Title: Strunk v. PERB

State: oregon

Issuer: Oregon Supreme Court

Document:

FILED:  March 8, 2005
IN THE SUPREME COURT OF THE STATE OF OREGON
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)
(Cases Consolidated)
En Banc
On petitions for direct judicial review of House Bill 2003
(2003), House Bill 2004 (2003), and House Bill 3020 (2003).
Argued and submitted July 30, 2004.
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
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.
Oregon Laws 2003, chapter 67, sections 5, 6, 7, and 8, as
amended by Oregon Laws 2003, chapter 625, sections 10, 11, and
12, are declared void.  The final sentence in Oregon Laws 2003,
chapter 67, section 10(3), is declared void.  In all other
respects, petitioners' claims for relief are denied or dismissed.
Balmer, J., concurred and filed an opinion.
Durham, J., concurred in part and dissented in part, and
filed an opinion in which Riggs and Kistler, JJ., joined.
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 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 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 P2d 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 P2d 846 (1996), and justiciability is not
waivable, Barcik v. Kubiaczyk, 321 Or 174, 186-87, 895 P2d 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 P2d 1289 (1982); see also State ex rel v. Funk, 105 Or 134,
155, 199 P 592, overruled on demurrer, 209 P2d 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 opportunity to consider and refine the
factual and legal issues.  See, e.g., Western Helicopter Services
v. Rogerson Aircraft, 311 Or 361, 370, 811 P2d 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.
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 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 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 a service retirement
allowance equal to approximately 63 percent of their final
average salary.  By the early 1990s, that figure had increased to
66 percent and, between 1996 and 2002, 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 allowance through annual cost-of-living
adjustments (COLAs).  Such 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 P2d 1018 (1992) (legislature's
repeal of income tax exemption statute as to PERS members'
retirement benefits constituted 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 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 a rate no 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 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, 1993 -- 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. * * * 
"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 P2d 846
(1988), Hughes, 314 Or 1, and Oregon State Police Officers' Assn.
v. State of Oregon, 323 Or 356, 918 P2d 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.  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, which ordinarily would require payment of
damages to SAIF employers resulting from the breach, id. at
402. (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.  Most significant to our analysis here, the
court in Hughes concluded that "PERS was intended to be and is a
contract between the state and its employees[.]"  314 Or at 25.
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.
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.  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.  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.
In Hughes, this court set out a two-step process for
addressing a claim of contract 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.  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 (engaging in
those inquiries).  Further, as noted above, this court in Hughes
concluded that PERS constituted a statutory contract.  Id. at 25.
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.  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 P2d 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 byindividuals,
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 the
public welfarecannot be established by mere
implication."
Id. at 213-14.
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 P2d 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 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 P2d 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, its administrative rules, and the
PERS Handbook.  Rather, Petitioner Dahlin is arguing
that the PERS Handbook 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.  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 P2d 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.  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 US 803, 109
S Ct 1500, 103 L Ed 2d 891 (1989).  At the time of the Davis
decision, 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.  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.
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 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 238 A. 330; ORS 238 A. 335.  As before, employers
still may agree to pick up the six percent contributions.  Or
Laws, 2003, ch 733, § 34, codified as ORS 238 A. 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."
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 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.  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 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 received 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 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 P2d 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 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
(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, 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 P2d
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 P2d 608
(1997) (quoting Allison v. Hatton, 46 Or 370, 372, 8 P 101
(1905)); see also State ex rel Caleb v. Beesley, 326 Or 83, 88,
949 P2d 724 (1997) (to same general effect).
With the foregoing principles in mind, we glean the
following from the progression of the statutory benefit formulas
over time.  From 1953 through 1967, PERS did not provide members
with any minimum level of benefits.  Instead, members received
only the contributions and earnings in their accounts matched by
an employer pension in 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 amendment effected a reenactment of the
entire section and provides 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.  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 (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 in 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 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
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 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 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 (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 to 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.  
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 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.
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 (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 (constitutional
amendment that eliminated assumed earnings rate on contributions
to member accounts for work performed both before and after date
of adoption impaired contract 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 overly generous in hindsight, are
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 (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 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 those 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 ("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
(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 from the enactment
as initially worded, provided, in part, as follows:
"A member may elect at any time to have 25, 50 or
75 percent of contributions by the member to the fund
on and after the effective date of the election paid
into the Variable Annuity Account, credited to a
variable account, and reserved for the purchase of a
variable annuity.  A member who has elected to have a
percentage of contributions so paid, credited and
reserved may elect at any time thereafter to have an
additional 25 or 50 percent of contributions by the
member, but not to exceed a maximum of 75 percent, so
paid, credited and reserved.  An election shall be in
writing on a form furnished by [PERB] and be filed with
[PERB].  An election shall be effective on January 1
following the filing thereof."
ORS 238.260(3) (2001). (49)
  The 2003 PERS legislation,
however, added a new paragraph (b) to ORS 238.260(3), stating
that, "[n]otwithstanding any other provision of this section, a
member may not contribute to the Variable Annuity Account after
December 31, 2003."  Or Laws 2003, ch 67, § 3.
(2) The Parties' Arguments
All petitioners, except petitioner Sartain, argue that
they have a statutory "right" to continue directing a percentage
of their PERS contributions to equity investments via their
variable accounts, and they focus not only on the use of the word
"shall" in ORS 238.260(3) (2001), but also on the wording "at any
time," "on and after," and "at any time thereafter" in that
provision to support their claim that that right extends to
future, rather than to only present, member contributions to
PERS.  Moreover, petitioners point to the legislative history of
the 1967 enactment as support for their claim that the
legislature intended, through establishment of the variable
annuity account program, "to allow employees the opportunity to
increase their benefits." (50)
  As before with respect to the
statutory provisions governing PERS members' regular accounts,
petitioners argue that, by permitting no further contributions to
the variable annuity account program, the 2003 PERS legislation
breaches or impairs the PERS contract because the statutory
provisions are 
"unquestionably part of the PERS Act, [are] integral to
the calculation of benefits under the Act, [use]
unambiguously promissory [wording], [and] contain no
language excluding contributions attributable to future
service from the general contractual protection and no
reservation of [the] right of future amendment."
Respondents likewise advance what in essence repeats
their argument concerning PERS members' regular accounts in
response to petitioners' variable account claims, viz., that,
because members have no continuing contractual right to make
contributions to PERS, they similarly have no right to direct
those contributions to a variable account.  Respondents view the
wording "at anytime thereafter" in ORS 238.260(3) (2001) not as
establishing a right to make future contributions but, instead,
as allowing a member to change his or her election at any time so
long as the variable account remains available as a statutory
option.  Finally, respondents emphasize that nothing about the
2003 PERS legislation impacts funds held in a member's variable
account as of the effective date of that legislation.
(3) Discussion
For many of the same reasons that we concluded that the
statutory provisions respecting PERS members' regular accounts
are terms of the PERS contract, we likewise conclude, and do so
without further discussion, that the variable account provisions
are as well.  (We do not understand respondents to argue to the
contrary.)  Accordingly, we proceed to determine the meaning of
those statutory contractual terms, specifically, whether they
constitute a legislative promise that members would have a right
for the duration of their membership in PERS to continue
directing contributions to their variable accounts.
From a textual standpoint, and from petitioners'
perspective, the salient wording of ORS 238.260(3) (2001) is the
phrase "at any time," which appears two times in that
subsection. (51)
  Read in isolation, those broad temporal
references could support petitioners' contention that the
legislature promised PERS members that they would be permitted to
contribute to their variable accounts (as well as to increase
their contributions to those accounts) for the duration of their
active membership.  Ascribing such an intent to the legislature,
however, becomes much less supportable when other wording in the
statute is considered, particularly the wording that ties a
member's right "at any time" to contribute to a variable account
to the member's "contributions * * * to the fund."  (Emphasis
added.)  Likewise, a member's right to increase his or her
variable account election "at any time thereafter" is tied to
"contributions by the member" to the fund.  (Emphasis added.)
As we have held above, the legislature did not promise
members that they could continue making contributions to the fund
throughout their membership in PERS.  And, because we have upheld 
the legislature's 2003 decision to prohibit members from further
contributing to the fund (and, instead, to direct member
contributions to the IAP), there no longer will be fund
contributions from which a percentage could be directed to a
variable account.  As we view the entirety of the wording of ORS
238.260(3) (2001), then, that wording does not support
petitioners' claim of a promise of a continued right to invest in
the variable annuity account program.  Instead, at most, such a
right of contribution exists only so long as members are
permitted to contribute to the fund.
We do, however, perceive from that wording a different
legislative promise respecting the variable annuity account
program that extends throughout membership in PERS.  That is, for
any member "who has elected to have a percentage of contributions
so paid," once PERB has credited those monies to the member's
variable account, those contributions will be "reserved for the
purchase of a variable annuity."  ORS 238.260(3) (2001) (emphasis
added).  Stated differently, although the wording of the statute
does not support a continued right to contribute to the variable
annuity account program, the wording does evince a legislative
promise to reserve until the time of retirement any monies that a
member has invested in the variable annuity account program for
the purchase of a variable annuity.
Turning next to context, we find little to support or
detract from the preliminary observations that we have gleaned
from the words of ORS 238.260(3) (2001).  Again, we deem the
actions of the 1981 Legislative Assembly to be the focal point
for our analysis, because it was that body that fundamentally
restructured the system to provide for the Full Formula benefit. 
Consistently with the comprehensive nature of the 1981
legislation, the legislature also added a provision to former ORS
237.197 (1979), renumbered as 238.260(12) (1995), to account for
those members who had made contributions to the variable annuity
account program or who had made contributions on salary in excess
of $4,800 per year between 1956 and 1967.  Or Laws 1981, ch 761,
§ 6.  For such members, the legislature directed PERB to
determine the difference between each member's total account
balance and what that total would have been had the member either
not participated in the variable annuity account program, not
made excess contributions, or both.  Id.  The value of the
difference, whether positive or negative, then resulted in either
an increase or a decrease to the member's monthly service
retirement allowance.
Through that amendment to what is now ORS 238.260(12),
the 1981 Legislative Assembly not only preserved the excess
contributions that some members had made before 1967 and
contributions to the variable annuity account program between
1967 and 1981, but also permitted the variable annuity account
program to remain as a meaningful part of the system. 
(Otherwise, absent the Money Match or the Pension Plus Annuity
yielding a higher pension component, increases or decreases to a
member's variable account would serve only to increase or
decrease the amount that an employer would have to pay to fund
the pension component of the service retirement allowance under
the Full Formula.)  What that limited contextual evidence does
not suggest, however, is that the legislature promised members
that they would have the ability to contribute to their variable
accounts throughout their membership in PERS.  That amendment,
instead, concerned only the effect that a variable account could
have on the service retirement allowance that a member ultimately 
would receive at retirement. (52)

In light of the foregoing discussion, we conclude that
there is nothing inconsistent between the earlier promise that
the legislature made with respect to the variable annuity account
program –- that any funds placed into variable accounts would be
reserved for the purchase of a variable annuity -– and the 2003
Legislative Assembly's decision to discontinue permitting PERS
members to contribute to their variable accounts.  Consequently,
there can be no breach or impairment of the obligations set out
in the PERS contract in that respect.
d.   Cost-of-Living Adjustments (COLAs)
As briefly explained earlier, both before and after the
2003 PERS legislation, ORS 238.360 (2001) required (and still
requires) PERB to determine and apply annual COLAs, based on the
Consumer Price Index (CPI), to retired PERS members' service
retirement allowances.  However, parts of the 2003 PERS
legislation effectively suspend COLAs on particular service
retirement allowances, until specified financial conditions are
met, for certain retired Tier One members.  The legislature took
that step in response to a trial court ruling in the City of
Eugene litigation, also described below.  Strunk and Sartain
petitioners argue that that part of the 2003 legislation
constitutes either an impairment or a breach of the statutory
PERS contract.  We address those contentions below, beginning
with a discussion of the City of Eugene litigation.
(1)  Background
As discussed earlier in this opinion, the PERS statutes
provide for the maintenance of various reserve accounts.  Most
significant to the City of Eugene litigation are the contingency
reserve and the gain-loss reserve.  
ORS 238.670(1) describes the parameters of the
contingency reserve, providing that PERB "shall set aside" as
much interest and other income received through investment as
PERB "may deem advisable, not exceeding seven and one-half
percent of the combined total of such income[,]" for the purpose
of maintaining a contingency reserve to "prevent any deficit of
money available for the payment of retirement allowances, due to
interest fluctuations, changes in mortality rate or * * * other
contingency."  ORS 238.670(1).  PERB has not funded a contingency
reserve since 1979. 
ORS 238.255 (2001) (now ORS 238.255(1)) describes the
parameters of the "gain-loss reserve," to which PERB is required
to charge certain amounts.  With respect to the gain-loss
reserve, the Special Master found: 
"Before the enactment of the 2003 [PERS]
legislation, PER[B] maintained a 'gain-loss reserve' in
which it set aside a portion of annual fund earnings to
ensure that sufficient assets would be available to pay
guaranteed benefits at the assumed earnings rate.  In
years when fund earnings exceeded the guaranteed
amount, PERB deposited a portion of those funds into
the gain-loss reserve.  The evidence showed that it is
reasonable to fund the gain-loss reserve at a level
that would fund projected Tier One guaranteed earnings
credits for a 30-month period, which, using the current
assumed earnings rate of 8 percent, would set the
reserve balance at 20 percent of the fund's value."
As to PERB's treatment of the gain-loss reserve and the
contingency reserve in the late 1990s, the Special Master found
as follows: 
"In 1999, the fund earned approximately $7.5
billion, or 24.89 percent of its value.  [PERB credited
20 percent to Tier One regular accounts for that year.] 
PERB allocated approximately $1.3 billion to the gain-loss reserve, which left it funded at approximately 72
percent of [its] new 30-month goal.  After PERB
allocated 1999 earnings, the gain-loss reserve had a
positive balance of $4.744 billion.
"If PERB had fully funded the contingency reserve
for 1999 by crediting 7.5 percent of the fund's
earnings as authorized by ORS 238.670(1) and, if PERB
had fully funded the gain-loss reserve according to its
30-month goal, approximately 11.33 percent would have
been available for crediting to Tier One
accounts." (53)

The funding gap created by PERB's choice not to fund
the two accounts fully, as the Special Master described it, meant
that an imbalance existed that PERB sought to make up through
assessments -- i.e., contribution rate orders -- on employers. 
In response to those assessments, three local government
employers, including the City of Eugene, challenged their 1998
and 2000 contribution rate orders by filing an action against
PERB in Marion County Circuit Court.  Several employers also
challenged PERB's order allocating 1999 earnings.  In part, the
employers argued that their contribution rates would have been
lower if PERB properly had funded the contingency and gain-loss
reserves.  All the challenges were consolidated and became the
City of Eugene litigation.  Several PERS members intervened in
the litigation to defend PERB's crediting decisions respecting
their regular accounts.  
In July 2001, the trial court held that PERB had abused
its discretion by not funding the contingency reserve since 1979. 
The court further held that PERB had abused its discretion by
crediting 20 percent interest to Tier One members' regular
accounts in 1999, instead of properly funding the contingency and
gain-loss reserves.  The court remanded the challenged rate
orders to PERB with instructions that PERB issue new rate orders
consistently with the court's judgment.  PERB and intervenors
appealed that judgment to the Court of Appeals, which transferred
the litigation to this court pursuant to Oregon Laws 2003,
chapter 537, section 1, where it is now pending.    
