Supreme Court Decision – PERS Q & A March 10, 2005 1. What did the Court decide? On March 8, 2005, the Oregon Supreme Court handed down the much awaited decision in the case brought by OEA and other public employee unions challenging the 2003 PERS Reform Legislation. The Court’s decision addressed four major challenges involving the 2003 legislation. In a unanimous 7-0 decision, the Supreme Court held that all changes to the 8% guarantee were unconstitutional. Second, in a unanimous 7-0 decision, the Supreme Court held that the PERS changes forcing a suspension of the cost of living adjustment (COLA) was a breach of the PERS contract. Third, on a closer 4-3 vote, the Court rejected public employee challenges to legislative changes made to the 6% employee contribution. Also, on a 7-0 vote, the Court rejected the public employee challenge to the legislative method for updating the mortality tables used to calculate benefits. The victory on the 8% and COLA issues was substantial in terms of benefits to OEA members. 2. What are the effects of the Court’s ruling on each of these issues? Guaranteed Rate of Interest – 8% First, the guaranteed rate of interest applies to Tier 1 members, those members who became employees in the system before 1996. The 2003 legislative reform would have prohibited crediting this assumed rate of interest to Tier 1 accounts if there was a deficit in the reserve account which has been the case in recent years. Therefore, Tier 1 members have not been credited with any interest on earnings for those accounts since January 2004. The Court decision requires that Tier 1 members be credited with the assumed rate of interest as promised by the statutory PERS contract. Cost of living adjustments Prior to the 2003 legislative reforms, PERS retirees received annual cost of living adjustments of up to 2% a year. The 2003 legislation had the effect of reducing or withholding cost of living adjustments for some retirees. The Court’s decision nullifies the Legislature’s reduction or temporary elimination of cost of living adjustments and restores the COLA, as promised in statute, for all retirees affected. 6% employee contribution As of January 1, 2004, the 2003 legislative reforms redirected the 6% employee contributions to individual account plans (like a 401k or IRA) from that point forward. The effect of this legislative action is to diminish growth and earnings in employee accounts and reduce the annuity portion of a member’s retirement benefits. It also saves the PERS system money. The effect of the Court’s ruling is to uphold the Legislature’s change from January 1, 2004 into the future, so that employees’ 6% contributions will now begin accruing in new individual account plans that will rise and fall with the stock market. This change progressively reduces the value of money match and it stops future contributions to the variable account. Funds already in the variable account will remain there. Updating the Mortality Tables The PERS board has from time to time updated the actuarial equivalency factors used on mortality tables to calculate benefits for members who are retiring. Prior to the 2003 legislative reforms, PERS rules promised that for most PERS members, any changes to the system’s actuarial calculations would not result in a lowering of benefits. The 2003 legislative reforms broke this promise. The Legislature adopted changes that require PERS to retroactively apply updated actuarial factors to a member’s entire account. The Court’s ruling upholds this legislative change. 3. Will the Court’s decision require recalculation of employer contributions during the current biennium? No. Therefore, public employer budgets should not suffer a negative impact during the 2005-2007 budget cycle. The Governor, the Speaker of the House of Representatives and PERS all agree on this point. 4. Can public employees appeal those parts of the decision we lost? Public employees currently have pending a Constitutional challenge in federal court on the same matters. At this time, that challenge is before the Ninth Circuit Federal Court of Appeals. Our attorneys will be evaluating the merits of continued litigation over the challenges that were rejected by the Oregon Supreme Court. However, the Oregon Supreme Court’s analysis on these points makes our federal appeal more difficult. 5. Can the State of Oregon or Public Employees Retirement System appeal those parts of the Supreme Court decision that we won? No. The State and other public employers cannot appeal on the issues decided in favor of the public employees today. 6. Will Tier 1 members receive the guaranteed minimum rate on their money that is now being redirected to the Individual Account Program (IAP)? No. Only a Tier 1 member’s regular (fixed) account is eligible for guaranteed earnings at the assumed interest rate, currently 8%. The PERS Board actuary sets the assumed interest rate and then the PERS Board must adopt it. The assumed interest rate has been set at 8% for many years. If it were to be reduced, it would cause employer rates to go because they would have the same liability but their money would be assumed to be earning less. The Individual Account Plan (IAP) receives all employee contributions and was purposefully set-up outside of the PERS fund. The IAP will receive earnings and losses at the market rate. 7. Will the employer contribution go into the Individual Account Plan (IAP) or the regular PERS account? Employers will continue to contribute to PERS to fund their share of the cost of member benefits. Employer contributions have never gone to individual accounts nor will they now go to the IAP accounts. 8. Prior to the 2003 legislation, money in the regular PERS account often earned significantly more than the 8% minimum. Will this be the case once again? As a result of the Strunk decision, the PERS Board must annually credit the regular account of Tier 1 members with a minimum of the assumed interest rate, currently set at 8%. The PERS Board has the authority to credit earnings at a higher rate if they are sufficient after setting aside money for reserves and other administrative costs. 