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BLAME THE OREGON SUPREME COURT FOR THE P.E.R.S. PROBLEM
By Bill Sizemore
April 16, 2003
There’s plenty of blame to go around for the debacle surrounding Oregon’s public employee retirement system (PERS): The state legislature, which routinely caves in to the public employee unions; the public employee dominated PERS board, which has consistently enhanced public employee pension benefits without regard to cost, former governors Atiyeh, Goldschmidt, Roberts, and Kitzhaber, and also current governor Ted Kulongoski, who as a former state senator and attorney general played a major contributing role.
The problem has not just been the Democrats. True, Kulongoski back in 1979 was the original sponsor of the legislation that resulted in public employees not having to pay any part of the cost of their lavish pensions; but it was Republican Vic Atiyeh, a former governor, who had the audacity to sue the state to overturn Measure 8, a PERS reform measure approved by Oregon voters back in 1994. The official estimate of taxpayer savings under Measure 8 was $349.5 million per year back in 1994, a number that would be much higher today.
To varying degrees, all of these people and their entities helped saddle Oregon taxpayers with what is today an obscenely generous public employee retirement system that is $17 billion in the hole and allows career public employees to enjoy average pension benefits actually exceeding their highest working salaries. Unbelievably, by 2010, PERS projects some employees will retire with pensions literally double their highest working salary, not including their social security benefits.
It is hard to believe that any taxpayer funded system would pay a $50,000 per year school teacher a pension of $100,000 per year, starting at age 58, but that’s the kind of system Oregon’s political leaders have created. That ’s where PERS itself says we are headed.
If nothing else, the existence of such a system is testimony to the awesome political power of the public employee unions, who buy Democrats and frighten even the most solidly conservative Republicans.
There is one entity, however, that deserves more blame for the current PERS problem than all the others put together: the Oregon Supreme Court, consisting of seven justices, all of whom are beneficiaries of the PERS system. Today, it is this one entity that stands in the way, blocking any meaningful reform of the system.
In 1996, the Supreme Court issued a decision overturning Measure 8, the aforementioned 1994 voter-approved PERS reform measure, on grounds that defy both common sense and legal reasoning. It is that ill-advised decision that today prevents the state legislature from devising any meaningful resolution of the PERS problem.
Many respected attorneys, including governor Ted Kulongoski and former labor secretary Jack Roberts, have told me that the Measure 8 case was wrongly decided.
In 1994, when I drafted Measure 8, my primary concern was to avoid violating the contractual rights of public employees, which are guaranteed by a clause in the U.S. Constitution prohibiting states from adopting laws impairing the obligations of contracts.
To avoid this legal pitfall, I drafted Measure 8 to affect only future contracts, not existing ones. I knew that the Oregon Supreme Court had earlier issued a decision regarding this very subject, the Hughes decision, which in effect stated that a public employee contract could be changed for work not yet performed, but not for work that had already been performed. Under the Hughes decision, a contract could be changed prospectively, but not retroactively. At least that is the way then attorney general Ted Kulongoski interpreted the Hughes decision.
When the Supreme Court decided the Measure 8 case, however, it created a special kind of contract that could never be changed, even prospectively. The court decided that when a contract involves pension benefits, it could not be changed.
The court essentially declared that when a public employee is hired, he or she is guaranteed by an “implied contract” whatever pension benefits and terms and conditions that were available on that day, and that no changes could ever be made to those terms and conditions for as long as that person was employed.
The decision was absurd. Even though no written or verbal agreement set forth the terms of such a contract, the court opined that the moment the employee was hired an implied contract was created, and that the government was stuck with that system no matter what it cost and no matter what affect the system had on the taxpayers or on the government’s ability to provide even essential services to the public.
Bear in mind that the rest of a public employees’ compensation, including his or her salary and health benefits, are guaranteed only for the length of the current collective bargaining agreement under which the employee works, usually a two or three year period, and not for the rest of the employee’s career. Bear in mind also that no employee has a contractual right to any increase in salary beyond the term of the current collective bargaining agreement. Not so with pensions, however.
The 1996 court mysteriously decided that pensions are somehow a special kind of compensation in a class all their own, and that unlike all other forms of compensation, including take-home pay, pension obligations can never be changed, even if the obligation becomes absurd and the government employer cannot meet the pension obligation and still fulfill its basic mission.
The court’s logic is akin to saying that an employee always has a right to the salary he enjoys today or the job he has today, because he had come to expect that salary, and had even purchased a house or car based upon an expectation of that level of income. The 1996 court did not say that regarding salary or health care benefits, but it did say that regarding pension benefits.
In effect, the court said that public employee pension benefits take priority over everything else in government, including public education, public safety, and public health. And that is exactly the way things are playing out in Oregon. Schools are closing, the school year is being shortened, and jail cells are being emptied partly because of the Measure 8 decision.
