IN THE SUPREME COURT OF THE STATE OF OREGON

JENNIFER JAMES, LISA RIEGEL, ROSANNE SCOTT, ROBERT MARTINEAU, REGINA THOMPSON, EMILY MARX, DUSTIN ANDREWS,

BRANDON SILENCE, and THOMAS CLEARY,

Petitioners,

v.

STATE OF OREGON; STATE OF OREGON by and through the Department of Human Services and the Department of Transportation;

MULTNOMAH COUNTY; CITY OF PORTLAND; CITY OF SALEM; OREGON HEALTH & SCIENCE UNIVERSITY; MOUNT HOOD

COMMUNITY COLLEGE; MOLALLA RIVER SCHOOL DISTRICT; and PUBLIC EMPLOYEES RETIREMENT BOARD,

Respondents.

S066933

PETITIONERS’ OPENING BRIEF AND EXCERPT OF RECORD

____________________________________________________________

Aruna A. Masih OSB 973241 Gregory A. Hartman OSB 741283 Bennett Hartman, Attorneys at Law, LLP 210 SW Morrison St., Suite 500 Portland, OR 97204 Telephone: 503-227-4600 aruna@bennetthartman.com greg@bennetthartman.com Of Attorneys for Petitioners

Ellen F. Rosenblum OSB 753239 Attorney General Benjamin Gutman OSB 160599 Solicitor General Oregon DOJ, Appellate Division 1162 Court St NE Salem, OR 97301 Telephone: 503 378-4402 ellen.f.rosenblum@doj.state.or.us benjamin.gutman@doj.state.or.us Of Attorneys for State Respondents

February 19, 2020 09:36 AM

Tracy Reeve OSB 891123 City Attorney Robert L. Taylor OSB 044287 Chief Deputy City Attorney Daniel Simon OSB 124544 Deputy City Attorney City of Portland 1221 SW 4th Avenue, Ste 430 Portland, OR 97204 Telephone: 503 823-4047 tracy.reeve@portlandoregon.gov robert.taylor@portlandoregon.gov dan.simon@portlandoregon.gov Of Attorneys for Respondent City of Portland

Jenny Madkour, OSB 982980 County Counsel, Multnomah County 501 SE Hawthorne Blvd, Room 500 Portland, OR 97214 Telephone: 503 988-3138 jenny.m.madkour@multco.us Of Attorneys for Respondent Multnomah County

Sharon A. Rudnick OSB 830835 William F. Gary OSB 770325 J. Arron Landau OSB 094135 Harrang Long Gary Rudnick PC 497 Oakway Rd Ste 380 Eugene, OR 97401 Telephone: 541 485-0220 sharon.rudnick@harrang.com william.f.gary@harrang.com aaron.landau@harrang.com Of Attorneys for Respondents City of Salem, Oregon Health & Science University, Mount Hood Community College and Molalla River School District

i

INDEX OF CONTENTS

I. STATEMENT OF THE CASE .................................................................. 1

A. Nature of the Action .................................................................. 1

B. Nature of the Judgment Sought to be Reviewed ....................... 2

C. Statutory Basis of Jurisdiction ................................................... 3

D. Entry of Judgment and Timeliness of Appeal ............................ 3

E. Questions Presented ................................................................ 3

F. Summary of Argument .............................................................. 4

G. Summary of Material Facts ....................................................... 7

1. PERS Membership Overview. ......................................... 7

2. Petitioner Information. ..................................................... 8

3. Pre-SB 1049 PERS Retirement Benefits Overview. ...... 11

4. System Funding. ............................................................ 16

5. December 31, 2017 Actuarial Valuation. ........................ 19

5. 2019 Legislative Session. .............................................. 20

6. SB 1049 Changes. ........................................................ 32

7. PERS Implementation of SB 1049 Changes. ................. 34

II. FIRST ASSIGNMENT OF ERROR SB 1049, §§1-19 and §§ 39-40 impair obligations regarding IAP “employee contributions,” “employee “salary,” and “employer contribution”-funded pension benefits of the PERS contract in violation of Article I, Section 21 of the Oregon Constitution or in the alternative, breach those terms of the PERS contract. ........................................................................................... 36

A. Standard of Review ................................................................ 36

ii B. Preservation of Error............................................................... 37

C. Argument ................................................................................ 37

1. Legal Standard. ............................................................. 37

2. There is a “PERS Contract,” and the “employee salary,” “employer contribution”-funded pension, and “employee contribution”- funded IAP benefit statutes are terms of the PERS Contract. ............................................................. 41

3. The statutes at issue relate to “core benefits” which are either “expressly or impliedly irrevocable” or subject only to changes which are consistent with a “segmented service” approach. ......................................................... 47

4. The challenged sections of SB 1049 impair or breach the obligations of “core benefit” statutes. ............................. 66

5. The impairment or breach of the PERS contract is not supported by any cognizable defense under Article I, Section 21. .................................................................... 73

III. SECOND ASSIGNMENT OF ERROR SB 1049 §§1-19 and §§ 39-40 take private property (IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension benefits) for public use without just compensation in violation of Article I, section 18 of the Oregon Constitution. ......................................................... 74

A. Standard of Review ................................................................ 74

B. Preservation of Error............................................................... 74

C. Argument ................................................................................ 74

1. Legal Standard. ............................................................. 74

2. Petitioners have a property interest in their IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension benefits. ........................... 76

iii

3. The challenged sections of SB 1049 constitute a taking of private property for public use without just compensation. ...................................................................................... 77

IV. THIRD ASSIGNMENT OF ERROR SB 1049 §§1-19 and §§ 39-40 impair obligations regarding IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension obligations of the PERS contract in violation of Article I, Section 10, clause1 of the United States Constitution or in the alternative, breach those terms of the PERS contract. .......................................................................... 79

A. Standard of Review ................................................................ 79

B. Preservation of Error............................................................... 79

C. Argument ................................................................................ 80

1. Legal Standard. ............................................................. 80

2. The IAP “employee contributions,” “employee salary,” and “employer contribution”- funded pension benefits are contractual terms of the PERS Contract under federal law. ................................................................................ 82

3. The challenged sections of SB 1049 substantially impair the IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension obligations of the PERS Contract. ............................................................. 83

4. The impairment or breach of the IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension obligations of the PERS Contract is not reasonable or necessary to support any public purpose defense under Article I, Section 10. ....... 84

V. CONCLUSION ..................................................................................... 87

iv

INDEX OF APPENDIX

Oregon Laws 2019, ch 355 (SB 1049) ............................................. APP-1

OAR 459-005-0525 (2019) ............................................................ APP-31

ORS chapter 238 (2017)(Excerpts) ................................................ APP-33

ORS chapter 238A (2017)(Excerpts) ............................................ APP-44

Joint Committee on Ways and Means Subcommittee on Capital Construction Membership and Meeting Schedule .......................... APP-55

PERS Presentation, February 15, 2019 JWMCC Meeting ............ APP-57

PERS Director Olineck Letter, February 20, 2019 ......................... APP-91

2019 Regular Session, SB 1049 Overview ................................... APP-95

Recording Log, May 10, 2019 JWMCC Meeting ........................... APP-98

PERS Presentation, May 10, 2019 JWMCC Meeting .................. APP-100

PERS Actuary Analysis, May 9, 2019 ......................................... APP-121

PERS Coalition Testimony, May 14, 2019 JWMCC Meeting ....... APP-146

SB 1049 Budget Report and Measure Summary ........................ APP-150

Transcript Senate Floor Discussion, May 23, 2019 ..................... APP-157

Transcript House Floor Discussion, May 30, 2019 ...................... APP-166

v

INDEX OF AUTHORITIES

Cases Allied Structural Steel Co. v. Spannaus,

438 US 234, 98 S Ct 2716, 57 L Ed 2d 727 (1978) ................................. 80 Arkansas Game and Fish Com'n v. U.S.,

133 S Ct 511, 184 L Ed 2d 417 (2012) .................................................... 75 Arken v. City of Portland,

351 Or 113, 263 P3d 975 (2011) .................................................. 6, 63, 64 Association of Surrogates & Supreme Court Reporters v. New York,

940 F2d 766 (2d Cir 1991) ...................................................................... 84 Babbit v. Wilson,

9 CalApp3d 288 ...................................................................................... 50 Bakenhaus v. City of Seattle,

48 Wash2d 695, 296 P2d 536 (1956) ..................................................... 49 Brown v. Legal Found. of Washington,

538 US 216, 123 S Ct 1406, 155 L Ed 2d 376 (2003) ....................... 77, 78 Campbell et al. v. Aldrich,

159 Or. 208, 79 P.2d 257 (1938) ............................................................ 37 Cereghino et al v. State Highway Com.,

230 Or 439, 370 P2d 694 (1962) ............................................................ 75 Coast Range Conifers v. Board of Forestry,

339 Or 136, 117 P3d 990 (2005) ...................................................... 75, 76 Contributors to Pennsylvania Hospital v. Philadelphia,

245 US 20, 38 S Ct 35 ............................................................................ 77 Dunn v. City of Milwaukie,

355 Or 339 (2014) ............................................................................ 75, 76

vi

Eckles v. State of Oregon,

306 Or 380, 760 P2d 846 (1988) .................................................... Passim El Paso v. Simmons,

379 US 497, 85 S Ct 577, 13 L Ed 2d 446 (1965) ................................... 77 Energy Reserves Grp., Inc. v. Kansas Power & Light Co.,

459 US 400, 103 S Ct 697, 74 L Ed 2d 569 (1983) ................................. 83 Fletcher v. Peck,

10 US 87, 3 LEd 162 (1810) ................................................................... 37 Gen. Motors Corp. v. Romein,

503 US 181, 112 S Ct 1105, 117 L Ed 2d 328 (1992) ....................... 80, 82 Goldsmith v. Brown,

5 Or 418 (1875) ...................................................................................... 37 Hanson v. City of Idaho Falls,

92 Idaho 512, 446 P2d 634 (1968) ......................................................... 49 Hawkins v. City of La Grande,

315 Or 57, 843 P2d 400 (1992) .............................................................. 75 Home Bldg. & Loan Ass'n v. Blaisdell,

290 US 398, 54 S Ct 231, 78 L Ed 413 (1934) .................................. 80, 81 Hughes v. State,

314 Or 1, 838 P2d 1018 (1992) ...................................................... Passim In Re Marriage of Richardson,

307 Or 370, 769 P2d 179 (1989) ............................................................ 77 Kern v. City of Long Beach,

29 Cal2d 848, 179 P2d 799 (1947) ......................................................... 50 McGrath v. Rhode Island Ret. Bd.,

88 F3d 12 (1st Cir 1996) ................................................................... 81, 87

vii

Moeller v. Multnomah County, 218 Or 413, 345 P2d 813 (1959) ............................................................ 75

Moro v. State,

357 Or 167, 351 P3d 1 (2015) ........................................................ Passim O'Harra v. The City of Portland,

3 Or 525 (1869) ...................................................................................... 37 RUI One Corp. v. City of Berkeley,

371 F3d 1137 (9th Cir. 2004) ............................................................ 80, 81 Southern California Gas Co. v. City of Santa Ana,

336 F 3d 885 (9th Cir 2003) ..................................................................... 83 State of Nev. Employees Ass'n, Inc. v. Keating,

903 F2d 1223 (9th Cir 1990) ............................................................. 81, 82 Stovall v. State of Oregon,

324 Or 92, 922 P2d 646 (1996) .............................................................. 42 Strunk v. Public Employees Retirement Bd.,

338 Or 145, 108 P3d 1058 (2005) .................................................. Passim Taylor v. Multnomah County Deputy Sheriff’s Retirement Board,

265 Or 445, 510 P2d 339 (1973) ................................................ 41, 49, 50 Trustees of Dartmouth College v. Woodward,

17 US 518, 4 LEd 629 (1819) ................................................................. 37 United States Trust Co. v. New Jersey,

431 US 1, 97 S Ct 1505 (1977) ....................................................... Passim Univ. of Haw. Prof'l Assembly v. Cayetano,

183 F3d 1096 (9th Cir 1999) ....................................................... 82, 84, 85 Weaver v. Evans,

80 Wash2d 461, 495 P2d 639 (1972) ..................................................... 49

viii

Yeazell v. Copins, 98 Ariz 109, 402 P2d 541 (1965) ............................................................ 49

Statutes 26 U.S.C. 415(b) ....................................................................................... 46 IRC § 72(d) ............................................................................................... 62 IRC §401(a)(17) ...................................................................... 12, 16, 47, 55 IRC § 414(k) ............................................................................................. 62 IRC § 415 ................................................................................................. 62 Or Laws 1953, ch 200 ......................................................................... 54, 63 Or Laws 1983, ch 830 ............................................................................... 54 Or Laws 1987, ch 617 ............................................................................... 54 Or Laws 1999, ch 317 ............................................................................... 54 Or Laws 2003, chs 67, 68, 625, 733 ..................................................... 8, 61 Or Laws 2019, ch 355 ....................................................................... 1, 4, 32 ORS 237.147 (1979) ..................................................................... 14, 52, 60 ORS 238A.005 ........................................................................ 43, 45, 47, 56 ORS 238A.025 .................................................................................... 62, 65 ORS 238A.100 et seq. .............................................................................. 46 ORS 238A.115 .......................................................................................... 49 ORS 238A.125 ............................................................ 11, 43, 46, 56, 65, 70 ORS 238A.160 .......................................................................................... 16

ix

ORS 238A.220 .................................................................................... 11, 65 ORS 238A.330 .................................................................................. Passim ORS 238A.335 .......................................................................................... 13 ORS 238A.350 ...................................................... 11, 43, 44, 59, 60, 62, 65 ORS 238A.470 .................................................................................. Passim ORS 238.005 .................................................................................... Passim ORS 238.200 .................................................................................... Passim ORS 238.205 ............................................................................................ 44 ORS 238.225 ...................................................................................... 11, 65 ORS 238.250 ...................................................................................... 12, 59 ORS 238.280 ............................................................................................ 16 ORS 238.300 .................................................................................... Passim ORS 238.430 et seq ................................................................................. 11 ORS 238.435 ............................................................................................ 16 ORS 238.660 ...................................................................................... 63, 64 ORS ch 238 .......................................................................................... 7, 41 ORS ch 238A ........................................................................................ 7, 41 ORS ch 652 .......................................................................................... 2, 87 Pub L 103 - 66, §312 (1993) ..................................................................... 55

x

Rules ORAP 5.05 ............................................................................................... 88 Regulations OAR chapter 459 ........................................................................................ 7 OAR 459-005-0525 (2019) ............................................................... Passim Other Authorities Oregon Constitution, Article I, Section 18 ................................... 1, 4, 73, 74 Oregon Constitution, Article I, Section 21 ........... 1, 3, 37, 39, 41, 67, 73, 74 United States Constitution, Article I, Section 10 .... 1, 3, 4, 37, 79, 80, 82, 84

1

PETITIONERS’ OPENING BRIEF

I. STATEMENT OF THE CASE

A. Nature of the Action

This case involves a direct challenge to the constitutionality of certain

sections of Oregon Laws 2019, chapter 355 (“SB 1049”) which, in a

concerted effort to relieve public employers of their obligations under the

Public Employee Retirement System (“PERS”): (1) redirect some employee

contributions from employee accounts in the Individual Account Program

(“IAP”) to a new employee pension stability account (“EPSA”) used to offset

employer costs and (2) reduce and cap employee “salary” used to calculate

both contributions for and retirement benefits of PERS members.

