Counsel Listed on Inside Cover April 2020

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,

vs.

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.

SC S066933

ANSWERING BRIEF OF RESPONDENTS CITY OF SALEM, OREGON HEALTH AND SCIENCE UNIVERSITY, MOUNT HOOD

COMMUNITY COLLEGE AND MOLALLA RIVER SCHOOL DISTRICTS

Petition For Direct Review – Legislation Senate Bill 1049 (2019)

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

Of Attorneys for Petitioners

Tracy Pool Reeve, OSB 891123 tracy.reeve@portlandoregon.gov Daniel Simon, OSB 124544 dan.simon@portlandoregon.gov Robert Taylor, OSB 044287 robert.taylor@portlandoregon.gov City of Portland 1221 SW 4th Avenue, Suite 430 Portland, OR 97204 Telephone: (503) 823-4047

Of Attorneys for Respondent City of Portland

Jenny Morf Madkour, OSB 982980jenny.m.madkour@multco.us Multnomah County 501 SE Hawthorne Blvd., Rm. 500 Portland, OR 97214 Telephone: (503) 988-3138

Of Attorneys for Respondent Multnomah County

Sharon A. Rudnick, OSB 830835 sharon.rudnick@harrang.com William F. Gary, OSB 770325 william.f.gary@harrang.com Harrang Long Gary Rudnick P.C. 497 Oakway Road, Suite 380 Eugene, OR 97401-5647 Telephone: (541) 485-0220

Of Attorneys for Respondents City of Salem, Oregon Health and Science University, Mount Hood Community College and Molalla River School District

Benjamin Gutman, OSB 160599 benjamin.gutman@doj.state.or.usDepartment of Justice Appellate Division 1162 Court Street NE Salem, OR 97301 Telephone: (503) 378-4402

Of Attorneys for Respondents State of Oregon and Public Employees Retirement Board

i

TABLE OF CONTENTS

Page

I. QUESTIONS ON REVIEW ......................................................... 1

II. SUMMARY OF MATERIAL FACTS........................................... 3

III. SUMMARY OF ARGUMENT ..................................................... 3

IV. RESPONSE TO FIRST ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not unconstitutionally impair an obligation of contract in violation of Article I, Section 21, of the Oregon Constitution or breach any contractual obligation. .................................................................................... 9

A. The court decides the constitutionality of the challenged sections of SB 1049 in a well-established legal context. .... 9

1. Is there a contract? .................................................. 11

2. What are the terms of the contract? ....................... 12

3. What obligations do those terms provide? .............. 12

4. Has the state impaired an obligation of the contract?.................................................................................. 15

B. SB 1049, sections 1-19 (redirection of member contributions), do not impair an obligation of contract in violation of Article I, section 21. ....................................... 15

1. Sections 1-19 direct a portion of some members’ contributions made on or after July 1, 2020 to new individual ESPAs and mandate that those funds be used to pay the member’s benefits earned on or after that date. .................................................................. 15

2. Sections 1-19 do not unconstitutionally impair an obligation of contract in violation of Article I, section 21. ............................................................................. 18

ii

3. Petitioners’ arguments to the contrary do not establish an unconstitutional impairment. ............ 21

C. Sections 39-40 do not unconstitutionally impair an obligation of contract under Article I, section 21. ............ 31

1. Sections 39-40 cap “salary” only for years beginning on and after January 1, 2020. ................................. 31

2. Sections 39-40 do not unconstitutionally impair an obligation of contract in violation of Article I, section 21. ............................................................................. 36

3. Petitioners’ arguments to the contrary do not establish an unconstitutional impairment. ............ 37

D. Neither sections 1-19 nor sections 39-40 of SB 1049 breaches an existing contractual obligation. ................... 46

V. RESPONSE TO SECOND ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not cause a taking under Article I, Section 18, of the Oregon Constitution. ..................... 46

VI. RESPONSE TO THIRD ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not impair an obligation of contract in violation of Article I, Section 10 of the U.S. Constitution. .............................................................................. 48

VII. CONCLUSION .......................................................................... 49

iii

TABLE OF AUTHORITIES

Cases Page(s)

DeMendoza v. Huffman, 334 Or 425, 51 P3d 1232 (2002) ..................................................... 48

Eckles v. State.306 Or 380, 760 P2d 846 (1988) ..................................................... 46

Hawkins v. City of LaGrande, 315 Or 57, 843 P2d 400 (1992) ....................................................... 47

Hughes v. State, 314 Or 1, 838 P2d 1018 (1992) ................................................. 11, 19

Moro v. State, 357 Or 167, 351 P3d 1 (2015) ..... 3, 4, 6, 9, 10, 11, 12, 13, 14, 19, 21, 22, 23, 36, 41, 42, 49, 50, 51

RUI One Corp. v. City of Berkeley, 371 F3d 1137 (9th Cir 2004) .......................................................... 49

Strunk v. PERB, 338 Or 145, 108 P3d 1058 (2005) ..... 3, 12, 15, 16, 17, 18, 22, 23, 24, 25, 28, 32, 38

Taylor v. Mult. County Deputy Sheriff’s Retirement Bd., 265 OR 445, 510 P2d 339 (1973) .................................................... 14

Statutes

IRC section 401(a)(17) .................................................................. 33, 37

Or Laws 2003, chapter 67 ................................................................... 28

ORS 238.005(9) ................................................................................... 32

ORS 238.005(26)(c) ............................................................................. 33

ORS 238.200(1)(a) (2001) .................................................................... 23

ORS 238.200(2) (2001) ........................................................................ 23

iv

ORS 238.200(4) (2017) ........................................................................ 24

ORS 238.205 (2001) ...................................................................... 23, 24

ORS 238.229 ....................................................................................... 17

ORS 238.300 .......................................... 6, 15, 24, 26, 29, 31, 32, 35, 38

ORS 238.300(1) ................................................................................... 32

ORS 238.300(2) ................................................................................... 32

ORS 238.350(1) ................................................................................... 19

ORS 238A.005(17)(c) ........................................................................... 33

ORS 238A.005(17(c)(I) (2017) ....................................................... 33, 34

ORS 238A.130 ..................................................................................... 32

ORS 238A.200(4) (2017) ..................................................................... 26

ORS 238A.240 ..................................................................................... 27

ORS 238A.320 ..................................................................................... 28

ORS 238A.330 (2017) .......................................................................... 24

ORS 238A.340 ..................................................................................... 27

ORS 238A.350(1) ................................................................................... 5

ORS 238A.400 ........................................................................... 5, 18, 19

ORS 238A.470 ..................................................................................... 27

Other Authorities

House Committee on PERS, April 17, 2003, Hearing Room E, Tapes 52-53 ...................................................................... 29

OAR 459-005-0525 (2019) ................................................................... 33

Or Const. Art. I, §18 ........................................................................... 47

Or Const. Art. I, §21 ................................................................... 4, 9, 46

v

SB 1049, section 1 ............................................................................... 19

SB 1049, section 1(2)............................................................................. 5

SB 1049, section 1(2)(a)(A) ................................................................. 17

SB 1049, section 1(2)(a)(B) ................................................................. 17

SB 1049, section 1(2)(b)(B) ................................................................. 17

SB 1049, section 1(2)(c) ....................................................................... 17

SB 1049, sections 1-19 ....................... 3, 4, 5, 6, 8, 17, 19, 20, 31, 46, 48

SB 1049, section 2(b)(A) ...................................................................... 17

SB 1049, section 3 ............................................................................... 30

SB 1049, section 3(2)........................................................................... 17

SB 1049, section 3(3)............................................................................. 5

SB 1049, section 3(3)(a) ..................................................................... 18

SB 1049, section 3(3)(b) ...................................................................... 18

SB 1049, section 3(4)........................................................................... 30

SB 1049, section 39(26)(M) ............................................................. 7, 34

SB 1049, sections 39-40 ................... 3, 6, 7, 8, 31, 33, 37, 41, 44, 46, 48

U.S. Const. Art. I, §10 ....................................................................... 4, 9

1

I. QUESTIONS ON REVIEW

1. Do Senate Bill (“SB”) 1049, sections 1-19 (redirection of

member contributions), impair an obligation of contract in violation

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

10, of the U.S. Constitution?

