Oregon Allowed To Cut Retirement Benefits For Public Employee

For many years, participants in the Oregon Public Employment Retirement System (PERS) had their contributions to the fund directed to either a “regular” or “variable” account. Since 1975, the PERS statutory scheme provided that the earnings on the regular accounts “will be no less than the existing assumed earnings rate.”

As time went by, the performance of PERS investments led the “assumed earnings rate” to be quite high. The result was that in the year 2000, the average PERS member who retired with 30 years of service ended up with a service retirement allowance equal to 106 percent of the member’s final average salary.

In 2003, the Oregon Legislature changed the PERS system. The Legislature directed that in the future, member contributions would no longer be made into “regular” or “variable” accounts, but would rather be placed in a new “individual account program” account. The net result will be a significantly lower retirement benefit.

A group of public employees sued, alleging that the Legislature’s actions violated the federal contract laws. The Contracts Clause, found at Section 10 of Article 1 of the Constitution, provides that “no state shall pass any law impairing the obligations of contracts.” For many years, public retirement benefits have thought to have been protected by the Contracts Clause.

The federal Ninth Circuit Court of Appeals ruled that the Contracts Clause did not prohibit the 2003 changes in the PERS system. The Court did not dispute that retirement benefits were subject to the Contracts Clause; rather, the Court commented that “we are called upon to determine the contours of the employee’s PERS contract.” The Court found that at no point did the Oregon Legislature promise employees “a perpetual or immutable right to contribute to their regular and variable accounts. The Oregon Legislature’s promise to the employees was simply that they would receive service retirement allowances calculated under whichever formula yields the highest pension amount for that member. The Legislature did not alter or eliminate that promise when it enacted the 2003 PERS legislation.”

Robertson v. Kulongoski, 2006 WL 3007758 (9th Cir. 2006).

This article appears in the December 2006 issue