Specifically, Petitioners Jennifer James, Lisa Riegel, Rosanne Scott,

Robert Martineau, Regina Thompson, Emily Marx, Dustin Andrews,

Brandon Silence, and Thomas Cleary (hereinafter referred to collectively as

“Petitioners”) allege that SB 1049, §§1-19 (employee contributions) and §§

39-40 (salary cap) impair the obligations of the PERS contract in violation

of Article I, Section 21 of the Oregon Constitution and Article I, Section 10

of the United States Constitution, constitute a taking without just

compensation in violation of Article I, Section 18 of the Oregon

Constitution, or breach the PERS contract such that they are entitled to a

2

remedy.1 To remedy these constitutional and contractual violations,

Petitioners request that the court declare the challenged provisions of

SB 1049 to be unconstitutional and void in whole or in part, or, in the

alternative, declare that petitioners are entitled to damages for breach of

contract2 or just compensation; enjoin respondents from implementing

SB 1049 in whole, or in part; and award such other relief as may be just

and equitable, including costs and reasonable attorney fees incurred in the

prosecution of this action under the public purpose or common fund

doctrines or under ORS chapter 652 relating to collection of wages.

B. Nature of the Judgment Sought to be Reviewed

There is no judgment sought to be reviewed because this case

involves direct judicial review of a legislative enactment.

1 All petitioners are impacted by the redirection of employee

contributions under SB 1049, §§ 1-19. Petitioner Cleary currently earns a salary above the cap imposed by SB 1049, §§ 39-40, and is also impacted by those sections.

2 In Strunk v. Public Employees Retirement Bd., 338 Or 145, 225, 108 P3d 1058 (2005), the court recognized that, “normally, this court leaves to the legislature, as the ‘most appropriate branch of government in the first instance,’ the choice as to which remedy to select when legislation breaches a statutory contract.” Citing Hughes v. State, 314 Or 1, 838 P2d 1018 (1992). However, under the unique circumstances of that case, the court voided the challenged provisions of the law. This case presents the similar circumstances.

3

C. Statutory Basis of Jurisdiction

SB 1049, § 65(1) expressly confers jurisdiction on the Oregon

Supreme Court to determine “whether this 2019 Act breaches any contract

between members of the Public Employees Retirement System and their

employers or violates any provision of the Oregon Constitution or of the

United States Constitution, including, but not limited to, impairment of

contract rights of members of the Public Employees Retirement System

under Article I, section 21, of the Oregon Constitution, or Article I, section

10, clause 1, of the United States Constitution.”

D. Entry of Judgment and Timeliness of Appeal

SB 1049, § 65(2)(a) gives any person who has been or will be

adversely affected by the legislation the option to file a petition for direct

review with this court within 60 days after the effective date of the

legislative acts. The effective date of SB 1049 was June 11, 2019.

Petitioners filed their petition challenging SB 1049 on August 9, 2019.

Therefore, Petitioners’ petitions for direct review are timely.

E. Questions Presented

1. Do SB 1049, §§1-19 and §§39-40 impair any obligations of the

PERS Contract in violation of Article I, section 21 of the Oregon

Constitution or in the alternative, breach the PERS Contract?

4 2. Do SB 1049, §§ 1-19 and §§39-40 effect a taking of private

property for public use without just compensation in violation of Article I,

section 18 of the Oregon Constitution?

3. Do SB 1049, §§1-19 and §§39-40 impair any obligations of the

PERS Contract in violation of Article I, section 10, clause 1 of the United

States Constitution or, in the alternative, breach the PERS contract?

F. Summary of Argument

This direct review proceeding gives the Oregon Supreme Court the

opportunity to confirm for PERS members, PERS-participating employers,

and the Legislative Assembly alike that there are certain “core benefit”

rights protected by the “PERS Contract” which may not be constitutionally

impaired, taken, or breached.

One of those “core benefits” is the right to an “employer contribution”-

funded Full Formula pension or service retirement allowance for service

performed on or after January 1, 2004. The Full Formula benefit derives

from statutes that are “remunerative” and “mandatory” within the meaning

of this court’s decision in Moro v. State, 357 Or 167, 204-205, 351 P3d 1

(2015). In Strunk v. Public Employees Retirement Bd., 338 Or 145, 186,

190-91, 108 P3d 1058 (2005), this court, after reviewing the text, context,

and legislative history ORS 238.300, concluded that the 1981 enactment of

5

the Full Formula benefit was unambiguously promissory, shifted the risk of

investment losses to employers, and set the floor below which retirement

benefits could not fall. To assure that benefits do not fall below that floor,

the court should find that the components of the Full Formula benefit,

including the definition of “salary” used to calculate “final average salary”, is

an “expressly or impliedly irrevocable” term of the PERS contract and may

not be changed even prospectively for Tier 1 and Tier 2 members.

Alternatively, if the court does not find that term to be “irrevocable,”

the court must, at a minimum, protect such benefits attributable to service

already provided under a “segmented service” approach. This approach

was approved by the majority in Moro, 357 Or 232, and is also embedded

in the express reservation of rights statute, ORS 238A.470, applicable to

OPSRP members. SB 1049, §§39-40 and their implementing PERS

regulation OAR 459-005-0525, however, do not use a “segmented service”

approach to change the definition of “salary”, and therefore, must be voided

as unconstitutionally reducing benefits attributable to prior service.

The court should also void SB 1049, §§1-19 which redirect some of

the “employee contributions” from the IAP to the EPSAs to pay for the

“pension” benefit because that change also violates the promise of an

“employer contribution”-funded pension or service retirement allowance for

6

service performed on or after January 1, 2004. In addition, it violates the

“exclusive benefit” doctrine and “trust principles” which this court found to

be a term of the PERS contract in Arken v. City of Portland, 351 Or 113,

162-64, 263 P3d 975 (2011). Under those principles, IAP employee

contributions belonging to active Tier 1, Tier 2, and OPSRP members may

not be diverted to reduce “employer costs” for system funding concerns

driven by benefits attributable to other employees, primarily retirees.

The system has sufficient funds in “employer reserves” to pay the

accrued liability for benefits owed to active Tier 1, Tier 2, and OPSRP

members; nonetheless, SB 1049, §§1-19 will divert a portion of active

employee IAP contributions to provide additional funding for the pension

system as a whole. This diversion is not based on the funding needs of

active members but remains in place until the entire system is 90% funded.

The legislative history for SB 1049 makes clear that the legislature

understood that the unfunded actuarial liability (UAL) problem of the system

is a retiree-driven, “legacy cost” for public services which must be borne by

all Oregonians. Nevertheless, because of a lack of political support for

taxes or true revenue reform, SB 1049 unconstitutionally passes that cost

on to active members, accomplishing indirectly what it was prohibited from

7

accomplishing directly. Therefore, the court should declare the challenged

sections of SB 1049 null and void.

G. Summary of Material Facts

1. PERS Membership Overview.

“In one form or another, Oregon has provided its public employees

with a retirement plan, as a contractual benefit of public employment, since

1945. Strunk v. PERB, 338 Or 145, 157, 108 P3d 1058 (2005); see also

ER-100-101 (RJSF ¶1).3 Since 1953, those benefits have been

administered under PERS. Id. The provisions of PERS are contained in

chapters 238 and 238A of the Oregon Revised Statutes (ORS), as well as

portions of chapter 237, and also chapter 459 of the Oregon Administrative

Rules (OAR). ER-101 (RJSF ¶2).

Public employees become PERS members after working six months

in a qualified position for the state or one of the other 900-plus PERS-

participating public employers. ER-101 (RJSF ¶3). As of October 2018,

3 The acronym “RJSF” will be used throughout this brief to refer to the

parties’ Revised Joint Stipulated Facts and General Stipulations filed with the court on January 17, 2020. ER-100-130. The parties’ General Stipulations in the RJSF recognize that there are a number of historical facts regarding the 2003 and 2013 legislative changes to PERS and general operation of the system which are contained in this court’s prior decisions in Moro v. State, 357 Or 167, 174-191, 351 P3d 1 (2015) and Strunk, 338 Or at 151-168. Petitioners refer the court back to those facts for the history and operation of the system.

8

there were more than 367,000 members in PERS, including members

currently employed in qualifying positions (active members), members not

currently employed in qualifying positions who have not withdrawn their

accounts or retired (inactive members), and members who have retired

from the system and have begun receiving benefits (retired members). ER-

101. All these PERS members fall into three broad membership categories

based on their date of hire: (a) Tier 1 members are those hired before

January 1, 1996; (b) Tier 2 members are those hired between January 1,

1996 and August 28, 2003; and (c) OPSRP (short for Oregon Public

Service Retirement Plan)4 are those hired on or after August 29, 2003. Id.

2. Petitioner Information.

Petitioners are all public employees who are active members of

PERS. ER-121 (RJSF ¶43). Petitioner Jennifer James is a Head Secretary

at the Molalla River School District. ER-121-22 (RJSF ¶45). Petitioner Lisa

Riegel is a Financial Outreach Specialist for Mount Hood Community

College. ER-122 (RJSF ¶47). Petitioner Roseanne Scott is a Social

4 OPSRP or the third tier of PERS was created as part of the “2003

PERS Legislation” (used to refer collectively to Oregon Laws 2003, chs. 67 (HB 2003), 68 (HB 2004), 625 (HB 3020), and 733 (HB 2020)). As of December 31, 2017, 66% of active members in PERS were OPSRP members. APP-77.

9

Services Specialist for the Oregon Department of Human Services (DHS).

ER-123 (RJSF ¶49). Petitioner Robert Martineau is a Water Operations

Mechanic for the City of Portland. ER-124 (RJSF ¶51). Petitioner Regina

Thompson is a Right of Way Agent for the Oregon Department of

Transportation (ODOT). ER-124-25 (RJSF ¶53). Petitioner Emily Marx is a

registered nurse for Multnomah County. ER-125-26 (RJSF ¶55). Petitioner

Dustin Andrews is a registered nurse for the Oregon Health & Science

University (OHSU). ER-126-27 (RJSF ¶57). Petitioner Brandon Silence is a

Fire Captain for the City of Salem. ER-127 (RJSF ¶59). And, Petitioner

Thomas Cleary serves as an Assistant District Attorney for Multnomah

County. ER-128 (RJSF ¶61).

Some of the Petitioners are PERS Tier 1 members (Thompson,

Cleary), some are Tier 2 members (James, Scott, Martineau), and some

are OPSRP members (Riegel, Marx, Andrews, Silence). ER-121-128

(RJSF ¶43-61). All of the Petitioners are members of the Individual Account

Program (“IAP”) of PERS. ER-121 (RJSF ¶43). Sections 1-19 of SB 1049

(employee contributions) will reduce the amount of IAP retirement benefits

that all the Petitioners will receive, and they will be “adversely affected” by

those sections, as the term is used in section 65 of SB 1049, if they

continue in their PERS-covered employment after the effective date of July

12

a. “Employee Contributions” Fund IAP Account.

Before the 2003 PERS Legislation, PERS Tier 1 and Tier 2 members

made employee contributions to a “regular” member account in PERS. ER-

102 (RJSF¶6); ORS 238.250. The amounts in the regular accounts were

used at retirement to fund the annuity component of the Tier 1 and Tier 2

members’ service retirement allowance under ORS 238.300. Moro, 357 Or

at 178. However, the 2003 PERS Legislation (ORS 238.200(4)) prohibited

Tier 1 and Tier 2 members from continuing to “make employee

contributions to the fund for service performed on or after January 1, 2004.”

Id. Instead, since January 1, 2004, Tier 1, Tier 2, and OPSRP active

members have been required to make employee contributions of 6% of the

member’s salary to the IAP. ER-105 (RJSF¶15).

For purposes of calculating the employee contribution of 6% of a

member’s salary, prior to the enactment of SB 1049, ORS 238.005

contained no cap for salary for Tier 1 PERS members like Petitioner

Cleary. ER-113 (RJSF¶30). The definition for “salary" for Tier 2 and

OPSRP members, from their inception, has been set to track the level

prescribed by the Internal Revenue service under Internal Revenue Code

Section 401(a)(17), which was $280,000 in 2019 and is indexed for

inflation. ER-113 (RJSF¶30).

13 PERS Tier 1, Tier 2, and OPSRP active members’ 6% employee

contributions to the IAP may be paid by the members’ participating

employer pursuant to ORS 238A.335. ER-105 (RJSF¶16). The participating

employer may reduce the members’ employee compensation in order to

pay the contribution or may pay the contribution without reducing the

employee compensation [commonly known as the “employee pick-up”]. Id.

The employee contributions have been credited to individual

employee accounts in the IAP and adjusted annually for actual earnings

and losses minus any administrative expenses. ER-105 (RJSF¶15). [A]t

retirement, [a Tier 1, Tier 2, or OPSRP IAP member] can choose to receive

the account balance as a lump sum payment, or alternatively, in

installments paid over 5, 10, 15, or 20 years or as an Anticipated Life Span

Option distribution. Id.

b. “Employer Contributions” Fund Pension or Service Retirement Allowance.

In addition, at retirement, OPSRP members receive a pension funded

solely by employer contributions and earnings on those contributions, and

since January 1, 2004, the retirement allowance for [***] Tier 1 and Tier 2

members has been funded by employer contributions, employee

contributions made before January 1, 2004, and earnings. ER-105

(RJSF¶15)(emphasis added); see also ORS 238.200(4)(expressly

14

prohibiting Tier 1 and Tier 2 members from continuing to “make employee

contributions to the fund for service performed on or after January 1,

2004.”).

PERS uses the three methods referenced in ORS 238.300 to

calculate the service retirement allowance for Tier 1 and Tier 2 members.

ER-102-03 (RJSF¶7). The three methods are known as Full Formula,

Formula Plus Annuity, and Money Match. 7 Id. A PERS Tier 1 or Tier 2

member receives a service retirement allowance based on the formula that

produces the highest benefit amount. Id.

The majority of PERS Tier 1 and Tier 2 members are now retiring

under the Full Formula, which was intended by the legislature to be the

primary calculation method. ER-104 (RJSF¶11). The Full Formula was

enacted in 1981 and in Strunk, 338 Or at 190-191, [this court] characterized

it as “provid[ing] members with a formula under which the risk of earnings

loss fell—and continues to fall-- squarely on employers. The changes that

the 1981 amendments made to former ORS 237.147 (1979), now ORS

238.300 were material: they added a new, primary benefit calculator to the

7 See Strunk, 338 Or at 185 for a detailed description of the three

ORS 238.300 formulas for calculating Tier 1 and Tier 2 service retirement allowance benefits.

15

system and shifted the downside risk of investment return away from

members.” ER-104 (RJSF¶12).

The Full Formula calculates a member’s service retirement allowance

by multiplying the member’s final average salary by a statutory factor of

1.67 percent (two percent for police officers and firefighters) and then

multiplying the resulting figure by the member’s years of service. ER-103-

04 (RJSF¶10). That service retirement allowance then is funded by

calculating an annuity amount that is the actuarial equivalent of the

member’s pre-2004 account balances plus earnings through retirement (the

annuity component) and the remaining monthly benefit is funded by

employer reserves in an amount necessary to make up the difference (the

pension component). Id. Upon retirement, funds are transferred from the

Tier 1 and Tier 2 pre-2004 employee accounts and employer reserve

accounts8 into the Benefits-in-Force (“BIF”) reserve in an amount estimated

to be sufficient to fund each member’s benefit. ER-108 (RJSF¶24).