2. Do SB 1049, sections 1-19, breach any contractual right to

PERS benefits?

Proposed rule of law with regard to questions 1-2. SB 1049,

sections 1-19, do not impair an obligation of contract in violation of

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

10, of the U.S. Constitution, or breach any contractual right to PERS

benefits because petitioners have no contractual right to make

ongoing contributions to their Individual Account Program (“IAP”)

accounts and because sections 1-19 do not affect benefits already

earned as of the law’s effective date. Any changes to benefits

resulting from the enactment of sections 1-19 will apply only to

benefits earned for work performed after the law’s effective date.

3. Do SB 1049, sections 39-40 (prospective change in definition

of “salary”), impair an obligation of contract in violation of Article I,

2

section 21, of the Oregon Constitution or Article 1, section 10, of the

U.S. Constitution?

4. Do SB 1049, sections 39-40, breach any contractual right to

PERS benefits?

Proposed rule of law with regard to questions 3-4. SB 1049,

sections 39-40, do not impair an obligation of contract in violation of

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

10, of the U.S. Constitution, or breach any contractual right to PERS

benefits because sections 39-40 do not affect benefits already earned

as of the law’s effective date. Any changes to benefits resulting from

the enactment of sections 39-40 will apply only to benefits earned for

work performed after the law’s effective date.

5. Do SB 1049, sections 1-19 or sections 39-40, cause a taking

of private property for public use without just compensation in

violation of Article I, section 18, of the Oregon Constitution?

Proposed rule of law: Neither sections 1-19 nor sections 39-40

causes an unconstitutional taking because petitioners have no

property interest in retirement benefits that have not yet been

earned as of the effective date of those enactments.

3

II. SUMMARY OF MATERIAL FACTS

Respondents address the facts relevant to their response to

each assignment of error in the appropriate sections below. This

court’s background sections in Strunk v. PERB, 338 Or 145, 156-167,

108 P3d 1058 (2005), and Moro v. State, 357 Or 167, 175-192, 351

P3d 1 (2015), and the parties’ Stipulated Facts (“Stip. Facts”) 1-29

(ER-100-110) provide general context regarding the history and

operations of PERS.

III. SUMMARY OF ARGUMENT

Neither SB 1049, sections 1-19 (redirection of employer

contributions) nor sections 39-40 (cap on “salary”) unconstitutionally

impairs or breaches any contractual obligation owed to petitioners

for PERS benefits. In Moro v. State, this court held that the offer of

PERS benefits is a “continuing offer.” With each rendition of service,

an employee accepts any open offer for additional PERS benefits,

“but only as far as the work that the member has performed.” 357

Or at 201. Said another way, the PERS contract binds employers to

compensate a member “for only the work that the member has

rendered and based on only the terms offered at the time that the

4

work was rendered, even if the employer changed that offer over

time.” Id.

Put simply, in Moro, this court held that the legislature may

lawfully change the terms of the PERS offer so long as the changes

do not alter benefits already earned for work already performed. In

light of that ruling, all of petitioners’ challenges to SB 1049 turn on

the answer to one question of law: Do any of the challenged

provisions alter benefits petitioners have earned for work they

performed before SB 1049’s effective date? The answer to that

question is no, and the challenged provisions of SB 1049, therefore,

are valid.

Petitioner’s first and third assignments of error allege that SB

1049, sections 1-19, impair a contractual obligation to credit member

contributions to IAP regular accounts in violation of Article I, section

21, of the Oregon Constitution or Article I, section 10, of the U.S.

Constitution. Petitioners argue in the alternative that sections 1-19

breach that contractual obligation. Petitioners’ arguments fail

because sections 1-19 make only prospective changes to the PERS

offer, and leave all benefits earned before their effective date intact.

5

SB 1049, sections 1-19, take effect on July 1, 2020. Beginning

on that date, PERS will redirect a portion of some members’

contributions from their IAP accounts to new, individual Employee

Pension Stabilization Accounts (“ESPAs”), for as long as PERS

remains less than 90% funded. The remainder of the members’

contributions will continue to be credited to their IAP accounts. SB

1049, section 1(2). The other statutes applicable to the IAP are

unchanged: All funds in members’ IAP accounts—whether

contributed before July 1, 2020 or after—will continue to be credited

with net earnings and losses. ORS 238A.350(1). Upon retirement,

members will receive the accumulated balance in their IAP accounts.

ORS 238A.400. The funds in a member’s ESPA will be used only to

pay for the member’s benefits that accrue on or after July 1, 2020.

Funds in excess of what is needed for that purpose will be returned

to the member or the member’s beneficiary. SB 1049, section 3(3).

SB 1049 changed prospectively the “continuing offer” of IAP

benefits available to members. With the enactment of SB 1049,

sections 1-19, members had notice that, for service performed on or

after July 1, 2020, some of them would see their member

contributions divided between their IAP accounts and their ESPAs.

6

By working after July 1, 2020, members will accept this new offer of

PERS benefits, which includes the SB 1049 amendments. SB 1049,

sections 1-19, do exactly what this court in Moro said the legislature

could do—they alter the IAP benefit only prospectively, thereby

protecting members’ rights to IAP benefits already earned. There is

no unconstitutional impairment or breach of any contractual

obligation owed to petitioners.

The same is true with regard to SB 1049, sections 39-40, which

took effect on January 1, 2020. Those provisions changed the

definition of “salary” for the years 2020 and thereafter for purposes

of calculating “final average salary,” one factor in the full formula

benefit calculation. The full formula calculates a member’s “final

average salary” by averaging the member’s three highest annual

salaries earned. The formula multiplies that “final average salary”

number by 1.67% for Tier 1 and Tier 2 members (2% for police and

fire personnel) or by 1.5% for OPSRP members. It then multiplies

that number by the member’s years of service, to arrive at the

member’s full formula benefit [“final average salary” x 1.67% x years

of service = full formula benefit]. ORS 238.300.

7

Going forward, for purposes of calculating “final average

salary,” a member’s “salary” for any given year will be determined

according to the definition of “salary” in effect for the year in which

the salary was earned. Members retain the benefit of higher salaries

earned in years before 2020. When SB 1049, was enacted, however,

members were put on notice that, for the years 2020 and thereafter,

their “salary” for purposes of calculating “final average salary” will

be capped at $195,000, adjusted annually for inflation. SB 1049,

section 39(26)(M). By working after January 1, 2020, members

accepted an offer of PERS benefits that included the amendments

made by SB 1049, sections 39-40.

SB 1049, sections 39-40, protect the full formula benefits

petitioners have earned for work performed before January 1, 2020,

and make only prospective changes to that benefit calculation

method for work performed in 2020 and thereafter. There is no

unconstitutional impairment or breach.

In their second assignment of error, petitioners claim that the

challenged sections of SB 1049 cause an unconstitutional taking of

their property interest in “IAP ‘employee contributions,’ ‘employee

salary,’ and ‘employer contribution’-funded pension benefits.” Op.

8

Br. 74. In other words, petitioners assert that they have a property

interest in the right to have the pre-SB 1049 provisions regarding

member contributions and defining “salary” remain unchanged over

the course of their employment.

That argument rests on the same faulty premise as the

argument petitioners made in support of their claim that SB 1049,

sections 1-19, and sections 39-40 unconstitutionally impair or breach

their PERS contracts, that is, that they have contractual property

rights in benefits not yet earned. But petitioners have no property

interest in unearned benefits. Petitioners’ only contractual right is

to receive the benefits offered at the time they perform work.