Pursuant to the trial court's judgment, the Fiscal
Services Division (FSD) of PERS recalculated the credits to Tier
One members' regular accounts for 1999 and concluded that, if
PERB properly had funded the contingency and gain-loss reserves
in 1999, the appropriate credit to members' regular accounts for
that year would have been 11.33 percent.  Before FSD presented
that figure to PERB for final approval, however, the legislature
requested that information directly from FSD.  The legislature
subsequently enacted the 2003 PERS legislation.  Oregon Laws
2003, chapter 67, sections 9 and 10, as amended by Oregon Laws
2003, chapter 625, section 13, effectively codifying the 11.33
percent figure as the correct 1999 crediting decision. (54)
  
After the legislature enacted Oregon Laws 2003, chapter
67, PERB and the employer parties entered into a settlement
agreement purporting to resolve the City of Eugene litigation. 
That settlement agreement provided, in part:
"[E]xcept in the event of a supervening change in law
(such as by a legislative enactment or further court
order):
"* * * * *
"1.3 The new 1999 earnings allocation order * * *  will
provide that the appropriate earnings allocation
to Tier [One] regular member accounts is 11.33
[percent], that 7.5 [percent] of the 1999 earnings
should have been allocated to the contingency
reserve established by ORS 238.670(1), and that
the gain-loss reserve created by ORS 238.670(3)
should have been funded to the full extent of the
former PERB's policy to maintain a gain-loss
reserve sufficient to credit the assumed interest
rate to Tier [One] regular member accounts during
a period of 30 months of 0 [percent] earnings."  
After entering into that settlement agreement, PERB moved to
dismiss the appeal, but intervenors opposed that motion, and this
court denied it without prejudice.  As a result of the court
challenges to PERB's 1999 crediting decision, that decision was
potentially subject to reversal at the time that the legislature
enacted Oregon Laws 2003, chapter 67, sections 9 and 10, as
amended by Oregon Laws 2003, chapter 625, section 13.
Oregon Laws 2003, chapter 67, sections 9 and 10, as
amended by Oregon Laws 2003, chapter 625, section 13, apply to
only Tier One members who receive service retirement allowances
pursuant to the Money Match and who retired on or after April 1,
2000, but before April 1, 2004.  As pertinent here, section 10,
as amended by Oregon Laws 2003, chapter 625, section 13, requires
PERB to recalculate two alternative service retirement allowances
for those members, resulting in a "revised" allowance and a
"fixed" allowance.
To calculate the "revised" service retirement
allowance, PERB first must recalculate the affected members'
regular account balances as if 11.33 percent, rather than 20
percent, had been credited in 1999.  PERB then must recalculate
the members' service retirement allowances based on those newly
calculated account balances and apply the appropriate COLAs for
each calendar year since each member's retirement to the newly
calculated service retirement allowance.  As a result of those
calculations, PERB will have determined a new service retirement
allowance for each affected member as of the date of the
calculation, based on an 11.33 percent credit to each member's
regular account in 1999 (i.e., the "revised" service retirement
allowance).  Or Laws 2003, ch 67, § 10(2), as amended by Or Laws
2003, ch 625, § 13.  PERB thereafter is required to apply annual
COLAs on members' "revised" service retirement allowances.  Or
Laws 2003, ch 67, § 10(2)(d).
To calculate the "fixed" service retirement allowance,
PERB must determine the amount payable to each affected member on
July 1, 2003, or on the member's retirement date, whichever is
later.  The resulting "fixed" service retirement allowance may
not be adjusted by annual application of a COLA.  Or Laws 2003,
ch 67, § 10(3), as amended by Or Laws 2003, ch 625, § 13. (55)

Finally, Oregon Laws 2003, chapter 67, section 10(4),
as amended by Oregon Laws 2003, chapter 625, section 13, requires
that each affected member be paid the greater of the newly
calculated "revised" and "fixed" service retirement allowances. 
Stated differently, if an affected member's "fixed" service
retirement allowance (which is based on a 20 percent credit in
1999, but is not subject to an annual COLA) exceeds that member's
periodically determined "revised" service retirement allowance
(which is based on an 11.33 percent credit in 1999 and is subject
to an annual COLA), then that member will not receive annual
COLAs until such time as the "revised" allowance exceeds the
"fixed" allowance.  From that point forward, the member will
receive annual COLAs on the "revised" service retirement
allowance.
(2) The Parties' Arguments
Strunk and Sartain petitioners argue that Oregon Laws
2003, chapter 67, sections 9 and 10, as amended by Oregon Laws
2003, chapter 625, section 13, breach the PERS statutory contract
and impair contractual obligations in violation of Article I,
section 21.  They particularly argue, as pertinent here, that ORS
238.360 (2001), which required PERB to provide retired members
with annual COLAs on their monthly service retirement allowances,
is a term of the PERS contract.  ORS 238.360 (2001) provided, in
part:
"(1)  As soon as practicable after January 1 each
year, [PERB] shall determine the percentage increase or
decrease in the cost-of-living for the previous
calendar year, based on the Consumer Price Index * * *. 
Prior to July 1 each year the allowance which the
member or the member's beneficiary is receiving or is
entitled to receive on August 1 for the month of July
shall be multiplied by the percentage figure
determined, and the allowance for the next 12 months
beginning July 1 adjusted to the resultant amount.
"(2)  Such increase or decrease shall not exceed
two percent of any monthly retirement allowance in any
year and no allowance shall be adjusted to an amount
less than the amount to which the recipient would be
entitled if no cost-of-living adjustment were
authorized."
Strunk and Sartain petitioners argue that, contrary to Oregon
Laws 2003, chapter 67, section 10(3), as amended by Oregon Laws
2003, chapter 625, section 13, which calculates a "fixed" service
retirement allowance that is not subject to an annual COLA, ORS
238.360(1) (2001) required PERB to provide COLAs on all service
retirement allowances.  In other words, Strunk and Sartain
petitioners assert that affected Tier One members who are
receiving "fixed" service retirement allowances under the 2003
PERS legislation have a contractual right to receive annual COLAs
on those allowances, even though the allowances were based on a
regular account balance that, in the legislature's determination,
included an erroneous 20 percent credit in 1999.  They argue
that, when a member has performed fully under the PERS contract
in reliance on the promise set out in ORS 238.360(1) (2001), that
member's rights have vested and the legislature may not take away
COLAs without breaching the PERS contract or unconstitutionally
impairing an obligation of that contract.
Respondents acknowledge that the affected Tier One
members have performed fully and are entitled to receive service
retirement allowances that are calculated based on amounts
properly credited to their regular accounts.  They argue,
however, that petitioners seek more than that.  Petitioners,
respondents claim, are asserting that they have a contractual
right to receive service retirement allowances that reflect an
improper credit of 20 percent in 1999.  The PERS statutes,
respondents argue, do not grant petitioners the right to
erroneously credited earnings.  In fact, they assert, another
statute -- ORS 238.715 (which we discuss in greater detail below)
-- authorizes PERB to recover the over-credited amounts from
petitioners, even though they are retired.
Respondents also observe that, in addition to setting
out specific avenues for recouping overpayments, ORS 238.715(8)
allows PERB to use "any other remedies that may be available to
[it] for recovery of amounts incorrectly paid from the
fund[.]" (56)
  Respondents argue that, in enacting Oregon Laws
2003, chapter 67, section 10, as amended by Oregon Laws 2003,
chapter 625, section 13, the legislature has provided PERB with
"other remedies" for recouping the erroneously credited earnings. 

(3)  Discussion
Before turning to our analysis of petitioners' claims,
we think it helpful to clarify the precise nature of our inquiry
here.  First, no party appears to dispute that, in creating the
"fixed" service retirement allowance coupled with the suspension
of an annual COLA, the legislature's intent was to recoup what it
deemed to be overpayments to the affected members' regular
accounts in 1999. (57)
  Second, as discussed below, respondents
note that the PERS statutes contemplate that PERB erroneously
might pay certain amounts to a member who already has retired and
that PERB generally is permitted, as a statutory matter, to
recoup erroneous payments.  And, third, as respondents appear to
suggest, Strunk and Sartain petitioners' particular contractual
challenges to the COLA suspension in Oregon Laws 2003, chapter
67, section 10(3), in essence raise the question whether the
legislature's choice to preclude application of annual COLAs on
fixed retirement allowances was a permissible method of
facilitating such a recoupment.  Stated differently, by directing
PERB to suspend annual COLAs on fixed retirement allowances, does
the 2003 PERS legislation either impair or breach PERB's
obligation to apply annual COLAs under ORS 238.360 (2001)?
As with our analysis of the foregoing challenged
aspects of the 2003 PERS legislation, we first determine whether
ORS 238.360 constituted a term of the PERS statutory contract
before the enactment of the 2003 legislation.  ORS 238.360 (2001)
provided, in part:
"(1)  As soon as practicable after January 1 each
year, [PERB] shall determine the percentage increase or
decrease in the cost of living for the previous
calendar year, based on the Consumer Price Index * * *. 
Prior to July 1 each year the allowance which the
member or the member's beneficiary is receiving or is
entitled to receive on August 1 for the month of July
shall be multiplied by the percentage figure
determined, and the allowance for the next 12 months
beginning July 1 adjusted to the resultant amount.
"(2)  Such increase or decrease shall not exceed
two percent of any monthly retirement allowance in any
year and no allowance shall be adjusted to an amount
less than the amount to which the recipient would be
entitled if no cost of living adjustment were
authorized." 
(Emphasis added.)  The legislature enacted that statute in 1971,
and its substance has remained unchanged, notwithstanding other
interim amendments.  See former ORS 237.060(1) (1971), renumbered
as ORS 238.360 (1995) (setting out original statute). 
ORS 238.360(1), as it existed in 2001 and as presently
worded, provides that PERS members' monthly service retirement
allowances annually shall be adjusted to reflect "the percentage
increase or decrease in the cost of living for the previous
calendar year[.]"  Like the tax provision analyzed in Hughes, the
text of ORS 238.360(1) (2001) evinces a clear legislative intent
to provide retired members with annual COLAs on their service
retirement allowances, whenever the CPI warrants such COLAs.  We
therefore conclude that the general promise embodied in ORS
238.360(1) (2001) was part of the statutory PERS contract
applicable to the group of retired members affected by the 2003
provisions at issue here.  Having so concluded, we now must
determine the extent of that promise.
We return to the wording of the statute and,
specifically, the requirement that, prior to July 1 each year,
"the allowance which the member or the member's beneficiary is
receiving or is entitled to receive" on August 1 for the month of
July must be subject to a COLA.  ORS 238.360(1) (2001) (emphasis
added).  The context of ORS 238.360(1) (2001), which includes
other related statutes, PGE, 317 Or at 611, assists our reading
of the emphasized wording.  As noted earlier, ORS 238.715 (2001)
provided, in part:
"(1) If [PERB] determines that a member of the
system or any other person receiving a monthly payment
from the * * * [f]und has received any amount in excess
of the amounts that the member or other person is
entitled to under this chapter, [PERB] may recover the
overpayment or other improperly made payment by:
"(a) Reducing the monthly payment to the member or
other person for as many months as may be determined by
[PERB] to be necessary to recover the overpayment or
other improperly made payment; or
"(b) Reducing the monthly payment to the member or
other person by an amount actuarially determined to be
adequate to recover the overpayment or other improperly
made payment during the period during which the monthly
payment will be made to the member or other person."
(Emphasis added.)  As is apparent from the text of ORS 238.715(1)
(2001), the legislature has anticipated that PERB might pay
amounts from the fund in error -- that is, a member (or other
person, such as a beneficiary) might be paid more from the fund
than that member is "entitled" to "receive[]" under the PERS
statutes.  And, in the event that such an overpayment occurs, the
legislature further has provided that PERB may recover that
overpayment.
In light of the identical wording in ORS 238.360 (2001)
and ORS 238.715(1) (2001), regarding allowances that a member is 
"entitled to receive" and amounts "received" that exceed those to
which a member is "entitled," we conclude that the promise set
out in ORS 238.360(1) (2001) respecting the application of annual
COLAs does not extend to erroneous overpayments included in a
member's service retirement allowance that the member was not
entitled to receive.  However, the promise does extend to
properly calculated service retirement allowances.
Having defined the scope of the legislature's promise,
we turn to the 2003 PERS legislation to determine whether -- and,
if so, to what extent -- it is inconsistent with that promise. 
As explained earlier, Oregon Laws 2003, chapter 67, section 10,
as amended by Oregon Laws 2003, chapter 625, section 13, provides
that the original service retirement allowances for retired Tier
One members who are affected by that section shall be
recalculated in two ways, resulting in a "revised" service
retirement allowance and an alternative "fixed" service
retirement allowance.  As also noted above, the "revised" service
retirement allowance continues to be subject to an annual COLA
under ORS 238.360(1).  The "fixed" service retirement allowance
is set at the amount that was payable to the retired member as of
July 1, 2003, or as of the member's retirement date, whichever is
later, and is not subject to an annual COLA under ORS 238.360(1). 
The crux of the question before us, then, is whether the "fixed"
service retirement allowance calculated under Oregon Laws 2003,
chapter 67, section 10(3), as amended by Oregon Laws 2003,
chapter 625, section 13, either does or does not qualify as an
allowance that is subject to an annual COLA under ORS 238.360(1)
(2001).  Stated more specifically, does the "fixed" service
retirement allowance represent payment of an "allowance" that the
member was not "entitled to receive?"
The answer to that question is no.  It is true that the
legislature's apparent intent in creating the "fixed" service
retirement allowance -- most notably, when coupled with
elimination of any otherwise applicable COLA -- was to allow PERB
to recoup certain amounts credited to the affected members'
accounts in 1999 (and which the 2003 Legislative Assembly deemed
to be overpayments).  However, the "fixed" service retirement
allowance itself represents a determined allowance -- that is, an
allowance expressly determined by the legislature.  In light of
that legislative determination, the "fixed" service retirement
allowance cannot be said to transfer to the affected member any
funds to which the member (again, in the legislature's
determination) was not entitled.  As such, the "fixed" service
retirement allowance falls within the scope of the promise set
out in ORS 238.360(1) (2001) -- that is, that PERB annually apply
a COLA to each affected member's allowance (in years in which the
CPI warrants such a COLA) -- because the allowance represents
funds that the member, by legislative determination, is "entitled
to receive."
We therefore conclude that the elimination of annual
COLAs from the "fixed" service retirement allowance, as set out
in Oregon Laws 2003, chapter 67, section 10(3), is inconsistent
with the legislature's promise set out in ORS 238.360(1) (2001). 
Having done so, we next must determine whether that inconsistency
amounts to a breach or an impairment of that obligation under the
PERS contract.  As to that question, this court's decision in
Eckles, 306 Or 380, is instructive.
As explained earlier, Eckles involved legislation that
had transferred surplus funds from the IAF -- which, by statute,
were to be used for only workers' compensation purposes -- to the
General Fund.  There, as here, the legislature's intent in
transferring the funds had been to attain a legislative goal
that, generally speaking, appeared legitimate and was not in
dispute (in Eckles, avoiding a state budget deficit).  However,
it was the legislature's method for attaining that goal that, in
the court's determination in Eckles, had contractual implications
for the state.  Specifically, the court concluded that the part
of the legislation that had eliminated the state's obligation to
use IAF funds in the statutorily specified manner constituted an
unconstitutional impairment of the state's contractual
obligation.  306 Or at 399.  The court further concluded that the
part of the legislation that had directed the transfer of funds
amounted to a mandate that the state breach the contract.  Id. at
400.