The OPSRP pension benefit is calculated similarly to the Tier 1 and

Tier 2 Full Formula benefit. The OPSRP general service pension is

calculated by multiplying the member’s final average salary by a statutory

8 The PERS Tier 1 and Tier 2 program has separate individual

accounts for each participating employer. ER-108 (RJSF¶24).

16

factor of 1.50 percent (1.8 percent for police officers and firefighters) and

then multiplying the resulting figure by the member’s years of service. The

“normal retirement age” for OPSRP members is later than for Tier 1 and

Tier 2 members. ER-104 (RJSF¶13); compare ORS 238.280 (Tier 1); ORS

238.435 (Tier 2); and ORS 238A.160 (OPSRP). In contrast to the Tier 1

and Tier 2 program, all OPSRP employer contributions are placed into a

single employer reserve without differentiation and all benefits are paid

from the OPSRP employer reserve. ER-108 (RJSF¶24).

For purposes of calculating “final average salary” for the pension or

service retirement allowance, prior to the enactment of SB 1049, ORS

238.005 contained no cap for salary for Tier 1 PERS members like

Petitioner Cleary. In addition, the definition for salary for Tier 2 and OPSRP

members, from their inception, have been set to track the level prescribed

in the Internal Revenue Code Section 401(a)(17), which was $280,000 in

2019 and is indexed for inflation. ER-113 (RJSF¶30).

4. System Funding.

At the end of each calendar year, the PERS actuaries calculate the

system’s funded status. ER-107 (RJSF¶21). Every two years, the PERS

Board sets individual employer contribution rates so that, over time, those

contributions will be sufficient to fund the benefits earned, if earnings and

17

other relevant actuarial factors (such as payroll growth, withdrawals,

retirements, and mortality) follow current assumptions and the contributions

are made. ER-107-08 (RJSF¶23).

Employer contribution rates consist of two components: the “normal

cost” and the “unfunded actuarial liability” (“UAL”). ER-107-08 (RJSF¶23).

An employer’s normal cost is an “actuarial present value estimate” of its

employees’ future benefits attributable to that biennium, stated as a

percentage of employee pay. The normal cost, therefore, is attributable

only to active members. Id. On the other hand, the UAL can be attributed to

all members, whether active, inactive, or retired.9 Id. When the plan is

underfunded, the board increases employer contribution rates above the

normal cost by including a rate that is projected to systematically reduce

the UAL. Id. Rather than increase employer contribution rates to eliminate

the UAL over a specified period of time if future experience matches

assumptions and contributions are made, contribution rates are set to pay

off the UAL over a 20-year period for Tier 1 and Tier 2 and over a 16-year

period for OPSRP. Id.

9 The UAL may result from the failure of the PERS fund investments

to achieve the system’s assumed rate of return or from the failure of the system to meet other projections such as payroll growth, withdrawals, retirements, and mortality. Moro, 357 Or at 176, 178.

18 Every two years, the PERS Actuary prepares detailed employer

contribution rate reports for each PERS-participating employer. See ER-

108 (RJSF¶ 25 for example). In these rate orders, which are stated as

percentage of salary for active members, employer contribution rates

include a normal cost rate for various employee groupings (Tier 1/Tier 2,

OPSRP, general service and police & fire), a Tier 1/Tier 2 system UAL rate,

and an OPSRP system UAL rate. Id.; see also ER-109 (RJSF ¶26). PERS

then adjusts the rates of individual employers for offsets from side accounts

and transition liabilities or surpluses.10 PERS deposits the funds received

from employers into the appropriate Tier 1 and Tier 2 or OPSRP reserve.

In its system valuations, employer rate orders, and investment

crediting, the PERS Tier 1 and Tier 2 program is tracked separately from

the OPSRP program. ER-108 (RJSF¶24). The PERS Tier 1 and Tier 2

program has separate individual accounts for each participating employer.

In contrast, all OPSRP employer contributions are placed into a single

OPSRP employer reserve. The employer reserves in the PERS Fund11

10 Employer side accounts hold deposits plus accumulated

investment returns from individual PERS employers of pension obligation bond proceeds and other advance lump-sum payments. ER-110 (RJSF¶29).

11 See ER-108 (RJSF¶24) for all the different accounts and reserves the system tracks within the Public Employees Retirement Fund.

19

include both normal cost and UAL payments made by employers. ER-109

(RJSF¶27).

5. December 31, 2017 Actuarial Valuation.

The system valuation as of December 31, 2017 set the employer

contribution rates for the 2019-2021 biennium. APP-80. As of December

31, 2017, approximately 72 percent of the total accrued liability of PERS

was attributable to members who are no longer working in PERS-covered

employment (retired and inactive members). ER-109-10 (RJSF¶28).

As of December 31, 2017, PERS was 73 percent funded (80 percent

including employer side accounts). ER-110-11 (RJSF¶29). The UAL was

$22.3 billion ($16.7 billion including side accounts). According to the PERS

analysis shown below, the liability for retirees as of December 31, 2017 is

$55 billion while the assets in the BIF which are set aside to pay benefits to

the retirees is only $24.3 billion. Tier 1 and Tier 2 active and inactive

member accrued liability is $23.4 billion while funds in the pre-2004

20

employee accounts and Tier 1/Tier 2 employer reserves is $33.3 billion.

OPSRP liabilities are $5.6 billion ($4.9 billion for active members, $385.2

million for inactive members and $310.1 million for retirees) and OPSRP

reserve assets are $4.1 billion.

5. 2019 Legislative Session.

Early in the 2019 Legislative Session, PERS Director Kevin Olineck

(“Olineck”) shared the above information showing that 72% of the system’s

accrued liabilities were attributable to “retirees” and “inactive members”

with the Joint Ways and Means Capital Construction subcommittee

(hereinafter “JWMCC”). APP-72, 76. The JWMCC was charged with

reviewing PERS legislative concepts, including SB 1049. APP-96. Other

21

materials provided to the JWMCC at its first, February 15, 2019 meeting

included the PERS “Comprehensive Annual Financial Report” for the Fiscal

Year Ended June 30, 2018 and a PERS system overview document

entitled “PERS By the Numbers,” updated September 2018.12

After the February 15, 2019 meeting, in response to questions from

the JWMCC members, the PERS Director also provided a letter to the

JWMCC dated February 20, 2019, (APP-91-92) explaining the state of the

system’s “legacy UAL” and attempts at PERS “solutions” as follows:

“There are no short-term, or inexpensive, solutions that solve the legacy UAL associated with a retirement system as mature as PERS. Simply put, the UAL was decades in the making and will take decades to resolve, using solid actuarial principles. Trying to pick winners, losers, or mandate “fairness” of employer rates and member benefits is not a long-term solution to this problem. In fact, some perceived solutions merely add complexity while basically maintaining the fiscal status quo, or create a deeper hole both fiscally and administratively in the long-term. There is a strong argument to say the 2003 reforms that created the OPSRP pension program and the IAP account program for all members have been successful in establishing a sustainable cost basis for OPSRP members, while providing what are seen to be adequate benefits. The legacy UAL cost for Tier One and Tier Two members will remain, and employers need to pay that until the UAL associated with these members is eliminated. This is the cost of the work PERS members have

12 See February 15, 2019 Meeting Materials located on the Oregon

Legislative Information Service (OLIS) at https://olis.leg.state.or.us/liz /2019R1/Committees/JWMCC/2019-02-15-12-00/MeetingMaterials

22 done over the last seven decades to create a system of public safety, infrastructure, schools, and other government services in Oregon.”

The JWMCC received additional invited testimony and information

about PERS funding and administration and legislative concepts from

various sources during multiple hearings in March and April of 2019.13 In

their testimony on March 29, 2019, the PERS Coalition of unions

representing public employees like Petitioners reminded the JWMCC that

most of the legislative concepts appeared, among other things, “to cut

benefits again for workers who are not the source of the unfunded liability

and who are already receiving lower benefits.” See March 29, 2019

JWMCC Meeting Materials (Testimony of PERS Coalition) (emphasis in

original).14

On May 6, 2019, the key legislative concepts were introduced as SB

1049 and referred to the Joint Ways and Means Committee. APP-95-97.

13 See March 1, 2019 JWMCC Meeting Materials on OLIS at

https://olis.leg.state.or.us/liz/2019R1/Committees/JWMCC/2019-03-01-12-00/MeetingMaterials; See March 8, 2019 JWMCC Meeting Materials on OLIS at https://olis.leg.state.or.us/liz/2019R1/Committees/JWMCC/2019-03-08-12-00/MeetingMaterials; See March 29, 2019 JWMCC Meeting Materials on OLIS at https://olis.leg.state.or.us/liz/2019R1/Committees /JWMCC/2019-03-29-12-00/MeetingMaterials; See April 12, 2019 JWMCC Meeting Materials on OLIS at https://olis.leg.state.or.us/liz/2019R1 /Committees/JWMCC/2019-04-12-12-00/MeetingMaterials

14 Located on OLIS at https://olis.leg.state.or.us/liz/2019R1/ Downloads/CommitteeMeetingDocument/182868

23

The Joint Ways and Means Committee referred the bill on to the JWMCC.

Id. On May 10, 2019, the JWMCC received a copy of the SB 1049-1

amendments15 and heard from PERS Director Olineck regarding the

legislative concepts. APP-100-19. At that meeting, Olineck also presented

to the JWMCC analysis about these concepts prepared by the PERS

Actuary, dated May 9, 2019. APP-120-45.

The PERS Actuary’s May 9, 2019 analysis was prepared at the

requested of LFO and PERS. ER-111-113 (RJSF¶30). The analysis

covered the following legislative concepts: (1) Redirect Member

Contributions; (2) Final Average Salary; (3) Money Match Interest Rate; (4)

Reamortization of Tier 1/Tier 2 Unfunded Actuarial Liability (UAL); and (5)

Contributions on Rehired Retiree Member Payroll. The PERS Actuary’s

analysis showed the impact of the legislative concepts on the December

31, 2017 Valuation results were as follows:

15 See the text of SB 1049-1 on OLIS at https://olis.leg.state.or.us

/liz/2019R1/Downloads/CommitteeMeetingDocument/198604

24

The analysis showed the estimated impact on 2021-2023 uncollared Base

employer contribution rates would be as follows:

The analysis indicated that [***] the following table showed the impact on

employer rates by biennium of [the IAP redirect] offset:

The analysis estimated that the impact of redirecting IAP contributions on

illustrative examples of PERS Tier 1, Tier 2, and OPSRP members’ IAP

account balances would be as follows, assuming a 7.0% annual investment

return and pay increases of 4%:

25

The analysis further indicated that based on the legislative concepts

analyzed, the PERS System would not reach 90% funded status until

approximately 2035 if the system met its assumed rate of return of 7.2%

and even later if the actual rate of return were lower such as 5%. Finally,

with regard to the final average salary limit legislative concept, the

Actuary’s analysis explained

In this Final Average Salary limit example, the PERS Actuary used what

the parties will refer to as a “segmented service” approach.

26

On May 14, 2019, the JWMCC held a public hearing and discussed

the SB 1049-2 amendments.16 At the public hearing, the PERS Coalition of

unions again reminded the JWMCC to be mindful of the fact that the

changes would impact members who were not the cause of the UAL and

who were already receiving lower and more affordable benefits. See APP-

146-49. The testimony also cautioned the JWMCC to be mindful to protect

benefits attributable to service provided prior to the effective date of the

change. Id. at 147. The testimony further warned the JWMCC that any

redirection of IAP contributions would need to take into account benefits

attributable to service already provided within the meaning of this court’s

decision in Moro. Id. For example, there would be members whose

retirement benefit would be calculated under the Money Match method and

would be based solely upon the value of their pre-January 1, 2004 “regular

account” balance and service provided prior to January 1, 2004.Id. Yet, SB

1049 would still redirect their IAP contributions. Id. In addition, the

redirection of IAP contributions under SB 1049 came with no additional

retirement benefit, unlike the redirection to the IAP before this court in the

16 See May 14, 2019 Meeting Materials located on OLIS at

https://olis.leg.state.or.us/liz/2019R1/Committees/JWMCC/2019-05-14-17-00/MeetingMaterials

27

Strunk case. APP-147. Finally, the testimony reminded the JWMCC that it

would not be legal for the legislature to simply redirect active employee IAP

contributions to pay for the existing UAL of the system. Id.

During the session, Legislative Counsel Marissa James and PERS

Manager, Policy Analysis and Compliance Division, Stephanie Vaughn also

discussed limitations on use of redirected member contributions, including

the following:

ER-114 (RJSF¶31).

On May 21, 2019, the JWMCC held a work session on the bill and

reviewed the SB 1049-5 and 1049-8 amendments.17 Based on the advice

from the Legislative Fiscal Office18 and after review of a Preliminary Budget

Report (APP-150-56) highlighting the employer contribution rate savings for

17 See May 21, 2019 Meeting Materials on OLIS at https://olis.leg.

state.or.us/liz/2019R1/Committees/JWMCC/2019-05-21-09-00/Meeting Materials

18 See LFO Recommendation on OLIS at https://olis.leg.state.or.us /liz/2019R1/Downloads/CommitteeMeetingDocument/201112

28

the 2021-2021 biennium associated with the bill’s various components from

the PERS Actuary’s May 9, 2019 analysis, the JWMCC voted to

recommended adoption of SB 1049-8 to the full Joint Ways and Means

Committee.19

Later that same day, the Joint Ways and Means Committee held a

work session on SB 1049.20 The committee reviewed the recommendation

of the JWMCC, the Preliminary Budget Report and the SB 1049-9

amendments. The committee voted to adopt SB 1049-8 and to move the

bill to the floor of the Senate.21

The Senate voted to adopt SB 1049-8 on May 23, 2019 and referred

the bill to the House.22 A common theme running through the comments on

the floor of the Senate was that the PERS UAL was a shared responsibility

and debt of the public as a whole, and that asking just a few Oregonians

19 See May 21, 2019 Meeting Recording Log on OLIS at

https://olis.leg.state.or.us/liz/2019R1/Committees/JWMCC/2019-05-21-09-00/RecordingLog

20 See May 21, 2019 Joint Ways and Means Committee Meeting Materials on OLIS at https://olis.leg.state.or.us/liz/2019R1/ Committees/JWM/2019-05-21-12-00/MeetingMaterials

21 See May 21, 2019 Joint Ways and Means Committee Meeting Recording Log on OLIS at https://olis.leg.state.or.us/liz/2019R1 /Committees/JWM/2019-05-21-12-00/RecordingLog

22 See SB 1049 Bill Measure Summary on OLIS at https://olis.leg.state.or.us/liz/2019R1/Measures/Overview/SB1049

29

(i.e., active PERS members who were not the cause of the UAL) to help

pay down that public debt was not fair, but that Senators felt compelled to

act to prevent potential future cuts to public services, particularly schools.

See Senate Floor Discussion23 See also APP-157-165 (Transcript of

Senate Floor Discussion), including the following excerpts:

Sen. Girod – “Colleagues, again, this is tough. If you’re from the left, I’m sure you were going to say that it’s unfair. I couldn’t agree with you more. It is extremely unfair. But to do nothing is even worse because of the state that we are in” APP-157. Sen. Knopp – “To public employees, this is difficult. There’s no doubt. This bill, though, takes the best of the bad options” APP-158.