Benefits for work not yet performed will depend on the offer made at

the time that service is rendered. None of the challenged sections of

SB 1049 alter any benefits earned by members before the effective

dates of the challenged enactments. Therefore, there is no

unconstitutional taking of private property rights.

This court should hold that SB 1049, sections 1-19 and sections

39-40 are valid.

9

IV. RESPONSE TO FIRST ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not unconstitutionally impair an obligation of contract in violation of Article I, Section 21, of the Oregon Constitution or breach any contractual obligation.

A. The court decides the constitutionality of the challenged sections of SB 1049 in a well-established legal context.

This court decides the question of whether the challenged

provisions of SB 1049 unconstitutionally impair an obligation of the

PERS statutory contract pursuant to a well-established legal

framework developed through decades of PERS litigation. The

court’s most recent case on this subject, Moro v. State, 357 Or 167,

established a blueprint for how the legislature may lawfully amend

PERS—a blueprint that the legislature carefully followed in enacting

SB 1049.

Article I, section 21, of the Oregon Constitution states that ‘[n]o

* * * law impairing the obligation of contracts shall ever be passed.”

Because Article I, section 21, was derived from the federal Contract

Clause (Article I, section 10, of the U.S. Constitution), this court

interprets the state Contract Clause as being consistent with its

federal counterpart. Moro, 357 Or at 192.

10

In 1857, when the state Contract Clause was adopted, it was

well established that the federal Contract Clause applied only to

laws that impaired contractual obligations existing at the time the

law was enacted. Id. at 193. This court has applied that same

limitation to the reach of the state Contract clause. See id. at 194

(“[W]hen applying the state Contract Clause, we consider the

potential impairment of contract obligations arising only from

contracts entered into before the effective date of the law being

challenged.”) (emphasis in original)). The court has described the

reason for that limitation as “simple:” “If the contract creates

obligations that contravene a law in effect at the time that the

contract is entered, then the parties have no legitimate expectation

that those obligations will be enforced.” Id. citing Eckles v. State. 306

Or 380, 399, 760 P2d 846 (1988).

In analyzing whether a law contravenes Oregon’s Contract

Clause, the court engages in a four-part inquiry: (1) is there a

contract; (2) if so, what are its terms; (3) what obligations do those

terms require; and (4) has the challenged law impaired an obligation

of that existing contract? Moro, 357 Or at 194.

11

1. Is there a contract?

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

concluded that the legislature “intended and understood” that PERS

benefits are contractual obligations of participating employers. Id. at

18. The court in Moro went a step further and examined the nature

of the contractual obligations established by the PERS statutes. The

court concluded that they are employment contracts making a

“continuing offer” of PERS benefits in exchange for current service by

the employee. As long as the employer continues to offer PERS

benefits, the employee may continue to accept the offer by working,

and thereby earn additional contractual rights to additional benefits.

Moro, 357 Or at 199. As such, “[t]he PERS contract reaches only as

far as a member has accepted the offer, and a member’s acceptance

reaches only as far as the work the member has performed.” Id. at

201.

From the employers’ perspective,

“the PERS contract binds a participating employer to compensate a member for only the work that the member has rendered and based on only the terms offered at the time that the work was rendered, even if the employer changed that offer over time.”

12

Id. In other words, the legislature may change the terms of the

PERS benefits offered without offending the Contract Clause so long

as the changes do not alter benefits already earned for work already

performed. The fact that an amendment may reduce the prospective

retirement benefits employees expected to earn for work not yet

performed does not violate the Contract Clause.

2. What are the terms of the contract?

Not every provision of the PERS statutes creates a contract. As

this court has noted, “we have long applied a canon of construction

that disfavors interpreting statutes as contractual promises.” Moro,

357 Or at 195. That means that, to conclude that a statute creates a

contract, the court must find “clear and unmistakable contractual

intent” on the part of the legislature. As this court said in Strunk,

“the intention to surrender or suspend legislative control over

matters vitally affecting the public welfare cannot be established by

mere implication.” Strunk, 338 Or at 171, quoting Campbell et al. v.

Aldrich et al., 159 Or 208, 213-214, 79 P2d 257 (1938).

3. What obligations do those terms provide?

Because PERS members repeatedly accept their employers’

offers of PERS benefits by continuing to work, to determine whether

13

the challenged sections of SB 1049 impair an existing obligation of

contract, this court must determine the employers’ contractual

obligations to provide retirement benefits before the effective dates of

those challenged sections. PERS members are entitled to have those

pre-amendment obligations applied to the service they performed

before the challenged sections of SB 1049 became effective—but not

to service performed after those dates. By working after SB 1049

becomes effective, PERS members accept an offer of benefits that

includes the SB 1049 amendments.

This court has recognized that an offer for a particular PERS

benefit could be irrevocable over the life of a member’s service, but

only in two circumstances. First, a statute may contain an

irrevocable offer of benefits, but “only if the irrevocability is an

express term of the offer.” Moro, 357 Or at 222, quoting Strunk, 338

Or at 192 n20. In other words, to find a term of the PERS contact

irrevocable, this court must find that the statute at issue includes an

express promise that the terms of a contractual obligation will not be

changed even prospectively, i.e., for work that has yet to be

performed. Moro, 357 Or at 227.

14

Second, as the Moro court noted, an offer of benefits may be

irrevocable in the unique circumstance where the offer can be

accepted only by performance that takes time to complete, as was the

case in Taylor v. Mult. County Deputy Sheriff’s Retirement Bd., 265

OR 445, 510 P2d 339 (1973). As the Moro court noted:

“The fact that PERS is a unilateral contract simply means that the employee is not contractually bound to carry out some future performance—that is, there is nothing in the terms of the PERS contract obligating the employee to continue working for the employer. But the implied term of irrevocability recognized in Taylor does not apply to all offers of unilateral contracts; instead, it applies only to those offers that are accepted by performance that takes time to complete.”

Moro, 357 Or at 224. The court distinguished the facts of the Taylor

case from an offer of benefits that does not take time to accept, but

rather that can be accepted incrementally as an employee renders

additional service. In the latter case, “[t]he member’s work

continually and serially completes the performance necessary to

accrue benefits attributable to that work, thus eliminating the

concern of uncompensated work that drove this court’s analysis in

Taylor.” Id. at 224-225.

15

4. Has the state impaired an obligation of the contract?

Having determined the terms of participating employers’

contractual obligations to provide PERS benefits before the effective

dates of the challenged sections of SB 1049, the court turns to the

question of whether those provisions impair any of those obligations.

We address that question below.

B. SB 1049, sections 1-19 (redirection of member contributions), do not impair an obligation of contract in violation of Article I, section 21.

1. Sections 1-19 direct a portion of some members’ contributions made on or after July 1, 2020 to new individual ESPAs and mandate that those funds be used to pay the member’s benefits earned on or after that date.

Before 2004, all active PERS members contributed, either

directly or by employer “pickup,” 6% of their salaries to their regular

member accounts in PERS. Earnings (and for Tier 2 members,

losses) on the contributions were credited to those accounts. At

retirement, PERS members received the highest of three benefit

calculations—the full formula, the money match, or (for members

who made contributions before 1981) the pension-plus-annuity

formula. Strunk, 338 Or at 164; see id. at 161 (describing the three

formulas); ORS 238.300. Upon retirement, the funds in a member’s

16

regular account were transferred to the benefits-in-force reserve

together with an amount from the employer’s reserves which, when

combined with the member’s account, was deemed actuarially

sufficient to pay the member’s retirement benefits. Strunk, 338 Or

at 162.

Effective January 1, 2004, all future member contributions

were redirected from the regular member accounts in PERS to

individual member accounts in the IAP. The IAP functions as a

defined contribution component of PERS. An IAP account is credited

with actual earnings or losses (less administrative expenses), and the

accumulated balance is paid out to members upon retirement. The

amounts in an IAP account are not subject to matching under the

money match calculation and are not entitled to COLA

enhancements. Id. at 180.

