# Strunk v. Public Employees Retirement Board

> Oregon Supreme Court · March 8, 2005 · 338 Or. 145

URL: https://www.frixlaw.com/law-library/cases/835784

## Case

- **Full name:** Richard STRUNK, Donald Reed, Carol Booker, Larry Blumenstein, Alan Lively, Merlene Martin, William Smee, Denise Jacobsen, and Susanna Rhodes, Petitioners, v. PUBLIC EMPLOYEES RETIREMENT BOARD, State of Oregon, State of Oregon by and Through the State Board of Higher Education, North Douglas School District, Deschutes County, Portland School District, City of Salem, South Lane School District, and Oregon Health Sciences University, Respondents; Pamela BURT, Nori J. McCann-Cross, Gerald Frost, Nancy B. Miller, Bradd a Swank, Linda Zuckerman, Vicky J. Johnson, Stephen D. Krohn, and Claudia L. Howells, Petitioners, v. PUBLIC EMPLOYEES RETIREMENT BOARD, Marion County, Oregon Department of Justice, Oregon Department of Transportation, Oregon Judicial Department, and State of Oregon, Respondents; Dave DAHLIN, Petitioner, v. PUBLIC EMPLOYEES RETIREMENT BOARD (Dawn Morgan, Janice Deringer, Mark Gardiner, Jeanne Garst, Glenn Harrison, Todd Schwartz, George Russell, Steven Bjerke), Theodore Kulongoski, Governor, State of Oregon, Respondents, and LEAGUE OF OREGON CITIES and Oregon School Boards Association, Intervenors; Daniel EVANS, Wayne Dykes, Charles French, Jim Botwinis, Gary Harkins, and James Michaud, Petitioners, v. CITY OF GRANTS PASS, Josephine County, Multnomah County, the City of Eugene, and the State of Oregon, Respondents; Martha SARTAIN, Petitioner, v. PUBLIC EMPLOYEES RETIREMENT BOARD, State of Oregon, and State of Oregon, by and Through the Oregon Department of Transportation, Respondents, and LEAGUE OF OREGON CITIES and Oregon School Boards Association, Intervenors; Michael O. WHITTY, Dennis Ulsted, and H. Thomas Andersen, Petitioners, v. PUBLIC EMPLOYEES RETIREMENT BOARD and SAIF Corporation, Respondents, and LEAGUE OF OREGON CITIES and Oregon School Boards Association, Intervenors
- **Court:** Oregon Supreme Court
- **Decided:** March 8, 2005
- **Citations:** 338 Or. 145; 108 P.3d 1058; 2005 Ore. LEXIS 104
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Muniz, De Muniz, Balmer, Durham, Riggs, Kistler
- **Cited by:** 54 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/835784

## How later opinions describe it (automated extraction)

- concluding a statute was not a part of the statutory PERS contract where the text and “stat- utory context do not establish clearly and unambiguously that the legislature intended” the statute to be a promise to PERS members
- 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”
- stating that employer contribution 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”
- 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
- 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)

## Opinion text

108 P.3d 1058 (2005)
338 Or. 145
Richard STRUNK, Donald Reed, Carol Booker, Larry Blumenstein, Alan Lively, Merlene Martin, William Smee, Denise Jacobsen, and Susanna Rhodes, Petitioners,
v.
PUBLIC EMPLOYEES RETIREMENT BOARD, State of Oregon, State of Oregon by and through the State Board of Higher Education, North Douglas School District, Deschutes County, Portland School District, City of Salem, South Lane School District, and Oregon Health Sciences University, Respondents.
Pamela Burt, Nori J. McCann-Cross, Gerald Frost, Nancy B. Miller, Bradd A Swank, Linda Zuckerman, Vicky J. Johnson, Stephen D. Krohn, and Claudia L. Howells, Petitioners,
v.
Public Employees Retirement Board, Marion County, Oregon Department of Justice, Oregon Department of Transportation, Oregon Judicial Department, and State of Oregon, Respondents.
Dave Dahlin, Petitioner,
v.
Public Employees Retirement Board (Dawn Morgan, Janice Deringer, Mark Gardiner, Jeanne Garst, Glenn Harrison, Todd Schwartz, George Russell, Steven Bjerke), Theodore Kulongoski, Governor, State of Oregon, Respondents, and
League of Oregon Cities and Oregon School Boards Association, Intervenors.
Daniel Evans, Wayne Dykes, Charles French, Jim Botwinis, Gary Harkins, and James Michaud, Petitioners,
v.
City of Grants Pass, Josephine County, Multnomah County, The City of Eugene, and The State of Oregon, Respondents.
Martha Sartain,
v.
Public Employees Retirement Board, State of Oregon, and State of Oregon, by and through the Oregon Department of Transportation, Respondents, and
League of Oregon Cities and Oregon School Boards Association, Intervenors.
Michael O. Whitty, Dennis Ulsted, and H. Thomas Andersen, Petitioners,
v.
Public Employees Retirement Board and Saif Corporation, Respondents, and
League of Oregon Cities and Oregon School Boards Association, Intervenors.
(SC S50593 (Control); S50647; S50645; S50532; S50686; S50685).
Supreme Court of Oregon, En Banc.
Argued and Submitted July 30, 2004.
Decided March 8, 2005.
*1063 Gregory A. Hartman, Bennett, Hartman, Morris & Kaplan, LLP, Portland, argued the cause for petitioners Richard Strunk, Donald Reed, Carol Booker, Larry Blumenstein, Alan Lively, Merlene Martin, William Smee, Denise Jacobsen, and Susanna Rhodes. With him on the briefs were Michael J. Morris and Aruna A. Masih, Bennett, Hartman, Morris & Kaplan, LLP, Portland.
J. Michael Alexander, Swanson, Lathen, Alexander & McCann, PC, Salem, argued the cause and filed the briefs for petitioners Pamela Burt, Nori J. McCann-Cross, Gerald Frost, Nancy B. Miller, Bradd A Swank, Linda Zuckerman, Vicky J. Johnson, Stephen D. Krohn, and Claudia L. Howells.
Richard J. Birmingham, Birmingham, Thorson & Barnett, PC, Seattle, Washington, argued the cause and filed the briefs for petitioner Dave Dahlin.
John E. Hoag, Eugene, argued the cause for petitioners Daniel Evans, Wayne Dykes, Charles French, Jim Botwinis, Gary Harkins, and James Michaud. With him on the briefs was Daryl Garrettson, McMinnville.
Brian R. Talcott, Dunn, Carney, Allen, Higgins & Tongue, LLP, Portland, argued the cause for petitioner Martha Sartain. With him on the briefs were Scott A. Jonsson and James M. Hillas, Dunn Carney, Allen, Higgins & Tongue, LLP, Portland.
Michael O. Whitty, Eugene, argued the cause and filed the briefs for himself and for petitioners Dennis Ulsted and H. Thomas Andersen.
James P. Baker, Orrick, Herrington & Sutcliffe, LLP, San Francisco, California, argued the cause and filed the briefs for respondent Public Employees Retirement Board.
Stephen S. Walters, Stoel Rives, LLP, Portland, argued the cause and filed the briefs for respondents State of Oregon, State Board of Higher Education, Marion County, Oregon Department of Justice, Oregon Department of Transportation, Oregon Judicial Department, Theodore Kulongoski, Public Utilities Commission Office, and SAIF Corporation. With him on the briefs were Charles F. Hinkle, Jeremy D. Sacks, Andrew M. Altschul, and Amy Edwards, Stoel Rives, LLP, Portland.
William F. Gary, Harrang Long Gary Rudnick, PC, Eugene, argued the cause and filed the briefs for respondents North Douglas School District, Deschutes County, Portland School District, City of Salem, South Lane School District, Oregon Health Sciences University, League of Oregon Cities, Oregon *1064 School Boards Association, City of Grants Pass, Josephine County, Multnomah County, City of Eugene, and Salem-Keizer School District. With him on the briefs were Sharon A. Rudnick, Jerome Lidz, and Karla Alderman, Harrang Long Gary Rudnick, PC, Eugene.
Edward J. Brunet, Portland, filed the brief for amici curiae Associated Oregon Industries, Oregon Business Association, Oregon Business Council, and Portland Business Alliance.
Ron Ledbury, Portland, filed the brief for himself amicus curiae.
De MUNIZ, J.
These six original jurisdiction petitions, which we have consolidated for review, raise contractual and constitutional challenges to certain amendments that the 2003 Legislative Assembly made to the Public Employees Retirement System (PERS). The amendments at issue derive primarily from two separate, but related, enactments. The first, House Bill (HB) 2003 (2003), Oregon Laws 2003, chapter 67, is known as the PERS Reform and Stabilization Act of 2003 and alters PERS in a variety of respects. The second, HB 2004 (2003), Oregon Laws 2003, chapter 68, affects the actuarial equivalency factors used to compute retired PERS members' service retirement allowances. [1]
We have considered both the factual and legal aspects of the challenges that the petitions present. Having done so, and for the reasons set out below, we conclude that the provisions of Oregon Laws 2003, chapter 67, as amended by Oregon Laws 2003, chapter 625, that eliminate the annual assumed earnings rate credit [2] to PERS Tier One members' [3] regular accounts impair a contractual obligation of the PERS contract in violation of Article I, section 21, of the Oregon Constitution. [4] We further conclude that the provision of Oregon Laws 2003, chapter 67, section 10(3), that, in effect, temporarily suspends annual cost-of-living adjustments to the service retirement allowances of certain retired Tier One members breaches an obligation of the PERS contract. In all other respects, we conclude that petitioners' challenges to the 2003 PERS legislation are not well taken.
I. PRELIMINARY CONSIDERATIONS
A. Jurisdiction
Oregon Laws 2003, chapter 625, section 17(1), provides:
"Jurisdiction is conferred on the Supreme Court to determine in the manner provided by this section whether the implementation of actuarial equivalency factor tables under section 2 or 4, chapter 68, Oregon Laws 2003 (Enrolled House Bill 2004), breaches any contract between members of the Public Employees Retirement System and their employers, or violates any constitutional provision, including but not limited to impairment of contract rights of members of the Public Employees Retirement System under section 21, Article I, of the *1065 Oregon Constitution, or clause 1, section 10, Article I, of the United States Constitution." [5]
Oregon Laws 2003, chapter 625, section 17a, contains essentially identical operative wording, except that the grant of jurisdiction pertains to determinations "whether the provisions of chapter 67, Oregon Laws 2003 (Enrolled House Bill 2003)" breach any PERS contract or violate any constitutional provision.
The 2003 PERS legislation contains other jurisdictional and quasi-jurisdictional provisions as well. We have considered every statutory jurisdictional prerequisite and, with the three exceptions explained below, have determined that each of the petitioners in each of these consolidated cases is properly before this court and that each petition presents a justiciable controversy. [6]
The first of the three claims that fall short of the jurisdictional or justiciability requirements is petitioner Dahlin's claim for relief under 42 USC section 1983 . [7] With respect to that claim for relief, petitioner Dahlin states that he "is advancing no new impairment arguments under Section 1983, but rather, [is] utilizing that section as a procedural vehicle to raise his United States Constitutional claims * * * [and] as one method by which he may recover his costs and attorney fees in this action." Respondents assert, correctly we conclude, that petitioner Dahlin's section 1983 claim falls outside the legislature's limited grant of original jurisdiction to this court, quoted above. Contrary to petitioner Dahlin's implicit assertion that the legislation allows multiple avenues for presenting challenges, the only "procedural vehicle[s]" that the legislature has authorized for review of the 2003 PERS legislation in this court as original matters are the petitions to which that legislation refers. Those petitions do not include the federal statutory claim that section 1983 provides. We therefore dismiss petitioner Dahlin's section 1983 claim.
The second problematic claim is petitioner Dahlin's challenge to an aspect of the 2003 PERS legislation that, effectively, temporarily suspends annual cost-of-living adjustments (COLAs) as to certain retired Tier One members. See Or. Laws 2003, ch. 67, § 10(3), as amended by Or. Laws 2003, ch. 625, § 13 (so providing). Section 10 applies to only members who:
"(a) Established membership in [PERS] before January 1, 1996, * * *;
"(b) Receive a service retirement allowance calculated under ORS 238.300(2)(b)(A); and
"(c) Have an effective date of retirement that is on or after April 1, 2000, and before April 1, 2004."