Sen. Golden – “None of my choices are politically easy or pain-free, but we already know that about the PERS challenge. But, that’s not a license to shove a widely disproportionate share of what is all of our burden on the shoulders of a very small percentage of Oregonians who didn’t create this mess and that are not unduly benefiting from it.” APP-159. Sen. Fagan – “This bill comes down to two key questions for me. Number one, do I believe that we should fully fund the services that Oregonians rely on, and then question number two is are the people doing that work overpaid? And that answer for me is “yes” on the first question and “no” on the second question. They are not overpaid, and as I testified in committee Oregon teachers saved my life.” APP-160. Sen. Frederick- “This issue is a very, very difficult one for everyone here. It’s particularly difficult for me. It is not simply a

23 See May 23, 2019 Senate Floor Recording and Recording Log on

OLIS at http://oregon.granicus.com/MediaPlayer.php?clip id=27004

30 bumper sticker issue. The folks who created the crisis we have with PERS are not the ones who we are asking to take on the main role.” APP-161. Sen. Gelser – “ There are no easy answers because the cost of PERS is real. This is a very real challenge for our cities, our counties, our school districts, all of our public employers, every single Oregonian. This is a debt that we have all incurred, and it is a debt that has provided benefits that we all share. [***] Every single one of us should help pay that debt. We should not put that debt on the shoulders of a small group of people.” APP-162. Sen. Manning- This is very difficult as you’ve heard all my colleagues get up and express. And, I stand firmly with workers but I’m looking at this as a two-legged ladder. It’s unfair that you have to have both sides in order to get to where we need to do and that’s education for our kids. I know that we can do much better with this, and I am fully committed to doing much better. This is a tough one. This is really tough.” APP-164.

See also Written Vote Explanation24

Sen. Prozanski – “As I mentioned, this was not an easy vote but based on all the factors presented to us, it was a necessary one to ensure that there would not be more devastating impacts on state public workers or services to the public. I look forward to the Legislature providing additional compensation to those workers to offset their redirected contribution rates.”

The House took up SB 1049 A-Engrossed on May 30, 2019. The

discussion on the floor of the House was similar in nature to that on the

24 See Text of Written Vote Explanation on OLIS at

https://www.oregonlegislature.gov/pcive/SB%201049%20Prozanski%205-24-2019.pdf

31

floor of the Senate. House Representatives recognized that the benefit cuts

included in SB 1049 were unfair to current active workers who were not the

cause of the system’s UAL. See House Floor Discussion;25 See also APP-

166-70 (Transcript House Floor Discussion). Even Representative Holvey

who carried the bill to the floor shared the following concerns about the bill

in his closing (APP-169):

“Thank you, Madam Speaker. Colleagues, it’s difficult. This is a difficult vote. And, had I or anybody in this body been willing, which I would be, to raise taxes to cover this increase, we would have done it. We tried to go down that road, but we heard, no we won’t vote for raising taxes to solve these sorts of problems. We’d rather see your budgets cut. That’s not a solution. [***] Colleagues, I believe Senate Bill 1049A is that solution. But make no mistake, the work is not done, and we will struggle with our workforce until we raise enough revenues in this state to pay workers what they are deserved. We have trouble filling our vacant positions because our compensation is not high enough. We need salary increases around this state. I challenge you. I will vote for those increases but right now, we have to stem this impending issue coming at us in the 21-23 biennium. And, if you think doing nothing is an answer, I believe you are wrong. I urge an aye vote.”

After the bill passed the House 31 to 29, a number of the Representatives

filed individual written explanations of their votes.26

25 See House Floor Recording and Recording Log on OLIS at

http://oregon.granicus.com/MediaPlayer.php?clip id=07b33cea-22ca-4f70-b790-d6eb4d441a35&meta id=8a2403fa-e9e3-4815-9906-119f6d334348

26 See text of Written Vote Explanations on OLIS at https://www.oregonlegislature.gov/pcive/Forms/Display.aspx?View

32

SB 1049 became effective on June 11, 2019 and has been

incorporated into the 2019 Oregon Laws as chapter 355. APP-1-30.

6. SB 1049 Changes.

Although SB 1049 made other changes to the system, such as: (1)

extending the amortization period for the existing Tier 1 and Tier 2

unfunded liability (§27); (2) allowing employees to choose their preferred

TDF (§§28-33); (3) allowing retirees to work full-time during the period

2020-2024 to address a workforce shortage (§§34-38); and (4) providing

some new funding for employer rate relief and reporting (§§20-26 and 42-

58), the provisions challenged by Petitioners and the subject of this action

concern the benefit reductions for active members effected by: (1)

redirection of employee contributions from the IAP to the new EPSA

accounts (§§1-19) and (2) the capping of salary for purposes of

contributions and calculation of benefits (§§39-40).

a. Redirection of Employee Contributions from IAP to EPSA.

Pursuant to SB 1049, §1(2)(c), a portion of the employee

contributions to members’ IAP accounts of active Tier 1, Tier 2, and

OPSRP members will be redirected to the new [***] EPSAs established for

={55B3C8F7-2A7D-440A-970E-9E9C88208AAB}&FilterField1=Session &FilterValue1=2019R1&FilterField2=Measure&FilterValue2=SB1049

33

each member. ER-115 (RJSF¶34). More specifically, after July 1, 2020, if

the IAP member’s salary exceeds $2,500 in a calendar month (which is

likely to be the case for all Petitioners), then 2.5% of the member’s salary

for Tier 1 and Tier 2 members and 0.75% of the member’s salary for

OPSRP members will be placed in [the] new [***] EPSAs. ER-114

(RJSF¶33). The funds in the EPSAs will not be subject to a match of

employer contributions at retirement and the redirection will continue until

the system as a whole is 90 percent or greater funded, including employer

side accounts. ER-115 (RJSF¶34). The member’s ESPA will be applied to

the cost of the member’s pension benefit accrued on or after July 1, 2020.

Any amount in the ESPA that exceeds the cost of the member’s post-July

1, 2020 accrued benefit will be paid out to the member in a lump sum.[27]

According to the PERS Actuary, the system as a whole (including employer

side accounts) is not projected to reach this 90 percent or greater funded

status until after 2035, under current PERS assumptions. The amortization

period for OPSRP UAL is shorter than the amortization period for the UAL

of the Tier 1 and Tier 2 program, and therefore, it is anticipated that there

27 According to Petitioners Consulting Actuary, it is highly unlikely that

any of those amounts would be returned because the amounts diverted will not exceed the future normal cost for pension benefits. See e.g. ER-98.

34

will be no UAL attributable to OPSRP sooner than to the Tier 1 and Tier 2

program if actual experience going forward matches current assumptions.

ER-115 (RJSF¶34).

b. Salary Cap for Contributions and Benefits.

Pursuant to SB 1049, §§39-41, effective January 1, 2020, the

definition of “salary” for all purposes under PERS (including for calculating

PERS Tier 1, Tier 2, and OPSRP members’ IAP contributions and pension

benefits under the system) is capped at $195,000 for a calendar year

(adjusted annually for inflation). ER-116-17 (RJSF¶37). If any period over

which salary is determined is less than 12 months, the $195,000 cap will be

prorated for that period. Id. PERS is granted the authority to take action to

implement the change. Id.

7. PERS Implementation of SB 1049 Changes.

a. Salary Cap OAR Adopted.

Pursuant to SB 1049, §62, the PERS Board is given the authority to

take action to implement the legislative change regarding the salary

limitation provisions of SB 1049. ER-117 (RJSF¶39). To implement the

terms of SB 1049, the PERS Board used the rule-making process. The

PERS Board received comments from two parties recommending that, at a

minimum, PERS should implement the salary limitation provisions of SB

35

1049 using the “segmented service” approach modeled by the PERS

Actuary in its May 9, 2019 analysis provided to the legislature. At the

December 6, 2019 PERS Board meeting, the PERS Board voted to adopt

OAR 459-005-0525 (Ceiling on Compensation for Purposes of

Contributions and Benefits)(APP-31-32) from the notice of the rule without

any changes. The final rule does not use the “segmented service”

approach. According to the PERS Actuary, use of the “segmented service”

approach would result in a higher retirement benefit amount for some

members.

PERS also created a website to explaining how it intends to apply the

SB 1049 salary cap. ER-117 (RJSF¶38). On the website, PERS has

provided the examples of how it intends to apply the salary limitation. See

ER-118-119 (RJSF¶39)(Including excerpts of examples for Tier 1/Tier 2 full

and partial year, and OPSRP)

b. Redirection of Employee IAP Contributions to EPSA.

Pursuant to SB 1049, §60, the PERS Board is given the authority to

take action to implement the legislative redirection of member contributions

from the IAP to the new EPSA accounts. ER-120 (RJSF¶41). Although the

PERS Board has not yet made a final decision, the PERS Actuary’s

analysis assumes that the redirected IAP member contributions to their

36

EPSAs will offset 2021-2023 employer contributions. At the October 4,

2019 PERS Board meeting, the PERS Actuary provided the PERS Board

the following information regarding the impact of using the redirected IAP

contributions to offset employer contributions in the 2021-2023 biennium.

II. FIRST ASSIGNMENT OF ERROR

SB 1049, §§1-19 and §§ 39-40 impair obligations regarding IAP “employee contributions,” “employee “salary,” and “employer contribution”-funded pension benefits of the PERS contract in

violation of Article I, Section 21 of the Oregon Constitution or in the alternative, breach those terms of the PERS contract.

A. Standard of Review

In a direct review proceeding such as this, “The court conducts a de

novo review of the evidentiary record and a plenary review of the legal

issues presented.” Strunk, 338 Or at 155. With regard to “order of review,”

the court has explained that when it is presented with multiple bases for

disposition, it addresses state constitutional law claims before considering

the federal claims. Moro, 357 Or at 192 citing Strunk, 338 Or at 171.

37

B. Preservation of Error

Petitioners preserved these claims through their First, Fourth, Fifth

and Eighth Claims for Relief in their Petition.

C. Argument

1. Legal Standard.

Article I, Section 21, of the Oregon Constitution provides in relevant

part: “No law * * * impairing the obligations of contracts shall ever be

passed.” That provision was adopted in 1857 and derived from the federal

Contract Clause, Article I, section 10, clause 1, of the United States

Constitution. See Moro, 357 Or at 192 citing Eckles v. State of Oregon, 306

Or 380, 389-390, 760 P2d 846 (1988)(tracing the history of the state

Contract Clause). In line with the early federal Contract Clause cases,28

Article I, section 21, has been applied to contracts of the state and its

subdivisions. Eckles, 306 Or at 390, citing Campbell et al. v. Aldrich et al.,

159 Or. 208, 213–14, 79 P.2d 257 (1938); O'Harra v. The City of Portland,

3 Or. 525, 526–27 (1869); see also Goldsmith v. Brown, 5 Or 418

28 In Eckles, 306 Or at 390, this court explained that, as early as

Fletcher v. Peck, 10 US 87, 3 LEd 162 (1810), the Supreme Court of the United States used the federal provision to prevent Georgia from nullifying its land grants, and in the famous case of Trustees of Dartmouth College v. Woodward, 17 US 518, 4 LEd 629 (1819), the Court used the provision to prevent New Hampshire from changing the terms of a pre-independence royal charter that had been granted to Dartmouth College.

38

(1875)(finding that 1874 Act violated contract rights acquired under the act

of 1870 to payment of the bonds in question at the earliest period citing

federal Dartmouth College case).

To determine whether a law violates Article I, section 21, this court’s

analysis has focused on the following questions: (1) is there a contract?; (2)

if so, what are its terms?; (3) what obligations do those terms require?; and

(4) has the law in question impaired any obligation of that contract? Moro,

357 Or at 194 citing Strunk, 338 Or at 170 and Hughes, 314 Or at 14.

This court will normally apply general principles of contract law to

these questions. Hughes, 314 Or at 14. However, when the State is a party

to the contract, the following additional rules apply: (1) a state contract will

not be inferred from legislation that does not unambiguously express an

intention to create a contract; (2) the Contract Clause does not limit the

state’s power of eminent domain; and (3) the state may not contract away

its “police power.” Id.

In determining whether a particular statute unambiguously expresses

an intent to be contractual in nature, “the context in which the * * * statute is

enacted is of primary importance.” Hughes, 314 at 25; see also Strunk,

338 Or at 183, n 34 (“We decline respondents' invitation to construe certain

of the statutory provisions at issue * * * in isolation. Rather, as we address

39

petitioners' contentions, we must view the wording of all the statutory

provisions at issue in the context of their collective operation”); Moro, 357

Or at 203 (our cases discussing and applying that standard do not focus

solely on the use of such specifically promissory language. Instead, we

have repeatedly emphasized the importance of context at this step—

namely, the context of already having established that the parties intended

to form a contract).

The contractual obligation may not be avoided by reliance on the

“police power” doctrine, where the police power alleged to be implicated is

just the state’s inherent power to enact laws and regulations to protect the

vital interests of the people. Eckles, 306 Or at 399. As this court has

emphasized,

“The ‘police power’ is indistinguishable from the state’s inherent power to enact laws and regulations; the existence of the power cannot explain the extent to which the power is constitutionally limited. * * * [T]he state cannot avoid a constitutional command by ‘balancing’ it against another of the state’s interests or obligations, such as protection of the ‘vital interests’ of the people. Limits on the contractual obligations of the state must be found within the language or history of Article I, Section 21, itself.”

Id. (citations omitted). The language and history of Article I, Section 21,

have been found not to allow the “police power” doctrine to be stretched so

far as to permit the state to disregard a statutory financial guarantee to

40

persons or corporations participating in a state insurance system to remedy

a financial crisis in the name of protection of the vital interests of the

people. Eckles, 306 Or at 399. Similarly, this court explained that,

“[b]ecause the case before us involves the financial obligations of public

employers, this case ‘as a threshold matter may not be said automatically

to fall within the reserved powers that cannot be contracted away.” Moro,

357 Or at 229, citing United States Trust Co. v. New Jersey, 431 US 1, 24-

25, 97 S Ct 1505 (1977).

Finally, with regard to whether the legislation impairs a contractual

obligation, the key is to determine whether the state has eliminated any

contractual obligation. See e.g., Eckles, 306 Or at 399-401. A contractual

obligation consists of the legal duties imposed on the contracting party by

operation of law. Id. at 400. These legal duties include the requirement

that a breaching party compensate the non-breaching party for its failure to

perform pursuant to the terms of the contract. Id. If the law eliminates a

basis for the contractual liability, there is an impairment. Hughes, 314 Or at

31-32. If the basis for contractual liability continues to exist but the law

mandates non-performance, there is a breach. Id.

For the reasons explained further below, the “salary” components of

pension and service retirement benefit, the “employer contribution”-funded

41

pension for service provided after January 1, 2004, and “employee

contribution”-funded IAP provisions of ORS chapter 238 and 238A are

contractual in nature and protected by Article I, Section 21 of the Oregon

Constitution. SB 1049 §§1-19 (redirection of IAP employee contributions)

and §§39-40 (salary cap) impair those obligations of the PERS contract in

violation of Article I, Section 21 of the Oregon Constitution or in the

alternative, breach those terms of the PERS contract. Therefore, the court

should declare these sections of SB 1049 to be unconstitutional and void in

whole or in part, or in the alternative, award damages for breach of

contract, and award Petitioners’ their costs and reasonable attorney fees

incurred in the prosecution of this action under the “public purpose” or

“common fund” doctrines or under ORS chapter 652.

