Are the Recently Passed PERS Reforms Even Legal?

Kyle Curtis Facebook

As the modest reforms that passed through the House impact previously determined benefits, it likely that the constitutionality of these reforms will be determined in the courts. It appears that in an effort to save money, the state legislature may have just purchased themselves quite an expensive, legal headache.

Are the Recently Passed PERS Reforms Even Legal?

At least you can't say that Oregon Senate Republicans aren't clever. Or... can you?

PERS reform passed the state House this week on a party-line vote. With the House’s approval of Senate Bill 822, the bill now heads to the desk of Governor Kitzhaber and will go into effect upon his signature.

There are very few topics relating to public education that generate as strong a response as PERS reform. The state’s public pension system, PERS provides a modest retirement to those that worked for decades in the public sector. Unfortunately, PERS has had a funding deficit ever since losing 25 percent of its investment portfolio during the economic collapse of 2008. Similar public pension plans have been identified around the country as the reason why states are dealing with staggering deficits that limit their ability to provide public services. While it may seem heartless to reduce monthly retirement benefits, if Oregon lacks the funds then it simply can’t honor its commitments to retired public employees and provide funding for the state's school districts.

Republican state lawmakers abstained from voting for the proposed PERS reform which they determined wouldn’t do enough to reduce the overall costs of PERS and instead referred to the proposed reforms as “PERS lite.” The question is what, exactly, would any PERS reform proposal require to look like to merit any Republican support? What monthly pension for retired public employees would be an amount that Republicans can determine affordable? It appears that the only acceptable option for Republican state lawmakers is to ratchet down the guaranteed benefits as much as possible, ignoring any ethical concern about honoring previously agreed contracts.

In fact, as the modest reforms that passed through the House impact previously determined benefits, it likely that the constitutionality of these reforms will be determined in the courts. It appears that in an effort to save money, the state legislature may have just purchased themselves quite an expensive, legal headache.

By pitting retired public employees against the current needs of Oregon’s public schools, the PERS reform presents a classic example of robbing Peter to pay Paul. As Rep. Chris Garrett, D-Lake Oswego, was quoted in the Statesman Journal story on the PERS reform being passed by the House: “Innocent people will be casualties of a yes vote and a no vote.” While PERS has been cited by many critics as an expensive burden that hamstrings school district budgets, a tax increase package on corporations and high wage-earners that would increase revenues for struggling schools was blocked, resulting in a compromise that closed some tax loopholes to raise one-tenth of the originally identified $200 million increased funds. So while the need to increase available funds for school districts is justified to reduce monthly public pensions, this same justification was not enough to raise funds through tax increases on corporations and high-income households.

Look, I get it. PERS is a simple math problem. By losing one-quarter of its investment value in 2008, the PERS board had to raise employment payroll contribution rates to compensate for that loss of funding. As a result, PERS payments will, on average, consume nearly one-quarter of school districts' payroll budgets. Previous to the financial collapse of 2008, however, the PERS investment portfolio saw increased gains above the guaranteed eight percent which allowed for decreased employer contributions. “This is what happens when you have a ‘defined benefit’ retirement system,” explains Greg Hartman, an attorney who has served as legal counsel to the PERS coalition since the 1980s. “Employees understand that they work so many years, they will get a guaranteed benefit regardless of how it’s calculated. Ideally, employers set aside the funds for investment and the risk and reward falls on to the responsibility of the employer. The alternative option would be the ‘defined contribution’ in which the method of investment—and the risk and reward—fall on to the responsibility of the employee.”

PERS retirement benefits have been criticized for out-performing the retirement plans provided by private employers. Hartman points out how “defined contribution”-style retirement accounts have impacted the upcoming wave of retirees: “The past few decades have seen a migration from defined benefit plans to defined contribution plans—which have been a substantial failure in providing for secure retirements. We now see the Baby Boom generation approaching retirement and they have little funds in their 401Ks. They are attempting to retire on the very little funds they have available, or live off Social Security.”

