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    IN THE SUPREME COURT OF THE STATE OF OREGON

    EVERICE MORO, TERRI DOMENIGONI, CHARLES CUSTER, JOHNHAWKINS, MICHAEL ARKEN, EUGENE DITTER, JOHN OKIEF,

    MICHAEL SMITH, LANE JOHNSON, GREG CLOUSER, BRANDON

    SILENCE, ALISON VICKERY, and JIN VOEK,Petitioners,

    v.

    STATE OF OREGON, STATE OF OREGON by and through theDepartment of Corrections, LINN COUNTY, CITY OF PORTLAND, CITY

    OF SALEM, TUALATIN VALLEY FIRE & RESCUE, ESTACADA SCHOOLDISTRICT, OREGON CITY SCHOOL DISTRICT, ONTARIO SCHOOLDISTRICT, BEAVERTON SCHOOL DISTRICT, WEST LINN SCHOOL

    DISTRICT, BEND SCHOOL DISTRICT, and PUBLIC EMPLOYEESRETIREMENT BOARD,

    Respondents,

    and

    LEAGUE OF OREGON CITIES; OREGON SCHOOL BOARDSASSOCIATION; CENTRAL OREGON IRRIGATION DISTRICT; and

    ASSOCIATION OF OREGON COUNTIES;Intervenors.

    S061452 (Control)

    PETITION FOR DIRECT JUDICIAL REVIEW OF SB 822 AND SB 861MORO PETITIONERS COMBINED REPLY BRIEF

    ____________________________________________________________

    WAYNE STANLEY JONES,Petitioner,

    v.PUBLIC EMPLOYEES RETIREMENT BOARD, ELLEN ROSENBLUM,

    Attorney General and JOHN A. KITZHABER, Governor,Respondents.

    S061431September 2014

    September 22, 2014 04:29 P

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    ____________________________________________________________

    MICHAEL D. REYNOLDS,Petitioner,

    v.

    PUBLIC EMPLOYEES RETIREMENT BOARD, State of Oregon; andJOHN A. KITZHABER, Governor, State of Oregon,

    Respondents.

    S061454____________________________________________________________

    GEORGE A. RIEMER,

    Petitioner,

    v.

    STATE OF OREGON; OREGON GOVERNOR JOHN KITZHABER;OREGON ATTORNEY GENERAL ELLEN ROSENBLUM; OREGON

    PUBLIC EMPLOYEES RETIREMENT BOARD; and OREGON PUBLICEMPLOYEES RETIREMENT SYSTEM,

    Respondents.

    S061475____________________________________________________________

    GEORGE A. RIEMER,Petitioner,

    v.

    STATE OF OREGON; OREGON GOVERNOR JOHN KITZHABER;OREGON ATTORNEY GENERAL ELLEN ROSENBLUM; OREGON

    PUBLIC EMPLOYEES RETIREMENT BOARD; and OREGON PUBLIC

    EMPLOYEES RETIREMENT SYSTEM,Respondents.

    S061860

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    Gregory A. Hartman, OSB 741283

    Aruna A. Masih, OSB 973241

    Bennett, Hartman, Morris & Kaplan, LLP

    210 SW Morrison St., Suite 500

    Portland, OR 97204Telephone 503-227-4600

    [email protected]

    [email protected]

    Of Attorneys for Moro Petitioners

    AG Ellen Rosenblum #753239

    SG Anna M. Joyce #013112AAG Keith L. Kutler #852626

    AAG Matthew J. Merritt #122206

    Michael A. Casper, # 062000

    Oregon Department of Justice

    1162 Court Street NE

    Salem, OR 97301-4096

    Telephone: 503-378-4402

    [email protected]@doj.state.or.us

    [email protected]

    [email protected]

    Of Attorneys for State Respondents

    William F. Gary, #770325

    Sharon A. Rudnick #830835Harrang Long Gary Rudnick PC

    360 E. 10thAve., Suite 300

    Eugene, OR 97401

    Telephone: 503-242-0000

    [email protected]

    [email protected]

    [email protected]

    Of Attorneys for Respondents LinnCounty, Estacada, Oregon City,

    Ontario, West Linn School Districts

    and Beaverton School Districts,

    and Intervenors Oregon School

    Boards Association and

    Association of Oregon Counties

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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    Harry Auerbach #821830

    Office of the City Attorney

    1221 SW 4thAvenue, Ste 430

    Portland, OR 97204

    Telephone: 503 [email protected]

    v

    Of Attorneys for Respondent City of

    Portland

    Daniel B. Atchison #040424

    Office of City Attorney

    555 Liberty Street SE Rm 205

    Salem, OR 97301

    Telephone: 503 [email protected]

    Of Attorneys for Respondent City

    of Salem

    Eugene J. Karandy II #972987

    Office of the County Attorney

    Linn County Courthouse104 SW Fourth Avenue, Room 123

    Albany, OR 97321

    Telephone: 541 967-3840

    [email protected]

    Of Attorneys for Respondent Linn

    County

    Edward F. Trompke #843653

    Jordan Ramis PC

    Two Centerpointe Drive, 6th

    FloorLake Oswego, OR 97035

    Telephone: 503 598-5532

    [email protected]

    Of Attorneys for Respondent

    Tualatin Valley Fire & Rescue

    Lisa M. Frieley #912763

    Oregon School Boards Association

    PO Box 1068

    Salem, OR 97308

    Telephone: 503 588-2800

    [email protected]

    Of Attorneys for Respondents

    Estacada, Oregon City, Ontario, and

    West Linn School Districts and

    Intervenor Oregon School Boards

    Association

    W. Michael Gillette #660458

    Leora Coleman-Fire #113581

    Sara Kobak #023495

    William B. Crow #610180

    Schwabe Williamson & Wyatt PC

    1211 SW 5thAve Suite 1900

    Portland, OR 97204

    Telephone: 503-222-9981

    [email protected]

    [email protected]

    [email protected]

    [email protected]

    Of Attorneys for Intervenor League

    of Oregon Cities

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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    Rob Bovett #910267

    Association of Oregon Counties

    1201 Court St. NE Ste 300

    Salem, OR 97301

    Telephone: [email protected]

    Of Attorneys for Linn County

    Michael D. Reynolds (Petitioner

    Pro Se)

    8012 Sunnyside Avenue N.

    Seattle, WA 98103

    Telephone: [email protected]

    Petitioner pro se

    George A. Riemer (Petitioner Pro

    Se)

    23206 N.Pedregosa Drive

    Sun City West, AZ 85375

    Telephone: [email protected]

    Petitioner pro se

    Wayne S. Jones (Petitioner Pro

    Se)

    18 North Foxhill Road

    North Salt Lake, UT 84054

    Telephone: [email protected]

    Petitioner pro se

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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    i

    INDEX OF CONTENTS

    I. INTRODUCTION ..................................................................................... 1

    II. UNILATERAL STATUTORY CONTRACT ARGUMENTS ....................... 4

    A. COLAs and SB 656 benefits were legally accepted by bothcurrent employees and retirees. ............................................... 7

    B.

    The offer of COLAs and SB 656 benefits is consistent withconstitutional requirements for unambiguous intent to create acontract and with all the other provisions of the PERS Act foundby this court to be a term of the PERS Contract. ...................... 9

    1. The 1971 COLA statute did not regularize a series oflegislative ad hocs. ........................................................ 13

    2.

    The 1971 COLA statute did not provide a lesser benefit....................................................................................... 14

    3. The 1971 COLA statute was not enacted to reducefinancial risk. .................................................................. 15

    4.

    The 1971 COLA statute as amended is much more than adirection to PERS; it is promissory. ................................ 16

    5.

    SB 656 Benefits also evince a legislative intent to create acontract.......................................................................... 18

    III. STATUTORY CONTRACT INTERPRETATION ARGUMENTS ........... 19

    A. The 2 percent maximum and CPI Bank are part and parcel ofthe COLA promise. ................................................................. 20

    B.

    ORS 238A.470 does protect COLA attributable to prior service................................................................................................ 21

    C. The SB 656 Exemption language was intended to coverexemption of PERS benefits as a whole. ................................ 23

    IV. FEDERAL CONTRACTS CLAUSE ARGUMENTS .............................. 24

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    ii

    A. Reserved Police Powers. ........................................................ 26

    B. Substantiality. ......................................................................... 30

    C. Public Purpose. ...................................................................... 38

    D. Balancing. ............................................................................... 44

    V. TAKINGS ARGUMENTS ...................................................................... 48

    VI. PROCEDURAL ARGUMENTS ............................................................ 48

    VII. PORTLAND & TVF&R ARGUMENTS ................................................ 50

    A.