In Strunk, some PERS members challenged the redirection of

member contributions to the IAP, arguing that it breached or

impaired their contractual right to continue making contributions to

their regular PERS accounts. The court rejected that claim,

concluding that the redirection of member contributions from

17

members’ regular PERS accounts to their IAP accounts did not

breach or impair an obligation of the PERS contract. Id. at 192.

SB 1049, sections 1-19, accomplish a partial “about face” by

redirecting a portion of some members’ contributions from their IAP

accounts to a new member account—the EPSA. The legislation

works as follows:

• If a member’s salary does not exceed $2500 per month (adjusted annually for inflation), the member’s entire 6% contribution is credited to the member’s IAP account. SB 1049, section 1(2)(a)(A); (2)(b)(A).

• For Tier 1 and Tier 2 members earning more than $2500 per month, 3.5% of the member’s contribution is credited to the member’s IAP account, and 2.5% is credited to the member’s EPSA. Id. at section 1(2)(a)(B).

• For OPSRP members earning more than $2500 per month, 5.25% of the member’s contribution is credited to the member’s IAP account, and 0.75% is credited to the member’s EPSA. Id. at section 1(2)(b)(B).

• In any biennium following an actuarial determination showing that “the funded status of the system, including any lump sum payments made under ORS 238.229, is 90 percent or greater,” the full 6%-member contribution will be credited to all members’ IAP accounts. Id. at section 1(2)(c).

• The EPSAs will be credited annually with net earnings or losses. Id. at section 3(2).

• All amounts accumulated in a member’s EPSA “shall be applied by the board to pay the costs of the [member’s] pension or other retirement benefits that * * * accrue on

18

or after July 1, 2020 [the effective date of the legislation].” Id. at section 3(3)(a).

• If the amounts in a member’s EPSA exceed the costs of the member’s retirement benefits earned on or after July 1, 2020, the excess is refunded to the member or the member’s beneficiary. Id. at section 3(3)(b).

Upon retirement, the funds in the member’s EPSA will be used

exclusively to pay for the portion of the member’s defined retirement

benefit earned after July 1, 2020. Id. at section 3(3)(a). In addition,

the member will receive the amounts accumulated in the member’s

IAP account, which will include the full 6% member contribution for

work performed before July 1, 2020, and for contributions made after

July 1, 2020, the portion of the 6% member contribution credited to

the employee’s IAP account, as described above. ORS 238A.400.

2. Sections 1-19 do not unconstitutionally impair an obligation of contract in violation of Article I, section 21.

Legislation may impair an existing statutory contractual

obligation if it changes or eliminates such an obligation. Strunk, 338

Or at 170. In deciding whether sections 1-19 unconstitutionally

impair a term of petitioners’ PERS contracts, the court must

determine whether the redirection of a portion of a members’

contribution from their IAP account to their EPSA, as contemplated

19

by SB 1049, section 1, alters or eliminates benefits already earned,

for work already performed. The answer to that question is no.

The IAP is a benefit paid to members as part of their PERS

retirement benefits. To that extent, members have a contractual

right to receive that benefit. See Hughes, 314 Or at 18 (benefits

provided by PERS are contractual). In altering the IAP benefit,

however, the legislature did exactly what this court in Moro said it

could do—it altered the benefit only prospectively, thereby protecting

PERS members’ rights to IAP benefits already earned.

The prospective-only nature of SB 1049, sections 1-19, is

apparent on the face of the legislation. The full amount of the

accumulated 6% contributions to members’ IAP accounts for work

performed before July 1, 2020 (the effective date of SB 1049, sections

1-19) remains intact. Those amounts will continue to be credited

with earnings and losses and will be paid out in full to members

upon retirement according to the terms of the IAP program. ORS

238.350(1) (individual accounts adjusted at least annually with net

earnings or losses); 238A.400 (payment of IAP account upon

retirement).

20

With the enactment of SB 1049, those same members had

notice that, for service performed on or after July 1, 2020, some of

them would see their contributions split between their IAP accounts

and their EPSAs. Upon retirement, all of the funds accrued in their

IAP accounts will continue to be paid out to members according to

the terms of the IAP program. The funds accrued in their Tier 1 and

Tier 2 regular member accounts will continue to be transferred to the

benefits-in-force reserve and used to pay the members’ benefits (also

unchanged). The funds accumulated in members’ EPSAs will be

used to pay for the portion of the retirement benefits they earned

after July 1, 2020—that is, after the effective date of the SB 1049,

sections 1-19. By continuing to work after July 1, 2020, those

members will accept the new offer of IAP benefits reflected in SB

1049, sections 1-19, in exchange for their current service.

In that way, SB 1049, sections 1-19, protect members’ IAP

benefits earned before July 1, 2020 for work performed before that

date and offer additional PERS benefits in exchange for service

performed on or after July 1, 2020, on terms as amended by those

21

sections of SB 1049.1 The type of prospective change in benefits

effected by SB 1049’s provisions redirecting member contributions is

exactly what this court in Moro found to be constitutional. See Moro,

357 Or at 201 (“The PERS contract binds a participating employer to

compensate a member for only the work that the member has

rendered and based on only the terms offered at the time the work

was rendered, even if the employer changed the offer over time.”).

3. Petitioners’ arguments to the contrary do not establish an unconstitutional impairment.

Petitioners’ primary argument is that the redirection of a

portion of some members’ contributions from their IAP accounts to

their EPSAs violates an irrevocable promise that members would

receive a pension fully funded by employer contributions. Op. Br. 59.

No such promise was made.

First, petitioners repeatedly assert that a statutory contractual

promise can be made “impliedly irrevocable.” See, e.g., Op Br. 60

1 Petitioners argue that SB 1049 will result in a “loss of retirement benefits.” Op. Br. at 10. That “loss,” however, is actually the amount the employees would have had in their IAP accounts had the statutes remained unchanged throughout their careers (and assuming they retired with 30 years of service). No employees will “lose” money contributed to their IAP accounts before the effective date of SB 1049 as a result of the SB 1049 amendments.

22

(statutory language “create[d] an ‘expressly or impliedly irrevocable’

term of the PERS contract that the pension would be funded

exclusively by employers.”) This court has held that no statutory

contractual obligation “can[] be established by mere implication,”

never mind an irrevocable one. Strunk, 338 Or at 171 (internal

citation omitted). As discussed above, this court has made it clear

that a statutory promise becomes irrevocable in only two

circumstances: if the statutes expressly make that promise (Moro,

357 Or at 222), or if the promise imposes conditions on acceptance

that take time to complete. Id. at 223-224. There is no other

circumstance from which a promise of irrevocability can result.

The latter circumstance does not exist here because acceptance

of the IAP benefit does not take time to complete. Rather, the benefit

accrues incrementally as a PERS member renders additional service.

As this court said with regard to the COLA benefit, “[t]he member’s

work continually and serially completes performance necessary to

accrue the benefits attributable to the work, thus eliminating the

concern of uncompensated work that drove this court’s analysis in

Taylor [v. Mult. Co. Deputy Sheriffs’ Ret. Bd].” Id. at 224-225.

23

The only other way a statutory promise of PERS benefits can

become irrevocable is “if the irrevocability is an express term of the

offer.” Id. at 222, quoting Strunk, 338 Or at 192 n40 (“The predicate

question—which we determine to be dispositive in these cases—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 a

covered member’s service.”) (first emphasis in Strunk, second

emphasis in Moro). The court in both Strunk and Moro “found no

such words,” 357 Or at 233, and the history of the relevant statutes

shows that there are none here either.

As discussed above, before January 1, 2004, PERS members

were required to contribute, or their employers could contribute on

their behalf, 6% of their salaries to their regular accounts in PERS.