Applying Eckles to the statutory contractual issue
before us now, it is indisputable that the promise set out in ORS
238.360(1) (2001) respecting annual COLAs remains part of the
PERS statutory scheme applicable to the affected group of retired
members.  However, by precluding application of annual COLAs to
"fixed" service retirement allowances determined for those
affected members, Oregon Laws 2003, chapter 67, section 10(3),
amounts to a directive from the legislature to PERB to breach the
promise set out in ORS 238.360(1) (2001) with respect to those
members.  We conclude, as petitioners contend, that that aspect
of the 2003 PERS legislation breaches a term of the PERS
contract.  See Eckles, 306 Or at 400-02 (so explaining in similar
circumstances); see also Hughes, 314 Or at 32-33 (same). (58)

Having so concluded, we now must address as a final
matter the disposition of petitioners' claims for relief
respecting the above-described COLA provisions of the 2003 PERS
legislation.  As explained, Oregon Laws 2003, chapter 67, section
10(3), breaches the PERS contract by directing PERB not to
provide annual COLAs on "fixed" service retirement allowances. 
Normally, this court leaves to the legislature, as the "most
appropriate branch of government in the first instance," Hughes,
314 Or at 33 n 36, the choice as to which remedy to select when
legislation breaches a statutory contract.  Here, however, under
what we deem to be unique circumstances, we conclude that the
prudent dispositional action is to invalidate the offending
statutory wording.  Accordingly, we declare that part of Oregon
Laws 2003, chapter 67, section 10(3), that provides, "[t]he fixed
service retirement allowance may not be adjusted under ORS
238.360," to be void.  The effect of our choice to declare that
part of the law to be void is that petitioners will be returned 
-- at least for the time being -- to the same position in which
they would have been if the legislature had not enacted the COLA
suspension. (59)
   
e.  Actuarial Equivalency Factors
As noted earlier in this opinion and as explained more
fully below, part of the 2003 PERS legislation modifies the
calculation of service retirement allowances for certain PERS
members who entered the system before 1999, by adopting new
actuarial equivalency factors (AEFs).  All petitioners challenge
that part of the legislation, as discussed below.
(1) Background
We take the following description of PERB's approach
toward AEFs from the Special Master's report:
"From time to time, after consulting with its
actuary,[ (60)
] PERB has adopted AEFs for use in the
administration of the fund.  AEFs are based on
assumptions concerning the future earnings of the fund
and members' expected mortality rates.  AEFs are used
to convert lump sum account balances to monthly payment
streams and to change one optional benefit payment form
to another.  When converting a lump sum to a monthly
benefit, the lump sum and the monthly benefit payments
are actuarially equivalent if both forms of payment
have the same present value.  Two of the three types of
PERS retirement benefits--Money Match and Pension Plus
Annuity--are calculated based on AEFs.
"Before 1978, PERB used a substantial number of
AEF tables that applied to particular categories of
members.  In 1978, PERB adopted two simplified sets of
actuarial tables, one each for male and female members. 
The tables for female members produced a lower monthly
retirement allowance, because they assumed that females
would, on average, have longer life spans after
retirement than males.
"In Henderson v. State, U.S. District Court Case
No. CV74-538, the court concluded that the use of
separate gender-based calculations was
unlawful.[ (61)
]  In 1978, PERB adopted the male-only
actuarial factors for all PERS members.  That process
commonly was referred to as 'topping up' the AEF
tables.  The topped-up tables increased employer
contribution rates by 0.49 percent.
"In 1978, PERB adopted a 7 percent assumed
earnings rate for the fund.  In 1979, PERB increased
the assumed earnings rate to 7.5 percent.  However, it
did not change the system's AEFs because (1) the
actuary determined that members generally were living
longer after retirement; and (2) new actuarial factors
would have blended assumed male and female mortality
rates and, therefore, would have been lower than those
produced by the use of male-only tables.  PERB did not
change its AEFs again until 1989.
"When PERB increased the assumed earnings rate to
8 percent in 1989, it also adopted revised mortality
tables.  The revised AEFs were a combination of the
pre-existing 7 percent earnings and 1978 male-only
mortality assumptions, and new 8 percent earnings and
1989 blended male/female mortality assumptions.  PERB
used the new factors only if they increased member
benefits; otherwise, PERB used the preexisting factors.
"In 1993, PERB adopted [former] OAR 459-05-055
[(1993)].  That rule provided that [the] PER[S]'s
actuary would perform an actuarial equivalency study
every two years.  The rule required the actuary to
'recommend to [PERB] assumptions, factors and the
rationale for any recommended changes to the actuarial
tables used by [PERS].' [Former] OAR 459-05-055(1)(b)
(1993)[, renumbered as OAR 459-005-0055 (1996)]. 
Subsection (2) of the rule provided, in part:
"'(b)  All changes to the System's
annuity tables shall be prospective only for
allowances effective on or after the
effective date of the change;
"'(c)  If the consulting actuary's
recommendation to change a factor would
produce a lower benefit, [PERB] will not
change the current factor.'
"In the 1995 actuarial study, the actuary reported
that continuing improvement in mortality rates would
justify an adjustment of the system's AEFs, but he
opined that [former] OAR [459-05-055 (1993)] * * *
foreclosed the adoption of factors that would reduce
member benefits.  The actuary asked PERB to review the
rule because mortality rates were expected to continue
to improve, and the use of the existing AEFs was a
significant cost consideration."
(Footnote omitted.)  The actuary also explained in a July 1995
letter to PERB that the factors that PERB intended to adopt
pursuant to former OAR 459-05-055 (1993) would not serve to
achieve "'true actuarial equivalenc[y]' because of the
grandfathering of higher benefit factors over the years[.]"  
In 1996, PERB both renumbered and amended former OAR
459-05-055 (1993) (set out in part above) to provide that AEFs
would be updated for only members who joined PERS after January
1, 1999.  The new rule, renumbered as OAR 459-005-0055 (1996),
provided, in part:
"(4) * * *  
"* * * * * 
"(b)  All changes to the System's actuarial
equivalency factors shall be prospective only for that
portion of an allowance attributable to service as an
active member beginning on or after the effective date
of the change.
"(5) Notwithstanding subsection (4)(b) of this
rule, for members who established membership in PERS
before January 1, 1999, as described in Oregon Laws
1995, Chapter 654, Section 2, [PERB] shall not change a
factor that would produce a lower periodic or single
benefit payment, and any change of factor(s) shall
apply to the total allowance payable."
PERB had promulgated that rule in response to legal advice that
it had received regarding maintaining the fund's status as a
qualified governmental retirement plan and trust under the
Internal Revenue Code (IRC). (62)

The Special Master's report explains:
"In 2001, PERB again reviewed the AEFs for the
system.  At that time, PERB adopted a policy of using
factors based on current mortality assumptions if the
factors adequately protected benefits previously earned
under former AEFs.  PERB reviewed various options for
protecting accrued benefits, but it had not completed
that process when it became apparent that the 2003
legislature intended to enact legislation on the same
subject.
"In sum, before the 2003 legislation was enacted,
PERB generally used AEFs that had been in effect since
1978 and that did not match the assumptions that the
actuary used to value the system and make projections
about system costs.  Those factors understated the life
expectancy of PERS members.  When they were used to
convert a member's account balance to a monthly
allowance, the aggregate value of the monthly allowance
was higher than the value of the account balance. 
Therefore, unless additional funds were contributed to
the system, the account balance would have dissipated
before the member's average life expectancy was
reached.  Put another way, because the AEFs did not
match the actuary's life expectancy assumptions for the
system, the amount available to pay the BIF[ (63)
] upon
a member's retirement was, other things being equal,
insufficient to cover the projected costs for that
member.  PERS then had to 'true up' the BIF by
transferring additional amounts from employer accounts.
"In 1995, the actuary estimated that the continued
use of a 'grand[]fathered' approach to changes in AEFs
cost the system approximately 0.5 percent of payroll
per year.  As more members retired under the Money
Match and the amount of their benefits increased, the
financial impact of using outdated factors also grew. 
In 2002, the actuary estimated that the immediate use
of updated mortality tables would decrease employer
contribution rates by approximately 2.28 percent of
payroll."
(Footnote omitted.)
Oregon Laws 2003, chapter 68, section 2, requires PERB
to adopt current actuarial equivalency factor tables that "use
the best actuarial information on mortality available at the time
[PERB] adopts the tables[.]"  Those tables become effective on
January 1 of the calendar year following PERB's adoption of the
new tables.  Id.
Further, Oregon Laws 2003, chapter 68, section 4, as
amended by Oregon Laws 2003, chapter 67, section 40, and Oregon
Laws 2003, chapter 625, section 16, modifies the calculation for
the annuity component of the service retirement allowance for
certain members who entered the system before 1999. 
Specifically, such members who retired (or will retire) on or
after July 1, 2003, will have their annuity components calculated
under the new legislation, which directs PERB to use one of two
calculations, whichever produces the greater benefit.  The first
requires application of the AEFs in effect as of the member's
effective retirement date to the retiring member's account
balances on that date; the second creates an account balance as
of June 30, 2003, that consists of only the member's
contributions and earnings credited as of that date, and PERB
then determines the member's annuity component from that balance
using the AEFs in effect on June 30, 2003.  That second
calculation generally is referred to as the "look-back"
provision. 
(2)  The Parties' Arguments
All petitioners, except petitioner Sartain, challenge
Oregon Laws, chapter 68, section 4, as amended by Oregon Laws
2003, chapter 67, section 40 and Oregon Laws 2003, chapter 625,
section 16, which requires PERB to adopt updated AEFs and,
beginning July 1, 2003, to apply those AEFs when calculating
certain retired PERS members' annuity components.  They rely
primarily on OAR 459-005-0055(5) (1996), which, as quoted above,
provided:
"Notwithstanding subsection (4)(b) of this
rule,[ (64)
] for members who established membership in
PERS before January 1, 1999, as described in Oregon
Laws 1995, Chapter 654, Section 2, [PERB] shall not
change a factor that would produce a lower periodic or
single benefit payment, and any change of factor(s)
shall apply to the total allowance payable."
They assert that, because PERB is the trustee of the fund and has
been granted authority to adopt rules governing administration of
the fund, the foregoing rule is a term of the PERS statutory
contract.  As such, they argue that the legislature may not
remove that term by requiring PERB to calculate annuity
components using updated AEFs, the likely effect of which will be
to reduce their service retirement allowances.  
As support for that contention, petitioners argue that
ORS 238.630(3)(g) (2001), a predecessor version of which is
discussed further below, gave PERB "the absolute authority" to
establish the system's actuarial factors (specifically, those in
effect since 1978) and required that such factors "shall
constitute part of the system."  They further argue that ORS
238.650(2) (2001), which provided that "[a]ll rules adopted by
[PERB] become part of the written plan document of [PERS],"
reinforces their contractual right to enforce the terms of OAR
459-005-0055(5) (1996).  Because Oregon Laws 2003, chapter 68,
section 4, as amended by Oregon Laws 2003, chapter 67, section
40, and Oregon Laws 2003, chapter 625, section 16, nullifies the
effect of that rule, petitioners argue, it breaches the PERS
contract and impairs obligations of the contract.
Petitioner Dahlin presents the same argument, but adds
a "federal law" analysis premised on his observation that PERB
must maintain the fund's tax status under the IRC.  His analysis
is designed to illustrate that the incorporation of updated AEFs
will violate provisions of the IRC, jeopardize the fund's tax
status, and therefore violate petitioners' contractual rights.  
For their part, respondents first observe that the PERS
statutes require AEFs to yield service retirement allowances that
are the "'actuarial equivalent' of members' account balances." 
Yet petitioners, in respondents' view, assert a contractual right
to the use of outdated factors that, by definition, cannot
produce actuarial equivalency.  To support that argument,
respondents cite ORS 238.630(3)(g) (2001), which required PERB to
adopt new AEFs from "time to time" that, once applied, will
calculate the "actuarial equivalen[t] of optional forms of
retirement allowances," and ORS 238.300(1) (2001), which required
(and still requires) "actuarial equivalen[cy]" in converting each
member's account balances at retirement into the annuity
component of the member's service retirement allowance.     
Respondents further dismiss the validity of OAR 459-005-0055(5) (1996) by observing that that rule departs from the
aforementioned legislative mandates.  Finally, respondents
observe that the 2003 "look-back" calculation preserves the
service retirement allowances that members would have received
had PERB calculated their annuity components using the factors
and account balances in place the day before the 2003 PERS
legislation went into effect.  Thus, they argue, Oregon Laws
2003, chapter 68, section 4, as amended by Oregon Laws 2003,
chapter 67, section 40, and Oregon Laws 2003, chapter 625,
section 16, does not reduce retroactively the service retirement
allowances to which members are entitled. 
(3)  Discussion
As an initial matter, we briefly dispose of petitioner
Dahlin's separate IRC-based claims.  First, addressing fully
those IRC-based claims would require an analysis of specific IRC
provisions.  IRC section 7476(a), however, confers jurisdiction
to determine retirement plan qualification to the United States
Tax Court.  It follows that engaging in the analysis that
petitioner Dahlin's IRC-based claims require would be outside the
scope of our jurisdiction.  We therefore reject petitioner
Dahlin's IRC-based claims without further discussion.
Turning to the other challenges, our analysis again
must begin with determining the specific terms of the PERS
statutory contract. 
Former ORS 237.251(3)(g) (1991), renumbered as ORS
238.630(3)(g) (1995), which initially provided the basis for
PERB's adoption of the rule that became OAR 459-005-0055 (1996),
provided:  
"[PERB] [s]hall determine the actuarial equivalency of
optional forms of retirement allowances and establish
from time to time for that purpose the necessary
actuarial factors, which shall constitute a part of the
system[.]" (65)

We again apply the PGE methodology, 317 Or at 610-12, to the
statute to ascertain the legislature's intent and conclude that
the legislature's intent is clear from the first level of
analysis.  As respondents argue, former ORS 237.251(3)(g) (1991)
set out a legislative mandate that PERB periodically perform two
tasks:  first, to determine the "actuarial equivalency of
optional forms of retirement allowances"; and, second, to
"establish[,] from time to time[,] for [the purpose of
determining the actuarial equivalency of optional forms of
retirement allowances,] the necessary actuarial factors, which
shall constitute a part of the system[.]"  Former ORS
237.251(3)(g) (1991) therefore required PERB periodically to
update its actuarial factors to ensure that service retirement
allowances ultimately paid, regardless of the form of those
allowances, (66)
 satisfied an "actual equivalency" standard.  
Similarly, former ORS 237.147 (1991) renumbered as ORS
238.300(1) (1995), provided, in part, that the annuity component
of each member's service retirement allowance "shall be the
actuarial equivalent" of each member's "accumulated contributions
* * * at the time of retirement."  In short, both statutes
clearly indicate that the legislature intended for members'
service retirement allowances to satisfy an "actuarial
equivalency" standard.  The legislature delegated that
responsibility, which included updating the system's actuarial
factors, to PERB.  
The PERS statutes did not define the term "actuarial
equivalent" at the time that PERB adopted former OAR 459-05-055
(1993), renumbered as OAR 459-005-0055 (1996); that term remained
undefined until 2003. (67)
  The PERS actuary, however,
testified consistently with the following explanation of the
term, as set out in the Special Master's report:
"AEFs are based on assumptions concerning the future
earnings of the fund and members' expected mortality
rates.  AEFs are used to convert lump sum account
balances to monthly payment streams and to change one
optional benefit payment form to another.  When
converting a lump sum to a monthly benefit, the lump
sum and the monthly benefit payments are actuarially
equivalent if both forms of payment have the same
present value."
(Emphasis added.)  That definition suggests that the concept of
actuarial equivalency, as it relates to these cases, is concerned
with substituting equally one form of payment for another -- that
is, a lump sum representing a member's total service retirement
allowance for a stream of payments over time derived from that
sum.  In addition, it is clear that, if mortality rates improve,
members' monthly allowances would decrease if AEFs properly are
updated to reflect those improvements.  
