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Federal Court Upholds PERS Reform (August 23, 2004)
In an order dated August 19 and sent to the parties today, U.S. District Judge Michael W. Mosman ruled that the 2003 legislative reforms to the Public Employees Retirement System do not violate the Contract Clause of the United States Constitution.

“The opinion is a clean sweep for state and local government employers and their taxpayers,” said William F. Gary, lead counsel for local government intervenors in the case. “Judge Mosman’s opinion is clear, concise, and completely consistent with our view that the legislative reforms are valid and do not violate employees’ contract rights.”

The lawsuit, filed by public employee unions, challenged most of the major provisions of the PERS reforms enacted by the 2003 Oregon legislature and signed into law by the Governor. Oral argument on motions for summary judgment was held in April with Judge Mosman issuing his opinion and order late last week.

“The legislative changes here are either prospective, curative, or consistent with the pre-existing terms of the contact,” Judge Mosman wrote.

The order said the Contract Clause does not prohibit legislation that operates prospectively. “If the State of Oregon is to be bound to provide employees a set level of benefits in perpetuity, such a legislative intent must be clear. Here it is not,” the court said.

There were several claims for relief sought in the lawsuit. Following is a summary of Judge Mosman’s ruling on each claim:

  1. Elimination of employee accounts: “Plaintiffs do not show how prospectively changing the PERS ‘individual account’ into a new ‘transition account’ results in any reduction of value of member accounts. … The Reform Legislation leaves untouched member accounts in existence before January 1, 2004.”

  2. Elimination of guaranteed rate: “Actually, the PERS statutes do not guarantee any specific rate of earnings, but instead provide for the crediting at ‘the assumed interest rate for that year as determined by the Board.’ … PERS members were never entitled to have any particular rate of interest credited to their account for work already performed. [T]hey were never entitled to a guaranteed rate of interest into the future.”

  3. Repayment of deficit: No Contract Clause claim is ripe because “it is purely speculative to assume that the gain-loss reserve will be in a deficit in the future.”

  4. Change in method of crediting accounts: “The amounts already accrued in a member’s account remain unaltered.” This claim does not apply retroactively.

  5. Cost-of-living adjustment freeze until excess benefit contributions are recovered: “These decisions do not have a retroactive effect. They have a curative effect. Stated another way, the law does not retroactively reduce lawful benefits, it reduces unlawfully accrued benefits.”

  6. Elimination of right to invest in variable account: “This claim, like others, is based on plaintiffs’ theory that the Contract Clause protects against future harm to plaintiffs' future work. … The change in the Variable Account was prospective only; members' past contributions were untouched and remain in the Variable Account.”

  7. Reduction of current employee accounts to enforce the City of Eugene case: This claim considered the excess payments in 1999 to be an administrative expense charged to future earnings on active member accounts. “Again, the legislature made a determination to recoup unlawfully credited earnings, an act that is not a violation of the PERS contract.”

  8. Employers not responsible for mistaken benefits: “This claim too does not retroactively diminish accrued benefits, but operates on a going-forward basis and, therefore, does not violate the Contract Clause.”

  9. Retroactive change of actuarial equivalency factor tables: “By requiring the Board to follow the law, and utilize up-to-date actuarial tables, [the reform legislation] does not violate the PERS contract and does not therefore violate the Contract Clause.”

The lawsuit named the Governor and the former PERS Board as defendants. Local government employees sought and received permission to intervene in the federal court case.

The consolidated lawsuits filed in state court challenging the PERS reforms remain pending in the Oregon Supreme Court.

For more information: contact Bill Gary at (541) 485-0220.

To see a copy of Judge Mosman’s order, click here.

  • Consolidated PERS Litigation: Summary of Non-State Defendants'
    Answering Brief (June 2004)
    The PERS reform legislation was enacted to correct the unintended effects of PERB's mismanagement of PERS. To read the summary in its entirety, click here.

  • Consolidated PERS Litigation: Non-State Defendants' Answering Brief (June 2004)
    Petition for direct judicial review of HB 2003, HB 2004, and HB 3020. To read the brief in its entirety, please click here.

  • Henderson et al v. State of Oregon et al Case Number: 3:74-cv-538 ( June 10, 2004) Record of Proceedings: Motion Hearing. The court finds that Judge Solomon's consent decree is insufficiently specific and definite to support a finding of civil contempt, as discussed in greater detail at oral argument. Thus the court GRANTS the motions for summary judgment filed by the PERS Board members, the state, and Salem-Keizer School District. In addition, the court DENIES movants' motion for summary judgment, GRANTS movants' motion for leave to file amended motion for order to show cause, and DENIES the motion to strike affidavit of former PERS attorney William F. Hoelscher. Order DENYING Motion to Reopen the case. Gregory A. Hartman and Henry J. Kaplan present as counsel for plaintiff(s). Stephen Scott Walters, James Baker, and William F. Gary present as counsel for defendant(s).

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