Notwithstanding the 1996 court’s flawed logic, there is no legal reason why Oregon’s public employees retirement system cannot be modified. The 1996 court’s opinion was based on a flawed interpretation of the federal contract clause. Even the U.S. Supreme Court has interpreted the federal contract clause differently than the Oregon Supreme Court.
The federal contract clause often has been interpreted by the federal courts as allowing contract impairment, when the state has a “significant” and “legitimate” purpose for doing so. With schools closing, criminals being set loose, a $17 billion PERS deficit, and employees retiring on pensions exceeding their actual salaries, certainly the purpose for modifying a merely “implied” contact with public employees is both significant and legitimate.
It is not an overstatement to say that the Measure 8 decision has eviscerated state and local elected officials’ ability to control their budgets. Runaway pension costs have decimated the finances of the state, as well as local governments and school districts across the state. Elected officials have been handcuffed in their efforts to address the problem. The court should not have the power to do that.
Arguably, for the judicial branch of government to place such an inescapable harness on the legislative and executive branches of government and to prevent them from controlling their budgets is a violation of the separation of powers doctrine. In doing just that, the 1996 Oregon Supreme Court clearly overstepped its authority, and the governor and state legislature should not stand for it.
Even members of the current court believe the 1996 court overreached. The three Supreme Court justices who dissented in the Measure 8 decision even went so far as to say in their dissent that the majority had lost their perspective and overstepped their authority. Strong words, indeed. Those words alone should justify the current court reconsidering the reasoning that led to the 1996 decision.
In fact, there may be no other way out of the current PERS dilemma. Any proposal that meaningfully addresses the PERS problem, including abolishing the system and starting over, runs into the roadblock of the Measure 8 decision, or at least a lawsuit from the public employee unions claiming such a violation.
One major contributor to the current $17 billion PERS deficit is a provision of state law that guarantees public employees, who were hired prior to 1996, an eight percent return on the money in their PERS account, regardless of the actual return. By passing Measure 8, voters eliminated the eight percent guaranteed rate of return.
The Oregon Supreme Court decided, however, that Measure 8 violated the contractual right of employees; concluding that public employees had a contractual right to enjoy at least an eight percent return on their pension accounts, even if the employee’s account actually lost money.
The court was wrong. No contractual right to an eight percent return could have been created. For decades, there has been a provision in the state constitution prohibiting the state from incurring a debt in excess of $50,000. The eight percent guaranteed rate of return on public employees’ retirement accounts has created a debt now running into billions of dollars. Legally, the state could never have created a contract with employees guaranteeing an eight percent return, because such a contract would have violated the constitution’s debt limitation.
How did the 1996 court get around the constitution’s debt limit? The court concluded that since PERS is a fully funded system, no debt was created. Well, PERS is not fully funded today and a huge debt has been created. Thanks to the court, the state now faces a $17 billion debt created under a state constitution that prohibits a debt in excess of $50,000.
Thanks to the Oregon Supreme Court, the current legislature faces huge financial obligations created by previous state legislatures, another violation of the state constitution.
The Measure 8 decision defies any common sensical interpretation of the debt limit provision of the Oregon Constitution. The guaranteed rate of return must be unconstitutional and therefore unenforceable, because it creates a debt in excess of $50,000. End of problem, or at least the end of much of the problem.
Finally, let’s assume for purposes of argument that the Measure 8 decision somehow was correct and that the measure violated the contractual rights of employees employed prior to the 1994 effective date of Measure 8. Nonetheless, there is simply no way that Measure 8 could have violated the contractual rights of the thousands of employees who have been hired since Measure 8 passed. Measure 8 must still be effective for them.
On what basis could Measure 8 have violated the contractual rights of employees hired after the measure was adopted? Those employees should have no guaranteed rate of return. They should be contributing six percent of their salaries into their pensions with no offsetting pay raise. They should be prohibited from using their unused sick leave to artificially inflate their pensions.
Today, there are a number of new faces in the Oregon Supreme Court. The current court might decide the contract issues differently and open the door for real PERS reform. Indeed, it should. If Chief Justice Wallace Carson and Justice Gillette believed in 1996 that the majority had overstepped their authority and lost their perspective in throwing out Measure 8, they ought to be willing to lead the current court in a more reasonable direction.
And the current legislature should give them a case with which to do just that.
Bill Sizemore is executive director of the Oregon Taxpayers Union and was author and chief petitioner of Measure 8, a voter-approved 1994 ballot measure that was invalidated by the Oregon Supreme Court.
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Bill Sizemore is a registered Independent who
works as executive director of the Oregon Taxpayers Union, a statewide
taxpayer organization. Bill was the Republican candidate for governor
in 1998. He and his wife Cindy have four children, ages eight to thirteen,
and live on 36 acres in Beavercreek, just southeast of Oregon City, Oregon.
"Thanks to Oregon