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Critics say decision will result in higher pension costs



Oregon’s Supreme Court has ruled that a cost-of-living adjustment for public retirees cannot be changed retroactively.

The court, in a long-awaited April 30 decision, also ruled that lawmakers can change how that cost-of-living increase is applied to benefits earned by employees — but only after dates of the 2013 changes.

“The state made a good-faith deal with these employees, who devoted so much of their working lives to serving their communities,” said Greg Hartman, a Portland lawyer who represented 14 plaintiffs in the main case.

“Today the Supreme Court let them know that they can count on a secure retirement, and will be able to afford groceries, medical bills, car repairs and other day-to-day living expenses which rise with inflation.”

Local government and business associations said the decision will result in higher pension costs under the Public Employees Retirement System.

Jim Green, deputy executive director of the Oregon School Boards Association — and also a member of the Salem-Keizer School Board — said this:

“If the Legislature does not take additional action, the decision wipes out the bulk of the savings contained in the PERS legislation, which means that schools across the state are going to face significantly higher PERS costs going forward.”

The Oregon Business Association also decried the decision, and offered a statement by a leading economist, who said millions will go into public pensions rather than education and other services.

“Oregon made a generational mistake in public policy, and the court has essentially ruled that we have to live with it,” said John Tapogna, president of ECONorthwest. “That puts Oregon in a challenging economic position for the next couple of decades. Families and businesses can choose Washington, with similar amenities, but without the legacy costs of an ill-devised pension system.”

The court rejected appeals by out-of-state retirees of the Legislature’s decision to discontinue payments granted years ago to help retirees offset state income taxes. The payments remain in place for in-state retirees.

Although employee unions opposed those changes when lawmakers considered them, they did not defend them in court, leaving two out-of-state retirees to file separate lawsuits.

Chief Justice Thomas Balmer, writing for the court, acknowledged that a dollar spent on public pensions is one that cannot go toward other services.

“The Legislature’s interest in enhancing those services is entirely appropriate,” he wrote.

“The Legislature, however, must pursue those objectives consistently with constitutional requirements, including Oregon’s constitutional prohibition against impairing the obligations of contracts.”

Retirees, public employees and their unions went to court to challenge the changes. They argued that the changes violated the contract between government employers and workers.

“We conclude that petitioners have a contractual right to receive the pre-amendment COLA for benefits that they earned before the effective date of the amendments,” Balmer wrote.

What’s next

Although all the implications have yet to emerge from the court’s decision by the Oregon Supreme Court on public-pension changes, here’s what we know:

n Up to 128,000 public retirees will get more from cost-of-living increases, which lawmakers capped in 2013. The court ruled that while changes are allowed in how the increases are calculated, they cannot apply retroactively to benefits already earned before 2013 — and overall savings to the system are going to be far less than the $5 billion projected.

The exact amounts retirees will get have yet to be calculated by the Public Employees Retirement System, spokesman David Crosley said. But according to a 2014 report by the Legislative Fiscal Office, totals could range between $130 million and $155 million. It is unclear whether interest on judgments applies; the typical rate is 9 percent.

PERS could draw from a contingency fund of $600 million.

n The 925 government employers under PERS, which covers about 95 percent of all Oregon public employees, will not have to pay higher contribution rates for the two-year budget cycle that starts July 1.

That’s because the PERS board set those rates last fall.

But according to the Legislative Fiscal Office report, those rates would have to go up by 5.5 percentage points for state agencies and school districts in the next two-year budget period. That translates into $319 million more from state agencies and $358 million more from school districts in the 2017-19 cycle on top of their regular rates.

Oregon’s 197 school districts get the lion’s share of their operating costs from the state budget. Lawmakers could shift all of the added pension-contribution costs onto the districts, but it’s more likely that the state would assume two-thirds and the districts the remaining third.

Cities, counties and special districts also would pay higher contribution rates. No estimates were available, but they are likely to be in the tens of millions.