    There is a justiciable controversy between Petitioners Custerand Ditter and Respondent TVF&R. ....................................... 50

    B. The local employers are bound by the PERS contract. ........... 52

    1. Respondent Portland. .................................................... 52

    2. Respondent TVF&R. ..................................................... 53

    C. Failure to pay pension benefits constitutes a violation of ORS652.200 because such benefits are wages. ............................ 54

    VIII. CONCLUSION .................................................................................. 56

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    iii

    INDEX OF APPENDIX

    Index to Legislative History Provided to Strunk Court (Excerpt) .... APP-16

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    iv

    INDEX OF AUTHORITIES

    Cases

    Adams v. Schrunk,6 Or App 580, 488 P2d 831, rev den(1971) ...................................... 4

    Allen v. County of Jackson,191 Or App 185, 82 P3d 628 (2003), affd340 Or 146 (2006).......... 56

    Allied Structural Steel Co. v. Spannaus,438 US 234, 98 S Ct 2716, 57 LEd2d 234 (1978) ............................ 34

    Arken v. City of Portland,351 Or 113, 263 P3d 975 (2011) ....................................................... 8

    Baltimore Teachers Union v. City of Baltimore,6 F3d 1012 (4thCir. 1993) ................................................................ 47

    Brown v. Oregon State Bar,293 Or 446, 648 P2d 1289 (1982) ................................................... 50

    Campbell v. Aldrich,159 Or 208, 79 P2d 257 (1938) ..................................... 11, 24, 26, 28

    City of La Grande v. Pub. Employes Ret. Bd.,281 Or 137, 576 P2d 1204 (1978), on reh'g, 284 Or 173, 586 P2d765 (1978) ....................................................................................... 54

    Contl Illinois Nat. Bank & Trust Co.,696 F2d 692 (9th Cir. 1983) ............................................................. 46

    Crawford v. Teachers Ret. Fund Assn,164 Or 77, 99 P2d 729 (1940) ........................................................... 4

    Cummings Constr. v. School Dist. No. 9,242 Or 106, 408 P2d 80 (1965) ....................................................... 50

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    v

    Eckles v. State of Oregon,306 Or 380, 760 P2d 846 (1988) ........ 9, 11, 19, 25, 26, 28, 34, 48, 57

    Farmers Ins. Co. v. Mowry,350 Or 686, 261 P3d 1 (2011) ....................................................... 2, 3

    Fisk v. Police Jury of Jefferson,116 US 131, 6 S Ct 329, 29 LEd 587(1885) ..................................... 32

    Harryman v. Roseburg Fire Dist,244 Or 631, 420 P2d 51 (1966) ......................................................... 4

    Hekker v. Sabre Construction Co.,265 Or 552, 510 P2d 347 (1973) ..................................................... 54

    Hickey v. Chicago Truck Drivers, Helpers & Warehouse Workers Union,980 F2d 465 (7th Cir 1992) .............................................................. 22

    Hughes v. State,314 Or 1, 838 P2d 1018 (1992) ... 9, 10, 11, 13, 19, 20, 25, 28, 31, 49,53

    Johnson v. City of Pendleton,131 Or 46, 280 P 873 (1929) ........................................................... 53

    Kantor v. Boise-Cascade Corp.,75 Or App 698, 708 P2d 356 (1985), rev den, 300 Or 506, 713 P2d1058 (1986) ............................................................................... 54, 55

    La Grande/Astoria v. PERB,281 Or 137, 576 P2d 1204, affd on rehg284 Or 173, 586 P2d 765(1978) .............................................................................................. 52

    Lornsten v. Union Fishermans Co-Op Packaging Co.,

    71 Or 540, 143 P 621 (1914) ..................................................... 25, 29

    Morgan v. Sisters School Dist. # 6,353 Or 189, 301 P3d 419 (2013) ..................................................... 50

    Mugler v. Kansas,123 US 623, 8 S Ct 273, 31 LEd 205 (1887) .................................... 29

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    vi

    Oregon State Police Officers Assn. v. State of Oregon,323 Or 356, 918 P2d 765 (1996) ............................................... 12, 16

    Pendleton School Dist. v. State of Oregon,456 Or 596, 200 P3d (2009) ............................................................ 50

    Ragsdale v. Department of Revenue,321 Or 216, 895 P2d 1348 (1995) ................................... 8, 18, 23, 24

    Shaw v. International Ass'n of Machinists and Aerospace Workers PensionPlan,750 F2d 1458 (9th Cir.), cert den, 471 US 1137, 105 S Ct 2678, 86LEd2d 696 (1985) ............................................................................ 22

    Southern California Gas Co. v. City of Santa Ana,336 F3d 885 (9thCir 2003) ............................................................... 47

    State ex rel. Nilsen v. Ore. Motor Ass'n,248 Or 133, 432 P2d 512 (1967) ..................................................... 54

    State of Nev. Employees Ass'n, Inc. v. Keating,903 F2d 1223 (9th Cir 1990) ............................................................ 46

    State v. Ciancelli,

    339 Or 282, 121 P3d 613 (2005) ....................................................... 2Stovall v. State,

    324 Or 92, 922 P2d 646 (1996) ............................................. 8, 51, 52

    Strunk v. PERB,338 Or 145, 108 P3d 1058 (2005) . 6, 8, 11, 12, 13, 16, 17, 19, 31, 32,33, 34, 37, 38, 39, 49, 57

    Sturges v. Crowninshield,

    17 US 22, 4 LEd 529 (1819) ............................................................ 32

    Tadsen v. Praegitzer, Inc.,324 Or 465, 928 P2d 980 (1996) ..................................................... 35

    Taylor v. Mult. Dep. Sher. Ret. Bd.,265 Or 445, 510 P2d 339 (1973) ................................. 4, 5, 6, 7, 9, 11

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    vii

    U.S. Trust Co. of New York v. New Jersey,431 US 1, 97 S Ct 1505, 52 LEd2d 92 (1977) ... 26, 28, 33, 34, 36, 44,47, 53

    Vogl v. Department of Revenue,327 Or 193, 960 P2d 373 (1998) ........................................... 8, 23, 24

    Statutes

    29 United States Code 1054 ................................................................... 21

    Oregon Laws 1963, ch 608 ....................................................................... 13

    Oregon Laws 1967, ch 622 ....................................................................... 14

    Oregon Laws 1971, ch 738 ................................................................... 7, 14

    Oregon Laws 1991, ch 796 ................................................................... 7, 18

    Oregon Laws 1997, ch 839 ....................................................................... 23

    ORS 237.355 ............................................................................................ 52

    ORS 238.035 ............................................................................................ 52

    ORS 238.300 ............................................................................................ 16

    ORS 238.350 ............................................................................................ 16

    ORS 238.355 ............................................................................................ 16

    ORS 238.360 ............................................................................................ 16

    ORS 238A.025 ............................................................................................ 7

    ORS 238A.125 .......................................................................................... 22

    ORS 238A.180 .......................................................................................... 22

    ORS 238A.470 ................................................................................ 5, 21, 22

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    viii

    ORS 652.140 ............................................................................................ 55

    ORS 652.190 ............................................................................................ 55

    ORS 652.200 ...................................................................................... 55, 56

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    1

    MORO PETITIONERS COMBINED REPLY BRIEF

    I. INTRODUCTION

    Moro Petitioners1present this Combined Reply Brief to the Answering

    Briefs filed by the Respondents2and Intervenors3in this matter. All of the

    Answering Briefs urge the court to overrule, ignore, or otherwise distinguish

    some or all of the courts prior cases relating specifically to PERS and to

    pensions in general. The LOCs brief even reviews virtually all of the

    courts prior pension and PERS decisions, pointing out those areas of the

    courts analysis with which the LOC now disagrees.

    Two conclusions should be obvious from the Answering Briefs. First,

    a straightforward application of the courts existing pension cases and

    methodology for analyzing PERS contract issues will result in a decision in

    1The term Moro Petitioners is used in the same manner as in theOpening Brief. SeeOpening Brief, p. 1.

    2Respondents filing Answering Briefs include: (1) State of Oregon,State of Oregon by and through the Department of Corrections, and thePublic Employees Retirement Board (State Respondents); (2) Linn Countyand Estacada, Oregon City, Ontario, Beaverton, West Linn and Bend-LaPine School Districts (County/SD Respondents); (3) City of Portland

    (Portland); and (4) Tualatin Valley Fire & Rescue District (TVF&R). Cityof Salem is also a Respondent but only submitted a letter on August 26,2014 joining in the Answering Briefs filed by others.

    3Intervenors filing Answering Briefs include: (1) the Oregon Leagueof Cities (LOC) and (2) the OregonSchool Boards Association (OSBA)and the Association of Oregon Counties (AOC). The latter joined in the

    Answering Brief filed by the County/School District Respondents.

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    favor of Petitioners. Respondents and Intervenors would not make such a

    vigorous attack on the courts prior cases if it were not necessaryto

    overturn some or all of them in order for them to prevail.