Or. Laws 2003, ch. 67, § 10(5). [8] Petitioner Dahlin, however, is not a retired PERS member, and, as an active Tier One member, the provisions that he seeks to challenge respecting *1066 the COLA suspension do not apply to him. On that basis, respondents jointly assert that he lacks standing to pursue that particular challenge. We agree. See, e.g., Brumnett v. PSRB, 315 Or. 402, 405 , 848 P.2d 1194 (1993) (for party to have standing, court's decision must have some practical effect on party's rights).
Petitioner Dahlin's attempts to avoid the foregoing conclusion are not well taken. First, he argues that he has brought his claims as a class action and that "members of the class have standing to raise this claim." Regardless of the legal validity of that assertion, nothing in the pleadings or the record supports the proposition that petitioner Dahlin sought to maintain a class action. Second, petitioner Dahlin argues that respondents have waived any objection to his standing. Standing, however, is an aspect of justiciability, McIntire v. Forbes, 322 Or. 426, 433 , 909 P.2d 846 (1996), and justiciability is not waivable, Barcik v. Kubiaczyk, 321 Or. 174, 186-87 , 895 P.2d 765 (1995). Accordingly, we dismiss petitioner Dahlin's petition to the extent that it seeks to challenge the temporary COLA suspension.
The third problematic matter concerns claims that Strunk petitioners have advanced — and in which Burt, Dahlin, and Evans petitioners have joined — challenging Oregon Laws 2003, chapter 67, sections 14b(1)(b) and (2), as amended by Oregon Laws 2004, chapter 625, section 31, which provide as follows:
"(1) If the Public Employees Retirement Board [(PERB)] is required to correct one or more of the erroneous benefit calculation methods identified in City of Eugene et al. v. State of Oregon, Case Nos. 99C-12794, 00C-16173, 99C-12838 and 99C-20235, [PERB] shall recover the cost of benefits erroneously paid to retired members as a result of those erroneous benefit calculations by one or both of the following methods:
"* * * * *
"(b) [PERB] may treat all or part of the present value of the benefits erroneously paid and payable to retired members as a result of the erroneous benefit calculations as an administrative expense of the Public Employees Retirement System, to be paid exclusively from future income of the Public Employees Retirement Fund, and to be amortized over an actuarially reasonable period not to exceed 15 years.
"(2) In no event may the cost of erroneous benefit calculation methods identified in City of Eugene et al. v. State of Oregon be considered an employer liability or charged to employers through employer contributions."
As one of their arguments in response to petitioners' challenges to sections 14b(1)(b) and (2), respondents argue that those challenges "are either moot or not yet ripe for adjudication." We agree with the latter contention.
This court long has held that, for a claim to be justiciable, "[t]he controversy must involve present facts as opposed to a dispute which is based on future events of a hypothetical issue." Brown v. Oregon State Bar, 293 Or. 446, 449 , 648 P.2d 1289 (1982); see also State ex rel v. Funk, 105 Or. 134, 155 , 199 P. 592 , overruled on demurrer, 105 Or. 134 , 209 P. 113 (1922) ("courts pass upon concrete cases and not abstract propositions of law"). As the City of Eugene litigation presently stands — and it is that litigation upon which sections 14b(1)(b) and (2) are predicated — PERB has agreed not to act under those sections. Whether the status quo will change remains to be seen. [9] What is certain is that, at this time, petitioners' challenge to those sections is premature. Accordingly, we dismiss the claim as not ripe for adjudication.
B. De Novo and Plenary Review
This court best fulfills its obligation to interpret the laws of this state after a trial court and the Court of Appeals have had an *1067 opportunity to consider and refine the factual and legal issues. See, e.g., Western Helicopter Services v. Rogerson Aircraft, 311 Or. 361, 370 , 811 P.2d 627 (1991) ("Our experience with cases on direct appeal or in which we are exercising our original jurisdiction has taught us that the issues and arguments in both kinds of cases often are not as well defined or as focused as are the issues and arguments in cases in which discretionary review is sought after the case has filtered through the lens of a Court of Appeals decision."). Those considerations notwithstanding, for these proceedings, the legislature has directed this court to determine all issues as original matters in this court. To comply with that directive, this court appointed a special master to conduct the trial of all factual issues and to assemble the record. We now conduct a de novo review of the evidentiary record and a plenary review of the legal issues presented.
C. The Evidentiary Record
The court appointed now-Chief Judge David Brewer of the Oregon Court of Appeals to act as Special Master on the court's behalf in these proceedings and to hold an evidentiary hearing, rule on prehearing matters, and make recommended findings of fact. The Special Master completed that assignment in commendable fashion, and his efforts warrant this court's grateful acknowledgment. He guided these cases through a two-week evidentiary hearing, oversaw the creation of a voluminous record, and prepared a comprehensive written report, including extensive recommended findings of fact. That report has gone virtually unchallenged before this court, and, unless specifically noted, we have adopted those recommended findings of fact.
Although the parties challenge only a few of the Special Master's specific recommended findings of fact, they have drawn freely from the evidentiary record to advance factual assertions that were not contained in the Special Master's report. As appropriate — that is, when relevant and proved by a preponderance of the evidence — this court has made independent findings in response to those factual assertions.
D. Motions to Compel Production
We address a final preliminary consideration. Petitioners in two of the proceedings, Strunk and Dahlin, twice moved the Special Master to compel the production of documents that they unsuccessfully had sought to obtain in discovery from respondent Public Employees Retirement Board (PERB). PERB had withheld production of those documents on the ground that the documents, which related to advice that the Attorney General had given to PERB concerning the actuarial equivalency factors used to compute retired members' benefits, constituted privileged lawyer-client communications. The Special Master refused to compel production of the documents.
Petitioner Dahlin and Strunk petitioners have assigned the rulings of the Special Master as error. We uphold the Special Master's refusal to compel the production of the documents, because, in our view, the documents are not relevant to any claim at issue in these proceedings.
Having resolved the preliminary considerations that these matters present, we proceed to an overview of PERS generally and of the parties and their claims and defenses.
II. BACKGROUND
A brief summary of the history and operation of PERS, as well as the changes that the 2003 PERS legislation made to the system, provide context for the parties' arguments. As the Special Master noted in his report, "[t]he statutory, administrative, historical, and operational backgrounds against which both the 2003 legislation and the instant claims have arisen are exceedingly complex." The summary that follows borrows heavily from the Special Master's written report. More fully developed discussions about particular aspects of the system are set out later as we address the parties' specific arguments.
*1068 A. PERS Before the 2003 Legislation [10]
1. General Considerations
In one form or another, Oregon has provided its public employees with a retirement plan, as a contractual benefit of public employment, since 1945. Funding for the system comes from three sources: (1) employee member contributions, presently set at six percent of salary; (2) employer contributions, in an amount actuarially determined to be necessary when added to the employee member contributions to cover the cost of accrued and projected future service retirement allowances payable to retired members; and (3) investment earnings on those contributions. The assets, taken together, constitute the Public Employees Retirement Fund (the fund) and are used to pay the costs of the system: member service retirement allowances and administrative expenses. Except for variable account funds, which we discuss below, all PERS funds are commingled for investment purposes.
PERB administers PERS and acts as trustee for the fund. PERB conducts its operations through a director and staff that PERB employs, and PERB administers the system in consultation with the PERS actuary. [11] PERB sets employer contribution rates, adopts actuarial equivalency factors and assumed earnings rates, establishes reserve accounts, and allocates annual earnings to accounts and reserves. The Oregon Investment Council (OIC) invests the assets of the fund. [12]
2. Membership in and Funding of PERS
Public employees of participating employers become PERS members upon completing six months of uninterrupted service. [13] Every PERS member has a regular "account" in PERS. The member's regular account consists of the member's contributions to the system and earnings that PERB has credited to those contributions. In addition, in 1967, the legislature enacted an optional variable annuity account program for members who are willing to have their contributions and benefits fluctuate with the equity markets. A member who participates in the variable annuity account program has two member accounts: a regular account and a variable account. Members' contributions to their variable accounts are paid into the Variable Annuity Account and are invested solely in the Oregon Equity Fund. [14]
For purposes of this litigation, there are two categories of PERS members. "Tier *1069 One" members are public employees who joined PERS before January 1, 1996. Tier One members are entitled to a guaranteed minimum rate of return on their regular accounts based on the assumed earnings rate. To ensure that sufficient assets exist to pay guaranteed benefits to Tier One members at the assumed earnings rate, PERS maintains a "gain-loss reserve." In years when fund earnings exceed the assumed earnings rate, PERB deposits a portion of those excess earnings into the gain-loss reserve. In years when fund earnings are less than the assumed earnings rate, PERB uses funds from the reserve to make up the difference.
PERS members who joined the system on or after January 1, 1996, are known as "Tier Two" members. Unlike Tier One members, Tier Two members have no earnings guarantee on their regular accounts and, correspondingly, do not benefit from the fund's gain-loss reserve. [15]
Crediting of member accounts occurs annually as of December 31 of each calender year. At the beginning of each calendar year, PERB reviews changes in the value of the fund since the beginning of the previous year. PERB staff determines the fund's value using standard accounting methods. Based on the fund's annual growth, PERB allocates earnings to various accounts within the fund on an "equal crediting" basis; that is, every dollar within the fund receives the same percentage share of earnings regardless of the account to which that dollar is designated. [16]
The PERS actuary also recommends the adoption of employer contribution rates in an "Actuarial Valuation" that usually issues as of December 31 in odd-numbered years. Employers begin paying newly established contribution rates on July 1 of the following year. Employer contribution rates consist of two components: the employer's normal cost toward payment of members' service retirement allowances and the amount necessary to amortize any unfunded actuarial liability (UAL). The normal cost component of the employer contribution rate is based on the PERS actuary's best estimate of the amount needed to pay service retirement allowances to current members in the future. The adjustment of the employer contribution rate either for UAL or actuarial surplus is based on the difference between an employer's account balance and the projected future service retirement allowances payable to its employee members. If an actuarial surplus exists, then the employer pays less than the normal cost rate. If the employer has a UAL, then PERB adds an additional, amortized charge to the employer's normal cost rate. [17]
3. Service Retirement Allowance Formulas
There are three formulas available for calculating a PERS member's service retirement *1070 allowance, commonly known as the Pension Plus Annuity, the Full Formula, and the Money Match. The Pension Plus Annuity, which is available to only members who contributed to PERS before August 21, 1981, consists of the sum of an annuity component and a pension component. The annuity component is composed of the actuarial equivalent of the member's account balances at retirement. The pension component, funded by the employer, is equal to one percent of the member's final average salary (1.35 percent for legislators and police and fire employees) for each service year.
The Full Formula also includes an annuity component composed of the actuarial equivalent of the member's account balances at retirement and a pension component; however, the pension component is calculated differently than under the Pension Plus Annuity. The Full Formula first calculates a member's service retirement allowance by multiplying the member's final average salary by a factor set at 1.67 percent (two percent for legislators, police officers, and firefighters) and then multiplying the resulting figure by the member's years of membership. That service retirement allowance then is funded using the actuarial equivalent of the member's account balances at retirement (the annuity component) and employer contributions required to make up the difference (the pension component).
Under the Money Match, a member's service retirement allowance is calculated by determining the sum of the actuarial equivalent of the member's account balances at retirement (the annuity component) and then adding a sum in an equal amount that is charged to the employer, i.e., the "match" (the pension component). The resulting service retirement allowance therefore amounts to twice the actuarial equivalent of the member's account balances at retirement.
At retirement, a PERS member receives a service retirement allowance based on the formula that produces the highest pension amount among the foregoing three alternative formulas. [18] By the late 1980s, members who retired with 30 years of creditable service received service retirement allowances equal to approximately 63 percent of their final average salaries. By the early 1990s, that figure had increased to 66 percent and, between 1996 and 2002, had increased to 85 percent. In 2000, the average PERS retired member with 30 years of creditable service retired at the age of 53 with a service retirement allowance equal to 106 percent of the member's final average salary. [19]
Regardless of the formula used to determine a retired member's service retirement allowance, PERS historically has increased such allowances through annual cost-of-living adjustments (COLAs). COLAs are based on the Consumer Price Index and are capped at two percent of each member's allowance. If the index increases by more than two percent for the year, then the increase above two percent is "banked" and may be added to the member's COLA in later years when the index increases by less than two percent.
