Moro v. State of Oregon

No. 16 April 30, 2015 167

IN THE SUPREME COURT OF THE

STATE OF OREGON

Everice MORO;

Terri Domenigoni; Charles Custer; John Hawkins;

Michael Arken; Eugene Ditter; John O’Kief;

Michael Smith; Lane Johnson; Greg Clouser;

Brandon Silence; Alison Vickery; and Jin Voek,

Petitioners,

v.

STATE OF OREGON;

State of Oregon,

by and through the Department of Corrections;

Linn County; City of Portland;

City of Salem; Tualatin Valley Fire & Rescue;

Estacada School District; Oregon City School District;

Ontario School District; Beaverton School District;

West Linn School District; Bend School District;

and Public Employees Retirement Board,

Respondents,

and

LEAGUE OF OREGON CITIES;

Oregon School Boards Association;

and Association of Oregon Counties,

Intervenors,

and

CENTRAL OREGON IRRIGATION DISTRICT,

Intervenor below.

S061452 (Control)

Wayne Stanley JONES,

Petitioner,

v.

PUBLIC EMPLOYEES RETIREMENT BOARD;

Ellen Rosenblum, Attorney General;

and Kate Brown, Governor,

Respondents.

S061431

168 Moro v. State of Oregon

Michael D. REYNOLDS,

Petitioner,

v.

PUBLIC EMPLOYEES RETIREMENT BOARD,

State of Oregon; and Kate Brown,

Governor, State of Oregon,

Respondents.

S061454

George A. RIEMER,

Petitioner,

v.

STATE OF OREGON;

Oregon Governor Kate Brown;

Oregon Attorney General Ellen Rosenblum;

Oregon Public Employees Retirement Board;

and Oregon Public Employees Retirement System,

Respondents.

S061475

George A. RIEMER,

Petitioner,

v.

STATE OF OREGON;

Oregon Governor Kate Brown;

Oregon Attorney General Ellen Rosenblum;

Public Employees Retirement Board;

and Public Employees Retirement System,

Respondents.

S061860

On petition for judicial review of legislation.*

Argued and submitted October 14, 2014.

Gregory A. Hartman, Bennett, Hartman, Morris &

Kaplan, LLP, Portland, filed the briefs and argued the cause

for petitioners Everice Moro, Terri Domenigoni, Charles

______________

*  Senate Bill 822, signed into law May 6, 2013, and Senate Bill 861, signed

into law October 8, 2013.

Cite as 357 Or 167 (2015) 169

Custer, John Hawkins, Michael Arken, Eugene Ditter,

John O’Kief, Michael Smith, Lane Johnson, Greg Clouser,

Brandon Silence, Alison Vickery, and Jin Voek. With him on

the briefs was Aruna A. Masih.

George A. Riemer, Sun City West, Arizona, argued the

cause and filed the briefs on behalf of himself.

Michael D. Reynolds, Seattle, Washington, argued the

cause and filed the briefs on behalf of himself.

Wayne Stanley Jones, North Salt Lake City, Utah, filed

the briefs on behalf of himself.

William F. Gary, Harrang Long Gary Rudnick P.C.,

Portland, argued the cause and filed the briefs for respon-

dents Linn County, Estacada School District, Oregon City

School District, Ontario School District, West Linn School

District, Beaverton School District, Bend School District

and intervenors Oregon School Boards Association and

Association of Oregon Counties. With him on the brief was

Sharon A. Rudnick.

Keith L. Kutler, Assistant Attorney General, Salem,

argued the cause and filed the brief for State respondents.

With him on the brief were Ellen F. Rosenblum, Attorney

General, Anna M. Joyce, Solicitor General, and Matthew J.

Merritt, Assistant Attorney General.

Harry Auerbach, Chief Deputy City Attorney, Portland,

filed the brief for respondent City of Portland.

Edward H. Trompke, Jordan Ramis PC, Lake Oswego,

filed the brief for respondent Tualatin Valley Fire and

Rescue.

W. Michael Gillette, Schwabe, Williamson & Wyatt, PC,

Portland, argued the cause and filed the brief for interve-

nor League of Oregon Cities. With him on the brief were

William B. Crow, Sara Kobak, and Leora Coleman-Fire.

Craig A. Crispin, Crispin Employment Lawyers, Portland,

filed the brief for amicus curiae AARP.

Sarah K. Drescher, Tedesco Law Group, Portland, filed

the brief for amicus curiae International Association of Fire

Fighters.

170 Moro v. State of Oregon

Before Balmer, Chief Justice, and Kistler, Walters,

Linder, Brewer, and Baldwin, Justices, and Haselton, Chief

Judge of the Oregon Court of Appeals, Justice pro tempore.**

BALMER, C. J.

Brewer, J., concurred and filed an opinion.

Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7,

8, 9, and 10, are declared unconstitutional under Article I,

section 21, of the Oregon Constitution insofar as they affect

retirement benefits earned before May 6, 2013. Oregon Laws

2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session),

are declared unconstitutional under Article I, section 21,

of the Oregon Constitution insofar as they affect retire-

ment benefits earned before October 8, 2013. Oregon Laws

2013, chapter 2, section 8 (Special Session) is declared void.

Petitioners’ requests for relief challenging Oregon Laws

2013, chapter 53, sections 11, 12, 13, 14, 15, 16, and 17, are

denied.

______________

**  Landau, J., did not participate in the consideration or decision of this case.

Cite as 357 Or 167 (2015) 171

Active and retired public employees filed petitions for direct judicial review

of 2013 statutory amendments to the Public Employees Retirement System

(PERS). The amendments eliminated the payment of an income tax offset to

nonresident PERS retirees and modified the cost-of-living adjustment (COLA)

applied to PERS benefits. Held: (1) the income tax offset is not a term of the PERS

statutory contract, because it is not compensation for work performed; (2) the

benefits provided under the income tax offset are a term of a 1997 settlement

agreement, but the 2013 amendments neither impair nor breach the terms of

the settlement agreement, because the agreement expressly contemplates, and

provides a means for seeking relief for, such benefit reductions; (3) the COLA is

a term of the PERS statutory contract, reaffirming Strunk v. PERB, 338 Or 145,

108 P3d 1058 (2005); (4) the 2013 amendments do not impair petitioners’ contrac-

tual rights by modifying the COLA prospectively as to benefits that petitioners

earned on or after the effective dates of the amendments; (5) the 2013 amend-

ments impair petitioners’ contractual rights by modifying the COLA retrospec-

tively as to benefits that petitioners already had earned before the effective dates

of the amendments, thus the 2013 amendments partially violate Article I, section

21, of the Oregon Constitution; (6) eliminating payment of the income tax offset

to nonresident retirees does not violate the federal Privileges and Immunities

Clause, Article IV, section 2, clause 1, of the United States Constitution; (7) elim-

inating payment of the income tax offset to nonresident retirees does not violate

the federal Equal Protection Clause of the Fourteenth Amendment to the United

States Constitution; (8) eliminating payment of the income tax offset to nonresi-

dent retirees does not violate 4 USC section 114.

Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10, are

declared unconstitutional under Article I, section 21, of the Oregon Constitution

insofar as they affect retirement benefits earned before May 6, 2013. Oregon

Laws 2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session), are declared

unconstitutional under Article I, section 21, of the Oregon Constitution insofar

as they affect retirement benefits earned before October 8, 2013. Oregon Laws

2013, chapter 2, section 8 (Special Session) is declared void. Petitioners’ requests

for relief challenging Oregon Laws 2013, chapter 53, sections 11, 12, 13, 14, 15,

16, and 17, are denied.

172 Moro v. State of Oregon

BALMER, C. J.

Petitioners are active and retired members of the

Public Employee Retirement System (PERS) challenging

two legislative amendments aimed at reducing the cost of

retirement benefits—Senate Bill (SB) 822 (2013), which

eliminated income tax offset benefits for nonresident retir-

ees and modified the cost-of-living adjustment (COLA)

applied to PERS benefits, and SB 861 (2013), which further

modified the PERS COLA. Or Laws 2013, ch 53 (SB 822);

Or Laws 2013, ch 2 (Spec Sess) (SB 861). Petitioners raise

numerous challenges to the amendments but argue primar-

ily that the amendments impair their contractual rights and

therefore violate the state Contract Clause, Article I, sec-

tion 21, of the Oregon Constitution, and the federal Contract

Clause, Article I, section 10, clause 1, of the United States

Constitution.

On that issue, respondents and intervenors, which

include the State of Oregon and other public employers par-

ticipating in PERS (collectively, respondents), contend that

the amendments in SB 822 and SB 861 modify noncontrac-

tual and insubstantial PERS benefits and that, even if the

amendments impair constitutionally protected contractual

rights, the impairment is justified on public purpose grounds.

Specifically, respondents argue that the amendments were a

reasonable and necessary response to increases in employer

contribution rates required by the Public Employee

Retirement Board (the board), which administers PERS.

Those rate increases stem from the recession that caused

the PERS fund to lose 27% of its value in 2008. To make

up for those losses and to restore the funding needed to pay

future benefits, the board increased the contribution rates

imposed on respondents and other participating employers.

Respondents insist that those rate increases are sufficiently

burdensome to justify the benefit reductions and excuse any

contractual impairment that might result.

We have considered the parties’ arguments and

conclude that nonresident petitioners have no contractual

right to the income tax offset payments and, therefore, that

the legislature did not violate the state or federal Contract

Clauses by eliminating those payments to nonresident

Cite as 357 Or 167 (2015) 173

retirees in SB 822. We also reject petitioners’ other chal-

lenges to the elimination of the income tax offset payments

for nonresident retirees.

Our assessment of the COLA amendments is more

complicated. Before the amendments at issue in this case,

the COLA provisions had been in place and unchanged

for 40 years. Indeed, a substantial number of PERS retir-

ees worked their entire careers while the pre-amendment

COLA provisions were in effect and then retired. We con-

clude that petitioners have a contractual right to receive the

pre-amendment COLA for benefits that they earned before

the effective dates of the amendments—that is, benefits

that are generally attributable to work performed before the

amendments went into effect. Thus, insofar as they apply

retrospectively to benefits earned before the effective dates,

the COLA amendments impair the PERS contract and vio-

late the state Contract Clause. Petitioners, however, have no

contractual right to receive the pre-amendment COLA for

benefits that they earned on or after the effective dates of

the amendments—that is, benefits that are generally attrib-

utable to work performed after the amendments went into

effect. In the absence of specific contract rights outside the

PERS statutes, the COLA amendments do not violate the

state or federal Contract Clauses when applied to benefits

earned on or after the effective dates.

Further, we reject respondents’ substantiality and

public purpose arguments attempting to justify that impair-

ment. Because the COLA is compounded annually, the

COLA grows over time to become a significant part of the

PERS retirement benefits. Even seemingly small changes

to the COLA rate, like those at issue in this case, can have

a substantial impact on the value of the benefits. Although

there is no doubt that the legislature passed SB 822 and

SB 861 to address legitimate public policy concerns and

with an appropriate sensitivity to the impact that the

amendments would have on retirees, those concerns do not

establish a defense to the contractual impairment that the

amendments effect. The public purpose defense that respon-

dents ask this court to recognize imposes a high bar to jus-

tify the state’s impairment of a state contract, like PERS,

and the record in this case does not meet that standard.

174 Moro v. State of Oregon

We therefore hold that respondents constitutionally

may cease the income tax offset payments to nonresidents

as set out in SB 822 and that respondents also constitution-

ally may apply the COLA amendments as set out in SB 822

and SB 861 prospectively to benefits earned on or after the

effective dates of those laws, but not retrospectively to bene-

fits earned before those effective dates.1 Subject to applicable

vesting requirements, PERS members who have worked for

participating employers both before and after the relevant

effective dates are entitled to a COLA rate that is blended to

reflect the different COLA provisions applicable to benefits

earned at different times.

I. BACKGROUND

A.  Jurisdiction and Evidentiary Record

The legislature conferred original jurisdiction on this

court to determine whether SB 822 and SB 861 are invalid,

unconstitutional, or a breach of the contracts between PERS

members and their employers. See SB 822, § 19(1) (conferring

original jurisdiction on this court); SB 861, § 11(1) (same).

In furtherance of that jurisdiction, we appointed Multnomah

County Circuit Court Judge Stephen K. Bushong to act as

special master. See SB 822, § 19(6) (authorizing the court to

appoint a special master); SB 861, § 11(6) (same). As special

master, Judge Bushong presided over an evidentiary hearing

and prepared a thorough report containing his recommended

findings of fact. See Special Master’s Preliminary Report

and Recommended Findings of Fact (Apr 29, 2014) (Special

Master’s Report). The parties have not materially challenged

the special master’s recommended findings, which we have

adopted unless otherwise noted.2

1

Because we hold that the COLA amendments may not be applied retrospec-

tively, we also void, for the reasons set out below, 357 Or at 232-33, the provi-

sions of SB 861 allowing for certain supplemental payments to retirees that were

intended to mitigate the impact of that retrospective application.

2

We previously considered a motion to disqualify the sitting judges of the

Oregon Supreme Court from hearing this case and a motion to disqualify Judge

Bushong from acting as special master on the ground that those individuals

are PERS members and therefore have an interest in the outcome of this case.

Moro v. State of Oregon, 354 Or 657, 661-62, 320 P3d 539 (2014). We denied those

motions and held that the “rule of necessity” precluded disqualification. Id. at 672.

“[U]nder the ‘rule of necessity,’ if the only judges authorized by law to decide a case

all have an interest in the outcome of the case, that interest is not disqualifying

Cite as 357 Or 167 (2015) 175

B.  PERS Funding and Benefits

PERS has been “a contractual benefit of public

employment[ ] since 1945.” Strunk v. PERB, 338 Or 145,

157, 108 P3d 1058 (2005). Employees become PERS mem-

bers after working six months in a qualified position for

the state or other participating public employer. ORS

238.015(1); ORS 238A.100(1); ORS 238A.300(1). There are

more than 330,000 members in the PERS system, includ-

ing current employees (active members), unretired former

employees (inactive members), and retired former employ-

ees (retired members).3 And there are about 900 participat-

ing public employers, including all state departments and

agencies, all school districts, and nearly all units of local

government.

The board administers PERS and serves as trustee

of the Public Employee Retirement Fund (the fund), which

the board uses to pay member retirement benefits. ORS

238.660(1); see also White v. Public Employees Retirement

Board, 351 Or 426, 437-38, 268 P3d 600 (2011) (discussing

the standards for the board when serving as a trustee). As

of December 2013, the fund had approximately $68 billion

in assets. The board is responsible for ensuring that the

fund’s assets are sufficient to pay the benefits owed to PERS

members.

The board attempts to prefund each member’s ben-

efits by collecting contributions both from that member and

from his or her employer while the member is working. The

board then invests those contributions over the course of the

member’s career and collects the income from those invest-

ments. As a result, the board relies on three sources to gen-

erate the fund’s assets: member contributions; employer con-

tributions; and investment income. Strunk, 338 Or at 157.

Ultimately, the board must generate sufficient assets from

those three sources to equal the retirement benefits owed to

PERS members.

because judges have ‘the absolute duty’ to ‘hear and decide cases within their

jurisdiction.’ ” Id. at 667 (quoting United States v. Will, 449 US 200, 215, 101 S Ct

471, 66 L Ed 2d 392 (1980)).

3

We take the facts from the Special Master’s Report or other records admit-

ted by the special master as evidence in the hearing that he conducted.

176 Moro v. State of Oregon

Some retirement plans are “defined contribution

plan[s].” See 26 USC § 414(i) (defining defined contribution

plans). A defined contribution plan defines how much the

member and employer contribute but does not promise that

a member will receive a particular amount in benefits at

retirement. Generally, the plan administrator deposits the

contributions into an account for the member and invests

those contributions. At retirement, the member’s benefit is

whatever money is in the member’s account. Consequently,

the assets of a defined contribution plan always equal the

benefits owed to members.

The alternative to defined contribution plans are

“defined benefit plan[s].” See 26 USC § 414(j) (defining

defined benefit plans). As the name suggests, a defined ben-

efit plan defines the benefit first, and then the plan adminis-

trator attempts to set the current contribution rates to pay for

those future benefits. Setting the proper contribution rates

often requires an administrator to make numerous projec-

tions about future events that might affect the costs of the

retirement benefit. The events that the plan administrator

needs to project depend on the nature of the defined benefits.

Those projections are often complex and frequently include

future compensation levels of members, life expectancies of

members, and future rates of return on plan investments.

The plan administrator then revises those projections as

needed to reflect the actual events that the administrator

previously projected. Those revisions indicate whether the

plan administrator previously overestimated or underesti-

mated the contributions needed to fund future benefits. If

the plan administrator overestimated, then future contribu-

tion rates will be lower. If the plan administrator underesti-

mated, then future contribution rates will be higher.

