By Ted Sickinger | The Oregonian/OregonLive
Nine public employees filed suit Friday to overturn portions of a new law that trims future retirement benefits for employees to rein in escalating costs of Oregon’s Public Employees Retirement System.
The lawsuit seeks to eliminate provisions enacted through Senate Bill 1049 that require employees to contribute to their pensions, as well as new limits on salaries used to calculate retirement benefits. The employees contend that the resulting loss of retirement benefits is unconstitutional, a breach of contract and an “illegal taking” without compensation.
Combined, those provisions are expected to reduce pension costs for public employers by about $150 million in the next two-year budget cycle. That’s about 10% percent of the savings expected from the bill, a majority of which came from delaying repayment of the system’s $27 billion deficit.
For most employees, the cost sharing provisions would reduce a career employees’ overall retirement benefits by about 1% to 2% of pay by reducing ending balances in retirement accounts that supplement regular pension benefits, though the actual impact depends on age and length of service. Those affected by the new salary caps could see both a reduction in pension benefits and the balance of their individual accounts.
In public testimony on the bill, union officials warned lawmakers they felt the reductions were unconstitutional and that they would challenge them in court — as they have successfully done in the past.
In Moro v. State of Oregon in 2015, the court overturned a key piece of the Legislature’s 2013 PERS reforms, ruling that reductions to retirees’ cost of living adjustments were unconstitutional because they broke contracts the state had made with PERS members. The case set a framework to test the legality of any future benefit changes, namely that lawmakers cannot retroactively change benefits that members had already earned for past service. The court left the door open to change benefits on future service, but with limitations.
Aruna Masih, the plaintiff’s lawyer – in the current case and the 2015 challenge — said the two new provisions seek to address the unfunded liability, which is largely attributable to former employees who have already retired. She also said the court made it clear that parts of the core benefits are irrevocable, and that you must look at the legislative history and intent of particular benefits to determine whether they can be changed.
“We plan to present the facts and context of the IAP and the contribution provisions, that it’s part of the calculation of the core benefits that should not even be changed on a prospective basis,” she said.
As it stands today, public employees in Oregon make no contribution toward their pension benefits, making Oregon PERS an outlier among public pension systems. Instead, employees’ retirement contributions -– 6% of pay — go into a separate 401(k)-like account that is supplemental to the pension.
Starting Jan. 1, the new cost-sharing provisions will redirect a portion of those contributions to support employees’ pension benefits. The change amounts to 2.5% of pay for employees hired before Aug. 28, 2003, and 0.75% of pay for employees hired after.
The cost-sharing doesn’t apply to employees making less than $30,000 a year, and the pension contributions stop altogether if the pension fund regains a funded status of 90%.
The legislation also limits the final salary that can be used to calculate pension benefits to $195,000 for members hired after 1996. The limit is indexed to inflation, and in practice, it will only apply to only a handful of employees today, so the underlying savings are almost meaningless.
Jennifer James, the lead plaintiff in the suit, has worked for the Molalla River School District for the past 20 years. She said she makes about $40,000 a year, and if she works another 10, retiring at age 57, the balance in her individual account will be reduced by 13%, or about $18,000.
“I can’t make that up with the money I make” she said. “I empathize with the problem, but this is not good solution,” she said. “This was what I was promised. PERS was designed to recruit and retain people to public service, and I could be making a lot more in the private sector. I think the state needs to keep up their end of the bargain.”
The salary limits established by Senate Bill 1049 are so high that they only affect a small fraction of public employees covered by PERS today. But that could change in the future, and those impacted will see both a reduction in contributions and subsequent earnings in their individual accounts as well as a reduction in their pensions, because the salary limits will also be used in the calculation of their pension.
Thomas Cleary, a 54-year-old district attorney in Multnomah County, is also one of the plaintiffs. He already earns more than the $195,000 salary cap, and if he works until age 65, an actuary calculated, the ending balance in his individual account would be reduced by $15,764, and his monthly pension would be reduced by $344, or 3.8 percent.
The plaintiffs also include a Salem firefighter, nurses from OHSU and Multnomah County, a state employee from Lebanon, a Gresham community college employee, and a child welfare worker and a water mechanic in Portland.
Marjorie Taylor, senior policy director for PERS, said neither the Department of Justice nor the Legislative Counsel’s office had made public any advice to lawmakers on the legality of Senate Bill 1049.
But Marisa James, an attorney in the Legislative Counsel’s office, did address the question in a 2016 memo to Senators Betsy Johnson, D-Scappoose, and Tim Knopp, R-Bend, who were exploring the legal and financial implications of various PERS reforms at the time.
James told the lawmakers that if the employee contributions were being used to pay for pension benefits that had already been accrued, “we believe it would be unconstitutional under Moro.”
Masih said the legislature had explicitly linked the new employee pension contributions to the unfunded liability by including the provision in SB 1049 that ends the contributions if the system regains a funded status of 90 percent.
The business community was a strong backer of the employee contribution provisions. It is also supporting a coalition that has filed ballot measures to replace the current pension plan with a 401(k) for new employees or require higher contributions to the pension system from all employees.
“We expected this, and we welcome the court’s decision,” said Tim Nesbitt, a former labor leader who is leading the coalition, called PERS Solutions for Public Services. “We need the clarity from the courts.”