Title: Moro v. Oregon

State: oregon

Issuer: Oregon Supreme Court

Document:

No. 16	
April 30, 2015	
167
IN THE SUPREME COURT OF THE 
STATE OF OREGON
Everice MORO; 
Terri Domenigoni; Charles Custer; John Hawkins; 
Michael Arken; Eugene Ditter; John O’Kief; 
Michael Smith; Lane Johnson; Greg Clouser; 
Brandon Silence; Alison Vickery; and Jin Voek,
Petitioners,
v.
STATE OF OREGON; 
State of Oregon, 
by and through the Department of Corrections; 
Linn County; City of Portland; 
City of Salem; Tualatin Valley Fire & Rescue; 
Estacada School District; Oregon City School District; 
Ontario School District; Beaverton School District; 
West Linn School District; Bend School District; 
and Public Employees Retirement Board,
Respondents,
and
LEAGUE OF OREGON CITIES; 
Oregon School Boards Association; 
and Association of Oregon Counties,
Intervenors,
and
CENTRAL OREGON IRRIGATION DISTRICT,
Intervenor below.
S061452 (Control)
Wayne Stanley JONES,
Petitioner,
v.
PUBLIC EMPLOYEES RETIREMENT BOARD; 
Ellen Rosenblum, Attorney General; 
and Kate Brown, Governor,
Respondents.
S061431
168	
Moro v. State of Oregon
Michael D. REYNOLDS,
Petitioner,
v.
PUBLIC EMPLOYEES RETIREMENT BOARD, 
State of Oregon; and Kate Brown, 
Governor, State of Oregon,
Respondents.
S061454
George A. RIEMER,
Petitioner,
v.
STATE OF OREGON; 
Oregon Governor Kate Brown; 
Oregon Attorney General Ellen Rosenblum; 
Oregon Public Employees Retirement Board; 
and Oregon Public Employees Retirement System,
Respondents.
S061475
George A. RIEMER,
Petitioner,
v.
STATE OF OREGON; 
Oregon Governor Kate Brown; 
Oregon Attorney General Ellen Rosenblum; 
Public Employees Retirement Board; 
and Public Employees Retirement System,
Respondents.
S061860
On petition for judicial review of legislation.*
Argued and submitted October 14, 2014.
Gregory A. Hartman, Bennett, Hartman, Morris & 
Kaplan, LLP, Portland, filed the briefs and argued the cause 
for petitioners Everice Moro, Terri Domenigoni, Charles
______________
	
*  Senate Bill 822, signed into law May 6, 2013, and Senate Bill 861, signed 
into law October 8, 2013.
Cite as 357 Or 167 (2015)	
169
Custer, John Hawkins, Michael Arken, Eugene Ditter, 
John O’Kief, Michael Smith, Lane Johnson, Greg Clouser, 
Brandon Silence, Alison Vickery, and Jin Voek. With him on 
the briefs was Aruna A. Masih.
George A. Riemer, Sun City West, Arizona, argued the 
cause and filed the briefs on behalf of himself.
Michael D. Reynolds, Seattle, Washington, argued the 
cause and filed the briefs on behalf of himself.
Wayne Stanley Jones, North Salt Lake City, Utah, filed 
the briefs on behalf of himself.
William F. Gary, Harrang Long Gary Rudnick P.C., 
Portland, argued the cause and filed the briefs for respon-
dents Linn County, Estacada School District, Oregon City 
School District, Ontario School District, West Linn School 
District, Beaverton School District, Bend School District 
and intervenors Oregon School Boards Association and 
Association of Oregon Counties. With him on the brief was 
Sharon A. Rudnick.
Keith L. Kutler, Assistant Attorney General, Salem, 
argued the cause and filed the brief for State respondents. 
With him on the brief were Ellen F. Rosenblum, Attorney 
General, Anna M. Joyce, Solicitor General, and Matthew J. 
Merritt, Assistant Attorney General.
Harry Auerbach, Chief Deputy City Attorney, Portland, 
filed the brief for respondent City of Portland.
Edward H. Trompke, Jordan Ramis PC, Lake Oswego, 
filed the brief for respondent Tualatin Valley Fire and 
Rescue.
W. Michael Gillette, Schwabe, Williamson & Wyatt, PC, 
Portland, argued the cause and filed the brief for interve-
nor League of Oregon Cities. With him on the brief were 
William B. Crow, Sara Kobak, and Leora Coleman-Fire.
Craig A. Crispin, Crispin Employment Lawyers, Portland, 
filed the brief for amicus curiae AARP.
Sarah K. Drescher, Tedesco Law Group, Portland, filed 
the brief for amicus curiae International Association of Fire 
Fighters.
170	
Moro v. State of Oregon
Before Balmer, Chief Justice, and Kistler, Walters, 
Linder, Brewer, and Baldwin, Justices, and Haselton, Chief 
Judge of the Oregon Court of Appeals, Justice pro tempore.**
BALMER, C. J.
Brewer, J., concurred and filed an opinion.
Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7, 
8, 9, and 10, are declared unconstitutional under Article I, 
section 21, of the Oregon Constitution insofar as they affect 
retirement benefits earned before May 6, 2013. Oregon Laws 
2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session), 
are declared unconstitutional under Article  I, section 21, 
of the Oregon Constitution insofar as they affect retire-
ment benefits earned before October 8, 2013. Oregon Laws 
2013, chapter 2, section 8 (Special Session) is declared void. 
Petitioners’ requests for relief challenging Oregon Laws 
2013, chapter 53, sections 11, 12, 13, 14, 15, 16, and 17, are 
denied.
______________
	
**  Landau, J., did not participate in the consideration or decision of this case.
Cite as 357 Or 167 (2015)	
171
Active and retired public employees filed petitions for direct judicial review 
of 2013 statutory amendments to the Public Employees Retirement System 
(PERS). The amendments eliminated the payment of an income tax offset to 
nonresident PERS retirees and modified the cost-of-living adjustment (COLA) 
applied to PERS benefits. Held: (1) the income tax offset is not a term of the PERS 
statutory contract, because it is not compensation for work performed; (2) the 
benefits provided under the income tax offset are a term of a 1997 settlement 
agreement, but the 2013 amendments neither impair nor breach the terms of 
the settlement agreement, because the agreement expressly contemplates, and 
provides a means for seeking relief for, such benefit reductions; (3) the COLA is 
a term of the PERS statutory contract, reaffirming Strunk v. PERB, 338 Or 145, 
108 P3d 1058 (2005); (4) the 2013 amendments do not impair petitioners’ contrac-
tual rights by modifying the COLA prospectively as to benefits that petitioners 
earned on or after the effective dates of the amendments; (5) the 2013 amend-
ments impair petitioners’ contractual rights by modifying the COLA retrospec-
tively as to benefits that petitioners already had earned before the effective dates 
of the amendments, thus the 2013 amendments partially violate Article I, section 
21, of the Oregon Constitution; (6) eliminating payment of the income tax offset 
to nonresident retirees does not violate the federal Privileges and Immunities 
Clause, Article IV, section 2, clause 1, of the United States Constitution; (7) elim-
inating payment of the income tax offset to nonresident retirees does not violate 
the federal Equal Protection Clause of the Fourteenth Amendment to the United 
States Constitution; (8) eliminating payment of the income tax offset to nonresi-
dent retirees does not violate 4 USC section 114.
Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10, are 
declared unconstitutional under Article I, section 21, of the Oregon Constitution 
insofar as they affect retirement benefits earned before May 6, 2013. Oregon 
Laws 2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session), are declared 
unconstitutional under Article I, section 21, of the Oregon Constitution insofar 
as they affect retirement benefits earned before October 8, 2013. Oregon Laws 
2013, chapter 2, section 8 (Special Session) is declared void. Petitioners’ requests 
for relief challenging Oregon Laws 2013, chapter 53, sections 11, 12, 13, 14, 15, 
16, and 17, are denied.
172	
Moro v. State of Oregon
	
BALMER, C. J.
	
Petitioners are active and retired members of the 
Public Employee Retirement System (PERS) challenging 
two legislative amendments aimed at reducing the cost of 
retirement benefits—Senate Bill (SB) 822 (2013), which 
eliminated income tax offset benefits for nonresident retir-
ees and modified the cost-of-living adjustment (COLA) 
applied to PERS benefits, and SB 861 (2013), which further 
modified the PERS COLA. Or Laws 2013, ch 53 (SB 822); 
Or Laws 2013, ch 2 (Spec Sess) (SB 861). Petitioners raise 
numerous challenges to the amendments but argue primar-
ily that the amendments impair their contractual rights and 
therefore violate the state Contract Clause, Article I, sec-
tion 21, of the Oregon Constitution, and the federal Contract 
Clause, Article I, section 10, clause 1, of the United States 
Constitution.
	
On that issue, respondents and intervenors, which 
include the State of Oregon and other public employers par-
ticipating in PERS (collectively, respondents), contend that 
the amendments in SB 822 and SB 861 modify noncontrac-
tual and insubstantial PERS benefits and that, even if the 
amendments impair constitutionally protected contractual 
rights, the impairment is justified on public purpose grounds. 
Specifically, respondents argue that the amendments were a 
reasonable and necessary response to increases in employer 
contribution rates required by the Public Employee 
Retirement Board (the board), which administers PERS. 
Those rate increases stem from the recession that caused 
the PERS fund to lose 27% of its value in 2008. To make 
up for those losses and to restore the funding needed to pay 
future benefits, the board increased the contribution rates 
imposed on respondents and other participating employers. 
Respondents insist that those rate increases are sufficiently 
burdensome to justify the benefit reductions and excuse any 
contractual impairment that might result.
	
We have considered the parties’ arguments and 
conclude that nonresident petitioners have no contractual 
right to the income tax offset payments and, therefore, that 
the legislature did not violate the state or federal Contract 
Clauses by eliminating those payments to nonresident 
Cite as 357 Or 167 (2015)	
173
retirees in SB 822. We also reject petitioners’ other chal-
lenges to the elimination of the income tax offset payments 
for nonresident retirees.
	