    The Answering Briefs fail, however, to satisfy the burden this court

    places on parties seeking to change precedent. See e.g. Farmers Ins. Co.

    v. Mowry, 350 Or 686, 698, 261 P3d 1 (2011), and State v. Ciancelli, 339

    Or 282, 290, 121 P3d 613 (2005). The burden is on Respondents and

    Intervenors to not only persuade the court that the constitutional rule they

    attack was not formulated by means of the appropriate paradigm or by

    some suitable substitute,but also that application of the appropriate

    paradigm establishes that the challenged constitutional rule is incorrect.

    Ciancelli, 339 Or at 291. Even if they make this showing, they must still

    persuade the court that, when the passage of time and the precedential

    use of the challenged rule is factored in, overturning the rule will not unduly

    cloud or complicate the law. Id. Such is the case because stability and

    predictability are important values in the law; individuals and institutions act

    in reliance on this courts decisions, and to frustrate reasonable

    expectations based on prior decisions creates the potential for uncertainty

    and unfairness. Farmers Ins. Co., 350 Or at 698. Here, Respondents and

    Intervenors call upon the court to upset reasonable expectations built up

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    over more than 40 years, with little to no explanation of how they have

    satisfied the above standards for reversal of precedent.4

    Second, if the court accepts this invitation, it will render meaningless

    the concept of a PERS contract, as there would appear to be no section

    of the PERS statutes which would meet the standard that Respondents and

    Intervenors propose for finding a statutory contractual commitment.5

    Alternatively, if there is any remaining PERS contractual commitment, the

    State and local employers can still escape it by claiming that their actions

    are reasonable and necessary for an important public purpose.

    In this reply, Moro Petitioners will resist LOCs invitation to strolldown

    memory lane and re-analyze all prior pension and PERS cases but will

    instead focus on those factors specifically relevant to the issues currently

    before the court. They will point out the flaws and weaknesses of the major

    arguments raised by the Answering Briefs. Since it is not possible to

    address every argument and sub-argument within the word limitations set

    4

    In fact, other than a passing reference to Mowry, at page 25 of StateRespondents Answering Brief, Respondents and Intervenors do not evencite to these cases.

    5Respondents and Intervenors do not clearly articulate the preciselanguage or standards necessary to formulate a PERS Contract. Rather,they simply argue that in all instances at issue, the current language is notsufficient.

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    4

    by the court, to the extent that certain arguments are not covered here, the

    court should not assume that Moro Petitioners accept them.

    II. UNILATERAL STATUTORY CONTRACT ARGUMENTS

    Relying on this courts announcement of the unilateral contract

    theory of pensions inTaylor v. Mult. Dep. Sher. Ret. Bd., 265 Or 445, 451,

    510 P2d 339 (1973), Respondents and Intervenors make a multi-level,

    bootstrap argument about what the legislature could or could not have

    intended in 1971, when it first provided Cost of Living Adjustments (COLAs)

    to both retirees and active members. They argue that the legislature could

    not have intended COLAs to be contractual because under the unilateral

    contract theory retirees were not in a position to provide any additional

    service subsequent to the passage of the statute to accept such a

    contract.6 Stated differently, the legislature in 1971 and 1973 when it

    adopted and improved COLAs must have anticipated this courts decision

    in Taylor(decided May 17, 1973), reading the unilateral contract theory

    into Oregons older pension cases.7 They do not explain, however, why if

    the legislature were so prescient it did not intend to create contractual

    6State Brief, pp. 21-22; County/SD Brief, pp. 23-24.7Crawford v. Teachers Ret. Fund Assn, 164 Or 77, 99 P2d 729

    (1940);Adams v. Schrunk, 6 Or App 580, 488 P2d 831, rev den(1971);Harryman v. Roseburg Fire Dist, 244 Or 631, 420 P2d 51 (1966).

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    rights in those PERS members who were capable of providing service

    following their enactment. As this court clarified in Taylor, 265 Or at 451,

    We conclude from the above authorities that Oregon has adopted not only

    the contractual concept of pensions, but, also, the concept that contractual

    rights can arise prior to the completion of the service necessary to a

    pension. The adoption of a pension plan,the court explained, was an

    offer for a unilateral contract which can be accepted by the tender of part

    performance. 265 Or at 452. Moreover, by the time the legislature

    adopted SB 656 benefits and OPSRP COLA, it was clearly aware that as to

    those PERS members who provide service after the enactment dates, the

    courts would be applying the unilateral contract theory of pensions. That

    is why the legislature included ORS 238A.470 in the OPSRP statutes,

    expressly preserving to itself the right to make changes prospectively to

    OPSRP so long as benefits attributable to prior service are protected. As

    explained further below, the vast majority of retirees and members are

    protected by the unilateral contract theory. Those who are not are

    protected under other contractual theories.

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    Recognizing the weakness of their reliance on the unilateral contract

    theory for the vast majority of the PERS population,8Respondents and

    Intervenors argue alternatively that Taylorleft unanswered the question of

    how specific the terms of a statutory pension plan needed to be to make it

    an offer for a unilateral contract, and, other than in its analysis of the

    diversion of the six percent contribution to the IAP in Strunk v. PERB, 338

    Or 145, 183-193, 108 P3d 1058 (2005), this court has not followed faithfully

    the special rules for statutory contracts in its PERS cases.9 Therefore, its

    COLA analysis in Strunkwas flawed and should be disavowed or limited.10

    As explained further below, however, this courts prior PERS cases,

    particularly Strunk, have applied correctly the special rules for statutory

    contracts. Moreover, these cases have created decades of reasonable

    reliance and expectation in PERS members and retirees, weighing heavily

    in favor of upholding precedent.

    8A finding that pre-1971 retirees could not accept the COLA contractwould at most impact a handful of retirees and would not help Respondentspreserve the billions of dollars of savings effected by SB 822 and SB 861.

    9LOC Brief, p. 14; State Brief, p. 24; County/SD Brief, pp. 38-3910State Brief, p. 35; County/SD Brief, p. 40; LOC Brief, pp. 47-48.

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    A. COLAs and SB 656 benefits were legally accepted byboth current employees and retirees.

    There is no denying that when COLAs and SB 656 benefits were

    enacted, they were offered not just to those already retired. COLAs were

    made available to any person who has retired or who will retireas a

    member of the system on and after July 1, 1972. ER-1 (Oregon Laws

    1971, ch 738 11)(Emphasis added). Similarly, SB 656 benefits were

    offered to an employee who is a member of the system (ER-32) and to

    any person who has retired as a member(ER-34). Oregon Laws 1991,

    ch 796 2, 3(6). Finally, OPSRP COLAs were offered only to active

    members who joined the system after August 29, 2013. ORS 238A.025(2).

    All Moro Petitioners provided service after the effective date of these

    legislative enactments. Moreover, PERS By the Numbers (ER-140) makes

    clear that the vast majority of current retirees and PERS members (like

    Moro Petitioners) have provided service after 1971, and therefore, were

    capable of accepting the COLA offer through part performance within the

    meaning of Taylor. Those who were already retired by 1971 would now be

    in their 90s or older, representing a miniscule portion of the total PERS

    retiree population, and those who retired before 1991 are also older and

    decades into retirement. Id. These older retirees suffer from the greatest

    loss of purchasing power. ER-130 (2013 Purchasing Power Study).

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    InArken v. City of Portland, 351 Or 113, 138-39, 263 P3d 975 (2011),

    this court recognized that promissory estoppel can bind the government

    to a promise reasonably relied upon by PERS retirees. If there were ever

    circumstances to which this substitute for consideration were applicable,

    Moro Petitioners assert, it is to that limited group of older PERS participants

    who retired before the enactments at issue and have been receiving

    COLAs for over 40 years and SB 656 benefits for 20 plus years pursuant to

    the express instruction of the legislature and the reassurance of this

    court.11 See Ragsdale v. Department of Revenue, 321 Or 216, 895 P2d

    1348 (1995)(recognizing SB 656 not dependent upon individual tax liability

    or state of retiree residence); Stovall v. State, 324 Or 92, 124, 922 P2d 646

    (1996)(finding legislature acted reasonably when it imposed cost of SB 656

    and HB 3349 benefits on retirees former employer, whether the employer

    be a local government or the state); Vogl v. Department of Revenue, 327

    Or 193, 212, 960 P2d 373 (1998)(We do not overrule Ragsdale or its

    analysis of the 1991 law); Strunk, 338 Or at 224 (confirming that an annual

    COLA in ORS 238.360(1) is a term of the PERS Contract).

    11Moro Petitioners also adopt by this reference the arguments madeby Petitioner Reynolds that pre-1991 retirees provided consideration for theSB 656 and HB 3349 benefits by accepting them as part of the settlementof the Chess/Stovalllitigation. Reynolds Brief, at pp. 12-19.

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    In light of all these factors, the court should find that COLAs and

    SB 656 benefits were legally accepted not just by employees through part

    performance, and but also by retirees through their reasonable reliance.

    Moreover, as explained further below, the offer of COLAs and SB 656

    benefits is consistent with constitutional requirements for unambiguous

    intent to create a contract and with all the other provisions of the PERS Act

    found by this court to be a term of the PERS Contract. In contrast, the

    alternative standard (if any) proposed by Respondents and Intervenors

    would render the PERS contract meaningless.