Finally, in addition to the benefits described above, members who retired before 1991 receive an increase in benefits to remedy unlawful taxation on retirement income benefits attributable to service before 1991. See generally Hughes v. State of Oregon, 314 Or. 1 , 838 P.2d 1018 (1992) (legislature's repeal of income tax exemption statute as to PERS members' retirement benefits constituted *1071 breach of PERS contract, requiring legislatively created remedy).
When a PERS member retires, PERB transfers the member's account balances to the Benefits-In-Force reserve account (BIF), together with an amount from the employer's accumulated contributions. The amount transferred from the employer's account is that which PERB has determined is necessary to pay the member's service retirement allowance. PERB also regularly "trues up" the BIF by recalculating the funds necessary to pay all expected service retirement allowances for retired members. If PERB's actuary determines that the BIF is insufficient to pay those allowances, then PERB deducts from all employer accounts the amounts necessary to eliminate the deficiency. Conversely, if the BIF is overfunded, then PERB adds the overage to all employer accounts. For accounting purposes, PERB does not make adjustments to individual employer accounts; instead, PERB maintains a balancing account that shows the actuary's "trueing up" calculations.
4. Recent Fiscal Status of the Fund
The fiscal status of the fund following poor investment performances in 2000, 2001, and 2002 — together with significant growth in fund liabilities and employer contribution rates — was the primary motivator of the 2003 PERS legislation. See generally Or Laws 2003, ch 67 (preamble). Those considerations provided much of the focus of the parties' advocacy before the Special Master and this court. As context for the issues that we resolve in these cases, we set out the following brief discussion of the fund's financial status, which we take from the Special Master's report:
"For the 2001-03 biennium, the [S]tate of Oregon's general fund and lottery budget was approximately $11 billion. Oregon's local governments will collect approximately $17.8 billion in own-source revenues in fiscal year 2003-04. In comparison, at the end of 2002, the fund had a total UAL of more than $15 billion [based on the fair market value of fund assets]. In January 2003, the UAL reached $16.41 billion. During the 2003 legislative session, the UAL exceeded $17 billion, but it had declined to $12.7 billion by July 2003.
"Between 1991 and 2000, the nation experienced the longest sustained period of economic growth in its history. During that time, the average investment return on the fund was approximately 15 percent per year. However, over that same period, the system's funded ratio, which compares the value of fund assets to projected liabilities, declined. In 1991, the fund's value equaled the amount of its projected future liabilities. By 2001, the value of the fund's assets equaled 89 percent of its projected future liabilities. In 2002, based on then-current actuarial assumptions, the PERS actuary projected that PERS liabilities would increase from approximately $45 billion in 2001 to approximately $65 billion by 2007. In 2002, the actuary also projected that the funded ratio would remain below 80 percent until 2010 and that the funded ratio probably would not equal 100 percent until 2027. In early 2003, that ratio declined to 65.4 percent."
(Footnote omitted.)
B. The 2003 PERS Legislation
The following summary addresses only those changes to the system following the 2003 PERS legislation that petitioners have challenged in this litigation. [20]
1. Member Accounts
As noted, before the 2003 PERS legislation, all active PERS members contributed, either directly or by employer pick-up, [21] six percent of their salaries to their regular accounts. Earnings on those contributions also were credited to those accounts. Under the 2003 PERS legislation, all member contributions *1072 made after January 1, 2004, are placed into an "account" for each member under a new Individual Account Program (IAP) instead of being credited to PERS regular accounts. The balances held in members' IAP accounts will not be annually credited at not less than the assumed earnings rate and, at retirement, will not be subject to employer matching under the Money Match or be enhanced by annual COLAs.
2. Investment in the Variable Annuity Account Program
Under the 2003 PERS legislation, as of December 31, 2003, members no longer may contribute to the variable annuity account program. The legislation does not affect contributions credited to members' variable accounts before that date.
3. The "Call"
As explained earlier, the legislature has required PERB to create a reserve account, known as the "gain-loss" reserve, to offset any deficit created in years in which fund earnings fell below the assumed earnings rate. By statute, PERB could not maintain that reserve account in a deficit position for more than five years. PERB's process for eliminating such a deficit has been referred to as the "call." There never has been a five-year deficit in the reserve account, and, accordingly, PERB never has implemented the call. The 2003 PERS legislation eliminates the statutory provisions respecting the call.
4. The Assumed Earnings Rate and Crediting of Accounts
As noted, before the 2003 PERS legislation, the PERS statutes guaranteed all Tier One members that PERB would credit earnings on their regular accounts annually at not less than the assumed earnings rate. The 2003 PERS legislation, however, prohibits the allocation of earnings to Tier One members' regular accounts in any year in which a deficit exists in the gain-loss reserve or the allocation of earnings would cause a deficit in the gain-loss reserve. [22] The amendment does not apply to members who retired before April 1, 2004. For Tier One members who retire on or after that date, the amount in their regular accounts at retirement cannot be less than the amount that those accounts would have reflected if PERB had credited those accounts with earnings at the assumed earnings rate for every year that the accounts existed. If a member's regular account balance is deficient in that respect, then PERS is required to pay the difference out of the gain-loss reserve.
5. Cost-of-Living Adjustments
As noted, retired PERS members are entitled to annual COLAs on their service retirement allowances not to exceed two percent per year. Under the 2003 PERS legislation, PERS must calculate two alternative service retirement allowances for certain members who retired on or after April 1, 2000, and before April 1, 2004 — a "revised" service retirement allowance and a "fixed" service retirement allowance. The "revised" service retirement allowance calculates the amount that the member would have received if PERB had credited all members' regular accounts with 11.33 percent interest in 1999 — instead of the 20 percent interest that PERB actually credited to members' regular accounts for that year. [23] The "fixed" service retirement allowance essentially "fixes" each *1073 member's allowance as of July 1, 2003, or the effective date of the member's retirement (whichever is later), but then is not subject to an annual COLA. The legislation further provides that each member in the identified group shall receive the "greater" of the "revised" and "fixed" service retirement allowances.
6. Actuarial Equivalency Factors
Under an administrative rule that PERB adopted in 1993, and later amended in 1996, PERB declared that it would not reduce, by application of new actuarial equivalency factors (AEFs), [24] the service retirement allowances of PERS members who joined the system before 1999. That declaration notwithstanding, the 2003 PERS legislation directs the implementation of updated AEFs beginning July 1, 2003, and thereby modifies the AEF calculation for certain members who entered the system before 1999. Members who retired on or before June 30, 2003 — one day before the effective date of the new legislation — receive service retirement allowances calculated using the AEFs in place before the legislative reforms. All other members who joined the system before 1999 and who retired or will retire on or after July 1, 2003, will receive service retirement allowances that are subject to the new legislation. Those allowances are determined using one of two calculations, whichever produces the greater benefit. The first requires that the AEFs in effect at a member's effective retirement date be applied to the member's account balance. The second creates an account balance as of June 30, 2003, that consists only of the member's contributions and earnings credited as of that date. Based on that account balance, PERB determines the member's service retirement allowance using the AEFs in effect on June 30, 2003.
C. The Parties and Their Claims
The following is an overview of the parties and their primary contentions, taken from the Special Master's report:
"Petitioners are current and former public employees who are [Tier One] members of PERS. * * * Petitioners have named as [respondents] the State of Oregon and certain state agencies (the state), [PERB], and various other public employers (the nonstate [respondents]). Petitioners each assert [under state law] that the 2003 legislation impairs a statutory contract between petitioners and their public employers * * *, breaches the statutory PERS contract, and takes their property without just compensation * * *. Some of the petitioners also assert contract impairment and takings claims under the United States Constitution. Petitioners seek to have many of the provisions of the 2003 legislation declared unconstitutional and to enjoin their implementation.
"Petitioners in the Strunk, Burt, and Evans cases rely, for the sources of their claims, on the PERS statutes that existed before the enactment of the 2003 legislation and certain PERB administrative rules in effect before the legislation's enactment. Petitioners in the Dahlin, * * * Sartain, and Whitty cases also rely on those provisions and, in addition, assert that the PERS contract consists of other terms, including provisions of employee handbooks, oral representations, or documents that PERS officials have provided to them over the years. Those petitioners' claims allege breaches and impairments of contract and takings based on those additional purported terms.
"The state has raised several defenses to petitioners' claims. It asserts that (1) the statutory provisions and other materials on which petitioners rely are not part of the obligation of any contract to which they are parties; (2) any impairment of the obligation of petitioners' PERS contracts is insubstantial or nonexistent; (3) any impairment is justified by important public purposes; and (4) petitioners have no property interest that the 2003 legislation affects. * * *
*1074 "Nonstate [respondents] present a somewhat different array of defenses. Like the state, they first assert that many of the provisions that petitioners seek to enforce are not statutory contractual promises. They also contend that the 2003 legislation did not breach or impair those provisions that constitute statutory contractual promises because it did not change substantially the substance of those promises and, in any event, none of the affected provisions was beyond the reach of the legislature's power of amendment or repeal. They assert that the 2003 legislation has `only prospective effects.'
"In addition, nonstate [respondents] assert that PERB lacked authority to create binding contractual obligations between themselves and petitioners with respect to PERS benefits. Further, [they] argue that, even if PERB had such authority, the rules and actions on which petitioners rely were unauthorized or contrary to statute, and petitioners have no right to retain the benefits resulting from them. According to nonstate [respondents], the legislature has the exclusive authority to determine PERS benefit levels.
"Nonstate [respondents] also have raised several affirmative defenses to petitioners' breach of contract claims. Assuming that the legislature intended the statutes, rules, and other materials on which petitioners rely to constitute part of the PERS contract, [they] assert that their performance is excused on the following grounds: (1) mutually mistaken assumptions that PERB would administer the PERS system in a prudent manner to provide benefits in accordance with legislative intent; and (2) impossibility or impracticability based on extreme financial hardship."
(Emphasis in original; footnotes omitted.)
III. DISCUSSION
A. General Summary of Case Law and Legal Principles
To the extent that it provides background for some of the discussion that follows, we briefly summarize this court's decisions in Eckles v. State of Oregon, 306 Or. 380 , 760 P.2d 846 (1988), Hughes, 314 Or. 1 , 838 P.2d 1018 , and Oregon State Police Officers' Assn. v. State. of Oregon, 323 Or. 356 , 918 P.2d 765 (1996) ( OSPOA ), which the parties cite to support many of their competing contentions in these proceedings.
Eckles involved legislation that had transferred surplus funds from the Industrial Accident Fund (IAF) to the General Fund for the purpose of avoiding a state budget deficit. The plaintiff, an employer insured by the State Accident Insurance Fund Corporation (SAIF), contended that the legislation violated Article I, section 21, of the Oregon Constitution by impairing the state's contractual obligation (set out in an earlier statute) to use the funds in the IAF for only workers' compensation purposes. This court concluded that the part of the legislation that eliminated the state's obligation to use the surplus funds in the manner specified in the earlier statute constituted an unconstitutional impairment of the state's contractual obligation. 306 Or. at 399 , 760 P.2d 846 . The court further concluded that the part of the legislation that directed the transfer of funds amounted to a mandate that the state breach the contract, id. at 400 , 760 P.2d 846 , which ordinarily would require payment of damages to SAIF employers resulting from the breach, id. at 402 , 760 P.2d 846 . [25]
Hughes involved legislation that had repealed a state income tax exemption for PERS benefits; specifically, the legislation had (1) made that exemption inapplicable to state personal income taxation; and (2) repealed the corresponding provision in the tax statutes. The plaintiffs, who were present and retired public employees, challenged the legislation under Article I, section 21, and this court ultimately held that the two statutory provisions, respectively, unconstitutionally impaired a contractual obligation and breached the PERS contract. 314 Or. at 29-33 , 838 P.2d 1018 . Most significant to our analysis here, the court in Hughes concluded *1075 that "PERS was intended to be and is a contract between the state and its employees[.]" 314 Or. at 25 , 838 P.2d 1018 .