Our assessment of the COLA amendments is more 
complicated. Before the amendments at issue in this case, 
the COLA provisions had been in place and unchanged 
for 40 years. Indeed, a substantial number of PERS retir-
ees worked their entire careers while the pre-amendment 
COLA provisions were in effect and then retired. We con-
clude that petitioners have a contractual right to receive the 
pre-amendment COLA for benefits that they earned before 
the effective dates of the amendments—that is, benefits 
that are generally attributable to work performed before the 
amendments went into effect. Thus, insofar as they apply 
retrospectively to benefits earned before the effective dates, 
the COLA amendments impair the PERS contract and vio-
late the state Contract Clause. Petitioners, however, have no 
contractual right to receive the pre-amendment COLA for 
benefits that they earned on or after the effective dates of 
the amendments—that is, benefits that are generally attrib-
utable to work performed after the amendments went into 
effect. In the absence of specific contract rights outside the 
PERS statutes, the COLA amendments do not violate the 
state or federal Contract Clauses when applied to benefits 
earned on or after the effective dates.
	
Further, we reject respondents’ substantiality and 
public purpose arguments attempting to justify that impair-
ment. Because the COLA is compounded annually, the 
COLA grows over time to become a significant part of the 
PERS retirement benefits. Even seemingly small changes 
to the COLA rate, like those at issue in this case, can have 
a substantial impact on the value of the benefits. Although 
there is no doubt that the legislature passed SB 822 and 
SB 861 to address legitimate public policy concerns and 
with an appropriate sensitivity to the impact that the 
amendments would have on retirees, those concerns do not 
establish a defense to the contractual impairment that the 
amendments effect. The public purpose defense that respon-
dents ask this court to recognize imposes a high bar to jus-
tify the state’s impairment of a state contract, like PERS, 
and the record in this case does not meet that standard.
174	
Moro v. State of Oregon
	
We therefore hold that respondents constitutionally 
may cease the income tax offset payments to nonresidents 
as set out in SB 822 and that respondents also constitution-
ally may apply the COLA amendments as set out in SB 822 
and SB 861 prospectively to benefits earned on or after the 
effective dates of those laws, but not retrospectively to bene-
fits earned before those effective dates.1 Subject to applicable 
vesting requirements, PERS members who have worked for 
participating employers both before and after the relevant 
effective dates are entitled to a COLA rate that is blended to 
reflect the different COLA provisions applicable to benefits 
earned at different times.
I.  BACKGROUND
A.  Jurisdiction and Evidentiary Record
	
The legislature conferred original jurisdiction on this 
court to determine whether SB 822 and SB 861 are invalid, 
unconstitutional, or a breach of the contracts between PERS 
members and their employers. See SB 822, § 19(1) (conferring 
original jurisdiction on this court); SB 861, § 11(1) (same). 
In furtherance of that jurisdiction, we appointed Multnomah 
County Circuit Court Judge Stephen K. Bushong to act as 
special master. See SB 822, § 19(6) (authorizing the court to 
appoint a special master); SB 861, § 11(6) (same). As special 
master, Judge Bushong presided over an evidentiary hearing 
and prepared a thorough report containing his recommended 
findings of fact. See Special Master’s Preliminary Report 
and Recommended Findings of Fact (Apr 29, 2014) (Special 
Master’s Report). The parties have not materially challenged 
the special master’s recommended findings, which we have 
adopted unless otherwise noted.2
	
1  Because we hold that the COLA amendments may not be applied retrospec-
tively, we also void, for the reasons set out below, 357 Or at 232-33, the provi-
sions of SB 861 allowing for certain supplemental payments to retirees that were 
intended to mitigate the impact of that retrospective application.
	
2  We previously considered a motion to disqualify the sitting judges of the 
Oregon Supreme Court from hearing this case and a motion to disqualify Judge 
Bushong from acting as special master on the ground that those individuals 
are PERS members and therefore have an interest in the outcome of this case. 
Moro v. State of Oregon, 354 Or 657, 661-62, 320 P3d 539 (2014). We denied those 
motions and held that the “rule of necessity” precluded disqualification. Id. at 672. 
“[U]nder the ‘rule of necessity,’ if the only judges authorized by law to decide a case 
all have an interest in the outcome of the case, that interest is not disqualifying 
Cite as 357 Or 167 (2015)	
175
B.  PERS Funding and Benefits
	
PERS has been “a contractual benefit of public 
employment[ 
] since 1945.” Strunk v. PERB, 338 Or 145, 
157, 108 P3d 1058 (2005). Employees become PERS mem-
bers after working six months in a qualified position for 
the state or other participating public employer. ORS 
238.015(1); ORS 238A.100(1); ORS 238A.300(1). There are 
more than 330,000 members in the PERS system, includ-
ing current employees (active members), unretired former 
employees (inactive members), and retired former employ-
ees (retired members).3 And there are about 900 participat-
ing public employers, including all state departments and 
agencies, all school districts, and nearly all units of local 
government.
	
The board administers PERS and serves as trustee 
of the Public Employee Retirement Fund (the fund), which 
the board uses to pay member retirement benefits. ORS 
238.660(1); see also White v. Public Employees Retirement 
Board, 351 Or 426, 437-38, 268 P3d 600 (2011) (discussing 
the standards for the board when serving as a trustee). As 
of December 2013, the fund had approximately $68 billion 
in assets. The board is responsible for ensuring that the 
fund’s assets are sufficient to pay the benefits owed to PERS 
members.
	
The board attempts to prefund each member’s ben-
efits by collecting contributions both from that member and 
from his or her employer while the member is working. The 
board then invests those contributions over the course of the 
member’s career and collects the income from those invest-
ments. As a result, the board relies on three sources to gen-
erate the fund’s assets: member contributions; employer con-
tributions; and investment income. Strunk, 338 Or at 157. 
Ultimately, the board must generate sufficient assets from 
those three sources to equal the retirement benefits owed to 
PERS members.
because judges have ‘the absolute duty’ to ‘hear and decide cases within their 
jurisdiction.’ 
” Id. at 667 (quoting United States v. Will, 449 US 200, 215, 101 S Ct 
471, 66 L Ed 2d 392 (1980)).
	
3  We take the facts from the Special Master’s Report or other records admit-
ted by the special master as evidence in the hearing that he conducted.
176	
Moro v. State of Oregon
	
Some retirement plans are “defined contribution 
plan[s].” See 26 USC § 414(i) (defining defined contribution 
plans). A defined contribution plan defines how much the 
member and employer contribute but does not promise that 
a member will receive a particular amount in benefits at 
retirement. Generally, the plan administrator deposits the 
contributions into an account for the member and invests 
those contributions. At retirement, the member’s benefit is 
whatever money is in the member’s account. Consequently, 
the assets of a defined contribution plan always equal the 
benefits owed to members.
	
The alternative to defined contribution plans are 
“defined benefit plan[s].” See 26 USC §  414(j) (defining 
defined benefit plans). As the name suggests, a defined ben-
efit plan defines the benefit first, and then the plan adminis-
trator attempts to set the current contribution rates to pay for 
those future benefits. Setting the proper contribution rates 
often requires an administrator to make numerous projec-
tions about future events that might affect the costs of the 
retirement benefit. The events that the plan administrator 
needs to project depend on the nature of the defined benefits. 
Those projections are often complex and frequently include 
future compensation levels of members, life expectancies of 
members, and future rates of return on plan investments. 
The plan administrator then revises those projections as 
needed to reflect the actual events that the administrator 
previously projected. Those revisions indicate whether the 
plan administrator previously overestimated or underesti-
mated the contributions needed to fund future benefits. If 
the plan administrator overestimated, then future contribu-
tion rates will be lower. If the plan administrator underesti-
mated, then future contribution rates will be higher.
	
PERS is a defined benefit plan, although it has 
some components of a defined contribution plan. See ORS 
238.600(1) (“It is the intent of the Legislative Assembly 
that [PERS] be qualified and maintained under sections 
401(a), 414(d) and 414(k) of the Internal Revenue Code as 
a tax-qualified defined benefit governmental plan.”). The 
board, therefore, first determines the value of projected ben-
efits for each member and then attempts to set current con-
tribution rates so that, when invested, those contributions 
Cite as 357 Or 167 (2015)	
177
will grow and fully fund the benefits that the member will 
receive in retirement. Member contribution rates are set by 
statute at 6% of the member’s salary. ORS 238.200(1)(a); 
ORS 238A.330(1).4 As a result, the board may adjust only 
the employer contribution rates.
	
The board sets employer contribution rates every 
biennium. Strunk, 338 Or at 159. Employer contribution 
rates can consist of two components: the “normal cost” and 
an amount needed to amortize any “unfunded actuarial lia-
bility.” Id. at 160. An employer’s normal cost is an “actuar-
ial estimate” of its employees’ future benefits attributable to 
that biennium. Arken v. City of Portland, 351 Or 113, 122, 
263 P3d 975 (2011), adh’d to on recons sub nom Robinson v. 
Public Employees Retirement Board, 351 Or 404, 268 P3d 
567 (2011). The normal cost, therefore, applies to only active 
members.
	
On the other hand, the unfunded actuarial liabil-
ity can apply to all members, whether active, inactive, or 
retired. If the board determines that the previous normal 
costs that it collected will be insufficient to pay projected 
future benefits, then the amount of that insufficiency is the 
unfunded actuarial liability. Strunk, 338 Or at 160. When 
the plan is underfunded, the board increases employer con-
tribution rates above the normal cost by adding an amount 
that will reduce the unfunded actuarial liability.5 Rather 
than increase employer contribution rates to eliminate the 
unfunded actuarial liability in a given biennium, which 
could cause contribution rates to spike, the board typically 
seeks to pay down the unfunded actuarial liability over 
many years.
	
Unfunded actuarial liabilities result, in part, from 
uncertainties in the actuarial estimates used by the board. 
For example, those actuarial estimates include calculating 
	
4  Usually, employers pay for that contribution on behalf of their employees 
(called the “six percent pick up”). See Strunk, 338 Or at 164 n  21 (describing 
the six percent pick up); ORS 238.205(1) (authorizing employers to pick up the 
employee contribution); ORS 238A.335(1) (same).
	
