The Oregon Supreme Court has upheld the 2019 legislative changes that divert part of future public employee retirement contributions to pay current pensions.
A unanimous court, in an opinion released Thursday, Aug. 6, concluded that the changes to the Public Employee Retirement System (PERS) do not violate either the state or federal constitutional guarantees of contracts. The court rejected arguments to the contrary by several public employees, who were represented by employee unions.
Unlike the 2013 legislative changes that reduced PERS annual cost-of-living increase for pensions, which the court ruled could not apply retroactively for work already performed, the justices said lawmakers can change future terms for use of retirement contributions.
"The fact that an employee has accepted an offer of benefits by performing services does not necessarily prevent the employer from changing the terms of the offer for future work," Chief Justice Martha Walters wrote for the court.
The lead plaintiff in the legal challenge was Jennifer James, a school secretary in Molalla, who said the decision will cost her $18,000 from her individual account plan.
"With SB 1049 (from 2019) you impacted the people who work on the front lines during pandemics, natural disasters and states of emergencies to keep our communities safe and healthy," she said in a statement provided by the PERS Coalition. "The ruling is deeply disappointing and will have long-term financial impacts for PERS members. Workers are paying the price for the Legislature's unwillingness to keep their promises."
Unions have vowed to withhold support from Democratic legislators who voted for the bill.
The state Department of Justice represented PERS, and other lawyers represented local governments named in the lawsuit.
Mike Cully, executive director of the League of Oregon Cities, praised the decision. He said every extra dollar spent by local governments on public-pension contributions — which, together with earnings from PERS investments, pay for current pensions — means less money for public services. Those contributions as a share of payroll costs are rising.
"During the 2019 legislative session, the LOC and cities across the state worked with partners to seek constitutionally permissive and equitable reforms to PERS," Cully said. "Today's Oregon Supreme Court decision not only ensures pension obligations are funded fairly in Oregon, but also recognizes the very deliberate and limited manner in which the reforms provided by SB 1049 were made."
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.
The Legislature made two main changes to the system, which had about 225,000 active workers and 150,000 retirees as of December 2019. Virtually all of the retirees were hired before August 2003 and qualify for more generous benefits, although according to PERS, just under two-thirds of them (about 95,000) are paid $3,000 or less per month.
One change diverted part of the 6% contributions that public employees make to their pensions. For employees hired before August 2003, 3.5% still goes into their individual account programs, and 2.5% is diverted to current pensions. For employees hired afterward — now the majority of Oregon's public workforce — 5.25% still goes into their accounts and .75% is diverted.
This diversion will continue until PERS funding status reaches 90% of unfunded actuarial liability. According to PERS estimates, the system has at least 15 years to reach that level. 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%.
The court said employees do not lose anything in the long run.
"None of the contributions subject to redirection will be used to benefit anyone other than the member who made the contribution," Walters wrote. "Although petitioners' (employees') argument suggests that already retired members benefit from the redirection of current members' contributions, that suggestion is incorrect. Retired members will receive the same retirement allowances and pensions regardless of the redirection provision."
The other change caps the annual salary to which PERS benefits applies at $195,000, starting this year and adjusted annually for inflation. The court rejected an argument by the plaintiffs that the calculation of the final average salary on which a pension is based is akin to what the court did in 2015, when it ordered a blended cost-of-living increase taking into account work before and after the Legislature's 2013 change.
"An amendment changing the definition of final average salary precludes a member from increasing the benefits that the member may earn, but it does not reduce the benefits that the member already has earned," Walters wrote. "A blended approach is not necessary when an amendment operates only prospectively."
NOTE: Adds context to story; adds comment by Mike Cully of the League of Oregon Cities, which filed arguments in a friend-of-the-court brief in this case.
Link to text of opinion of the Oregon Supreme Court in James v. Oregon can be found here.
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