The PERS board could choose to spread out those increases over a couple of budget cycles.

Oregon’s unfunded liability for public pensions will go up, from an estimated $2.6 billion at the end of 2013 — after lawmakers enacted the changes — to $8.7 billion. In terms of a fully funded system, Oregon would drop from 96 percent — the highest since 2007, before the financial markets crash in 2008 — to 89 percent.

While market gains in 2012 and 2013 helped PERS investments recover, the Legislative Fiscal Office report speculates that further gains will not be enough to offset the results of the court decision.

“It would require extraordinary returns for 2014 and 2015 in order to fully mitigate employer rate increases for the 2017- 19 biennium from the Supreme Court overturning reform legislation,” the report said.

Out-of-state retirees failed in their attempt to maintain payments that PERS makes to Oregon retirees to help them offset state income taxes on their pensions. Lawmakers ended such payments, and the court upheld that change, which reduces future liability by about $400 million.

Differing views

What’s less clear is what lawmakers and Gov. Kate Brown can do with the system now that the court has struck down retroactive changes that were considered in violation of the state constitutional guarantee against impairment of contracts.

Minority Republicans in the House and Senate urged action to salvage part of what was a “grand bargain” in 2013. Lawmakers, prodded by then-Gov. John Kitzhaber, raised some taxes and pared public pensions in exchange for a cut in small-business taxes and increased funding for schools and other state services.

“PERS continues to gobble up more and more of our resources,” said Senate Republican Leader Ted Ferrioli of John Day.

“Once again, Oregon faces billions in unfunded PERS costs that will hurt schools, police departments and other local critical services,” said the earlier statement by Ferrioli and House Republican Leader Mike McLane of Powell Butte. “It is clear that we will need to work together again to streamline government and create jobs in order to protect Oregon from a looming fiscal crisis.”

The Legislative Fiscal Office report, which was prepared last year, suggests that time is too short for lawmakers to do much in their 2015 session. Adjournment must occur by July 11, and lawmakers are looking at a target two weeks earlier.

“The Legislature, however, would have time to begin contingency planning for the 2016 legislative session and the 2017-19 biennium,” the report said.

“This may include: (a) limiting certain types of ongoing payroll costs (e.g., compensation); (b) setting aside funding to mitigate the potential 2017-19 rate increase; and (c) revisiting remaining statutory reform options.”

Senate President Peter Courtney, D-Salem, and House Speaker Tina Kotek, D-Portland, said in separate statements that with PERS contribution rates already set for the next budget cycle, it’s time to move on.

Courtney said, “The Supreme Court has done its job. Now it’s time for the Legislature to do its job. We need to balance the budget. We need to give Oregon what she needs to grow. We need to boost the economy. We need a transportation plan.”

Kotek said, “The Supreme Court has now ruled that some of those changes will stand, but gave clear direction that others were unconstitutional, leaving the Legislature with no other options to pursue. This decision does not impact the 2015-17 budget.”

Brown became governor 70 days ago upon Kitzhaber’s resignation amid influence-peddling and conflict-of-interest allegations.

She said this in a statement: “I will be reviewing the ruling and assessing next steps, including the short and long-term fiscal needs of PERS, and I will be working with the PERS Board to determine what next steps they will take.”

It will be up to Brown, or whoever is elected in 2016 to complete the remaining two years in Kitzhaber’s term, to cope with the full implications of the decision.

WL-WV reacts

West Linn-Wilsonville Superintendent Bill Rhoades offered the following response to the PERS ruling:

"In Oregon each biennium delivers its own set of unknowns and challenges for districts in preparing their budgets, and this will be one more layer to consider leading into 2017. At this point it seems there is still a lot to learn about possibilities for dealing with the implications of this ruling. We will remain optimistic that our elected leaders will generate swift and salient solutions to guide and support districts in our planning for our children and their schools."

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