5  When the board determines that it previously overestimated the normal 
cost, then the employer receives a financial credit reducing its current normal 
cost. Strunk, 338 Or at 160.
178	
Moro v. State of Oregon
and applying an assumed earnings rate on investments.6 
Unfunded actuarial liabilities may, therefore, result from 
the board’s failure to achieve that rate of return. Historically, 
PERS has depended heavily on investment income. Between 
1970 and 2012, more than 72% of the funding for PERS 
came from investment income.
	
The board faces further actuarial difficulties 
because of the nature of benefits available to each category 
of PERS member. An employee’s membership category 
depends on when the employee worked for a participat-
ing employer. There are three broad categories of PERS 
members: Tier One members were hired before January 1, 
1996; Tier Two members were hired between January 1, 
1996, and August 28, 2003; and Oregon Public Service 
Retirement Plan (OPSRP) members were hired after 
August 28, 2003.7
	
Tier One and Tier Two members receive a monthly 
retirement benefit called a “service retirement allowance,” 
which is paid for the life of the member. ORS 238.300. The 
service retirement allowance is funded by member and 
employer contributions. Strunk, 338 Or at 160. A member’s 
contributions are deposited into a “regular account” and 
invested by the board. The board credits returns on those 
investments back into the member’s regular account. The 
regular accounts of Tier One members are credited each 
year with an amount equal to at least the assumed earnings 
rate described above. Under certain conditions, the board 
may, but is not required to, allocate greater amounts to 
those accounts. See id. at 164-65 (describing crediting prac-
tices before and after the 2003 PERS legislation). The board 
uses the employee contributions and the amounts credited 
to the regular account to fund an annuity benefit that is 
paid for the life of the member. Id. at 165 n 22.
	
6  For many years, the board applied an 8% assumed earnings rate. In 2013, 
the board lowered it to 7.75%.
	
7  Although OPSRP has a different name and appears in a different ORS 
chapter, see ORS chapter 238 (setting out Tier One and Tier Two benefits) and 
ORS chapter 238A (setting out OPSRP benefits), all three categories are PERS 
members, see ORS 238.600(1) (“The Public Employees Retirement System con-
sists of this chapter and ORS chapter 238A.”).
Cite as 357 Or 167 (2015)	
179
	
Employer contributions, and their investment 
income, fund any unfunded part of the annuity owed to Tier 
One and Tier Two retired members, as well as an additional 
pension benefit for those members using one of three formu-
las: Full Formula; Money Match; or Pension Plus Annuity. 
Id. at 160-62.8 The board uses whichever formula yields the 
highest pension amount for that member. ORS 238.300. This 
court previously detailed those formulas in Strunk. 338 Or 
at 160-62. For present purposes, it is important to note that 
the legislature intended the Full Formula, which is based on 
years of service and final average salary, to be the primary 
formula and the one most commonly used to determine a 
member’s benefits. Id. at 185-86.
	
Those three pension formulas and the annuity are 
used to calculate the service retirement allowance at the 
time that a Tier One or Tier Two member retires. There 
are, however, two post-retirement calculations that may 
increase the benefit: a cost-of-living adjustment (COLA) and 
an income tax offset. Id. at 162. Both the COLA and the 
income tax offset are based on a percentage of the service 
retirement allowance and are funded through employer con-
tributions. Because those benefits are central to this action, 
they are described in more detail below.
	
The value of those combined benefits—the service 
retirement allowance as adjusted by the COLA and the 
income tax offset—is what the board attempts to project 
when it sets employer contribution rates for Tier One and 
Tier Two members. To do that, the board makes actuarial 
projections involving a member’s career path, future earn-
ings, and life expectancy, as well as anticipated earnings on 
investments. Each of those projections involves uncertainty, 
making it difficult for the board to set proper contribution 
rates at any given time and creating the opportunity for 
unfunded actuarial liabilities.
	
The board’s crediting practices during the 1980s 
and 1990s created further risks of unfunded actuar-
ial liabilities. Although the legislature expected the Full 
Formula to be the primary formula, Money Match became 
	
8  Pension Plus Annuity is available to only those Tier One members who con-
tributed to PERS before 1981. Strunk, 338 Or at 160.
180	
Moro v. State of Oregon
predominant starting in the 1990s and continuing until 
2012. Money Match calculates the member’s pension based 
on the value of the member’s regular account. When invest-
ment earnings significantly exceeded the assumed earn-
ings rate during the 1990s and early 2000s, the board often 
credited much of those earnings to the Tier One members’ 
regular accounts rather than saving more of those earnings 
in a reserve account used to pay the guaranteed return for 
Tier One members in underperforming years. See id. at 161 
n 18 (describing how Money Match became the dominant 
formula). The Money Match formula, the board’s crediting 
decisions, and the Tier One members’ guaranteed rate of 
return combined to produce “atypical” retirement benefits 
exceeding those of public employees in other jurisdictions. 
Special Master’s Report at 45.
	
That combination of factors not only led to larger 
benefits for members, but also exposed employers to larger 
liabilities. Further, because the reserve account was under-
funded, the board had few options to address unfunded actu-
arial liabilities other than significantly increasing employer 
contributions. See id. (“The design and implementation of the 
Tier I Money Match program was an important, structural 
contributor to the system’s financial challenges.”). Despite 
requests by some public employers and media reports about 
the system’s underfunding, the board did not change its 
crediting and other practices.9 Moreover, until 2003, the leg-
islature did not take action to limit PERS’s obligations by 
prospectively reducing benefits.
	
By 2003, PERS was only 65% funded. At that time, 
the legislature responded by establishing the Individual 
Account Program (IAP) and creating the third tier of mem-
bers, OPSRP. Other aspects of the 2003 legislation, as well 
as administrative changes to the calculation of benefits 
made by the board (after the board was reconstituted by the 
2003 legislation), reduced the fund’s obligations, thus help-
ing to relieve some of the benefit liabilities.
	
9  Participating employers ultimately challenged the board’s crediting 
practices—specifically related to crediting orders in 1998 and 2000—and 
obtained court orders that led to the fund recouping some of those credits, as 
well as to other administrative changes. See generally White, 351 Or at 430-31 
(describing the employer challenges).
Cite as 357 Or 167 (2015)	
181
	
Because of those legislative amendments, the con-
tributions of Tier One and Tier Two members have, since 
2004, no longer been placed into their regular accounts that 
fund the service retirement allowance. Instead, member 
contributions are placed into a separate IAP account that 
funds an IAP annuity. Although the IAP contributions are 
also invested, there is no guaranteed rate of return on those 
investments, even for Tier One members. Strunk, 338 Or at 
164. Further, the IAP annuity is not paid for the life of the 
member, and it is not subject to a COLA. Id. The IAP annu-
ity consists only of the money that exists in the member’s 
IAP account at the time that the member retires. Because 
the member receives only his or her contributions and the 
investment income from those contributions, the IAP annu-
ity can be viewed as a defined contribution component of 
the member’s retirement benefit and presents no risk of 
unfunded actuarial liability.
	
The 2003 legislation creating the IAP had no ret-
rospective effect on the contributions that Tier One and 
Tier Two members had already made to their regular 
accounts. Those previous contributions continue to fund 
service retirement allowance annuities, continue to be 
used to calculate service retirement allowance pensions, 
and, for Tier One members, continue to earn a guaranteed 
rate of return. Id. at 193. Further, the 2003 legislation had 
no impact on members who had already retired. They con-
tinue to receive the same benefits that were offered while 
they were working.
	
As a result of the 2003 legislation, Tier One and 
Tier Two members who have worked for a participating 
employer after 2003 receive two annuities—one under IAP 
and one as part of the service retirement allowance—and 
they continue to receive the service retirement allowance 
pension calculated under one of the three formulas noted 
above. The creation of the IAP has meant that the Full 
Formula is again the primary formula used to calculate ser-
vice retirement allowances for Tier One and Tier Two mem-
bers, although the percent of retirees qualifying for Money 
Match remains high. See Special Master’s Report at 11-12 
(stating that, as of January 2013, 45% of new retirees qual-
ified for Money Match).
182	
Moro v. State of Oregon
	
As noted, the 2003 legislation also created the third 
tier of PERS members: OPSRP members. Their retirement 
benefit is not called a service retirement allowance, although 
it also consists of an annuity and a pension. The annuity is 
the same IAP annuity available to Tier One and Tier Two 
members who continued to work after 2003. As a result, it is 
also a defined contribution component. The pension compo-
nent is a less generous version of the Full Formula based on 
the member’s years of service and final average salary. ORS 
238A.125(1). The OPSRP pension includes a COLA, but the 
OPSRP annuity does not.
	
The 2003 reforms helped to stabilize PERS. Before 
the 2003 legislation, PERS’s liabilities were growing by about 
12% per year. After the 2003 legislation, PERS’s liabilities 
grew by about 3 to 4% per year. Additionally, between 2003 
and 2007, the fund’s investments consistently earned well 
over the anticipated rate of return. After being only 65% 
funded in 2003, PERS was 98% funded by December 2007 
and had about $1.5 billion in unfunded actuarial liability.10 
Consistently with its existing practice and policy, in early 
2008, the board set the employer contribution rates for the 
2009-2011 biennium, beginning July 1, 2009, based on that 
December 2007 valuation. For the 2009-2011 biennium, 
the board set employer contribution rates that resulted in a 
system-wide average employer contribution rate of 12.4%—
that is, employers paid a combined weighted average of 
12.4% of their payroll to PERS for the retirement benefits 
for its past and current employees.
C.  Effect of the Recession
	
In 2008, after the board set the contribution rates 
for 2009-2011, the investment market suffered historic 
	
10  The numbers used in this opinion, for both the funded status and the 
amount of unfunded actuarial liability, do not include “side accounts.” Side 
accounts are generally lump-sum prepayments by an employer into the PERS 
trust using proceeds from pension obligation bonds. PERS does not calculate the 
employer’s debt obligation from those bonds, and the record does not otherwise 
reflect those obligations. To the extent that an employer has paid down those debt 
obligations, the numbers used in this opinion might overstate total employer lia-
bilities. But including side accounts, without including the debt obligations used 
to fund those accounts, would understate the total employer liabilities. Special 
Master’s Report at 13.
Cite as 357 Or 167 (2015)	
183
losses. PERS’s investments lost 27% of the fund’s value in 
2008. Those losses left the fund substantially underfunded. 
By December 2008, one year after determining that PERS 
was 98% funded, the board determined that PERS was only 
71% funded and had about $16.1 billion in unfunded actuar-
ial liability.
	