PERS is a defined benefit plan, although it has

some components of a defined contribution plan. See ORS

238.600(1) (“It is the intent of the Legislative Assembly

that [PERS] be qualified and maintained under sections

401(a), 414(d) and 414(k) of the Internal Revenue Code as

a tax-qualified defined benefit governmental plan.”). The

board, therefore, first determines the value of projected ben-

efits for each member and then attempts to set current con-

tribution rates so that, when invested, those contributions

Cite as 357 Or 167 (2015) 177

will grow and fully fund the benefits that the member will

receive in retirement. Member contribution rates are set by

statute at 6% of the member’s salary. ORS 238.200(1)(a);

ORS 238A.330(1).4 As a result, the board may adjust only

the employer contribution rates.

The board sets employer contribution rates every

biennium. Strunk, 338 Or at 159. Employer contribution

rates can consist of two components: the “normal cost” and

an amount needed to amortize any “unfunded actuarial lia-

bility.” Id. at 160. An employer’s normal cost is an “actuar-

ial estimate” of its employees’ future benefits attributable to

that biennium. Arken v. City of Portland, 351 Or 113, 122,

263 P3d 975 (2011), adh’d to on recons sub nom Robinson v.

Public Employees Retirement Board, 351 Or 404, 268 P3d

567 (2011). The normal cost, therefore, applies to only active

members.

On the other hand, the unfunded actuarial liabil-

ity can apply to all members, whether active, inactive, or

retired. If the board determines that the previous normal

costs that it collected will be insufficient to pay projected

future benefits, then the amount of that insufficiency is the

unfunded actuarial liability. Strunk, 338 Or at 160. When

the plan is underfunded, the board increases employer con-

tribution rates above the normal cost by adding an amount

that will reduce the unfunded actuarial liability.5 Rather

than increase employer contribution rates to eliminate the

unfunded actuarial liability in a given biennium, which

could cause contribution rates to spike, the board typically

seeks to pay down the unfunded actuarial liability over

many years.

Unfunded actuarial liabilities result, in part, from

uncertainties in the actuarial estimates used by the board.

For example, those actuarial estimates include calculating

4

Usually, employers pay for that contribution on behalf of their employees

(called the “six percent pick up”). See Strunk, 338 Or at 164 n 21 (describing

the six percent pick up); ORS 238.205(1) (authorizing employers to pick up the

employee contribution); ORS 238A.335(1) (same).

5

When the board determines that it previously overestimated the normal

cost, then the employer receives a financial credit reducing its current normal

cost. Strunk, 338 Or at 160.

178 Moro v. State of Oregon

and applying an assumed earnings rate on investments.6

Unfunded actuarial liabilities may, therefore, result from

the board’s failure to achieve that rate of return. Historically,

PERS has depended heavily on investment income. Between

1970 and 2012, more than 72% of the funding for PERS

came from investment income.

The board faces further actuarial difficulties

because of the nature of benefits available to each category

of PERS member. An employee’s membership category

depends on when the employee worked for a participat-

ing employer. There are three broad categories of PERS

members: Tier One members were hired before January 1,

1996; Tier Two members were hired between January 1,

1996, and August 28, 2003; and Oregon Public Service

Retirement Plan (OPSRP) members were hired after

August 28, 2003.7

Tier One and Tier Two members receive a monthly

retirement benefit called a “service retirement allowance,”

which is paid for the life of the member. ORS 238.300. The

service retirement allowance is funded by member and

employer contributions. Strunk, 338 Or at 160. A member’s

contributions are deposited into a “regular account” and

invested by the board. The board credits returns on those

investments back into the member’s regular account. The

regular accounts of Tier One members are credited each

year with an amount equal to at least the assumed earnings

rate described above. Under certain conditions, the board

may, but is not required to, allocate greater amounts to

those accounts. See id. at 164-65 (describing crediting prac-

tices before and after the 2003 PERS legislation). The board

uses the employee contributions and the amounts credited

to the regular account to fund an annuity benefit that is

paid for the life of the member. Id. at 165 n 22.

6

For many years, the board applied an 8% assumed earnings rate. In 2013,

the board lowered it to 7.75%.

7

Although OPSRP has a different name and appears in a different ORS

chapter, see ORS chapter 238 (setting out Tier One and Tier Two benefits) and

ORS chapter 238A (setting out OPSRP benefits), all three categories are PERS

members, see ORS 238.600(1) (“The Public Employees Retirement System con-

sists of this chapter and ORS chapter 238A.”).

Cite as 357 Or 167 (2015) 179

Employer contributions, and their investment

income, fund any unfunded part of the annuity owed to Tier

One and Tier Two retired members, as well as an additional

pension benefit for those members using one of three formu-

las: Full Formula; Money Match; or Pension Plus Annuity.

Id. at 160-62.8 The board uses whichever formula yields the

highest pension amount for that member. ORS 238.300. This

court previously detailed those formulas in Strunk. 338 Or

at 160-62. For present purposes, it is important to note that

the legislature intended the Full Formula, which is based on

years of service and final average salary, to be the primary

formula and the one most commonly used to determine a

member’s benefits. Id. at 185-86.

Those three pension formulas and the annuity are

used to calculate the service retirement allowance at the

time that a Tier One or Tier Two member retires. There

are, however, two post-retirement calculations that may

increase the benefit: a cost-of-living adjustment (COLA) and

an income tax offset. Id. at 162. Both the COLA and the

income tax offset are based on a percentage of the service

retirement allowance and are funded through employer con-

tributions. Because those benefits are central to this action,

they are described in more detail below.

The value of those combined benefits—the service

retirement allowance as adjusted by the COLA and the

income tax offset—is what the board attempts to project

when it sets employer contribution rates for Tier One and

Tier Two members. To do that, the board makes actuarial

projections involving a member’s career path, future earn-

ings, and life expectancy, as well as anticipated earnings on

investments. Each of those projections involves uncertainty,

making it difficult for the board to set proper contribution

rates at any given time and creating the opportunity for

unfunded actuarial liabilities.

The board’s crediting practices during the 1980s

and 1990s created further risks of unfunded actuar-

ial liabilities. Although the legislature expected the Full

Formula to be the primary formula, Money Match became

8

Pension Plus Annuity is available to only those Tier One members who con-

tributed to PERS before 1981. Strunk, 338 Or at 160.

180 Moro v. State of Oregon

predominant starting in the 1990s and continuing until

2012. Money Match calculates the member’s pension based

on the value of the member’s regular account. When invest-

ment earnings significantly exceeded the assumed earn-

ings rate during the 1990s and early 2000s, the board often

credited much of those earnings to the Tier One members’

regular accounts rather than saving more of those earnings

in a reserve account used to pay the guaranteed return for

Tier One members in underperforming years. See id. at 161

n 18 (describing how Money Match became the dominant

formula). The Money Match formula, the board’s crediting

decisions, and the Tier One members’ guaranteed rate of

return combined to produce “atypical” retirement benefits

exceeding those of public employees in other jurisdictions.

Special Master’s Report at 45.

That combination of factors not only led to larger

benefits for members, but also exposed employers to larger

liabilities. Further, because the reserve account was under-

funded, the board had few options to address unfunded actu-

arial liabilities other than significantly increasing employer

contributions. See id. (“The design and implementation of the

Tier I Money Match program was an important, structural

contributor to the system’s financial challenges.”). Despite

requests by some public employers and media reports about

the system’s underfunding, the board did not change its

crediting and other practices.9 Moreover, until 2003, the leg-

islature did not take action to limit PERS’s obligations by

prospectively reducing benefits.

By 2003, PERS was only 65% funded. At that time,

the legislature responded by establishing the Individual

Account Program (IAP) and creating the third tier of mem-

bers, OPSRP. Other aspects of the 2003 legislation, as well

as administrative changes to the calculation of benefits

made by the board (after the board was reconstituted by the

2003 legislation), reduced the fund’s obligations, thus help-

ing to relieve some of the benefit liabilities.

9

Participating employers ultimately challenged the board’s crediting

practices—specifically related to crediting orders in 1998 and 2000—and

obtained court orders that led to the fund recouping some of those credits, as

well as to other administrative changes. See generally White, 351 Or at 430-31

(describing the employer challenges).

Cite as 357 Or 167 (2015) 181

Because of those legislative amendments, the con-

tributions of Tier One and Tier Two members have, since

2004, no longer been placed into their regular accounts that

fund the service retirement allowance. Instead, member

contributions are placed into a separate IAP account that

funds an IAP annuity. Although the IAP contributions are

also invested, there is no guaranteed rate of return on those

investments, even for Tier One members. Strunk, 338 Or at

164. Further, the IAP annuity is not paid for the life of the

member, and it is not subject to a COLA. Id. The IAP annu-

ity consists only of the money that exists in the member’s

IAP account at the time that the member retires. Because

the member receives only his or her contributions and the

investment income from those contributions, the IAP annu-

ity can be viewed as a defined contribution component of

the member’s retirement benefit and presents no risk of

unfunded actuarial liability.

The 2003 legislation creating the IAP had no ret-

rospective effect on the contributions that Tier One and

Tier Two members had already made to their regular

accounts. Those previous contributions continue to fund

service retirement allowance annuities, continue to be

used to calculate service retirement allowance pensions,

and, for Tier One members, continue to earn a guaranteed

rate of return. Id. at 193. Further, the 2003 legislation had

no impact on members who had already retired. They con-

tinue to receive the same benefits that were offered while

they were working.

As a result of the 2003 legislation, Tier One and

Tier Two members who have worked for a participating

employer after 2003 receive two annuities—one under IAP

and one as part of the service retirement allowance—and

they continue to receive the service retirement allowance

pension calculated under one of the three formulas noted

above. The creation of the IAP has meant that the Full

Formula is again the primary formula used to calculate ser-

vice retirement allowances for Tier One and Tier Two mem-

bers, although the percent of retirees qualifying for Money

Match remains high. See Special Master’s Report at 11-12

(stating that, as of January 2013, 45% of new retirees qual-

ified for Money Match).

182 Moro v. State of Oregon

As noted, the 2003 legislation also created the third

tier of PERS members: OPSRP members. Their retirement

benefit is not called a service retirement allowance, although

it also consists of an annuity and a pension. The annuity is

the same IAP annuity available to Tier One and Tier Two

members who continued to work after 2003. As a result, it is

also a defined contribution component. The pension compo-

nent is a less generous version of the Full Formula based on

the member’s years of service and final average salary. ORS

238A.125(1). The OPSRP pension includes a COLA, but the

OPSRP annuity does not.

The 2003 reforms helped to stabilize PERS. Before

the 2003 legislation, PERS’s liabilities were growing by about

12% per year. After the 2003 legislation, PERS’s liabilities

grew by about 3 to 4% per year. Additionally, between 2003

and 2007, the fund’s investments consistently earned well

over the anticipated rate of return. After being only 65%

funded in 2003, PERS was 98% funded by December 2007

and had about $1.5 billion in unfunded actuarial liability.10

Consistently with its existing practice and policy, in early

2008, the board set the employer contribution rates for the

2009-2011 biennium, beginning July 1, 2009, based on that

December 2007 valuation. For the 2009-2011 biennium,

the board set employer contribution rates that resulted in a

system-wide average employer contribution rate of 12.4% —

that is, employers paid a combined weighted average of

12.4% of their payroll to PERS for the retirement benefits

for its past and current employees.

C.  Effect of the Recession

In 2008, after the board set the contribution rates

for 2009-2011, the investment market suffered historic

10

The numbers used in this opinion, for both the funded status and the

amount of unfunded actuarial liability, do not include “side accounts.” Side

accounts are generally lump-sum prepayments by an employer into the PERS

trust using proceeds from pension obligation bonds. PERS does not calculate the

employer’s debt obligation from those bonds, and the record does not otherwise

reflect those obligations. To the extent that an employer has paid down those debt

obligations, the numbers used in this opinion might overstate total employer lia-

bilities. But including side accounts, without including the debt obligations used

to fund those accounts, would understate the total employer liabilities. Special

Master’s Report at 13.

Cite as 357 Or 167 (2015) 183

losses. PERS’s investments lost 27% of the fund’s value in

2008. Those losses left the fund substantially underfunded.

By December 2008, one year after determining that PERS

was 98% funded, the board determined that PERS was only

71% funded and had about $16.1 billion in unfunded actuar-

ial liability.

To balance those losses, the board was required

to increase employer contribution rates. But, based on the

schedule for setting and implementing employer contribu-

tion rates, the next rate increase would not go into effect

until July 2011. And not all the losses would show up in that

rate schedule, because the board uses a “rate collar,” which

spreads out large rate increases over multiple biennia. In

2010, the board set the rates for the 2011-2013 biennium.

The “collared” system-wide average contribution rate set by

the board for that biennium was 16.3%. Because that rate

did not reflect all the 2008 losses, the unaccounted-for losses

increased employer contribution rates in later biennia.

In 2012, the board set the employer contribution rates

for the next biennium, 2013-2015, based on the December

2011 valuation. At that time, the fund’s recent investment

performance had been mixed, which left the funded status

of PERS similar to what it had been in December 2008.

Whereas PERS was 71% funded in December 2008 with

$16.1 billion in unfunded actuarial liabilities, PERS was

only 73% funded in December 2011 and maintained about

$16.3 billion in unfunded actuarial liabilities. The 2013-2015

collared rate is 21.4%. Without the statutory amendments at

issue in this case, the board projects that the rate will rise to

about 25% and will remain at that rate through 2029.11

11

From 1975 to 2005, average employer contribution rates were between

9.15% and 11.4%. After 2005, the rates rose because of the higher unfunded actu-

arial liabilities in the early 2000s and then were reduced as the board paid down

those liabilities: 18.89% in 2005-2007; 14.9% in 2007-2009; 12.4% in 2009-2011.

The record in this case, however, does not allow us to compare directly those

historical employer contribution rates with the current and projected employer

contribution rates. In 2013, the board adopted more conservative actuarial meth-

ods and assumptions that increase employer contribution rates by about 2.5%, at

least in the short term. A comparison to historical contribution rates may not be

useful anyway. Based on the current level of unfunded actuarial liabilities, it is

apparent that those historical rates understated the actual costs that employers

faced.

184 Moro v. State of Oregon

D.  2013 Legislative Amendments

The legislature responded to the effect of the recent

recession on PERS with statutory amendments in 2013.

Those amendments were intended to reduce employer con-

tribution rates by reducing current and future benefits owed

to PERS members, including, specifically, retired members.

At that time, approximately 60% of the unfunded actuar-

ial liability was owed to retired members. Those statutory

amendments reflect two discrete categories of benefits: the

COLA and the income tax offset.

1.  COLA Statutes

The COLA increases the benefits of retired mem-

bers to account for changes in the cost of living. It applies

to the entire service retirement allowance available to Tier

One and Tier Two members, which includes both the annu-

ity and pension components. And the COLA applies to the

pension available to OPSRP members. But the COLA does

not apply to the annuity available under the IAP for Tier

One, Tier Two, or OPSRP members. The COLA has always

been funded by employer contributions.

First enacted in 1971, the pre-amendment COLA

statute had three notable components: the COLA require-

ment in subsection (1); the COLA cap in subsection (2); and

the COLA bank in subsection (3).12 See ORS 238.360 (2011);

12

In full, the pre-amendment COLA provision that applied to Tier One and

Tier Two members provided:

“(1) As soon as practicable after January 1 each year, the Public

Employees Retirement Board shall determine the percentage increase or

decrease in the cost-of-living for the previous calendar year, based on the

Consumer Price Index (Portland area—all items) as published by the Bureau

of Labor Statistics of the U.S. Department of Labor for the Portland, Oregon

area. Prior to July 1 each year the allowance which the member or the mem-

ber’s beneficiary is receiving or is entitled to receive on August 1 for the

month of July shall be multiplied by the percentage figure determined, and

the allowance for the next 12 months beginning July 1 adjusted to the resul-

tant amount.

“(2) Such increase or decrease shall not exceed two percent of any

monthly retirement allowance in any year and no allowance shall be adjusted

to an amount less than the amount to which the recipient would be entitled if

no cost-of-living adjustment were authorized.

“(3) The amount of any cost-of-living increase or decrease in any year

in excess of the maximum annual retirement allowance adjustment of two

Cite as 357 Or 167 (2015) 185

ORS 238A.210 (2011); see also Or Laws 1971, ch 738, § 11

(enacting COLA).