2. There is a “PERS Contract,” and the “employee salary,” “employer contribution”-funded pension, and “employee contribution”- funded IAP benefit statutes are terms of the PERS Contract.

Since Taylor v. Multnomah County Deputy Sheriff’s Retirement

Board, 265 Or 445, 451, 510 P2d 339 (1973), this court has expressly

recognized 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.” Accordingly, in its

subsequent cases involving PERS benefits, this court has repeatedly held

42

that “the legislature ‘intended and understood’ that PERS benefits are

contractual and as a result, ‘PERS is a contract between [a participating

employer] and its employees.’” Moro, 357 Or at 195 citing Hughes, 314 Or

at 18; see also Strunk, 338 Or at 183 (quoting Hughes, 314 Or at 22 we are

“mindful that the ‘accepted proposition of the contractual nature of PERS is

an essential background’ for [its] inquiry.”); Stovall v. State of Oregon, 324

Or 92, 124, 922 P2d 646 (1996)(“[P]articipating PERS employers ***

promised plaintiffs that plaintiffs would receive, at a minimum, the

retirement compensation provided in the PERS statutes”). Because it has

already found that the legislature intended PERS benefits to be part of

participating public employers’ compensation contracts with public

employees, this court’s focus in PERS cases now is only on whether the

legislature intended a particular PERS provision to be a part of that overall

contractual promise. Moro, 357 Or at 203.

Whether a particular provision is a part of the PERS contractual

promise is a matter of “legislative intent” and is guided by two principles

applied to the “context” of the particular provisions at issue. 357 Or at 204.

First, the provision must be “remunerative” as opposed to purely

“administrative” in nature. Id. “Remunerative” provisions are those “statutes

defining eligibility for, or the scope of, those benefits.” Id. Second, “a

43

remunerative provision will be a term of the offer only if it is mandatory,

rather than optional or discretionary.” Id. at 205.

In this case, each of the provisions at issue is “remunerative” and

“mandatory” within the meaning of this court’s decision in Moro, 357 Or at

204-205. The statutory provisions at issue include the following: (1) the

definition of salary in ORS 238.005 (26) applicable to the calculation of Tier

1 and Tier 2 member “employee contributions” under ORS 238A.330 and

“final average salary” under ORS 238.300; (2) the definition of salary in

ORS 238A.005(17) applicable to the calculation of OPSRP member

“employee contributions” under ORS 238A.330 and “final average salary”

under ORS 238A.125; and (3) the redirection of “employee contributions”

from funding the service retirement allowance or pension benefit to funding

the IAP account benefit “for service performed on or after January 1, 2004”

provided for in ORS 238.200(4), ORS 238A.330, and ORS 238A.350. See

APP-33-54. These provisions are “remunerative” because there is no

dispute that they relate to “eligibility for” or “scope of” either the IAP and/or

the pension benefit.

In addition, they are “mandatory” because the language used by the

legislature in these statutes provides no “discretion” to the PERS Board

and participating employers to take any action other than that provided by

44

statute. For example, as shown below, the statutes redirecting “employee

contributions” from the pre-2004 “regular account” funding the service

retirement allowance or pension benefit (ORS 238.200(4) to the IAP

account funding the IAP benefit (ORS 238A.330 and 238A.350), in relevant

part, use the following “mandatory” language (italicized for emphasis):

238.200 Employee contributions generally. [***] (4) Notwithstanding subsections (1) to (3) of this

section, a member of the system, or a participating employer acting on behalf of the member pursuant to ORS 238.205, is not permitted or required to make employee contributions to the fund for service performed on or after January 1, 2004. [***]

238A.330. Employee Contributions. (1) A member of

the individual account program must make employee contributions to the individual account program of six percent of the member’s salary.

(2) Employee contributions made by a member of the individual account program under this section shall be credited by the board to the employee account established for the member under ORS 238A.350 (2).

238A.350 Individual accounts established. (1) Upon any contributions being made to the individual account program by or on behalf of a member of the program, the Public Employees Retirement Board shall create the account or accounts described in this section. Each account shall be adjusted at least annually in accordance with rules adopted by the board to reflect any net earnings or losses on those contributions and to pay the reasonable administrative costs of maintaining the program to the extent the earnings on the assets of the program are insufficient to pay those costs. The adjustments described in this subsection shall continue until the account is distributed to the member or forfeited.

45

(2)(a) The board shall establish an employee account, which shall consist of the employee contributions made by or on behalf of the member as adjusted under subsection (1) of this section.

(Emphasis added). In addition, the definition of “salary” provided in

ORS 238.005(26) and ORS 238A.005(17) is inextricably intertwined

with the “mandatory” formula for calculation of “final average salary”

for the pension benefit for Tier 1, Tier 2, and OPSRP members, which

until SB 1049 was funded by employers, in relevant part, as follows:

238.300 Service Retirement Allowance. Upon retiring from service at normal retirement age or thereafter, a member of the system shall receive a service retirement allowance which shall consist of the following annuity and pensions:

(1) A refund annuity which shall be the actuarial equivalent of accumulated contributions, if any, by the member and interest thereon credited at the time of retirement, which annuity shall provide an allowance payable during the life of the member and at death a lump sum equal in amount to the difference between accumulated contributions at the time of retirement and the sum of the annuity payments actually made to the member during life shall be paid to such person, if any, as the member nominates by written designation duly acknowledged and filed with the board or shall otherwise be paid according to the provisions of this chapter for disposal of an amount credited to the member account of a member at the time of death in the event the member designates no beneficiary to receive the amount or no such beneficiary is able to receive the amount. If death of the member occurs before the first payment is due, the member account of the member shall be treated as though death had occurred before retirement.

(2)(a) A life pension (nonrefund) for current service provided by the contributions of employers, which pension, subject to paragraph (b) of this subsection, shall be an amount

46 which, when added to the sum of the annuity, if any, under subsection (1) of this section and the annuity, if any, provided on the same basis and payable from the Variable Annuity Account, both annuities considered on a refund basis, results in a total of:

(A) For service as a police officer or firefighter, two percent of final average salary multiplied by the number of years of membership in the system as a police officer or firefighter before the effective date of retirement.

(B) For service as other than a police officer or firefighter, including service as a member of the Legislative Assembly, 1.67 percent of final average salary multiplied by the number of years of membership in the system as other than a police officer or firefighter before the effective date of retirement.

(b) A pension benefits under this section shall be at least [***]

238A.125 Amount of pension; rules. (1) Upon retiring

at normal retirement age, a vested pension program member shall be paid an annual pension for the life of the member as follows:

(a) For service as a police officer or firefighter, 1.8 percent of final average salary multiplied by the number of years of retirement credit attributable to service as a police officer or firefighter.

(b) For service as other than a police officer or firefighter, 1.5 percent of final average salary multiplied by the number of years of retirement credit attributable to service as other than a police officer or firefighter.

(2) Notwithstanding any provision of ORS 238A.100 to 238A.250, the annual benefit payable to a member under the pension program and under any other tax-qualified defined benefit plan maintained by the participating public employer may not exceed the applicable limitations set forth in 26 U.S.C. 415(b), as in effect on December 31, 2018. The Public Employees Retirement Board shall adopt rules for the administration of this limitation, including adjustments in the annual dollar limitation to reflect cost-of-living adjustments authorized by the Internal Revenue Service.

47

(Emphasis added). Both here and in ORS 238A.005(17)(c)(I)(2017) and

OAR 459-005-0525 (pre-2019), the only limitations on “salary” or benefits

included were those tied to the Internal Revenue Code (IRC) and only for

OPSRP and Tier 2 members. As noted above, the IRC Section 401(a)(17)

limit for “salary” for Tier 2 and OPSRP in 2019 was $280,000. ER-113

(RJSF¶30).

Finally, the only express reservation of rights to change benefits

made by the legislature appears in ORS 238A.470 and applies only to

OPSRP members (i.e., persons who became members of PERS on or after

August 29, 2003) and only “as long as the change applies only to benefits

attributable to service performed and salary earned on or after the date of

the change.” No such reservation of rights exists for prospective changes to

Tier 1 and Tier 2 members’ benefit calculations. Therefore, the court must

move to the third step of the contractual analysis and look to the extent of

the obligation in the statutory provisions at issue.

3. The statutes at issue relate to “core benefits” which are either “expressly or impliedly irrevocable” or subject only to changes which are consistent with a “segmented service” approach.

To determine the extent of the obligation under a “remunerative” and

“mandatory” provision of the PERS contract, the court looks to the text and

context of the provisions at issue to determine whether they are “expressly”

48

or “impliedly” irrevocable. Moro, 357 Or at 201-202. “That analysis includes

considering whether, before the effective date of the amendments,

participating employers were contractually obligated to keep relevant parts

of the PERS offer open even after the effective date of the amendments.”

Id. According to this court, “It is those obligations that set the conditions

that the legislature may not in the future alter without consequence.”

Strunk, 338 Or at 201.

For a term of the PERS contract to be “expressly irrevocable,” this

court requires the use of something more than “shall.” Moro, 357 Or at 226.

However, the language is not required to refer “directly to contracts,

promises, or guarantees.” Id. at 203. For example, in Hughes, 314 Or at 28,

this court determined that a statute which expressly used the terms

“accrued and accruing” did not encompass “benefits that may accrue in the

future.” That conclusion was based on an examination of the actual text of

the statute at issue. Similarly, in Strunk, 338 Or at 193, the court’s

conclusion that future employee contributions could be redirected from the

employee “regular account” to the “IAP account” was based on a review of

the text of ORS 238.200 in its context and legislative history.29

29 As discussed further above at pp. 26-27 and below in Section 4.b.,

the redirection here is different than that before the court in Strunk,

49 The court will also look to the context of a statute to determine

whether it is “impliedly irrevocable.” For example, in Moro, 357 Or at 223-

224, this court cited the lengthy “vesting period” in the ordinance at issue

in the Taylor case as an example of “context” which would support a finding

of “implied irrevocability.” “When the performance necessary to accept the

offer takes time to complete, there is a concern that the offering party will

revoke the offer after receiving partial performance but before receiving the

complete performance necessary to form the unilateral contract.” Id. at 223.

In Moro, the court was careful to note, however, that there is a

difference between the term “vested” as it is used for purposes of “pension”

plans (see 357 Or at 199 n. 19), and how that term is used generally in

Contract Clause cases. In the context of the PERS pension benefit, for

instance, the vesting period is five years for Tier 1 and Tier 2 members

(see ORS 238.005(30)) and can be shorter in some instances for OPSRP

members (see ORS 238A.115). However, in the context of the Taylor case

and the other Contract Clause cases cited therein,30 “vested” was used

because it comes with no additional pension benefit and a reduction in the member’s IAP account balance.

30 See Yeazell v. Copins, 98 Ariz 109, 402 P2d 541, 544-545 (1965); Weaver v. Evans, 80 Wash2d 461, 495 P2d 639, 648-649 (1972); Bakenhaus v. City of Seattle, 48 Wash2d 695, 296 P2d 536 (1956); Hanson v. City of Idaho Falls, 92 Idaho 512, 446 P2d 634, 636-637 (1968);

50

more generally to refer to the point in time after which benefits may not be

altered without consequence under the Contract Clause. See Taylor, 265

Or 451. Neither the Taylor decision nor any of the other cases cited therein

expressly reference any pension plan “vesting period.” Rather the term

“vested” benefit is used in the more general Contract Clause sense.

Therefore, Taylor is not a case just about a pension plan “vesting period,”

but the court in Moro was correct to point out that a lengthy vesting period

might be “context” giving rise to a finding of “implied irrevocability.”

Certainly, the legislature’s decision to provide a shorter vesting period for

PERS cannot reasonably be said to reflect a legislative determination to

reduce the level of protection afforded PERS members.

The court, in Moro, 356 Or at 199-200, was also mindful to distinguish

“salary” from “retirement benefits.” The court explained that the serial

contractual concepts applicable to salary “are difficult to apply to pension

benefits, because of the complex formulas often used to calculate the

benefits and because of the lapse of time between the employee earning

the benefit and the employer delivering the benefit.” Id. at 199. Therefore,

the contractual analysis applicable to salary “does not necessarily require a

Kern v. City of Long Beach, 29 Cal2d 848, 179 P2d 799 (1947); Babbit v. Wilson, 9 CalApp3d 288, 88 Cal Rpts 623 (1970).

51

finding that the PERS offer can be changed prospectively, like the salary

offer.” Id. at 201. Rather, “[t]he predicate question [***] is whether the

contract offer that the particular pension plan presents contains such a

promise, i.e., a promise that extends over the life of the member’s covered

service.” Strunk, 338 Or at 192 n. 40 (discussing the Taylor case).

In other words, the irrevocability analysis is dependent upon a review

of the text, context, and history of the pre-amendment statutes at issue. As

shown further below, the statutes at issue relate to “core benefits” which

are either “expressly or impliedly irrevocable” or subject only to changes

which are consistent with a “segmented service” approach.

a. “Salary” is a key component of the “final average salary” used to calculate the “core pension benefit” and is “expressly or impliedly irrevocable” or subject only to changes which are consistent with a “segmented service” approach.

i. Tier 1 and Tier 2 Member Benefits.

For Tier 1 and Tier 2 members, ORS 238.300 (2017) outlined above

provides the “context” for analyzing the SB 1049 changes to the definition

of “salary” provided in ORS 238.005(26). That is the case because it is the

definition of “salary” which determines the amount of “final average salary”

used to calculate the “core pension benefit” promised to Tier 1 and Tier 2

members in ORS 238.300. In Strunk, 338 Or 183-191, this court reviewed

52

the text, context, and legislative history of ORS 238.300 and concluded that

the 1981 enactment of the Full Formula benefit was unambiguously

promissory, shifted the risk of investment losses to employers, and set the

floor below which retirement benefits could not fall for Tier 1 and Tier 2

members.

First, reviewing the text of ORS 238.300, this court explained in

Strunk, 338 Or at 185, that:

“As a matter of plain text, ORS 238.300 (2001) provides first, that a member is entitled to receive a service retirement allowance that is calculated by multiplying the member’s final average salary by a factor of 1.67 percent for general service employees [and 2.0 percent for police and fire employees] and then multiplying the resulting figure by the member’s years of membership. That service retirement allowance then is funded by an annuity component (consisting of the actuarial equivalent of the member’s account balances at retirement) and a pension component (consisting of employer contributions). ORS 238.300(1), (2)(a) (2001). That is the Full Formula. In addition, tracing the legislative history of Money Match, Pension

Plus Annuity, and Full Formula, the court noted the following about the

enactment of the Full Formula in 1981:

“With that amendment, the legislature, for the first time, provided members with a formula under which the risk of earnings loss fell –and continues to fall—squarely on employers. The changes that the 1981 amendments made to former ORS 237.147 (1979), now ORS 238.300, were material: they added a new, primary benefit calculator to the system and shifted the downside risk of investment return away from members. Because we presume that the legislature intended

53 those material changes to change the meaning of the statute materially as well, we conclude that the 1981 amendments effected a reenactment of the entire section and provided the version of the statute to which we will look in ascertaining the legislature’s promissory intent.”