To balance those losses, the board was required 
to increase employer contribution rates. But, based on the 
schedule for setting and implementing employer contribu-
tion rates, the next rate increase would not go into effect 
until July 2011. And not all the losses would show up in that 
rate schedule, because the board uses a “rate collar,” which 
spreads out large rate increases over multiple biennia. In 
2010, the board set the rates for the 2011-2013 biennium. 
The “collared” system-wide average contribution rate set by 
the board for that biennium was 16.3%. Because that rate 
did not reflect all the 2008 losses, the unaccounted-for losses 
increased employer contribution rates in later biennia.
	
In 2012, the board set the employer contribution rates 
for the next biennium, 2013-2015, based on the December 
2011 valuation. At that time, the fund’s recent investment 
performance had been mixed, which left the funded status 
of PERS similar to what it had been in December 2008. 
Whereas PERS was 71% funded in December 2008 with 
$16.1 billion in unfunded actuarial liabilities, PERS was 
only 73% funded in December 2011 and maintained about 
$16.3 billion in unfunded actuarial liabilities. The 2013-2015 
collared rate is 21.4%. Without the statutory amendments at 
issue in this case, the board projects that the rate will rise to 
about 25% and will remain at that rate through 2029.11
	
11  From 1975 to 2005, average employer contribution rates were between 
9.15% and 11.4%. After 2005, the rates rose because of the higher unfunded actu-
arial liabilities in the early 2000s and then were reduced as the board paid down 
those liabilities: 18.89% in 2005-2007; 14.9% in 2007-2009; 12.4% in 2009-2011. 
The record in this case, however, does not allow us to compare directly those 
historical employer contribution rates with the current and projected employer 
contribution rates. In 2013, the board adopted more conservative actuarial meth-
ods and assumptions that increase employer contribution rates by about 2.5%, at 
least in the short term. A comparison to historical contribution rates may not be 
useful anyway. Based on the current level of unfunded actuarial liabilities, it is 
apparent that those historical rates understated the actual costs that employers 
faced.
184	
Moro v. State of Oregon
D.  2013 Legislative Amendments
	
The legislature responded to the effect of the recent 
recession on PERS with statutory amendments in 2013. 
Those amendments were intended to reduce employer con-
tribution rates by reducing current and future benefits owed 
to PERS members, including, specifically, retired members. 
At that time, approximately 60% of the unfunded actuar-
ial liability was owed to retired members. Those statutory 
amendments reflect two discrete categories of benefits: the 
COLA and the income tax offset.
1.  COLA Statutes
	
The COLA increases the benefits of retired mem-
bers to account for changes in the cost of living. It applies 
to the entire service retirement allowance available to Tier 
One and Tier Two members, which includes both the annu-
ity and pension components. And the COLA applies to the 
pension available to OPSRP members. But the COLA does 
not apply to the annuity available under the IAP for Tier 
One, Tier Two, or OPSRP members. The COLA has always 
been funded by employer contributions.
	
First enacted in 1971, the pre-amendment COLA 
statute had three notable components: the COLA require-
ment in subsection (1); the COLA cap in subsection (2); and 
the COLA bank in subsection (3).12 See ORS 238.360 (2011); 
	
12  In full, the pre-amendment COLA provision that applied to Tier One and 
Tier Two members provided:
	
“(1)  As soon as practicable after January 1 each year, the Public 
Employees Retirement Board shall determine the percentage increase or 
decrease in the cost-of-living for the previous calendar year, based on the 
Consumer Price Index (Portland area—all items) as published by the Bureau 
of Labor Statistics of the U.S. Department of Labor for the Portland, Oregon 
area. Prior to July 1 each year the allowance which the member or the mem-
ber’s beneficiary is receiving or is entitled to receive on August 1 for the 
month of July shall be multiplied by the percentage figure determined, and 
the allowance for the next 12 months beginning July 1 adjusted to the resul-
tant amount.
	
“(2)  Such increase or decrease shall not exceed two percent of any 
monthly retirement allowance in any year and no allowance shall be adjusted 
to an amount less than the amount to which the recipient would be entitled if 
no cost-of-living adjustment were authorized.
	
“(3)  The amount of any cost-of-living increase or decrease in any year 
in excess of the maximum annual retirement allowance adjustment of two 
Cite as 357 Or 167 (2015)	
185
ORS 238A.210 (2011); see also Or Laws 1971, ch 738, § 11 
(enacting COLA).
	
The COLA requirement in subsection (1) required 
the board to calculate the COLA each year according to 
the Portland Consumer Price Index (CPI) and to add the 
COLA to the applicable retirement benefit—whether the 
service retirement allowance or the OPSRP pension ben-
efit. According to that provision, the relevant retirement 
benefit “shall be multiplied by the [COLA],” and the benefit 
“adjusted to the resultant amount.” ORS 238.360(1) (2011); 
ORS 238A.210(1) (2011). The COLA requirement made the 
COLA automatic and, by adding the COLA to the retire-
ment benefit itself, allowed the COLA to compound from 
year to year. Therefore, as retired members aged, the COLA 
became a larger and larger percentage of their retirement 
benefit.
	
The COLA cap in subsection (2) originally limited 
the COLA to increasing or decreasing the retirement benefit 
by 1.5% in any year, provided that the adjusted benefit could 
not be less than the original benefit calculated at the time of 
retirement. See former ORS 237.060(1) (1971). In 1973, the 
legislature revised the cap to allow the COLA to increase or 
decrease the applicable retirement benefit by 2%. Or Laws 
1973, ch 695, § 1. Before the 2013 amendments at issue in 
this case, the legislature had not changed the COLA cap 
since raising it in 1973.
	
The COLA “bank” referred to in subsection (3) kept 
reserves of changes to the CPI that were above or below 
the COLA cap. For example, if the CPI increased by 3% in 
one year, then the board applied a 2% COLA to a member’s 
percent shall be accumulated from year to year and included in the computa-
tion of increases or decreases in succeeding years.
	
“(4)  Any increase in the allowance shall be paid from contributions of the 
public employer under ORS 238.225. Any decrease in the allowance shall be 
returned to the employer in the form of a credit against contributions of the 
employer under ORS 238.225.”
ORS 238.360 (2011), amended by Or Laws 2013, ch 53, §§ 1, 3; Or Laws 2013 
(Spec Sess), ch 2, §§ 1, 3. The COLA provision that applied to OPSRP members is 
substantively similar, except that it provides no COLA bank, as in subsection (3). 
ORS 238A.210 (2011), amended by Or Laws 2013, ch 53, §§ 5, 7; Or Laws 2013 
(Spec Sess), ch 2, § 3.
186	
Moro v. State of Oregon
benefit and banked the additional 1% increase so that it could 
be added to the member’s COLA in later years when the CPI 
was less than 2%. Since 1972, the CPI has been below 2% 
in only seven years. As a result, most retired members have 
substantial percentage points in their COLA banks. The 
COLA bank was available to only Tier One and Tier Two 
members and was not available to OPSRP members.
	
During its regular legislative session in 2013, the 
legislature passed SB 822, which reduced the COLA cap 
from 2% to 1.5% for 2013 and then imposed a graduated 
COLA cap based on a member’s total annual retirement ben-
efit beginning in 2014.13 SB 822, §§ 1-9. SB 822 reduced the 
COLA cap, but the COLA was still based on the Portland 
CPI and could still be banked. After passing SB 822, the 
legislature revisited the issue during a special session in 
September 2013. In that special session, the legislature 
passed SB 861, which made more dramatic changes to the 
COLA system beginning in 2014, replacing the graduated 
COLA cap of SB 822 before it went into effect. SB 861, §§ 1, 4. 
SB 861 converts the COLA benefit to a fixed COLA that is 
not based on the Portland CPI and is no longer subject to a 
COLA cap or COLA bank. The fixed annual COLA avail-
able under SB 861 is also graduated, although it is gener-
ally lower than the previous COLA caps, providing a 1.25% 
COLA on the first $60,000 of the retirement benefit and a 
0.15% COLA on all benefits above $60,000.
	
To soften the impact of those changes, SB 861 also 
provides for supplemental payments for retired members to 
be paid from 2014 to 2019. Under SB 861, the board may 
provide retired members with an annual payment of 0.25% 
of their yearly retirement benefit, but not to exceed $150. 
Further, members receiving less than $20,000 per year in 
retirement benefits will receive a separate annual payment 
of 0.25% of their yearly retirement benefit, which can total 
up to $50. The supplemental payments, unlike the COLA, 
	
13  For 2014, SB 822 would have imposed a 2% COLA cap on the first $20,000 
of the retirement benefit; a 1.5% COLA cap on the benefit between $20,001 and 
$40,000; a 1% COLA cap on the benefit between $40,001 to $60,000; and a 0.25% 
COLA cap on all benefits above $60,000. As discussed in the text, the legislature 
made further changes in the COLA during a 2013 special session before SB 822’s 
2014 rates went into effect.
Cite as 357 Or 167 (2015)	
187
are not added to the service retirement allowance or OPSRP 
pension, and they are not paid directly out of employer con-
tributions. Instead, the supplemental payments are taken 
from the fund’s contingency reserve. SB 861, § 8(6).
2.  Tax Offset Statutes
	
In addition to the COLA amendments, the 2013 
legislature also made changes to another post-employment 
PERS benefit: the income tax offset payment. Beginning 
in 1945, when the legislature first established PERS, all 
PERS retirement benefits were exempt from Oregon income 
tax. Oregon law provided no similar exemption for pension 
benefits of federal employees. In Davis v. Michigan Dept. of 
Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989), 
the United States Supreme Court held that exempting state 
pension benefits from taxation, but not exempting federal 
pension benefits, violated the intergovernmental tax immu-
nity doctrine. Id. at 817. In Davis, the Court explained that 
a state could cure that violation either “by extending the 
tax exemption to retired federal employees (or to all retired 
employees), or by eliminating the exemption for retired state 
and local government employees.” Id. at 818.
	