ORS 238.200(1)(a) (2001); 238.200(2)(2001); 238.205 (2001).2 Strunk,

2 Those statutes stated: “An active member of the system shall contribute to the fund and there shall be withheld from salary of the member six percent of salary.” ORS 238.200(1)(a) (2001). “The contributions of each member as provided in subsection (1) of this section shall be deducted by the employer from each payroll and transmitted by the employer to [PERS], which shall cause them to be credited to the member account of the member.” ORS 238.200(2) (2001).

24

338 Or at 179. In 2003, the legislature amended ORS 238.200 to

discontinue the requirement that PERS members make

contributions to the members’ regular member accounts:

“[A] member of [PERS], 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. * * *

ORS 238.200(4) (2017). Instead, effective January 1, 2004, members’

6% contributions were paid into their IAP accounts rather than into

their PERS regular member accounts. ORS 238A.330 (2017).

In Strunk, the petitioners challenged the constitutionality of the

redirection of member contributions from PERS regular member

accounts to the IAP. The Strunk petitioners argued that before the

2003 amendments, they were contractually entitled not only to

receive upon retirement a service retirement allowance calculated

under the formula that yielded the highest pension amount under

ORS 238.300, but also to contribute during their employment a

“Notwithstanding any other provision of this chapter, and subject to the provisions of this section, a public employer participating in the system may agree * * * to ‘pick up,’ assume or pay the full amount of contributions to the fund required of all or less than all active members of the system employed by the employer.” ORS 238.205 (2001).

25

certain percentage of their salary to their regular accounts in order

to increase the value of their money match benefit at retirement.

Strunk, 338 Or 192. This court disagreed, holding:

“Nothing in the text of ORS 238,200(1)(a) (2001), which required PERS members to contribute six percent of their salaries to the fund, supports petitioners’ argument that the legislation intended the contribution to be immutable. As noted earlier, the 1981 Legislative Assembly lowered the member contribution rate from a high of seven percent to a uniform six percent. And, at the same time, the legislature grandfathered those members previously paying a contribution rate of less than six percent even though it meant that those members’ account balances, and therefore the service retirement allowances that the members ultimately would receive, would be smaller under the Money Match. In other words, the text of ORS 238.200(1)(a) (2001) and its statutory context do not establish clearly and unambiguously that the legislature intended to promise members that they could contribute six percent of their salaries to their regular accounts throughout their PERS membership so as to maximize their pension component calculation under the Money Match.”

Id. at 192 (emphasis added).

The same is true here: There was nothing “immutable” about

the 2003 legislature’s decision to direct future member contributions

from their PERS regular accounts to their IAP accounts. The

26

statutes creating the IAP contain no express promise that the terms

of the IAP would never change. And therefore the 2019 legislature

was free to redirect future member contributions from members’ IAP

accounts to members’ EPSAs.

Petitioners cite to the fact that ORS 238A.200(4) (2017)

prohibited members from making contributions to their PERS

regular accounts and to a statement to the legislature from then-

Governor Kulongoski that member contributions “[are] the members’

money and it should remain a part of their ultimate pension system.”

They assert that together those statements “create an ‘expressly or

impliedly irrevocable’ term of the PERS contract that the pension

would be funded exclusively by employers.” Op. Br. at 60. That is

not enough to create an irrevocable promise.

As an initial matter, there is no doubt that, with the redirection

of member contributions to the IAP, the legislature decided that the

funding sources for the defined benefit provided by ORS 238.300

would not include member contributions made after January 1, 2004.

However, even after that change, those benefits were not funded

“exclusively by employers”—they were funded by employer

27

contributions, member contributions made before January 1, 2004,

and earnings on the PERS Fund.

Regardless, there simply is nothing in the text of the statutes

creating the IAP that amounts to an express promise, or

“establish[es] clearly and unambiguously” that the legislature

intended to make an irrevocable promise to members that their

contributions would continue to go into their IAP accounts

throughout their employment. In fact, the context of the IAP

statutes shows the opposite.

First, in ORS 238A.470, the legislature expressly reserved the

right to make prospective changes to OPSRP members’ benefits.

That statute refutes any notion that the legislature intended the

statutes establishing the IAP to create any irrevocable contractual

obligations to OPSRP members, including an irrevocable right to

contribute the full amount of their member contributions to their IAP

accounts throughout their employment.

Second, the IAP statutes themselves contemplate future

amendment. ORS 238A.340 states that, if an employer makes

contributions to the IAP on behalf of a member under ORS 238A.240

(employer “pickup”), those funds are held for the member in an

28

employer account in the IAP. ORS 238A.320 establishes when a

member becomes vested in that account, including: “(c) If the

individual account program is terminated, the date on which

termination becomes effective, but only to the extent the account is

then funded[.]” That statute demonstrates a clear and unmistakable

understanding by the 2003 legislature that a future legislature could

decide to stop the funding of the IAP entirely. In that context, this

court cannot find the requisite legislative intent to make a member’s

right to contribute to the IAP irrevocable—in fact, quite the opposite.

Moreover, the legislative history of the 2003 legislation

demonstrates that the legislature’s purpose in creating the IAP was

not to create an additional retirement benefit at all, never mind an

irrevocable one. The purpose of the 2003 PERS reforms was to

address an immediate problem—the continuing and unmanageable

growth of the PERS unfunded liability. See Strunk, 338 Or at 162-

163 (“The fiscal status of the fund following poor investment

performances in 2000, 2001, and 2002—together with significant

growth in fund liabilities and employer contribution rates—was the

primary motivator of the 2003 PERS legislation.”); Or Laws 2003,

chapter 67 (preamble).

29

The specific purpose of redirecting member contributions to the

IAP was to limit the outsized growth of the money match benefit,

which requires employers to match the amounts accumulated in

PERS member accounts at retirement. See House Committee on

PERS, April 17, 2003, Hearing Room E, Tapes 52-53 (Testimony of

Margaret Hallock on behalf of Governor Theodore Kulongoski)

(“With respect to the 6 percent member contribution, we agree in

general with the proposal in HB 2003 to prohibit member

contribution[s] being added to regular accounts in the future. * * *

Removing [them] from the regular PERS accounts halts the

compounding of these contributions which then must be matched in

the future. * * *”). One consequence of the legislature’s decision to

redirect member contributions away from member accounts is that

members got a new benefit, the IAP, in addition to their defined

benefit under ORS 238.300. But the legislature’s motivation for

doing so was not to create a new benefit. Its purpose was to curtail

an existing benefit—the money match. That history simply does not

jive with the notion that the legislature intended the IAP benefit to

be irrevocable by future legislatures.

30

Finally, petitioners assert that the 2003 legislation establishing

the IAP created in members an irrevocable promise that their

member contributions to the IAP will not be used to pay for employer

costs associated with other employees (ie. retirees). Op. Br. 64, 66,

71-73. They make that argument based on their analysis that the

majority of the PERS unfunded liability results from benefits owed to

retired members. Id. at 71. From that, petitioners assert that

member contributions are being redirected to pay for those legacy

costs. Id.

But that assertion is directly contrary to the words of SB 1049,

section 3, which states that the amounts in a member’s EPSA “shall

be applied by the board to pay the costs of the pension or other

retirement benefits that are payable to the member or the member’s

beneficiary under [PERS] and that accrue on or after July 1, 2020.”

Subsection 4 provides that if the amounts accrued in a member’s

EPSA exceed the costs of the member’s retirement benefits earned on

or after July 1, 2020, “the board shall refund the excess amounts in a

lump sum to the member or the member’s beneficiary.” In other

words, the legislation expressly requires that member contributions

paid into an EPSA either be used to pay the member’s own

31

retirement benefits or be refunded to the member. Under no

circumstance will member contributions to EPSAs be used to pay for

“employer costs associated with other employees,” as petitioners

wrongly assert.