338 Or at 190-191. With regard to that “promissory intent,” this court

expressly held that:

“the wording of ORS 238.300 (2001) is unambiguously promissory. Through that statute, the legislature continuously and unequivocally has communicated to [Tier 1 and Tier 2] PERS members that, if they retire from service at normal retirement age, they will receive a pension component of their final service retirement allowance that: (1) when combined with the actuarial equivalent of their accumulated contributions to the fund, will consist of the Full Formula amount based on years of service, final average salary, and class of service that equals or exceeds any pension component calculated under the other two formulas; or (2) in the event the Full Formula calculation falls short, a pension component calculated under the Money Match or the Pension Plus Annuity. In short, the state’s obligation as set out in ORS 238.300(2001) is to provide a final service retirement allowance made up of an annuity component and a pension component at the minimum level described above.”

338 Or at 186 (Emphasis added). Finally, with regard to the “minimum

level” of benefit promised, the court explained that:

“it appears to us that, notwithstanding the somewhat awkward placement of the words “at least” in ORS 238.300(2)(b)(2001), the legislature intended to set the Full Formula as the primary formula and generally, designed the Full Formula so as to provide a minimum level below which the pension component shall not fall. That is so because the Full Formula, which, significantly, is set out in the first two parts of the statute, ORS 238.300(1) and (2)(a)(2001), sets a defined benefit that does

54 not vary depending on fluctuations in earnings or on the size of the member’s annuities from the regular and variable accounts.”

338 Or at 185-186. In short, this court has already determined that the Full

Formula is the unambiguously promissory, core, minimum benefit level for

Tier 1 and Tier 2 members below which the pension benefit cannot fall

without violating the legislature’s promissory intent.

That unambiguously promissory, minimum “core pension benefit”

means nothing if the components of Full Formula (i.e., final average salary

(including the definition of salary), creditable service, and the formula

amounts) are not equally promissory. Over the years, the definition for

“salary” in current ORS 238.005(26) has undergone minimal changes.

Subsection (a) has remained virtually unchanged since 1953. See Or Laws

1953, ch 200, §2(4). Subsections (b) and (c)(A)-(H) were adopted in 1983

right after the enactment of the Full Formula, as part of a PERS

“housekeeping” bill to add into statute provisions which were part of PERS

rules and to provide uniformity. Or Laws 1983, ch 830, §1. The only other

changes since then have been to address insurance issues for dependents

in subsection (c)(B)(Or Laws 1987, ch 617, §1) and for domestic partners in

subsection (c)(I) (Or Laws 1999, ch 317, §24).

55 Most importantly, there is no factual dispute that prior to SB 1049,

ORS 238.005(26) contained no monetary cap on “salary” for calculation of

benefits for Tier 1 members, and the only cap for Tier 2 members’ “salary”

was that in OAR 459-005-0525 (pre-2019), adopted to comply with Internal

Revenue Code Section 401(a)(17). The federal law “grandfathered”

employees of governmental plans, such as PERS Tier 1 members, who

first became an “eligible participant” in “the plan prior to the first plan year

beginning after December 31, 1995.”31 The cap imposed on Tier 2

employees has increased annually since Tier 2’s inception in January 1,

1996, at the level set by the Internal Revenue Service (IRS). APP-31-32. In

2019, that limit was $280,000. ER-113 (RJSF¶30).

The court should find, therefore, that “salary” is a key component of

the “final average salary” used to calculate the Full Formula “core pension

benefit” and is “expressly or impliedly irrevocable” term of the PERS

contract of Tier 1 and Tier 2 members. For Tier 1 members, that term

includes no monetary cap for “salary” for purposes of calculation of pension

benefits, and for Tier 2 members, that term is tied to the IRC Section

401(a)(17) cap, which in 2019 was $280,000 and is subject to increases set

31 See Pub L 103 - 66, §312 (1993)(Omnibus Budget Reconciliation

Act of 1993, Aug. 10, 1993).

56

by the IRS. Even if the court were to determine that these are not

“expressly or impliedly irrevocable” terms of the PERS Contract for Tier 1

and Tier 2 members, the court must, at a minimum, apply the “segmented

service” approach to protect benefits attributable to service provided before

the change as approved by the court in Moro and explained further below.

ii. OPSRP Member Benefits.

For purposes of calculating their “final average salary” and resulting

core pension benefits under ORS 238A.125, OPSRP members have also

been subject only to the monetary cap imposed by the IRS referenced in

ORS 238A.005(17)(c)(I) and OAR 459-005-0525 (pre-2019) from the

inception of OPSRP in 2003. To the extent the court determines that these

clearly “remunerative” and “mandatory” provisions are subject to the

express legislative reservation of rights in ORS 238A.470, it must still find

that any change may not be applied to reduce benefits attributable to that

segment of service already performed before SB 1049. This “segmented

service” approach is mandated by the text of ORS 238A.470 and has been

previously approved by the majority opinion in Moro, 357 Or at 232 n. 36 to

protect benefits attributable to prior service.

Under this approach, a member’s total years of service is divided into

segments of service provided before and after the change. 357 Or 232 n.

57

36. At retirement, the laws in effect before the change (including the higher

IRC salary cap for OPSRP members) are applied to calculate the “final

average salary” and pension benefits attributable to the segment of service

provided before the change, and the SB 1049 lower cap for “salary” is

applied to calculate the benefits attributable to the segment of service

provided after January 1, 2020. The two resulting amounts are then added

together to provide a blended retirement benefit reflecting the different

“segments of service” before and after the change.32

This approach was modeled by the PERS Actuaries in their analysis

of the “final average salary” cap legislative concept shared with the

JWMCC by PERS on May 10, 2019. ER-113 (RJSF¶30). In that analysis,

the PERS Actuaries explained this approach as follows:

“We understand the proposed $195,000 limit on FAS would apply prospectively (i.e., only for benefits associated with service performed after 2019), would be indexed over time, and would affect both Tier 1/Tier 2 members and OPSRP pension members.

32 It is important to note that the “segmented service” approach

approved by the majority in Moro is also different from the private sector approach under the Employee Retirement Income Security Act (ERISA), which uses a “proxy final average salary (see Moro. See 357 Or 249-252 (Justice Brewer concurring opinion), but ERISA does not apply to public sector plans like PERS.

58 Specifically, we understand the Final Average Salary used in the benefit calculations for service performed before January 1, 2020 would be unaffected by the limit, and would also reflect post-2019 salary growth, if applicable:

• For example, if an OPSRP general service member retires with a FAS of $220,000 prior to the application of this concept’s indexed limit, has 15 years of service prior to January 1, 2020, and 10 years of service after that date, we understand the initial benefit calculation (prior to any adjustment for early commencement or form of payment) would be: [1.5% X 15 X $220,000] + [1.5% X 10 X (lesser of $220,000 or Indexed Limit]”

Id. The key is that benefits attributable to that segment of service provided

before the effective date of the SB 1049 “salary cap” reflects the actual

post-2019 salary growth or increases which would have been applied under

the laws in effect before the passage of SB 1049. The fact that this analysis

references a cap on “final average salary” instead of a cap on the definition

of “salary” is a difference without distinction, because the SB 1049 cap on

“salary” and effectuating PERS regulation as shown further below in

Section 4.a operate as the functional equivalent of capping “final average

salary” mid-career for members, which is inconsistent with the legislative

promise made at the time the service was provided to calculate benefits

based on an uncapped salary. Therefore, the analysis should not change to

59

be consistent with the “segmented service” approach mandated by ORS

238A.470 and approved by the majority in Moro, 357 Or 232 n 36.

Accordingly, the court should find that “salary” set at the IRC level

with annual increases through the date of retirement is a key component of

OPSRP members “core pension benefit” which is subject only to changes

which are consistent with a “segmented service” approach.

b. The redirection of “employee contributions” from the IAP to the EPSA to offset employer costs also violates “expressly or impliedly irrevocable” provisions of the PERS contract providing for a pension funded by employer contributions.

i. Tier 1 and Tier 2 Members.

As explained above in Section I.G.3.a, prior to January 1, 2004, Tier

1 and Tier 2 members’ “employee contributions” under ORS 238.200 went

to their ORS 238.250 regular account to fund the refund annuity portion of

their service retirement allowance under ORS 238.300(1). Since January 1,

2004, however, all members’ “employee contributions” have gone to their

individual employee IAP accounts (ORS 238A.330 and 238A.350), and

only “employer contributions” have gone to fund pension benefits

attributable to service provided on or after that date. ER-105 (RJSF¶15).

For Tier 1 and Tier 2 members’ the text, context, and legislative history of

the statutory provisions at issue (ORS 238.200(4), ORS 238.300, ORS

60

238A.330 and ORS 238A.350) clearly support a finding of “express or

implied irrevocability” of a pension funded by employers.

Since 1981, when the Full Formula was enacted, not only has ORS

238.300(2)(a) provided for a life pension “provided by the contributions of

employers,” but also since the “2003 PERS Legislation,” ORS 238.200(4)

has expressly provided that, a Tier 1 or Tier 2 “member of the system [***]

is not permitted or required to make employee contributions to the fund for

service performed on or after January 1, 2004.” Together, this language

contains the “something more than shall” within the meaning of this court’s

decision in Moro, 357 Or at 225-226 to create an “expressly or impliedly

irrevocable” term of the PERS contract that the pension would be funded

exclusively by employers.

This conclusion is supported further by this court’s discussion of the

enactment of Full Formula in Strunk, 338 Or at 190-191. As noted above, in

that case, this court explained that with the enactment of the Full Formula

in 1981, the legislature “provided members with a formula under which the

risk of earnings loss fell –and continues to fall—squarely on employers.”

This court noted further that, “the changes that the 1981 amendments

made to former ORS 237.147 (1979), now ORS 238.300, were material:

61

they added a new, primary benefit calculator to the system and shifted the

downside risk of investment return away from members.” Id.

The legislative history of the diversion of Tier 1 and Tier 2 members’

“employee contributions” from the “regular account” to the IAP by the 2003

PERS Legislation further supports the conclusion that the legislature

intended for “employer contributions” to be the sole funding source for

pension benefits attributable to service on or after January 1, 2004 and

wanted “employee contributions” to be the sole property of employees to

support a separate “defined contribution” benefit. For example, during the

2003 Legislative Session, Margaret Hallock, representing Governor

Theodore Kulongoski, explained the Governor’s support for the diversion of

the “employee contributions” from funding the ORS 238.300 service

retirement allowance to the funding of the IAP benefit as follows:

“With respect to the 6 percent member contribution, we agree in general with the proposal in HB 2003 to prohibit the member contribution being added to regular accounts in the future. We believe that this money should be shifted to a separate defined contribution account. Removing it from the regular PERS accounts halts the compounding of these contributions which then must be matched in the future. But, this 6 percent is the members’ money and it should remain a part of their ultimate pension system. We should not provoke cries that we are taking it away from them but should retain these funds in a companion account. And, this new defined contribution plan could be a part of a successor pension system for new hires.”

See House Committee on PERS, April 17, 2003, Hearing Room E

62

Tapes 52-53, 3:00 PM (Testimony of Margaret Hallock). The legislature

responded by: (1) prohibiting employee contributions to support the service

retirement allowance “for service provided on or after January 1, 2004”

(ORS 238.200(4)), (2) enacting the IAP individual accounts and providing

that those accounts would hold “employee contributions” and be “adjusted

at least annually” for earnings and expenses “until the account is distributed

to the member or forfeited” (ORS 238A.330(2) and ORS 238A.350(1)-(2)),

and (3) expressly providing that, “[i]t is the intent of the Legislative

Assembly that pursuant to section 414(k) of the Internal Revenue Code the

individual account program be established and maintained as a tax-

qualified defined contribution governmental plan for the purposes of

sections 72(d) and 415 of the Internal Revenue Code.” ORS 238A.025(1).

During the 2019 Legislative Session, Legislative Counsel Marissa

James discussed the requirements to maintain the tax-qualified status of

such a defined contribution governmental plan. She noted that not only do

employee contributions have to be maintained in individual accounts to pay

for benefits for that member, but also those contributions could not be

“used to pay employer contributions” for benefits owed to other employees.

The advice is also consistent with the general trust principles of the

“exclusive benefit doctrine” recognized by this to court to embedded in the

63

PERS Contract in Arken v. City of Portland, 351 Or 113, 162, 263 P3d 975

(2011). In Arken, this court explained that, “Fundamentally, the PERF is a

trust fund to be used for the exclusive benefit of members and their

beneficiaries.” 351 Or at 162 citing ORS 238.660(1)-(2). The court then

went on to explain that:

“The express declaration of the PERF as a trust fund dates back at least to 1953 (see Or. Laws 1953, ch. 200, § 10) and it has been carried forward continuously to the present. ORS 238.660 declares PERF to be a trust fund, declares PERB to be a trustee of that fund with fiduciary obligations, and requires that fund assets may not be diverted from the exclusive benefit of members. How fund assets are to be used, how the amount of member benefits are to be determined, and how a member will benefit from the growth in value of the contributions that accumulate in that member’s account are fundamental components of the PERS system. Consequently, we determine that the trust fund obligations imposed by ORS 238.660 are a part of the statutory PERS contract. We note, that although a PERS member may not be entitled to any particular rate of growth in the member’s account, beyond the assumed interest rate, the distribution of PERF earnings among the various accounts is a “zero-sum” matter: If overpayments beyond what should be charged are made to one account, then lesser amounts than should be allocated will be available for payments to other accounts. Here, if overpayments made to the Window Retirees are allocated as administrative expenses of the PERF, then a lesser amount of the PERF earnings will be available for distribution to the reserve accounts or to the accounts of all other PERS members with existing accounts. In other words, PERF earnings—i.e., assets of the fund—that have been generated based on contributions from Tier One and Tier Two members of PERS would be diverted from the benefit of those members and their beneficiaries to the exclusive benefit of the Window Retirees.

64 Such a diversion would violate the trust obligation of the board to use fund assets for the benefit of those members whose contributions generated the fund assets.”

351 Or at 162-163 (emphasis added). The court next found support for its

finding in “long-standing” trust principles, and found that, “ORS 238.660

incorporates those general trust principles into the operations of the PERS,

by prohibiting the diversion of trust fund assets to favor one set of

beneficiaries of the trust over another.” 351 Or at 164. Having reviewed all

these trust principles, the court concluded that,

“categorically treating the erroneous overpayments to all Window Retirees as an administrative expense violates well-established trust fund principles that are embedded in ORS 238.660 because that treatment favors the Window Retirees over other beneficiaries of PERS. Because those trust fund principles are part of the PERS statutory contract, that in turn violates the statutory contract rights of all Tier One and Tier Two members of PERS with existing member accounts.”

351 Or at 165.

Accordingly, the court should find that “for service performed on or

after January 1, 2004,” Tier 1 and Tier 2 members have an “expressly or

impliedly irrevocable” right to a pension funded exclusively by “employer

contributions” and that their “employee contributions” may not be diverted

from their individual IAP accounts to reduce “employer costs” associated

with general funding of the system, including benefits attributable primarily

to other employees (i.e., retirees). Instead, those “employee contributions”

65

remain the property of Tier 1 and Tier 2 members “until the account is

distributed to the member or forfeited.”

ii. OPSRP Members.