In response to Davis, the legislature eliminated the 
exemption for retired PERS members and began imposing 
personal income taxes on PERS benefits in 1991. Affected 
members sued. The next year, in Hughes v. State of Oregon, 
314 Or 1, 838 P2d 1018 (1992), this court held that the tax 
exemption was part of the PERS contract and that the legis-
lature had both impaired the PERS contract by eliminating 
the contractual obligation to exempt retirement benefits and 
breached the PERS contract by subjecting members’ retire-
ment benefits to state income tax. Id. at 31-33.
	
According to Hughes, the state could prevent mem-
bers from accruing additional tax-exempt benefits, but the 
participating employers were contractually required to 
provide a tax exemption for retirement benefits that were 
earned while the tax exemption was in effect. Id. at 31 
(“PERS retirement benefits accrued or accruing for work 
performed before the effective date of that section [repealing 
the tax exemption] * 
* 
* may not be taxed.”). As a result, the 
legislature could make prospective changes to the tax status 
188	
Moro v. State of Oregon
of pension benefits that members could earn going forward, 
but the legislature could not make retrospective changes—
that is, could not deny tax benefits for future retirement 
payments that members had earned already. Id.
	
Rather than imposing a damage award against the 
employers for breaching the contract, Hughes allowed the 
legislature to determine in the first instance what an appro-
priate remedy would be. Id. at 33. Dissatisfied with the legis-
lature’s efforts to craft a remedy, affected members seeking 
damages brought a class action, known as the Stovall/Chess 
class action litigation. That action was resolved in 1997 
through a settlement agreement that incorporated certain 
PERS changes that the legislature had enacted to offset the 
increased tax burden facing PERS members. Those changes 
were enacted as Oregon Laws 1991, ch 796 (SB 656) (1991 
offset), 1995 Oregon Laws, ch 569 (HB 3349) (1995 offset), 
and Oregon Laws 1997, ch 175 (HB 2034).14
	
The legislature enacted the 1991 offset at about the 
same time that it repealed the tax exemption. The 1991 off-
set provides a benefit to both active and retired members 
based on years of service, ranging from 1% for members with 
more than 10 years of service to 4% for members with more 
than 25 or 30 years of service, depending on the member’s 
occupation. SB 656, § 4. Although the rate of the 1991 offset 
is not based on the income tax rate and was passed before 
this court’s decision in Hughes, the legislature nevertheless 
intended the 1991 offset to avoid or mitigate the anticipated 
damage claim that was the subject of the Hughes decision. 
For that reason, the legislature included a provision that 
would allow employers to avoid paying the 1991 offset if “the 
retirement benefits payable under [PERS] are exempt from 
Oregon personal income taxation.” SB 656, § 12(1).
	
The legislature enacted the 1995 offset in response 
to the Stovall/Chess litigation, which followed the Hughes 
	
14  The statutory scheme containing those laws has been renumbered and 
reorganized on numerous occasions since their original codification. The rel-
evant provisions of SB 656 are currently compiled at ORS 238.366 and ORS 
238.368. The relevant provisions of HB 3349 are currently compiled at ORS 
238.362(3), (4)(a) and ORS 238.364. And the relevant provisions of HB 2034 are 
currently compiled at ORS 238.362(1), (2), (4)(b).
Cite as 357 Or 167 (2015)	
189
decision. See HB 3349, § 2(1) (noting that the benefits are “in 
compensation for damages suffered by those members * 
* 
* 
by reason of subjecting benefits paid * 
* 
* to Oregon personal 
income taxation”). To calculate the 1995 offset, the board 
applies a formula intended to negate the “maximum Oregon 
personal income tax rate,” which was 9% in 1991. HB 3349, 
§  3(4)(a); see ORS 316.037(1)(a) (1991) (setting personal 
income tax rates). The 1995 offset applies to only the part of 
a member’s benefit that “is attributable to service rendered 
by the member before October 1, 1991,” which is when the 
legislature repealed the income tax exemption. HB 3349, 
§ 3(4)(b); see also Vogl v. Dept. of Rev., 327 Or 193, 206-08, 
960 P2d 373 (1998) (describing the enactment of the 1995 
offset). Further, both the 1991 and the 1995 offsets are avail-
able to only Tier One members who established membership 
in PERS before July 14, 1995. HB 3349, § 3(8). Members 
eligible for both the 1991 and 1995 offset payments receive 
only the higher of the two. HB 3349, § 3(1)(a).
	
The 1995 offset also includes two provisions relevant 
to the anticipated settlement of the Stovall/Chess litigation. 
First, no member may bring a new class action challeng-
ing the elimination of the tax exemption. HB 3349, § 4(a). 
And second, no member acquires a contractual right to the 
1995 offsets. HB 3349, § 3 (“No member of the system or 
beneficiary of a member of the system shall acquire a right, 
contractual or otherwise, to the increased benefits provided 
by sections 3 to 10 of this Act.”). In 1997, the legislature 
enacted a statute providing that, if the state decreases the 
benefits provided under the 1991 and the 1995 offsets with-
out also decreasing the tax burden of PERS members, then 
a plaintiff member of the Stovall/Chess class action who had 
challenged the elimination of the tax exemption may reopen 
that class action. HB 2034, § 4(4)(b).
	
The settlement agreement that ultimately resolved 
the Stovall/Chess litigation in 1997 recognizes that the 
1991 offset, the 1995 offset, and the 1997 amendments 
were enacted “to provide a remedy for state income taxa-
tion of PERS benefits” and that the plaintiff PERS mem-
bers “agree[d] to accept the remedies provided in SB 656 
(1991), HB 3349 (1995) and HB 2034 (1997) as full and 
190	
Moro v. State of Oregon
complete payment for all claims raised in these consolidated 
actions.” The settlement agreement further states that, if 
the state reduces the benefits under those provisions with-
out an equal reduction to the Oregon personal income taxes 
imposed on PERS members, then the class action may be 
reopened. Id.15
	
In 2011, the legislature amended the 1995 offset, 
so that it is no longer available to then-active and -inactive 
members who, upon retirement, live out of state or are other- 
wise not subject to Oregon personal income taxes. Or Laws 
2011, ch 653, § 2. In 2013, the legislature passed SB 822, 
which, in addition to the changes to the COLA system dis-
cussed above, also amended the tax offset provisions. SB 
822 prohibits paying either the 1991 offset or the 1995 offset 
to any retired member who is not subject to Oregon income 
tax assessments, including nonresident retirees. SB 822, 
§§ 11-13. That change affects more than 16,000 nonresident 
PERS retirees (or other beneficiaries), which is about 14% of 
benefit recipients.
E.  Effect of the 2013 Amendments
	
In March 2013, after SB 822 had been introduced, 
the board’s actuary estimated the impact of the amendments 
contained in that bill—viz., the first iteration of the COLA 
modifications and the elimination of the tax offset payments 
to nonresident PERS members. That analysis projected that 
SB 822 would reduce the employer contribution rates by 2.5% 
of total payroll. For the 2013-2015 biennium, it would reduce 
the employer contribution rates from 21.1% to 18.6%. And 
through 2029, the board projected that the pre-SB 822 rates 
would be 25.5% and the post-SB 822 rates would be 23.0%. 
Approximately 0.3% of the 2.5% reduction was attributable 
to the elimination of the tax offsets for nonresident retir-
ees. The remaining 2.2% reduction was attributable to the 
COLA modifications.
	
15  Additionally, the state faced lawsuits from federal retirees living in 
Oregon who had argued that the tax offsets were in fact tax rebates that violated 
Davis and the intergovernmental tax immunity doctrine. This court held that the 
1991 offset did not violate the intergovernmental tax immunity doctrine but the 
1995 offset did. Ragsdale v. Dept. of Rev., 321 Or 216, 229, 895 P2d 1348 (1995), 
cert den, 516 US 1011, 116 S Ct 569, 133 L Ed 2d 493 (1995) (addressing the 1991 
offset); Vogel, 327 Or at 211-12 (addressing the 1995 offset).
Cite as 357 Or 167 (2015)	
191
	
In September 2013, the board’s actuary estimated 
the impact of the additional COLA modifications in SB 
861, although the analysis did not include the supplemen-
tal payments that were ultimately included in SB 861. That 
analysis projected that SB 861 would reduce the projected 
employer contribution rates by an additional 2.0%. As a 
result, the combined effect of SB 822 and SB 861 is esti-
mated to reduce employer contribution rates by 4.5% of total 
payroll through 2029, which represents about $5.3 billion 
in savings, stated on a system-wide, present value basis. Of 
those savings, about $390 million results from eliminating 
the tax offsets for nonresident retirees.
	
Those projected savings, combined with investment 
earnings that exceeded the assumed earnings rate (14.3% 
in 2012 and 15.6% in 2013), reduced PERS’s unfunded 
actuarial liability. In December 2013, the board’s actuary 
estimated that PERS’s unfunded actuarial liability was 
$8.1 billion and that PERS was 87% funded.
II.  ANALYSIS
	
Petitioners include both active and retired Tier 
One members, who are both residents of Oregon and non-
residents. They also include active Tier Two and OPSRP 
members, who are all residents. Petitioners contend that SB 
822 and SB 861 unconstitutionally impair their employment 
contracts in violation of the state Contract Clause, Article I, 
section 21, of the Oregon Constitution, and the federal 
Contract Clause, Article I, section 10, clause 1, of the United 
States Constitution. In the alternative, they contend that 
the amendments breach their contracts and constitute an 
unconstitutional taking of their property without just com-
pensation in violation of Article I, section 18, of the Oregon 
Constitution, and the Fifth Amendment to the United States 
Constitution. Petitioners further argue that the amend-
ments violate the state Equal Privileges or Immunities 
Clause, Article  I, section 20, of the Oregon Constitution, 
the federal Privileges and Immunities Clause, Article  IV, 
section 2, clause 1, of the United States Constitution, and 
the federal Equal Protection Clause of the Fourteenth 
Amendment to the United States Constitution. Finally, one 
petitioner argues that the amendments violate a federal 
192	
Moro v. State of Oregon
statute, 4 USC section 114. Despite presenting those vari-
ous challenges, petitioners generally focus their arguments 
on the state and federal Contract Clauses.
	