OSPOA involved challenges to Ballot Measure 8 (1994), which had amended the Oregon Constitution in three ways relating to PERS: (1) by mandating that public employees make six percent contributions to public retirement plans, if so covered, and, correspondingly, by precluding public employers from "picking up" that contribution on behalf of their employee members; (2) by prohibiting the state from guaranteeing a rate of return on retirement contributions; and (3) by prohibiting any increase of retirement benefits based on unused sick leave. The plaintiffs brought federal impairment of contract challenges to the amendments, and, after applying state law principles to construe the underlying PERS contract, this court invalidated the amendments as unconstitutional impairments of that contract. In reaching that conclusion, the court concluded that each of the statutory PERS provisions at issue — that is, the provisions permitting employer "pick-up" of the employee's contribution, guaranteeing an assumed earnings rate, and providing for inclusion of unused sick leave in benefit calculations — constituted terms of the PERS contract that applied even to work yet to be performed. 323 Or. at 372-79 , 918 P.2d 765 .
We note some considerations from Eckles and Hughes that guide our analysis in these cases. First, in Eckles, this court clarified that the contracts provision of Article I, section 21, prohibited the impairment of a contractual obligation. Eckles, 306 Or. at 395 , 760 P.2d 846 . As to the determination whether newer legislation amounts to an impairment of a preexisting statutory contractual obligation, the court focused on whether the legislation would change or eliminate the state's obligation under that contract. Id. at 399-400 , 760 P.2d 846 . By contrast, the court explained that legislation that mandated a breach on the state's part of such a contractual obligation — but did not change or eliminate the obligation itself — did not contravene Article I, section 21, although, in accordance with that constitutional provision, such legislation ordinarily would require payment of damages resulting from the breach. Id. at 400-02 , 760 P.2d 846 .
In Hughes , this court set out a two-step process for addressing a claim of contractual impairment or breach under Article I, section 21:
"First, it must be determined whether a contract exists to which the person asserting an impairment is a party; and, second, it must be determined whether a law of this state has impaired an obligation of that contract. General principles of contract law normally will govern both inquiries, even where the state is alleged to be a party to the contract at issue."
Hughes, 314 Or. at 14 , 838 P.2d 1018 . In its ensuing analysis, the court divided the first question into three component inquiries: (1) is there a state contract?; (2) if so, what are its terms?; and (3) what obligations do the terms provide? See id. at 17-29 , 838 P.2d 1018 (engaging in those inquiries). Further, as noted above, this court in Hughes concluded that PERS constituted a statutory contract. Id. at 25 , 838 P.2d 1018 .
B. Obligation of Successive Legislatures
We underscore that the claims presented here, for the most part, concern contract formation and implicate what this court has described as the "significant" proposition that, if certain circumstances are met, "one legislature may bind a succeeding legislature to a particular course of action." Id. at 13 , 838 P.2d 1018 . That proposition is significant, in part because "[o]rdinarily it is the function of a legislature to make laws and not contracts." Campbell et al. v. Aldrich et al., 159 Or. 208, 213 , 79 P.2d 257 (1938). However, as the court in Campbell went on to state:
"[L]egislative enactments may contain provisions which, when accepted as the basis of action by individuals, become contracts between them and the state. It is also equally well established that the intention of the Legislature thus to create contractual obligations, resulting in extinguishment to a certain extent of governmental powers, must clearly and unmistakably appear. The intention to surrender or suspend legislative control over matters vitally affecting *1076 the public welfare cannot be established by mere implication."
Id. at 213-14 , 79 P.2d 257 .
C. Order of Analysis
As a final preliminary matter, we note that petitioners' arguments arise under and implicate various sources of state and federal law. When, as here, we are presented with multiple bases for disposition, this court generally considers the issues hierarchically. See, e.g., State v. Kennedy, 295 Or. 260, 262 , 666 P.2d 1316 (1983) (so stating; addressing defendant's state constitutional law claim before considering his federal claim). Accordingly, we begin by addressing petitioners' claims under state law.
D. Petitioners' State Law Contractual Claims
As noted above, Strunk, Burt, and Evans petitioners rely solely upon the PERS statutes and certain administrative rules as they existed before the 2003 PERS legislation as the bases for their contractual claims — that is, their claims that the 2003 legislation either impairs or breaches obligations set out in the PERS contract. Dahlin and Whitty petitioners, however, cast a broader net. They argue that, in addition to statutory and administrative rule provisions, the PERS contract includes documents that PERB has provided to them over the years. [26] Whitty petitioners, moreover, also rely on the employee handbook that they received from their employer as establishing some of their contractual rights. Finally, Strunk and Burt petitioners also assert that the 2003 PERS legislation breaches not only the PERS contract but also the settlement agreement resolving litigation that followed this court's decision in Hughes .
1. Handbooks and Other Materials as Contract Terms
a. Whitty Petitioners
Whitty petitioners are each employees of SAIF, and they named PERB and SAIF as respondents to their petition for review. Whitty petitioners' opening brief asserts, in part:
"In addition to the [a]rguments stated by the Strunk Petitioners, the Whitty petition[ers] are relying upon the Respondent SAIF Corporation's written policy concerning retirement, stated in the SAIF Employee Handbook, as part of their contract with their employer. * * *
"The SAIF policy also refers the employee to the PERS Handbook, `for complete details of the retirement program.' * * *
"* * * * *
"The language used by SAIF Corporation in its retirement policy statement, words such as `established,' `secure' and `guarantees,' is language of contract. * * *"
In response, respondents argue that (1) the PERS statutes do not reflect a legislative intent to delegate either to PERB or to SAIF the power to bind future legislatures; (2) even if the legislature had purported to delegate that power, the delegation would be an unconstitutional abdication of the legislature's lawmaking authority; (3) even if such a delegation were permissible, there is no evidence that the legislature intended to delegate *1077 such authority to PERB staff or SAIF, as opposed to PERB; and (4) at least insofar as the SAIF employee manual is concerned, it promises nothing more than the ability of its employees to participate in PERS like all other state employees.
In reply, Whitty petitioners argue, in part, as follows:
"Respondents argue that the SAIF policy on retirement and the PERS Handbook are not part of Petitioners' contract because the language of the PERS statutes does not reflect an intent to delegate the power to bind future legislatures to an administrative agency. The language of the PERS statutes also does not delegate to SAIF Corporation, or any other governmental agency the power to enter into any contract with its employees. Yet, this court has held that a Multnomah County Ordinance is a sufficient basis for a retirement benefit contract. Taylor v. Multn[.] * * * Dept[.] Sher[.] Ret[.] B[d.], 265 Or. 445, 451 , 510 P.2d 339 (1973). * * * If a county can contract with its employees through enactment of an ordinance establishing a retirement benefit, certainly an independent public corporation, SAIF, can contract with employees through adoption of a policy conferring retirement benefits. * * *
"* * * * *
"As to whether the PERS Handbook is a part of Petitioners' contract with SAIF, the SAIF policy on retirement incorporates the benefits conferred in that Handbook by reference. * * * It did not adopt the Handbook as a `legal reference.'" [27]
b. Petitioner Dahlin
Petitioner Dahlin's opening brief asserts, in part:
"Petitioner Dahlin relied on the PERS statutes, rules, handbooks, annual statements and web site estimates when planning his retirement. Based on his review of the communications from PERS, Petitioner Dahlin believed that the Money Match would produce a greater retirement benefit than the Full Formula. Petitioner Dahlin's understanding that the Money Match calculation would exceed the value of the Full Formula benefit was confirmed by annual statements that he received from PERS beginning in 1998.
"* * * * *
"At all relevant times, the PERS handbooks * * * stated that `"vesting" means you cannot lose your benefit rights, even if you stop working in covered employment.'"
Respondents offered essentially the same arguments in response to petitioner Dahlin as they did to Whitty petitioners, summarizing their response as follows:
"[P]etitioner Dahlin asserts that his contract rights — to the extent they exist — arise from PERS handbooks and his annual statements, in addition to the PERS statutes and regulations. This assertion is incorrect. There has been no legislative delegation to PER[B] that would allow the agency to bind future Legislative Assemblies. Indeed, such a delegation would be unconstitutional. Moreover, these documents on which petitioner Dahlin relies actually contain language disclosing the fact that they are not legal references or complete statements of the PERS statutes or rules, and that in [the event of] any conflict the statutes and rules shall prevail."
In reply, petitioner Dahlin states:
"[Respondents] respond that as of 2001 the Handbooks contained a disclaimer that indicated that if a conflict exists between the PERS statutes and the Handbook, the statute will control. * * *
"[Respondents'] response, however, missed the point of Petitioner Dahlin's argument. Petitioner Dahlin is not arguing that a conflict exists between the PERS statute[s], its administrative rules, and the PERS Handbook. Rather, Petitioner Dahlin is arguing that the PERS Handbook *1078 is consistent with Oregon Law and the lack of a `reservation of rights clause' is the recognition of and an embodiment of the contract theory of pensions. * * *"
c. Discussion
To the extent that petitioner Dahlin and Whitty petitioners argue that the PERS handbooks, PERB communications, and the employment policies of SAIF form part of the PERS contract, we reiterate that this court has held that PERS is a statutory contract. Hughes, 314 Or. at 25 , 838 P.2d 1018 . Therefore, the question whether the materials on which petitioners in part rely constitute terms of that statutory contract is a question of legislative intent. See generally PGE v. Bureau of Labor and Industries, 317 Or. 606, 610-11 , 859 P.2d 1143 (1993) (statutory construction involves ascertaining legislature's intent; to do so, court first examines text and context of statute at issue); ORS 174.020(1)(a) ("[i]n the construction of a statute, a court shall pursue the intention of the legislature if possible"). Even disregarding respondents' argument that the legislature lacks the power to delegate to an administrative agency or other subdivision of the state the authority to set the terms of the PERS contract, the predicate question remains: did the legislature intend to do so?
In that respect, petitioners point to no Oregon statute indicating that the legislature intended to permit PERB or any other entity as a general matter to set or alter any terms of the PERS statutory contract. [28] Nor has our own research revealed any support for the idea that the legislature intended to permit PERB or any other governmental entity — through the issuance of handbooks, policy statements, account summaries, or otherwise — to provide binding pronouncements of the retirement benefits that PERS will provide. We hold that the PERS handbooks, communications from PERB to PERS members, and SAIF's employment policies do not constitute terms of the PERS contract.
That holding does not meet directly the separate argument of Whitty petitioners that the 2003 PERS legislation breaches or impairs their separate employment contracts with SAIF. They analogize those contracts to the ordinance at issue in Taylor, 265 Or. 445 , 510 P.2d 339 . That analogy is inapposite, however, for the simple reason that nothing about the retirement policy at issue in Taylor implicated a state statutory contract or any other legislative policy. [29] For Whitty petitioners to succeed in that argument, the retirement policy that SAIF provides to its employees would have to be independent of PERS. But that is not the case. SAIF offers its employees the PERS retirement plan, not a SAIF retirement plan or some sort of PERS hybrid. And, as we determined above, nothing in the PERS statutes indicates that the legislature intended to authorize public employers to set the terms of the PERS contract.
Accordingly, we reject the arguments of petitioner Dahlin and Whitty petitioners that the PERS contract includes terms outside the PERS statutes (and applicable administrative rules) and the argument of Whitty petitioners that the 2003 PERS legislation breaches or impairs their employment contracts with SAIF.
2. The Chess Settlement
Until 1991, PERS benefits were not subject to state or local income taxation. ORS 237.201 (1989). In 1989, the United States Supreme Court held that, if a state exempts from state and local taxation pension benefits paid by state and local governments, principles of intergovernmental tax immunity require like treatment of pension benefits paid by the federal government. Davis v. Michigan Dept. of Treasury, 489 U.S. 803 , 109 S.Ct. 1500 , 103 L.Ed.2d 891 (1989). At the time of the Davis decision, *1079 Oregon taxed federal pension benefits as personal income.
Responding to that and other decisions, the 1991 Legislative Assembly enacted Oregon Laws 1991, chapter 823, which repealed the tax exemption for PERS benefits, thereby equalizing the tax treatment of state and federal pensions. As noted earlier in this opinion, this court in Hughes held that that repeal of the tax exemption breached the PERS contract. Hughes, 314 Or. at 33 , 838 P.2d 1018 . The court, however, concluded that "[t]he legislature is the most appropriate branch of government in the first instance to choose among the available remedies" for that breach. Id. at 33 n. 36, 838 P.2d 1018 .