As noted above, there is no factual dispute that from the inception of

OPRSP, the pension benefit for OPSRP members has been funded

exclusively by employers. See ER-105 (RJSF¶15); ORS 238A.125; ORS

238A.220. In OPSRP, “all participating public employers are considered to

be a single employer for purposes of the employer contributions under

ORS 238.225 that are required for the funding of the pension program

established under ORS 238A.025.” ORS 238A.220(1). Employer

contributions go into the OPSRP employer reserve, and pension benefits

for OPSRP retirees are paid directly out of that reserve. ER-108

(RJSF¶24). “Employee contributions,” on the other hand, have gone to the

IAP individual employee accounts established under ORS 238A.330 and

ORS 238A.350.

Even if the above “remunerative” and “mandatory” rights are subject

to any express reservation of rights in ORS 238A.470, those reserved

rights must still be exercised consistently with the tax qualification

requirements of the IRC and the exclusive benefit doctrine. As noted

above, those requirements do not allow individual employee accounts to be

66

used to pay for “employer costs” associated with other employees. The

court should find these requirements to be an “expressly or impliedly

irrevocable” term of the OPSRP members’ PERS contract.

Furthermore, as shown below, the challenged sections of SB 1049

impair or breach the “expressly or impliedly irrevocable” obligations of

these “core benefit” statutes for Tier 1, Tier 2, and OPSRP members, and

therefore, they must be voided in whole or in part.

4. The challenged sections of SB 1049 impair or breach the obligations of “core benefit” statutes.

In Strunk, 338 Or at 170, this court cited Eckles and Hughes and

explained the difference between an impairment and a breach as follows:

“First, in Eckles, this court clarified that the contracts provision of Article I, section 21, prohibited the impairment of a contractual obligation. Eckles, 306 Or at 395, 760 P.2d 846. As to the determination whether newer legislation amounts to an impairment of a preexisting statutory contractual obligation, the court focused on whether the legislation would change or eliminate the state's obligation under that contract. Id. at 399–400, 760 P.2d 846. By contrast, the court explained that legislation that mandated a breach on the state's part of such a contractual obligation—but did not change or eliminate the obligation itself—did not contravene Article I, section 21, although, in accordance with that constitutional provision, such legislation ordinarily would require payment of damages resulting from the breach. Id. at 400–02, 760 P.2d 846.”

67

As explained further below, the challenged sections of SB 1049 change or

eliminate the nature of the PERS contract for both the “employee

contribution” funded IAP benefit and the “employer contribution” funded

pension or service retirement allowance benefit. Therefore, the court

should find an impairment. In addition, both in Strunk, 338 Or at 206 and

Moro, 357 Or at 228, this court confirmed that it has not yet found that the

state Contract Clause protects parties from only “substantial” impairments.

However, even if such a requirement existed under Article I, Section 21, as

explained further below, the changes made by SB 1049 are clearly

“substantial” and the “salary” cap will be applied in a way that reduces

benefits attributable to service already provided.

a. Substantial and Retroactive Impact of Salary Cap.

With regard to the changes to the definition of “salary” effected by SB

1049,§§49-51, it is important to note that not only do they impose a new

cap for Tier 1 members like Petitioner Cleary, but also substantially reduce

the “salary” used for Tier 2 and OPSRP members’ contributions and

benefits from the IRC cap of $280,000 in 2019 to $195,000.33 Pursuant to

33 Although the OPSRP and Tier 2 Petitioners do not currently make

over the SB 1049 $195,000 cap, if they were to move to other PERS-covered positions above the cap, they would be subject to this cap. SB 1049, §65(2) grants standing not just to a PERS member “who is adversely affected” but also to anyone “who will be adversely affected.”

68

SB 1049, §§39-41, effective January 1, 2020, the definition of “salary” for

all purposes under PERS (including for calculating PERS Tier 1, Tier 2, and

OPSRP members’ IAP contributions and pension benefits under the

system) is capped at $195,000 for a calendar year (adjusted annually for

inflation). ER-116-17 (RJSF¶37). If any period over which salary is

determined is less than 12 months, the $195,000 cap will be prorated for

that period. Id. PERS is granted the authority to take action to implement

the change. Id. The rule PERS has adopted (OAR 459-005-0525) pursuant

to authority delegated by SB 1049, §62, does not use the “segmented

service” approach (ER-117 (RJSF¶39)) approved by the majority in Moro,

357 Or at 232 n. 36, and thereby, reduces benefits attributable to pre-SB

1049 service. According to the PERS Actuary, use of the “segmented

service” approach would result in a higher retirement benefit amount for

some members. Id.

This impact on benefits attributable to prior service can be seen in

the examples provided by the PERS Board on its website explaining the

application of the SB 1049 salary cap. ER-118-119 (RJSF¶39). For

instance, under PERS’ first example for a Tier 1 or Tier 2 member with

salary above the cap before SB 1049, the difference between calculating

69

the benefits attributable to prior service under the PERS rule versus the

“segmented service” approach would be about $538 per month as follows:

PERS WEBSITE EXAMPLE (ER-118-19)

PERS RULE APPROACH

($205K X 1.67% X 30 years)/12 = $8,558.75

“SEGMENTED SERVICE” APPROACH

Pre-SB 1049 Segment with salary increases ($220K X 1.67% X 27 yrs)/12 = $8,266.50

+ Post-SB 1049 Segment with $195K cap and CPI34

[[($195,000 + $198,900 + 202,878)/3] X 1.67% X 3 yrs]/12 = $830.52

Total Benefit = $9,097.02 According to the analysis of Petitioners’ consulting actuary, for

Petitioner Cleary, the imposition of the cap reduces the amount going into

his IAP account effective January 1, 2020 through his date of retirement

and at retirement age, will reduce his Full Formula retirement benefit by

34 For CPI, Petitioners used the increases as calculated by their

Consulting Actuary for Petitioner Cleary. See ER-99.

70

$344 per month or 3.8%. This means that SB 1049 will substantially reduce

the amount that Petitioner Cleary will receive in retirement benefits for the

remainder of his life. See e.g. Moro, 357 Or 228 (discussing the substantial

impact of 2% of COLA on the base retirement amount over the remaining

life of the member).

b. Substantial Impact of Diversion of IAP benefits.

With regard to the diversion of the IAP contributions, SB 1049 does

indirectly what it is prohibited from doing directly—i.e., using the diverted

IAP employee contributions to offset employer payments to the employer

reserves with no additional pension benefit for Tier 1, Tier 2, or OPSRP

members and a substantial reduction of the IAP benefit. As explained

above, pursuant to SB 1049, §§1-19, after July 1, 2020, if an active Tier 1,

Tier 2, or OPSRP member’s salary exceeds $2,500 in a calendar month

(which is likely to be the case for all Petitioners), then 2.5% of Tier 1 and

Tier 2 members’ salary and 0.75% of OPSRP members’ salary will be

placed in the new EPSAs to offset employers’ costs for pension benefits

that accrue under ORS 238.300(2)(a) and ORS 238A.125 on or after July

1, 2020. ER-114 (RJSF¶33). EPSA balances in excess of that amount will

be returned to employees but will not be subject to a match of employer

contributions under ORS 238.300(1), and the redirection will continue until

71

the system as a whole is 90 percent or greater funded, including employer

side accounts. ER-115 (RJSF¶34). According to the PERS Actuary, the

system as a whole (including employer side accounts) is not projected to

reach this 90 percent or greater funded status until after 2035, under

current PERS assumptions. Id.

The legislature was fully aware, however, that the active members

impacted by the redirection are not the cause of the system’s unfunded

liability. See Section I.G.5. Information shared by PERS with the legislature

showed that approximately 72 percent of the system’s accrued liability is

attributable to those who are not active members (i.e., retirees and inactive

members who have left the system). APP-72, 76. That information also

shows that as of December 31, 2017, there was $37.4 billion set aside in

the Tier 1 and Tier 2 employer reserves, the Tier 1 and Tier 2 pre-2004

employee accounts, and the OPSRP employer reserves to pay the $28.7

billion in accrued benefits owed to all active and inactive members. APP-

72. As the green boxes below demonstrate, the UAL funding problem is

that the amount owed to retirees ($55.3 billion) on the left and the amount

set aside in the BIF to pay those retirees ($24.3 billion) on the right “don’t

align.” Id.

72

Nevertheless, under SB 1049 active Tier 1, Tier 2, and OPSRP members

will be required to continue to divert their IAP “employee contributions” to

offset employer contributions until this funding imbalance of the system as

a whole related to benefits owed to other employees (primarily retirees) is

improved to 90 percent. In the 2021-2023 biennium alone, according to the

PERS Actuary, SB 1049 would redirect over $285 million dollars from

active employee IAP accounts (ER-120 (RJSF¶41)) to reduce employer

obligations to the system with no additional pension benefit to active Tier 1,

Tier 2, and OPSRP members and a substantial reduction in their IAP

account balances.

73

More specifically, according to Petitioners’ Consulting Actuary,

Petitioners will lose amounts in the range of $9,802 to $59,851 and 4.7%

up to 14.3% of their IAP account balances at retirement age, and it is highly

unlikely that any of those amounts would ever be returned to them because

the amounts diverted will not exceed the future normal cost for pension

benefits that accrue on or after July 1, 2020. ER-24, 33, 42, 52, 62, 71, 80,

89, 99. The amounts are also consistent with the illustrative examples

prepared by the PERS Actuary using similar assumptions and shared with

the legislature. See APP-130. These amounts represent a “substantial” loss

of retirement benefits for Petitioners at retirement age or if they choose

installments, potentially of the amounts they will receive over their

anticipated life span.

Accordingly, the court should find that the changes, at a minimum,

breach the PERS contract and more likely, substantially impair obligations

of the PERS Contract. As explained further below, this impairment or

breach is not supported by any cognizable defense under Article I, Section

21 of the Oregon Constitution.

5. The impairment or breach of the PERS contract is not supported by any cognizable defense under Article I, Section 21.

74 Finally, it is important to note that, unlike the Strunk and Moro cases,

Respondents in this case have not raised any “economic necessity” or

“public purpose” balancing, “police powers” defenses, which were rejected

in those cases. Therefore, the court must find that the impairment or breach

of the PERS contract effected by SB 1049 on the “employee contribution”-

funded IAP and “employer contribution”-funded pension benefit is not

supported by any cognizable defense under Article I, Section 21.

III. SECOND ASSIGNMENT OF ERROR

SB 1049 §§1-19 and §§ 39-40 take private property (IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension benefits) for public use without just compensation in violation of Article I, section 18 of the

Oregon Constitution.

A. Standard of Review

Petitioners incorporate by this reference their discussion above in

Section II.A.

B. Preservation of Error

Petitioners preserved this claim through their Third and Seventh

Claims for Relief in their Petition.

C. Argument

1. Legal Standard.

Under Article I, Section 18 of the Oregon Constitution, “Private

property shall not be taken for public use * * * without just compensation.”

75

Article I, Section 18, was modeled after the federal takings clause. Dunn v.

City of Milwaukie, 355 Or 339, *5 (2014), citing Coast Range Conifers v.

Board of Forestry, 339 Or 136, 144, 117 P3d 990 (2005) (discussing

federal roots of Article I, Section 18). The United States Supreme Court has

recognized that there is a nearly infinite variety of ways that government

action or regulation can affect property interests. Arkansas Game and Fish

Com'n v. U.S., 133 S Ct 511, 518, 184 L Ed 2d 417 (2012). Because of

that, no “magic formula” has been identified to enable federal courts to

determine, in every variety of case, whether a given interference with

property is a taking. Id. This court has generally recognized, however,

that, property is taken, for purposes of Article I, section 18, where there has

been “destruction, restriction or interruption of the necessary use and

enjoyment” of that property for a public purpose. Hawkins v. City of La

Grande, 315 Or 57, 68, 843 P2d 400 (1992) (quoting Moeller v. Multnomah

County, 218 Or 413, 431, 345 P2d 813 (1959)). Although most cases

arising under the takings clause involve the state’s exercise of its eminent

domain powers over real property, personal property, too, is protected. 315

Or at 67. Fundamental legal interests in property, such as the right to

possess, use, and dispose of property, are also protected. See Cereghino

et al v. State Highway Com., 230 Or 439, 445, 370 P2d 694 (1962). But

76

whether the invasion is to real property or personal property, and to the

physical property or the intangible but essential rights of ownership in it, the

one principle that holds true is that the government's conduct must be

“tantamount to a public appropriation” of property, both in nature and in

degree. Dunn, 355 Or 339, citing Coast Range Conifers, 339 Or at

147)(discussing various tests and observing that, under them, government

act must be “tantamount to a public appropriation of private property”).

Therefore, as explained further below, the court should find that

petitioners have a property interest in their IAP employee contributions and

pension benefits. The challenged sections of SB 1049 constitute a taking of

private property for public use without just compensation. Accordingly,

petitioners are entitled to just compensation in an amount equivalent to the

loss they have suffered as a result of the challenged provisions.

2. Petitioners have a property interest in their IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension benefits.

Petitioners incorporate by this reference their discussion above in

Section II.C. The U.S. Supreme Court has recognized that, contract rights

are a form of property and as such may be taken for a public purpose

provided that just compensation is paid. U.S. Trust Co. of New York v.

New Jersey, 431 US 1, 19 n 16, 97 S Ct 1505, 1516, 52 L Ed 2d 92 (1977)

77

citing Contributors to Pennsylvania Hospital v. Philadelphia, 245 US 20, 38

S Ct 35, 62 L Ed124 (1917); see El Paso v. Simmons, 379 US 497, 533-

534, 85 S Ct 577, 597, 13 L Ed 2d 446 (1965) (Black, J., dissenting). In the

context of family law cases, this court has also recognized that even

employees with non-vested interest in their PERS pension benefits have a

“property interest” in that benefit. In Re Marriage of Richardson, 307 Or

370, 377, 769 P2d 179 (1989). Some PERS Tier 1, Tier 2, and OPSRP

members have also collectively bargained to pay for their employee

contributions to the IAP through direct deductions of their paychecks, while

others have bargained to have them picked-up as part of their total

compensation.35 ER-105 (RJSF¶ 16). The court should, therefore, find that

petitioners have a property interest in their IAP employee contributions and

employer contribution funded pension benefits.

3. The challenged sections of SB 1049 constitute a taking of private property for public use without just compensation.

35 The court may take judicial notice, for example, of the collective

bargaining agreement between the State of Oregon Department of Administrative Services and SEIU, 503, which provides for employee self-payment of the employee contribution. See https://www.oregon.gov/das /HR/CBA/SEIU%2020172019%20Mid%20Term%20State%20Contract%20Summary%20Document.pdf

78 In Brown v. Legal Found. of Washington, 538 US 216, 220, 123 S Ct

1406, 155 L Ed 2d 376 (2003), the U.S. Supreme Court was called on to

determine whether the State of Washington’s use of interest on lawyers'

trust accounts (IOLTA) to pay for legal services provided to the needy

constituted a “taking” and if so what “just compensation” was due. With

limited discussion, the court found that using the interest “in providing legal

services to literally millions of needy Americans certainly qualifies the * * *

distribution of these funds as a ‘public use’” within the meaning of the Fifth

Amendment. 538 US at 232. However, no “just compensation” was owed

because plaintiffs could not present any evidence to show that that they

personally suffered any financial losses from a correct application of the

IOLTA program because only funds that cannot earn net interest for the

client must be deposited in an IOLTA account . Brown, 538 US at 224.