PERB, however, has adopted a rule that essentially
renders the AEFs static.  OAR 459-005-0055(5) (1996) provided
that, for certain members, (68)
 "[PERB] shall not change a
factor that would produce a lower periodic or single benefit
payment."  That text effectively states that, even if the PERS
actuary recommended that PERB update the AEFs to reflect improved
mortality assumptions, PERB would not do so if it would result in
lower monthly service retirement allowances for certain members. 
Indeed, the PERS actuary testified before the Special Master that
PERB had declined to update the AEFs notwithstanding his warning
that the PERB-applied AEFs were not producing actuarially
equivalent benefits (as former ORS 237.251(3)(g) (1991) and
former ORS 237.147(1) (1991) required) and his advice that PERB
not adopt OAR 459-05-0055 (1996).
Petitioners argue that the last clause of former ORS
237.251(3)(g) (1991) -- "which shall constitute a part of the
system" -- demonstrates a legislative intent to provide PERB with
the absolute authority to establish, at its discretion, the
system's actuarial factors.  They argue that, because of that
authority, the actuarial factors that PERB has established are
part of the PERS statutory contract and cannot be changed without
either breaching or impairing their contractual rights.  We
disagree, for two reasons.  
First, petitioners' reading of the final clause of
former ORS 237.251(3)(g) (1991) both misapprehends and devalues
the clause that precedes it.  Again, that provision provided:
"[PERB] [s]hall determine the actuarial
equivalency of optional forms of retirement allowances
and establish from time to time for that purpose the
necessary actuarial factors, which shall constitute a
part of the system[.]"
As a grammatical matter, the phrase, "which shall constitute part
of the system," refers to factors that necessarily ensure
actuarial equivalency in the payment of PERS members' service
retirement allowances -- a standard by which, as the Special
Master found, the AEFs used before the 2003 PERS legislation fell
short.  See generally, Bryan A. Garner, A Dictionary of Modern
American Usage 648 (1998) (nonrestrictive clause provides detail
as to preceding noun).  Relatedly, in light of the legislature's
choice to use nonrestrictive wording in the final clause, it is
apparent that the legislature's primary intent was to ensure that
PERB update the AEFs as necessary to produce actuarial
equivalency in the calculation of members' service retirement
allowances.  See id. (nonrestrictive clauses generally provide
supplemental detail relating to preceding noun, as opposed to
more essential detail); see also generally Feero v. Housley, 205
Or 404, 415, 288 P2d 1052 (1955) (court presumes that legislature
meant exactly what it stated within statutory provision).
Petitioners' suggested reading of former ORS
237.251(3)(g) (1991) also renders that provision internally
inconsistent, effectively directing PERB to establish proper AEFs
to ensure actuarial equivalency in calculating PERS members'
service retirement allowances on the one hand, while providing
PERB with authority to make those factors permanent on the other. 
That is not a plausible reading of the statute.  To the contrary,
the statutory wording demonstrates that the legislature intended
for PERB to ensure that a retired member's stream of monthly
payments would be the actuarial equivalent of that member's total
service retirement allowance.  And, in so doing, PERB was
required, "from time to time for that purpose[,]" former ORS
237.251(3)(g) (1991), to establish the actuarial factors
necessary to produce that result.  Nowhere in chapter 237 (now
chapter 238) did the legislature evince any contrary intent. 
And, no part of that chapter suggests that the legislature
intended to give PERB the authority to make its AEFs permanent.
Based on the foregoing, we reject petitioners' argument
that the legislature intended in former ORS 237.251(3)(g) (1991),
which, as noted, provided the basis for PERB's adoption of OAR
459-05-055 (1993), renumbered as OAR 459-005-0055 (1996), to
freeze the AEFs in place at that time, as part of the statutory
contract.  It follows that nothing about Oregon Laws 2003,
chapter 68, sections 2 and 4, as amended by Oregon Laws 2003,
chapter 67, section 40, and Oregon Laws 2003, chapter 625,
section 16, breaches or impairs an obligation of the PERS
contract.
E. State Constitutional Claim Under Article I, 
Section 20
Petitioner Dahlin argues that the 2003 PERS legislation
discriminates on the basis of age in violation of the equal
privileges and immunities clause of Article I, section 20, of the
Oregon Constitution. (69)
  More specifically, he argues that
the Special Master's findings indicate that the 2003 legislation
will have a disparate impact on the service retirement allowances
of "older workers" as opposed to those of younger workers.  He
argues that, because the 2003 legislation denies older workers
benefits that it specifically confers to younger workers, it
violates his rights under Article I, section 20.
Petitioner Dahlin uses various terms to describe the
purported "class" to which he belongs.  On one hand, he argues
that the 2003 PERS legislation denies benefits to "older workers"
-- a term that he does not define -- that it confers to younger
workers, but, on the other, he asserts membership in a specific
class, namely, Tier One members aged 40 and older.  However, even
assuming that either categorization is sufficient to define a
class for the purposes of Article I, section 20, petitioner
Dahlin cannot prevail as a member of either class, as explained
below.  
As to petitioner Dahlin's argument based on a class of
"older workers," the Special Master's report states that "mid-career employees -- that is, those within 10 years of retirement
-- [will] experience greater impacts on their future benefits" as
a result of the 2003 PERS legislation.  According to his report,
those members are aged 42 to 52.  His report indicates further
that members aged 57 are expected to receive benefits greater
than those received by mid-career members and even than those
received by members aged 37.  That data indicates that the oldest
group of members are projected to receive benefits in excess of
those received by many younger members.  Petitioner Dahlin
presents no additional evidence nor any evidence to the contrary. 
In fact, he relies exclusively on the findings set out in the
Special Master's report, but he reaches a conclusion exactly
opposite to that which is inescapable based on the data set out
in that report.  We conclude that, even if this court were to
agree that "older workers" compose a recognizable class under
Article I, section 20, petitioner Dahlin cannot prevail on his
claim here because the evidence simply does not support his
assertion that the 2003 PERS legislation treats "older workers"
disparately from younger ones.
As to petitioner Dahlin's argument based on a class of 
"Tier One members aged 40 and older," that argument essentially
asserts age discrimination within the broader "class" of Tier One
members.  Being a Tier One member, however, is a status created
entirely by the PERS statutory scheme.  As this court has
explained, the legislature is free to create statutory classes
and to create distinctions among those classes.  Greist v.
Phillips, 322 Or 281, 292, 906 P2d 789 (1995).  What the
legislature may not do, however, is create distinctions based on
characteristics that exist independent of the terms of
legislation.  Crocker and Crocker, 332 Or 43, 54-55, 22 P3d
759 (2001).  As noted above, petitioner Dahlin has failed to
prove any distinction based on age.  He therefore is left to rely
entirely on his status as a Tier One member.  Because that
classification was created by the statutory scheme at issue and
does not exist independently of that scheme, it cannot serve as a
basis for petitioner Dahlin to assert an Article I, section 20,
violation.  We therefore reject his claim.
F. Remaining Constitutional Claims
In addition to the claims for relief that we have
addressed, various petitioners also challenge parts of the 2003
PERS legislation based on the "takings" provisions of the Oregon
Constitution and the United States Constitution, Or Const, Art I,
§ 18; US Const, Amend V, IV, and the Contracts Clause of the
United States Constitution, US Const, Art I, § 10.  The foregoing
holdings dispose of those claims, either because we have voided
the challenged legislation in light of petitioners' state
contract claims or because our determination of the particular
obligations set out in the PERS contract obviates the fundamental
premise of petitioners' remaining claims (that is, that the PERS
contract granted them "rights" that cannot be breached, impaired,
or taken for public use).  We therefore need not discuss those
claims further. 
IV.  CONCLUSION
"The function of the court is to declare the law as it
is and not what it thinks it ought to be."  Wallace v.
International Ass'n, 155 Or 652, 661-62, 63 P2d 1090 (1937).  We
offer that nearly 70-year-old statement from our predecessors on
this bench neither in apology nor as commentary on the various
legislative and executive policy choices -– both past and present
–- that these cases have brought before us.  Instead, we
reiterate that pronouncement here because we think that it is
both correct and reflective of our efforts to resolve these
compelling issues –- efforts that counsel and the parties
themselves advanced considerably through their diligent and
capable conduct of this litigation.
We conclude that, in two respects, petitioners have
prevailed on their claims for relief.  First, petitioners in each
of the cases correctly have argued that the provisions of the
2003 PERS legislation that alter the manner in which earnings are
credited to the regular accounts of Tier One members impair an
obligation of the statutory PERS contract in violation of Article
I, section 21, of the Oregon Constitution.  As such, those
provisions are void and of no effect.  Second, Strunk and Sartain
petitioners are correct in their assertion that the provision of
the 2003 PERS legislation that directs PERB to not apply annual
COLAs to certain retired members' "fixed" service retirement
allowances breaches the contrary obligation of the PERS contract
to do so; that provision also is declared void and of no effect. 
In all other respects, we conclude that petitioners' claims for
relief are not well taken.
Oregon Laws 2003, chapter 67, sections 5, 6, 7, and 8,
as amended by Oregon Laws 2003, chapter 625, section 10, 11, and
12, are declared void.  The final sentence in Oregon Laws 2003,
chapter 67, section 10(3), is declared void.  In all other
respects, petitioners' claims for relief are denied or dismissed.
BALMER, J., concurring.
I join in each aspect of the majority's analysis and
disposition of these proceedings, including those that follow
from this court's decision in Oregon State Police Officers' Assn.
v. State of Oregon, 323 Or 356, 918 P2d 765 (1996) (OSPOA).  We
appropriately have declined to revisit the questions of statutory
interpretation and legislative intent that OSPOA addressed and
decided.  Our respect for that precedent, however, should not be
misread as an endorsement of either the result or the reasoning
in that case.
To the contrary, in my view, the court in OSPOA lost
sight of the polestar of statutory contractual analysis:  clear,
unambiguous, and unmistakable promissory intent.  See Hughes v.
State of Oregon, 314 Or 1, 17, 838 P2d 1018 (1992) ("a contract
will not be inferred from * * * legislation unless it
unambiguously expresses an intention to create a contract");
Campbell et al. v. Aldrich et al., 159 Or 208, 213-14, 79 P2d 257
(1938) (legislature's intention "to create contractual
obligations * * * must clearly and unmistakably appear";
surrender of legislative control over vital public matters
"cannot be established by mere implication").  Having lost that
bearing, the court in OSPOA proceeded to misconstrue the "assumed
interest rate" provision of ORS 238.255 -- a patently
administrative provision intended to smooth fluctuations in PERS
fund earnings -- as both a material and a perpetual aspect of the
PERS contract.  See OSPOA, 323 Or at 377-78 (construing "assumed
interest rate" provision).  Oregon's public employers and
taxpayers must live with the effect of OSPOA's error for some
time to come.  Our appropriate respect for stare decisis in the
interpretation of statutes, and more particularly of statutory
contracts on which public employees have relied, compels as much. 
OSPOA, however, ought not have any more vitality than that.
I concur.
DURHAM, J., concurring in part and dissenting in part.
I write separately to explain why I join in some but
not all of the majority's analysis and conclusions. 
I begin by noting that I agree with the majority's
invocation of the "rule of necessity" to allow the justices of
this court to address and decide the issues in these proceedings. 
I also agree with the majority's determinations regarding
petitioners' standing and the existence of justiciable
controversies; the dismissal of petitioner Dahlin's claims under
42 USC section 1983 and on behalf of certain PERS retirees; the
dismissal, on ripeness grounds, of claims by petitioners in
Strunk, Burt, Dahlin, and Evans challenging Oregon Laws 2003,
chapter 67, sections 14b(1)(b) and 14b(2); and the denial of
motions to compel production of documents in the Strunk and
Dahlin proceedings.
I turn now to the majority's disposition of
petitioners' other substantive challenges to the 2003 PERS
legislation.
ANNUAL CREDITING OF MEMBERS' REGULAR ACCOUNTS AT ASSUMED EARNINGS RATE
The majority declares that Oregon Laws 2003, chapter
67, sections 5, 6, 7, and 8, as amended by Oregon Laws 2003,
chapter 625, sections 10, 11, and 12, are void, because those
provisions impair the state's contractual retirement obligation
with its employees in violation of Article I, section 21, of the
Oregon Constitution.  That section provides, in part:  "No * * *
law impairing the obligation of contracts shall ever be passed  
* * *."  The cited provisions of the 2003 PERS legislation
concern the legislature's cancellation of annual crediting of
Tier One member regular account balances at the assumed earnings
rate.  I concur with the majority's conclusion in that respect.  I also concur with the majority that the legislature's
modification of the statutory scheme for charging public employer
accounts when credited income exceeds earnings for more than five
years (the "call") does not impair the statutory contract.  The
underlying contractual obligation to credit member regular
accounts remains with the state regardless of the state's
accounting arrangements with public employers regarding the
funding of member account balances.
COST OF LIVING ADJUSTMENTS (COLAs)
The majority also concludes that Oregon Laws 2003,
chapter 67, section 10(3), direct the Public Employees Retirement
Board (PERB) to breach the promise of annual COLAs on certain
"fixed" service retirement allowances.  Strunk, ___ Or at ___
(slip op at 109).  I conclude that the cited section of the 2003
legislation regarding COLAs purports to eliminate a contractual
obligation of the state.  As a consequence, that that provision
of the 2003 legislation impairs an obligation of contract in
violation of Article I, section 21, and is invalid for that
reason.  The legislature's attempt to suspend COLAs on properly
calculated service retirement allowances for the affected retired
members is void.  
The majority rests its breach of contract theory on its
reading of Eckles v. State of Oregon, 306 Or 380, 760 P2d 846
(1988).  In Eckles, this court examined two provisions of a
statute, Oregon Laws 1982 (Special Session 3), chapter 2 (the
"Transfer Act").  One provision of the Transfer Act, section
four, eliminated the state's statutory contractual obligation to
employers to use certain surplus funds in a statutory trust fund
only for purposes related to the workers' compensation laws.  A
second provision, section two, directed the State Treasurer to
transfer $81 million from that statutory trust fund to the state
General Fund.
The court concluded that section four of the Transfer
Act impaired the state's contractual obligation under preexisting
contracts with employers and was unconstitutional in that
respect.  The court also concluded that section two of the
Transfer Act did not alter the state's contractual obligation to
employers.  Requiring the State Treasurer to transfer funds did
nothing to change the state's contractual promise to use the
funds solely for purposes related to workers' compensation laws. 
In the court's view, however, section two did breach the state's
promise; the transfer of the funds exposed the state to a legal
obligation to compensate employers for the breach.
In my view, the elimination of COLAs in the 2003 PERS
legislation is closely analogous to the elimination of the
statutory contractual duty effected by section four of the
Transfer Act, as discussed in Eckles.  The majority's attempt to
compare that aspect of the 2003 PERS legislation to the operation
of section two of the Transfer Act, as discussed in Eckles, is
unconvincing.  I conclude that the majority misreads Eckles.
Nevertheless, I see no reason to dissent from the
result that the majority adopts following its breach of contract
analysis.  The majority returns the parties to the position that
they occupied before the legislature adopted its 2003 amendment,
and declares that that amendment is void.  As Eckles
demonstrates, that is the proper remedy when legislation impairs
the obligation of a statutory contract in violation of Oregon
Constitution, Article I, section 21.  As a consequence, I concur
in that aspect of the majority opinion.
ADOPTION OF NEW ACTUARIAL EQUIVALENCY FACTORS (AEFs)
The 2003 PERS legislation modifies the preexisting
statutory scheme regarding PERB's application of actuarial
equivalency factors (AEFs) to convert a member's account balance
to a monthly allowance, among other things.  Petitioners contend
that, pursuant to a lawful delegation of rulemaking authority,
PERB had adopted rules in 1993 (former OAR 459-05-055) and 1996
(OAR 459-005-0055) that required PERB to refrain from changing
any AEF if the adoption of the new factor would have the effect
of lowering a periodic or single benefit payment to a member. 