When the legislature failed to enact a remedy, class action litigation — to which we refer as the Chess litigation — ensued. The trial court in Chess ultimately approved a settlement for damages covering all PERS retirees who were PERS members before the effective date of the 1991 tax repeal (September 29, 1991). The settlement agreement provided that the "[p]laintiffs agree to accept the remedies provided in [the legislation] as full and complete payment for all claims raised in [the class] actions." The legislature adopted the terms of the Chess settlement and codified them at ORS 238.375 to 238.380. ORS 238.375(3) provides:
"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 [ORS 238.375 to 238.380]."
The implementation of those settlement terms resulted in an annual increase in employer contribution rates of approximately 1.4 percent, amounting to a permanent annual expense that PERB assumed would continue for 30 years.
Strunk and Burt petitioners argue that Oregon Laws 2003, chapter 67, as amended by Oregon Laws 2003, chapters 625 and 733, when considered generally, breaches the settlement agreement in Chess. Their analysis proceeds as follows: PERB understood that codifying the Chess settlement would increase employer contribution rates; employer contribution rates in fact increased as a direct result of that legislation; the preamble to Oregon Laws 2003, chapter 67, states that one reason for the enactment was to address the increase in employer contribution rates; some of that increase resulted from the Chess settlement legislation; and therefore, "[t]o the extent that the legislature has lowered PERS retirement benefits, at least in part, because of the increase granted by [the legislation], then it has in fact repealed the benefits of [that legislation]."
Respondents disagree for various reasons, only one of which we need address. Respondents argue, we conclude correctly, that the Chess settlement agreement by its specific terms limited petitioners' rights to those set out in the 1991 legislation and that that legislation expressly disavowed the creation of any contractual rights. The wording of ORS 238.375(3), which codified the settlement, could not be clearer in that respect. Nothing about the context of that wording alters what we perceive to be the legislature's manifest intent. Because petitioners have failed to demonstrate a contractual right that Oregon Laws 2003, chapter 67, as amended by Oregon Laws 2003, chapters 625 and 733, is capable of breaching with respect to the Chess settlement, we reject their argument.
3. Petitioners' Statutory Contract Claims
We now turn to the central issues in these cases — that is, petitioners' contentions that various aspects of the 2003 PERS legislation unconstitutionally impair statutory contractual obligations set out in the PERS contract in violation of Article I, section 21, or, alternatively, that aspects of the 2003 legislation breach statutory contractual obligations set out in the PERS contract. We discuss each challenged aspect of the 2003 legislation separately.
a. Redirection of Members' Contributions to the IAP
(1) The Statutes
As noted, before the 2003 PERS legislation, PERS members were required to contribute, or to have employers contribute on behalf of their employee members, six percent *1080 of members' salaries to those members' regular accounts. We set out the relevant statutes below.
ORS 238.200(1)(a) (2001) provided:
"An active member of the system shall contribute to the fund and there shall be withheld from salary of the member six percent of that salary."
ORS 238.200(2) (2001) provided, in part:
"The contributions of each member as provided in subsection (1) of this section shall be deducted by the employer from each payroll and transmitted by the employer to [PERB], which shall cause them to be credited to the member account of the member."
ORS 238.205 (2001) provided, in part:
"Notwithstanding any other provision of this chapter, and subject to the provisions of this section, a public employer participating in the system may agree, by a written employment policy or agreement in effect on or after July 1, 1979, to `pick-up,' assume or pay the full amount of contributions to the fund required of all or less than all active members of the system employed by the employer."
The 2003 PERS legislation, however, amended ORS 238.200 to discontinue contributions to the PERS fund:
"a member of [PERS], or a participating employer acting on behalf of the member pursuant to ORS 238.205, is not permitted or required to make employee contributions to the fund for service performed on or after January 1, 2004. * * *"
Or. Laws 2003, ch 67, § 1(4), as amended by Or. Laws 2003, ch. 625, § 9, codified as ORS 238.200(4). Instead, all PERS members who established membership in the system before August 29, 2003, now are members of the IAP. ORS 238A.305(1). As of January 1, 2004, those members' six percent contributions — which remain mandatory — now go into their IAP accounts, rather than into their regular accounts. Or. Laws 2003, ch. 733, §§ 32, 34, 35, codified as ORS 238A.330; ORS 238A.335. As before, employers still may agree to pick up the six percent contributions. Or. Laws, 2003, ch. 733, § 34, codified as ORS 238A.335. Each IAP account is credited with earnings and losses on the member's contributions, less administrative expenses. Or. Laws 2003, ch. 733, § 37(1), codified as ORS 238A.350(1). Upon retiring, the member will receive, in a lump sum payment, the full amount of that member's IAP account, Or. Laws 2003, ch. 733, § 41(1), codified as ORS 238A.400(1), in addition to any retirement benefits for work performed before January 1, 2004, to which the member may be entitled under PERS as it existed before the 2003 legislation. Alternatively, in lieu of the lump sum payment, the member may elect to receive the amount in his or her IAP account in installments paid over 5, 10, 15, or 20 years. Or. Laws 2003, ch. 733, § 41(2), codified as ORS 238A.400(2).
As noted earlier in this opinion, although PERS members will receive at retirement the balances held in their IAP accounts, those balances (1) are not guaranteed annual crediting at not less than the assumed earnings rate; (2) at retirement, will not be subject to the Money Match; and (3) at retirement, will not be enhanced by annual COLAs. Respondent State of Oregon characterizes the IAP accounts as "invested and credited in the same fashion as a typical 401(k) or IRA account," and we agree with that general description.
(2) The Parties' Arguments
All petitioners, except petitioner Sartain, challenge the discontinuation of PERS members' contributions to their regular accounts. [30] Petitioners argue that the 2001 versions of the statutes set out above
"were unquestionably part of the PERS Act, were integral to the calculation of benefits under the Act, were unambiguously promissory, [and] contained no language excluding contributions attributable to future service from the general contractual protection and no reservation of right of future amendment."
*1081 In support of that assertion, petitioners note that ORS 238.250 (2001), which provided for the regular account (as that statute continues to do), has remained virtually unchanged since the adoption of the first state retirement act in 1945.
Although petitioners note that amounts from each member's IAP account will be payable at retirement as a lump sum without employer matching or application of annual COLAs, that is not the effect of the legislation that they emphasize. Instead, petitioners argue primarily that,
"[a]s a result of this diversion, most mid-career employees will lose the option of retiring under Money Match and will find their benefits calculated under the less generous full formula benefit. * * * Under ORS 238.300 (2001), however, petitioners were promised calculation of their benefits under the formula which would produce the highest value. * * * By diverting their contributions, Section 1 of HB 2003 [Or Laws 2003, ch 67, § 1], effectively denies petitioners the contractual protection afforded by ORS 238.300(2) (2001).[ [31] ]
"* * * * *
"As it did in OSPOA, [ [32] ] this court should find that this permanent elimination of petitioners' statutory right to receive a pension calculated on the full value of their account[,] including future contributions and earnings thereon, constitutes an impairment of their PERS contract or[,] at a minimum, a breach of the contractual promise that all member contributions and earnings would be directed to and maintained in that PERS member account."
Respondents counter that PERS members' contributions to their regular accounts are an obligation on each member's part, rather than a contractual right that inures to each member's benefit. To the extent that any such promise exists, respondents continue, there is no support in the text or context of the PERS statutes for a legislative promise that members could continue to contribute to their regular accounts throughout their PERS membership.
Respondents assert that that conclusion is bolstered by the fact that, when the legislature adopted the Full Formula in 1981, it simultaneously reduced the statutory contributions of higher compensated PERS members from seven percent to six percent. Or. Laws 1981, ch. 761, § 1 (discussed further below). Such a reduction, they argue, is inconsistent with a legislative understanding that PERS members would have a perpetual right to maintain contributions to the system at a particular level. Otherwise, the legislature would have grandfathered those members who, before 1981, were required to contribute seven percent of salary so as to preserve the amount of benefits that those members would receive at retirement.
Responding to petitioners' assertion that most mid-career PERS members effectively will lose the option of retiring under the Money Match, respondents counter that the PERS statutes require only that a member receive a service retirement allowance calculated under the formula that produces the highest pension amount, whichever formula that may be. There is no indication, they contend, that the legislature intended that members would have an option to have their service retirement allowances calculated under a particular formula, the Money Match or otherwise. Moreover, respondents assert that certain wording in the PERS statutes indicates that the legislature intended the Money Match to be the floor for any service retirement calculation and, consistently with that proposition, either the Full Formula or the Pension Plus Annuity provided the highest service retirement allowance for most members before the mid-1990s. [33] They conclude *1082 that, under the 2003 PERS legislation, members still will have those retirement benefits that derive from their member accounts as they existed before the 2003 PERS legislation, calculated on the full value of those accounts. As to the other statutes upon which petitioners rely, ORS 238.205 (2001) (permitting employer pick-up) and ORS 238.250 (2001) (requiring PERB to provide regular accounts for members, showing contributions and earnings), respondents argue that the 2003 PERS legislation does not alter the pick-up provisions and that the directive for PERB to establish PERS regular accounts for members is nothing more than "a clerical obligation imposed on PERB" to "maintain appropriate record-keeping on member's regular accounts."
In the end, respondents assert that petitioners' only true complaint respecting the redirection of PERS member contributions to the IAP is that their projected future service retirement allowances under the 2003 PERS legislation will not be as high as those allowances would have been without the legislation. And, although respondents agree that such will be the case, they disagree with petitioners' claims that that complaint has either contractual or constitutional consequences.
(3) Discussion
We begin by noting some preliminary considerations. First, we are mindful that the "accepted proposition of the contractual nature of PERS is an essential background" for our inquiry. Hughes, 314 Or. at 22 , 838 P.2d 1018 . Further, although petitioners cite a number of statutes as significant to our analysis of their challenge to the redirection of member contributions to the IAP, we conclude that the service retirement allowance formula provisions, set out in ORS 238.300 (2001), viewed in context with other statutes that petitioners cite, are the most central to our analysis, as explained below. [34]
As noted, the crux of petitioners' analysis is that the diversion of contributions from PERS members' regular accounts to IAP accounts means that "most mid-career employees will lose the option of retiring under Money Match and will find their benefits calculated under the less generous full formula benefit." Accordingly, we proceed to assess in detail the relevant benefit formulas that PERS provides. That is, we consider whether the statutory provisions containing those formulas are part of the PERS contract and, if so, the extent of the state's obligation in that regard.
ORS 238.300 (2001) [35] provided, in part, as follows:
"Upon retiring from service at normal retirement age or thereafter, a member of the system shall receive a service retirement allowance which shall consist of the following annuity and pensions:
"(1) A refund annuity which shall be the actuarial equivalent of accumulated contributions *1083 by the member and interest thereon credited at the time of retirement * * *.
"(2)(a) A life pension (nonrefund) for current service provided by the contributions of employers, which pension, subject to paragraph (b) of this subsection, shall be an amount which, when added to the sum of the annuity under subsection (1) of this section and the annuity, if any, provided on the same basis and payable from the Variable Annuity Account, both annuities considered on a refund basis, results in a total of:
"(A) For service as a police officer or firefighter, two percent of final average salary multiplied by the number of years of membership in the system * * *.
"(B) For service as a member of the Legislative Assembly, two percent of final average salary multiplied by the number of years of membership in the system * * *.
"(C) For service as other than a police officer, firefighter or member of the Legislative Assembly, 1.67 percent of final average salary multiplied by the number of years of membership in the system * * *.
"(b) A pension under this subsection shall be at least:
"(A) The actuarial equivalent of the annuity provided by the accumulated contributions of the member.
"(B) For a member who made contributions before August 21, 1981, the equivalent of a pension computed pursuant to this subsection as it existed immediately before that date."
As a matter of plain text, ORS 238.300 (2001) provides, first, that a member is entitled to receive a service retirement allowance that is calculated by multiplying the member's final average salary by a factor of 1.67 percent for general service employees and then multiplying the resulting figure by the member's years of membership. That service retirement allowance then is funded by an annuity component (consisting of the actuarial equivalent of the member's account balances at retirement) and a pension component (consisting of employer contributions). ORS 238.300(1), (2)(a) (2001). That is the Full Formula.