    B. The offer of COLAs and SB 656 benefits is consistentwith constitutional requirements for unambiguous intent tocreate a contract and with all the other provisions of thePERS Act found by this court to be a term of the PERSContract.

    In Hughes v. State, 314 Or 1, 838 P2d 1018 (1992), this court applied

    the unilateral contract theory announced in Taylorto the PERS Act. The

    court commenced its analysis correctly with the so-called additional rules

    for statutory contracts,12noting that the states power to tax was not a

    reserved police power which could not be contracted away. 314 Or at 14-

    12Briefly, those rules are: (1) a state contract will not be inferred

    from legislation that does not express an intention to create a contract;(2) the Contract Clause does not limit the states power of eminent domain;and (3) the state may not contract away its police power. 314 Or at 14citing Eckles v. State of Oregon, 306 Or 380, 397-99, 760 P2d 846 (1988).

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    15. On the issue of unambiguous intent to create a contract, the court

    recognized correctly that it was not writing on a blank slate because [t]he

    contractual nature of such pension schemes was settled in Taylor. Id.at

    18. It declined the States invitation to revisit the issue of the contractual

    nature of PERS and similar pension plans. Id. Nevertheless, it did

    undertake a thorough review of the manner in which the legislature re-

    enacted the 1953 PERS Act, following advice from the Attorney General to

    Governor Patterson about the creation and protection of vested benefits, to

    confirm that, the legislature intended and understood that PERS

    constituted an offer by the state to its employees, for a unilateral contract.

    Id.at 19-20.

    Next, the court turned to the tax exemption statute itself explaining

    that:

    In determining whether a particular statute is of acontractual nature, we, [***], conclude that thecontext in which the [***] statute is enacted is ofprimary importance. Specifically, in this case, thecontext and purpose of the entire PERS contract[***] and the fact that formerORS 237.201 wasenacted as part and parcel of the Public Employes

    Retirement Act of 1953 lead to a conclusion thatformerORS 237.201 is a term of the larger PERScontract. Only by looking at the statute in isolation,as the state asks us to do, could one escape thisconclusion. Such an exercise, however, is notanalytically proper or helpful. Consequently, wehold that PERS was intended to be and is a contract

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    between the state and its employees, and thatformer ORS 237.201, enacted as an essential partof and within the context of that contract, is a termof that contract.

    314 Or at 25. Finally, turning to the text of the tax exemption statute, the

    court found that, formerORS 237.201 is, if anything, more promissory in

    its language than the rest of the PERS scheme that, independently, this

    court has held to be a contract (id.at 26), that nothing in the 1969

    amendments to the statute detracts from that conclusion (id. at 27) and

    that the only benefits expressly exempted from taxation in formerORS

    237.201 are those accrued and accruing. Id.at 28.

    Contrary to the contentions of LOC (Brief, at p. 31), there was nothing

    glib about the courts analysis in Hughes. It was consistent with this

    courts recognition in Taylorthat Oregon had rejected the gratuity theory

    and adopted the unilateral contracttheory of pensions. It was also

    consistent with the additional rules for statutory contracts recognized in

    Eckles, 306 Or at 397-99, citing Campbell v. Aldrich, 159 Or 208, 213-14,

    79 P2d 257 (1938). Even the State and County/SD Respondents accept

    this, citing with approval to the courts analysis in Hughes. SeeState Brief,

    pp. 20-24, 28-29; County/SD Brief, pp. 14-16.

    However, citing Justice Balmers concurrence in Strunk, 338 Or at

    239, they all argue that the court subsequently lost sight of the polestar of

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    statutory contractual analysis: clear, unambiguous, and umistakable

    promissory intent in Oregon State Police Officers Assn. v. State of

    Oregon, 323 Or 356, 918 P2d 765 (1996)13and even in Strunk, did not

    apply the standard correctly to its review of the COLA statute.14 They give

    varying reasons for how and why the court got it wrong on the COLA

    question in Strunk. The State blames the dearth of briefing and lack of

    participation by the Department of Justice. Brief, p. 25. The LOC argues

    the court was not presented with the pre-1971 history of COLAs (i.e., the

    13thcheck system). Brief, p. 48 n 29. Finally, County/SD Respondents

    argue that the courts analysis was short and superficial. Brief, p. 39.

    Moro Petitioners reply that the courts analysis in Strunk(including

    the COLA analysis) was mindful of the unequivocal intent requirement for

    a finding of statutory contracts. Indeed, Justice Balmers concurrence cited

    with such fervor by Respondents and Intervenors makes that clear. See

    alsoStrunk, 338 Or at 171(discussing special rules to bind successive

    legislatures). Also, the court was provided with legislative history regarding

    all the statutory changes at issue in Strunk. APP-16-18.15 Moreover, as

    13LOC Brief, p. 50; State Brief, p. 24; County/SD Brief, at pp. 18-19.14State Brief, p. 35; County/SD Brief, p. 40; LOC Brief, pp. 47-48.15Moro Petitioners request leave of the court to submit these

    additional pages of Appendix.

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    explained further below, even if the court had reviewed the history of the

    13thcheck system in conjunction with the COLA enactment, it could only

    have reached the conclusion that the legislature went from a permissive

    may-based 13thcheck system to a mandatory shall-based system with

    a permanent increase to the base for pre-1972 retirees and COLAs adding

    to the base going forward for all, supporting its conclusion in Strunkthat

    COLA was intended to be a contractual term of the PERS Contract based

    on a proper application of the text in context approach laid out in Hughes.

    1. The 1971 COLA statute did not regularize a series of legislativead hocs.

    Contrary to the contentions of Intervenor LOC (Brief, p. 48), the pre-

    1971 system was not a series of legislative ad hoc increases which were

    regularized through the 1971 enactment. Rather, the pre-1971 system was

    based on a 1963 legislative enactment which authorized but did not

    mandate PERS to provide a 13thcheck. The 1963 enactment (Oregon

    Laws 1963, ch 608 9) stated in full:

    The Board, by means of a dividend system, maydistribute annually to retired members of the system

    the net interest received through investment of thefund in excess of the assumed rate of interest.Excess interest received for calendar yearscommencing after December 31, 1959 may bedistributed under this section.

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    Use of the word maysuggests that the legislature did no more than

    authorize PERS to make the 13thcheck payment. In 1967, the legislature

    amended the statute (Oregon Laws 1967, ch 622 20) to limit the benefit to

    those who retired before 1968; again, an indication that the legislature did

    not perceive the 13thcheck system to be contractual in nature. Finally, the

    additional amount did not become a part of the base of the monthly

    retirement allowance to be increased in any subsequent year. It was just

    an additional or 13thcheck.

    2. The 1971 COLA statute did not provide a lesser benefit.

    Intervenor LOCs argument(Brief, p. 60) that somehow the 1971

    enactment provided a lesser benefit and that the failure of any member to

    challenge that reduction indicates an understanding of lack of contractual

    intent is also without merit. Even a cursory review of Oregon Laws 1971,

    ch 738, which was presented to the Strunk court, would have made clear

    that, in addition to adopting COLAs in Section 11, in Section 9, the

    legislature provided a permanent 25 percent increase to the base monthly

    service retirement allowance for pre-1968 retirees and a permanent 12

    percent increase to the base monthly service retirement allowance for

    those retiring between 1968 and 1972 to which the COLA would be applied

    going forward, increasing the base annually for their lifetime. Given these

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    increases, even if the 13thcheck system were deemed to be contractual,

    no reasonable argument could be made that any retiree or active member

    was disadvantaged by the 1971 enactment.

    3. The 1971 COLA statute was not enacted to reduce financialrisk.

    The court should also reject Respondents and Intervenors

    arguments16that the 1971 enactment was meant to lower overall financial

    risk of the system to paying COLAs. As explained above, the existing 13th

    check system was based on a direct examination by PERS of the financial

    condition of the PERS system resulting in a single payment made on a

    yearly basis based on the systems ability to afford that payment (i.e.,

    earnings in excess of the assumed rate). There can be no question that

    this type of payment, based on a direct examination of the condition of the

    system and limited to a single payment, is perhaps the lowest-risk method

    of providing some COLA.

    In contrast, the 1971 enactments, which provided for an ongoing

    COLA based on a measurement of the cost of living rather than on an

    analysis of the financial health of the PERS system, and including the

    COLA amount in a retirees base pension, increased the financial risk to the

    system. It is for this reason and with the realization that it was making a

    16LOC Brief, p. 8; County SD Brief, p. 27.

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    long-term financial commitment to both active and retired members that the

    1971 legislature engaged in extended discussion of the actuarial analysis

    of the costs of the proposed COLA benefits. Had the legislature been

    considering a COLA system which could be adjusted as the legislature

    deemed appropriate every few years, there would have been little reason

    for this extended discussion. The emphasis would not have been on the

    question of what this is going to cost over the long term, but whether the

    system can pay this in the short term, because the legislature could always

    make an adjustment if necessary.