The COLA requirement in subsection (1) required

the board to calculate the COLA each year according to

the Portland Consumer Price Index (CPI) and to add the

COLA to the applicable retirement benefit—whether the

service retirement allowance or the OPSRP pension ben-

efit. According to that provision, the relevant retirement

benefit “shall be multiplied by the [COLA],” and the benefit

“adjusted to the resultant amount.” ORS 238.360(1) (2011);

ORS 238A.210(1) (2011). The COLA requirement made the

COLA automatic and, by adding the COLA to the retire-

ment benefit itself, allowed the COLA to compound from

year to year. Therefore, as retired members aged, the COLA

became a larger and larger percentage of their retirement

benefit.

The COLA cap in subsection (2) originally limited

the COLA to increasing or decreasing the retirement benefit

by 1.5% in any year, provided that the adjusted benefit could

not be less than the original benefit calculated at the time of

retirement. See former ORS 237.060(1) (1971). In 1973, the

legislature revised the cap to allow the COLA to increase or

decrease the applicable retirement benefit by 2%. Or Laws

1973, ch 695, § 1. Before the 2013 amendments at issue in

this case, the legislature had not changed the COLA cap

since raising it in 1973.

The COLA “bank” referred to in subsection (3) kept

reserves of changes to the CPI that were above or below

the COLA cap. For example, if the CPI increased by 3% in

one year, then the board applied a 2% COLA to a member’s

percent shall be accumulated from year to year and included in the computa-

tion of increases or decreases in succeeding years.

“(4)  Any increase in the allowance shall be paid from contributions of the

public employer under ORS 238.225. Any decrease in the allowance shall be

returned to the employer in the form of a credit against contributions of the

employer under ORS 238.225.”

ORS 238.360 (2011), amended by Or Laws 2013, ch 53, §§ 1, 3; Or Laws 2013

(Spec Sess), ch 2, §§ 1, 3. The COLA provision that applied to OPSRP members is

substantively similar, except that it provides no COLA bank, as in subsection (3).

ORS 238A.210 (2011), amended by Or Laws 2013, ch 53, §§ 5, 7; Or Laws 2013

(Spec Sess), ch 2, § 3.

186 Moro v. State of Oregon

benefit and banked the additional 1% increase so that it could

be added to the member’s COLA in later years when the CPI

was less than 2%. Since 1972, the CPI has been below 2%

in only seven years. As a result, most retired members have

substantial percentage points in their COLA banks. The

COLA bank was available to only Tier One and Tier Two

members and was not available to OPSRP members.

During its regular legislative session in 2013, the

legislature passed SB 822, which reduced the COLA cap

from 2% to 1.5% for 2013 and then imposed a graduated

COLA cap based on a member’s total annual retirement ben-

efit beginning in 2014.13 SB 822, §§ 1-9. SB 822 reduced the

COLA cap, but the COLA was still based on the Portland

CPI and could still be banked. After passing SB 822, the

legislature revisited the issue during a special session in

September 2013. In that special session, the legislature

passed SB 861, which made more dramatic changes to the

COLA system beginning in 2014, replacing the graduated

COLA cap of SB 822 before it went into effect. SB 861, §§ 1, 4.

SB 861 converts the COLA benefit to a fixed COLA that is

not based on the Portland CPI and is no longer subject to a

COLA cap or COLA bank. The fixed annual COLA avail-

able under SB 861 is also graduated, although it is gener-

ally lower than the previous COLA caps, providing a 1.25%

COLA on the first $60,000 of the retirement benefit and a

0.15% COLA on all benefits above $60,000.

To soften the impact of those changes, SB 861 also

provides for supplemental payments for retired members to

be paid from 2014 to 2019. Under SB 861, the board may

provide retired members with an annual payment of 0.25%

of their yearly retirement benefit, but not to exceed $150.

Further, members receiving less than $20,000 per year in

retirement benefits will receive a separate annual payment

of 0.25% of their yearly retirement benefit, which can total

up to $50. The supplemental payments, unlike the COLA,

13

For 2014, SB 822 would have imposed a 2% COLA cap on the first $20,000

of the retirement benefit; a 1.5% COLA cap on the benefit between $20,001 and

$40,000; a 1% COLA cap on the benefit between $40,001 to $60,000; and a 0.25%

COLA cap on all benefits above $60,000. As discussed in the text, the legislature

made further changes in the COLA during a 2013 special session before SB 822’s

2014 rates went into effect.

Cite as 357 Or 167 (2015) 187

are not added to the service retirement allowance or OPSRP

pension, and they are not paid directly out of employer con-

tributions. Instead, the supplemental payments are taken

from the fund’s contingency reserve. SB 861, § 8(6).

2.  Tax Offset Statutes

In addition to the COLA amendments, the 2013

legislature also made changes to another post-employment

PERS benefit: the income tax offset payment. Beginning

in 1945, when the legislature first established PERS, all

PERS retirement benefits were exempt from Oregon income

tax. Oregon law provided no similar exemption for pension

benefits of federal employees. In Davis v. Michigan Dept. of

Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989),

the United States Supreme Court held that exempting state

pension benefits from taxation, but not exempting federal

pension benefits, violated the intergovernmental tax immu-

nity doctrine. Id. at 817. In Davis, the Court explained that

a state could cure that violation either “by extending the

tax exemption to retired federal employees (or to all retired

employees), or by eliminating the exemption for retired state

and local government employees.” Id. at 818.

In response to Davis, the legislature eliminated the

exemption for retired PERS members and began imposing

personal income taxes on PERS benefits in 1991. Affected

members sued. The next year, in Hughes v. State of Oregon,

314 Or 1, 838 P2d 1018 (1992), this court held that the tax

exemption was part of the PERS contract and that the legis-

lature had both impaired the PERS contract by eliminating

the contractual obligation to exempt retirement benefits and

breached the PERS contract by subjecting members’ retire-

ment benefits to state income tax. Id. at 31-33.

According to Hughes, the state could prevent mem-

bers from accruing additional tax-exempt benefits, but the

participating employers were contractually required to

provide a tax exemption for retirement benefits that were

earned while the tax exemption was in effect. Id. at 31

(“PERS retirement benefits accrued or accruing for work

performed before the effective date of that section [repealing

the tax exemption] * * * may not be taxed.”). As a result, the

legislature could make prospective changes to the tax status

188 Moro v. State of Oregon

of pension benefits that members could earn going forward,

but the legislature could not make retrospective changes—

that is, could not deny tax benefits for future retirement

payments that members had earned already. Id.

Rather than imposing a damage award against the

employers for breaching the contract, Hughes allowed the

legislature to determine in the first instance what an appro-

priate remedy would be. Id. at 33. Dissatisfied with the legis-

lature’s efforts to craft a remedy, affected members seeking

damages brought a class action, known as the Stovall/Chess

class action litigation. That action was resolved in 1997

through a settlement agreement that incorporated certain

PERS changes that the legislature had enacted to offset the

increased tax burden facing PERS members. Those changes

were enacted as Oregon Laws 1991, ch 796 (SB 656) (1991

offset), 1995 Oregon Laws, ch 569 (HB 3349) (1995 offset),

and Oregon Laws 1997, ch 175 (HB 2034).14

The legislature enacted the 1991 offset at about the

same time that it repealed the tax exemption. The 1991 off-

set provides a benefit to both active and retired members

based on years of service, ranging from 1% for members with

more than 10 years of service to 4% for members with more

than 25 or 30 years of service, depending on the member’s

occupation. SB 656, § 4. Although the rate of the 1991 offset

is not based on the income tax rate and was passed before

this court’s decision in Hughes, the legislature nevertheless

intended the 1991 offset to avoid or mitigate the anticipated

damage claim that was the subject of the Hughes decision.

For that reason, the legislature included a provision that

would allow employers to avoid paying the 1991 offset if “the

retirement benefits payable under [PERS] are exempt from

Oregon personal income taxation.” SB 656, § 12(1).

The legislature enacted the 1995 offset in response

to the Stovall/Chess litigation, which followed the Hughes

14

The statutory scheme containing those laws has been renumbered and

reorganized on numerous occasions since their original codification. The rel-

evant provisions of SB 656 are currently compiled at ORS 238.366 and ORS

238.368. The relevant provisions of HB 3349 are currently compiled at ORS

238.362(3), (4)(a) and ORS 238.364. And the relevant provisions of HB 2034 are

currently compiled at ORS 238.362(1), (2), (4)(b).

Cite as 357 Or 167 (2015) 189

decision. See HB 3349, § 2(1) (noting that the benefits are “in

compensation for damages suffered by those members * * *

by reason of subjecting benefits paid * * * to Oregon personal

income taxation”). To calculate the 1995 offset, the board

applies a formula intended to negate the “maximum Oregon

personal income tax rate,” which was 9% in 1991. HB 3349,

§ 3(4)(a); see ORS 316.037(1)(a) (1991) (setting personal

income tax rates). The 1995 offset applies to only the part of

a member’s benefit that “is attributable to service rendered

by the member before October 1, 1991,” which is when the

legislature repealed the income tax exemption. HB 3349,

§ 3(4)(b); see also Vogl v. Dept. of Rev., 327 Or 193, 206-08,

960 P2d 373 (1998) (describing the enactment of the 1995

offset). Further, both the 1991 and the 1995 offsets are avail-

able to only Tier One members who established membership

in PERS before July 14, 1995. HB 3349, § 3(8). Members

eligible for both the 1991 and 1995 offset payments receive

only the higher of the two. HB 3349, § 3(1)(a).

The 1995 offset also includes two provisions relevant

to the anticipated settlement of the Stovall/Chess litigation.

First, no member may bring a new class action challeng-

ing the elimination of the tax exemption. HB 3349, § 4(a).

And second, no member acquires a contractual right to the

1995 offsets. HB 3349, § 3 (“No member of the system or

beneficiary of a member of the system shall acquire a right,

contractual or otherwise, to the increased benefits provided

by sections 3 to 10 of this Act.”). In 1997, the legislature

enacted a statute providing that, if the state decreases the

benefits provided under the 1991 and the 1995 offsets with-

out also decreasing the tax burden of PERS members, then

a plaintiff member of the Stovall/Chess class action who had

challenged the elimination of the tax exemption may reopen

that class action. HB 2034, § 4(4)(b).

The settlement agreement that ultimately resolved

the Stovall/Chess litigation in 1997 recognizes that the

1991 offset, the 1995 offset, and the 1997 amendments

were enacted “to provide a remedy for state income taxa-

tion of PERS benefits” and that the plaintiff PERS mem-

bers “agree[d] to accept the remedies provided in SB 656

(1991), HB 3349 (1995) and HB 2034 (1997) as full and

190 Moro v. State of Oregon

complete payment for all claims raised in these consolidated

actions.” The settlement agreement further states that, if

the state reduces the benefits under those provisions with-

out an equal reduction to the Oregon personal income taxes

imposed on PERS members, then the class action may be

reopened. Id.15

In 2011, the legislature amended the 1995 offset,

so that it is no longer available to then-active and -inactive

members who, upon retirement, live out of state or are other-

wise not subject to Oregon personal income taxes. Or Laws

2011, ch 653, § 2. In 2013, the legislature passed SB 822,

which, in addition to the changes to the COLA system dis-

cussed above, also amended the tax offset provisions. SB

822 prohibits paying either the 1991 offset or the 1995 offset

to any retired member who is not subject to Oregon income

tax assessments, including nonresident retirees. SB 822,

§§ 11-13. That change affects more than 16,000 nonresident

PERS retirees (or other beneficiaries), which is about 14% of

benefit recipients.

E.  Effect of the 2013 Amendments

In March 2013, after SB 822 had been introduced,

the board’s actuary estimated the impact of the amendments

contained in that bill—viz., the first iteration of the COLA

modifications and the elimination of the tax offset payments

to nonresident PERS members. That analysis projected that

SB 822 would reduce the employer contribution rates by 2.5%

of total payroll. For the 2013-2015 biennium, it would reduce

the employer contribution rates from 21.1% to 18.6%. And

through 2029, the board projected that the pre-SB 822 rates

would be 25.5% and the post-SB 822 rates would be 23.0%.

Approximately 0.3% of the 2.5% reduction was attributable

to the elimination of the tax offsets for nonresident retir-

ees. The remaining 2.2% reduction was attributable to the

COLA modifications.

15

Additionally, the state faced lawsuits from federal retirees living in

Oregon who had argued that the tax offsets were in fact tax rebates that violated

Davis and the intergovernmental tax immunity doctrine. This court held that the

1991 offset did not violate the intergovernmental tax immunity doctrine but the

1995 offset did. Ragsdale v. Dept. of Rev., 321 Or 216, 229, 895 P2d 1348 (1995),

cert den, 516 US 1011, 116 S Ct 569, 133 L Ed 2d 493 (1995) (addressing the 1991

offset); Vogel, 327 Or at 211-12 (addressing the 1995 offset).

Cite as 357 Or 167 (2015) 191

In September 2013, the board’s actuary estimated

the impact of the additional COLA modifications in SB

861, although the analysis did not include the supplemen-

tal payments that were ultimately included in SB 861. That

analysis projected that SB 861 would reduce the projected

employer contribution rates by an additional 2.0%. As a

result, the combined effect of SB 822 and SB 861 is esti-

mated to reduce employer contribution rates by 4.5% of total

payroll through 2029, which represents about $5.3 billion

in savings, stated on a system-wide, present value basis. Of

those savings, about $390 million results from eliminating

the tax offsets for nonresident retirees.

Those projected savings, combined with investment

earnings that exceeded the assumed earnings rate (14.3%

in 2012 and 15.6% in 2013), reduced PERS’s unfunded

actuarial liability. In December 2013, the board’s actuary

estimated that PERS’s unfunded actuarial liability was

$8.1 billion and that PERS was 87% funded.

II. ANALYSIS

Petitioners include both active and retired Tier

One members, who are both residents of Oregon and non-

residents. They also include active Tier Two and OPSRP

members, who are all residents. Petitioners contend that SB

822 and SB 861 unconstitutionally impair their employment

contracts in violation of the state Contract Clause, Article I,

section 21, of the Oregon Constitution, and the federal

Contract Clause, Article I, section 10, clause 1, of the United

States Constitution. In the alternative, they contend that

the amendments breach their contracts and constitute an

unconstitutional taking of their property without just com-

pensation in violation of Article I, section 18, of the Oregon

Constitution, and the Fifth Amendment to the United States

Constitution. Petitioners further argue that the amend-

ments violate the state Equal Privileges or Immunities

Clause, Article I, section 20, of the Oregon Constitution,

the federal Privileges and Immunities Clause, Article IV,

section 2, clause 1, of the United States Constitution, and

the federal Equal Protection Clause of the Fourteenth

Amendment to the United States Constitution. Finally, one

petitioner argues that the amendments violate a federal

192 Moro v. State of Oregon

statute, 4 USC section 114. Despite presenting those vari-

ous challenges, petitioners generally focus their arguments

on the state and federal Contract Clauses.

Respondents argue that the COLA and income tax

offset are not contractual and, therefore, the changes to

those statutes do not violate the state and federal Contract

Clauses. Even if those provisions are part of a contract,

respondents contend that the amendments do not substan-

tially impair the contract and are justified by a sufficient

public purpose.

When presented with arguments arising under

both state and federal law, we generally attempt to dispose

of the case on state law grounds before reaching questions

of federal law. Strunk, 338 Or at 171. As a result, we begin

with the state Contract Clause arguments.

A.  State Contract Clause

The state Contract Clause, Article I, section 21, of

the Oregon Constitution, states that “[n]o * * * law impair-

ing the obligation of contracts shall ever be passed[.]” Or

Const Art I, § 21. That provision was adopted in 1857 and

derived from the federal Contract Clause, Article I, section

10, clause 1, of the United States Constitution. See Eckles v.

State of Oregon, 306 Or 380, 389, 760 P2d 846 (1988) (trac-

ing the history of the state Contract Clause). As a result, we

have interpreted the state Contract Clause as being consis-

tent with the United States Supreme Court’s interpretation

of the federal Contract Clause in 1857. See id. at 389-90

(inferring from the history of the state Contract Clause

that “the framers of the Oregon Constitution intended to

incorporate the substance of the federal provision, as it

was then interpreted by the Supreme Court of the United

States”).

This court has previously recognized that, in 1857,

it was well established that the federal Contract Clause

protected only those obligations arising from contracts that

were formed before the effective date of the law being chal-

lenged. See id. at 399 n 18 (“Future private contracts, as

well, are not protected by the state and federal contracts

clauses.” (Citing Ogden v. Saunders, 25 US 213, 6 L Ed 606

Cite as 357 Or 167 (2015) 193

(1827).)); see also Local Div. 589, etc. v. Comm. of Mass., 666

F2d 618, 637 (1st Cir 1981) (Breyer, J.) (“It has been clear

since 1827 that the [federal Contract] Clause applies only

to laws with retrospective, not prospective, effect.” (Citing

Ogden, 25 US 213.)).