Similarly, in Eckles, although this court recognized that “the need to

resolve the financial crisis that induced the Legislative Assembly to pass

the Transfer Act could perhaps be described as a ‘vital interest’ of the

state” (306 Or at 399), no just compensation was owed because, plaintiff

failed “to prove that he was damaged by the transfer of funds.” Eckles, 306

Or at 403.

79 Unlike the plaintiffs in those cases, Petitioners here have established

substantial financial loss attributable to the SB 1049 changes to their

“employee contribution” funded IAP and “employer contribution” funded

pension benefits. Petitioners incorporate herein their discussion above in

Section II.C.4. Furthermore, the legislative history records for SB 1049

make clear that the purpose of the SB 1049 changes was to save the State

and local jurisdictions money so that they could provide their regular

services to the general public. See Section I.G.5. Therefore, the court

should find that petitioners have established “public use” and are entitled to

“just compensation” for the losses they have incurred.

IV. THIRD ASSIGNMENT OF ERROR

SB 1049 §§1-19 and §§ 39-40 impair obligations regarding IAP “employee contributions,” “employee salary,” and “employer

contribution”-funded pension obligations of the PERS contract in violation of Article I, Section 10, clause1 of the United States

Constitution or in the alternative, breach those terms of the PERS contract.

A. Standard of Review

Petitioners incorporate by this reference their discussion above in

Section II.A.

B. Preservation of Error

Petitioners preserved these claims through their Second, Fourth,

Sixth and Eighth Claims for Relief in their Petition.

80

C. Argument

1. Legal Standard.

The Contract Clause of the United States Constitution states, “No

State shall * * * pass any * * * Law impairing the Obligation of Contracts.”

US Const, Art I, § 10, cl 1. Whether a state law violates the Contract

Clause is governed by a three-step inquiry. The first inquiry concerns

“whether the state law has, in fact, operated as a substantial impairment of

a contractual relationship.” RUI One Corp. v. City of Berkeley, 371 F3d

1137, 1147 (9th Cir. 2004) (quoting Allied Structural Steel Co. v. Spannaus,

438 US 234, 244, 98 S Ct 2716, 57 L Ed 2d 727 (1978) and Home Bldg. &

Loan Ass'n v. Blaisdell, 290 US 398, 411, 54 S Ct 231, 78 L Ed 413 (1934).

This threshold inquiry itself has three components: (1) “whether there is a

contractual relationship” Id. (Gen. Motors Corp. v. Romein, 503 US

181,186, 112 S Ct 1105, 117 L Ed 2d 328 (1992)(quoting Allied Structural

Steel Co., 438 U S at 244, 98 S Ct 2716)); (2) whether a change in the law

impairs that contractual relationship; and (3) whether the impairment is

substantial. Id. at 186.

If this three-component threshold inquiry results in a finding that a law

has substantially impaired a contractual relationship, a court must address

the second inquiry, which concerns whether “the State, in justification, has

81

a significant and legitimate public purpose behind the regulation, such as

the remedying of a broad and general social or economic problem” to

guarantee that “the State is exercising its police power, rather than

providing a benefit to special interests.” RUI One Corp., 371 F3d at 1147

(quoting Blaisdel, 54 S Ct 231).

The final inquiry concerns “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

legislation's adoption.” RUI One Corp, 371 F3d at 1147 (quoting U.S.

Trust, 431 US at 22 and Blaisdel, 54 S Ct 231). “[W]hen a state is itself a

party to a contract, courts must scrutinize the state's asserted purpose with

an extra measure of vigilance.” McGrath v. Rhode Island Ret. Bd., 88 F3d

12, 16 (1st Cir 1996) citing U S Trust, 431 U S at 26 (“[C]omplete deference

to a legislative assessment of reasonableness and necessity is not

appropriate because the State's self-interest is at stake.”). Indeed, the

State is “not free to consider substantial contractual impairments on a par

with other policy alternatives.” State of Nev. Employees Ass'n, Inc. v.

Keating, 903 F2d 1223, 1228 (9th Cir 1990).

“A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend

82 money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”

U.S. Trust, 431 U S at 26. “An impairment may not be considered

necessary if there is ‘an evident and more moderate course’ of action that

would serve Defendants' ‘purposes equally well * * *.’” Univ. of Haw. Prof'l

Assembly v. Cayetano, 183 F3d 1096, 1107 (9th Cir 1999)(quoting U.S.

Trust, 431 U S at 31).

For the reasons explained further below, the court should find that the

“employee contribution”-funded IAP and “employer contribution”-funded

pension benefits are also contractual terms of the PERS Contract under

federal law. The challenged sections of SB 1049 substantially impair or

breach those obligations of the PERS Contract in violation of Article I,

Section 10 of the United States Constitution. The impairment of those

obligations of the PERS Contract is not necessary and reasonable to

support any public purpose that could not be supported by other means

that are shared by all Oregonians. Therefore, the challenged sections of SB

1049 are unconstitutional and must be voided in whole or in part.

2. The IAP “employee contributions,” “employee salary,” and “employer contribution”- funded pension benefits are contractual terms of the PERS Contract under federal law.

Federal law controls whether an agreement constitutes a contract for

purposes of Contract Clause analysis. Romein, 503 US at 187; see also

83

State of Nev. Employees Ass'n, Inc. v. Keating, 903 F2d 1223, 1227 (9th

Cir1990). Here, petitioners’ claims are supported by express and

promissory statutory language. Petitioners incorporate by this reference

their discussion above in Section II.C.2. Therefore, Petitioners have also

established a contract right under federal law.

3. The challenged sections of SB 1049 substantially impair the IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension obligations of the PERS Contract.

Total destruction of contractual expectations is not necessary for a

finding of substantial impairment. Energy Reserves Grp., Inc. v. Kansas

Power & Light Co., 459 US 400, 411, 103 S Ct 697, 704, 74 L Ed 2d 569

(1983) citing US Trust, 431 U S at 26–27. “An impairment of a public

contract is substantial if it deprives a private party of an important right,

thwarts the performance of an essential term, defeats the expectations of

the parties, or alters a financial term.” Southern California Gas Co. v. City

of Santa Ana, 336 F 3d 885, 890 (9th Cir 2003)(internal citations omitted).

The changes made to the “employee contribution” funded IAP and

“employer contribution”-funded pension benefits are “substantial” under any

of these tests. Petitioners incorporate by this reference their discussion

above at Section II.C.4. Not only have Petitioners established substantial

personal financial losses attributable to the changes effected by SB 1049,

84

but also the record establishes that PERS Actuary calculated the reduction

of benefits lost in the hundreds of millions of dollars. ER-112, 120

(RJSF¶¶30, 41). The court should, therefore, find that the challenged

sections of SB 1049 substantially impair the above obligations of the PERS

Contract.

4. The impairment or breach of the IAP “employee contributions,” “employee salary,” and “employer contribution”-funded pension obligations of the PERS Contract is not reasonable or necessary to support any public purpose defense under Article I, Section 10.

To determine reasonableness, the court looks at the extent of the

impairment as well as the public purpose to be served. See United States

Trust Co., 431 U S at 29. On review, the court balances “the contractual

rights of the individual against the essential attributes of sovereign power

necessarily reserved by the States to safeguard the welfare of their

citizens.” Cayetano, 183 F3d at 1107 citing Association of Surrogates &

Supreme Court Reporters v. New York, 940 F2d 766, 771 (2d Cir 1991). An

impairment may not be considered necessary if there is “an evident and

more moderate course” of action that would serve Defendants' “purposes

equally well,” see United States Trust Co., 431 US at 31, because “[t]he

contract clause of the Federal Constitution limits the ability of a State, or

85

subdivision of a State, to abridge its contractual obligations without first

pursuing other alternatives.” See Cayetano, 183 F3d at 1107.

For example, in Cayetano, 183 F3d at 1108, the Ninth Circuit found

that the State of Hawaii failed to demonstrate that a statute delaying

issuance of payroll checks was reasonable and necessary to fulfill an

important public purpose in light of Hawaii's budgetary crisis because:

“Although perhaps politically more difficult, numerous other alternatives exist which would more effectively and equitably raise revenues.” Other options available to Defendants were a federal maximization project (to obtain additional reimbursements from the federal government), additional budget restrictions, the repeal of tax credits, and the raising of taxes. Defendants have not explained why it is reasonable and necessary that the brunt of Hawaii's budgetary problems be borne by its employees.”

Similarly, in analyzing the support for the 2003 PERS Legislation, in

Strunk, 338 Or at 210, this court explained that:

“First, we emphasize that we are not dealing here with legislation that impairs private contracts. Instead, we are dealing with a statutory contract. In other words, it is one of the parties to the contract (the state) that now is attempting to rely on a change in circumstances to permit it to alter its contractual obligations in a constitutional manner. In that light, we note that the Special Master made, among others, the following recommended findings:

• “Oregon's state tax burden currently is approximately .7

percent less than the national average.” • “[T]here is little voter willingness to raise taxes to provide

additional government revenues.”

86

• The “capital downturn” from 2000 through 2002,

although causing a greater impact on state tax revenues than previous economic downturns over the past two decades, “did not compare in magnitude or duration to the Great Depression of the 1930s.”

To be sure, the Special Master's report contains other

recommended findings that demonstrate that the state's recent fiscal status is both serious and has resulted in substantial detriments to the provision of governmental services across the state. We accept all those findings. Taken together, however, they do not justify a rewriting of the assumed earnings rate guarantee in a manner that would result in the elimination of earnings both promised and actually credited over time to Tier One members' regular accounts.”

Like respondents in Strunk or Moro, respondents here also cannot

establish that the changes to the IAP employee contributions and employer

contribution funded pension benefits are justified by economic crisis or are

reasonably tailored and necessary to resolve any public purpose. Changes

made to PERS which lower employer contribution rates do not make

fundamental changes to Oregon’s revenue system and ultimately will not

resolve Oregon’s K-12 funding issue. This fact was acknowledged by

legislators in the legislative history cited above in Section I.G.5. In short,

“[b]ecause this fourth component requires careful judicial scrutiny in all

events, it is clear that a state must do more than mouth the vocabulary of

the public weal in order to reach safe harbor; a vaguely worded or

pretextual objective, or one that reasonably may be attained without

87

substantially impairing the contract rights of private parties, will not serve to

avoid the full impact of the Contracts Clause.” McGrath, 88 F3d at 16.

V. CONCLUSION

For the foregoing reasons, the court should declare the challenged

sections of SB 1049 to be unconstitutional and void in whole or in part, or in

the alternative, declare that Petitioners are entitled to damages for breach

of contract or just compensation, and award Petitioners’ costs and

reasonable attorney fees incurred in the prosecution of this action under

the public purpose or common fund doctrine and/or ORS chapter 652.

Dated this day of February 18, 2020.

BENNETT HARTMAN, Attorneys at Law, LLP

s/Aruna A. Masih Aruna A. Masih, OSB 973241 Gregory A. Hartman, OSB 741283 Bennett Hartman, Attorneys at Law, LLP 210 SW Morrison St., Suite 500 Portland, OR 97204 Telephone 503-227-4600 Email aruna@bennetthartman.com Email greg@bennetthartman.com

Of Attorneys for Petitioners

88

CERTIFICATE OF COMPLIANCE WITH ORAP 5.05(2)(d) Brief length I certify that (1) this brief complies with the word-count limitation in

ORAP 5.05(1)(b) as amended by the February 13, 2020 order of the court allowing Petitioners to file a brief not to exceed 20,000 words; and (2) the word-count of this brief (as described in ORAP 5.05(1)(a)) is 19,190 words.

Type size I certify that the size of the type in this brief is not smaller than 14

point for both the text of the brief and footnotes as required by ORAP 5.05(3)(b)(ii).

Dated this day of February 19, 2020.

BENNETT HARTMAN, LLP

s/Aruna A. Masih Aruna A. Masih, OSB 973241 Gregory A. Hartman, OSB 741283 Bennett Hartman, Attorneys at Law, LLP 210 SW Morrison St., Suite 500 Portland, OR 97204 Telephone 503-227-4600 Email aruna@bennetthartman.com Email greg@bennetthartman.com

Of Attorneys for Petitioners

Page 31 REVISED JOINT STIPULATED FACTS AND GENERAL STIPULATIONS

GENERAL STIPULATIONS

Without waiving any relevancy objections, the parties may cite to the

following documents in their briefing: 1. The factual findings of the Oregon Supreme Court in Moro v. State,

357 Or 167, 174-191 (2015) and Strunk v. PERB, 338 Or 145, 151-

168 (2005); and

2. Legislative History Records.

The parties agree that if in writing their briefs they need to cite to facts that

are contained in The PERS By the Numbers Updated October 2018 or The

December 31, 2017 Actuarial Valuation, they will approach the other parties for

additional stipulations before raising the issue with the court.

DATED this day of January 17, 2020. Respectfully Submitted,

BENNETT HARTMAN, LLP

s/Aruna A. Masih Aruna A. Masih, OSB #973241 aruna@bennetthartman.com Gregory A. Hartman, OSB #74128 greg@bennetthartman.com 210 SW Morrison St. Suite 500 Portland, OR 97204-3149 (503) 227-4600

Of Attorneys for Petitioners

Ellen F. Rosenblum Attorney General of Oregon

/s/ Benjamin Gutman Benjamin Gutman #160599 Solicitor General 1162 Court St NE Salem, OR 97301 (503) 378-4402Benjamin.Gutman@doj.state.or.us

Of Attorneys for Respondents State of Oregon, State of Oregon by and through the Department of Human Services and Department of Transportation, and Public Employees Retirement Board

ER-130

CERTIFICATE OF FILING I certify that, I directed the PETITIONERS’ OPENING BRIEF AND EXCERPT OF RECORD to be electronically filed with the Appellate Court Administrator, Appellate Court Records Section, by using the court’s electronic filing system pursuant to ORAP 16 on February 18, 2020.

CERTIFICATE OF SERVICE I certify that service of a copy of this PETITIONERS’ OPENING BRIEF AND EXCERPT OF RECORD will be accomplished on the following participant(s) in this case, who is a registered user of the appellate courts' eFiling system, by the appellate courts' eFiling system at the participant's email address as recorded this date in the appellate eFiling system:

Ellen Rosenblum OSB 753239 Benjamin Gutman OSB 160599 Oregon DOJ, Appellate Division 1162 Court St NE Salem, OR 97301 Of Attorneys for State Respondents

Tracy Reeve OSB 891123 Robert L. Taylor OSB 044287 Daniel Simon OSB 124544 City of Portland 1221 SW 4th Avenue, Ste 430 Portland, OR 97204 Of Attorneys for Respondent City of Portland

Jenny Madkour, OSB 982980 County Counsel, Multnomah County 501 SE Hawthorne Blvd, Room 500 Portland, OR 97214 Of Attorneys for Respondent Multnomah County

Sharon A. Rudnick OSB #830835 William F. Gary OSB #770325 J. Arron Landau OSB #094135 Harrang Long Gary Rudnick PC 497 Oakway Rd Ste 380 Eugene, OR 97401 Of Attorneys for Respondents City of Salem, Oregon Health & Science University, Mount Hood Community College and Molalla River School District

DATED this day of February 19, 2020. BENNETT HARTMAN, Attorneys at Law, LLP

s/Aruna A. Masih Aruna A. Masih, OSB 973241

Of Attorneys for Petitioners