Respondents argue that the COLA and income tax 
offset are not contractual and, therefore, the changes to 
those statutes do not violate the state and federal Contract 
Clauses. Even if those provisions are part of a contract, 
respondents contend that the amendments do not substan-
tially impair the contract and are justified by a sufficient 
public purpose.
	
When presented with arguments arising under 
both state and federal law, we generally attempt to dispose 
of the case on state law grounds before reaching questions 
of federal law. Strunk, 338 Or at 171. As a result, we begin 
with the state Contract Clause arguments.
A.  State Contract Clause
	
The state Contract Clause, Article I, section 21, of 
the Oregon Constitution, states that “[n]o * 
* 
* law impair-
ing the obligation of contracts shall ever be passed[.]” Or 
Const Art I, § 21. That provision was adopted in 1857 and 
derived from the federal Contract Clause, Article I, section 
10, clause 1, of the United States Constitution. See Eckles v. 
State of Oregon, 306 Or 380, 389, 760 P2d 846 (1988) (trac-
ing the history of the state Contract Clause). As a result, we 
have interpreted the state Contract Clause as being consis-
tent with the United States Supreme Court’s interpretation 
of the federal Contract Clause in 1857. See id. at 389-90 
(inferring from the history of the state Contract Clause 
that “the framers of the Oregon Constitution intended to 
incorporate the substance of the federal provision, as it 
was then interpreted by the Supreme Court of the United 
States”).
	
This court has previously recognized that, in 1857, 
it was well established that the federal Contract Clause 
protected only those obligations arising from contracts that 
were formed before the effective date of the law being chal-
lenged. See id. at 399 n 18 (“Future private contracts, as 
well, are not protected by the state and federal contracts 
clauses.” (Citing Ogden v. Saunders, 25 US 213, 6 L Ed 606 
Cite as 357 Or 167 (2015)	
193
(1827).)); see also Local Div. 589, etc. v. Comm. of Mass., 666 
F2d 618, 637 (1st Cir 1981) (Breyer, J.) (“It has been clear 
since 1827 that the [federal Contract] Clause applies only 
to laws with retrospective, not prospective, effect.” (Citing 
Ogden, 25 US 213.)).
	
Federal courts have described that distinction as 
turning on whether the law in question operates prospec-
tively or retrospectively. See, e.g., United States Trust Co. v. 
New Jersey, 431 US 1, 18 n 15, 97 S Ct 1505, 52 L Ed 2d 92 
(1977) (“[T]he States undoubtedly had the power to repeal 
the covenant prospectively.”); Local Div. 589, etc., 666 F2d 
at 637 (quoted above); see also Robertson v. Kulongoski, 359 
F Supp 2d 1094, 1100 (D Or 2004), aff’d, 466 F3d 1114 (9th 
Cir 2006) (“The Contract Clause does not prohibit legisla-
tion that operates prospectively.”).
	
The reason for that limitation is simple: If the con-
tract creates obligations that contravene a law in effect at 
the time that the contract is entered, then the parties have 
no legitimate expectation that those obligations will be 
enforced. See Eckles, 306 Or at 399 n 18 (“[T]he laws in exis-
tence when a contract is formed define the obligation of the 
contract.”); see also Bagley v. Mt. Bachelor, Inc., 356 Or 543, 
552-53, 340 P3d 27 (2014) (“[C]ourts determine whether a 
contract is illegal by determining whether it violates public 
policy as expressed in relevant constitutional and statutory 
provisions and in case law[.]” (citing Delaney v. Taco Time 
Int’l, Inc., 297 Or 10, 681 P2d 114 (1984).))
	
We have applied that limitation expressly. For 
example, in Eckles, we held that a provision of the Transfer 
Act, which shifted funds from a state trust account to the 
state’s general fund, violated the state Contract Clause only 
“insofar as it affects * 
* 
* insurance contracts entered into 
before the enactment of the Transfer Act.” Eckles, 306 Or 
at 399. Nevertheless, that same provision was valid “[a]s to 
subsequent contracts, including renewals of [existing] con-
tracts[.]” Id. As to those contracts entered after the law’s 
effective date, the law “would define, not impair, the [par-
ties’] contractual obligations[.]” Id.
	
Similarly, in Hughes, we relied on Eckles and pro-
hibited repealing the PERS tax exemption “as it relates to 
194	
Moro v. State of Oregon
PERS retirement benefits accrued or accruing for work per-
formed before the effective date of that [repeal].” 314 Or at 
31; see also id. at 20 (“Accrued and accruing pension benefits 
are protected under Oregon Law.”). As we quoted approv-
ingly from an Attorney General Opinion, “ 
‘Employe[e] pen-
sion plans, whether established by law or contract, create a 
contractually based vested property interest which may not 
be terminated by the employer, except prospectively.’ 
” Id. at 
20-21 (quoting 38 Op Atty Gen 1356, 1365 (1977) (emphasis 
in original)).
	
Therefore, when applying the state Contract Clause, 
we consider the potential impairment of contractual obli-
gations arising only from contracts entered into before the 
effective date of the law being challenged. In this case, SB 
822 became effective on May 6, 2013, and SB 861 became 
effective on October 8, 2013. The scope of our analysis is 
defined by the obligations arising from contracts entered 
before those dates.
	
Our analysis in previous cases addressing viola-
tions of the state Contract Clause has focused on the follow-
ing questions: (1) is there a contract?; (2) if so, what are its 
terms?; (3) what obligations do those terms require?; and 
(4) has the state impaired an obligation of that contract? 
Strunk, 338 Or at 170 (citing Hughes, 314 Or at 14).
	
We normally answer those questions by apply-
ing general rules of contract law. Id. But if the state is 
alleged to be a party to the contract, we supplement the 
general rules of contract law with additional considerations 
informed by the state’s role serving the public. Id. On the 
one hand, enforcing state contracts binds the state to its 
previous promises, which were made to advance its previ-
ous policy goals. Requiring the state to meet those obliga-
tions can prevent or hinder the state’s pursuit of its current 
policy goals by limiting funds available to pursue those 
goals. On the other hand, the state would be unable to pur-
sue its current policy goals if it were unable to bind itself 
at all—that is, if it were unable to make any enforceable 
promises to other parties. The state, for example, would 
have a hard time finding a company to build its roads if the 
state were unable to enter into an enforceable contract with 
Cite as 357 Or 167 (2015)	
195
a construction company, ensuring that the company would 
get paid for its work. Providing parties with binding con-
tractual rights facilitates mutually beneficial exchanges, 
which in turn benefit the state as much as any other party 
to a contract.
	
Thus, the state may enter into contracts and be 
bound by the promises contained in those contracts, so long 
as the state is not “contract[ing] away its ‘police powers’ 
” 
or limiting its power of eminent domain. Id. at 14. Further, 
we have long applied a canon of construction that disfavors 
interpreting statutes as contractual promises. See Strunk, 
338 Or at 171 (disfavoring statutory contracts binding the 
state).16 When the legislature pursues a particular policy 
by passing legislation, it does not usually intend to prevent 
future legislatures from changing course. Id. For that rea-
son, “ 
‘[t]he intention to surrender or suspend legislative 
control over matters vitally affecting the public welfare can-
not be established by mere implication.’ 
” Id. at 171 (quoting 
Campbell et al. v. Aldrich et al., 159 Or 208, 213-14, 79 P2d 
257 (1938)). We therefore treat a statute as a contractual 
promise only if the legislature has “ 
‘clearly and unmistak-
ably’ 
” expressed its intent to create a contract. Id. (quoting 
Campbell, 159 Or at 213-14); see Hughes, 314 Or at 14 (“[A] 
state contract will not be inferred from legislation that does 
not unambiguously express an intention to create a con-
tract.”). With those considerations in mind, we turn to the 
questions posed above.
1.  Is there a contract?
	
We have repeatedly held that the legislature 
“intended and understood” that PERS benefits are contrac-
tual and, as a result, “PERS is a contract between [a par-
ticipating employer] and its employees.” Hughes, 314 Or at 
18; see also Strunk, 338 Or at 183 (noting the contractual 
	
16  We have previously noted that those limitations may not be exhaustive, 
“but any further rules of this nature ‘must be found within the language or his-
tory of Article I, section 21, itself.’ 
” Hughes, 314 Or at 14 (quoting Eckles, 306 Or 
at 399). Federal courts recognize similar limitations and refer to them as the 
“reserved powers doctrine” and the “unmistakability doctrine.” United States v. 
Winstar Corp., 518 US 839, 874, 116 S Ct 2432, 135 L Ed 2d 964 (1996) (opinion of 
Souter, J.).
196	
Moro v. State of Oregon
nature of PERS benefits).17 The parties agree that each of 
the petitioners in this case has a contract with a partici-
pating employer relating to PERS benefits. Because of their 
agreement on that point, the parties provide little analysis 
of that question in the briefing. But the nature and scope of 
that contract provide necessary context for the answers to 
the other questions posed by this challenge and therefore 
deserve further discussion.
	
A contract is most commonly formed by an offer, an 
acceptance of that offer, and an exchange of consideration. 
See Homestyle Direct, LLC v. DHS, 354 Or 253, 262, 311 P3d 
487 (2013) (describing contract formation; citing Restatement 
(Second) of Contracts § 17(1) (1981)).18 Ordinarily, an offer 
contains a promise that will become enforceable only when 
the offer is accepted. See Restatement § 24 comment a (“In 
the normal case, * 
* 
* the offer itself is a promise[.]”); Richard 
A. Lord, 1 Williston on Contracts § 4:7, 449 (4th ed 2007) 
(defining an ordinary offer as a “conditional promise”).
	
In the employment context, an employer frequently 
offers a promise of compensation in exchange for an employ-
ee’s service. The compensation can take various forms, such 
as salary, bonuses, and fringe benefits. Pension benefits are 
another form of compensation. Whereas, for example, salary 
is compensation paid to the employee every two weeks or at 
the end of each month, a pension is compensation paid to the 
employee at retirement. Pension benefits therefore are “part 
of the employee’s promised but delayed compensation for the 
performance of his [or her] job.” Taylor v. Mult. Dep. Sher. 
Ret. Bd., 265 Or 445, 450, 510 P2d 339 (1973). Regardless of 
whether the pension benefit is promised by a public or pri-
vate employer, “the employee accepts a lower present wage 
in order to receive a pension upon retirement[.]” Lord, 19 
Williston on Contracts § 54:38 at 541.
	