Federal courts have described that distinction as

turning on whether the law in question operates prospec-

tively or retrospectively. See, e.g., United States Trust Co. v.

New Jersey, 431 US 1, 18 n 15, 97 S Ct 1505, 52 L Ed 2d 92

(1977) (“[T]he States undoubtedly had the power to repeal

the covenant prospectively.”); Local Div. 589, etc., 666 F2d

at 637 (quoted above); see also Robertson v. Kulongoski, 359

F Supp 2d 1094, 1100 (D Or 2004), aff’d, 466 F3d 1114 (9th

Cir 2006) (“The Contract Clause does not prohibit legisla-

tion that operates prospectively.”).

The reason for that limitation is simple: If the con-

tract 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. See Eckles, 306 Or at 399 n 18 (“[T]he laws in exis-

tence when a contract is formed define the obligation of the

contract.”); see also Bagley v. Mt. Bachelor, Inc., 356 Or 543,

552-53, 340 P3d 27 (2014) (“[C]ourts determine whether a

contract is illegal by determining whether it violates public

policy as expressed in relevant constitutional and statutory

provisions and in case law[.]” (citing Delaney v. Taco Time

Int’l, Inc., 297 Or 10, 681 P2d 114 (1984).))

We have applied that limitation expressly. For

example, in Eckles, we held that a provision of the Transfer

Act, which shifted funds from a state trust account to the

state’s general fund, violated the state Contract Clause only

“insofar as it affects * * * insurance contracts entered into

before the enactment of the Transfer Act.” Eckles, 306 Or

at 399. Nevertheless, that same provision was valid “[a]s to

subsequent contracts, including renewals of [existing] con-

tracts[.]” Id. As to those contracts entered after the law’s

effective date, the law “would define, not impair, the [par-

ties’] contractual obligations[.]” Id.

Similarly, in Hughes, we relied on Eckles and pro-

hibited repealing the PERS tax exemption “as it relates to

194 Moro v. State of Oregon

PERS retirement benefits accrued or accruing for work per-

formed before the effective date of that [repeal].” 314 Or at

31; see also id. at 20 (“Accrued and accruing pension benefits

are protected under Oregon Law.”). As we quoted approv-

ingly from an Attorney General Opinion, “ ‘Employe[e] pen-

sion plans, whether established by law or contract, create a

contractually based vested property interest which may not

be terminated by the employer, except prospectively.’ ” Id. at

20-21 (quoting 38 Op Atty Gen 1356, 1365 (1977) (emphasis

in original)).

Therefore, when applying the state Contract Clause,

we consider the potential impairment of contractual obli-

gations arising only from contracts entered into before the

effective date of the law being challenged. In this case, SB

822 became effective on May 6, 2013, and SB 861 became

effective on October 8, 2013. The scope of our analysis is

defined by the obligations arising from contracts entered

before those dates.

Our analysis in previous cases addressing viola-

tions of the state Contract Clause has focused on the follow-

ing questions: (1) is there a contract?; (2) if so, what are its

terms?; (3) what obligations do those terms require?; and

(4) has the state impaired an obligation of that contract?

Strunk, 338 Or at 170 (citing Hughes, 314 Or at 14).

We normally answer those questions by apply-

ing general rules of contract law. Id. But if the state is

alleged to be a party to the contract, we supplement the

general rules of contract law with additional considerations

informed by the state’s role serving the public. Id. On the

one hand, enforcing state contracts binds the state to its

previous promises, which were made to advance its previ-

ous policy goals. Requiring the state to meet those obliga-

tions can prevent or hinder the state’s pursuit of its current

policy goals by limiting funds available to pursue those

goals. On the other hand, the state would be unable to pur-

sue its current policy goals if it were unable to bind itself

at all—that is, if it were unable to make any enforceable

promises to other parties. The state, for example, would

have a hard time finding a company to build its roads if the

state were unable to enter into an enforceable contract with

Cite as 357 Or 167 (2015) 195

a construction company, ensuring that the company would

get paid for its work. Providing parties with binding con-

tractual rights facilitates mutually beneficial exchanges,

which in turn benefit the state as much as any other party

to a contract.

Thus, the state may enter into contracts and be

bound by the promises contained in those contracts, so long

as the state is not “contract[ing] away its ‘police powers’ ”

or limiting its power of eminent domain. Id. at 14. Further,

we have long applied a canon of construction that disfavors

interpreting statutes as contractual promises. See Strunk,

338 Or at 171 (disfavoring statutory contracts binding the

state).16 When the legislature pursues a particular policy

by passing legislation, it does not usually intend to prevent

future legislatures from changing course. Id. For that rea-

son, “ ‘[t]he intention to surrender or suspend legislative

control over matters vitally affecting the public welfare can-

not be established by mere implication.’ ” Id. at 171 (quoting

Campbell et al. v. Aldrich et al., 159 Or 208, 213-14, 79 P2d

257 (1938)). We therefore treat a statute as a contractual

promise only if the legislature has “ ‘clearly and unmistak-

ably’ ” expressed its intent to create a contract. Id. (quoting

Campbell, 159 Or at 213-14); see Hughes, 314 Or at 14 (“[A]

state contract will not be inferred from legislation that does

not unambiguously express an intention to create a con-

tract.”). With those considerations in mind, we turn to the

questions posed above.

1.  Is there a contract?

We have repeatedly held that the legislature

“intended and understood” that PERS benefits are contrac-

tual and, as a result, “PERS is a contract between [a par-

ticipating employer] and its employees.” Hughes, 314 Or at

18; see also Strunk, 338 Or at 183 (noting the contractual

16

We have previously noted that those limitations may not be exhaustive,

“but any further rules of this nature ‘must be found within the language or his-

tory of Article I, section 21, itself.’ ” Hughes, 314 Or at 14 (quoting Eckles, 306 Or

at 399). Federal courts recognize similar limitations and refer to them as the

“reserved powers doctrine” and the “unmistakability doctrine.” United States v.

Winstar Corp., 518 US 839, 874, 116 S Ct 2432, 135 L Ed 2d 964 (1996) (opinion of

Souter, J.).

196 Moro v. State of Oregon

nature of PERS benefits).17 The parties agree that each of

the petitioners in this case has a contract with a partici-

pating employer relating to PERS benefits. Because of their

agreement on that point, the parties provide little analysis

of that question in the briefing. But the nature and scope of

that contract provide necessary context for the answers to

the other questions posed by this challenge and therefore

deserve further discussion.

A contract is most commonly formed by an offer, an

acceptance of that offer, and an exchange of consideration.

See Homestyle Direct, LLC v. DHS, 354 Or 253, 262, 311 P3d

487 (2013) (describing contract formation; citing Restatement

(Second) of Contracts § 17(1) (1981)).18 Ordinarily, an offer

contains a promise that will become enforceable only when

the offer is accepted. See Restatement § 24 comment a (“In

the normal case, * * * the offer itself is a promise[.]”); Richard

A. Lord, 1 Williston on Contracts § 4:7, 449 (4th ed 2007)

(defining an ordinary offer as a “conditional promise”).

In the employment context, an employer frequently

offers a promise of compensation in exchange for an employ-

ee’s service. The compensation can take various forms, such

as salary, bonuses, and fringe benefits. Pension benefits are

another form of compensation. Whereas, for example, salary

is compensation paid to the employee every two weeks or at

the end of each month, a pension is compensation paid to the

employee at retirement. Pension benefits therefore are “part

of the employee’s promised but delayed compensation for the

performance of his [or her] job.” Taylor v. Mult. Dep. Sher.

Ret. Bd., 265 Or 445, 450, 510 P2d 339 (1973). Regardless of

whether the pension benefit is promised by a public or pri-

vate employer, “the employee accepts a lower present wage

in order to receive a pension upon retirement[.]” Lord, 19

Williston on Contracts § 54:38 at 541.

17

The modification of the quote from Hughes substitutes “a participating

employer” for “the state.” The court in Hughes used “the state” as a “convenient

term[ ] for all public employers.” Hughes, 314 Or at 5 n 3.

18

“Consideration” is that which one party provides to the other in exchange

for entering into the contract. See Homestyle Direct, 354 Or at 262 (describing

consideration); see also Restatement § 71(2) (defining “consideration” as a perfor-

mance or return promise “sought by the promisor in exchange for his promise and

[ ] given by the promisee in exchange for that promise”).

Cite as 357 Or 167 (2015) 197

As a result, the contracts at issue in this case are

the employment contracts between petitioners and their

participating public employers. To the extent that each

employment contract binds a participating employer to fund

PERS benefits for its employees, we previously have referred

to those contractual obligations as the “PERS contract.” See,

e.g., Hughes, 314 Or at 6 n 5 (stating that the “ ‘PERS con-

tract’ ” refers to “the contracts [that PERS members] each

have with their respective PERS participating employers”).

Although the PERS contract results from an offer

and acceptance, the PERS statutes are themselves not an

offer that employees can accept. Instead, each participat-

ing employer offers a promise to its employees to provide

compensation, including PERS benefits, in exchange for

the employees’ services. See Stovall v. State of Oregon, 324

Or 92, 123, 922 P2d 646 (1996) (“[The] employers were the

entities that agreed to the terms of [the employees’] com-

pensation, including the terms relating to retirement ben-

efits.”). The PERS statutes establish that PERS benefits

are a statutorily required term in the offer that each par-

ticipating employer makes to its employees. See id. at 124

(“[P]articipating PERS employers * * * promised plaintiffs

that plaintiffs would receive, at a minimum, the retirement

compensation provided in the PERS statutes.”); see also

Restatement § 5 comment c (describing statutory contract

terms).

Before a participating employer’s promise of PERS

benefits becomes the PERS contract for any particular

employee, it is merely an offer that the employee can either

accept or reject. Generally, an offer, by itself, does not impose

any obligation on the offering party, who may change or

revoke an offer that has not been accepted—assuming that

the offering party is not otherwise required to leave the offer

open. See Hogan v. Alum. Lock Shingle Corp., 214 Or 218,

226, 329 P2d 271 (1958) (“[T]here is no agreement until the

offer has been accepted in accordance with its very terms.”);

see also Restatement § 24 comment a (noting that an offer is

“revocable until accepted”); Arthur Linton Corbin, 1 Corbin

on Contracts § 2.19 at 222 (Joseph M. Perillo ed., rev ed

1993) (“Any communicated change in the terms of an offer

operates as a revocation of that offer.”). But once an offer

198 Moro v. State of Oregon

has been accepted, it ceases to be an offer as such; instead,

the terms of the offer become the terms of the contract. See

Restatement § 42 comment c (“Once the offeree has exercised

his power to create a contract by accepting the offer, a pur-

ported revocation is ineffective as such.”).

Therefore, a participating employer’s offer of PERS

benefits becomes a contract only when an employee accepts

the offer. An offer can invite two different types of accep-

tance, resulting in either a bilateral contract or a unilateral

contract. An offer for a bilateral contract invites the other

party to accept with a return promise—that is, by prom-

ising some future performance. See 1 Corbin on Contracts

§ 1.23 (describing bilateral contracts). An offer for a uni-

lateral contract invites the other party to accept with per-

formance—that is, by actually doing the performance that

the offering party seeks. See id. (describing unilateral con-

tracts). As a result, by the time that an offer for a unilateral

contract is accepted, the accepting party has already fully

performed and owes the offering party no future obligation.

Id. In that case, the resulting contract is unilateral because

only the offering party owes a legally enforceable obligation

to the other. Id.; see also Homestyle Direct, 354 Or at 268-69

(describing unilateral contracts); Mark Pettit, Jr., Modern

Unilateral Contracts, 63 B U L Rev 551, 552 (1983) (“The

distinguishing feature of the unilateral contract is that

the second party (the offeree) has not made a promise in

return.”).

Because the offer of PERS benefits invites employ-

ees to accept by providing current service for the employer—

rather than by promising to provide some service in the

future—the resulting PERS contract is a unilateral con-

tract. See Hughes, 314 Or at 21 (“ ‘[A]doption of the pension

plan was an offer for a unilateral contract.’ ” (Quoting Taylor,

265 Or at 452.)). In this case, petitioners have accepted the

offer by providing the services that their employers sought.

See Stovall, 324 Or at 124 (1996) (“Plaintiffs accepted [the

promised PERS benefits] by working for their employers.”);

Hughes, 314 Or at 21 n 26 (“ ‘[A]n employee pension or disabil-

ity plan may be viewed as an offer to the employee which may

be accepted by the employee’s continued employment, and

such employment constitutes the underlying consideration

Cite as 357 Or 167 (2015) 199

for the promise.’ ” (Quoting Rose City Transit Co. v. City of

Portland, 271 Or 588, 593, 533 P2d 339 (1975).)).

Thus, an employee earns a contractual right to the

offered PERS benefits at the time that the employee renders

his or her services to the employer.19 But merely because

the PERS contract has been formed does not mean that

the contractual relationship between the employer and the

PERS member becomes static. As long as the employer con-

tinues offering PERS benefits, PERS members can continue

accepting that offer and, thereby, earn additional contrac-

tual rights to additional PERS benefits.

Those concepts are difficult to apply to pension ben-

efits, because of the complex formulas often used to calcu-

late the benefits and because of the lapse of time between

the employee earning the benefit and the employer deliver-

ing the benefit. Those concepts are seen more clearly when

applied to a simpler benefit, such as salary. For example, in

State ex rel. Thomas v. Hoss, 143 Or 41, 21 P2d 234 (1933),

an employee was working for the Bureau of Labor and earn-

ing a salary of $180 per month. Id. at 42-43. In the mid-

dle of March 1933, the legislature reduced his salary to

$172 per month. Id. at 47. When the state issued his monthly

paycheck at the end of March, the state applied the lower

salary to the entire month. Id. at 42-43.

This court rejected the state’s contention that the

law required that the employee receive the lower salary for

the whole month, even though he had worked for half the

month while the state was offering the higher salary. Id. at

19

In previous decisions, this court has described the formation of the PERS

contract as conveying to the accepting employee a “vested” right to the offered

retirement benefits. See, e.g., Oregon State Police Officers’ Assn. v. State of Oregon,

323 Or 356, 380, 918 P2d 765 (1996) (OSPOA) (so stating); Hughes, 314 Or at 20

(same). However, in the pension context, “vested” has a specific meaning that is

distinct from contract formation and from benefit accrual. “Accruing” is “the rate

at which an employee earns benefits to put in [the employee’s] pension account[.]”

Central Laborers’ Pension Fund v. Heinz, 541 US 739, 749, 124 S Ct 2230, 159 L

Ed 2d 46 (2004). “Vesting” is “the process by which an employee’s already-accrued

pension account becomes irrevocably [the employee’s] property[.]” Id. Therefore, an

employee who has rendered service to a participating public employer has accepted

the employer’s offer and accrued PERS benefits even before the employee has a

vested right to the benefits. An unvested PERS member has only a limited con-

tractual right to the accrued benefits, because the employer’s obligation to provide

those benefits is conditional on the employee having a vested right to the benefits.

200 Moro v. State of Oregon

47. According to the court, “the legislature was at liberty at

any time to reduce [the salary] amount. But it is settled that

after a salary has been earned the public employee’s right

thereto becomes vested and cannot be taken away by any

legislation thereafter enacted[.]” Id. (emphasis added). The

employee, therefore, accepted the salary being offered at the

time that he rendered his services. Although he could be

paid the lower salary for the second part of the month—

because he continued working even after the state reduced

its salary offer—the employee was entitled to the higher

salary for the first part of the month, because he had been

offered the higher salary during that part of the month and

he had accepted that offer by working during that period.20

In effect, the court in Thomas treated the employer’s

salary offer as a continuing offer that remained open for a

series of acceptances and resulted in a series of separate

contracts. See Corbin, 1 Corbin on Contracts § 2.33 at 300

(“[A]n offer [can be] made in such terms as to create a power

to make a series of separate contracts by a series of sepa-

rate acceptances.”). The employee, therefore, first accepted

that continuing offer on his first day of work. That accep-

tance established his contractual right to the offered com-

pensation only for that day’s work. The employee repeatedly

accepted that offer each subsequent day that he worked for

the employer, establishing his additional contractual right

to compensation for each additional day’s work. But as to

future work that the employee had not yet performed, the

employee had not accepted the employer’s continuing offer,

which remained just that—an offer. See id. (“The closing

of one of these separate contracts by one acceptance leaves

the offer still revocable as to any subsequent acceptance.”).