However, if the pension component as calculated under the Full Formula is less than the actuarial equivalent of the annuity component based on a member's accumulated contributions to the fund, then the member is entitled to receive a higher pension component — that is, one composed of the actuarial equivalent of the member's accumulated contributions. ORS 238.300(2)(b)(A) (2001). That is the Money Match ( i.e., the employer-funded pension component "matches" the member's annuity component). And, if a member contributed to PERS before August 21, 1981, and the pension component calculated for that member based on the system as it existed immediately before that date provides a higher pension component than ones calculated under the Full Formula and the Money Match, then the member receives the higher pension amount. ORS 238.300(2)(b)(B) (2001). That is the Pension Plus Annuity.
In other words, ORS 238.300 (2001) provided (and still provides) that a retired PERS member will receive a final service retirement allowance that is calculated under the one formula of the three described above that yields the highest pension amount for that member, whichever formula that may be. At the same time, it appears to us that, notwithstanding the somewhat awkward placement of the words "at least" in ORS 238.300(2)(b) (2001), the legislature intended to set the Full Formula as the primary formula and, generally, designed the Full Formula so as to provide a minimum level below which the pension component should not fall. That is so because the Full Formula, which, significantly, is set out in the first two parts of the statute, ORS 238.300(1) and (2)(a) (2001), sets a defined benefit that does not vary depending on fluctuations in earnings or on the size of the member's annuities from the regular and variable accounts. [36] Thus, in that context, the words "at least" in ORS 238.300(2)(b) (2001) refer to a calculation of *1084 the Full Formula pension component that equals or exceeds a calculation of a pension component calculated under the Money Match (based on the member's accumulated contributions to the fund) or the Pension Plus Annuity (based on earlier statutory requirements).
More importantly, the wording of ORS 238.300 (2001) is unambiguously promissory. Through that statute, the legislature continuously and unequivocally has communicated to PERS members that, if they retire from service at normal retirement age, they will receive a pension component of their final service retirement allowance that, (1) when combined with the actuarial equivalent of their accumulated contributions to the fund, will consist of the Full Formula amount based upon years of service, final average salary, and class of service that equals or exceeds any pension component calculated under the other two formulas; or (2) in the event that the Full Formula calculation falls short, a pension component calculated under the Money Match or the Pension Plus Annuity. In short, the state's obligation as set out in ORS 238.300 (2001) is to provide a final service retirement allowance made up of an annuity component and a pension component at the minimum level described above.
The context of ORS 238.300 (2001), which includes the development of the statute through successive legislatures, Swarens v. Dept. of Rev., 320 Or. 326, 331 , 883 P.2d 853 1994 ), confirms that reading. ORS 238.300 and its predecessor statute, former ORS 237.147 (1993), have been a part of the PERS statutes since the creation of PERS in 1953. [37] During those 50 years, the benefits that PERS has provided and the manner for calculating them have changed considerably. As the Special Master noted, when the legislature created PERS, the system provided a Money Purchase Plan with an employer matching component. See Or. Laws 1953, ch. 200, § 18 (setting out benefit formula). [38] The stated goal of that formula, once combined with an annuity funded by member contributions, was to provide career employees ineligible for the federal Social Security program approximately one half of their final average salaries; for those eligible for Social Security, the target was less. Id. at § 13.
In 1955, the legislature increased the target replacement ratio from 50 to 60 percent of final average salary, including Social Security. Or. Laws 1955, ch. 131, § 5(2). That enactment also modified the member contribution rate to provide that members making more than $4,800 per year could elect to contribute an equal percentage of salary in excess of that amount, which contributions would "purchase at retirement[] additional benefits which will be matched by the employer." Id.
In 1967, the legislature repealed the provisions stating target retirement goals and abandoned calculating member contribution rates based strictly on actuarial assumptions, opting instead for a straight percentage-of-salary model. See Or. Laws 1967, ch. 622, § 4. The legislature also enacted the Pension Plus Annuity, under which retired members would receive an annuity (based on accumulated contributions and earnings) and a pension calculated as the actuarial equivalent of 1.67 percent of the member's final average salary for general service employees (1.92 percent for fire and police employees) multiplied by years of membership up to 30 years for general service (25 years for fire or police service). Or. Laws 1967, ch. 622, § 13. Finally, the legislature repealed the employer matching method for calculating the pension component. Id.
In 1969, the legislature restored the employer matching method (now known as the "Money Match") as one method for determining the pension component of retirement benefits. As between the Money Match and *1085 the Pension Plus Annuity, the amendment provided that the pension component of a service retirement allowance "shall be at least the actuarial equivalent of the annuity provided by the accumulated contributions of the [member]." Or. Laws 1969, ch. 640, § 7(2)(b) (emphasis added).
Other than changing the multiplier for the Pension Plus Annuity, Or. Laws 1971, ch. 738, § 2; Or. Laws 1973, ch. 695, § 4, removing the 25- and 30-year limits on years of membership, Or. Laws 1971, ch. 738, § 2, and including legislators in the system, Or. Laws 1975, ch. 137, § 3, the legislature did not amend the PERS statutes in any significant way until 1981. In that year, the legislature added the Full Formula, described in greater detail above, which has remained substantially unchanged since that time. Or. Laws 1981, ch. 761, § 4. [39]
As we develop more fully below, the evolution of the statutory provisions setting out the formulas for calculating PERS members' service retirement allowances, in our view, accords with the preliminary conclusion that we drew from examining the text of ORS 238.300 (2001). That is, contrary to petitioners' arguments, the legislature did not promise that PERS would be maintained so that the Money Match remains the primary calculator of member service retirement allowances, which it presently happens to be because it usually is the most remunerative. Instead, that statutory evolution demonstrates that the legislature promised that members would receive service retirement allowances calculated under whichever formula yields the highest pension amount for that member and that the Full Formula calculation ordinarily should equal or exceed calculations under the Money Match or, if applicable, the Pension Plus Annuity.
Before assessing the import of the statutory context set out above, we must ensure that we are ascertaining the intent of the correct legislature — an inquiry that is critical when analyzing statutory contracts. That is so because the fundamental purpose behind such contracts is to bind future legislative action. See generally Hughes, 314 Or. at 13 , 838 P.2d 1018 (discussing effect of binding succeeding legislature). To know when a legislature is so bound, we first must determine which legislature enacted the operative statutory contract.
As a general matter, this court has recognized several principles that it has applied at the first level of the PGE analysis, 317 Or. at 610-11 , 859 P.2d 1143 , to assist in the construction of amendatory acts. One of those principles is the presumption that "material changes in the language of the statute create material changes in meaning." Carlson v. Myers, 327 Or. 213, 225 , 959 P.2d 31 (1998). Another is a corollary to that presumption: "[I]t is presumed that such changes in meaning do not go further than is expressly declared or necessarily implied." Id. And, finally for our purposes here,
"`where a section of the statute is amended so as to read "as follows," and the section is then set forth with the changes intended to be made, those portions of the old section that are merely copied into the amendment without change are not to be considered as re-enacted or as a new statement of the law, but are to be read as a part of the earlier statute, if in conflict with another law passed after the section amended and before the amendatory act, unless there is a clear manifestation of legislative intention to the contrary. In the absence of such an intention, it is the change or the additions incorporated in the section amended only that are to be considered enacted.'"
Jones v. General Motors Corp., 325 Or. 404, 418 , 939 P.2d 608 (1997) (quoting Allison v. Hatton, 46 Or. 370, 372 , 80 P. 101 1905 )); see also State ex rel Caleb v. Beesley, 326 Or. 83, 88 , 949 P.2d 724 (1997) (to same general effect).
With the foregoing principles in mind, we glean the following from the progression of *1086 the statutory benefit formulas over time. From 1953 through 1967, PERS did not provide members with any minimum level of benefits. Instead, a retired member received only the contributions and earnings in his or her account matched by an employer pension in an equal amount. The key variable to that formula was earnings. And, as petitioners note, those earnings provided "the only hope that members would have of achieving an annuity which approached the goals of the system."
That changed in 1967, when the legislature repealed the employer-matching alternative and replaced it with the Pension Plus Annuity. Under that system, a retired PERS member was guaranteed a minimum pension component that would be added to whatever annuity that the contributions and earnings on the member's accounts had provided, whether those earnings had been good or bad. Thus, unlike the earlier employer-matching method, which had placed the risk of investment loss on members, under the Pension Plus Annuity, members could expect some minimum level of benefits and shared the risk of earnings shortfalls with employers.
As noted, in 1969, the legislature reinstated what is now known as the Money Match as an additional formula to calculate the pension component of a member's service retirement allowance. Such an amendment could have been a meaningful legislative act only if the legislature contemplated that the Money Match might for some retired members provide higher pension amounts. Such an expectation, however, does not support the conclusion that the legislature promised members that that always would be the case.
The final change that we determine to be relevant to understanding the evolution of the formulas for calculating service retirement allowances occurred in 1981 with the creation of the Full Formula. With that amendment, the legislature, for the first time, provided members with a formula under which the risk of earnings loss fell — and continues to fall — squarely on employers. The changes that the 1981 amendments made to former ORS 237.147 (1979), now ORS 238.300, were material: they added a new, primary benefit calculator to the system and shifted the downside risk of investment return away from members. Because we presume that the legislature intended those material changes to change the meaning of the statute materially as well, we conclude that the 1981 amendments effected a reenactment of the entire section and provide the version of the statute to which we will look in ascertaining the legislature's promissory intent.
Having concluded that Oregon Laws 1981, chapter 761, section 4, enacted the operative statutory contract that is now embodied in ORS 238.300 (and also was embodied in ORS 238.300 (2001)), we find nothing about the statutory law that preceded the 1981 amendments to former ORS 237.147 (1979) that detracts from the preliminary conclusion that we drew from the wording of ORS 238.300 (2001), that is, that the 1981 Legislative Assembly promised PERS members that, on retirement, they would receive the retirement formula yielding the highest pension amount. Nor do we find any contrary intent revealed in the other statutes upon which petitioners rely (concerning six percent member contributions and direction of those contributions to PERS regular accounts).
Our case law is consistent with that conclusion. As an initial matter, the parties have not directed us to a prior decision interpreting the relevant statutory provisions, and we have found none. Looking more broadly to this court's prior decisions involving PERS, petitioners place heavy reliance on this court's decision in OSPOA, 323 Or. 356 , 918 P.2d 765 . OSPOA , however, stands for only the proposition that the legislature promised members that the permissible employer pick-up of member contributions, assumed earnings rate for Tier One members, and unused sick-leave accrual provisions of the PERS statutory scheme were promissory and applied even to work yet to be performed. However, nothing 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 context of ORS 238.300 *1087 (2001). [40]
In summary, we conclude that the 1981 Legislative Assembly promised each eligible member that, at retirement, the member would be entitled to receive a service retirement allowance calculated under the formula that yielded the highest pension amount. The legislature did not alter or eliminate that promise when it enacted the 2003 PERS legislation.
Petitioners contend, however, that the statutory contractual obligation that we just have described includes an additional promise that PERS members have the right, during the course of their PERS membership, to contribute a certain percentage of their salary to their regular accounts so as to increase the value of their ultimate pension amount under the Money Match. We disagree.
Nothing in the text of ORS 238.200(1)(a) (2001), which required PERS members to contribute six percent of their salaries to the fund, supports petitioners' argument that the legislature intended that contribution to be immutable. As noted earlier, the 1981 Legislative Assembly lowered the member contribution rate from a high of seven percent to a uniform six percent. And, at the same time, the legislature grandfathered those members previously paying a contribution rate of less than six percent, even though it meant that those members' account balances, and therefore the service retirement allowances that the members ultimately would receive, would be smaller under the Money Match. In other words, the text of ORS 238.200(1)(a) (2001) and its statutory context do not establish clearly and unambiguously that the legislature intended to promise members that they could contribute six percent of their salaries to their regular accounts throughout their PERS membership so as to maximize their pension component calculation under the Money Match.
Applying the foregoing conclusions to petitioners' 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, the answer is clear: Nothing about the creation of the IAP alters the legislature's promise that, at retirement, each member will receive a service retirement allowance calculated under the formula yielding the highest pension amount, and nothing about the IAP legislation constitutes a breach of that promise. To the contrary, under the 2003 PERS legislation, each member in the system at the time of the effective date of that legislation will, at retirement, receive a service retirement allowance consisting of an annuity component based on the member's contributions and earnings and a pension component calculated under the formula that yields the highest pension amount.
b. The Assumed Earnings Rate
(1) The Statutes
Since 1975, the PERS statutory scheme has provided that the earnings to be credited annually to Tier One members' regular accounts will be no less than the existing assumed earnings rate. See generally Or. Laws 1975, ch. 333, § 2, codified as former ORS 237.277 (1975) (now ORS 238.255). [41] Petitioners identify the following statutory provisions as relevant to our consideration:
"[PERB] shall provide for a regular account for each active and inactive member of the system. The regular account shall *1088 show the amount of the member's contributions to the fund and the interest which they have earned. [PERB] shall furnish a written statement thereof upon request by any member or beneficiary of the system."