17  The modification of the quote from Hughes substitutes “a participating 
employer” for “the state.” The court in Hughes used “the state” as a “convenient 
term[ 
] for all public employers.” Hughes, 314 Or at 5 n 3. 
	
18  “Consideration” is that which one party provides to the other in exchange 
for entering into the contract. See Homestyle Direct, 354 Or at 262 (describing 
consideration); see also Restatement § 71(2) (defining “consideration” as a perfor-
mance or return promise “sought by the promisor in exchange for his promise and 
[ 
] given by the promisee in exchange for that promise”).
Cite as 357 Or 167 (2015)	
197
	
As a result, the contracts at issue in this case are 
the employment contracts between petitioners and their 
participating public employers. To the extent that each 
employment contract binds a participating employer to fund 
PERS benefits for its employees, we previously have referred 
to those contractual obligations as the “PERS contract.” See, 
e.g., Hughes, 314 Or at 6 n 5 (stating that the “ 
‘PERS con-
tract’ 
” refers to “the contracts [that PERS members] each 
have with their respective PERS participating employers”).
	
Although the PERS contract results from an offer 
and acceptance, the PERS statutes are themselves not an 
offer that employees can accept. Instead, each participat-
ing employer offers a promise to its employees to provide 
compensation, including PERS benefits, in exchange for 
the employees’ services. See Stovall v. State of Oregon, 324 
Or 92, 123, 922 P2d 646 (1996) (“[The] employers were the 
entities that agreed to the terms of [the employees’] com-
pensation, including the terms relating to retirement ben-
efits.”). The PERS statutes establish that PERS benefits 
are a statutorily required term in the offer that each par-
ticipating employer makes to its employees. See id. at 124 
(“[P]articipating PERS employers * 
* 
* promised plaintiffs 
that plaintiffs would receive, at a minimum, the retirement 
compensation provided in the PERS statutes.”); see also 
Restatement §  5 comment c (describing statutory contract 
terms).
	
Before a participating employer’s promise of PERS 
benefits becomes the PERS contract for any particular 
employee, it is merely an offer that the employee can either 
accept or reject. Generally, an offer, by itself, does not impose 
any obligation on the offering party, who may change or 
revoke an offer that has not been accepted—assuming that 
the offering party is not otherwise required to leave the offer 
open. See Hogan v. Alum. Lock Shingle Corp., 214 Or 218, 
226, 329 P2d 271 (1958) (“[T]here is no agreement until the 
offer has been accepted in accordance with its very terms.”); 
see also Restatement § 24 comment a (noting that an offer is 
“revocable until accepted”); Arthur Linton Corbin, 1 Corbin 
on Contracts §  2.19 at 222 (Joseph M. Perillo ed., rev  ed 
1993) (“Any communicated change in the terms of an offer 
operates as a revocation of that offer.”). But once an offer 
198	
Moro v. State of Oregon
has been accepted, it ceases to be an offer as such; instead, 
the terms of the offer become the terms of the contract. See 
Restatement § 42 comment c (“Once the offeree has exercised 
his power to create a contract by accepting the offer, a pur-
ported revocation is ineffective as such.”).
	
Therefore, a participating employer’s offer of PERS 
benefits becomes a contract only when an employee accepts 
the offer. An offer can invite two different types of accep-
tance, resulting in either a bilateral contract or a unilateral 
contract. An offer for a bilateral contract invites the other 
party to accept with a return promise—that is, by prom-
ising some future performance. See 1 Corbin on Contracts 
§  1.23 (describing bilateral contracts). An offer for a uni-
lateral contract invites the other party to accept with per-
formance—that is, by actually doing the performance that 
the offering party seeks. See id. (describing unilateral con-
tracts). As a result, by the time that an offer for a unilateral 
contract is accepted, the accepting party has already fully 
performed and owes the offering party no future obligation. 
Id. In that case, the resulting contract is unilateral because 
only the offering party owes a legally enforceable obligation 
to the other. Id.; see also Homestyle Direct, 354 Or at 268-69 
(describing unilateral contracts); Mark Pettit, Jr., Modern 
Unilateral Contracts, 63 B U L Rev 551, 552 (1983) (“The 
distinguishing feature of the unilateral contract is that 
the second party (the offeree) has not made a promise in 
return.”).
	
Because the offer of PERS benefits invites employ-
ees to accept by providing current service for the employer—
rather than by promising to provide some service in the 
future—the resulting PERS contract is a unilateral con-
tract. See Hughes, 314 Or at 21 (“ 
‘[A]doption of the pension 
plan was an offer for a unilateral contract.’ 
” (Quoting Taylor, 
265 Or at 452.)). In this case, petitioners have accepted the 
offer by providing the services that their employers sought. 
See Stovall, 324 Or at 124 (1996) (“Plaintiffs accepted [the 
promised PERS benefits] by working for their employers.”); 
Hughes, 314 Or at 21 n 26 (“ ‘[A]n employee pension or disabil-
ity plan may be viewed as an offer to the employee which may 
be accepted by the employee’s continued employment, and 
such employment constitutes the underlying consideration 
Cite as 357 Or 167 (2015)	
199
for the promise.’ 
” (Quoting Rose City Transit Co. v. City of 
Portland, 271 Or 588, 593, 533 P2d 339 (1975).)).
	
Thus, an employee earns a contractual right to the 
offered PERS benefits at the time that the employee renders 
his or her services to the employer.19 But merely because 
the PERS contract has been formed does not mean that 
the contractual relationship between the employer and the 
PERS member becomes static. As long as the employer con-
tinues offering PERS benefits, PERS members can continue 
accepting that offer and, thereby, earn additional contrac-
tual rights to additional PERS benefits.
	
Those concepts are difficult to apply to pension ben-
efits, because of the complex formulas often used to calcu-
late the benefits and because of the lapse of time between 
the employee earning the benefit and the employer deliver-
ing the benefit. Those concepts are seen more clearly when 
applied to a simpler benefit, such as salary. For example, in 
State ex rel. Thomas v. Hoss, 143 Or 41, 21 P2d 234 (1933), 
an employee was working for the Bureau of Labor and earn-
ing a salary of $180 per month. Id. at 42-43. In the mid-
dle of March 1933, the legislature reduced his salary to 
$172 per month. Id. at 47. When the state issued his monthly 
paycheck at the end of March, the state applied the lower 
salary to the entire month. Id. at 42-43.
	
This court rejected the state’s contention that the 
law required that the employee receive the lower salary for 
the whole month, even though he had worked for half the 
month while the state was offering the higher salary. Id. at 
	
19  In previous decisions, this court has described the formation of the PERS 
contract as conveying to the accepting employee a “vested” right to the offered 
retirement benefits. See, e.g., Oregon State Police Officers’ Assn. v. State of Oregon, 
323 Or 356, 380, 918 P2d 765 (1996) (OSPOA) (so stating); Hughes, 314 Or at 20 
(same). However, in the pension context, “vested” has a specific meaning that is 
distinct from contract formation and from benefit accrual. “Accruing” is “the rate 
at which an employee earns benefits to put in [the employee’s] pension account[.]” 
Central Laborers’ Pension Fund v. Heinz, 541 US 739, 749, 124 S Ct 2230, 159 L 
Ed 2d 46 (2004). “Vesting” is “the process by which an employee’s already-accrued 
pension account becomes irrevocably [the employee’s] property[.]” Id. Therefore, an 
employee who has rendered service to a participating public employer has accepted 
the employer’s offer and accrued PERS benefits even before the employee has a 
vested right to the benefits. An unvested PERS member has only a limited con-
tractual right to the accrued benefits, because the employer’s obligation to provide 
those benefits is conditional on the employee having a vested right to the benefits.
200	
Moro v. State of Oregon
47. According to the court, “the legislature was at liberty at 
any time to reduce [the salary] amount. But it is settled that 
after a salary has been earned the public employee’s right 
thereto becomes vested and cannot be taken away by any 
legislation thereafter enacted[.]” Id. (emphasis added). The 
employee, therefore, accepted the salary being offered at the 
time that he rendered his services. Although he could be 
paid the lower salary for the second part of the month—
because he continued working even after the state reduced 
its salary offer—the employee was entitled to the higher 
salary for the first part of the month, because he had been 
offered the higher salary during that part of the month and 
he had accepted that offer by working during that period.20
	
In effect, the court in Thomas treated the employer’s 
salary offer as a continuing offer that remained open for a 
series of acceptances and resulted in a series of separate 
contracts. See Corbin, 1 Corbin on Contracts § 2.33 at 300 
(“[A]n offer [can be] made in such terms as to create a power 
to make a series of separate contracts by a series of sepa-
rate acceptances.”). The employee, therefore, first accepted 
that continuing offer on his first day of work. That accep-
tance established his contractual right to the offered com-
pensation only for that day’s work. The employee repeatedly 
accepted that offer each subsequent day that he worked for 
the employer, establishing his additional contractual right 
to compensation for each additional day’s work. But as to 
future work that the employee had not yet performed, the 
employee had not accepted the employer’s continuing offer, 
which remained just that—an offer. See id. (“The closing 
of one of these separate contracts by one acceptance leaves 
the offer still revocable as to any subsequent acceptance.”). 
In those circumstances, unless an employer is subject to a 
legal obligation to keep that offer open, the employer can, 
	
20  The United States Supreme Court reached the same result more than 80 
years earlier in Butler et  al. v. Pennsylvania, 51 US 402, 13 L Ed 472 (1850). 
There, the Court found no violation of the federal Contract Clause when the 
Pennsylvania legislature reduced the salary of certain employees who had been 
appointed to positions with a fixed term at a fixed salary. Id. at 409. The Court 
held that, although the legislature could change the salary going forward, “[t]he 
promised compensation for services actually performed and accepted, during the 
continuance of the particular agency, may undoubtedly be claimed, both upon 
principles of compact and of equity[.]” Id. at 416.
Cite as 357 Or 167 (2015)	
201
like other offering parties, change or revoke the unaccepted 
offer of compensation for future work.
	