    4. The 1971 COLA statute as amended is much more than adirection to PERS; it is promissory.

    Finally, the court should reject Respondents and Intervenors

    invitation to relegate the valuable COLA benefit to the realm of a mere

    direction to PERS.17 The language of ORS 238.360 is certainly as

    promissory as the language used in ORS 238.300 (service retirement

    allowance) acknowledged by this court to be contractual in Strunk, 338 Or

    at 192, and cited with approval by Respondents and Intervenors. The

    language is also similar to ORS 238.350 and 238.355, which direct PERS

    to use sick leave to enhance benefits, found by this court to be contractual

    in Oregon State Police, 323 Or at 378-79, and graciously conceded to be

    17State Brief, p. 36; LOC Brief, p. 63; County SD Brief, p. 21.

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    correctly decided by Intervenor LOC. LOC Brief, p. 38. Adding to the

    promissory intent of the move from the may-based 13thcheck system to

    the shall-based COLA system was durational language in the text of

    Section 11 such as each year and accumulated from year to year. In

    the context of a lifetime annuityas provided by ORS 238.300, these

    words have clear long-term intent. As noted above, further supporting a

    long-term commitment is the legislatures careful consideration of the future

    actuarial costs associated with the increases and COLAs. Finally, nothing

    in the 1973 amendments detracts from the promissory intent because,

    based on inflationary trends at the time and inclusion and retention of the

    COLA bank, the increase of the maximum from 1.5 percent to 2 percent

    was only a gain for PERS retirees and members.18

    Therefore, this court can and should find that its prior PERS and

    pension cases and the text, context, and legislative history of COLAs all

    support its conclusion in Strunk, 338 Or at 221, that, ORS238.360(1)

    evinces a clear legislative intent to provide retired members with annual

    COLAs on their service retirement allowances, whenever the CPI warrants

    such COLAs.

    18Indeed the COLA bank has grown over the years since itsenactment so that those who retired in 1971 and 1973 have current CPIbanked in the amount of 97.04 and 95.98 percent respectively. ER-40.

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    5. SB 656 Benefits also evince a legislative intent to create acontract.

    Applying the same analysis to the offer of SB 656 benefits, the court

    should find it equally promissory. It is a mandatory service based benefit

    increase placed in the heart of the PERS Act itself. ER-34-37. The benefit

    was enacted after this court issued its decision in Taylor. Moreover, it is

    provided to every state retiree who qualifies for benefits (based on years of

    service), *** regardless of the state retirees residence. Ragsdale v.

    Department of Revenue, 321 Or 216, 230, 895 P2d 1348 (1995). The fact

    that the legislature intended to provide a long-term benefit is supported

    further by its express retention of the right to stop the benefit in any tax

    year in which the retirement benefits payable under the Public Employes

    Retirement System are exempt from Oregon personal income taxation.

    ER-36 (Oregon Laws 1991, ch 796 12(1)). Further supporting a finding

    that the legislature understood this language to be a reference to

    reinstatement of tax exemption for PERS benefits as a whole as opposed

    to individual retiree tax liability is this courts recognition in Ragsdale, 321

    Or at 228, that, [t]he amount of increased benefits are based on the PERS

    members years of service, noton their state income tax obligations.

    (Emphasis in original).

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    Therefore, like it did in Hughes, this court should decline the invitation

    implicit in Respondent and Intervenors arguments, to look at the offer of

    COLAs and SB 656 benefits in isolation (314 Or at 25) and to revisitthe

    issue of the contractual nature of PERS and similar pension plans, an issue

    that was first decided against the state nearly [four] decades ago in Taylor,

    314 Or at 18, a decision that has generated four decades of reliance and

    expectation in PERS members and retirees.

    III. STATUTORY CONTRACT INTERPRETATIONARGUMENTS

    Recognizing that they may not succeed in convincing the court to

    reverse precedent, Respondents and Intervenors next argue that the court

    should, nevertheless, interpret the statutes at issue so narrowly so as to

    read any promise out of them. These arguments should be rejected by the

    court as contrary to its well-established rules for interpretation of statutory

    contracts. For example, in Eckles v. State, 306 Or 380, 397, 760 P2d 846

    (1988), the court recognized that the unambiguous intent rule is concerned

    with the existence of the contract, rather than with the extent of the

    obligation. Similarly, in Hughes, 314 Or at 14, it noted that general

    principles of contract law normally will govern. Finally, in Strunk, 338 Or at

    183 n 34, the court applied the usual rules for determining legislative

    intent and reiterated that it will not construe statutory provisions in

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    isolation but rather will view the wording of all statutory provisions at issue

    in the context of their collective operation. (Emphasis added)citing

    Hughes, 314 Or at 23.

    A. The 2 percent maximum and CPI Bank are part andparcel of the COLA promise.

    Specifically, with regard to the ORS 238.360 COLA promise,

    Respondents and Intervenors call upon the court to find that only the

    concept of a COLA is contractual and not the mechanics of how it is

    calculated, such as the 2 percent maximum and CPI bank.19 If this court

    construes the COLA sections as required by Strunkand Hughes, however,

    it must conclude that the collective operationcalls for an annual

    adjustment up to a 2 percent maximum with the right to bank any CPI

    above the maximum and to use banked CPI to get to the 2 percent

    maximum in any year when the CPI is below the maximum. That these

    sections were intended to operate collectively is supported by the

    legislative history cited by Moro Petitioners at pages 53-55 of their Opening

    Brief. In 1973, when the legislature changed the maximum from

    1.5 percent to 2 percent, it left the CPI and CPI bank intact. ER-19-20. As

    noted above, the CPI bank is a valuable benefit which has grown over the

    19State Brief, p. 36 (referring to these parts of the COLA statutes asmere nuts and bolts); County/SD Brief, p. 40; LOC, p. 63.

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    years and assures members that they will receive the 2 percent maximum.

    For example, the CPI bank for those who retired in the 1970s is between

    62 to 90 percent. ER-40. The court should refuse Respondent and

    Intervenors invitation, therefore, to read this valuable component of the

    COLA benefit which has remained unchanged since the adoption of the

    COLA in 1971 out of the statutory promise.

    B. ORS 238A.470 does protect COLA attributable to priorservice.

    For purposes of the OPSRP COLA, Respondents and Intervenors

    avoid any substantive analysis of legislative intent by arguing generally that

    since the legislature intended to provide OPRSP members less than Tier I

    and Tier II members and since the 2 percent maximum is not contractual

    for Tier I and Tier II members, surely it could not have been intended to be

    so for OPSRP members. They argue further that the protections for

    contract rights acquired prior to the date of a change provided in

    ORS 238A.470 should not be applied to COLAs because they are not

    benefits attributable to service performed and salary earned.20

    Respondents provide no citation for this proposition. Federal courts, under

    ERISAs similar anti-cutback rule(29 USC 1054(g)(1)), however, have

    20State Brief, pp. 30-35; LOC Brief, pp. 68-69; County/SD Brief,pp. 57-60

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    recognized that COLAs do constitute accrued benefits protected from cut-

    backs because [a] participant's entitlement to his or her normal retirement

    benefit include[s], as one component, the right to have the benefits

    adjusted pursuant to the COLA provision. Hickey v. Chicago Truck

    Drivers, Helpers & Warehouse Workers Union, 980 F2d 465, 469 (7th Cir

    1992), citing Shaw v. International Ass'n of Machinists and Aerospace

    Workers Pension Plan, 750 F2d 1458 (9th Cir.), cert den, 471 US 1137,

    105 S Ct 2678, 86 LEd2d 696 (1985). The PERS Actuary also advised the

    legislature that the changes made by SB 822 reduced accrued liability by

    $2.6 billion (ER-43) and SB 861 by $1.9 billion (ER-83).

    In addition and contrary to the contentions of Respondents and

    Intervenors, COLA benefits very much vary from member to member based

    on their service provided and salary earned. While set at a 2 percent

    maximum, the actual dollar amount in COLA benefit each OPSRP

    members will receive is entirely dependent upon the amount of his or her

    underlying service and salary. SeeORS 238A.180; 238A.125. Therefore,

    reviewing the OPSRP COLA statute in context with ORS 238A.470, the

    court should find that the legislature only retained to itself the right to

    change OPSRP benefits (including COLA benefits) so long as it protected

    those benefits attributable to service already provided and salary already

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    earned from cut-back. This the legislature did not do. Therefore, the

    change violates OPSRP memberscontract rights.