As explained above, the IAP redirection provisions in SB 1049

make only prospective changes to the IAP program. Members retain

all contributions made to their IAP accounts before July 1, 2020. As

of the effective date of SB 1049, sections 1-19, the percentage of

member contributions made to individual IAP accounts will change

for some members, but only for work performed on or after July 1,

2020. That prospective change impairs no obligation of contract in

place at the time the post-July 1, 2020 work will be performed.

C. Sections 39-40 do not unconstitutionally impair an obligation of contract under Article I, section 21.

1. Sections 39-40 cap “salary” only for years beginning on and after January 1, 2020.

Sections 39-40 prospectively change the definition of “salary” in

the PERS statutes. As discussed above, upon retirement, a member

receives the highest retirement allowance yielded by the full formula,

the money match, or, for some members, the pension-plus-annuity

calculation. ORS 238.300.

32

The definition of “salary” impacts only the full formula benefit

calculation. The full formula calculates a members’ service

retirement allowance by multiplying the member’s “final average

salary” by a statutory factor, and then multiplying the resulting

figure by the member’s years of service. Id. For Tier 1 and Tier 2

members, the statutory factor is 1.67% (2% for police officers and

firefighters). For OPSRP members, the statutory factor is 1.5%. The

monthly service retirement allowance is funded by using the

actuarial equivalent of the member’s PERS account balances at

retirement (the annuity component) and employer contributions

required to make up the difference (the pension component). ORS

238.300(1), (2); Strunk, 338 Or at 160-161.

“Final average salary” is defined as the greater of (1) the

average of the three years before retirement in which a member was

paid the highest salary, or (2) the member’s average salary paid over

the last 36 calendar months of employment before retirement. ORS

238.005(9); ORS 238A.130. The definition of “final average salary”

was not changed by SB 1049. Rather, that legislation changed the

definition of “salary” on a going-forward basis, in part (and as

relevant here) for the purpose of calculating “final average salary.”

33

Before SB 1049, “salary” for purposes of “final average salary”

was not capped for Tier 1 members. “Salary” for Tier 2 and OPSRP

members was capped at the annual salary limit established in IRC

section 401(a)(17). ORS 238A.005(17(c)(I) (2017); OAR 459-005-0525

(2019). For 2019, Tier 2 and OPSRP members’ salaries were capped

at $280,000. Id.

SB 1049, sections 39-40, amend the definitions of “salary” in

ORS 238.005(26)(c) and ORS 238A.005(17)(c) to include the following

exclusion applicable to all PERS members:

“’Salary’ or “other advantages” does not include: * * *

“(M) For years beginning on or after January 1, 2020, any amount in excess of $195,000 for a calendar year. If any period over which salary is determined is less than 12 months, the $195,000 limitation for that period shall be multiplied by a fraction, the numerator of which is the number of months in the determination period and the denominator of which is 12. On January 1 of each year, the board shall adjust the dollar limit provided by this subparagraph to reflect any percentage changes in the Consumer Price Index for All Urban Consumers, West Region (All Items), as published by the Bureau of Labor Statistics of the United States Department of Labor.”

SB 1049, sections 39 and 40.

34

Going forward, for purposes of calculating “final average

salary,” a member’s “salary” for any given year will be determined

according to the definition of “salary” in effect for the year in which

the salary was earned. For example:

• For Tier 1 members, “salary” for the years before 2020 will not be subject to a cap and “salary” for Tier 2 and OPSRP members will be capped at the applicable IRS annual salary limit, as provided by the statutes that were in effect in the year those salaries were earned. ORS 238A.005(17)(c)(I) (2015).

• For the years 2020 and after, “salary” for all PERS members will be capped at $195,000 (adjusted annually for inflation).3 SB 1049, section 39(26(M). Employees who choose to work in 2020 do so with notice that the PERS offer has changed in that regard and they accept that amended offer by rendering services.

Once the appropriate annual “salary” is determined for each

year of service, the calculation of a member’s “final average salary”

remains unchanged by SB 1049. For example:

1. For a Tier 1 member who retires in 2022 and whose three highest earning years were before 2020, the member’s “salary” for purposes of determining “final average salary” would be the full amount of salary earned in those years. For example, if the member earned $200,000 in 2017, $205,000 in 2018, and $210,000 in 2019, the member’s “final average salary” as calculated upon retirement in

3 For ease of explanation, we ignore the impact of the annual adjustments to the cap on “salary” for the purpose of the examples used in this brief and assume that the cap is $195,000.

35

2022 will be the average of those three highest years, or $205,000 ($200,000 + $205,000 + $210,000 ÷ 3).

2. For a Tier 1 member who retires in 2022 and whose highest earing years were in 2018, 2019, and 2020, the member would have the benefit of the full amount of salary earned in 2018 and 2019 and would be subject to the $195,000 salary cap in 2020. For example, if the member earned $200,000 in 2018, $205,000 in 2019 and $210,000 in 2020, the member’s “final average salary” would be $200,000 ($200,000 + $205,000 + $195,000 ÷ 3). The $195,000 salary cap is applied only to the member’s earnings for work performed in 2020, after the PERS offer was changed to cap “salary” at that amount.

3. For a Tier 1 member who retires in 2022 and whose highest earning years were in 2020, 2021, and 2022, the member’s “salary” for purposes of calculating “final average salary” would be subject to the SB 1049 cap in each year. If the member’s actual salary exceeded $195,000 in each of those years, the member’s “final average salary” would be $195,000.

In each circumstance above, the member’s “final average

salary”—whether it be $205,000, $200,000, or $195,000—will be

applied across all of the member’s years of service, as the full formula

calculation requires (“final average salary” x 1.67% x years of service

= service retirement allowance). ORS 238.300.

/ / /

/ / /

/ / /

/ / /

36

2. Sections 39-40 do not unconstitutionally impair an obligation of contract in violation of Article I, section 21.

As this court concluded in Moro, because

“the PERS offer is a continuing offer, * * * each additional rendition of service accepts any open offer for additional PERS benefits. * * * The PERS contract binds a participating employer to compensate a member for only the work that the member has rendered and based only on the terms offered at the time that the work was rendered, even if the employer changed that offer over time.”

357 Or at 201. As the above examples make clear, even after the

enactment of SB 1049, at retirement, every member will get the

benefit of the definition of “salary” that was in place at the time the

member rendered the service and earned the salary. That is all that

participating employers promised. And that is what the PERS

statutes as amended by SB 1049 provide.

Said another way, no retiring members’ “final average salary”

will be lower than their “final average salary” would have been had

the member retired (or had the legislature terminated PERS

altogether) in 2019, before the effective date of the SB 1049

amendments to the definitions of “salary,” because the member will

retain the benefit of the more generous definition of “salary” in place

37

during the members’ working years before 2020. It certainly is

possible that a member’s “final average salary” might be lower than

it would have been had SB 1049, sections 39-40, not been enacted

and the PERS offer’s definition of “salary” had remained unchanged,

but that is not the PERS offer that participating employers have

made, and it is not the PERS offer that members who continue to

work in 2020 will have accepted.

3. Petitioners’ arguments to the contrary do not establish an unconstitutional impairment.

In arguing that the salary cap provisions of SB 1049 are an

unconstitutional impairment of contract, petitioners assert that the

definition of “salary” in place before the enactment of SB 1049 is an

irrevocable promise, meaning that members are entitled to have that

same definition of “salary” apply to the calculation of their “final

average salary” for the life of their employment. Op.Br. at 54-55.

Petitioners base that argument on the following assertions: (1) the

full formula benefit calculation is promissory in nature; (2) the

definition of “salary” is a key component of that formula; and (3)

before SB 1049, there was no salary cap for Tier 1 members, and Tier

2 and OPSRP members were subject to the cap imposed by IRC

401(a)(17). Id. All of that may well be true, but nothing in

38

petitioners’ arguments, or the statutes or rules they cite,

demonstrates an unequivocal legislative intent to make either the

full formula benefit or the definition of “salary” an irrevocable

obligation of contract.

