

Not so fast, said the appellate court. It is settled law that interest follows the principal. That is, whoever owns the principal is entitled to interest on it. See, e.g., Webb's Fabulous Pharmacies v. Beckwith, 449 U.S. 155 (1980). And that would be the teachers whose contributions made up the fund. Interest, said the court, accrues from day to day, regardless of how a fund may be set up to make it payable. As such, that interest was not the state's to "redefine" into something other than the private property of the teachers. The idea is so deeply ingrained in our general precepts that it is entitled to constitutional protection and not subject to confiscation at the whim of a government entity.

The state's position was based on the idea that states have the right and the ability to define (and redefine) property interests. In this case, the state decided that the funds did not earn interest on a daily basis and thus nothing could have been taken from the teachers when the daily interest was placed into the state's own treasury. Wrong. As the appellate court put it, "a State may not sidestep the Takings clause by disavowing traditional property interests long recognized under state law." In other words, redefinition in order to enrich the state ran afoul of the U.S. Constitution. In the court's words, "there is a core notion of constitutionally protected property into which state regulation simply may not intrude without prompting Takings Clause scrutiny." The opinion had no difficulty in concluding that interest on funds was the constitutional property of those who owned the funds, regardless of what some state statute might say. Guerin v. Fowler, 899 F.3d 1112 (9th Cir. 2018).

The appellate opinion is on solid ground. In addition to the United States Trust Co. case note above, the Supreme Court has dealt with similar issues numerous times. It has been wary, for example, of "statutes tainted by a governmental object of self-relief ... in which the Government seeks to shift the costs of meeting its legitimate public responsibilities to private parties." United States v. Winstar Corp., 518 U.S. 839 (1996). And it has noted that careful examination of governmental motives and actions "is of particular importance ... where the Government has a direct pecuniary interest in the outcome of the proceeding." United States v. Good Real Property, 510 U.S. 43 (1993). Is there any doubt that balancing a state's budget by theft of property from teachers' retirement funds is off limits?

And that should have been the end of that. But the state pressed on. It filed a petition for writ of certiorari, asking the Supreme Court to validate its right to steal (one gropes for a better word, but none occurs) funds from private citizens to help the state cover its own bills.

In a nutshell, the state's position is that a state has the absolute right to decide what constitutes "property" within its borders, and it is free both to define and to redefine that concept at will. More than that, the state claims that the 11th Amendment to the U.S. Constitution, which precludes suing a state for damages, also immunizes states from injunctive relief when the state's actions violate the constitutional rights of its citizens.

The state's certiorari petition should be acted on soon. Based on the law discussed above, it ought to be denied. If not, count on a seriously intense battle at the Supreme Court in the not too distant future. Stay tuned. I almost hope that the state gets what it has asked for, i.e., Supreme Court review. I strongly suspect that a substantial majority of the court will be offended by the state's high-handed action and rule against it in strong terms. It might even be unanimous. Time will tell. 