9. What does the Strunk decision mean for Tier 2 employees (those hired between 1/1/1996 - 8/28/2003)? The majority of the 2003 PERS Reform Legislation was meant to adversely impact Tier 1 members with two exceptions, the updated mortality tables, and the end of new contributions into PERS accounts by diverting the 6% employee contribution into the new individual account program. While we were unsuccessful in our legal challenge to these two areas, the Court did, however, reaffirm its prior cases recognizing the contractual nature of PERS and left no room for those who might be interested in getting rid of the PERS system in its entirety. Tier II participants are now more likely to retire on a combination of full formula and IAP account rather than money match. The good news is that for many Tier II participants this is projected to provide a greater benefit. 10. As a result of the 2003 PERS Reform Legislation, the cost of out-of-state purchase time and military purchase time became unaffordable. Will the Strunk decision positively impact the formula used to determine the cost of out-of-state teaching time or military time and help it to become affordable again? Yes. Today’s ruling should help in making the cost of purchase time more affordable. The PERS Board will need to discuss the outcome of the Strunk decision with its actuary and adopt new rules implementing the court’s decision before we are able to determine how substantially. This will take several months. According to PERS, of even greater impact is the much better than expected stock market returns in 2004. As a result of the 2003 PERS Reform Legislation, PERS assumed that Tier 1 members would receive 0% earnings on their regular account for up to four years. This has turned out to be incorrect and Tier 1 members only received 0% earnings for one year. This makes a huge difference in the cost of purchase time. Members receiving an expensive estimate for purchase time may want to request a new calculation from PERS. 11. Does the Strunk decision impact break-in-service? No. The legal challenge to break in service is a separate case. OEA as part of the PERS Coalition has challenged the adoption of new laws limiting the amount of time a PERS member may be away from public employment without jeopardizing their status as either a Tier 1 or Tier 2 PERS member. 12. What is the bottom-line for the Money Match formula? The Court allowed the statutory changes made by the Legislature that redirected the 6% employee contribution to the new individual account program. This will have the impact of substantially slowing the growth of the employee’s account. Because the employee account will not grow as quickly, money match will at some point no longer provide the best retirement benefit and become obsolete. 13. I have a certain percentage of my retirement invested in the variable. Does this ruling impact that? The Supreme Court agreed that employee’s did not have a contractual right to make contributions into the variable account. While your PERS variable account continues to receive earnings, no contributions have been deposited into the account since January 2003. 14. How does this impact the look-back calculation? The Supreme Court agreed that employee’s did not have a right to the use of specific life-expectancy tables when PERS calculates their retirement benefit. So, the Strunk decision will not have an impact on the look-back calculation. 15. When does the PERS Board credit earnings to member accounts and how many years were frozen by the attempted freeze on Tier 1 Member regular accounts? PERS credits earnings to member accounts on annual basis, usually in March or April for the prior year. PERS Tier 1 members did not receive any earnings on their regular account for 2003 (which normally would have been credited in the Spring 2004). The PERS Board has already announced that it will credit earnings at 8% for 2004. 16. How will calculations be made with member's money being in both the regular PERS account and the Individual Account Program (IAP)? PERS Tier 1 and Tier 2 members will continue to receive the best retirement benefit for which they are qualified. So, at retirement they will receive a PERS Benefit calculated under full formula, money match or pension plus annuity. They will also receive an additional monthly benefit based on the individual account program. 17. If I retired after the implementation of the 2003 PERS Reform Legislation but prior to the Strunk decision, and didn’t receive earnings for 2003, will my benefit be recalculated to include it? Yes. You will receive all benefits for which you are qualified to receive as per the Strunk decision, regardless of when you retired or will retire. 18. Does this decision have any impact on the Lipscomb decision and the resulting PERS Board adoption of the variable account adjustment? We won’t know until the Supreme Court issues the Lipscomb decision (otherwise known as City of Eugene v. PERS Board). This decision could be issued at anytime. 19. Is the court decision effective immediately, i.e., what impact does it have on folks looking at retiring in the next couple months? The court decision is effective immediately. It is likely to take some time to figure out and implement, however. The PERS Board and the PERS actuary both have work to do before member’s will receive benefits that must be refunded. There is no impact on the implementation of the decision and when you retire. You should retire as you have planned. 20. Will the issues we didn't win be pursued at the Federal Court Level? We are challenging the same issues in federal court. The case is currently in front of the Ninth Circuit Court of Appeals. Our attorneys are evaluating the necessity of continuing the case in its entirety, given the Oregon Supreme Court’s decision. 21. If I am entitled to a retroactive benefit will I receive interest on that payment? Unfortunately the answer is not clear. Our attorneys will continue to monitor this issue as PERS implements the remedies required by the Supreme Court.