As explained above, ORS 238.300 sets out the service

retirement allowances to which a retiring member is entitled. That

statute, or its predecessor, has been a part of the PERS statutes

since the creation of PERS in 1953. Strunk, 338 Or at 187. As the

Strunk court noted: “During those 50 years, the benefits that PERS

has provided and the manner for calculating them have changed

considerably.” Id. at 187. Some formulae have been modified; others

have been entirely abandoned. See id. at 187-189 (setting out the

various legislative changes in PERS benefit formulae over its 50-year

history). From that legislative review, the Strunk court concluded

that, in enacting and amending ORS 238.300, the legislature did not

intend to promise that any benefit formula or calculation method

would be immutable. Id. at 192.

By changing the definition of “salary,” the legislature affected

the amount of full formula benefits that some members will earn for

future work. Even if that is considered a change in the full formula

39

itself, it is a change that the legislature was entitled to make—

because it never promised that it would not do so. The key here is

that the change in the definition of “salary” enacted by SB 1049 is

prospective only, in that it affects how “salary” is defined only for

work performed after July 1, 2020.

Petitioners argue that the salary cap provisions of SB 1049 can

be considered prospective only if they are implemented according to a

particular “segmented service” approach. Op. Br. 56-59, 68-69.

Petitioners misunderstand how the salary cap provisions of SB 1049

work.

During the 2019 legislative session, the legislature asked the

PERS actuary to model the impact of a change in the definition of

“final average salary” for purposes of the full formula calculation. In

other words, the actuary was asked to model a scenario in which

“final average salary” itself would be capped at $195,000 for years

beginning with 2020. In the analysis, the actuary illustrated the

concept by first calculating a member’s “final average salary” at the

time of retirement without the application of any cap on “final

average salary.” That “final average salary” amount was then used

to calculate the retiree’s full formula benefit for the years the

40

member worked before 2020. The actuary then calculated the “final

average salary” using the statutory cap on “salary” and used the

lower of the capped and uncapped final average salary figures to

calculate the retiree’s full formula benefit for work performed in 2020

and thereafter. The actuary then added together those two

calculations to arrive at the member’s total service retirement

allowance. ER-111-113 (Stip. Facts 30).

That particular legislative concept would give members the

benefit of their post-2019 salary growth in the calculation of their

pre-2020 benefits. As the actuary explained it:

“Specifically, we understand the Final Average Salary used in the benefit calculations for service performed before January 1, 2020 would be unaffected by the [“final average salary”] 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 * * * would be:

[1.5% x 15 x $220,000] + [1.5% x 10 x (lesser of $220,000 or [final average salary cap)].”

Id.

41

Petitioners assert that this type of “segmented approach”—that

gives members the benefit of salaries earned after the effective date

of SB 1049, sections 39-40, when calculating the full formula benefit

that a member earned before the effective date of that amendment—

is the only constitutional approach to implementing the salary cap

provisions of SB 1049, and is mandated by Moro. That is wrong for

several reasons.

First, Moro did not mandate a particular “segmented

approach,” or mandate a “segmented approach” at all. As discussed

above, Moro said only that that PERS must calculate a member’s

benefits according to the rules in place at the time the employee

performed the work and earned the benefit. Moro, 357 Or at 201

(“The PERS contract binds a participating employer to compensate a

member * * * based only on the terms offered at the time that the

work was rendered, even if the employer changed that offer over

time.”). While in some circumstances that might result in PERS

calculating two benefit amounts—an amount for benefits earned on

the segment of a member’s years of service performed before the

effective date of a statutory amendment and an amount for benefits

earned on the segment of a member’s years of service performed after

42

that date—there is nothing magical about any particular “segmented

approach” in meeting an employer’s contractual obligations to

provide benefits.

Second, had the 2019 legislature chosen to cap the amount of

“final average salary” for purposes of the full formula calculation, it

would not have been required to give members the benefit of salaries

earned after the effective date of that change when calculating their

pre-amendment “final average salary.” Under Moro, the legislature

would have been required to calculate the member’s full formula

benefit for years of service through 2019 using the definition of “final

average salary” in place before 2019, and to calculate the member’s

full formula benefit for years of service in 2020 and thereafter using

the amended definition of “final average salary” including the cap.

The combination of the two would equal the member’s total service

retirement allowance and would honor all of the employers’

contractual obligations in place at the time the member provided the

service entitling the member to the benefit.

That is all the Contract Clause requires. See Moro, 357 Or at

201 (employer must provide benefits based only on the terms offered

at the time the work was performed). Despite petitioners’

43

unsupported assertion otherwise, nothing in the PERS statutes or

the Oregon Constitution would require the legislature, in calculating

member benefits earned for work performed as of a specified date, to

give members the benefit of salary they earn for work performed

after that date.

Third, in the end, the legislature did not adopt the proposal

modeled by the actuary, and, in fact, did not adopt a cap on “final

average salary” at all. Even after SB 1049, a member can have a

“final average salary” applied to years of service in 2020 and

thereafter that exceeds the individual “salary” cap of $195,000, if the

member’s highest earning years occurred before 2020. See examples

1 and 2 above.

As explained above, rather than changing the definition of

“final average salary,” the legislature amended the definition of

“salary.” Petitioners claim that that is a distinction without a

difference, because the salary cap provisions of SB 1049 “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

uncapped salary.” Op. Br. at 58.

44

That misstates the contractual promise the legislature made

with regard to the full formula calculation. The legislature promised

that it would calculate the full formula using an uncapped salary

figure for Tier 1 members, and a salary figure capped at the IRS

limit for Tier 2 and OPSRP members for work performed while that

promise was in place. That promise ended in January 2020 with the

enactment of SB 1049, which capped “salary” in 2020 and

thereafter—or at least until the legislature changes the PERS offer

again.

Finally, it is worth noting that even petitioners’ proposed

“segmented approach” creates “winners and losers.” Take, for

example, a Tier 1 employee who retires in 2029 with 20 years of

service. Assume that the employee’s highest earning years were

2018, 2019, and 2020, and that the employee earned $500,000 in

each of those years.

• Under SB 1049, sections 39-40, the employee’s full formula would be calculated as follows: PERS would calculate the employee’s “final average salary” by averaging the employee’s actual salary for both 2018 and 2019 and a capped salary of $195,000 for 2020, yielding a “final average salary” of $398,334. PERS would then calculate the employee’s full formula benefit by multiplying $398,334 by 1.67%, and then multiplying that

45

figure times the employee’s 20 years of service, for a benefit of $133,043.33.

• Under petitioners’ “segmented approach,” PERS would calculate the employee’s full formula benefit as follows: PERS would calculate the employee’s “final average salary” based on the employee’s three highest earning years without a cap, making the employee’s “final average salary” equal to $500,000. PERS would then calculate the employee’s full formula benefit for the employee’s years of service preceding the enactment of SB 1049 (the 10 years preceding 2020) by multiplying a “final average salary” of $500,000 by a factor of 1.67% and then multiplying that figure by 10 years of service, for a benefit of $83,500. Separately, PERS would calculate the employee’s full formula benefit for the employee’s 10 years of service in 2020 and thereafter by using a “final average salary” capped at $195,000, for a benefit in the amount of $32,565. PERS would then add those two benefits amounts together, for a total of $116,065.

In that example, the employee’s annual benefit is almost

$17,000 more under SB 1049 than under the “segmented approach”

that petitioners claim is required to avoid an unconstitutional

impairment of contract. In the end, however, neither approach is

constitutionally mandated. The relevant question is whether the

approach taken by the legislature in SB 1049, sections 39-40, avoids

an unconstitutional impairment of contract by calculating member

benefits according to the laws in place at the time the work earning

the benefit was performed. The answer to that question is yes.

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D. Neither sections 1-19 nor sections 39-40 of SB 1049 breaches an existing contractual obligation.