ORS 238.250 (2001).
"The regular account for an active or inactive member of the system shall be examined each year. If the regular account is credited with earnings for the previous year in an amount less than the earnings that would have been credited pursuant to the assumed interest rate for that year determined by [PERB], the amount of the difference shall be credited to the regular account and charged to a reserve account in the fund established for the purpose. A reserve account so established may not be maintained on a deficit basis for a period of more than five years. Earnings in excess of the assumed interest rate for years following the year for which a charge is made to the reserve account shall first be applied to reduce or eliminate the amount of a deficit. [PERB] shall attempt to ensure that the reserve account is funded with amounts adequate to leave a zero balance in the account when all members who establish membership in the system before January 1, 1996, as described in ORS 238.430, have retired."
ORS 238.255 (2001).
"The administrative expenses of the system shall be paid from interest earned by the retirement fund; provided, that if such interest be insufficient the expense in excess thereof shall be paid from the contributions which this chapter requires participating employers to pay into the [f]und."
ORS 238.610(1) (2001).
"At the close of each calendar year in which the earnings on the * * * [f]und equal or exceed the assumed interest rate established by [PERB] under ORS 238.255, [PERB] shall set aside, out of interest and other income received through investment of the * * * [f]und during that calendar year, such part of the income as [PERB] may deem advisable, not exceeding seven and one-half percent of the combined total of such income, which moneys so segregated shall remain in the fund and constitute therein a reserve account. [PERB] shall continue to credit the reserve account in the manner required by this subsection until [PERB] determines that the reserve account is adequately funded for the purposes specified in this subsection. Such reserve account shall be maintained and used by [PERB] to prevent any deficit of moneys available for the payment of retirement allowances, due to interest fluctuations, changes in mortality rate or, except as provided in subsection (3) or (4) of this section, other contingency. * * *"
ORS 238.670(1) (2001). As noted earlier, since 1989, the current assumed earnings rate has been set at eight percent.
The 2003 Legislative Assembly amended ORS 238.255 (2001), set out above, and broke it into new subsections (1) and (2), as follows (deleted text in brackets and italics; new text in boldface type):
"(1) The regular account for [ an active or inactive member of the system ] members who established membership in the system before January 1, 1996, as described in ORS 238.430, and for alternate payees of those members, shall be examined each year. If the regular account is credited with earnings for the previous year in an amount less than the earnings that would have been credited pursuant to the assumed interest rate for that year determined by [PERB], the amount of the difference shall be credited to the regular account and charged to a reserve account in the fund established for the purpose. [ A reserve account so established may not be maintained on a deficit basis for a period of more than five years. Earnings in excess of the assumed interest rate for ] In years following the year for which a charge is made to the reserve account, all earnings on the regular accounts of members who established membership in the system before January 1, 1996, as described in ORS 238.430, and of alternate payees of those members, shall first be applied to reduce or eliminate the amount of a deficit. Only earnings on the regular accounts of members who established membership in the system before *1089 January 1, 1996, as described in ORS 238.430, and of alternate payees of those members, may be used to reduce or eliminate the amount of a deficit.
"(2) Notwithstanding subsection (1) of this section and except as provided in subsection (5) [ [42] ] of this section, [PERB] may not credit any earnings to the regular accounts of members who established membership in the system before January 1, 1996, as described in ORS 238.430, or of alternate payees of those members, in any year in which there is a deficit in the reserve account established under subsection (1) of this section, or credit any earnings to the regular accounts of those members, or alternate payees, that would result in a deficit in that reserve account. In any year in which the fund experiences a loss, [PERB] shall charge the amount of the loss attributable to the regular accounts of members who established membership in the system before January 1, 1996, as described in ORS 238.430, against the reserve account."
Or. Laws 2003, ch. 67, § 5, as amended by Or. Laws 2003, ch. 625, § 10. The amendments to ORS 238.255 apply to the crediting of earnings for calendar year 2003 and thereafter. Or. Laws 2003, ch 67, § 6, as amended by Or Laws 2003, ch 625, § 11. [43]
In a separate enactment, the legislature added a new subsection (3) to ORS 238.255 (2001), as follows:
"The regular account for an active or inactive member who established membership in the system before January 1, 1996, as described in ORS 238.430, may not be credited with earnings in excess of the assumed interest rate until:
"(a) The reserve account established under subsection (1) of this section no longer has a deficit;
"(b) The reserve account established under subsection (1) of this section is fully funded with amounts determined by [PERB], after consultation with the actuary employed by [PERB], to be necessary to ensure a zero balance in the account when all members who established membership in the system before January 1, 1996, as described in ORS 238.430, have retired; and
"(c) The reserve account established under subsection (1) of this section has been fully funded as described in paragraph (b) of this subsection in each of the three immediate preceding calendar years."
Or. Laws 2003, ch. 3, § 1, as amended by Or. Laws 2003, ch. 67, § 5, codified as ORS 238.255(3).
Finally, the 2003 Legislative Assembly amended the earnings crediting process for Tier One PERS members in one other respect, by enacting a new statute that provides as follows:
"(1) Notwithstanding any other provision of this chapter, the regular account balance of a member or alternate payee described in subsection (3) of this section may not be less than the amount provided for under subsection (2) of this section for the purpose of computing retirement allowances, death benefits and amounts to be paid to a withdrawing member under ORS 238.265 and for other computations under the provisions of this chapter that are based on a member's or alternate payee's regular account balance. If the regular account balance of a member or alternate payee described in subsection (3) of this section is less than the amount provided for under subsection (2) of this section at the time of retirement or withdrawal of the account, [PERB] shall credit the account with the difference and charge the amount so credited to the reserve account established under ORS 238.255.
"(2) The minimum regular account balance for a member or alternate payee described *1090 in subsection (3) of this section is the amount that the regular account of a member or alternate payee would have contained if the regular account of the member had been credited with earnings at the assumed interest rate in every year in which the regular account of the member or alternate payee was in existence.
"(3) The provisions of this section apply only to:
"(a) A member who establishes membership in the system before January 1, 1996, as described in ORS 238.430, and who retires or withdraws the member account of the member on or after April 1, 2004; and
"(b) An alternate payee of a member described in paragraph (a) of this subsection."
Or. Laws 2003, ch. 67, § 8, as amended by Or. Laws 2003, ch. 625, § 12, codified as ORS 238.258.
2) The Parties' Arguments
From the pertinent statutes as they existed before the 2003 PERS legislation, all petitioners, except petitioner Sartain, glean a promise, the general nature of which is that PERS members "are guaranteed all earnings on their individual accounts, minus allocations for administrative expenses and properly constituted reserves." Moreover, for Tier One members, petitioners assert that the legislature has assured them since 1975 — the year that the predecessor statute to ORS 250.255 (2001) was enacted — that "the earnings to be credited annually to their account will be no less than the then-existing assumed interest rate." And, they continue, the legislative history of the 1975 enactment demonstrates that, if meeting that minimum crediting obligation creates a deficit in the gain-loss reserve lasting more than five years, then employers — not members — are responsible for recovering the balance. As with the provisions respecting contributions to members' regular accounts that predated the 2003 PERS legislation, petitioners view the wording of the statutory provisions respecting the crediting of earnings to those accounts as unambiguously promissory, applicable to work yet to be performed, and containing no reservation of the right to future amendment.
Based upon that understanding of the above-quoted 2001 statutory provisions, petitioners argue that the above-quoted provisions from the 2003 PERS legislation directly and indirectly either breach or impair those earlier obligations:
"There is no question but that these legislative changes eliminate the requirement that petitioners' [regular] accounts grow at a rate at least equal to the assumed rate annually as promised by the 1975 legislature. Furthermore, by removing the employer Call, these changes eliminate the requirement that after five years, any remaining deficit created by the payment of the guarantee becomes the liability of employers. * * * [Instead], all future deficits will be retired only through earnings on employee accounts. In accordance with these provisions, in 2004, [PERB] distributed zero earnings to petitioners ['] accounts for the 2003 earnings."
Respondents disagree. They argue that ORS 238.255 (2001) did not promise or require that PERB would credit PERS members' regular accounts with a specific amount of earnings each year. Instead, that statute requires only that crediting occur at "the assumed rate for that year determined by [PERB]," that PERB had the discretion to change that rate, and that the legislature may (and did in 2003) confine PERB's discretion in setting the assumed rate. Moreover, respondents argue that the 2003 PERS legislation applies to only prospective crediting decisions and that newly enacted ORS 238.258 ensures that members ultimately never will receive a lower service retirement allowance than they would have received if their regular accounts had been credited at the assumed earnings rate each year. Respondents also disagree with petitioners' reading of the former call provision as requiring employers to make up any five-year deficit in the gain-loss reserve. Finally, respondents argue that nothing in the statutes upon which petitioners rely establishes a legislative promise that PERS members are entitled to have credited to their regular *1091 accounts "any earnings in excess of the assumed rate."
(3) Discussion
Our assessment of the parties' arguments begins with this court's holding in OSPOA that the legislature intended the assumed earnings rate for Tier One members to constitute a promise that extends to work yet to be performed. Specifically, the court stated:
"The state's promise, as material, included employee access to the return rate procedure described in ORS 237.277. Section 11 [of Ballot Measure 8 (1994)] would cancel that obligation after employees partially performed their services. Moreover, section 11 impairs the obligation of contract stated in ORS 237.277, because it would entirely eliminate that obligation with respect to employee contributions to PERS made by current employees for work performed both before and after the effective date of Measure 8. Hughes; Taylor. "
OSPOA, 323 Or. at 378 , 918 P.2d 765 (emphasis in original). That holding, however, must be considered in the context of the nature of the impairment of the contractual obligation at issue in that case. There, Measure 8 had presented an all-or-nothing scenario, in eliminating in its entirety the legislative promise that Tier One members would receive annual crediting to their regular accounts in an amount not less than the assumed earnings rate.
The 2003 PERS legislation, however, does something other than simply eliminate the obligation. Instead, by enacting ORS 238.258 — which requires a guaranteed crediting at the applicable assumed earnings rates on a career basis at retirement — the legislature at least acknowledged the promissory nature of the guaranteed rate of return that OSPOA recognized. Accordingly, we are required to interpret the statutory provisions at issue in greater detail than did the court in OSPOA , so as to determine whether the 2003 PERS legislation is consistent with the earlier legislative promise. [44]
We address first petitioners' argument that the statutes before the 2003 PERS legislation guaranteed Tier One members not only annual earnings at a rate not less than the assumed earnings rate but also any earnings in excess of the assumed rate, less any allocations necessary for administrative expenses and properly constituted reserves. We find no support for that broad proposition in the wording of the statutes on which petitioners rely.
ORS 238.255 (2001), for example, addressed directly the circumstance in which a Tier One member's "regular account is credited with earnings for the previous year in an amount less than the earnings that would have been credited pursuant to the assumed interest rate for that year determined by [PERB]." In such instances, PERB credited the difference to the member's regular account and charged that amount to the gain-loss reserve. Although that wording supports a legislative promise that Tier One members' regular accounts will grow annually in an amount not less than the assumed earnings rate, that text evinces no support for the proposition that Tier One members contractually are entitled to any overage that is not applied to administrative expenses or reserves.
Neither does the legislative direction later in that statute that "[e]arnings in excess of the assumed interest rate for years following the year for which a charge is made to the [gain-loss reserve] shall first be applied to reduce or eliminate the amount of a deficit," ORS 238.255 (2001), support petitioners' claim. Although that sentence expressly contemplated the potential for excess earnings, the only command in the statutory wording is that the overage first go toward restoring the gain-loss reserve. Notably absent is any directive that, following such application, PERB must apply any remaining earnings to PERS members' regular accounts.