In those circumstances, unless an employer is subject to a

legal obligation to keep that offer open, the employer can,

20

The United States Supreme Court reached the same result more than 80

years earlier in Butler et al. v. Pennsylvania, 51 US 402, 13 L Ed 472 (1850).

There, the Court found no violation of the federal Contract Clause when the

Pennsylvania legislature reduced the salary of certain employees who had been

appointed to positions with a fixed term at a fixed salary. Id. at 409. The Court

held that, although the legislature could change the salary going forward, “[t]he

promised compensation for services actually performed and accepted, during the

continuance of the particular agency, may undoubtedly be claimed, both upon

principles of compact and of equity[.]” Id. at 416.

Cite as 357 Or 167 (2015) 201

like other offering parties, change or revoke the unaccepted

offer of compensation for future work.

Similarly, the PERS offer is a continuing offer. An

employee’s acceptance of the offer does not preclude the

employee from accepting the offer further by rendering addi-

tional services. Each additional rendition of service accepts

any open offer for additional PERS benefits. The PERS con-

tract reaches only as far as a member has accepted the offer,

and a member’s acceptance reaches only as far as the work

that the member has performed.

That analysis reveals how and when the PERS con-

tract is formed and the scope of the PERS benefits owed:

The PERS contract binds a participating employer to com-

pensate 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. Cf. Corbin, 1 Corbin on Contracts § 3.16

at 387 (“The employee accepts the offer by merely continuing

to render the specified service, and becomes entitled to the

promised salary in proportion to the work actually done.”).

That analysis, however, does not necessarily require

a finding that the PERS offer can be changed prospectively,

like the salary offer in Thomas. The parties in this case

dispute whether, before the 2013 amendments, one of the

express or implied terms offered and accepted included a

promise that the participating employers would not change

the terms of the offer, even prospectively. See Restatement

§ 87 (describing conditions under which an offering party

has a legal obligation to leave an offer open). We resolve that

issue below. See 357 Or at 221-26.

For present purposes, it is sufficient to conclude

that, under the prospective/retrospective distinction that we

apply under the state Contract Clause, our analysis is lim-

ited to the potential impairment of obligations owed by the

participating employers, and earned by members through

the work they performed, before the effective dates of the

amendments at issue. That analysis includes considering

whether, before the effective date of the amendments, partic-

ipating employers were contractually obligated to keep rel-

evant parts of the PERS offer open even after the effective

202 Moro v. State of Oregon

date of the amendments. We begin that analysis by deter-

mining the relevant terms of that PERS contract.

2.  What are the terms of the contract?

Petitioners contend that the pre-amendment tax

offset statutes and the pre-amendment COLA statutes

are contractually enforceable terms of the PERS contract.

According to petitioners, the unmistakability doctrine—

which, as noted, requires courts to interpret statutes as

noncontractual unless the legislature’s intent to bind the

state is unmistakable—applies to only the previous ques-

tion of whether there is a contract, but does not apply to

determining the terms of a contract. Petitioners further

argue that the pre-amendment version of both the income

tax offset statutes and the COLA statutes reveal the leg-

islature’s promissory intent through their use of the term

“shall.” Respondents dispute petitioners’ arguments and

contend that the unmistakability doctrine applies to this

question and that the statutes at issue fail to furnish the

clear and unmistakable legislative intent to offer the income

tax offsets and the COLA as terms of the PERS contract.

a.  Standards for identifying terms of the contract

To resolve this dispute, we first address the stan-

dard of legislative intent applied to this step. Respondents

are correct: the standard of clear and unmistakable contrac-

tual intent applies to both the question of whether there is

an offer to form a contract and also to whether a particu-

lar provision is a term of that offer. Our case law plainly

requires that result. See, e.g., Arken, 351 Or at 136 (“[T]he

terms of the statutory PERS contract are a matter of legis-

lative intent and only statutory terms that ‘unambiguously

evince[ ] an underlying promissory, contractual legisla-

tive intent’ become a part of the statutory PERS contract.”

(Quoting Hughes, 314 Or at 26.)).

Although respondents correctly identify the stan-

dard articulated in our case law, respondents ask us to apply

that standard by setting a much higher bar than we have

applied in the past. According to respondents, the legisla-

ture can satisfy that standard only by expressly describing

the statutory benefit as a contract, promise, or guarantee.

Cite as 357 Or 167 (2015) 203

Contrary to respondents’ assertions, however, our

cases discussing and applying that standard do not focus

solely on the use of such specifically promissory language.21

Instead, we have repeatedly emphasized the importance of

context at this step—namely, the context of already having

established that the parties intended to form a contract.

See, e.g., Strunk, 338 Or at 183 (“[W]e are mindful that the

‘accepted proposition of the contractual nature of PERS is

an essential background’ for our inquiry.” (Quoting Hughes,

314 Or at 22.)). Because we already have found that the leg-

islature intended PERS benefits to be part of the employer’s

contractual promise of compensation, the standard of clear

and unmistakable intent now focuses only on whether the

legislature intended a particular PERS provision to be part

of that promise.

As we have held in prior cases, the PERS statutory

scheme may define the terms of the PERS contract, even

though it does not use language referring directly to con-

tracts, promises, or guarantees. See, e.g., Strunk, 338 Or at

186 (finding that a member’s right to the use of a partic-

ular service retirement allowance formula is “unambigu-

ously promissory”); Hughes, 314 Or at 26 (stating that the

PERS previous tax exemption provision “unambiguously

evinces an underlying promissory, contractual legislative

intent”).22

21

Although it is common for courts to treat statutory public pension pro-

grams as contractual, it is “quite rare” for pension statutes to expressly refer

to contractual rights. Amy B. Monahan, Public Pension Plan Reform: The Legal

Framework, 5 Education, Finance & Policy, Minnesota Legal Studies Research,

No 10-13, 5 n 6 (2010) (“It is possible for a statute to contain explicit language

regarding the creation of a contractual relationship (see, e.g., N.J. Stat. Ann.

§ 43:13-22.33 (2009)), but this is quite rare.”).

22

The importance of context is well established in our case law. In Hughes,

for example, we criticized attempts to view a provision “in isolation and evaluate

whether [the provision], standing alone, demonstrates the requisite unambigu-

ous legislative intent to create a contractual obligation.” 314 Or at 23. Ignoring

the provision’s context “is not analytically proper or helpful.” Id. at 25. The court

in Hughes also reviewed numerous federal cases considering federal Contract

Clause challenges and concluded, “The constitutional protection that was

afforded to those provisions’ obligations followed from the fact that they were

part of a larger contract, not that they were promissory in and of themselves.”

Id. at 25 n 31. The court held that the same principles applied to identifying the

terms of the PERS contract. See id. (“This case presents an analogous situation

where we are faced with an underlying contract—the PERS contract—and the

question is whether the tax exemption statute is a term of that contract.”).

204 Moro v. State of Oregon

Still, not every provision within the PERS statutory

scheme is a term in the PERS contract. See Oregon State

Police Officers’ Ass’n. v. State of Oregon, 323 Or 356, 405, 918

P2d 765 (1996) (OSPOA) (Gillette, J., specially concurring

in part and dissenting in part) (“[N]ot every statutory provi-

sion in [PERS] is a part of that contract. Instead, whether a

particular provision is part of that contract is a question of

legislative intent.” (Emphasis in original.)). Beyond noting

that doubtful cases should be resolved in favor of finding

that a provision is not a term of the contract being offered,

there are two principles that we have considered in prior

cases that guide our use of context here.23

First, because the PERS offer promises remuner-

ative pension benefits as compensation for employment,

the offer may include provisions that define the eligibility

for benefits or the scope of benefits. See, e.g., Hughes, 314

Or at 22-23 (assessing whether a provision was an “inte-

gral part of the PERS statutes” and whether it was “part

and parcel” with the state’s promise of pension benefits);

id. at 26 (considering the “purpose of the PERS contract”);

Eckles, 306 Or at 393 (considering that the purpose of a

disputed provision was to provide assurances “to induce

skeptical employers to participate in a state insurance sys-

tem”). Because the legislature intended PERS to be part of

an offer promising pension benefits to employees, statutes

defining eligibility for, or the scope of, those benefits may

be part of the PERS offer, unless the legislature expresses

a contrary intent.

That principle is based in part on the potential dis-

tinction between provisions that relate to a remunerative

aspect of PERS and those that relate to an administrative

aspect of PERS. See Strunk, 338 Or at 239 (Balmer, J., con-

curring) (noting that a “patently administrative provision”

should not be treated as contractual because the legislature

failed to provide clear and unmistakable contractual intent,

even though the change may affect actual benefits received

by some members). The PERS statutes address both the

23

We do not mean to suggest that there may not be other principles to con-

sider in other cases, including other PERS cases. Rather, we mean only that we

identified these two principles as relevant in prior PERS cases.

Cite as 357 Or 167 (2015) 205

participating employers’ promise of pension benefits and the

manner in which the legislature directs the board and the

employers to carry out that promise, and the PERS offer

does not necessarily include those administrative aspects of

PERS as compensation for employment.

Second, not all remunerative provisions are terms of

the PERS offer. Instead, a remunerative provision will be a

term of the offer only if it is mandatory, rather than optional

or discretionary. See, e.g., Strunk, 338 Or at 201 (“Notably

absent is any directive that, following such application, [the

board] must apply any remaining earnings to PERS mem-

bers’ regular accounts.” (Emphasis in original.)); Hughes,

314 Or at 26 (finding that the tax exemption provision was

a term of the offer after emphasizing that the tax exemption

provision “provided that the PERS retirement benefits ‘shall

be’ exempt from all state and local taxes”).

b.  Were the pre-amendment tax offset provisions

a term of the PERS contract?

Retired nonresident petitioners contend that the

1991 and 1995 offsets are terms of the PERS contract.24 As

described above, the bills creating those provisions have a

complicated history, which is reflected in the complex statu-

tory scheme codifying those benefits.

Nevertheless, determining whether the 1995 offset

is contractual is simple. The statute itself states expressly

that it is not contractual: “No member of the system or bene-

ficiary of a member of the system shall acquire a right, con-

tractual or otherwise, to the increased benefits provided by

sections 3 to 10 of this 1995 Act. “ HB 3348, § 2(3). Thus, the

legislature clearly intended that the 1995 offset would not

be contractual.

Petitioners contend that the legislative history

establishes that the 1995 Legislative Assembly expected

that that provision, HB 3348, § 2(3), codified as ORS

238.362(3), would be repealed by a future legislature if the

parties settled their then-pending litigation over the income

24

The nonresident Moro petitioners contend only that the 1991 offset is

contractual.

206 Moro v. State of Oregon

tax exemption. And petitioners point out that the parties

entered a settlement agreement in 1997.

Even if we were to credit petitioners’ reading of the leg-

islative history, we would nevertheless interpret and enforce

the 1995 offset as it is written. Under petitioners’ interpreta-

tion, the 1995 Legislative Assembly left to future legislatures

the decision of whether to repeal HB 3348, § 2(3). Regardless

of whether the 1995 Legislative Assembly expected that a

future legislature would repeal that provision, the legislature

has not, in fact, repealed it. See Strunk, 338 Or at 178 (reject-

ing a similar interpretation of HB 3348, § 2(3)).

The 1991 offset requires a different analysis. The

1991 offset includes mandatory wording without the same

expressly noncontractual wording as the 1995 offset. See,

e.g., SB 656, § 3(6) (stating that service retirement allow-

ances “shall be increased” according to the 1991 offset).

Nevertheless, the context and legislative history of the 1991

offset establish that the 1991 offset is not part of the PERS

contract because it is not a component of the type of employ-

ment compensation benefits otherwise found in the PERS

contract.

To be sure, the 1991 offset was intended to compen-

sate PERS members for the losses that they would incur

when the state repealed the income tax exemption. See

Ragsdale, 321 Or at 224 (so stating). But the statute itself

was not an offer that members had accepted by rendering

services nor was it initially supported by an exchange of

consideration. Instead, the legislature enacted the 1991 off-

set as a type of pre-emptive damage payment to mitigate a

claim for breach of the PERS contract that no court had yet

sustained.

The legislature tied the 1991 offset to the repeal of

the tax exemption—rather than tying it to the work that

members performed—by preventing the payment of the

1991 offset in any year in which the tax exemption was

effective. SB 656, § 12(1)-(2). Further, the legislature con-

sidered the 1991 offset at the same time that it considered

repealing the tax exemption. And prior to repealing the

Cite as 357 Or 167 (2015) 207

tax exemption, legislative leaders sought advice from the

Attorney General on, among other things, whether the

state could mitigate damages arising from that breach by

enacting offsetting benefits. Letter of Advice dated May 10,

1989, to Sen Kitzhaber and Rep Katz (OP-6320); see also

Hughes, 314 Or at 19 n 22 (“Where a legislative enactment

follows the legal advice given, before the enactment, in an

opinion of the Attorney General, we have relied on such

an opinion as providing an indication of the legislature’s

purpose in enacting the measure.”). The Attorney General

advised that the state could mitigate damages “by increas-

ing PERS benefits to offset PERS members’ increased tax

liability caused by the breach.” Letter of Advice dated May

10, 1989, to Sen Kitzhaber and Rep Katz (OP-6320). During

hearings on the 1991 offset, Senate President Kitzhaber

noted that the legislature was “trying to develop a strat-

egy that offsets the impact of the tax.” Minutes of Senate

Committee on Labor, SB 656, SB 735, SB 1035, SB 1106,

SB 138, SB 1041, SB 632, May 8, 1991 (testimony of Sen

John Kitzhaber).

Thus, although the 1991 offset is calculated

according to years of service, it was intended to compen-

sate PERS members for a breach of contract and not for

their years of service. The 1991 offset was, therefore, not an

offer to PERS members inviting them to render services. It

was, instead, a noncontractual payment from participating

employers to PERS members, intended to limit the amount

of the employers’ liability if a breach of contract were later

established.

Even after this court held in Hughes that imposing

Oregon personal income tax on PERS benefits breached the

PERS contract, the participating employers were not under

a contractual obligation to pay the 1991 offset until the 1991

offset was incorporated into the 1997 settlement agreement.

Until then, the legislature remained free to change the

statute and discontinue the mitigation payments that the

employers had made previously. Ending those mitigation

payments would have increased the ultimate damage award

needed to remedy the breach, but ending those mitigation

payments would not have given rise to a separate breach of

208 Moro v. State of Oregon

contract claim. As a result, we hold that the 1991 offset is

not a term of the statutory PERS contract.25

Petitioners further argue that, if the 1991 offset

and the 1995 offset are not terms of the statutory PERS

contract, they are nevertheless terms of the 1997 settlement

agreement that resolved the Stovall/Chess class action liti-

gation. Petitioners correctly state that the settlement agree-

ment incorporates the income tax offset statutes: “Plaintiffs

agree to accept the remedies provided in SB 656 (1991), HB

3349 (1995) and HB 2034 (1997) as full and complete pay-

ment for all claims raised in these consolidated actions.”

The settlement agreement is a contract through which the

class action plaintiffs waived their claim for the damages

they incurred as a result of the tax-exemption repeal and, in

return, the participating employers promised to provide the

benefits set out in the 1991 and 1995 tax offsets.

Although the settlement agreement is a con-

tract, petitioners cannot assert that the legislature’s 2013

changes to the tax offsets impair their rights under that

contract. The settlement agreement itself contemplates

future legislative action decreasing the benefits available

under the tax offsets. According to the settlement agree-

ment, if the legislature decreased the benefits available

under the tax offsets, then the legislature could avoid dis-

turbing the parties’ rights under the settlement agreement

by enacting “an equivalent decrease in the Oregon per-

sonal income tax imposed on PERS benefits attributable

to service rendered before” the repeal of the tax exemption.

And if the legislature failed to similarly decrease Oregon

tax liabilities, then the class action plaintiffs would be

allowed to reopen the class action litigation and seek sup-

plemental relief.

25

Petitioners attempt to refute that conclusion by citing repeatedly from this

court’s opinion in Ragsdale, which considered whether the 1991 offset violated the

intergovernmental tax immunity doctrine. 321 Or at 229. In the context of con-

sidering whether the 1991 offset was a tax rebate, this court stated that, under

the 1991 offset, “every state retiree who qualifies for benefits (based on years of

service) will receive the benefits, regardless of the state retiree’s residency.” Id.

at 230. Suffice it to say that Ragsdale addressed a different legal issue. Even if

Ragsdale correctly identifies who qualified for the 1991 offset, Ragsdale sheds no

light on whether the legislature intended to create a statutory contract when it

enacted the offset provisions.

