Court voids PERS reforms.

Byline: David Steves The Register-Guard

SALEM - The Oregon Supreme Court on Tuesday struck down parts of a state law aimed at curbing pension payments to public employees, but state and local officials said the ruling doesn't appear to do any immediate harm to government budgets and service levels.

The court struck down two of the 2003 Legislature's key revisions to the Public Employees Retirement System, which at the time faced an unfunded liability of about $17 billion. The shortfall was blamed on both the historically poor performance of the stock market and what many critics considered to be overly generous pension benefits for Oregon's 302,000 active and retired public employees.

Public employees and their unions vigorously fought the overhaul, which was pushed by Gov. Ted Kulongoski and many Democratic and Republican lawmakers. After the legislation passed, workers sued, saying the changes uncon- stitutionally undermined contract rights by reneging on retirement benefits that workers were told they would receive when they took jobs with state agencies, cities, counties, schools, universities, colleges and other PERS employers.

The ruling, explained by the court in an opinion of more than 150 pages, was enough of a mixed bag that both sides declared partial victory. Government officials said it would take weeks, maybe as long as a year, to fully understand the long-term impact on public employers' pension costs and how retirement benefits for workers and pensioners would be affected. In its opinion, the court struck down the legislative changes that:

Abolished the guarantee that PERS members' accounts would earn at least 8 percent a year, even when actual investment returns fell below that rate. Under this provision, public employers had provided no interest earnings in 2003 to 110,000 PERS members who joined the retirement system before 1996.

Stopped the practice of increasing PERS retirees' benefits through cost-of-living adjustments. The Legislature had halted these "COLAs" for about 22,000 PERS members who had retired between 2001 and 2004.

However, the court found that many other elements of the 2003 changes were legally permissible, including the updating of decades-old mortality tables that had failed to reflect the longer life expectancy of current PERS retirees.

By updating these tables, PERS was able to reduce monthly pension payouts.

The court also upheld the Legislature's formation of a 401(k)-style defined-contribu-tion system for those hired by public employers after August 2003.

Kulongoski said enough elements of the reform package had been allowed by the court to stand that it represented a confirmation of efforts by himself and the Legislature to fix the PERS system.

"We have slowed the escalating costs, saved taxpayers billions of dollars now and into the future, and maintained our commitment to provide public employees with a fair, balanced and more importantly, a sustainable pension," he said.

Kulongoski said that, despite the court's decision that some pension benefits must be restored, the state's budgets for the current biennium and the one being written for 2005-07 would not be impacted. He said pension savings, combined with strong PERS investment returns of the past two years, will allow the state to absorb any immediate fallout from the court ruling.

"We now have time to reconvene the necessary participants and make deliberate and sound decisions about how to proceed - without placing a burden on the 05-07 budget under development in the Legislature," he said.

Paul Cleary, director of PERS, said investment returns for PERS funds exceeded 24 percent in 2003 and 14.5 percent last year, a big reason his agency was able to build up a $1.2 billion reserve to deal with fallout from the lawsuit.

He said that cushion meant that PERS would not have to raise the rates government employers pay to keep up with their workers' and retirees' pension costs.

Kulongoski said the PERS system has sufficient reserves needed to give the 8 percent returns to PERS members for 2003, as directed by the court. PERS earnings for 2004 haven't yet been distributed to accounts.

PERS officials were less certain about the longer-term impacts of the ruling on local and state PERS employers' rates. Agency spokesman David Crossley said such questions were being pursued with the goal of providing answers to the PERS board at its March 29 meeting.

Jim Carlson, Eugene's assistant city manager, said it will take about a year for local officials to know what the court's ruling will mean to the city budget. The city has been saving money in case of unfavorable court rulings, he said.

Just two months ago, the PERS board requested a 10 percent contribution rate increase from the city, Carlson said. The $2.3 million would bring the city's total annual PERS obligations to about $25 million, or 35.6 percent of total payroll costs.

The court's decision means "we are unlikely to have to cut services" in the 2007 budget year, Carlson said. "But we are unlikely to be able to add services that we had hoped to in future years."

Crossley said PERS was anticipating a flood of inquiries from PERS members about how the ruling would affect their incomes.

"We can't determine how this will affect individual accounts at this point," he said. "We're assessing the decision and we will post information as it becomes available."

Officials from the unions that backed the legal challenge said they were pleased that the court supported their notion that the Legislature could not undo retirement benefits that were contractually agreed to when the employees started working for the government.

"A pension is a promise to employees, and the employer has to stand up to that," said Joe DiNicola, president of the Service Employees International Union Local 503, which represents state and local government workers in Oregon.

Eugene retiree John Cuff said his retirement check of $2,400 a month was frozen because PERS stopped giving employees who retired between 2000 and 2004 cost-of-living adjustments.

After 24 years with the state Department of Veterans Affairs, Cuff retired in 2002, making him one of the affected retirees.

The court's decision means that PERS should resume the COLA increases, though Cuff said he will believe it when he sees a bigger check.

"I am starting to have more faith in the judicial system because a contract has to be contract and everybody has to live up to it," he said.

There is a misperception in the public that former employees covered by PERS such as himself are on easy street, Cuff said.

Cuff said he pays $800 a month, one-third of his PERS retirement income, for health insurance for him and his wife.

When he retired three years ago, the annual cost was $530, Cuff said. And he also pays taxes on the retirement income, he said. "These are the things that, when you are retired, you have to look at," Cuff said.

Bill Gary, a Eugene lawyer who represented a number of local government employers, said the most significant long-term effect of Tuesday's ruling was the judges' rejection of the idea ``that you can't do anything to impact future benefits" for PERS recipients.

``The Supreme Court very clearly said that's not the case,'' Gary said.

For documents and more information on the ruling, visit the court's Web site at www.ojd.state.or.us, navigate to News and then to Supreme Court.

Register-Guard Reporter Edward Russo and the Associated Press contributed to this report.

THE BATTLE OVER PERS

The issue: Unions and individual Public Employee Retirement System members sued the state over cost-cutting moves by the 2003 Legislature to reduce a projected pension system deficit.

Who won: The Oregon Supreme Court's ruling gave both sides wins and losses. The court overturned changes that ended guaranteed investment returns for 110,000 workers and shaved cost-of-living raises for some others. But the court also upheld a change that shifted employees' future pension contributions into new, less beneficial accounts.

Fiscal impact: Gov. Ted Kulongoski said the ruling will have no impact on the 2005-07 state budget because the pension system has more than

$1 billion in reserve to cover problems.