According to petitioners, PERB's rules "constitute[d] a part of
the system," as ORS 238.630(3)(g) (2001) provided, from the time
of their adoption.  Therefore, petitioners argue, by amending
certain statutes to require PERB to update its AEFs, the
legislature impaired an aspect of the retirement contract between
the state and the affected members of PERS.
Oregon Laws 2003, chapter 68, section 2, requires PERB
to adopt new AEFs that "use the best actuarial information on
mortality available at the time the board adopts the tables[.]" 
Section 4 of that law incorporates the new AEFs as a part of the
retirement calculus for members who retired on or after July 1,
2003, and exposes those retirees to the possibility of lower
retirement allowances under the new AEFs.  Petitioners contend
that those sections of Oregon Laws 2003, chapter 68, impair the
state's contractual obligation to its employees.
The majority rejects that claim, and I concur for the
following reason.  There is no question that PERB's 1993 and 1996
rule, in its amended 1996 form, in absolute and unconditional
terms, prohibited PERB from changing any AEF to the economic
detriment of any member who established PERS membership before
January 1, 1999.  It is unnecessary to decide in this proceeding
whether PERB exceeded its rulemaking authority in adopting those
rules.  The only true question is whether the statutes requiring
establishment of AEFs by PERB reflect a contractual intention by
the legislature, such that the Legislative Assembly in 2003
lacked authority to impair any obligation regarding AEFs that
PERB's rules embodied.
I assume arguendo that the legislature may create a
binding contract by a valid delegation of authority to an
administrative agency to specify contractual terms through
rulemaking.  However, that is not what occurred here.
For many years before it enacted the 2003 PERS
legislation, the legislature had required PERB to establish from
time to time the necessary actuarial factors that would allow
PERB to determine the actuarial equivalency of the optional forms
of retirement under the system.  See, e.g., former ORS
237.251(3)(g) (1991). (70)
  "Actuarial" means "relating to
statistical calculation esp. of life expectancy."  Webster's
Third New Int'l Dictionary 22 (unabridged ed 2002).  As a
variable in the statistical calculation of actuarial equivalency,
the factor of "life expectancy" has no constant and unchanging
value.  Rather, it is constantly in flux, shifting with the
prevalence in the subject population of the various factors
(e.g., health history, diet, exercise, tobacco use, etc.) that
influence longevity. (71)
  Former ORS 237.251(3)(g) (1991)
required PERB to take account of the changing character of the
factors that determine actuarial equivalency by establishing the
necessary actuarial factors "from time to time."
There is no question that the legislature has delegated
broad rulemaking authority to PERB.  When PERB adopted the two
rules now under consideration, former ORS 237.263 (1991),
renumbered as ORS 238.650(1995), provided:
"Subject to the limitations of ORS 237.001 to
237.315, the board shall, from time to time, establish
rules for transacting its business and administering
the system in accordance with the requirements of ORS
183.310 to 183.550."
(Emphasis added.)  That statute has remained in effect without
substantive modification through the present time.  Aside from
any question of the lawfulness of the 1993 and 1996 rules, that
statute confirms that PERB had authority to alter those rules at
any time.
PERB's broad authority to alter its rules is
insufficient, standing alone, to demonstrate that PERB's rules
did not reflect a legislative contractual intent while they were
in effect.  However, in view of PERB's duty under former ORS
237.251(3)(g) (1991) to evaluate the accuracy of its AEFs and
publish new ones from time to time, and the necessary qualifying
effect of that statute on PERB's rulemaking authority in former
ORS 237.263 (1991), I cannot read PERB's rules to create a
contractual obligation that later legislation could not impair. 
Former ORS 237.263 (1991) required PERB "from time to time" to
establish rules for conducting its business, and ORS
237.251(3)(g) (1991) and its statutory successors in force
through 2001 also required PERB to establish new AEFs "from time
to time."  Those provisions underscore the impermanence of the
AEF rules on which petitioners base their claim.  The foregoing
discussion demonstrates that the majority correctly rejects
petitioners' contract impairment claims based on PERB's 1993 and
1996 administrative rules.
PETITIONER DAHLIN'S AGE DISCRIMINATION CLAIM
The majority addresses and rejects the claim of
petitioner Dahlin that the 2003 PERS legislation discriminates
against him on the basis of age in violation of Article I,
section 20, of the Oregon Constitution.  I concur. 
TERMINATION OF EMPLOYEE CONTRIBUTIONS TO MEMBER ACCOUNT;
LOSS OF CREDITS TO MEMBER ACCOUNT AND ENHANCEMENTS TO RETIREMENT ALLOWANCE
The 2003 PERS legislation terminates the longstanding
statutory plan for funding a key component of public employee
retirement allowances, the member account.  The result is that,
for affected Tier One employees, decades-old statutory
requirements for credits to member accounts and employer matching
contributions no longer will apply.  Petitioners argue that those
changes inevitably will lead to reduced retirement allowances in
violation of their retirement contract with the state.  Moreover,
they contend, because employee retirement allowances will fall
under the 2003 PERS legislation, public employers will pay COLA
adjustments after petitioners retire on the basis of illegally
reduced retirement allowances, thus compounding the economic
injury to petitioners.  To evaluate petitioners' impairment of
contract claim in this respect, it is necessary to put in the
proper context the requirements for member accounts that were in
place before enactment of the 2003 PERS legislation.
The payment that an eligible member of the PERS system
receives on retiring is known as a service retirement allowance. 
ORS 238.300 (2001) provided:
"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:  * * *."
(Emphasis added.)
As that clause makes clear, two sources of funds
constitute the service retirement allowance:  an annuity and
pensions.  ORS 238.005 (2001) defined "annuity" and "pension" as
follows:
"For purposes of this chapter:
"(1) 'Annuity' means payments for life derived
from contributions made by a member as provided in this
chapter.
"* * * * *
"(15) 'Pension' means annual payments for life
derived from contributions by one or more public
employers."
The phrase "contributions made by a member" in the
statutory definition of "annuity" referred to the statutory
obligation of active members to contribute six percent of their
salaries to the Public Employees Retirement Fund (the fund).  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."
Oregon's statutory scheme for public employee
retirement always has required employees' contributions to the
fund that provides the financial basis for their retirement since
the creation of the present retirement system 60 years ago.  That
scheme also has required PERB to maintain individual accounts
that reflect both the amount of member contributions to the fund
and any increases in the account due to interest earnings.  See
OCLA § 90-710(2) (stating those requirements in the original
public employee retirement statute in 1945).  Until 2003, those
provisions had not changed significantly since 1945.  
Several statutes in effect in 2001, as set out below,
explained the nature and operation of member accounts and their
central importance to the calculation of each member's service
retirement allowance.  ORS 238.005(13) (2001) provided, in
part:
"(a) 'Member account' means the regular account
and the variable account.
"(b) 'Regular account' means the account
established for each active and inactive member under
ORS 238.250.
"(c) 'Variable account' means the account
established for a member who participates in the
Variable Annuity Account under ORS 238.260."  
ORS 238.200(2) (2001) provided:
"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 the board, which shall cause them to be
credited to the member account of the member."
ORS 238.250 (2001) provided: 
"The board shall provide for a regular account for
each active and inactive member of the system.  The
regular account shall show the amount of the member's
contributions to the fund and the interest which they
have earned.  The board shall furnish a written
statement thereof upon request by any member or
beneficiary of the system."
ORS 238.255 (2001) explained the requirements for
crediting the regular account of a Tier One member:  
"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 the board,
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.  The Public Employees
Retirement Board 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 established membership in the system before January
1, 1996, as described in ORS 238.430, have retired."
The statutes set out above demonstrate that the
requirements regarding member contributions of salary to the fund
served two functions.  First, they required a personal
investment, over time, by the member in the system that
ultimately would fund the member's retirement.  Second, they
afforded the member the opportunity, over time, to increase the
size of the resulting member's regular account.
The majority correctly reports that the PERS system
created three different formulas for calculating a member's
service retirement allowance and promised the members that the
state would calculate their benefits according to the one formula
out of the three that would provide the highest level of service
retirement allowance.  The three formulas are the Money Match,
the Pension Plus Annuity, and the Full Formula.  The Pension Plus
Annuity formula applies to only Tier One members who made
contributions to the system before August 21, 1981.  For the Tier
One members who do not meet that qualification, ORS 238.300
(2001) affords two, not three, formulas, the Money Match and the
Full Formula.  It is undisputed that, as petitioners argue, the
size of the member's service retirement allowance under the Money
Match and Pension Plus Annuity formulas turns directly on the
size of the accumulated percentage-of-salary contributions and
interest on those contributions in the member's regular account.
The three formulas arise from the terms of ORS 238.300,
which in 2001 provided:
"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 by the member
and interest thereon credited at the time of
retirement, which annuity shall provide an allowance
payable during the life of the member and at death a
lump sum equal in amount to the difference between
accumulated contributions at the time of retirement and
the sum of the annuity payments actually made to the
member during life shall be paid to such person, if
any, as the member nominates by written designation
duly acknowledged and filed with the board or shall
otherwise be paid according to the provisions of this
chapter for disposal of an amount credited to the
member account of a member at the time of death in the
event the member designates no beneficiary to receive
the amount or no such beneficiary is able to receive
the amount.  If death of the member occurs before the
first payment is due, the member account of the member
shall be treated as though death had occurred before
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 as a police officer or firefighter before the
effective date of retirement.
"(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 as a member of the Legislative Assembly before
the effective date of retirement.
"(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 as other
than a police officer, firefighter or member of the
Legislative Assembly before the effective date of
retirement.[ (72)
]
"(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.[ (73)
]
"(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.[ (74)
] 
"(c) As used in this subsection, 'number of years
of membership' means the number of full years plus any
remaining fraction of a year for which salary was paid
and contributions to the Public Employees Retirement
System made.  Except as otherwise provided in this
paragraph, in determining a remaining fraction a full
month shall be considered as one-twelfth of a year and
a major fraction of a month shall be considered as a
full month.  Membership of a school district employee,
an employee of the State Board of Higher Education
engaged in teaching or other school activity at an
institution of higher education or an employee of the
Department of Human Services, the Oregon Youth
Authority, the Department of Corrections or the State
Board of Education engaged in teaching or other school
activity at an institution supervised by the authority,
board or department, for all portions of a school year
in a calendar year in which the district school,
institution of higher education or school activity at
an institution so supervised in which the member is
employed is normally in session shall be considered as
a full one-half year of membership.  The number of
years of membership of a member who received a refund
of contributions as provided in ORS 237.976(2) is
limited to the number of years after the day before the
date on which the refund was received.  The number of
years of membership of a member who is separated, for
any reason other than death or disability, from all
service entitling the member to membership in the
system, who withdraws the amount credited to the member
account of the member in the fund during absence from
such service and who thereafter reenters the service of
an employer participating in the system but does not
repay the amount so withdrawn as provided in this
chapter, is limited to the number of years after the
day before the date of so reentering.
"(3) An additional life pension (nonrefund) for
prior service credit, including military service,
credited to the member at the time of first becoming a
member of the system, as elsewhere provided in this
chapter, which pension shall be provided by the
contributions of the employer."
(Emphasis added.)
The Money Match formula in that statute derives
particularly from the terms of ORS 238.300(2)(b)(A)
(2001). (75)
  The Special Master described the operation of the
Money Match formula as follows:
"[U]nder the Money Match method, a retired member
receives an annuity based on his or her member account
balance, which is matched by an equal annuity that the
member's employer or employers funds.  PERB
historically has calculated the Money Match benefit by
determining the balance in the member's regular
account, adding the balance in the member's variable
account, if any, and multiplying the combined balance
by an AEF.  A benefit in an equal amount is then added
and charged to the employer's account.  The resulting
retirement allowance is therefore twice the amount of
the benefit resulting from the member's own annuitized
account balances."
Special Master's Report at 13.
The legislature created the Pension Plus Annuity
formula in 1967, Oregon Laws 1967, chapter 622, and, as already
noted, it applies only to PERS members who have made
contributions before August 21, 1981.  The Special Master
described the operation of the Pension Plus Annuity formula as
follows:
"The Pension Plus Annuity method is available only
to members who made PERS contributions before August
21, 1981.  Under that method, PERS calculates a pension
equal to 1.0 percent of the member's final average
salary (1.35 percent for legislators, and police and
fire employees) for each year of service.  An annuity
calculated by multiplying the member's account balance
by an actuarial equivalency factor (AEF) is added to
the pension.  The retirement allowance is the sum of
the formula pension and the member's annuitized account
balance.  Under the Pension Plus Annuity method, the
retirement allowance is fully funded by employers."
The legislature created the Full Formula pension
benefit in 1981.  Or Laws 1981, ch 616, § 4.  The Special Master
described the operation of the Full Formula pension as follows:
"PERS staff calculates the Full Formula allowance
by multiplying the retiring member's final average
salary and years of service by a factor.  The formula
provides 50 percent of final average salary for career
employees (25 years of police/fire service, or 30 years
of general service).  Thus, the Full Formula
calculation consists of three components:  (1) the
member's final average salary; (2) the member's years
and months of creditable service as of the date of
retirement; and (3) a factor set by statute at 1.67
percent for general service employees and 2.0 percent
for legislators, police officers, and firefighters.7 
The member is entitled to an annuity in an amount equal
to the member's final average salary multiplied by the
length of creditable service multiplied by the
applicable statutory percentage factor.
"7  The Full Formula benefit for legislators,
police, and fire members provides a higher multiplier
that allows those members to receive a more favorable
retirement benefit, by allowing earlier retirement at a
full benefit, than is provided for members in general
service."
It is important to note that ORS 238.300(2)(a) (2001)
provided that the Full Formula method was "subject to paragraph
(b) of this subsection[.]"  The cited paragraph (b) (i.e., ORS
238.300(2)(b)), stated that "[a] pension under this subsection
shall be at least:", and then described the Money Match and
Pension Plus Annuity formulas.  When I read those passages
together, they indicate without ambiguity that the legislature
guaranteed that the pension portion of the qualified retiring
member's service retirement allowance, when calculated under the
Full Formula method, would not fall below the amount of the
pension to which the employee would be entitled under either the
Money Match formula or, if it applied, the Pension Plus Annuity
formula.
The foregoing discussion indicates that the preexisting
PERS system required Tier One members to contribute six percent
of their salary, either through payroll deduction or by employer
"pick-up," to the fund, but entitled members to accumulate those
contributions, together with interest on the contributions, in
each member's regular account.  That scheme created a tangible
incentive for Tier One members to accumulate as large a regular
account as possible, because, at retirement, the state guaranteed
that the size of the regular account, among other factors, would
determine the size of the member's service retirement allowance. 
Finally, because the Money Match and, as applicable, the Pension
Plus Annuity formulas operated as a financial floor beneath which
the pension component could not fall, the incentive that I
identify above existed for all Tier One members regardless of the
particular formula that PERS used to calculate their service
retirement allowance.
In 2003, the legislature amended ORS 238.200, which now
prohibits any future contributions to the fund and, thus, to the
member's regular account on or after January 1, 2004.  ORS
238.200(4) provides in part:
"Notwithstanding subsections (1) to (3) of this
section, a member of the system, 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."
The new statute continues to require members to contribute six
percent of their salary, (76)
 but now diverts those amounts
into an Individual Account Program (IAP).  Regular accounts will
continue to exist, but PERS no longer will credit salary
contributions to regular accounts.  The Special Master summarized
the consequences of that aspect of the 2003 PERS legislation as
follows:
"The diversion of member contributions to the IAP
will reduce members' future account balances for
purposes of employer matching under the Money Match
formula.  On a system-wide basis, the elimination of
employee contributions from the Money Match calculation
probably will cause the Full Formula option to overtake
the Money Match as the most common retirement formula. 