    C. The SB 656 Exemption language was intended to coverexemption of PERS benefits as a whole.

    Finally, with regard to SB 656 benefits, Respondents and Intervenors

    argue that, because SB 656, Section 12(1) (ER-36), provides that the

    benefit increases, shall not be paid in any tax year in which the retirement

    benefits are exempt from Oregon personal income taxation, this court

    should find that there was no promise to pay such benefits to individual

    members who are not subject to Oregon tax by virtue of their out of state

    residence. As noted above, however, in Ragsdale, 321 Or 216, this court

    carefully considered the various SB 656 sections in their collective

    operation and found that, [t]he amount of increased benefits are based on

    the PERS members years of service, noton their state income tax

    obligations, (Id. at 228), and *** regardless of the state retirees

    residence. (Id.at 230). That is the case because this court understood

    this section to refer to a collective exemption of PERS retirement benefits

    and not an individual determination of tax liability. More importantly, by the

    time this court considered Vogl v. Department of Revenue, 327 Or 193,

    212, 960 P2d 373 (1998), the state had adopted Oregon Laws 1997, ch

    839 10, therefore, the court had the opportunity to, but expressly did not

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    disavow its interpretation of SB 656 in Ragsdale. Like it did in Vogl, this

    court should again reject any different interpretation of SB 656 benefits.

    IV. FEDERAL CONTRACTS CLAUSE ARGUMENTS

    Recognizing that they may be unable to convince the court to

    interpret the promise right out of the COLA and SB 656 benefit statutes,

    Respondents and Intervenors argue that the court should still uphold the

    changes made by SB 822 and SB 861 because they fall within the states

    reserved police powers or alternatively, do not effect a substantial

    impairment and are supported by an important public purpose and

    appropriately balanced to address the costs attributable to retirees and out

    of state residents.21In support of the reserved police powers doctrine they

    rely primarily upon Campbell v. Aldrich, 159 Or 208, 213-14, 79 P2d 257

    (1938).22 For the substantiality requirement and public purpose

    defense, they rely primarily upon cases under the federal Contracts Clause

    and cases from other states which have contracts clause provisions in their

    state constitutions.23

    Moro Petitioners agree that this court has recognized that the state

    has certain reserved police powers which it may not contract away.

    21 State Brief, p. 44-78; County/SD Brief, pp. 71-94.22County/SD Brief, pp. 74-78.23State Brief, pp. 56-60; County/SD Brief, pp. 45-49.

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    However, those powers are limited to the protection of the public health,

    safety, and morals. Lornsten v. Union Fishermans Co-Op Packaging Co.,

    71 Or 540, 546-47, 143 P 621 (1914). They do not encompass the states

    spending power which may be contracted away. See e.g. Hughes, 314

    Or at 14-15. In addition, although this court recognized in Eckles, 306 Or at

    380, that based on the similarity of the federal and state contracts clause

    provisions, the framers of the Oregon Constitution intended toincorporate

    the substance of the federal provisions, as it was interpreted by the

    Supreme Court of the United States, into the Oregon Constitution, though

    not necessarily every case decided under the federal provision, contrary to

    the contentions of Respondents and Intervenors, the early cases under the

    federal provision do not support their position. More importantly, even the

    later cases under the federal provision, which the court recognized in

    Eckles, 306 Or at 380 to be of more limited value, cannot be stretched so

    thin as to cover legislative changes which effect a $5.3 billion dollar take-

    away of benefits from PERS members unsupported by any financial

    exigency and based only on a desire by the legislature to spend the dollars

    elsewhere. The State can always find use for extra money and is not free

    to consider contractual impairment on a par with other policy alternatives

    and objectives.

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    A. Reserved Police Powers.

    County/SD Respondents maintain that this court got it right on the

    central question in Eckles, about whether the statute creating the Industrial

    Accident Fund (IAF) created a contractual promise (Brief, p. 14), but got

    it wrong when it came to the reserved police powers doctrine. Brief, p. 80.

    They argue that the court in Eckles, 306 Or at 399, was incorrect in

    describing the issue as a balancing analysis. Id.It is not a matter of

    balancing the constitutionalviolation against the value of the public good

    (Brief, p. 80) but rather, a limit found within the language or history of

    Article I, section 21 itself. Brief, p. 82. In support of their reading of the

    reserved police powers doctrine, County/SD Respondents cite Campbell,

    159 Or 208. Brief, pp. 75-78. They call upon the court to return to this

    earlier reading of police powers doctrine(Brief, p. 82) but then, turn

    around and equate the doctrine to the federal public purpose defense

    which does include a balancing component. Brief, pp. 82-83.

    Moro Petitioners reply that County/SD Respondents conflate the

    reserved police power doctrine with the public purpose defense

    recognized by the federal courts. As the United States Supreme Court

    explained in U.S. Trust Co. of New York v. New Jersey, 431 US 1, 22-24,

    97 S Ct 1505, 52 LEd2d 92 (1977),

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    Undoubtedly, whatever is reserved of state powermust be consistent with the fair intent of theconstitutional limitation of that power. Blaisdell, 290U.S., at 439, 54 S.Ct. at 240. Moreover, the scopeof the States reserved power depends on thenature of the contractual relationship with which thechallenged law conflicts. ***

    When a State impairs the obligation of its owncontract, the reserved-powers doctrine has adifferent basis. The initial inquiry concerns the abilityof the State to enter into an agreement that limits itspower to act in the future. *** This doctrine requires

    a determination of the States power to createirrevocable contract rights in the first place, ratherthan an inquiry into the purpose or reasonablenessof the subsequent impairment. In short, the ContractClause does not require a State to adhere to acontract that surrenders an essential attribute of itssovereignty.

    In deciding whether a States contract was invalid

    ab initio under the reserved-powers doctrine, earlierdecisions relied on distinctions among the variouspowers of the State. Thus, the police power and thepower of eminent domain were among those thatcould not be contracted away, but the State couldbind itself in the future exercise of the taxing andspending powers. Such formalistic distinctionsperhaps cannot be dispositive, but they contain animportant element of truth. Whatever the proprietyof a States binding itself to a future course ofconduct in other contexts, the power to enter intoeffective financial contracts cannot be questioned.

    Any financial obligation could be regarded in theoryas a relinquishment of the States spending power,since money spent to repay debts is not availablefor other purposes. Similarly, the taxing power may

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    have to be exercised if debts are to be repaid.Notwithstanding these effects, the Court hasregularly held that the States are bound by theirdebt contracts.

    Because the bonds at issue in U.S. Trustwere purely financial debts, the

    court found that they did not compromise the states reserved powers. 431

    US at 25. However, the Court recognized, that if the financial obligation

    had gone further for example, to bind the State never to close the facility

    for health or safety concerns,the contract may have implicated reserved

    policed powers. 431 US at 25. Because the contract at issue in Eckles,

    306 Or at 398-99, like the bonds at issue in US Trust, involved only a

    financial guaranty, this court correctly concluded that the States police

    power doctrine could not be stretched so far as to disregard a financial

    guarantee to persons or corporations.

    This approach is also entirely consistent with the decisions of this

    court in both Campbelland in Hughes. In Campbell, 159 Or at 218-19, the

    court was faced with the states reserved police power to set educational

    policy which this court found could not be bartered away. In contrast, in

    Hughes, 314 Or at 14-16, this court was faced with the states power to tax,

    which this court relying upon early decisions of the United States Supreme

    Court found could be contracted away.

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    If the contract at issue does implicate the reserved police power of

    the state to protect the public health, safety, or morals, and is not a purely

    financial obligation based on powers which can be contracted away, then it

    is accurate that this court will still subject the exercise of the reserved

    power to judicial scrutiny. In Lornsten, 71 Or at 546-47, this court cited with

    approval to Justice Harlans decision in Mugler v. Kansas, 123 US 623,

    661, 8 S Ct 273, 31 LEd 205 (1887), as noting:

    The courts are not bound by mere forms, nor arethey to be misled by mere pretenses. They are atlibertyindeed, are under a solemn dutyto look atthe substance of things, whenever they enter uponthe inquiry whether the Legislature has transcendedthe limits of its authority. If therefore, a statutepurporting to have been enacted to protect thepublic health, the public morals, or the public safety,has no real or substantial relation to those objectsor is palpable invasion of rights secured by thefundamental law, it is the duty of the courts to soadjudge, and thereby give effect to theConstitution.

    Here, not only are the underlying COLA and SB 656 benefits purely

    financial debt obligations which do not implicate any reserved police

    power to protect the public health, safety, and morals, but also as

    discussed below, the impairment (indeed substantial impairment) of those

    benefits is not supported by any public purpose defense under the federal

    Contract Clause.

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    B. Substantiality.