A law unconstitutionally impairs a preexisting contractual

obligation for purposes of Article I, section 21, if the law changes or

eliminates the state’s obligation under that contract. Eckles, 306 Or

at 399-400. By contrast, legislation that mandates that the state not

comply with a statutory contractual obligation, but does not change

or eliminate the obligation itself, does not contravene Article I,

section 21, but rather mandates a breach of that obligation.

Here, neither sections 1-19 nor sections 39-40 mandates

participating employers to breach an existing contractual obligation

imposed by the PERS statutes. Rather, as explained above, those

provisions change the terms of the PERS offer going forward and

ensure that employers comply with the terms of their PERS

contractual obligations as they existed before SB 1049 was enacted.

There is no breach.

V. RESPONSE TO SECOND ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not cause a taking under Article I, Section 18, of the Oregon Constitution.

In their second assignment of error, petitioners claim that the

challenged provisions of SB 1049 result in a taking of their property

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in violation of Article I, section 18, of the Oregon Constitution, which

states: “Private property shall not be taken for public use * * *

without just compensation * * *.” To prove the alleged

unconstitutional taking, petitioners must prove that the challenged

provisions of SB 1049 amount to a “‘substantial’ interference with

private property rights.” Hawkins v. City of LaGrande, 315 Or 57,

68, 843 P2d 400 (1992). Petitioners cannot meet that burden.

Petitioners claim to have a property interest in “IAP ‘employee

contributions,’ ‘employee salary,’ and ‘employer contribution’-funded

pension benefits.” Op. Br. 74. In sum, petitioners’ taking claim is

based on the assertion that they have a contractual right to have the

pre-SB 1049 provisions affecting member contributions to the IAP

and defining “salary” remain unchanged during the course of their

employment. That is the same argument petitioners made in

support of their argument that SB 1049, sections 1-19 and sections

39-40, unconstitutionally impair or breach their PERS contracts.

The argument fails here, for the same reasons it fails above.

In short, petitioners argue that they have contractual property

rights in benefits not yet earned. But as respondents have

demonstrated, petitioners have no property interest in unearned

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benefits. Even assuming that contractual rights may be the subject

of an unconstitutional taking, the only contractual right to benefits

that petitioners have is the right to receive the benefits offered at the

time they perform work. They have no contractual right to any

particular benefits for services not yet rendered—those benefits will

depend on the offer made at the time that work is performed. As this

court has said in the context of punitive damages: “A vested right

must be something more than a mere expectation based upon the

anticipated continuance of existing laws * * *.” DeMendoza v.

Huffman, 334 Or 425, 449, 51 P3d 1232 (2002), quoting Coshun v.

Hurlburt et al., 102 Or 240, 243, 201 P 870 (1921).

None of the challenged sections of SB 1049 amounts to an

unconstitutional taking of private property rights.

VI. RESPONSE TO THIRD ASSIGNMENT OF ERROR: The challenged provisions of SB 1049 do not impair an obligation of contract in violation of Article I, Section 10 of the U.S. Constitution.

In their third assignment of error, petitioners claim that the

challenged provisions of SB 1049 violate Article I, section 10, of the

U.S. Constitution, which states: “No state * * * shall pass any * * *

Law impairing the Obligation of Contracts.” To determine whether a

law violates the federal Contract Clause, courts engage in a three-

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part inquiry. They begin by determining whether has there been a

substantial impairment of a contractual relationship. If the answer

to that question is yes, they then inquire whether the law is an

exercise of the state’s police power, and whether the adjustment of

contractual rights is justified by a sufficient public purpose. RUI

One Corp. v. City of Berkeley, 371 F3d 1137, 1147 (9th Cir 2004).

The first inquiry is dispositive here. As this court noted in

Moro, the federal Contract Clause protects only contracts that were

formed before the effective date of the law being challenged. Moro,

357 Or at 192 and cases cited therein. Thus, petitioners’ claims

under the federal Contract Clause fail for the same reason as their

claims under Oregon’s Contract Clause: Petitioners have no

contractual rights in any particular pension benefits for work not yet

performed.4

VII. CONCLUSION

Throughout their brief, petitioners return to one of their central

themes—that the unfunded liability in PERS is a “shared

4 In their third assignment of error, petitioners assert again that the challenged sections of SB 1049 breach statutory contractual obligations. Op. Br. 79. A claim of breach of contract is governed by state law. Respondents answered that claim in response to petitioners’ first assignment of error and will not do so again here.

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responsibility and debt of the public as a whole” and that asking

active PERS members “who were not the cause of the UAL” to help

pay down that debt is unfair. See, e.g., Op. Br. 28-29. There is no

doubt that the impacts of the challenged sections of SB 1049 fall on

active PERS members. There is also no doubt that the budgetary

impacts on PERS employers caused by the mounting unfunded

liability in PERS results in fewer teachers in our classrooms, fewer

police officers on our streets, closed library, cultural, and recreational

facilities, and sharply curtailed essential social services. See Moro,

357 Or at 234-235 (“When public employers have to pay higher PERS

contribution rates without additional funding, they have less money

to pay for current services provided by police officers, teachers, and

other employees delivering critical services to the public. The

legislature’s interest in enhancing those services is entirely

appropriate.”) (emphasis in original).

Certainly, the legislature found itself in a difficult position in

trying to balance those two, equally important but competing policy

concerns. But in the end, the legislature struck that balance by

enacting SB 1049, which will not return any money to state and local

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government coffers but will only slow the continued growth of their

PERS obligations over time.

This court has a single issue before it—did the legislature

appropriately followed the blueprint the court provided in Moro in

making the policy choices embedded in SB 1049. As we have

demonstrated above, the answer to the question is yes—the

challenged provisions of SB 1049 are constitutional and do not

breach any statutory contractual obligation. This court should

uphold them.

Respectfully submitted this 8th day of April, 2020.

HARRANG LONG GARY RUDNICK P.C.

By: s/Sharon A. Rudnick Sharon A. Rudnick, OSB #830835 sharon.rudnick@harrang.com William F. Gary, OSB #770325 william.f.gary@harrang.com

Of Attorneys for Respondents City of Salem, Oregon Health & Science University, Mount Hood Community College, and Molalla River School District

Page 1 – CERTIFICATE OF COMPLIANCE AND CERTIFICATES OF FILING AND SERVICE

COMBINED CERTIFICATE OF COMPLIANCE WITH BRIEF LENGTH AND TYPE SIZE REQUIREMENTS, AND

CERTIFICATES OF FILING AND SERVICE

I certify that this brief complies with the word-count limitation

in ORAP 5.05, which word count is 10,325 words.

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.

I certify that I filed the foregoing RESPONDENTS CITY OF

SALEM, OREGON HEALTH AND SCIENCE UNIVERSITY,

MOUNT HOOD COMMUNITY COLLEGE AND MOLALLA

RIVER SCHOOL DISTRICTS’ ANSWERING BRIEF with the

Appellate Court Administrator.

I certify that service 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:

Aruna A Masih, OSB 973241 Gregory A. Hartman, OSB 741283 Of Attorneys for Petitioners

Benjamin Gutman, OSB 160599Of Attorneys for Respondent State of Oregon and Public Employees Retirement Board

Page 2 – CERTIFICATE OF COMPLIANCE AND CERTIFICATES OF FILING AND SERVICE

Jenny Madkour, OSB 982980 Of Attorneys for Respondent Multnomah County

Tracy Pool Reeve, OSB 891123 Daniel Simon, OSB 124544 Robert Taylor, OSB 044287 Of Attorneys for Respondent City of Portland

DATED this 8th day of April, 2020.

HARRANG LONG GARY RUDNICK P.C.

By: s/Sharon A. Rudnick Sharon A. Rudnick, OSB 830835 sharon.rudnick@harrang.com William F. Gary, OSB 770325 william.f.gary@harrang.com

Of Attorneys for Respondents City of Salem, Oregon Health & Science University, Mount Hood Community College, and Molalla River School District