Although members will receive balances held in the IAP,
those balances will not be matched by employer
contributions, enhanced by cost of living increases, or
annuitized at the assumed earnings rate as part of a
defined benefit package."
In Hughes v. State of Oregon, 314 Or 1, 12, 838 P2d
1018 (1992), this court considered whether the legislature had
impaired the PERS contract in 1991 by modifying the statute that
made retirement benefits "accrued or accruing" under PERS exempt
from state income taxation.  The court acknowledged the rule that
the court will not infer a contract from legislation if the law
"does not unambiguously express an intention to create a
contract[.]"  Id. at 14.  The court, however, noted that the
contractual nature of PERS was a settled matter:
"We begin from the premise that PERS is a contract
between the state and its employees.  The contractual
nature of such pension schemes was settled in Taylor v.
Mult. Dep. Sher. Ret. Bd., 265 Or 445, 450, 510 P2d 339
(1973)."
Id. at 18.  The court concluded that, because contractual intent
of the legislature and the contractual nature of PERS were
matters of settled law, "[t]he only remaining question,
therefore, is whether and to what extent former ORS 237.201
(1989) [the statute that exempted "accrued or accruing" PERS
benefits from state taxation] was intended to be a term of the
PERS contract."  Id. at 21 (footnote omitted).  The court
answered that question in the affirmative, because, considering
the context of the tax exemption's enactment as a matter of
"primary importance," the legislature had included the exemption
"as part and parcel" of the 1953 PERS statute.  Id. at 25.
The Hughes court limited its impairment holding to
those PERS retirement benefits that already had accrued in the
past or were accruing at present, and distinguished those
categories from benefits accruing in the future, because the
preexisting PERS tax exemption statute had incorporated that
express distinction.  Thus, the Hughes court concluded, the
legislature had not obligated itself by its statutory contract to
treat as exempt PERS benefits received for work performed after a
change in the tax exemption statute.
Hughes relied on the Taylor case for the proposition
that, on acceptance of employment (and completion of a required
six-month period of service) with a PERS employer, subsequent
legislation cannot impair the employee's vested contractual
interest in a pension plan.  Hughes, 314 Or at 20.  In Taylor,
the plaintiff was a deputy sheriff who had served for 13 years as
a jail matron, and later as a corrections officer, in Multnomah
County.  The county adopted a retirement ordinance, known as
Ordinance No. 25, for sworn personnel who provided "law
enforcement" services to the county.  The county refused to allow
the plaintiff to participate, claiming that her work in the jail
did not involve "law enforcement" services.  The county soon
amended the ordinance, in Ordinance No. 29, to exclude the
plaintiff more clearly, and relied on its express authority under
the ordinance to determine the eligibility and qualifications of
county personnel to receive benefits under the county's
retirement system.
This court held that the plaintiff had acquired pension
rights under the original ordinance, Ordinance No. 25, because
her contractual rights arose when she first had rendered service
under that ordinance, not when she completed the service that the
later Ordinance No. 29 required for receipt of pension benefits:
"We conclude from the above authorities that
Oregon has adopted not only the contractual concept of
pensions, but, also, the concept that contractual
rights can arise prior to the completion of the service
necessary to a pension.  * * * Such rights are subject,
of course, to subsequent completion of the necessary
service."
Taylor, 265 Or at 451 (citations omitted).  According to Taylor,
"[t]he adoption of the pension plan was an offer for a unilateral
contract.  Such an offer can be accepted by the tender of part
performance."  Id. at 452. (77)

This court in Taylor quoted with approval the following
rules of law from the Restatement of the Law of Contracts
regarding the binding nature of the employer's offered terms in a
retirement plan once the employee accepts the offer by tendering
part performance:
"'If an offer for a unilateral contract is made,
and part of the consideration requested in the offer is
given or tendered by the offeree in response thereto,
the offeror is bound by a contract, the duty of
immediate performance of which is conditional on the
full consideration being given or tendered within the
time stated in the offer, or, if no time is stated
therein, within a reasonable time.
"'Comment:
"'* * * * *
"'b.  Tender, however, is sufficient.  Though not
the equivalent of performance, nevertheless it is
obviously unjust to allow so late withdrawal.  There
can be no actionable duty on the part of the offeror
until he has received all that he demanded, or until
the condition is excused by his own prevention of
performance by refusing a tender; but he may become
bound at an earlier day.  The main offer includes as a
subsidiary promise, necessarily implied, that if part
of the requested performance is given, the offeror will
not revoke his offer, and that if tender is made it
will be accepted.  Part performance or tender may thus
furnish consideration for the subsidiary promises      
* * *.'" 
Id. at 452-53 (quoting Restatement of the Law of Contracts § 45
(1932)).  Applying those principles to the facts in Taylor, the
court stated:
"As applied to the present circumstances,
plaintiff's tender of the contributions and acceptance
of the plan terminated defendants' power to revoke the
offer, and plaintiff would be entitled to the benefits
of the plan if she continued to work for the requisite
period necessary for retirement."
Id. at 454 (emphasis added).
Two additional authorities that this court discussed
with approval in Taylor confirm the binding nature of an
employer's offered inducements for employment once the employee
accepts them by commencing service.  In Harryman v. Roseburg Fire
Dist., 244 Or 631, 420 P2d 51 (1966), a public employer
represented that it would allow employees to accumulate unused
sick leave and pay them for it when they terminated employment. 
The plaintiff accepted employment.  Later, the public employer
revoked the sick leave policy and refused to pay the employee for
the sick leave that he had accumulated during his employment. 
This court held that the public employer was required to honor
the inducement for employment that it had made:
"When plaintiff entered upon his employment with
defendant he was advised that he would receive an
allowance for accumulated sick leave upon termination
of employment.  He accepted employment upon the
assumption that the allowance for sick leave was a part
of his compensation for services.  Since it was a part
of the inducement to accept employment, it can be
regarded as a contractual term of plaintiff's
employment.  Defendant could not, therefore, deprive
plaintiff of the allowance after he had earned it."
Id. at 634-35 (footnote omitted).
In Adams v. Schrunk, 6 Or App 580, 488 P2d 831 (1971),
the Court of Appeals held that a public employer was not entitled
to evade, by means of a charter amendment, a provision in its
original charter that allowed employees to accumulate time toward
their eligibility for retirement by counting time spent in
temporary service.  This court in Taylor provided the following
summary of the holding in Adams and expressly agreed with it:
"In Adams v. Schrunk, 6 Or App 580, 488 P2d 831 (1971),
(rev. denied November 16, 1971), the Court of Appeals
held that Portland police officers acquired a right to
have time served as temporary officers included in
their periods of service necessary to entitle them to a
pension.  At the time of the temporary service the then
existing pension plan authorized this inclusion in
computing the length of service necessary for a
pension, and contributions were withheld from the
officers' salaries.  Subsequently, the plan was amended
to deny the inclusion of such service.  The Court of
Appeals thus recognized, as Crawford [v. Teachers' Ret
Fund Ass'n, 164 Or 77, 99 P2d 729 (1940)] had not, that
a contractual right could be established before the
completion of the service necessary to a pension.  We
agree with that opinion."
Taylor, 265 Or at 450-51 (underscoring added).  See Hughes, 314
Or at 20 n 25 (noting that, in Taylor, "this court expressly
approved of the holding in Adams v. Schrunk * * *").
The Taylor court's statement about the earlier decision
in Crawford is significant.  Crawford correctly had held that a
teachers' retirement fund could not alter the terms of a
teacher's retirement benefits after the teacher had retired. 
However, the court had explained its holding in terms that
indicated that contract rights did not arise before the employee
had rendered complete service:
"[W]e think the trend of modern authority and the
better-reasoned cases are to the effect that
contractual relations are created and that, upon full
performance by the annuitant, rights accrue which
cannot be impaired by subsequent legislation * * *."
Id. at 87-88.  This court's discussion of Adams and Crawford in
Taylor constitutes a rejection of the statement in Crawford that
contract rights in a retirement plan do not arise before the
completion of the necessary service for retirement.
The final case that is pertinent to this discussion is
Oregon State Police Officers' Assn. v. State of Oregon, 323 Or
356, 918 P2d 765 (1996) (OSPOA).  OSPOA involved a contract
impairment challenge to three changes to PERS that a ballot
measure, Ballot Measure 8, purported to add to the state
constitution.  Section 10 of the measure repeated the existing
requirement that members must contribute six percent of their
salary to the system, but prohibited public employers, by
contract or otherwise, from "picking up" the employees' six
percent payment obligation.  That provision concerned the
legislature's enactment of former ORS 237.075 (1979) renumbered
as ORS 238.205 (1995), which authorized public employers to agree
with employees or to decide unilaterally to pick up the employee
contribution to PERS.  See OSPOA, 323 Or at 373 (explaining
operation of pick-up statute).  Section 11 of the ballot measure
withdrew the statutorily guaranteed minimum rate of return on
PERS member accounts.  Section 12 of the ballot measure purported
to nullify a statute that allowed retiring PERS members to add
accumulated unused sick leave benefits to their final average
salary.
The court in OSPOA reviewed at length the Oregon case
law, including the cases discussed in this opinion, on the
subject of contractual rights that arise from public employee
retirement plans.  Addressing section 10, the court stated:
"Under the Taylor analysis, and contrary to the
state's argument here, ORS 237.075, and the state's
implementation of the authority contained in that
statute, promised a pension benefit that plaintiffs
could realize only on retirement with sufficient years
of service, that is, after rendering labor for the
state.  Plaintiffs accepted that offer by working.  See
Taylor, 265 Or at 452.  The change mandated by section
10 alters the state's contractual obligation, in
violation of Taylor, by increasing plaintiffs' cost of
retirement benefits for services that, absent a lawful
separation of employment, they will provide in the
future.  That consequence, if approved, would permit
the state to retain the benefit of plaintiffs' labor,
but relieve the state of the burden of paying
plaintiffs what it promised for that labor.  That
result would frustrate plaintiffs' reasonable
contractual expectations that were based on legal
commitments expressly made by the state.
"Once offered and accepted, a pension promise made
by the state is not a mirage (something seen in the
distance that disappears before the employee reaches
retirement).  Nullification of an express term of
plaintiffs' PERS contract with the state is an
impairment for purposes of Contract Clause analysis, 
Allied Structural Steel Co. v. Spannaus, 438 US 234,
247, 98 S Ct 2716, 57 L Ed 2d 727 (1978).  Section 10
expressly and substantially changes the state's
contractual promise to plaintiffs with respect to the
cost of their participation in the PERS retirement plan
and the benefits that they will receive on retirement. 
Under section 10, the cost of participation to the
employee increases while the benefits that the employee
ultimately will receive on retirement decrease. 
Unquestionably, section 10 impairs the obligation of
plaintiffs' PERS contract."
OSPOA, 323 Or at 374-75 (emphasis in original; footnote omitted).
In dissent, Justice Gillette opined that the majority,
in analyzing section 10, had transformed a statutory permission
into a promise to pick up all public employees' six percent
contributions.  Id. at 409 (Gillette, J., dissenting).  The
majority responded to Justice Gillette's criticism as follows:
"The fatal flaw in that analysis is that it 'errs in
failing to consider the significance of context.' 
Hughes, 314 Or at 21 n 27.  The six percent pick-up is
an integral part of the underlying PERS pension
contract.  Unilateral termination of the six percent
pick-up term of the PERS pension contract materially
changes that underlying pension contract to plaintiffs'
detriment and, thus, frustrates plaintiffs' reasonable
reliance on the offer the state made to them and which
they accepted by the tender of part performance.  Id.
at 20-21."
Id. at 376.
OSPOA went on to hold that sections 11 and 12 of Ballot
Measure 8 also impaired employee contractual rights.  As to those
conclusions, the court was unanimous.  The court struck down
Ballot Measure 8 in its entirety.
I turn now to the analysis of the legislature's
alteration in 2003 of the preexisting scheme for crediting member
contributions in light of the case law discussed above.  Both
before and after the 2003 legislation, PERS members are subject,
as they have been for many decades, to a legal requirement to
contribute six percent of their salary to a discrete "account" in
PERS.  Salary contributions no longer will be credited to, and
enhance the value of, member regular accounts; instead, PERS will
credit salary contributions to the IAP.  Also, before and after
the legislative change, the regular account and IAP of each
member will earn a rate of interest.  What has changed is the
legislature's commitment before the 2003 legislative amendment
about how PERS will increase the value of those contributions
before and after retirement and, consequently, the value of each
member's service retirement allowance.
First, the 2003 PERS legislation cancelled the
preexisting unconditional obligation to increase Tier One member
account balances annually by the assumed interest rate.  I
already have indicated that I join in the majority's
determination that that change impaired the PERS contract.
Second, the 2003 PERS legislation has reduced
significantly the practical value of the Money Match formula by
prohibiting future contributions of salary to regular member
accounts and by eliminating any matching feature regarding the
IAP.  Before the change, PERS members could work and plan for a
service retirement allowance that would reflect a pension amount
not less than their accumulated salary contributions during their
years of service, increased annually by at least the assumed
interest rate, plus an amount not less than a pension (i.e., an
amount "matched" by the employer) that was the actuarial
equivalent of the annuity that the members' accumulated
contributions could provide.  After the 2003 PERS legislation,
the employer matching feature will not apply to member
contributions made after July 1, 2003, either directly as one
available retirement formula or as a minimum financial benchmark
for the service retirement allowance.
I conclude that that aspect of the 2003 PERS
legislation constitutes an impairment of contract under this
court's precedents.  According to OSPOA, Ballot Measure 8's
deprivation of the employer pick-up feature of the employee
regular account contribution scheme represented an impairment of
contract.  By dint of logic, we must recognize that the complete
prospective cancellation of that contribution scheme constitutes
an even clearer impairment of contract.
This court's cases defeat the majority's contrary
conclusion.  According to this court's case law, the proper focus
is the employer's retirement benefit plan in place at the
commencement of employment, together with any enhancements to
that plan that the employer implements after employment begins. 
In no case has this court allowed a public body to modify a
retirement plan to effect a practical reduction in benefits,
either directly or through an alteration of the applicable
formula for calculating benefits, after inducing employees to
render service in reliance on the retirement plan.  As Taylor
held, and as the Restatement of the Law of Contracts confirms,
the premise that makes the benefit plan unchangeable by the
employer's unilateral act is the employer's promise, which the
law implies, that the employer will not revoke the retirement
plan once the employee commences service.  Because the pre-2003
PERS scheme, i.e., the "offer," was in place when each petitioner
commenced his or her employment, the state is bound by its
implied promise not to revoke that offer once petitioners
tendered partial performance.
The majority makes two points in reaching its different
conclusion.  First, the majority asserts that, in 1981, the
legislature adopted the Full Formula and expected that that
formula would be "a new, primary benefit calculator to the
system."  ___ Or at ___ (slip op at 60.)  The majority also
observes that the Full Formula feature was significant because it
shifted the risk of poor market performance to employers and away
from employees.
The legislature's expectation about the frequency of
use of the Full Formula method as a "primary benefit calculator"
is just that:  an expectation.  As the Special Master found,
"[u]ntil 1997, PERB assumed that member retirement allowances
would be calculated under the Full Formula method[,]" but the
Money Match emerged instead in 1997 as the predominant formula. 