    On the issue of substantiality of the impairment, Respondents and

    Intervenors generally argue that the court should, as part of its analysis of

    the Oregon contract clause, impose a requirement of substantiality and

    argue further that the impairment here is not substantial. This is a

    daunting task given that the States own expert (the PERS actuary)

    projected that the present value of the benefits lost to members by the

    combination of SB 822 and SB 861 was a total of $5.3 billion. ER-41; ER-

    83; ER-193-94. This is the information which was given to the legislature

    and certainly was the clear understanding of the legislature about the

    financial impact of these measures on PERS members. Id. No alternative

    analysis was offered at the fact-finding hearing by any party, and therefore

    this analysis and its conclusions are uncontested.24 Recognizing this,

    Respondents and Intervenors argue instead that the legislation reduces

    only windfall benefits or thatthe future impact of the legislation on Moro

    Petitioners is lower than that recognized by this court to be substantial in

    Strunkor is too speculative for this court to award the relief requested. As

    24Moro Petitioners do not contest the analysis by the PERS Actuaryin calculating the value of the lost benefits from the perspective of thesystem. However, the PERS Actuary agreed that if the value of the lostbenefits were to be calculated from the perspective of individual membersthat a discount rate of 4 percent would be appropriate, which wouldsubstantially increase the amount of the loss. ER-223 n.117.

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    explained further below, each of these arguments is either unsupported by

    the law or the record, and therefore, must be rejected.

    First, on the question of whether the court should adopt the

    substantiality test, Respondents and Intervenors turn initially to this

    courtsstatement in Strunk, 338 Or at 206, that it has yet to determine

    whether substantiality of an impairment of a contractual obligation is

    required to show a violation of Article I, section 21.25 They argue that

    because Article I, section 21 was patterned on the federal Contract Clause,

    the court should adopt this substantiality standard.26 State Respondents

    maintain that this would be consistent with the approach taken by other

    states with a contracts clause in their state constitutions. Brief, p. 59.

    County/SD Respondents argue that, in fact, this court already did that by its

    reference to a substantial impairment in Hughes, 314 Or at 20. Brief,

    p. 48. They argue further that the substantiality requirement was

    developed early on in the federal Contracts Clause cases and is therefore,

    appropriately applied to Article I, section 21. County/SD Brief, p. 47.

    The early cases under the federal Contract Clause, however, are not

    as clear as Respondents allege. For example, as late as in Fisk v. Police

    25State Brief, p. 56.26State Brief, p. 57; County/SD Brief, p. 46.

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    Jury of Jefferson, 116 US 131, 6 S Ct 329, 331, 29 LEd 587(1885), the

    United States Supreme Court was explaining impairment to mean to alter

    so as to make the contract more beneficial to one party and less to the

    other, it is not a question of degree, manner or cause, *** it cannot be

    impaired in the remotest degree, it is where an essential part is annulled

    or partially rescinded, and [t]he obligation is impaired by a statute which

    authorizes its discharge by a smaller sum, or at a different time, or in a

    different manner than stipulated. (Internal citations omitted); see also

    Sturges v. Crowninshield, 17 US 22, 4 LEd 529 (1819)(cited by

    Respondent). It is this understanding of impairment which would have

    been incorporated into the Oregon Constitution and not, the later

    substantiality requirement developed by the federal courts.

    Second, even if this court were to adopt the later developed

    substantiality requirement, the impairment here is substantialas

    supported by actuarial expert testimony. ER-224-36. In support of their

    position that it is not, Respondents and Intervenors argue that the

    percentage adverse impact on Moro Petitioners is somewhat less than

    what the court noted for Strunkpetitioners.27 In Strunk,338 Or at 206, the

    court discussed this issue only in the context of those portions of the 2003

    27State Brief, p. 65; County/SD Brief, p. 49.

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    enactment which amended the guaranteed earnings on member accounts.

    The court indicated there were two primary reasons for its decision not to

    decide whether a showing of substantiality was necessary. First, benefit

    projections showed losses for the Strunkpetitioners between 12 and 20

    percent of benefits; and second, these potential reductions at least in part

    had a retrospectiveeffect or earnings accrued for work already

    performed. Id.at 206-07.

    While the general statement may be true that when confined to the

    somewhat limited view of a handful of PERS participants the percentage

    adverse impact on Moro Petitioners is somewhat less than what the court

    noted for the petitioners in Strunk, it is clear that the overall adverse impact

    of the 2013 COLA changes ($4.9 billion) is somewhat in excess of the

    adverse impact of the changes in crediting which were projected at $4.6987

    billion. Ex. 15, pp. 63-64 (2004 Special Master Report). Even if the

    financial impact of the 2013 enactments on individuals (calculated by the

    State itself as an average 7.65 percent) is somewhat less than the 2003

    enactments, the Respondents provide no authority to support the notion

    that these are nonetheless not substantial. For example, in U.S. Trust, 431

    US at 19, while the court did not specifically discuss the substantiality

    requirement, nonetheless the court pointed out that No one can be sure

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    precisely how much financial loss the bondholders suffered, but that that

    would not stop the court from granting relief because the State has made

    no effort to compensate the bondholders for any loss sustained by the

    repeal. In other words, without even a showing of a measurable loss to

    bondholders, in U.S. Trust, the court nonetheless granted relief.28 Also, in

    Allied Structural Steel Co. v. Spannaus, 438 US 234, 247, 98 S Ct 2716, 57

    LEd2d 234 (1978), the amount at issue was only $185,000 but the court

    found that in combination with the retroactive nature of the legislation to be

    a severe disruption of the contract at issue.

    Given these low thresholds, there would be little question that if the

    court were to utilize a substantiality test, the Moro Petitioners have made

    an adequate showing to satisfy that requirement. As explained at page 35

    of the Opening Brief, a year-by-year review of Moro Petitioners analyses

    shows that while the benefit losses start at a relatively low amount, they

    increase over time so that, for example, by the final year of his retirement

    28In Strunk, this court also voided the 2003 limitations on COLA

    benefits despite the fact that the present value analysis showed a mere$413.7 million loss to members as a whole, and there was no evidence inthe record relating to the impact of this change on any of the individualStrunk petitioners. Ex. 15, p. 66 (2004 Special Master Report). Similarly,in Eckles, 306 Or 402, the court found the transfer of $81 million to be abreach. However, since employers failed to establish individual lossattributable to that loss, they were only entitled to a declaratory ruling.

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    Petitioner Silence is projected to lose 33 percent of his benefit. 29

    Respondents and Intervenors argument that these estimates of future

    impact are somehow too speculative for this to court consideris ironic

    given that that the only evidence relied upon by Respondents and

    Intervenors to support the need for the challenged legislation is actuarial

    estimates regarding future employer contribution rates and the resulting

    impact on the states ability to provide other services into the future.

    Moreover, in Tadsen v. Praegitzer, Inc., 324 Or 465, 472, 928 P2d 980

    (1996), this court recognized that the lack of absolute certainty does not bar

    even a claim for future damages. It explained that:

    Only reasonable probability is required. Experttestimony may aid the fact-finder ***. In doing so,an expert may testify to economic assumptions thatnecessarily rely on estimates and predictions ofuncertain events. Id.

    Even though Moro Petitioners were only attempting to establish adverse

    impact instead of damages,they still presented expert actuarial analysis

    which used the same assumptions used by the PERS Actuary for the

    PERS system itself. SeeExhibits 1-14.

    29Moreover, the court can certainly take note that the losses toretirees in the 2013-15 biennium already total $70-85 million for lost COLAand $60-70 million for out of state retirees. No additional actuarial analysisis necessary to derive these numbers. ER-200-201 (Ex. 47, p. 2).

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    In contrast, County/SD Respondents make an extended argument

    (unsupported by any expert evidence), that under certain financial

    conditions, the new benefits provided by the 2013 statute may for some

    participants be better or almost as good as the old benefits.30 Brief, pp. 53-

    54. In the absence of any expert testimony supporting Respondents

    position, the court should rely upon the information provided by the PERS

    Actuary to the legislature that the statute was projected to reduce accrued

    liability and save money going forward. ER-41($2.6 billion reduction in

    accrued liability for SB 822); ER-83 ($1.9 billion reduction in accrued

    liability for SB 822); ER-193-94. As the court noted in US Trust, 431 US at

    28, No one has suggested here that the States acted for the purpose of

    benefiting the bondholders, and there is no serious contention that the

    value of the bonds was enhanced by the repeal of the 1962 covenant.

    The same is true here. The legislature knew it was pursuing a long term

    cost-saving measure.

    The court should also reject Respondents and Intervenors various

    arguments, which relate to elimination of windfalls, reasonable

    30They suggest that in years of no or low inflation, the new benefitmay be better, while conceding that this may not be true due to the COLAbank. They conclude by pointing out that in the first year even a retireereceiving $60,000 per year loses only $300. However, this ignores theprogressive nature of year-by-year loss of the benefit discussed above.

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    expectations, and reasonable reliance.31 None of these arguments are

    developed to any sufficient extent. Moreover, for all the reasons discussed

    above in Section II.A, reasonable expectations and reasonable reliance

    weigh heavily in favor of PERS members and retirees.

