PERS reformers won.

Byline: The Register-Guard

At first blush, public employees appeared to have won big on Tuesday when the Oregon Supreme Court invalidated two key provisions in the 2003 Legislature's effort to reform the Public Employee Retirement System. The more lasting victory, however, belongs to state and local governments and the taxpayers who support them. The court upheld two other elements of the reform package, and for the first time ruled that PERS benefits can be scaled back.

In all previous court fights, and there have been many, PERS members were found to have a contract right to their pension benefits. Neither the Legislature nor the voters could make changes that had the effect of reducing future benefits. In its 4-3 ruling Tuesday, however, the Supreme Court broke with that precedent and allowed legislatively approved benefit rollbacks to stand. The implication is clear: If PERS runs into further financial trouble, the Legislature can respond.

The court let stand the Legislature's order that PERS' antique actuarial tables be updated to reflect increased life expectances - the most common-sensical of the 2003 reforms. It also upheld the creation of a defined-contribution pension plan, similar to the 401(k) plans that have gained favor with private employers, for PERS-covered employees hired after August 2003. This change reduces the risk of unfunded PERS liabilities.

The court struck down the Legislature's suspension of cost-of-living increases in pension benefits for employees who retired between 2001 and 2004. It also tossed out the Legislature's attempt to terminate the guarantee that PERS members' accounts will earn a minimum return of 8 percent per year.

The 8 percent guarantee, however, did not create the $17 billion unfunded liability that PERS faced in 2003. The problem was that the PERS Board had credited members' accounts with earnings of more than 8 percent in years when the financial markets boomed, rather than setting money aside for the inevitable years in which returns fell flat. In the past two years, prudent reserve practices have built up a surplus of $1.2 billion. That's enough to cover the costs associated with Tuesday's court ruling. These practices have been institutionalized as a result of the 2003 reforms, reducing the risk of excess crediting in the future.

What's more, even with the 8 percent guarantee still in place, the overcrediting that helped create the unfunded liability is likely to be at least partially corrected. Circuit Court Judge Paul Lipscomb ruled in 2002 that the PERS Board abused its discretion in 1999, when it credited members with earnings of 20 percent. The case is on appeal; the Supreme Court has yet to render a decision. If the court upholds Lipscomb's ruling or decides that a settlement agreed to by the PERS Board and some of the plaintiffs makes the case moot, the 1999 crediting will be scaled back to 11.3 percent. Much of the imbalance that the Legislature sought to address by limiting cost-of-living increases and eliminating the 8 percent guarantee would be erased.

State and local governments still face substantial increases in the amounts they must contribute to PERS. But Gov. Ted Kulongoski says the 2005-07 budget will need no adjustments as a result of Tuesday's ruling. That's a strong sign that the central goal of the 2003 reforms - a financially sustainable public pension system - has been achieved. Better yet, the court has said the Legislature is within its rights in attempting to bring PERS resources and benefits into balance. That's the furthest-reaching result of Tuesday's ruling.