But the erroneous assumptions by the legislature and PERB about
which retirement formula might be used most frequently as a
"primary benefit calculator" cannot alter the fact that the pre-2003 PERS statute promised members that they would receive
benefits calculated according to the most economically attractive
formula from among three statutory formulas.  Those incorrect
assumptions about the frequency of use of the Full Formula and
whether it would be the "primary benefit calculator" have no
effect on the state's contractual obligation to pay the full
benefits that the statute held out to employees.
The majority's point also disregards the fact,
confirmed in the text of ORS 238.300(2)(b) (2001), that the
legislature required the employer's Full Formula pension to be
"at least" the actuarial equivalent of the Money Match and
Pension Plus Annuity formulas.  Thus, as a matter of clear text,
the Full Formula may be the ceiling but it is not the floor for
the statutory pension component.
I fail to see the significance of the fact that the
Full Formula shifted greater risk of market loss to employers. 
The PERS statute promised members that they would receive
benefits calculated according to the most economically attractive
retirement benefit formula regardless of market performance.  The
addition of the Full Formula benefit in 1981 merely added one
more option to the retirement calculation formulas.  The risk of
market loss under any of those formulas has nothing to do with
their function in the calculation of promised service retirement
allowances.
Finally, the majority notes that the statutory
provision regarding regular accounts contains no separate wording
that promises that the legislature will not terminate the
accumulation of member contributions in regular accounts.  This
court addressed and rejected a similar argument in Hughes that a
dissenting opinion asserted.  The majority in Hughes emphasized
that the legislature's inclusion of a tax exemption statute
within a larger statutory contract was a significant contextual
clue about the legislature's contractual intent; the absence of
promissory terms in the tax exemption statute itself was, in the
court's view, immaterial.  The court cited numerous United States
Supreme Court cases that held that a tax exemption was a term of
a larger contract, and noted:
"The significant fact [in those cases] is that an
underlying contract was present.  This case presents an
analogous situation where we are faced with an
underlying contract -- the PERS contract -- and the
question is whether the tax exemption statute is a term
of that contract.  Also significant is that in those
cases the tax exemption terms are not, on their face,
indicative of an intention not to repeal those
exemptions.  The constitutional protection that was
afforded to those provisions' obligations followed from
the fact that they were part of a larger contract, not
that they were promissory in and of themselves."
Hughes, 314 Or at 21-22 n 27 (emphasis added).
Applying that point from Hughes to this case, it is
immaterial that the legislature did not append explicit wording
to the regular account statute to confirm its unchangeability. 
What is significant is the statutory context.  Did the
legislature incorporate into the PERS contract the provisions for
regular accounts and the calculation of retirement benefits from
the accumulated benefits in those accounts?  Clearly, the answer
is yes.  The majority's contrary answer is a legal error.
ELIMINATION OF VARIABLE ACCOUNT
The Special Master found as follows:
"Before the enactment of Section 3 of HB 2003,
PERS members could elect to have 25, 50 or 75 percent
of their employee contributions allocated to variable
accounts, and they were entitled to purchase a variable
annuity at retirement with their variable account
balances.  ORS 238.260 (2001).  Section 3 of HB 2003
provides that, after December 31, 2003, members no
longer are permitted to direct contributions to the
variable account.  ORS 238.260(3)(b) (2003).
"Section 3 does not affect contributions credited
to member accounts before its effective date."
The Special Master explained the operation of the
variable account system before its cancellation as follows:
"Earnings on variable accounts are first allocated
to pay a proportionate share of administrative
expenses, and the remainder are credited to member
accounts.  The PERS system never has funded a reserve
from variable account earnings.  For many years, PERB
added the balances in the regular and variable accounts
of members who retired under the Money Match, and it
applied the relevant AEFs to calculate their monthly
annuities.  PERS then required employers to match those
annuities.  That practice gave members twice the
difference between the earnings on their regular and
variable accounts."
In essence, the variable account plan afforded members
the opportunity to obtain greater growth in their regular
accounts by investing a portion of their salary contributions in
equities.  ORS 238.260(1) explained the legislature's purpose in
establishing the variable account program:
"The purpose of this section is to establish a
well balanced, broadly diversified investment program
for certain contributions and portions of the member
accounts so as to provide retirement benefits for
members of the system that will fluctuate as the value
and earnings of the investments vary in relation to
changes in the general economy.  It is anticipated that
investment of those contributions and portions of the
member accounts in equities will result in the
accumulation of larger deposit reserves for those
members during their working years, tend to preserve
the purchasing power of those reserves and the
retirement benefits provided thereby and afford better
protection in periods of economic inflation."
Petitioners assert that the legislature's repeal of
their right to direct contributions to the variable account
program is an impairment of their contract.  The majority rejects
that claim, relying substantially on the reasoning used to reject
petitioners' claim regarding members' regular accounts.  In
particular, the majority points to the absence of specific words
in ORS 238.260 (2001) or any earlier version of the variable
account statute in which the legislature expressly promised to
continue the variable account program.  The majority draws the
conclusion from that fact that the legislature thus reserved the
right to repeal the variable account program at any time.
I disagree.  None of the components of the PERS
contract, including the promised retirement formulas and public
employer obligations, appear with a legislative promise that the
legislature will not repeal them.  The majority's reasoning
departs from this court's decisions that examine retirement
obligations from the standpoint of benefits offered.  None of
this court's cases have suggested that the absence of a promise
of non repeal exposes a retirement plan benefit to withdrawal or
cancellation.
The fact that the legislature's cancellation was only
prospective does not save it from an impairment of contract
challenge.  When the affected employees accepted employment, the
variable account plan represented one available means for
increasing the size of their regular accounts.  As the foregoing
discussion of the regular account challenge demonstrates, our
cases decline to allow employers, once employment commences, to
nullify aspects of a retirement plan that employees may use to
enhance their service retirement benefit.  For the reasons
expressed in that discussion, the majority's contrary conclusion
is erroneous.  
In conclusion, I respectfully dissent from the
majority's conclusions regarding the legislature's amendment of
the statutes regarding employee contributions to regular accounts
and variable accounts, and concur, for the reasons stated, with
the balance of the majority's conclusions.
Riggs and Kistler, JJ., concur with this opinion.
1. 
After the enactment of those bills, the legislature
made further amendments to both, HB 3020 (2003); Or Laws 2003, ch
625, and later amended HB 2003 even further, HB 2020 (2003); Or
Laws 2003, ch 733.  With the final form of the substantive
enactments now incorporated into the 2003 edition of the Oregon
Revised Statutes, there are a number of sources from which to
cite.  In an effort to promote clarity, and unless to do so would
detract from that purpose, we shall refer to the statutory
provisions at issue by their designations in the session laws,
e.g., "Oregon Laws 2003, chapter 67, section 1," and refer to the
legislation as a whole as the "2003 PERS legislation."
2. 
The assumed earnings rate is the rate of investment
return that the Public Employees Retirement Fund is assumed to
earn over 50 to 75 years.  That earnings assumption facilitates
the calculation of the funding necessary to maintain the system
on an actuarially sound basis.  The assumption has changed from
time to time.  From 1975 through 1978, the assumed earnings rate
was seven percent.  In 1979, the Public Employees Retirement
Board (PERB) increased the assumed earnings rate to seven and
one-half percent.  In 1989, PERB increased the rate again, this
time to its current level of eight percent.
3. 
A Tier One member is a PERS member who joined PERS
before January 1, 1996.
4. 
Article I, section 21, of the Oregon Constitution
provides, in part:
"No * * * law impairing the obligation
of contracts shall ever be passed[.]"
5. 
This is not the first instance in which the legislature
has conferred jurisdiction specifically on this court to
determine the validity of legislative or constitutional changes
to PERS.  In those prior instances, the "rule of necessity"
required the court to adjudicate the claims.  See Oregon State
Police Officers' Assn. v. State of Oregon, 323 Or 356, 361 n 3,
918 P2d 765 (1996); Hughes v. State of Oregon, 314 Or 1, 5 n 2,
838 P2d 1018 (1992) (both discussing that doctrine).  To the
extent that the justices of this court either have, or arguably
could be said to have, a financial stake in the outcome of this
litigation, we likewise conclude that the rule of necessity
requires that we decide the contractual and constitutional
challenges that the legislature has directed us to adjudicate.
6. 
The number of parties and claims has narrowed during
the pendency of these proceedings.  We perceive of no benefit to
the public, the bench, or the bar in explaining the evolution of
these cases in detail.
7. 
42 USC section 1983 provides, in part:
"Every person who, under color of any
statute, ordinance, regulation, custom, or
usage, of any State or Territory or the
District of Columbia, subjects, or causes to
be subjected, any citizen of the United
States or other person within the
jurisdiction thereof to the deprivation of
any rights, privileges, or immunities secured
by the Constitution and laws, shall be liable
to the party injured in an action at law,
suit in equity, or other proper proceeding
for redress[.]"
8. 
Oregon Laws 2003, chapter 625, section 13(6), amended
Oregon Laws 2003, chapter 67, section 10, to make that section
applicable as well to "the alternate payees and beneficiaries of
members described in subsection (5) of this section."
9. 
We discuss the City of Eugene litigation, which
presently is under advisement in this court, later in our
opinion.  At this point, it suffices to note that the plaintiffs
and the defendants (but not the intervenors) in that litigation
have entered into a settlement agreement that provides, among
other things, that PERB will not use the methods that section 14b
specifies to remedy the errors that the trial court identified.
10. 
For ease of reference, we use the present tense,
recognizing that the 2003 PERS legislation has changed the system
significantly.  We have included citations to various PERS
statutes in place before 2003 later in this opinion, in the
course of analyzing petitioners' claims.
11. 
PERB employs the PERS actuary to perform various
statutory functions.  See, e.g., ORS 238.360(3)(b) (2001) (PERB
shall arrange for actuarial services for PERS); ORS 238.605
(2001) (actuary shall prepare reports for PERB).
12. 
PERB holds the fund assets in trust, which, as noted,
OIC invests.  Before the 2003 PERS legislation, OIC had five
members:  three members whom the Governor appointed, one of whom
was required to be a PERB member; the State Treasurer; and the
PERS director (appointed by PERB), who was a nonvoting member. 
ORS 293.706 (2001).  OIC now has six members:  the State
Treasurer; the PERS director (still a nonvoting member); and four
members whom the Governor appoints, none of whom are required to
be PERB members.  ORS 293.706.
13. 
ORS 238.015(1) provides:
"No person may become a member of the
system unless that person is in the service
of a public employer and has completed six
months' service uninterrupted by more than 30
consecutive working days during the six
months' period.  Every employee of a
participating employer shall become a member
of the system at the beginning of the first
full pay period of the employee following the
six months' period.   Contributions for new
members shall first be made for those wages
that are attributable to services performed
by the employee during the first full pay
period following the six months' period,
without regard to when those wages are
considered earned for other purposes under
this chapter.  All public employers
participating in the Public Employees
Retirement System established by chapter 401,
Oregon Laws 1945, as amended, at the time of
repeal of that chapter, and all school
districts of the state, shall participate in,
and their employees shall be members of, the
system, except as otherwise specifically
provided by law."
14. 
PERB allocates earnings on variable accounts by first 
paying a proportionate share of administrative expenses and then
crediting the remainder to members' variable accounts.  PERB
never has funded a reserve from variable account earnings.  
Historically, employer funds were not invested in
the Variable Annuity Account.  To the extent that that account
outperformed the regular account, employers were required to
contribute additional amounts to match those earnings.  In 2000,
employers began participating in the Variable Annuity Account.
15. 
As noted later in this opinion, all petitioners who
remain part of these cases are Tier One members of PERS, either
active or retired.  The summary offered below therefore primarily
focuses on aspects of PERS that relate to Tier One members.
16. 
In years in which the earnings on the fund equal or
exceed the guaranteed earnings rate, PERB statutorily is required
to "set aside * * * 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." 
ORS 238.670(1).  Before 1980, PERB funded a contingency reserve
account, as set out in that statute, but it has not done so since
1979.
In 1969, PERB began investing the fund in equity
markets.  Since then, the actual earnings of the fund, overall,
substantially exceeded the assumed earnings rate.  Historically,
PERB credited members' regular accounts with earnings in excess
of the assumed earnings rate when fund earnings exceeded that
rate.
17. 
Between 1977 and 2001, PERS employer contribution rates
ranged from a high of 11.84 percent to a low of 9.15 percent of
payroll.  Between 1975 and 1997, the average normal cost for
employers ranged between 7.09 and 9.33 percent of payroll, and
the average rate at which employers paid amortized UAL during
that same period ranged from zero to 3.24 percent of payroll. 
The three highest UAL rates occurred between 1975 and 1979.
18. 
Until 1997, PERB assumed that most member service
retirement allowances would be calculated under the Full Formula. 
By that time, however, the Money Match had emerged as the
dominant formula.  We agree with the Special Master's finding
that the Money Match became the primary formula for calculating
service retirement allowances because of (1) the structure of
PERS; (2) the dramatically fluctuating investment markets of the
late 1990s and early 2000s; and (3) certain of PERB's
administrative practices concerning reserves, earning
allocations, and the variable annuity account program.
19. 
As the Special Master noted in his report, those
percentages, which commonly are referred to as "replacement
ratios," understate the extent to which service retirement
allowances under PERS replace a member's preretirement salary,
because, among other reasons, any Social Security benefits that a
retired member may become eligible to receive are not included in
the member's retirement income.
20. 
We provide citations to the session laws respecting the
particular provisions at issue later in the opinion.
21. Member contributions are established by statute at six
percent of salary and either are withheld from the member's
salary or paid, that is, "picked up," by the employer.  The pick-up historically has been negotiated separately between public
employers and employees.
22. As noted above, before the enactment of the 2003 PERS
legislation, PERB set aside a portion of annual fund earnings to
ensure that sufficient assets would be available to pay
guaranteed benefits at the assumed earnings rate.  In years when
fund earnings exceeded the guaranteed amount, PERB deposited a
portion of those funds into the gain-loss reserve.  According to
the evidence in the record, it is reasonable to fund the gain-loss reserve at a level that would fund projected Tier One
guaranteed earnings credits for a 30-month period, which, using
the current assumed earnings rate of eight percent, would set the
reserve balance at 20 percent of the fund's value.
23. We discuss the 1999 crediting in greater detail later
in this opinion.  At this point, we note that the 11.33 percent
figure on which the legislature focused derives from a
calculation that the PERS actuary performed, after the fact, to
determine the earnings crediting that would have occurred in 1999
if PERB had funded the contingency and gain-loss reserves fully
and also had not allowed employers to participate in the Variable
Annuity Account for that year.
24. As explained later in this opinion, the term "actuarial
equivalency factors" refers to computational tools used to
convert lump sum account balances to monthly payments streams and
to change one optional benefit payment form to another.  They
primarily are based on assumptions concerning future earnings or
investments and mortality rates.
25. The court noted, however, that the plaintiff in Eckles
neither sought compensation nor produced any evidence that he had
been damaged by the state's breach of contract.  Eckles, 306 Or
380, 402, 760 P2d 846 (1988).
26. Petitioner Sartain entered into a stipulation with
respondents to the effect that, with one exception, she would
rely upon only statutory and administrative law sources as
establishing the terms of her contract.  The exception was for "a
document known as the 'Notice of Entitlement' [that retired PERS
members] receive upon retirement."  Consistently with that
stipulation, petitioner Sartain's opening brief focuses on
statutory sources, but also includes the following footnote:
"The conduct of the PERS staff and PERB
further confirms the contractual nature of
the account balance and retirement allowance. 
At the time of petitioner Sartain's
retirement, she was informed that her account
balance was $289,633.41. * * * PERS sent her
a Notice of Entitlement setting forth her
balance and stating that her monthly
retirement benefit would be $5,426.22."