Cite as 357 Or 167 (2015) 209

Petitioners contend that SB 822’s amendments to

the tax offsets have not been balanced out by equivalent

decreases in state taxes. Even if true, that would not estab-

lish an impairment of the settlement agreement. Rather,

it would establish the contractual right to reopen the class

action litigation. We have not been asked to consider, nor do

we have jurisdiction to consider, the scope of that contrac-

tual right or its availability to nonresident class members.

Therefore, we do not resolve any potential argument that the

right to reopen the class action litigation does not extend to

nonresident petitioners because, under both state and federal

law, the Oregon personal income tax has been completely

eliminated as to nonresident PERS retirees since 1996. See 4

USC § 114(a) (preventing a state from “impos[ing] an income

tax on any retirement income of an individual who is not a

resident or domiciliary of such [s]tate”); ORS 316.127(9)(a)

(“Retirement income received by a nonresident does not con-

stitute income derived from sources within this state unless

the individual is domiciled in this state.”).26

Based on the foregoing, we hold that the 1991 and

1995 offsets are not terms of the statutory PERS contract

and, therefore, are not obligations under that contract that

could be “impaired” for purposes of applying the Contract

Clause. The 1991 and 1995 offsets, however, are terms of the

1997 class action settlement agreement. But the amendments

contained in SB 822, which reduce the benefits provided to

nonresident retirees under that settlement agreement, nei-

ther impair nor breach the terms of that agreement, because

the agreement expressly contemplates, and provides a means

for seeking relief for, such benefit reductions.

c.  Was the pre-amendment COLA provision a

term of the PERS contract?

As explained above, for Tier One and Tier Two mem-

bers, the pre-amendment COLA consisted of three relevant

26

Oregon’s personal income tax applies to the taxable income of “every full-

time nonresident that is derived from sources within this state.” ORS 316.037(3).

Both 4 USC section 114 and ORS 316.127(9) apply to retirement income received

after December 31, 1995. State Taxation of Pension Income Act of 1995, Pub. L.

No. 104–95 (HR 394), 109 Stat 979 (effective as to income derived on or after

January 1, 1996); Or Laws 1997, ch 839, § 11 (same).

210 Moro v. State of Oregon

subsections: the COLA requirement in subsection (1);

the COLA cap in subsection (2); and the COLA bank in

subsection (3). ORS 238.360 (2011). OPSRP members were

subject to substantially the same COLA provision, except that

they did not have a COLA bank available. ORS 238A.210

(2011).

Petitioners contend that this court has already

decided that the pre-amendment COLA provision is con-

tractual. In Strunk, this court considered a state Contract

Clause challenge involving the same pre-amendment COLA

provisions at issue here. 338 Or at 213. The legislative

amendment in Strunk temporarily prevented the board

from making COLA adjustments to the service retirement

allowances of certain retirees. Id. This court assessed the

merits of that challenge by first determining whether the

same pre-amendment COLA provision at issue in this case

“constituted a term of the PERS statutory contract[.]” Id. at

220. We first considered the text and context of the COLA

provision to determine whether it was a term of the PERS

contract. The text of the pre-amendment COLA statutes is

the same in this case as in Strunk, and the court in Strunk

emphasized the numerous phrases indicating that the

adjustment was mandatory:

“  ‘(1)  As soon as practicable after January 1 each

year, [the board] shall determine the percentage increase or

decrease in the cost of living for the previous calendar year,

based on the Consumer Price Index * * *. Prior to July 1

each year the allowance which the member or the member’s

beneficiary is receiving or is entitled to receive on August 1

for the month of July shall be multiplied by the percentage

figure determined, and the allowance for the next 12 months

beginning July 1 adjusted to the resultant amount.’

“ ‘(2)  Such increase or decrease shall not exceed two

percent of any monthly retirement allowance in any year

and no allowance shall be adjusted to an amount less than

the amount to which the recipient would be entitled if no

cost of living adjustment were authorized.’ ”

Id. at 220-21 (quoting ORS 238.360 (2001)) (emphases in

original; bracketed material added). This court then analo-

gized the COLA provision to the tax exemption provision in

Hughes: “Like the tax provision analyzed in Hughes, the text

Cite as 357 Or 167 (2015) 211

of ORS 238.360(1) (2001) evinces a clear legislative intent

to provide retired members with annual COLAs on their

service retirement allowances, whenever the CPI warrants

such COLAs.” Id. at 221. Based on that analysis, this court

held that “the general promise embodied in ORS 238.360(1)

(2001) was part of the statutory PERS contract[.]” Id.

Petitioners claim that Strunk establishes a precedent that

the pre-amendment COLA provision is contractual and ask

us to adhere to that precedent.

Respondents disagree. As an initial matter, respon-

dents read Strunk narrowly as holding that only the COLA

requirement in subsection (1) is a term of the contract. Based

on that premise, respondents argue that the COLA cap and

COLA bank were not addressed in Strunk and therefore this

court should consider whether they are terms of the PERS

contract without relying on Strunk.

Respondents’ narrow reading of Strunk fails,

because it does not account for the incongruity that would

result from treating the COLA requirement in subsection

(1) as contractual but treating the COLA cap and the COLA

bank as noncontractual. For example, the COLA require-

ment in subsection (1) ties the COLA to the CPI without

limitation. If the CPI went up 7%, then under subsection

(1) each retiree would receive a 7% COLA. If that limitless

COLA requirement were really the only contractual aspect

of the COLA provision, then the COLA cap would actually

breach the PERS contract by limiting the COLA. That is not

the result that respondents seek.

It is also not what the legislature intended. In the

original COLA statutes passed in 1971 and 1973, the COLA

requirement expressly referred to and incorporated the

COLA cap.27 See former Or Laws 1971, ch 738, § 11; Or Laws

27

Under former ORS 237.060 (1971), the relevant subsections were set out

in reverse order. The COLA cap was contained in subsection (1), and the COLA

requirement was in subsection (2). Former ORS 237.060(1)-(2) (1971). At that

time, the COLA requirement incorporated the COLA cap by stating, “Prior to

July 1 each year the allowance which the member is receiving or is entitled to

receive on August 1 for the month of July shall be multiplied by the percentage

figure determined, and subject to subsection (1) of this section, the member’s allow-

ance for the next 12 months beginning July 1 adjusted to the resultant amount.”

Former ORS 237.060(2) (1971) (emphasis added).

212 Moro v. State of Oregon

1973, ch 695, § 1. In 1989, through an amendment that was

not intended to impact the substance of the COLA provi-

sion, the legislature removed that cross-reference but moved

the COLA cap into another subsection. See Or Laws 1989,

ch 799, § 2 (re-organizing the COLA provision and moving

the COLA cap); see also Strunk, 338 Or at 221 (noting that

the “substance” of the COLA requirement and COLA cap

has “remained unchanged, notwithstanding other interim

amendments”). The legislature, therefore, intended that the

COLA requirement would operate together with the COLA

cap. Further, because the COLA bank merely directs the

board on how to apply the COLA cap, the COLA bank must

be interpreted consistently with the COLA cap.

Respondents nevertheless argue that, because

the COLA cap restricts the amount of COLA that employ-

ees can receive, it was intended to benefit employers and

is therefore distinct from any employee benefit that might

otherwise be created by the COLA requirement. But that

argument improperly frames the question.28 As noted, a pro-

vision is most often a term of the PERS contract if the provi-

sion determines the eligibility for, or scope of, a mandatory

PERS benefit. Regardless of whether the COLA cap benefits

employers or employees, the COLA cap clearly determines

the scope of the COLA requirement, and the COLA require-

ment was intended to benefit employees.

We conclude, therefore, that the legislature intended

the COLA requirement to be read with both the COLA cap

and the COLA bank as determining the overall value of

the COLA benefit. If the COLA requirement is contractual,

as we held in Strunk, then the COLA cap and COLA bank

are also contractual. We therefore read Strunk as providing

precedential authority for treating the COLA requirement,

the COLA cap, and the COLA bank of ORS 238.360 (2011)

as terms of the PERS offer.

28

Further, it is improper to assume that the COLA cap benefits only employ-

ers. Whether a particular COLA cap benefits employers or employees depends on

the alternatives. Employers may benefit from a COLA cap of plus or minus 2%

if the alternative is a limitless COLA. But at the time the legislature passed the

COLA cap of plus or minus 2%, the alternative was the existing COLA cap of plus

or minus 1.5%. Or Laws 1973, ch 695, § 1. The legislative history indicates that

increasing the COLA cap to plus or minus 2% was intended to benefit employees.

Cite as 357 Or 167 (2015) 213

Given that precedent, respondents ask us to dis-

avow our analysis of the COLA provision in Strunk. As

the parties seeking disavowal, respondents must “affirma-

tively persuad[e] us that we should abandon that prece-

dent.” Farmers Ins. Co. v. Mowry, 350 Or 686, 692, 261 P3d

1 (2011). Departing from precedent may be justified “when

a party affirmatively demonstrates that ‘an earlier case was

inadequately considered or wrong when it was decided.’ ” Id.

at 693. However, departing from prior precedent comes at

the cost of “predictability, fairness, and efficiency.” Id. As a

result, “[w]e will not depart from established precedent sim-

ply because the ‘personal policy preference[s]’ of the mem-

bers of the court may differ from those of our predecessors

who decided the earlier case.” Id. at 698.

Respondents contend that this court in Strunk inad-

equately considered the issue of whether the pre-amendment

COLA provision was part of the PERS contract. We disagree.

Although the analysis in Strunk is brief, it demonstrates suf-

ficient consideration of the issue. In Strunk, we largely relied

on the similarities between the pre-amendment COLA pro-

vision and the tax exemption provision at issue in Hughes.

Strunk, 338 Or at 221. Both provisions set out financial ben-

efits, and both use mandatory wording. Hughes, 314 Or at

26 (noting that the tax exemption statute stated that PERS

benefits “ ‘shall be’ ” exempt from income taxes (quoting ORS

237.201 (1989))); ORS 238.360(1) (2001) (stating that the

board “shall” calculate the COLA and that the COLA “shall

be” added to the service retirement allowance). Strunk does

not contain more analysis of that issue, but Hughes con-

tains an extensive analysis of why those factors are salient.

Hughes, 314 Or at 22-27. The court’s heavy reliance on

Hughes in Strunk does not mean that the court failed to ade-

quately consider the issue.

Respondents further argue that the legislative his-

tory of the COLA provision demonstrates that Strunk was

wrong at the time that it was decided. When the state began

offering PERS pension benefits in 1945, that offer included

no mechanism for automatically adjusting the benefits for

inflation. Or Laws 1945, ch 401. The service retirement

allowance calculated at the time of retirement was to remain

214 Moro v. State of Oregon

unchanged. Thus, as time went on, inflation diminished the

purchasing power of the service retirement allowance.

In 1963, the legislature attempted to offset those

losses by authorizing the board to distribute money to

retirees from investment returns earned in excess of the

assumed interest rate. Or Laws 1963, ch 608, § 9. The stat-

ute described that plan as a “dividend payment system.”

Id. The board was not, however, required to make any pay-

ments under that system. Instead, the board had discretion

whether to do so. Id. (“The board * * * may distribute * * * net

interest received through investment of the fund in excess of

the assumed rate of interest.” (Emphasis added.)). The sys-

tem was not only discretionary, but it was also conditioned

on the fund’s investments generating returns in excess of

the assumed earnings rate. Id. Further, any payments that

the board made under that system were one-time payments

that did not affect the retiree’s service retirement allowance

going forward. Id.

That system was in effect from 1964 to 1971. During

that time, the board authorized one payment per year to

retirees, in addition to the 12 monthly checks that retirees

received for their retirement allowance. Those additional

checks issued under the dividend repayment program were

known as “thirteenth checks.” See Special Master’s Report

at 20 (describing the history of the dividend repayment pro-

gram). In 1964, retirees received a thirteenth check equal to

one month of the retiree’s retirement allowance. Id. at 20-21.

The checks grew and, by 1971, were equal to 3.5 times the

retiree’s monthly retirement allowance. Id. at 21. Those

checks, however, did not increase a retiree’s service retire-

ment allowance and thus did not have the effect of “com-

pounding” that the later COLA provision had.

In 1971, the legislature repealed the discretion-

ary dividend payment system and enacted the COLA sys-

tem currently at issue. Or Laws 1971, ch 738, §§ 8, 11. As

noted above, the 1971 COLA provision imposed a COLA cap

of plus or minus 1.5%. Or Laws 1971, ch 738, § 11(1). The

1973 legislature increased the COLA cap to plus or minus

2%. Or Laws 1973, ch 695, § 1. Other than that increase in

Cite as 357 Or 167 (2015) 215

the COLA cap, the COLA system enacted in 1971 is sub-

stantively the same as the pre-amendment COLA provision

in effect until the 2013 amendments at issue in this case.

Despite enacting the COLA statute, the legislature still

provided discretionary ad hoc adjustments to service retire-

ment allowances from time to time, to help protect the pur-

chasing power of the retirement allowances.

Respondents contend that that legislative history

establishes that the COLA system is not a term of the PERS

contract. According to respondents, the original dividend

payment system was not a term of the contract for two rea-

sons. First, the benefits were discretionary rather than

mandatory. Second, the benefits were gratuitous, because

they were new benefits granted to individuals who were

already retired and who thus could not have accepted an

offer for new benefits by working. Respondents then argue

that the legislature intended the COLA system to be simply

a continuation of the discretionary and gratuitous dividend

payment system.

The conclusions that respondents draw from the

legislative history do not withstand scrutiny. Respondents

are correct that the original dividend system was discretion-

ary and gratuitous, but they are incorrect that the COLA

system is simply a continuation of the earlier scheme. The

COLA system is materially distinct from the dividend pay-

ment system. First, in contrast to the discretionary dividend

payment system, the COLA system is mandatory. Under the

pre-amendment COLA system, the board was required to

determine the percentage increase or decrease in the cost of

living for the previous year based on the CPI and required

to adjust service retirement allowances accordingly. ORS

238.360(1) (2011) (so stating). By enacting the COLA sys-

tem, the legislature made the board’s function ministerial

and the application of the COLA automatic.

Second, the fact that the pre-amendment COLA

system required employers to fund new benefits for some

individuals who were already retired does not mean that

the COLA benefit was not part of the employers’ offer to

current or future employees who could accept the offer by

working. Instead, it means only that the employers’ offer of

216 Moro v. State of Oregon

COLA benefits was not accepted by the individuals who had

already retired and, therefore, that those retirees did not

have a contractual right to the COLA. There is no doubt that

one of the goals of the COLA statute was to benefit then-cur-

rent retirees. But that goal is not inconsistent with the goal

of also providing greater financial benefits (and an incentive

to begin or continue employment) to individuals who had

not yet retired and who could accept a pension offer that

included COLA benefits.

Further, despite enacting the COLA system in 1971,

the legislature continued to make additional discretionary

ad hoc payments during periods of particularly high infla-

tion. As a result, employees could reasonably expect that the

COLA statute codified some minimum automatic protection

of the purchasing power of their future benefits that was

separate from any discretionary and gratuitous ad hoc ben-

efits that the legislature might otherwise provide.

Other material distinctions support our conclusion

that the COLA benefits were not merely a continuation of

the discretionary dividend payment benefits. For example,

whereas the dividend payments were supplemental pay-

ments that had no effect on how the board calculated the ser-

vice retirement allowance, the COLA is not a supplemental

payment and instead directly adjusts the service retirement

allowance itself. ORS 238.360(1) (2011) (“Prior to July 1

each year the allowance which the member or the member’s

beneficiary is receiving or is entitled to receive on August 1

for the month of July shall be multiplied by the percent-

age figure determined, and the allowance for the next 12

months beginning July adjusted to the resultant amount.”).

Therefore, the board, as directed by statute, incorporates

the COLA into the formula used for determining each retir-

ee’s service retirement allowance, and, after multiplying by

the appropriate interest rate, the “resultant amount” is the

“allowance.”

Additionally, the legislature funded the COLA

increases through current employer contributions rather

than rely on investment returns that exceed the assumed

interest rate in given year, which had been used to fund the

dividend payments. ORS 238.360(4) (2011) (COLA increases

Cite as 357 Or 167 (2015) 217

paid by employer). Those employer contributions are actu-

arially determined in an effort to prefund an employee’s

service retirement allowance before the employee retires.

See Strunk, 338 Or at 160 (stating that employer contribu-

tion rates are based in part on “the PERS actuary’s best

estimate of the amount needed to pay service retirement

allowances to current members in the future”). The COLA,

as noted above, is part of the service retirement allowance

employees will receive during their retirement. In fact, the

COLA is one of the actuarial assumptions that the board

uses to project the service retirement allowance of cur-

rent employees and determine the employer contribution

rates. See, e.g., Oregon Public Employees Retirement System

Actuarial Valuation 65 (Dec 13, 2013) (listing the statutory

“Cost-of-Living Adjustments” as an actuarial assumption);

see also id. at 21, 39 (noting that employer contributions are

based on actuarial assumptions). As a result, unlike the div-

idend payment program, employers pay for benefits under

the COLA system in exactly the same manner as the other

components of the service retirement allowance.