*1092 Likewise, ORS 238.670 (2001), which addressed years in which the fund's earnings equaled or exceeded the assumed earnings rate and on which petitioners also rely, did not contain any affirmative promise that PERS members were entitled to a crediting of the overage, less expenses, to their regular accounts. Instead, that statute provided only that, for such years, PERB "shall set aside, out of interest and other income received * * *, such part of the income as [PERB] may deem advisable, not exceeding seven and one-half percent of the combined total of such income" to a reserve account. That statute was not a legislative directive that PERB must credit any remaining excess earnings to members' regular accounts. Finally, we have found nothing in the context or history of those statutory provisions that detracts from the conclusion that we have drawn from the text — that is, that the legislature made no such promise respecting excess earnings. [45]
The record in these cases establishes that PERB in fact historically has credited PERS members' regular accounts with excess earnings in good investment years. Even so, it is not for this court to codify PERB's practices. Instead, our task is to ascertain those aspects of the PERS statutes that are promissory and, from those provisions, to determine the precise nature of the obligations that they impose. It is those obligations that set the conditions that the legislature may not in the future alter without consequence. That PERB may have been administering the system in a more generous fashion regarding crediting to members' regular accounts than the statutes required does not alter the nature of the promises that the legislature made.
For the reasons set out above, we conclude that Tier One members had no contractual right under the PERS statutes as they existed before the 2003 PERS legislation to the crediting of annual earnings in excess of the assumed earnings rate to their regular accounts. Instead, we conclude that, for Tier One members, annual crediting at — but not in excess of — the assumed earnings rate is the promise that the legislature extended. Those conclusions, moreover, undermine at least in part petitioners' subsidiary argument, viz., that the legislature contractually is bound to maintain the system's allocation of the burden of funding reserves and paying administrative expenses. So long as Tier One members' regular accounts are credited annually with earnings that do not fall below the assumed earnings rate, the legislature has reserved for itself the ability to redirect any excess earnings.
Those conclusions, however, do not address fully petitioners' argument that, by changing the future timing of the crediting process, the 2003 PERS legislation removes ( i.e., impairs) the obligation that Tier One members' regular accounts annually be credited at not less than the assumed earnings rate. In assessing that argument, we begin by comparing the statutory processes for Tier One regular account crediting both before and after the 2003 PERS legislation.
Before the 2003 PERS legislation, PERB examined the regular accounts of Tier One members annually to determine whether the earnings credited to those accounts fell below the assumed earnings rate. ORS 238.255 (2001). If they did, then PERB would credit the difference to those accounts and charge that difference to the gain-loss reserve. Id. That statute further provided that the gain-loss reserve could not be maintained on a deficit basis for more than five years (the call), and, respecting repayment of the deficit, the statute provided that PERB first must apply future earnings in excess of the assumed earnings rate to reduce or eliminate the deficit. And, as noted earlier in this opinion, the call provisions of the statute never have had to be invoked. Also, before the 2003 PERS legislation, Tier One members received annual statements showing the crediting from the previous year's earnings, and those earnings were never less than the assumed earnings rate.
*1093 Under the 2003 PERS legislation, however, the crediting system for Tier One members has changed considerably. First, as we have addressed and upheld above, Tier One members no longer are authorized to contribute salary withholdings to their regular accounts. Accordingly, any future growth in those accounts will derive solely from earnings on the members' account balances as of the effective date of the 2003 legislation. Moreover, it no longer is the case that Tier One members' regular accounts necessarily will receive year-by-year annual credits in an amount not less than the assumed earnings rate. For example, if a deficit exists in the gain-loss reserve, then PERB will apply Tier One regular account earnings to the gain-loss reserve in the years following to reduce or eliminate that deficit. [46] Moreover, PERB now may not credit any earnings to Tier One members' regular accounts for any year in which to do so would cause a deficit in the gain-loss reserve, and, for any year in which the fund experiences a loss, PERB is required to charge the amount of the loss attributable to Tier One members' regular accounts against the gain-loss reserve. Or. Laws 2003, ch. 67, § 5, as amended by Or. Laws 2003, ch. 625, § 10, codified as ORS 238.255(1) and (2). [47]
As described, there can be little doubt but that the 2003 PERS legislation took what was before an unconditional right of Tier One members to have their regular accounts credited in an amount not less than the assumed earnings rate and changed that right to a conditional one. That change, standing alone, would constitute an impairment of a contractual obligation set out in the PERS contract, because it amounts to an alteration of the legislature's promise respecting the crediting of members' regular accounts. See Eckles, 306 Or. at 395, 400 , 760 P.2d 846 (explaining gravamen of constitutional violation; contrasting impairment with breach).
The 2003 PERS legislation, however, added a new statutory provision, ORS 238.258 (quoted above), apparently to meet what otherwise seems a clear impairment of contractual obligation. That provision states that, for purposes of computing the service retirement allowance of a retired Tier One member, the member's minimum regular account balance will be "the amount that the regular account of a member would have contained if the regular account had been credited with earnings at the assumed interest rate in every year in which the regular account * * * was in existence." Or. Laws 2003, ch. 67, § 8(2), as amended by Or. Laws 2003, ch. 625, § 12. Therefore, the validity of petitioners' argument, as well as the validity of that aspect of the 2003 PERS legislation, depends on whether that new provision is consistent with the legislature's earlier guarantee. We conclude that it is not.
As discussed, the legislature's promise with respect to Tier One members was that those members would receive no less than the assumed earnings rate credited annually to their regular accounts. That statutory promise extends throughout PERS membership. See OSPOA, 323 Or. at 377-78 , 918 P.2d 765 (constitutional amendment that eliminated assumed earnings rate on contributions to member accounts for work performed both before and after date of adoption impaired contractual obligation set out in former ORS 237.777 (1975)). That part of the 2003 PERS legislation providing for a "minimum regular account balance," Or. Laws 2003, ch. 67, § 8(2), as amended by Or. Laws 2003, ch. 625, § 12, based on the assumed earnings rate over the life of a Tier One member's regular account, is not consistent with the above-described obligation. That is so because Tier One members' regular account balances currently reflect annual earnings credits that often exceeded the assumed earnings rate. Those prior earnings crediting decisions, whether or not they are deemed to have been overly generous in hindsight, are *1094 now final. To the extent that those final crediting decisions are reflected in Tier One members' regular account balances, no less than the assumed earnings rate must be credited annually to those account balances until retirement.
In creating a new, post hoc, career-crediting process, the 2003 PERS legislation, Or. Laws 2003, ch. 67, § 8, as amended by Or. Laws 2003, ch. 625, § 12, changes that obligation, ultimately resulting in many cases in account balances that will not represent the sum of all earnings that, consistently with the earlier legislative promise, annually have been (and would be) credited to Tier One members' regular accounts. We therefore hold that Oregon Laws 2003, chapter 67, sections 5 to 8, as amended by Oregon Laws 2003, chapter 625, sections 10 to 12, alter the state's earlier contractual obligation and thereby impair that obligation in violation of Article I, section 21, of the Oregon Constitution.
Having concluded that that part of the 2003 PERS legislation alters and thereby impairs the state's contractual obligation to credit Tier One members' regular accounts annually in an amount not less than the assumed earnings rate, we proceed to consider the State of Oregon and nonstate respondents' remaining alternative argument and affirmative defense that they advance to avoid the ultimate conclusion that that impairment is constitutionally significant. For the reasons set out below, we conclude that respondents' remaining argument and affirmative defense are not availing under the present circumstances.
First, respondents argue that, to violate Article I, section 21, of the Oregon Constitution, an impairment of contractual obligation must be "substantial." And, in respondents' view, any impairment resulting from the 2003 PERS legislation is not of that magnitude. Specifically, they argue:
"This Court has not directly addressed the question whether the Legislative Assembly may, within the confines of Oregon's Contract Clause, amend or alter an obligation without impairing or breaching a statutory contract. It has implied on several occasions, however, that a lesser modification to a statutory contract may be constitutionally permissible."
For that proposition, respondents rely primarily on the statement in Hughes that, once vested, "an employee's contractual interest in a pension plan may not be substantially impaired by subsequent legislation." 314 Or. at 20 , 838 P.2d 1018 (emphasis added). Moreover, respondents argue that other state and federal courts have reached the same conclusion in the context of pension litigation and urge this court to follow suit.
We agree with respondents that this court has yet to determine whether substantiality of an impairment of a contractual obligation is required to show a violation of Article I, section 21. Further, we have considered thoroughly the well-developed arguments from both sides addressing the issue. However, we conclude that we need not answer that question in this instance. That is so because, assuming without deciding that substantiality is a required element, we deem the impairment to the obligation in the PERS contract respecting the annual assumed earnings rate guarantee to be substantial. We reach that conclusion for two reasons.
As an initial matter, although the evidence of the impact of the crediting changes to Tier One members' regular accounts was sharply contested before the Special Master, and the Special Master found that the evidence consisted of estimates that were themselves contingent, that data is sufficiently precise to permit this court to find that, for Strunk petitioners as an example, the provisions relating to crediting of Tier One members' regular accounts will result in a reduction of benefits (compared to those that they would have received without the legislation) in amounts varying between approximately 12 and 20 percent per month. Such significant reductions are illustrative of a substantial impairment of the assumed earnings rate guarantee.
More significantly, we deem the impairment to be substantial for the further reason that the alternative that the legislature provided — career-long crediting at the assumed earnings rate — has a retrospective effect on *1095 earnings accrued for work already performed. That is so because, in providing the career-basis remedy, the 2003 PERS legislation disregards entirely PERB's earlier crediting decisions — decisions that generally were not challenged [48] — and effectively replaces the resulting regular account earnings, many of which had exceeded the minimum rate of earnings, with the assumed earnings rate. Absent some legal basis for such a downward adjustment, that legislative choice amounts to nothing more than a unilateral decision to reduce benefits already earned. That, in our view, is a substantial impairment of the contractual obligation respecting the assumed earnings rate guarantee. Accordingly, we reject respondents' argument to the contrary.
Respondents next argue by way of affirmative defense that, even if the impairment is substantial, a substantial impairment can be justified if reasonable and necessary for an important public purpose. Oregon has not adopted that view. See Hughes, 314 Or. at 14 n. 16, 838 P.2d 1018 ("the application of the rule that a state may not contract away its `police power' under Article I, section 21, of the Oregon Constitution, does not embrace the `balancing' analysis currently employed by the Supreme Court of the United States").
The parties introduced voluminous documentary and testimonial evidence concerning the financial status of PERS and the Oregon economy generally in support of and against what the Special Master described as respondents'"economic hardship defenses." That evidence, and specifically the recommended findings that the Special Master derived therefrom, do not convince us that the situation rises to the high threshold that would have to be met for an economic hardship defense — were we to recognize one — to succeed.
First, we emphasize that we are not dealing here with legislation that impairs private contracts. Instead, we are dealing with a statutory contract. In other words, it is one of the parties to the contract (the state) that now is attempting to rely on a change in circumstances to permit it to alter its contractual obligations in a constitutional manner. In that light, we note that the Special Master made, among others, the following recommended findings:
• "Oregon's state tax burden currently is approximately .7 percent less than the national average."
• "[T]here is little voter willingness to raise taxes to provide additional government revenues."
• The "capital downturn" from 2000 through 2002, although causing a greater impact on state tax revenues than previous economic downturns over the past two decades, "did not compare in magnitude or duration to the Great Depression of the 1930s."
To be sure, the Special Master's report contains other recommended findings that demonstrate that the state's recent fiscal status is both serious and has resulted in substantial detriments to the provision of governmental services across the state. We accept all those findings. Taken together, however, they do not justify a rewriting of the assumed earnings rate guarantee in a manner that would result in the elimination of earnings both promised and actually credited over time to Tier One members' regular accounts. We reject respondents' economic hardship affirmative defense and declare Oregon Laws 2003, chapter 67, sections 5 to 8, as amended by Oregon Laws 2003, chapter 625, sections 10 to 12, void. See Hughes 314 Or. at 31 , 838 P.2d 1018 (law impairing obligation of contract "is a nullity").
c. Elimination of the Variable Annuity Account Program
(1) The Statutes
As noted, the legislature in 1967 authorized PERS members to direct a percentage of their contributions to equity investments, by creating a variable annuity account program. Or. Laws 1967, ch. 622, § 24, codified as former ORS 237.197 (1967), renumbered as ORS 238.260 (1995). The 2001 version of that statute, which remains substantially unchanged *1096 from the enactment as initially worded, provided, in part, as follows:
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/835784. Public record. Not legal advice.