The footnote, however, contains no argument or authority that
would support an implicit assertion that the conduct of PERB or
its staff through issuance of the notice of entitlement somehow
became part of the PERS contract.  We therefore do not include
petitioner Sartain's challenge in our discussion concerning
materials outside the PERS statutes (and applicable
administrative rules) in formation of the PERS contract.
27. Respondents offer additional argument to the contrary
in their surreply brief.  That advocacy, however, falls outside
the appropriate scope of matters that properly may be addressed
in surreply.  Absent leave from this court, petitioners have the
final word in reply as to issues in their case-in-chief. 
Accordingly, we have not considered respondents' surreply brief
in that respect. 
28. As noted, with respect to the administrative rules
concerning actuarial equivalency factors, all petitioners, except
petitioner Sartain, argue that the legislature specifically
delegated authority to PERB to adopt the rule at issue.  We
address that claim later in this opinion.
29.  Taylor involved a retirement plan for sworn law
enforcement personnel of Multnomah County.  Taylor v. Mult. Dept.
Sher. Ret. Bd., 265 Or 445, 447, 510 P2d 330 (1973).
302. As noted earlier, all petitioners challenge the 2003
PERS legislation as it relates to Tier One members.  Our summary
of the parties' arguments and ensuing analysis likewise focuses,
for the most part, on Tier One members.
31. ORS 238.300 provides the various formulas for
calculating service retirement allowances, and we discuss those
formulas in greater detail below.
32. As explained earlier, this court concluded in OSPOA,
323 Or at 374-76, that, as at issue in the context of that
particular case, certain statutory contribution provisions
(including the optional employer "pick-up") constituted terms of
the PERS contract.
33. Concerning the genesis of the Money Match, the Special
Master noted as follows:
"In the mid-1950s, PERS was a Money
Purchase Plan with an employer matching
feature.  In 1968, the Money Purchase Plan
was repealed, and it was replaced with the
Pension Plus Annuity benefit formula.  PERB
later recognized that one or two members who
retired in the interim had received lower
benefits than they would have received under
the previous system and that such a reduction
was not permissible under a retirement plan
that is qualified under the Internal Revenue
Code (IRC).  PERB asked the legislature to
enact corrective legislation so that benefits
earned by such members would be protected
and, in response, the legislature reinstated
the matching feature."
34.  Relatedly, we decline respondents' invitation to
construe certain of the statutory provisions at issue –-
particularly, ORS 238.200 (2001), which required members to
contribute six percent of their salaries to the fund, and ORS
238.250 (2001), which required (and still requires) PERB to
provide a regular account for each member -- in isolation. 
Rather, as we address petitioners' contentions, we must view the
wording of all the statutory provisions at issue in the context
of their collective operation.  See Hughes, 314 Or at 23
(rejecting state's argument as impermissibly viewing tax
exemption at issue "in isolation" and as "standing alone").
In a similar vein, we note that this court's
earlier conclusion in OSPOA, 323 Or at 374-76, that the employer
pick-up provisions are part of the PERS contract does not
necessarily assist our analysis in this more complex case, which
requires that we view all the statutes at issue as a whole.
35. The 2003 Legislative Assembly amended ORS 238.300;
however, those amendments do not affect the formula calculations
that we discuss above.  See Or Laws 2003, ch 67, § 4, as amended
by Or Laws 2003, ch 625, § 22; Or Laws 2003, ch 733, § 46e.
36. There is one exception to the Full Formula's design of
providing a minimum level for a pension component, pertaining to
an adjustment for members who participate in the variable annuity
account program.  That adjustment is not at issue in these cases.
37. The 1953 act was entitled the "Public Employe[e]s
Retirement Act of 1953."  Or Laws 1953, ch 200, § 1.  The
predecessor scheme, enacted in 1945 and similarly named the
"Public Employees Retirement Act," was similar, but not identical
to, the 1953 act, eventually named PERS.  See Or Laws 1945, ch
401 (enacting original act).  For a general discussion of the
relationship between the 1945 and 1953 acts, see Hughes, 314 Or
at 7 n 7.
38. The 1953 act also provided an additional life pension
for service before the employee became a member of the system. 
Or Laws 1953, ch 200, § 18.
39. As respondents note, the 1981 Legislative Assembly also
amended the graduated contribution rates for members based on
salary, providing, instead, that the withholding for all members
would be six percent unless the member made less than $1,000 per
month, in which case less would be withheld.  Or Laws 1981, ch
761, § 1; former ORS 237.071 (1981).  As amended in 1981, that
statute, now numbered as ORS 238.200, has remained substantially
unchanged.
40. In their reply brief, petitioners also argue that this
court's decision in Taylor, 265 Or 445, "is a much more pivotal
case in this court's developing analysis of pension benefits than
is OSPOA."  In Taylor, which involved a county retirement system,
the court acknowledged that "contractual rights can arise prior
to the completion of the service necessary to a pension."  265 Or
at 451.  Of course they can.  The predicate question -- which we
determine to be dispositive in these cases -- is whether the
contract offer that the particular pension plan presents contains
such a promise, i.e., a promise that extends over the life of a
covered member's service.  And, in that respect, we find nothing
inconsistent between Taylor and our analysis here.
41. As noted, before January 1, 1996, PERS did not
recognize classes of membership.  See Or Laws 1995, ch 654, § 2
(providing limitation on benefits payable to persons establishing
membership on or after January 1, 1996).  In creating the "tiers"
of membership in 1995, the legislature made what is now ORS
238.255 inapplicable to Tier Two PERS members.  Or Laws 1995, ch
654, § 3.
42. Oregon Laws 2003, chapter 625, section 10(5), now ORS
238.255(5), provides that the amendments to ORS 238.255 do not
apply to a person who was a judge member of PERS on June 30,
2003.  
43. Petitioners do not rely on the amendments made to ORS
238.250 (2001) and ORS 238.610 (2001) during the 2003 legislative
session (the legislature did not amend ORS 238.670 (2001)), and
we agree that those amendments do not appear relevant to the
arguments that petitioners make.
44. In doing so, we choose not to revisit the court's
holding in OSPOA that the legislature's promise to Tier One
members of a guaranteed rate of return applies to work yet to be
performed.
45. As noted above, petitioners also cite ORS 238.250
(2001) (PERB shall provide members with regular accounts) and ORS
238.610 (2001) (employers responsible for covering difference
when administrative expenses exceed annual fund earnings) as
support for their argument.  We, however, see nothing in those
statutes that advances petitioners' assertion. 
46. For example, for that reason, PERB credited Tier One
members' regular accounts with no earnings for 2003. 
47. As noted above, under Oregon Laws 2003, chapter 3,
section 1, as amended by Oregon Laws 2003, chapter 67, section 5,
codified as ORS 238.255(3), Tier One regular accounts will not be
credited with earnings in excess of the assumed earnings rate
until the gain-loss reserve no longer has a deficit and is fully
funded as determined by PERB for three consecutive years.  The
validity of that legislation is not before us on review.
48. As discussed at length further in this opinion, a
particular crediting decision that PERB made in 1999 was
challenged as part of the City of Eugene litigation.
49. The legislature initially provided that members could
contribute either 25 or 50 percent of their PERS contributions to
the variable annuity account program.  Or Laws 1967, ch 622, §
24(3).  In 1973, the legislature increased the amount that
members could direct to their variable accounts by adding the 75
percent option.  Or Laws 1973, ch 695, § 5.  Other than that
change, and one other in 1981 that we discuss below, the
substantive provisions of the statute have remained the same over
time.
50. Even after the 2003 PERS legislation, there is no need
to rely on legislative history for that proposition.  ORS
238.260(1) itself provided as follows:
"It is anticipated that investment of those
contributions and portions of the member
accounts in equities will result in the
accumulation of larger deposit reserves for
those members during their working years,
tend to preserve the purchasing power of
those reserves and the retirement benefits
provided thereby and afford better protection
in periods of economic inflation."
See also Or Laws 1967, ch 622, § 24(1) (enacting that wording).
51. We do not deem the legislature's use of the words
"shall" and "on and after" in ORS 238.260(3) (2001) to be
indicative of a promise of a right to future contributions to the
variable annuity account program.  The import of the word "shall"
is limited by its context -- specifically, its reference to use
of a PERB-approved form and to a particular effective date. 
Similarly, the words "on and after" merely clarify when the
variable election takes effect.
52. As noted, there is a dispute in the City of Eugene
litigation as to that particular aspect of the variable annuity
account program.  The resolution of that dispute, however, does
not impact our analysis in these cases.
53. The Special Master made those findings based on
evidence presented to, and findings made by, the trial court in
the City of Eugene litigation, described in the text below.
54. As noted, Oregon Laws 2003, chapter 537, section 1,
granted this court "exclusive jurisdiction to decide" the City of
Eugene litigation.  We do not address here the merits of the
trial court's judgment in that litigation.  The issues that that
case presents more appropriately will be addressed in our opinion
in that case.
55. We note that the particular sentence in Oregon Laws
2003, chapter 67, section 10(3), that precludes application of
annual COLAs to "fixed" service retirement allowances was not
amended by Oregon Laws 2003, chapter 625, section 13.
56. The current versions of ORS 238.715(1) and (8) are
identical to the 2001 versions of those provisions.
57. As noted, in light of the pending City of Eugene
litigation, PERB's 1999 crediting decision remained subject to
reversal at the time that the legislature enacted the 2003 PERS
legislation.
58. Put another way, the legislature took what it deemed to
be restorative action, but used as the mechanism for doing so an
adjustment that implicated the COLA provision of the PERS
contract.  Our conclusion that that particular legislative action
amounted to a breach of the PERS contract, however, implies
nothing about PERB's -- or, for that matter, the legislature's --
authority to recover amounts determined to have been paid from
the fund in error.
59. Because the foregoing disposition returns petitioners
to the status quo ante, that disposition obviates any need to
consider petitioners' arguments that the temporary suspension of
COLAs constitutes a taking of property under Article I, section
18, of the Oregon Constitution or their additional contractual
and constitutional challenges to the "revised" service retirement
allowance calculations set out in Oregon Laws 2003, chapter 67,
section 10(2), as amended by Oregon Laws 2003, chapter 625,
section 13.
60. Since the inception of what is now PERS in 1945, the
legislature has required the PERS actuary to "prepare a report
evaluating the current and prospective assets and liabilities of
the system and indicating its current and prospective financial
condition."  ORS 238.605; see Or Laws 1945, ch 401, § 13 (stating
same).  The legislature further has required that, "[i]n
preparing the report[,] the actuary shall investigate the
mortality, disability, service and other experience of the
members of, and employers participating in the system, shall
state fully the condition of the system, and shall make such
recommendations as the actuary deems advisable to facilitate
administering it properly."  Id.
61. The United States Supreme Court also has held that that
practice violates Title VII of the Civil Rights Act of 1964.  See
Arizona Governing Committee v. Norris, 463 US 1073, 1084, 103 S
Ct 3492, 77 L Ed 2d 1236 (1983) ("The use of sex-segregated
actuarial tables to calculate retirement benefits violates Title
VII whether or not the tables reflect an accurate prediction of
the longevity of women as a class[.]")
62.  Following enactment of the 2003 PERS legislation, PERB
again amended the rule, to conform with the legislation.  See OAR
459-005-0055(3) (2004) (requiring use of updated AEFs for members
retiring after July 1, 2003).
63. As explained earlier, the BIF (or "Benefits-In-Force"
reserve account) acts as a transitional account to which PERB
transfers a newly retired member's account balances, together
with the employer contributions necessary to pay that member's
service retirement allowance.
64. That subsection provided that "[a]ll changes to the
System's actuarial equivalency factors shall be prospective only
for that portion of an allowance attributable to service as an
active member beginning on or after the effective date of the
change."
65. The text of that statutory provision was the same in
1996, when PERB renumbered and amended former OAR 459-05-055
(1993), renumbered as OAR 459-005-0055 (1996), and also was the
same in 2001.  The 2003 Legislative Assembly renumbered the
provision as ORS 238.630(3)(f) and amended it; that amendment is
not at issue here.
66. ORS 238.305 (1993) allowed (and still allows in amended
form) retired members to select from a variety of "optional"
service retirement allowance calculations, in addition to those
set out in ORS 238.300.
67. ORS 238A.005(2) now provides:  
"'Actuarial equivalent' means a payment
or series of payments having the same value
as the payment or series of payments
replaced, computed on the basis of interest
rate and mortality assumptions adopted by 
[PERB]."
68. Those members "established membership in PERS before
January 1, 1999[.]"  OAR 459-005-0055(5) (1996).
69. Article I, section 20, of the Oregon Constitution
provides that "[n]o law shall be passed granting to any citizen
or class of citizens privileges, or immunities, which, upon the
same terms, shall not equally belong to all citizens."
70.  Former ORS 237.251(3) (1991), which was in effect when
PERB adopted the rules in question, provided, in part:
"The board:
"(g) Shall determine the actuarial equivalency of
optional forms of retirement allowances and establish
from time to time for that purpose the necessary
actuarial factors, which shall constitute a part of the
system[.]"
That statute, renumbered as ORS 238.630(3)(g) in 1995, remained
in effect without substantive modification until the legislature
amended it by enacting Oregon Laws 2003, chapter 68, sections 2
and 4.
71. The legislature acknowledged the inherent variability
of the factors that influence the statistical determination of
actuarial equivalency when it adopted the following statement as
one of its premises for the enactment of House Bill 2004, which
the legislature later codified as Oregon Laws 2003, chapter 68:
"Whereas actuarial equivalency factors are based
on assumptions and conditions that vary over time as
the demographics of a system's constituent population
and the expected performance of investments of the
Public Employees Retirement Fund change, so that the
most reasonable expectation is that such factors, by
their very nature, must vary over time to reflect those
demographic and performance shifts * * *."
72. This paragraph states the Full Formula.
73. This paragraph states the Money Match formula.
74. This paragraph states the Pension Plus Annuity formula.
75. As the majority indicates, PERS, at its inception in
1945, provided for the creation of personal accounts into which
the public employee would pay an amount actuarially determined to
be sufficient, with earnings on the account balance, to provide
one-half of the proposed retirement allowance (typically, at the
time, 50% of final average salary).  OCLA § 90-714.  Upon
retirement, the employee would receive an annuity based on the
value of the personal account, and the public employer also would
provide a similar annuity, for the other one-half of the proposed
retirement allowance, by "matching" the amount in the employee's
individual account.  OCLA § 90-719.  The level of the projected
retirement benefit has increased over time, and the legislature
has augmented the PERS system from time to time with various
reserve features to provide stability during periods of loss. 
However, except for one two-year period over 35 years ago, the
PERS system has retained the Money Match formula as one available
method of retirement benefit calculation through the present
time.
76. ORS 238.200(1)(b) requires smaller salary contributions
from employees who were active members on August 21, 1981.
77. The court in Taylor selected the term "unilateral
contract" on the assumption that the employees could accept the
employer's offer by the tender of partial performance.  The
Taylor court's subsequent discussion of the binding effect of the
tender of partial performance confirms that, in the employment
context, partial performance terminates the employer's power to
revoke the offer.  Thus, one characteristic of a truly unilateral
contract -- the offeror's power to revoke the offer before the
offeree tenders full performance –- is not applicable in this
setting.
Moreover, the term "unilateral contract" may no longer
provide a fully accurate conception of the factors that make the
employment relationship binding.  Restatement (Second) of 
Contracts § 32 (1981), which the American Law Institute adopted
eight years after the Taylor decision, provides:
"In case of doubt an offer is interpreted as
inviting the offeree to accept either by promising to
perform what the offer requests or by rendering the performance, as the offeree chooses."
Under that provision, unless the employer insists on performance
as the sole mode of acceptance, the employee may bind the
employer to its offer either by partially performing or
promising to perform.  In either case, a valid
acceptance terminates the employer's power to revoke
the offer.