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Pension Reform Partially Overturned by Oregon Supreme Court

The Oregon Supreme Court on Thursday overturned a key piece of the Legislature's 2013 reform work on the Public Employees Retirement System, setting the stage for a heavy financial cost to government agencies across the state while restoring lost benefits to retirees.

By Ted Sickinger

The Oregon Supreme Court on Thursday overturned a key piece of the Legislature's 2013 reform work on the Public Employees Retirement System, setting the stage for a heavy financial cost to government agencies across the state while restoring lost benefits to retirees.

Bottom line, the court said a deal is a deal, and lawmakers can't lower cost-of-living adjustments on retirement benefits that were earned before the state reformed the public pension system.

The decision is a big win for 120,000 retirees, but not a clean sweep. For the most part, they will see benefits restored to the level they were expecting before they left government service.

Greg Hartman, the lead lawyer for the coalition of retirees and public employees who sued the state, estimated that the decision would restore more than $4 billion in future benefits to PERS members.

"We're talking about the people who educate our children, care for the elderly, and keep us safe," he said. "They didn't deserve to have the rug pulled out from under them. We're very pleased with this outcome."

Public employers -- including schools, municipalities, fire districts and state agencies -- are shuddering at the expected cost. PERS' actuary confirmed those fears Thursday, forecasting a potential cost increase as high as $870 million in the 2017 to 2019 biennium.

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

It's also an administrative headache for the retirement system, which will have to make almost two years worth of catch-up payments to current retirees and administer a more complicated cost-of-living formula for its members.

The court's ruling struck down the signature accomplishment of the 2013 Legislature and former Gov. John Kitzhaber, who struggled for months to come up with a menu of PERS changes that was economically meaningful and politically palatable.

There are still options available to reduce the state's soaring retirement costs, such as reducing or eliminating the so-called 6 percent pickup that employers pay into a separate retirement account for 70 percent of public employees. But those changes fall most heavily on newer employees whose pension plan has already been substantially downsized. They would be hard fought by public employee unions. And it's not clear if any influential Democrat is willing to carry the ball on further PERS reform, especially with an election in the offing.

Gov. Kate Brown said in a statement Thursday, "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."

To slow the skyrocketing cost of the system to public agencies, lawmakers decided to cut retirees benefits by reducing annual cost-of-living adjustments and eliminating -- for out-of-state retirees -- extra payments meant to compensate retirees for state tax liabilities on their benefits.

The justices, who are members of PERS, ruled that it was unconstitutional to lower annual cost of living adjustments for past service, meaning that government retirees will see an annual cost-of-living increase of 2 percent restored. They can also expect PERS to make good the reduced benefits over the last two years. Current employees will get the 2 percent COLA on that portion of their earnings posted before the Legislature changed the law.

The court ruled that it was legal to reduce the COLA for service rendered after the reforms were put in place. That means current and future employees will see lower inflation adjustments for benefits earned after May 2013.

The court let stand the Legislature's decision to eliminate -- for retirees that live out-of-state -- extra payments that were meant to compensate members for their Oregon income tax liability. Statutes previously made no distinction whether retirees had left the state and no longer paid those taxes. The Legislature's reform reduced benefits by an average of 6 percent for some 18,000 retirees.

The Legislature's 2013 reforms slashed PERS liability for future pension payments by $5.3 billion, with 90 percent generated by trimming the COLA benefit. That meant government agencies had to pay less to PERS to fund retirements. In the 2013-15 biennium, those agencies expected to save $400 million year. Savings were expected to increase to $500 million a year starting in the new fiscal year this July.

The court's decision will eliminate much of those savings, adding back $5 billion in overall liabilities. Resulting increases in employer payments will likely begin in 2017 because rates have already been set for the 2015 to 2017 biennium.

Indeed, PERS actuary estimated Thursday that if the Legislature takes no action to reduce PERS costs until 2017, requirement payments will jump by 4.5 percentage points of payroll. Systemwide, that's an $870 million cost increase over the two years.

The business group Associated Oregon Industries said Thursday that the cost for the state to pay back retirees for their two year reduction in benefits would be close to $130 million. It said PERS could make those payments out of its reserve fund without any immediate impact to the state general fund.

PERS Director Steve Rodeman said Thursday that retirees would receive a 2 percent COLA this July, and that restoring benefits lost during the the past two years "is the top priority of the agency."

Rodeman could not provide a timeframe for those payments.

Many PERS members argue that there is little sense and no fairness in trying to fix the state budget on the backs of public employees, and that stock market gains will inevitably pull the PERS system out of its deficit.

But after six years of a bull market, PERS liabilities once again exceed its assets by some $14 billion, and government agencies face another succession of rate increases to bail the system out over 20 years. Those rate increases could be exacerbated if PERS Board chooses to once again lower its expected rate of return on the system's investments, which it is currently contemplating.

John Tapogna, an economist with the economic consulting group EcoNorthwest, says Oregon made a generational mistake in public policy "and the Supreme Court has essentially ruled that we have to live with it."

"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," Tapogna said.  "Washington will be able to offer better public services at all levels of government."

(c)2015 The Oregonian (Portland, Ore.)

Caroline Cournoyer is GOVERNING's senior web editor.
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