Oregon Supreme Court overturns majority of PERS cuts

The Oregon Supreme Court has overturned a key portion of pension cuts to public employees enacted in 2013.

The decision means that schools, cities, state agencies and other public employers likely will face steep increases in the rates they pay toward the pension fund.

"That translates to teacher layoffs and higher class sizes," said Jim Green, deputy executive director of the Oregon School Boards Association.

On the flip side, thousands of retirees will see boosts to their pensions.

Two bills passed by the Legislature in 2013, Senate Bills 822 and 861, reduced the 2 percent cost-of-living adjustment for retirees in the Public Employees Retirement System. SB 822 also ended a payment meant to compensate out-of-state retirees paying Oregon income taxes.

Retirees appealed, saying the changes violated the contractual agreement between the state and workers.

The court consolidated several lawsuits challenging the cuts. All argued that PERS benefits are a contract between the state and its employees and cannot be changed retroactively.

In its unanimous opinion issued Thursday, the court upheld the state's ability to eliminate the income tax offset, and said the legislature can change the COLA for benefits being offered to current and future PERS members.

But it agreed with retirees that it is unconstitutional to cut the COLA retroactively. That provision accounted for the majority of the approximately $500 million in annual savings to public employers.

The COLA for current and new members is calculated with a series of graduated levels similar to tax brackets.

"As a result, PERS members who have earned a contractual right to PERS benefits both before and after the relevant effective dates of SB 822 and SB 861 will be entitled to receive a blended COLA rate, reflecting the different COLA rates applicable to benefits earned at different times," the Oregon Judicial Department said in a news release.

That will create an "actuarial nightmare," OSBA's Green said.

"Our attorneys are still analyzing the decision and weighing our legal options," he said.

Facing skyrocketing retirement costs for teachers, firefighters and other public employees, Oregon lawmakers approved the so-called "Grand Bargain" of pension cuts in a 2013 special session.

The cuts reduced employer contributions by about $800 million in the current two-year budget.

"For us, obviously it means long-term cost reductions won't be as significant as expected," said Mike Wolfe, chief operations officer at the Salem-Keizer School District.

The district has saved tens of millions of dollars over the years by bonding some of its PERS liability, Wolfe said.

"We're probably in a better position to absorb the increase," he said.

Though the increases won't hit governments until 2016 or 2017, they likely will impact Marion County's budget discussions this year, chief administrative officer John Lattimer said.

"We're going to talk about whether we want to put some money aside to be ready for it," he said. "We may do that."

It was not immediately clear how much the decision will cost taxpayers, though the impact is unlikely to be felt until the two-year budget cycle that begins in 2017. That's because public employer contribution rates already have been set for the next two years based on the assumption that the benefit cuts were legal.

A report last year by the Legislative Fiscal Office said a full reversal of the PERS cuts would cost the state an estimated $319 million and school districts $358 million in the 2017-2019 budget period. Since some of the cuts were upheld, the actual cost will be less.

Retirees also will be owed back pay for the inflation increases they were denied while the case was pending. PERS officials have said the payments can be covered by the pension system's contingency fund, which has about $600 million.

In a statement, Senate President Peter Courtney said that, now that the Supreme Court has done its job, it's time for the Legislature to do its job.

"We need to balance the budget," Courtney said. "We need to give Oregon what she needs to grow. We need to boost the economy. We need a transportation plan. It's time for us to come together for Oregon and her people."

In a joint statement, Republican Leaders Rep. Mike McLane and Sen. Ted Ferrioli said the decision is a step backward for the state.

"Once again, Oregon faces billions in unfunded PERS costs that will hurt schools, police departments and other local critical services," they wrote. "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."

Former Gov. John Kitzhaber said last year that if the court overturned the cuts, he would not try to cut PERS again.

In a written statement, new Gov. Kate Brown said, "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."

The Associated Press contributed to this story.

tloew@statesmanjournal.com, (503) 399-6779 or follow at Twitter.com/SJWatchdog

Four questions about the PERS decision

How much did the cuts save state and local governments? About $500 million per year. It's not yet known what the new figure will be, but it will be significantly lower.

How many people will be affected by the changes? PERS has more than 330,000 active and inactive members and retirees.

How many PERS members will have their 2 percent COLA restored? About 100,000. "Restoring those payments is our top priority," PERS spokesman David Crosley said.

What does this mean for the PERS unfunded liability? "Our actuary is working on some numbers. We don't have them yet," Crosley said.