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PERS REFORM ONLY WORKS WITH A FIREWALL AGAINST LEGAL CHALLENGES

Friday, December 16, 2011

Voters are ready for PERS reform. Essential services such as prison beds, law enforcement, and school days, are being sacrificed while PERS expenditures skyrocket. During 2009-2011, PERS spending will amount to approximately $825 million. That spending is set to increase by $495 million to $1.3 billion in 2011-2013.[i] It is clear that the system is broken. We must introduce legislation to fix the growing problems pertaining to the overall “PERS machinery.” We must eradicate wasteful spending while ensuring that public workers receive retirement benefits as promised.

Passing PERS reform is only half the battle. In the past, Oregon courts have overturned PERS reforms by invoking the Contract Clauses of both the Federal and Oregon Constitutions. To paraphrase, the Contract Clauses say that the state can’t pass laws that impair the obligations of existing contracts.[ii] The Oregon Supreme Court has consistently held that PERS members have “vested contractual rights in pension benefits.”[iii] Accordingly, the Federal and Oregon Contract Clauses serve as substantial barriers to PERS reform.

Nevertheless, courts have recognized a legal distinction between legislation that “impairs” a contract and legislation that merely “breaches” a contract between public employees and the State.[iv] The Oregon Supreme Court will allow legislation that breaches contracts, but will invalidate laws that impair contracts.[v] The Oregon Supreme Court has determined that legislation that impairs existing contracts are “statutes that prevent both performance of the contract and compensation to the nonbreaching party.”[vi] Well-drafted legislation can get around this distinction and merely result in a “breach” of contract, rather than unlawful “impairment” of the obligations of the contract.

As we move forward in our effort to curtail inefficient government spending, we must introduce reforms with this legal distinction in mind. There is no doubt that opponents of reform will bring legal challenges, but well-drafted legislation can and will survive.



[i] 2011-13 Estimated State Agency Payroll

2009-11 Salaries and Wages = $5,850,731,907  ($825,251,701 = Total PERS expenses, 2009-11)

(Source: Legislative Fiscal Office)

Assumed growth in State payroll expense = 3.75%  (Assumptions: 2.75% inflation + 1% Real Wage Growth)

(Source: PERS Actuary)

$5,850,731,907 X .0375 = $219,402,446.51 (Assumed increase in State payroll for 2011-13.)

$5,850,731,907 + 219,402,446.51 = $6,070,134,353.51  (Total anticipated State payroll for 2011-13.)

2011-13 Estimated State Agency PERS Calculations

$6,070,134,353.51 x .098    = $ 594,873,167  (9.8% for 2011-13 State’s employer contribution rate)

$6,070,134,353.51 x .06      =  $ 364,208,061  (6% Employee’s IAP paid by State for State employees.)

$6,070,134,353.51 x .0595  =   $ 361,172,994  (5.95% paid by State on Pension Obligation Bonds.)

(9.8% + 6% + 5.95% = 21.75%) = $1,320,254,222 (Total anticipated PERS costs for 2011-13 )

$1,320,254,222 – 825,251,701 =   $495,002,251  (Additional PERS costs for 2011-13 State Budget)

Note: “The rate components are as follows: 9.8% (2011-13 employer contribution rate) + 6.0% (member

IAP contribution) + 5.95% (POB service cost).”    ”… a 21.75% total cost basis.”

(Source: PERS Administration—3-11-2010 Email to Rep. Richardson—emphasis added.)

[ii] Hughes v. State, 314 Ore. 1, 33 (1992) (citing Taylor v. Multnomah County Deputy Sherriff’s Retirement Board, 265 Ore. 445, 450 (1973)).

[iii] Hughes v. State, 314 Ore. 1, 33 (1992) (citing Taylor v. Multnomah County Deputy Sherriff’s Retirement Board, 265 Ore. 445, 450 (1973)).

[iv] Kopilak, David, Hughes v. State: Breaching Statutory Contracts Without Violating Oregon’s Contract Clause, 72 Or. L. Rev. 487, 488 (1993).

[v] Ibid.

[vi] 72 Or. L Rev. at 500 (citing Hughes, 314 Ore. at 31).

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