    Furthermore, as the court emphasized in Strunk, 338 Or at 206-07,

    the fact that the 2003 changes in part had an adverse impact on benefits

    earned for work already performed supported a finding that the impairment

    was substantial. Interestingly, both State and County/SD Respondents

    simply announce that the factor has no relevance in this case.32 In fact, the

    2013 changes fall very heavily on benefits already earned for work already

    performed. Retirees have fully completed their service, and so all of their

    benefits are based on work previously performed. Also, many active

    members have already performed many years of service in PERS and

    accrued benefits which will be adversely impacted by the changes made by

    SB 822 and SB 861. The adverse impact on accrued benefits is not only

    supported by the data provided by the PERS Actuary to the legislature (ER-

    41; ER-83; ER-193-94), but also the CPI Bank information compiled by

    PERS. (ER-40). Just as it did in Strunk, therefore, this factor should weigh

    31State Brief, pp. 62-63; County/SD Brief, p. 48.32State Brief, p. 61; County SD Brief, p. 49.

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    very heavily in favor of the courts determination that the 2013 changes do,

    in fact, cause a substantial impairment in benefits.

    C. Public Purpose.

    Finally, even if the impairment is found to be substantial County/SD

    Respondentsargue at length (Brief, pp. 71-94) that the legislation should

    still be upheld as reasonable and necessary for a public purpose. The

    same defense was raised and rejected by this court in Strunk, 338 Or at

    207-208, without deciding whether Oregon should adopt it for purposes of

    its Article I, section 21 analysis. In Strunk, the court noted that the parties

    introduced voluminous evidence on this issue, which the Special Master

    described as Respondents economic hardship defenses.338 Or at 207.

    The court found that the evidence simply did not rise to the high threshold

    that would have to be met for an economic hardship defense to be

    successful, even if the court were to recognize that defense. Id. The court

    stressed that it was dealing with an alleged impairment to the States own

    contract and pointed out several findings by the special master which were

    particularly relevant. Specifically, it underscored Oregons relatively low tax

    burden, the fact that there was little willingness by the voters to raise taxes,

    and that the capital downturn of 2000 through 2002 did not compare in

    magnitude to the Great Depression of the 1930s. Id.at 207-08. Finally,

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    acknowledging that the states recent fiscal status is both serious and has

    resulted in substantial detriments to the provision of governmental services

    across the state, the court still found that, taken together, these findings

    did not justify a rewriting of the earnings rate guarantee. 338 Or at 208.

    The record evidence presented at the fact-finding hearing before the

    Special Master in this case should lead the court to two observations. First,

    nothing much has changed. Second, at least in the short-term, things are

    about as good as they get in the State of Oregon, given its flawed revenue

    system.

    Moro Petitioners called former State Economist and current Portland

    State University Professor Thomas Potiowsky as an expert witness. ER-

    203; 204-209; 221. Among other things, Potiowsky testified that Oregon

    remains a low-taxing state. ER-205. Oregon taxes have now dropped to

    11.8 percent lower per capita than the U.S. average, Oregon is ranked 33rd

    for state taxes as a percentage of personal income, and state taxes as a

    percentage of state productivity show Oregon as 14.8 percent below the

    national average. Id. Potiowsky attributes this low revenue in part to Ballot

    Measures 5, 47, and 50 passed by the Oregon voters in the 1990s, which

    not only restricted property taxes but generally shifted the burden of the

    support of our public schools over to the states general fund. ER-207.

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    Potiowsky also pointed to the substantial increase in spending for public

    safety (caused by Measure 11) and human services, which also negatively

    impact the states ability to spend for other purposes. ER-205. Despite

    these limits and pressures on revenue, Potiowsky testified that, at least in

    the immediate term, things are looking pretty good. ER-206-07. The 2013-

    15 General Fund budget increased by 14 percent over the prior biennium

    and is projected to show substantial growth through 2021. Id.at 206.

    On the issue of school finance, Potiowsky pointed out that Oregon

    invests less in education than nearly every other state as a percent of the

    total state budget, with only Maine and Wyoming spending a smaller

    percentage. ER-209. Nonetheless, in 2013-15, Oregon was able to

    substantially increase its allocation for K-12 education by approximately

    $836 million, which is $235 million more than the amount necessary to

    maintain current services for K-12 education. Id. Potiowsky made clear

    that it is Oregons flawed revenue system which makes it difficult for the

    state to keep up with its perceived needs, and the PERS system has

    neither caused the states financial difficulties, nor will the changes made in

    2013 resolve those financial difficulties. ER-221-22.

    In support of its public purpose defense County/SD Respondents

    called John Tapogna, President of EcoNorthwest, a consulting firm.

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    Tapogna cited various reports and analysis in support of the public purpose

    defense. For example, he cited a University of Chicago Forum of

    Economists who expressed grave concerns about public pension systems

    in the United States. However, Tapogna conceded that these observations

    by the economists were not specific to the condition of Oregons public

    employee retirement system. ER-211 n. 102. Moreover, the hosts of this

    forum expressly cautioned against using the expert opinions as a policy

    tool. Id. Tapogna also cited to a 2012 study which provided analysis of the

    challenges that would be faced in all 50 states in fully funding their pension

    plans in the next 30 years. However, the County/SD Respondents brief

    really does not adequately explain that the study was a what-if exercise

    based on an assumption that earnings over that entire period would on

    average be only 1.7 percent in excess of the cost of living. Ex. 80. The

    study then rank ordered the states based on the percent of increase they

    would have to make in their contribution rates to fully fund their pension

    plans given this extraordinarily bad earnings assumption. Not surprisingly,

    those states which were well funded, and currently enjoyed lower rates,

    including the state of Oregon, tended to show the greatest percentage

    increase, while those states which are already poorly funded and therefore,

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    already had higher rates would see a lower percentage increase.33

    Whatever conclusions can be drawn from this study regarding Oregon are

    further compromised by the fact, which Tapogna conceded, that the study

    used incorrect data in setting Oregons initial contribution rate. Tr. 233-34.

    The concerns expressed in the County/SD Respondents brief at pages 86-

    87 that Oregon would have to raise taxes to such an extent that everyone

    left the state or, alternatively, that Oregon could not compete with other

    states, were based on this flawed report. Moreover, there is nothing in the

    legislative history of SB 822 or SB 861 to support the conclusion that the

    legislature even considered this factor, let alone passed the legislation to

    address this concern. As discussed further below, the court must look to

    what the legislature actually said and did, as opposed to what County/SD

    Respondents assert after the fact in defense of the legislation.

    After the conclusion of the fact-finding hearing, in an initial draft of the

    findings, Special Master Judge Bushong described County/SD

    Respondents defense of the legislation using the same economic

    hardship defense descriptorused by the 2004 Special Master Report.

    33This analysis has been criticized as using an unrealisticassumption of earnings which is inconsistent with anticipated returns oninvestments (Ex. 75). PERS goes through a biennial analysis in setting itsassumed earnings rate. ER-184-85.

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    County/SD Respondents vehemently objected. SeeObjection to Special

    Masters Preliminary Report filed April 25, 2014. They argued at some

    length that the defense they were raising was not an economic defense but

    was a public purpose defense. After reviewing the County/SD

    Respondents evidence in support of its argument on this issue, however, it

    is difficult to discern any difference between the defenses raised in 2003

    and that being raised in the current case. Indeed, if there is no economic

    hardship, the best that can be said for the County/SD Respondents

    defense is that the only public purpose is that the state would prefer to

    spend the money it saves by not honoring its contractual commitments to

    PERS members to provide other services.

    It is true that rates are high, and just as in 2003, that has an impact

    on the states ability to deliver other important services. There is no

    question that the 2008 economic downtown which led to very bad

    investment returns has and will continue to have an impact on employer

    contribution rates. It is also true that employer contribution rates

    immediately prior to 2008 had reached a historic low, at least in comparison

    with rates for the last 30 years. ER-182-83. As described in the Special

    Masters report (ER-179), PERS uses a rate collaring system which has

    allowed increases in rates to be phased in over a period of time during

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    which not only was the system able to earn money (may even have

    earnings in excess of assumptions), but also the state of Oregon was able

    to substantially recover from the impacts of the 2008 downturn. ER-206-

    07. The most recent analysis by the PERS actuary shows that even if the

    system is able to earn only the amount of its current earnings assumption

    (7.75 percent), employer contribution rates will trend downward over the

    next several biennia. ER-197-98 (Ex. 41). Therefore, like it did in Strunk,

    this court should find that these factors together with those discussed

    further below cannot support the impairment of COLA and SB 656 benefits

    effected by SB 822 and SB 861 as reasonable and necessary for a public

    purpose.

    D. Balancing.

    Under the final step of federal public purpose balancing analysis, a

    court must inquire whether the adjustment of the rights and responsibilities

    of contracting parties is based upon reasonable conditions and is of a

    character appropriate to the public purpose justifying the legislations

    adoption. U.S. Trust, 431 US at 22. Citing testimony from the Governors

    Chief of Staff, County/SD Respondents argue that the problem with PERS

    is the payment to current retirees, particularly those who are receiving

    benefits on the higher end. Brief, pp. 89-90. They suggest that these

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    beneficiaries are those who are causing PERS employer contribution rates

    to rise and that the legislative response was narrowly focused to address

    that problem. It is difficult to understand how an argument can be made

    that t