We therefore reject respondents’ reading of the leg-

islative history of the COLA provisions and conclude that

nothing to which we have been directed by respondents

undermines our prior conclusion in Strunk that the COLA

is a term of the PERS offer.29

Finally, respondents argue that, even if Strunk

controls and this court applies that decision here, Strunk

reaches only Tier One and Tier Two members, under ORS

238.360 (2011), and should not be extended to OPSRP mem-

bers, under ORS 238A.210 (2011). Respondents are correct

that Strunk does not address OPSRP members directly. In

arguing that OPSRP members are distinct from Tier One

and Tier Two members, respondents do not rely on differ-

ences in the COLA statutes applicable to each category of

29

That conclusion is consistent with federal law holding that a COLA is a

term of a pension contract protected under ERISA. See, e.g., Hickey v. Chicago

Truck Drivers Union, 980 F2d 465, 469 (7th Cir 1992) (“A participant’s right to

have his basic benefit adjusted for changes in the cost-of-living accrued each year

along with the right to the basic benefit. A participant’s entitlement to his or her

normal retirement benefit included, as one component, the right to have the ben-

efits adjusted pursuant to the COLA provision.”).

218 Moro v. State of Oregon

members. As noted above, the COLA statute applicable to

OPSRP members is substantially similar to the COLA stat-

ute applicable to Tier One and Tier Two members, except

that OPSRP members do not have access to the COLA bank.

Compare ORS 238.360 (2011) (providing COLA benefits to

Tier One and Tier Two members) with ORS 238A.210 (2011)

(providing COLA benefits to OPSRP members). Instead,

respondents rely on a reservation of rights provision, ORS

238A.470, that the legislature applied to OPSRP members

but not to Tier One and Tier Two members. That provision

states:

“The Legislative Assembly may change the benefits

payable to [OPSRP members] * * *, as long as the change

applies only to benefits attributable to service performed

and salary earned on or after the date the change is made.”

ORS 238A.470.

We have not had occasion to interpret ORS 238A.470.

Respondents interpret the provision as setting up a distinc-

tion between prospective and retrospective changes to ben-

efits. According to respondents, the reservation of rights

allows the legislature to make only prospective changes to

benefits that are “attributable to service performance and

salary earned,” ORS 238A.470, and therefore limits the leg-

islature’s ability to make retrospective changes to those ben-

efits. Respondents further contend that that limitation does

not apply to benefits that are not “attributable to service per-

formance and salary earned,” id., and that the legislature is

free to make any changes to such benefits, even retrospec-

tive changes. Respondents then argue that COLA benefits

for OPSRP members are attributable to the CPI and are not

attributable to service performed or salary earned. Under

that reading, the legislature reserved the right to make any

change, without limitation, to the OPSRP COLA benefit. A

consequence of that reasoning is that any promise contained

in the pre-amendment COLA provision would be illusory, and

therefore not contractual, because the legislature retained

the discretion to retrospectively eliminate the benefit.

Respondents’ argument does not fit the word-

ing of the reservation of rights provision set out in ORS

238A.470. In the context of that provision, the phrase “as

Cite as 357 Or 167 (2015) 219

long as” means “provided that,” Webster’s Third New Int’l

Dictionary 129 (unabridged ed 2002), and serves the same

function as the phrase “if and only if,” Rodney Huddleston

and Geoffrey K. Pullum, The Cambridge Grammar of the

English Language 758 (2002). As a result, the legisla-

ture reserved the right to change benefits if and only if

the change applies to benefits “attributable to service per-

formed and salary earned on or after the date the change

is made.” ORS 238A.470. If COLA benefits are not “attrib-

utable to service performed and salary earned,” as respon-

dents contend, then ORS 238A.470 would not authorize

the legislature to make any changes to the COLA benefit,

whether prospective or retrospective.

Regardless, COLA benefits are “attributable to

service performed,” and therefore, under the only plausible

reading of ORS 238A.470, they may be changed only pro-

spectively. A benefit is attributable to service performed if

the employee acquires a right to that benefit as a result of

service performed. In that sense, the benefit is payable to

the OPSRP member because of the service that the member

performed. Respondents’ position confuses the rate of the

benefit and the right to receive the benefit. The rate of the

benefit is set by the combination of the CPI and the COLA

cap, but the employee’s right to receive the benefit is a result

of the service performed.

As a result, we conclude that the pre-amendment

COLA provisions are terms of the PERS contract for each

category of PERS members, whether Tier One, Tier Two, or

OPSRP.

3.  What obligations do those terms provide?

Because the 1991 and 1995 offsets are not part

of the PERS contract or otherwise capable of legislative

impairment, we do not need to consider those provisions

further. But the pre-amendment COLA statutes are part of

the PERS contract. As a result, we turn now to identify-

ing the participating employers’ obligations under the PERS

contract. “It is those obligations that set the conditions that

the legislature may not in the future alter without conse-

quence.” Strunk, 338 Or at 201.

220 Moro v. State of Oregon

As discussed above, the state Contract Clause pro-

hibits laws impairing obligations that arise from contracts

formed before the law’s effective date. PERS members accept

their employers’ offers of PERS benefits by rendering ser-

vices to their employers. Like the employee in Thomas who

repeatedly accepted his employer’s continuing offer of salary

each day that he worked, PERS members repeatedly accept

their employers’ PERS offers by continuing to work and

thereby earn additional contractual rights to PERS bene-

fits for that additional work. For example, if an employer

offers, and continues offering, two PERS members the same

compensation package, including PERS benefits, then—

assuming all other things are equal—the employee who

works longer will have a contractual right to a larger retire-

ment benefit under PERS.

This court relied on Thomas, and applied the

same analysis, to assess the PERS tax exemption provi-

sion in Hughes. 314 Or at 29 n 33 (citing Thomas, 143 Or

41). Because all PERS offers before October 1991 included

a tax exemption benefit, employees who had rendered ser-

vices before October 1991 had accepted that offer and had

accrued a contractual right to tax-exempt PERS benefits.

Id. at 29. That acceptance, however, protected only the part

of the service retirement allowance that was earned before

the exemption was repealed in October 1991. Id. Therefore,

in Hughes, by the time that the legislature repealed the

PERS tax exemption, PERS members already had a con-

tractual right to their accrued service retirement allowance

that would not be subject to state income taxes, even though

the employees had not yet retired and did not yet know the

value of their service retirement allowance.

Similarly, in this case, by the time that the leg-

islature enacted SB 822 and SB 861, modifying the pre-

amendment COLA provisions, PERS members already had

a contractual right to their accrued retirement benefits that

would be subject to the pre-amendment COLA. Hughes,

therefore, establishes a contractual obligation applicable in

this case: Members are entitled to have the pre-amendment

COLA applied to accrued PERS benefits earned before the

COLA amendments went into effect.

Cite as 357 Or 167 (2015) 221

The remaining question is whether the participat-

ing employers’ obligations extend beyond that baseline, viz.,

whether the participating employers were prohibited from

revoking the offer of the pre-amendment COLA benefits.

If the employers are required to continue offering the pre-

amendment benefits, then members might be allowed to

accept that offer on a continuing basis by performance until

they retire and to accrue additional retirement benefits sub-

ject to the pre-amendment COLA.

Our case law has not consistently answered that

remaining question.30 As noted, Hughes allowed the employ-

ers to revoke the offer of tax-exempt PERS benefits for future

work after finding no legislative intent to make the offer

irrevocable. Hughes, 314 Or at 28 (“The statute does not,

however, refer to PERS retirement benefits that may accrue

in the future. Had it chosen to do so, the legislature could

have dealt with future benefits, but it did not.”). Although the

PERS members had accrued a right to receive, at retirement,

a tax-exempt service retirement allowance for the years that

they had worked before the tax exemption was repealed, the

right that they accrued did not require the employers to

continue offering tax-exempt service retirement allowances.

For that reason, participating employers could change, and

thus revoke, the offer of tax-exempt PERS benefits. Id. at 29

(“[T]he state promised that all PERS retirement benefits

that have accrued or are accruing for work performed so long

as former ORS 237.201 remained in effect * * * are exempt

from state and local taxation forever. * * * [But the] state has

no contractual obligation not to tax unaccrued PERS retire-

ment benefits for work performed after the effective date of

the Act[.]”). Revoking the offer of tax-exempt PERS benefits,

however, precluded only the accrual of additional tax-exempt

service retirement allowances. Employees who accepted the

PERS offer before the repeal and who additionally accepted

the PERS offer after the appeal would therefore receive a

30

Other courts similarly have struggled with this issue. See McGrath v.

Rhode Island Retirement Bd., etc., 88 F3d 12, 17 (1st Cir 1996) (collecting cases

and stating that”[t]hough the principle that a pension plan represents an implied-

in-fact unilateral contract is fairly well settled and has been applied repeatedly to

state and municipal pension plans, there is significant disagreement about when

contractually enforceable rights accrue under such plans” (internal citations and

footnote omitted)).

222 Moro v. State of Oregon

service retirement allowance that was only partially exempt

from state taxes.

We applied a similar analysis in Strunk, which

upheld PERS amendments that affected the rate at which

retirement benefits would accrue for only future work. See,

e.g., 338 Or at 193 (rejecting “claims that the redirection of

PERS members’ future contributions to the IAP, as set out

in the 2003 PERS legislation, either breaches or impairs

a contractual obligation of the PERS contract” (emphasis

added)); id. at 213 (affirming amendments to “discontinue

permitting PERS members to contribute to their variable

accounts”). The court in Strunk recognized that an offer for

a particular PERS benefit could be irrevocable only if the

irrevocability is an express term of the offer. See id. at 192

n 40 (“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 prom-

ise, i.e., a promise that extends over the life of a covered

member’s service.” (First emphasis added; second emphasis

in original.)); see also Restatement § 25 (“An option contract

is a promise which meets the requirements for the formation

of a contract and limits the promisor’s power to revoke an

offer.”); Restatement § 87(1)(a) (“An offer is binding as an

option contract if it * * * is made irrevocable by statute.”).

The court in Strunk found no such words.

This court, nevertheless, reached the opposite con-

clusion in OSPOA, 323 Or 356, which was decided after

Hughes but before Strunk. The court in OSPOA concluded

that an offer for pension benefits is irrevocable not because

the irrevocability was an express term of the offer, but

because the irrevocability was an implied term of the offer.

According to OSPOA, a right to pension benefits, includ-

ing PERS benefits, “vest[s] on acceptance of employment[,]

* * * with vesting encompassing not only work performed

but also work that has not yet begun.” Id. at 371 (emphasis

added). In reaching that conclusion, the court in OSPOA

relied extensively on Taylor, in which this court had found

an offer for pension benefits to be impliedly irrevocable as

to an employee who attempted to participate in the pen-

sion plan. See id. at 368 (“ ‘The adoption of the pension plan

was an offer for a unilateral contract. Such an offer can be

Cite as 357 Or 167 (2015) 223

accepted by the tender of part performance. * * * [P]lain-

tiff’s tender of [part performance] terminated defendants’

power to revoke the offer[.]’ ” (Quoting Taylor, 265 Or 445,

452-53.)).

Taylor, however, is distinguishable from both

OSPOA and this case. Taylor addressed the vesting of pen-

sion benefits that had already accrued. In Taylor, a correc-

tions officer was eligible to participate in her employer’s pen-

sion plan, which required employees to work for 20 years

before vesting. 265 Or at 450.31 The employee tendered her

salary contributions after her first year of eligibility, but

her employer refused to receive them and then amended the

pension ordinance to exclude corrections officers from the

plan. Id. This court recognized the potential problem when

an offer for a unilateral contract proposes an acceptance that

takes time to complete. When the performance necessary to

accept the offer takes time to complete, there is a concern

that the offering party will revoke the offer after receiving

partial performance but before receiving the complete per-

formance necessary to form the unilateral contract.32

To address that concern, this court held in Taylor that,

because of the time that it would take the employee to vest

the benefits that she should have accrued, the offer contained

an implied term that prevented the employer from revoking

the employee’s opportunity to vest those benefits. Id. at 452.

That holding is consistent with rules of general contract law

that an offer is impliedly irrevocable if the invited form of

acceptance takes time to complete and the accepting party is

attempting to complete the acceptance. See Restatement § 45

(describing the formation of an implied option contract). That

type of implied irrevocability might apply, for example, if it

takes an employee a year to satisfy the conditions necessary

for a retention bonus. See, e.g., Walker v. American Optical

31

See also Multnomah Cnty., Or, Ordinance No. 25 (July 10, 1969) (describ-

ing eligibility for pension) (provided in Respondent’s Answering Brief at 9, Taylor

v. Mult. Dep. Sher. Ret. Bd., 11 Or App 488, 502 P2d 601 (1972)).

32

See Lord, 1 Williston on Contracts § 5:13 at 987 (“As a theoretical matter,

when an offeror makes an offer to enter into a unilateral contract, he or she

should be free to withdraw the offer at any time until performance has been com-

pleted by the offeree. However, great injustice may arise if the offeror’s power of

revocation continues so long.”).

224 Moro v. State of Oregon

Corp., 265 Or 327, 330-31, 509 P2d 439 (1973) (assessing the

formation of a retention bonus contract).

None of the claims in OSPOA, however, involved

conditions that took time to complete, such as the vesting

requirement in Taylor. OSPOA, nevertheless, relied on

Taylor and treated all pension offers as irrevocable, rea-

soning that participating employers “promised a pension

benefit that plaintiffs could realize only on retirement with

sufficient years of service, that is, after rendering labor for

the state. Plaintiffs accepted that offer by working.” OSPOA,

323 Or at 374 (emphasis in original). But OSPOA’s analy-

sis establishes only that PERS is an offer for a unilat-

eral contract. As discussed above, a unilateral contract is

always formed only after the accepting party has completed

the performance sought by the offering party. 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.33 But the implied term of irrevocability

recognized in Taylor does not apply to all offers of unilat-

eral contracts; instead, it applies to only those offers that

are accepted by performance that takes time to complete.

Taylor, 265 Or at 452-53.34

Unlike the vesting requirement at issue in Taylor,

the COLA benefit at issue in this case does not impose condi-

tions on acceptance that take time to complete. As discussed

above, the COLA benefit accrues incrementally as a PERS

member renders additional service to his or her employer.

33

Other terms of the employment agreement certainly could obligate the

employee to continue working for a specified period. But no such term is required

by the PERS contract. And this case does not present facts that would allow us to

consider how the statutory irrevocability of the COLA benefits would apply to an

employment contract that sets an employee’s rate of compensation for a specified

period of time, often called a “term contract.”

34

Most employment relationships, including at-will employment relation-

ships, are governed by such unilateral contracts. See, e.g., Lord, 19 Williston on

Contracts § 54:8 at 368 (“In fact, it has been said that most employment contracts

are unilateral, and this seems clearly to be the case with an at-will employment

relationship.” (Footnote omitted.)); Pettit, 63 B U L Rev at 559-60 (“Cases aris-

ing from the employer-employee relationship now comprise the largest and most

important group of cases in which courts invoke the concept of the unilateral

contract.”).

Cite as 357 Or 167 (2015) 225

The member’s work continually and serially completes the

performance necessary to accrue the benefits attributable to

that work, thus eliminating the concern of uncompensated

work that drove this court’s analysis in Taylor.

In Strunk, this court attempted to distance itself

from OSPOA by limiting OSPOA to the specific statutes at

issue in that case. See Strunk, 338 Or at 191-92 (“[N]othing

about the court’s interpretation of the statutory provisions

at issue in OSPOA mandates a conclusion different from the

one that we have reached after analyzing the text and con-

text of ORS 238.300 (2001).”). But the decision in OSPOA

did not rely on the wording of the specific statutes at issue

in that case. Instead, OSPOA prohibited prospective amend-

ments based on a particular view of pension plans that is

not supported by Taylor and is inconsistent with our earlier

decision in Hughes, with our later decision in Strunk, and

with the analysis set out above. As a result, we go a step

further than we did in Strunk and disavow the reasoning

that we applied in OSPOA.35

Even under the reasoning of Hughes and Strunk,

participating employers may nevertheless be required to

continue to offer the pre-amendment COLA benefit if the

irrevocability is an express term of the contractual rights

that the employees accrued before the effective dates of SB

822 and SB 861. Petitioners contend that the employers are

obligated to continue offering the pre-amendment COLA

benefits to all employees who began to work when those ben-

efits were in effect. In support of that position, they point

to numerous places where the pre-amendment COLA provi-

sions use mandatory language, such as “shall.” See, e.g., ORS

238.360(1) (2011) (directing that the member’s retirement

service allowance “shall be multiplied by the percentage fig-

ure determined, and the allowance for the next 12 months

beginning July 1 adjusted to the resultant amount”).

