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Lawyers argue about diversion of future contributions to pay current retirees, salary cap in 2019 law.

PMG FILE PHOTO - The Oregon Supreme Court has heard its third case about the PERS pension system in recent years. Whether lawmakers went too far last year in changing the public-pension system to reduce its future obligations is now in the hands of the Oregon Supreme Court.

The seven justices heard arguments Tuesday, June 16, from public retirees and the public employee unions challenging the changes — and from local and state governments defending them. There is no deadline for the court to act, although decisions are usually released six to nine months after oral arguments.

This is the third major public pension case in recent years upon which the Supreme Court has been asked to rule, following decisions in 2005 and 2015 that challenged legislative changes made in 2003 and 2013.

As part of their continuing effort to rein in Oregon's public pension liability — estimated at $24 billion at the end of last year — lawmakers in 2019 redirected some of the money going into individual account plans, which were created for all public employees in August 2003, to defined-benefit plans that serve pre-August 2003 retirees. Individual account plans blend contributions from employees and about 900 member public employers.

Public employee unions and retirees have challenged that planned diversion in Senate Bill 1049 as a breach of contract under the Oregon and U.S. constitutions. They also argue that the diversion constitutes a "taking" of private property for public use without just compensation, although the state says that argument has no merit.

Contract breach?

"A promise was made to these members at the time other benefits were taken away from them," said Aruna Masih, a lawyer for the Portland firm of Bennett Hartman, which represents the unions. "That promise is attributable to service performed on or after a particular date (August 2003).

"So this is a going-forward promise: We are taking away these benefits and we are promising you going forward that you will get this (individual account plan) account and you will not have to contribute toward your pension."

Most of the 225,000 current public employees were hired after August 2003, but most of the system's liability is owed to employees hired before then. Virtually all of the 150,000 active recipients in the Public Employees Retirement System accrued all or most of their benefits before August 2003.

Masih said there could be a distinction between the pre-August 2003 employees and retirees — known as Tiers 1 and 2 — and those hired after the 2003 changes.

But Solicitor General Benjamin Gutman, arguing for the state, said the 2019 change does not violate the state and federal constitutions because it applies to benefits that will be paid out after the law was passed. He said it doesn't change how they were accrued.

"An easier-to-understand analogy is that if the Legislature passed a law next year saying that the solicitor general's salary will be cut in half, and the savings are going to compensate crime victims, I might feel like they took my money," Gutman said.

"But that wasn't my money; I haven't earned it yet. If I continue to work, I am agreeing to continue to work at half the salary and the Legislature is free to do what it wants with the rest of the funds."

The diversion is in effect until the PERS system reaches 90% funded status. Depending on whether "side accounts" are counted — amounts set aside by state and local governments to pay part of their future pension liabilities — the system's funded status ranges from 75% to 79%.

Salary cap

The public employee unions also are challenging the Legislature's decision to impose a salary cap of $195,000, a point after which retirement benefits no longer will be calculated. Former University of Oregon football coach Mike Bellotti was among public employees whose pensions were boosted from outside contributions to their salaries, although the U.S. Internal Revenue Service has since disallowed the practice.

For Oregon public employees, pensions are based on a final average salary that consists of pay during the final three years of employment or their three years of highest earnings.

Masih argued that the cap deprives some employees of earnings that otherwise could count toward a final calculation of pension benefits.

"We have never taken the position that salary itself is locked in. Obviously employers get to bargain at the bargaining table on regular periods. Collective bargaining agreements are entered into with different levels of salary," she said. "But the system does have an assumption, and it's based on the actual experience of the system, that salaries will increase."

Bill Gary, a Eugene lawyer and a former state solicitor general and deputy attorney general representing several government agencies, argued otherwise.

"The promise was not that you would get your last three years of salary," he said. "It is true that one will not know until the point of retirement what the final average salary is, because you have to look backwards to see what the three highest years were. But one is not required … to work all the way until retirement."

While the 2003 changes in Oregon's public pension system set up a level of contributions by public employers to individual account plans of employees, he added, "There is nothing in the statute that suggests it was intended to be irrevocable."

Chief Justice Martha Walters and Justices Thomas Balmer and Chris Garrett heard the 90 minutes of oral arguments in the court's temporary quarters while the Supreme Court Building in Salem is under renovation. The building dates to 1914. The other four justices participated via video conference. The high court has rescheduled most arguments during the coronavirus pandemic.

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Watch the arguments

Link to Oregon Supreme Court video of June 16 arguments in the public pension case James v. Oregon.

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