PERS Decision by Oregon Supreme Court

by Paul J. Sundermier, Of Counsel

No matter what your feelings are about PERS retirees’ benefits, this is an important case. Business persons should be as happy as some retirees with this decision because it explains how the State of Oregon needs to be able to enter into contracts in order to create infrastructure and provide services and how the State needs to abide by the terms of its contracts to do both. Businesses that rely on government contracts need to know that they will be paid under the terms of the contract if they accept and perform accordingly. So do public employees who retire. If the State Legislature negates by a new law the terms of a contract previously made, in business or for PERS, the State is liable under the Constitutional claim of “impairment of contract.” The consolidated cases decided with the lead case of Moro v. State of Oregon, 357 Or 167 (2015), explained also that not every term that looks like a mandatory part of a contract is actually a term of the contract.

The cases involved two main issues: (1) can the Legislature change the terms of the PERS retirement contract that provided for a Cost of Living Adjustment (COLA) after a public employee has retired, and (2) can the Legislature change the terms of a “tax benefit increase” for certain retirees who had worked before PERS pensions were taxable even though they do not now pay Oregon income tax? The answers are (1) No and (2) Yes. The decisions turned on whether the provisions in the statutes governing PERS’ calculations of a retiree’s pension benefit “unambiguously evince an underlying promissory, contractual legislative intent.” What does that mean?

The Court found that the tax benefit increase was not intended to be part of the PERS benefit calculation for work performed during the retiree’s career but, instead, was a remedy for damages that the Legislature inflicted when it changed PERS benefits from a non-taxable to a taxable status in 1991. The evidence showed that the Legislature passed two laws, one in 1991 and one in 1995, which provided remedies (money) that were to be added to a retiree’s benefit to roughly compensate for the pension benefit attributable to the time worked prior to taxation. The 1995 law specifically stated that no PERS member has a right, “contractual or otherwise” to the benefits created by that law. That was enough for the court to conclude that it was not a mandatory contract term and could be changed. The 1991 law was found not to be an “offer” that an employee could accept, whose work would create the contract (providing “consideration”). The 1991 law was only compensation for the breach of contract that occurred when the legislature started taxing PERS benefits, even the amounts attributed to earnings during the earlier non-taxable era. That conclusion meant that the PERS retirees who had been receiving a “tax benefit increase” in their pensions were no longer entitled to receive it if they did not pay Oregon income tax. Retirees living in Washington are unhappy, especially those who moved there to get an approximate 9% “raise” by not having to pay Oregon income tax until now.

In contrast, the Court found that the COLA was a clear contractual term. The new legislation that lowered the COLA for future retirees and current retirees alike was an impairment of contract as to those who had already retired (accepted the PERS contract) before the new law was enacted.

In 1971, the Legislature adopted a law that was intended to provide a hedge against inflation for PERS retirees into the future. In 1973, the COLA was capped at 2% per year and a “bank” was established to hold funds earned in excess of 2% for those years when current funds would not cover the 2%. The new law reduced the COLA significantly. The Court said that the old COLA legislation was mandatory and made the PERS board’s function “ministerial and the application of the COLA automatic.” But, as in other PERS cases, the Court determined that the COLA was “automatic” only as to those PERS members who had retired before the new law took effect. For those who were still employed, the new, smaller COLA would apply to PERS benefits that are earned after its enactment, and, as is true of the “tax benefit increase,” when an employee worked before-and-after the effective date of the change, the COLA would be calculated according to a formula that takes the two periods of earnings and two COLA rates into account.

The take-away from this round of PERS decisions is that going to work for the government, like private businesses, does not guarantee that the salary and benefit package an employee starts with will be the same throughout a career, and the same is true for “deferred compensation” such as PERS pensions – unless there is a clear, unambiguous contract that makes such a guarantee. Like in business, salaries and benefits can go up or go down or be frozen. But once a public employee retires, the pension contract is set as to mandatory benefit terms. Legislative attempts to eliminate or reduce those kinds of benefits, even for good public policy causes, will be unconstitutional impairments of contract. At least, that’s what PERS retirees hope will continue to be the case.