The legislature’s use of “shall,” without more, is

plainly insufficient to establish the irrevocability of an offer.

Although this court has considered the use of “shall” as a

35

Our holding disavows only the reasoning applied by this court in OSPOA.

Our holding does not reach, and we have not been asked to consider, the prec-

edential value of OSPOA as it relates to the specific benefits at issue in that case.

226 Moro v. State of Oregon

factor that can weigh in favor of finding a statutory contract

offer, see, e.g., Hughes, 314 Or at 23 (applying statute pro-

viding that PERS benefits “shall be exempt” from Oregon

income tax (quoting former ORS 237.201 (1989)), the use of

“shall,” without more, has not been used to establish irrevo-

cability, see, e.g., id. at 29 (allowing participating employers

to prospectively revoke their offer of tax-free PERS benefits).

Consider, for instance, an employer’s promise that it “shall”

pay a potential employee $3,000 per month. That promise

does not expressly provide that the employer will not change

the employee’s compensation in the future, nor can we imply

from the word “shall” a promise to maintain that salary

without change.

The insufficiency of that argument is reinforced by

the concerns that we set out at the beginning of our Contract

Clause analysis—namely, that legislatures generally do not

intend to bind future legislatures. An irrevocable statu-

tory offer—particularly one that could involve potentially

decades of new and significant financial liabilities—would

deviate widely from that general presumption.

We therefore reject petitioners’ claim that the

COLA is an irrevocable term of the PERS offer that cannot

be changed prospectively. We agree with respondents that

the COLA provisions do not include a promise to apply any

specific COLA to increase retirement benefits for work that

is yet to be performed.

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

As we have just discussed, participating employers

are contractually obligated to provide members with the

pre-amendment COLA benefits for benefits earned before

the amendments became effective. Although the participat-

ing employers can change the COLA offer as to benefits that

might accrue in the future, they cannot change the COLA

contract as to benefits that have already accrued.

SB 822 reduced the COLA cap from plus or minus

2% to plus or minus 1.5% for 2013, and, beginning in 2014,

SB 861 eliminated the COLA cap and bank and imposed

a fixed rate of 1.25% on benefits received by retired mem-

bers up to $60,000 and a fixed rate of 0.15% on retirement

Cite as 357 Or 167 (2015) 227

income in excess of $60,000. SB 822 and SB 861 apply those

new COLA rates to all PERS benefits, without regard to

whether the benefits were earned before the effective dates

of those provisions. Because SB 822 and SB 861 would apply

to benefits earned before their effective dates, petitioners

contend that SB 822 and SB 861 retrospectively modify and

reduce the participating employers’ contractual obligations

with respect to COLA benefits and therefore impair obliga-

tions of their PERS contracts. See Strunk, 338 Or at 170 (“As

to the determination whether newer legislation amounts to

an impairment of a preexisting statutory contractual obli-

gation, the court focused on whether the legislation would

change or eliminate the state’s obligation under that con-

tract.” (citing Eckles, 360 Or at 399-400.)).

Respondents dispute the assertion that the COLA

amendments necessarily will reduce the benefits to PERS

members (and the obligations of the participating employ-

ers) and argue that SB 822 and SB 861 might, in fact,

benefit some PERS members. The pre-amendment COLA

depends on the Portland CPI and is variable, although it

cannot go below the service retirement allowance or the

OPSRP pension calculated at the time of a member’s retire-

ment. The amended COLA provision in SB 861 is a fixed

COLA at 1.25% and does not depend on the Portland CPI.

Respondents assert that it is possible that, under certain

economic conditions where the cost of living decreases or

increases a small amount only, some petitioners might be

better off under the amended COLA.

We reject respondents’ argument, because the record

in this case does not support it. In the evidentiary hearing

before the special master, the parties largely agreed on the

appropriate economic assumptions to use when projecting

the effect of SB 822 and SB 861 and the present value of the

changes. Although the parties reached different conclusions

as to the extent of the adverse financial effect on the benefits

PERS members will receive, they agreed that the effect will

be adverse. The contrary theoretical possibilities asserted

by respondents are insufficient to overcome the evidence

in the record. As a result, we agree with petitioners that

SB 822 and SB 861 impair the participating employers’

contractual obligations to apply the pre-amendment COLA

228 Moro v. State of Oregon

provisions to PERS benefits earned before the effective dates

of those amendments.

Respondents further invite this court to incorporate

a substantiality requirement into our standard for deter-

mining whether an asserted “impairment” is constitution-

ally cognizable. The impairment identified in this case—the

application of the COLA amendments to benefits earned

before the amendments—is, according to respondents, an

insubstantial impairment and therefore should not be pro-

tected by the state Contract Clause.

In Strunk, the court stated expressly that whether

the state Contract Clause protects parties from only “sub-

stantial” impairments remained an open question. Strunk,

338 Or at 206. The court did not reach the legal question of

whether to impose a substantiality requirement, because

the court found that, even if there were a substantial-

ity requirement, it would be satisfied in that case. Id. at

206-07.

We encounter the same circumstance here. The

record does not establish exactly how much money PERS

members would lose if the COLA amendments were allowed

to apply retrospectively. However, the record establishes that

the combined effect of COLA amendments in SB 822 and

SB 861 likely would be substantial. The pre-amendment

COLA provision generally would add 2% per year to the

value of a member’s retirement benefit. With annual com-

pounding, by the tenth year of retirement, the COLA can

make up about 20% of the retirement benefit (setting aside

any tax offset payments). And by the fourteenth year of

retirement, under the same conditions, the COLA can make

up about 30% of the retirement benefit. The record estab-

lishes that the COLA amendments would reduce petitioners’

cumulative retirement benefits by about 8 to 10%. The

record is therefore sufficient to establish that the impair-

ment in this case is substantial.

Finally, respondents contend that, in this case,

impairment is justified as reasonable and necessary for an

important public purpose. Respondents ask us to incorpo-

rate the federal public purpose defense into the application

Cite as 357 Or 167 (2015) 229

of the state Contract Clause. Under federal law, the pub-

lic purpose defense is an extension of the reserved powers

doctrine that we described earlier. See 357 Or at 195 n 16.

Under that standard, a sufficient public purpose may justify

the impairment of a state contract in two circumstances.

First, the state can impair a contract if adhering to it would

require the state to “surrender[ ] an essential attribute

of its sovereignty.” United States Trust Co., 431 US at 23.

Although it is not clear exactly what those attributes are, it

is clear that they do not include that state’s power to “bind

itself in the future exercise of the taxing and spending pow-

ers.” Id. at 24.

“Whatever the propriety of a State’s binding itself to a

future course of conduct in other contexts, the power to

enter into effective financial contracts cannot be ques-

tioned. Any financial obligation could be regarded in theory

as a relinquishment of the State’s spending power, since

money spent to repay debts is not available for other pur-

poses. Similarly, the taxing power may have to be exercised

if debts are to be repaid. Notwithstanding these effects, the

Court has regularly held that the States are bound by their

debt contracts.”

Id. Because the case before us involves the financial obliga-

tions of public employers, this case “as a threshold matter

may not be said automatically to fall within the reserved

powers that cannot be contracted away.” Id. at 24-25.

Second, laws that substantially impair contracts

may nevertheless be valid if the impairment is “reasonable

and necessary to serve an important public purpose.” Id. at

25. That requires, to some extent, balancing various policy

considerations, but it is a balancing with the scales weighed

against allowing the state to impair its own contractual

obligations. “[I]n reviewing economic and social regulation,

* * * courts properly defer to legislative judgment as to the

necessity and reasonableness of a particular measure.” Id.

at 22-23. Nevertheless,

“complete deference to a legislative assessment of rea-

sonableness and necessity is not appropriate because the

State’s self-interest is at stake. A governmental entity can

always find a use for extra money, especially when taxes do

not have to be raised. If a State could reduce its financial

230 Moro v. State of Oregon

obligations whenever it wanted to spend the money for what

it regarded as an important public purpose, the Contract

Clause would provide no protection at all.”

Id. at 26. In United States Trust Co., the United States

Supreme Court considered whether a more targeted mod-

ification to the contract would suffice and whether the

states could have achieved the same policy goals through

alternative means that avoided modifying the contracts

completely. Id. at 30. According to the Court, “a State is not

completely free to consider impairing the obligations of its

own contracts on a par with other policy alternatives.” Id.

at 30-31.

In this case, if we were to adopt that public pur-

pose defense, it would fail because respondents cannot elim-

inate, and largely do not consider, any alternative means for

achieving the very loosely defined policy goals put forward.

Those goals broadly relate to providing public agencies with

more money to provide better public services. The briefing

focuses on public safety and education.

Respondents’ desire for additional funding for those

services is not tied to any specifically identifiable deficien-

cies resulting from the current funding levels. Increasing

the quality of public safety and education services is always

desirable. Those are certainly appropriate targets of public

concern and legislative action. Respondents point out that

the COLA amendments will allow public employers to hire

more teachers, police officers, and others needed to carry out

those important functions. But the inquiry under the pro-

posed public purpose defense is not what the agencies can

do with additional funding; instead, the inquiry under the

proposed public purpose defense is whether the current level

of funding is so inadequate as to justify allowing the state to

avoid its own financial obligations. The record that respon-

dents have presented fails to establish that inadequacy.

Moreover, even if respondents had identified specific

public service deficiencies resulting from the current level of

funding, they have not demonstrated that those deficiencies

could not be remedied through funding from other sources.

Respondents assert that the state’s ability to generate tax

revenue is limited because it must keep taxes sufficiently

Cite as 357 Or 167 (2015) 231

low and services sufficiently high to avoid discouraging peo-

ple and businesses from moving to other states—those peo-

ple and businesses are the base that the state draws taxes

from. But respondents never compare Oregon’s tax burden

to other states. The record establishes that, in Oregon, state

taxes per capita are 11.8% below the national average. And

as a percent of gross state product, Oregon’s taxes per capita

are 14.8% below the national average. See Strunk, 338 Or at

207 (rejecting a similar public purpose argument because,

among other reasons, “ ‘Oregon’s state tax burden currently

is approximately .7 percent less than the national average’ ”

(citation omitted)). Assuming, without deciding, that we

could recognize a public purpose defense in appropriate cir-

cumstances, respondents have failed to demonstrate those

circumstances here. We therefore need not adopt respon-

dents’ public purpose defense.

5.  Disposition of COLA amendments

Although we conclude that the legislature cannot

change the COLA retrospectively, for PERS benefits already

earned, it can change the COLA prospectively, for benefits

earned by PERS members on or after the effective date of

the amendments. The 2013 PERS amendments do not dis-

tinguish between those prospective and retrospective appli-

cations. That raises the issue of whether this court must

hold the amendments void in whole or only to the extent that

they apply retrospectively to benefits already earned.

In previous cases involving state Contract Clause

challenges, we have applied the prospective/retrospective

distinction, and, although concluding that retrospective

application was unconstitutional, we have nevertheless

upheld the statutes at issue for purposes of prospective

application, even when the statutes themselves failed to dis-

tinguish between prospective and retrospective applications.

See, e.g., Hughes, 314 Or at 31 (concluding that the elim-

ination of an obligation not to tax PERS benefits violated

the Contract Clause only “as it relates to PERS retirement

benefits accrued or accruing for work performed before the

effective date of that [law]”); Eckles, 306 Or at 399 (allowing

otherwise violative statute to be applied “[a]s to subsequent

contracts, including renewals of [existing] contracts”).

232 Moro v. State of Oregon

We reach the same result in this case. The prospec-

tive application of the 2013 amendments is still consistent

with the legislative intent behind the amendments, because

it provides employers with long-term savings, although less

savings than an application that would also apply retrospec-

tively. Therefore, PERS members who have earned a con-

tractual right to PERS benefits by working for participating

employers both before and after the relevant effective dates

will be entitled to receive during retirement a blended COLA

rate that reflects the different COLA provisions applicable

to benefits earned at different times.36

Additionally, we hold that the supplemental pay-

ments provided for in SB 861 cannot be severed from the

unconstitutional application of SB 861 and are, therefore,

void in whole, even though the supplemental payment provi-

sion itself is not unconstitutional. Through ORS 174.040, the

legislature expressed its intent that, if a statute is partially

unconstitutional, then the remaining constitutional parts of

the statute will “remain in force unless * * * [t]he remaining

parts are so essentially and inseparably connected with and

dependent upon the unconstitutional part that it is appar-

ent that the remaining parts would not have been enacted

without the unconstitutional part.” ORS 174.040(2); see also

Outdoor Media Dimensions v. Dept. of Transportation, 340

Or 275, 300-01, 132 P3d 5 (2006) (illustrating principle);

Skinner v. Davis, 156 Or 174, 189-90, 67 P2d 176 (1937) (stat-

ing that it is “obvious” that the legislature did not intend for

those remaining parts with “no application or meaning” to

continue in full force and effect).

As described above, SB 861 provides retired mem-

bers with up to $200 annually in supplemental payments to

mitigate the impact of the reductions to the COLA benefit

resulting from the amendments in SB 861. SB 861, § 8. The

legislature intended the supplemental payments, which were

to be paid through 2019, to lessen the short-term impact

36

We do not decide, nor have we been asked to decide, the proper manner for

calculating an appropriate blended rate. See, e.g., ORS 238.364(5) (calculating

the blended rate resulting from the tax exemption repeal by “divid[ing] the num-

ber of years of creditable service performed before [the repeal of the tax exemp-

tion], by the total number of years of creditable service during which the pension

income was earned”).

Cite as 357 Or 167 (2015) 233

that the COLA amendments would have had on currently

retired members or on members who will retire before 2019.

Our holding in this case, which allows only the prospec-

tive application of the COLA amendments, already serves

that function: the COLA rates applied to retired members

will not be affected at all by the 2013 COLA amendments,

and the COLA rates applied to active members who retire

before 2019 will be affected only very minimally. If the sup-

plemental payments were to continue, then the members

just identified would effectively receive an increase in total

benefits that the legislature did not intend; by contrast, the

legislature’s intent in enacting SB 861 was to reduce—not

to increase—the retirement benefits being paid to those

members. We therefore hold that the supplemental payment

provision, SB 861, § 8, cannot be severed from the unconsti-

tutional application of the COLA reductions in SB 861.

B.  Other Claims

Nonresident petitioners assert other constitutional

and statutory arguments challenging the elimination of the

tax offsets. Most of petitioners’ remaining constitutional

arguments—under the federal Contract Clause, Article I,

section 10, clause 1, of the United States Constitution; and

the state and federal Takings Clause, Article I, section 18,

of the Oregon Constitution, and the Fifth Amendment to the

United States Constitution—are disposed of based on our

holding above that the tax offsets are not terms of the stat-

utory PERS contract and that the Stovall/Chess settlement

agreement has not been breached or impaired. See Strunk,

338 Or at 237-38 (disposing of similar arguments on similar

grounds).

Petitioners also argue that repealing the tax off-

set payments based on state of residence violates the fed-

eral Privileges and Immunities Clause and federal Equal

Protection Clause. The Privileges and Immunities Clause

requires “substantial equality of treatment” for both resi-

dents and nonresidents of the taxing state. Austin v. New

Hampshire, 420 US 656, 665, 95 S Ct 1191, 43 L Ed 2d 530

(1975). In this case, nonresidents are not subjected to the tax

that the tax offsets are intended to offset. As a result, pro-

hibiting payment of the tax offsets to nonresidents does not

234 Moro v. State of Oregon

upset the substantial equality between residents and non-

residents. For similar reasons, providing the tax offsets to

only those who must pay the tax does not violate the Equal

Protection Clause. Residency classifications do not trig-

ger strict scrutiny and are assessed under a rational basis

review. “The Constitution does not * * * presume distinctions

between residents and nonresidents of a local neighborhood

to be invidious. The Equal Protection Clause requires only

that the distinction drawn * * * rationally promote the regu-

lation’s objectives.” Arlington County Board v. Richards, 434

US 5, 7, 98 S Ct 24, 54 L Ed 2d 4 (1977). Where the objec-

tive is to remedy damages resulting from the imposition of

Oregon income tax, it is rational to provide that remedy to

only those who suffer the damages by paying Oregon income

tax.

Finally, petitioner Reynolds argues that eliminating

the tax offsets for nonresidents violates 4 USC section 114(a),

which provides, “No State may impose a

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