The Oregon Supreme Court on Thursday upheld the reductions in public employee pension benefits that the Legislature passed in 2019 to help address the state’s burgeoning pension funding deficit and rein in the escalating pension costs and resulting budget problems for public employers.
Nine public employees filed suit last August seeking to overturn two benefit reductions the Legislature made in Senate Bill 1049: requiring employees to share a small portion of the cost of their pension benefits, and putting a $195,000 limit on the final salary used in some benefit calculations.
Their lawyers argued that the changes constituted an impairment of contract under the state and federal constitutions, a “taking without just compensation” and a breach of public employees’ PERS contract rights.
In a unanimous decision, the court rejected those arguments, sticking with the principle it established in its 2015 decision on the last round of legal wrangling over PERS: the Legislature is entitled to change employee retirement benefits prospectively, for future service, but benefits earned on service already rendered are sacrosanct.
“The court recognized that we had taken fair and reasonable steps to reduce rising PERS costs,” said Jim Green, executive director of the Oregon School Boards Association. “It’s a victory for students by allowing Oregon schools to invest more in the classroom.”
The impact of Senate Bill 1049 falls mostly on longer-term employees, as well as those at the very top of the state’s pay scale.
The law redirected a portion of the required retirement contributions that employees make to an individual, 401(k)-like account that supplements their pension benefits to support the pension fund.
Employees making more than $30,000 a year and hired on or before Aug. 28, 2003, are now required to send 2.5% of their salary to support the pension. The remainder of their required retirement contributions – another 3.5% of salary - will still flow to the individual account.
Employees hired after Aug. 28, 2003, who make more than $30,000 a year will be sending 0.75% of salary to support the pension fund, with the remaining 5.25% of salary still flowing to individual accounts.
If the pension fund regains a funded status of 90% or more, the employee pension payments will be suspended and the full 6% of salary will go back into the individual account program. The funded status of the system stood at 72% at the end of 2019, though the way it is calculated for the purposes of the bill, including employers’ side accounts with PERS, the funded status was 79 percent.
The employee cost-sharing is expected to offset about $300 million in employer contributions statewide during the next two-year budget cycle. It is expected to reduce a 30-year employee’s overall retirement benefits by about 1% to 2% due to the reduction in ending balances in their individual account.
The $195,000 limit on final salary will impact far fewer public employees, and only those who retire under the full formula retirement method, which is based on a member’s final salary and years of service. The state of Oregon, for instance, has fewer than 100 employees who made more than that number in 2019, and some of them will retire under the system’s other retirement formulas because they will generate higher benefits.
Public employees pushed back hard on Senate Bill 1049, and their unions withdrew support from some lawmakers who backed the bill in the last election cycle. However, the most important piece of the bill financially had nothing to do with employee benefits, but was an accounting gimmick that lowered employers’ required contributions to PERS by extending the repayment period for its $24.5 billion deficit.
Jennifer James, a school secretary in Molalla, is the lead plaintiff in the lawsuit. In an e-mailed statement on Thursday, she said the ruling was deeply disappointing and would have long-term financial impacts for PERS members.
“We want to send a very strong message to the governor and the state legislature: enough is enough,” she said. “With SB 1049 you impacted the people who work on the front lines during pandemics, natural disasters and states of emergencies to keep our communities safe and healthy.... Workers are paying the price for the legislature’s unwillingness to keep their promises.”
-- Ted Sickinger; tsickinger@oregonian.com; 503-221-8505; @tedsickinger
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