Considering the sorry state of private retirement accounts over the last few decades, does it make sense for those that have invested in a poor-performing 401K account to criticize the guaranteed benefits received by public retirees? Or should it be enough cause for those in the private sector to demand a return to the "guaranteed benefit" retirement system that had previously been created and managed by private companies in the United States for decades?

Further critics of PERS decry its continual unfunded liability, pointing out that in 16 of the last 20 years the account has failed to meet its obligated benefits. Much of the expense created by PERS is due to the “money match” formula that matches an account balance at retirement with employer reserves, using this combined amount to determine monthly benefits. “In 2003, the legislature adopted significant changes to PERS as there was a general consensus that the system was broken,” explains Hartman. “To address the systemic issues, the legislature passed reforms that resulted in putting limits on the ‘money match’ formula. As a result, the value of money match accounts decreased. The fixes of 2003 worked: although ‘money match’ accounts are still higher than ‘full formula’ accounts they are becoming more equal in value. There is less talk about how PERS is fundamentally broken as there was ten years ago.”

Although the savings created by the legislative fixes passed in 2003 resulted in employers being able to reduce payments, the loss in value that occurred in 2008 has cancelled out these gains, taking the surplus of the PERS account and reduced employer payment rates in the process. Certainly, it could be suggested that if the economic collapse had not occurred, the surplus seen in 2007--and the corresponding lower employer rates--could have continued. But that is dealing with hypotheticals, opposed to addressing the fiscal challenges faced by school districts. While Hartman says “nobody is happy about” about the economic hardships due to the rate increases passed by the PERS board in response to the catastrophic losses of 2008, he also feels that it’s “inappropriate” to no longer honor the contracts that have been made to both retired and active public employees.

Becca Uherbelau, spokesperson for the Oregon Education Association, raises similar concerns about honoring previous contracts. Along with their labor partners, OEA opposed the reforms passed by Senate Bill 822, but had previously stated a willingness to consider PERS reforms that met a specific set of criteria. “Everyone recognizes the short-term problem posed by PERS,” says Uherbelau. “But we don’t want anything passed by the legislature to make things worse. The OEA has identified three criteria for any proposed PERS reform that we would support. The first is whether the proposed reform actually “saves” money. Does the proposal avoid unintended consequences? We don’t want to add any more to PERS long-term costs.”

“Second, any proposed reform needs to be legal. A contract is a contract, a promise is a promise. The reforms passed in 2003 suspended the COLA, but this suspension was struck down by the courts. Regardless of whether a proposed reform is a good idea, it needs to be legal. We find it interesting that a special session of the legislature was called to make a promise with Nike that will keep their taxes low—yet the legislature won’t make a similar promise to teachers and retired public employees.”

“And finally, we want to make sure that any proposed reform is fair. We hope that SB 822 doesn’t create a system of winners and losers, with the creation of another tier of lower benefits that would serve as a huge disincentive for potential public employees.”

With this week’s passage of PERS reforms that fall short of the OEA’s criteria, the question now turns to whether the idea of a court challenge will turn from a hypothetical to a reality. The recently passed COLA adjustment will certainly have an impact on the previously guaranteed benefits received by current retirees. As a result, the constitutionality of the COLA adjustment will more than likely need to pass legal muster via a court challenge. As Uherbelau points out, similar actions were adopted by the legislature previously in 2003, only to be tossed out by the courts. So, she asks, why are we going down this road a second time? “The legislature shouldn’t pass laws that are going to be challenged in the courts,” says Uhberlau. “It’s a question of when—not if—whether these reforms are going to be challenged. Even if the OEA or our coalition doesn’t initiate litigation, any PERS recipient impacted by these changes has standing. And to defend a legal challenge, the state is going to have to spend taxpayers’ funds litigating these reforms in court.”

When asked if a legal challenge to the recently-passed PERS reforms is on the horizon, Hartman—the legal counsel for the PERS coalition—answers with an unequivocal “Yes.”

“These reforms violate past contracts,” Hartman explains. “Our coalition challenged similar reforms in 2003. And we will challenge these reforms as well.”

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