Similarly, the PERS offer is a continuing offer. An 
employee’s acceptance of the offer does not preclude the 
employee from accepting the offer further by rendering addi-
tional services. Each additional rendition of service accepts 
any open offer for additional PERS benefits. The PERS con-
tract reaches only as far as a member has accepted the offer, 
and a member’s acceptance reaches only as far as the work 
that the member has performed.
	
That analysis reveals how and when the PERS con-
tract is formed and the scope of the PERS benefits owed: 
The PERS contract binds a participating employer to com-
pensate a member for only the work that the member has 
rendered and based on only the terms offered at the time 
that the work was rendered, even if the employer changed 
that offer over time. Cf. Corbin, 1 Corbin on Contracts § 3.16 
at 387 (“The employee accepts the offer by merely continuing 
to render the specified service, and becomes entitled to the 
promised salary in proportion to the work actually done.”).
	
That analysis, however, does not necessarily require 
a finding that the PERS offer can be changed prospectively, 
like the salary offer in Thomas. The parties in this case 
dispute whether, before the 2013 amendments, one of the 
express or implied terms offered and accepted included a 
promise that the participating employers would not change 
the terms of the offer, even prospectively. See Restatement 
§ 87 (describing conditions under which an offering party 
has a legal obligation to leave an offer open). We resolve that 
issue below. See 357 Or at 221-26.
	
For present purposes, it is sufficient to conclude 
that, under the prospective/retrospective distinction that we 
apply under the state Contract Clause, our analysis is lim-
ited to the potential impairment of obligations owed by the 
participating employers, and earned by members through 
the work they performed, before the effective dates of the 
amendments at issue. That analysis includes considering 
whether, before the effective date of the amendments, partic-
ipating employers were contractually obligated to keep rel-
evant parts of the PERS offer open even after the effective 
202	
Moro v. State of Oregon
date of the amendments. We begin that analysis by deter-
mining the relevant terms of that PERS contract.
2.  What are the terms of the contract?
	
Petitioners contend that the pre-amendment tax 
offset statutes and the pre-amendment COLA statutes 
are contractually enforceable terms of the PERS contract. 
According to petitioners, the unmistakability doctrine—
which, as noted, requires courts to interpret statutes as 
noncontractual unless the legislature’s intent to bind the 
state is unmistakable—applies to only the previous ques-
tion of whether there is a contract, but does not apply to 
determining the terms of a contract. Petitioners further 
argue that the pre-amendment version of both the income 
tax offset statutes and the COLA statutes reveal the leg-
islature’s promissory intent through their use of the term 
“shall.” Respondents dispute petitioners’ arguments and 
contend that the unmistakability doctrine applies to this 
question and that the statutes at issue fail to furnish the 
clear and unmistakable legislative intent to offer the income 
tax offsets and the COLA as terms of the PERS contract.
a.  Standards for identifying terms of the contract
	
To resolve this dispute, we first address the stan-
dard of legislative intent applied to this step. Respondents 
are correct: the standard of clear and unmistakable contrac-
tual intent applies to both the question of whether there is 
an offer to form a contract and also to whether a particu-
lar provision is a term of that offer. Our case law plainly 
requires that result. See, e.g., Arken, 351 Or at 136 (“[T]he 
terms of the statutory PERS contract are a matter of legis-
lative intent and only statutory terms that ‘unambiguously 
evince[ 
] an underlying promissory, contractual legisla-
tive intent’ become a part of the statutory PERS contract.” 
(Quoting Hughes, 314 Or at 26.)).
	
Although respondents correctly identify the stan-
dard articulated in our case law, respondents ask us to apply 
that standard by setting a much higher bar than we have 
applied in the past. According to respondents, the legisla-
ture can satisfy that standard only by expressly describing 
the statutory benefit as a contract, promise, or guarantee.
Cite as 357 Or 167 (2015)	
203
	
Contrary to respondents’ assertions, however, our 
cases discussing and applying that standard do not focus 
solely on the use of such specifically promissory language.21 
Instead, we have repeatedly emphasized the importance of 
context at this step—namely, the context of already having 
established that the parties intended to form a contract. 
See, e.g., Strunk, 338 Or at 183 (“[W]e are mindful that the 
‘accepted proposition of the contractual nature of PERS is 
an essential background’ for our inquiry.” (Quoting Hughes, 
314 Or at 22.)). Because we already have found that the leg-
islature intended PERS benefits to be part of the employer’s 
contractual promise of compensation, the standard of clear 
and unmistakable intent now focuses only on whether the 
legislature intended a particular PERS provision to be part 
of that promise.
	
As we have held in prior cases, the PERS statutory 
scheme may define the terms of the PERS contract, even 
though it does not use language referring directly to con-
tracts, promises, or guarantees. See, e.g., Strunk, 338 Or at 
186 (finding that a member’s right to the use of a partic-
ular service retirement allowance formula is “unambigu-
ously promissory”); Hughes, 314 Or at 26 (stating that the 
PERS previous tax exemption provision “unambiguously 
evinces an underlying promissory, contractual legislative 
intent”).22
	
21  Although it is common for courts to treat statutory public pension pro-
grams as contractual, it is “quite rare” for pension statutes to expressly refer 
to contractual rights. Amy B. Monahan, Public Pension Plan Reform: The Legal 
Framework, 5 Education, Finance & Policy, Minnesota Legal Studies Research, 
No 10-13, 5 n 6 (2010) (“It is possible for a statute to contain explicit language 
regarding the creation of a contractual relationship (see, e.g., N.J. Stat. Ann. 
§ 43:13-22.33 (2009)), but this is quite rare.”).
	
22  The importance of context is well established in our case law. In Hughes, 
for example, we criticized attempts to view a provision “in isolation and evaluate 
whether [the provision], standing alone, demonstrates the requisite unambigu-
ous legislative intent to create a contractual obligation.” 314 Or at 23. Ignoring 
the provision’s context “is not analytically proper or helpful.” Id. at 25. The court 
in Hughes also reviewed numerous federal cases considering federal Contract 
Clause challenges and concluded, “The constitutional protection that was 
afforded to those provisions’ obligations followed from the fact that they were 
part of a larger contract, not that they were promissory in and of themselves.” 
Id. at 25 n 31. The court held that the same principles applied to identifying the 
terms of the PERS contract. See id. (“This case presents an analogous situation 
where we are faced with an underlying contract—the PERS contract—and the 
question is whether the tax exemption statute is a term of that contract.”).
204	
Moro v. State of Oregon
	
Still, not every provision within the PERS statutory 
scheme is a term in the PERS contract. See Oregon State 
Police Officers’ Ass’n. v. State of Oregon, 323 Or 356, 405, 918 
P2d 765 (1996) (OSPOA) (Gillette, J., specially concurring 
in part and dissenting in part) (“[N]ot every statutory provi-
sion in [PERS] is a part of that contract. Instead, whether a 
particular provision is part of that contract is a question of 
legislative intent.” (Emphasis in original.)). Beyond noting 
that doubtful cases should be resolved in favor of finding 
that a provision is not a term of the contract being offered, 
there are two principles that we have considered in prior 
cases that guide our use of context here.23
	
First, because the PERS offer promises remuner-
ative pension benefits as compensation for employment, 
the offer may include provisions that define the eligibility 
for benefits or the scope of benefits. See, e.g., Hughes, 314 
Or at 22-23 (assessing whether a provision was an “inte-
gral part of the PERS statutes” and whether it was “part 
and parcel” with the state’s promise of pension benefits); 
id. at 26 (considering the “purpose of the PERS contract”); 
Eckles, 306 Or at 393 (considering that the purpose of a 
disputed provision was to provide assurances “to induce 
skeptical employers to participate in a state insurance sys-
tem”). Because the legislature intended PERS to be part of 
an offer promising pension benefits to employees, statutes 
defining eligibility for, or the scope of, those benefits may 
be part of the PERS offer, unless the legislature expresses 
a contrary intent.
	
That principle is based in part on the potential dis-
tinction between provisions that relate to a remunerative 
aspect of PERS and those that relate to an administrative 
aspect of PERS. See Strunk, 338 Or at 239 (Balmer, J., con-
curring) (noting that a “patently administrative provision” 
should not be treated as contractual because the legislature 
failed to provide clear and unmistakable contractual intent, 
even though the change may affect actual benefits received 
by some members). The PERS statutes address both the 
	
23  We do not mean to suggest that there may not be other principles to con-
sider in other cases, including other PERS cases. Rather, we mean only that we 
identified these two principles as relevant in prior PERS cases.
Cite as 357 Or 167 (2015)	
205
participating employers’ promise of pension benefits and the 
manner in which the legislature directs the board and the 
employers to carry out that promise, and the PERS offer 
does not necessarily include those administrative aspects of 
PERS as compensation for employment.
	
Second, not all remunerative provisions are terms of 
the PERS offer. Instead, a remunerative provision will be a 
term of the offer only if it is mandatory, rather than optional 
or discretionary. See, e.g., Strunk, 338 Or at 201 (“Notably 
absent is any directive that, following such application, [the 
board] must apply any remaining earnings to PERS mem-
bers’ regular accounts.” (Emphasis in original.)); Hughes, 
314 Or at 26 (finding that the tax exemption provision was 
a term of the offer after emphasizing that the tax exemption 
provision “provided that the PERS retirement benefits ‘shall 
be’ exempt from all state and local taxes”).
b.  Were the pre-amendment tax offset provisions 
a term of the PERS contract?
	
Retired nonresident petitioners contend that the 
1991 and 1995 offsets are terms of the PERS contract.24 As 
described above, the bills creating those provisions have a 
complicated history, which is reflected in the complex statu-
tory scheme codifying those benefits.
	
Nevertheless, determining whether the 1995 offset 
is contractual is simple. The statute itself states expressly 
that it is not contractual: “No member of the system or bene-
ficiary of a member of the system shall acquire a right, con-
tractual or otherwise, to the increased benefits provided by 
sections 3 to 10 of this 1995 Act. “ HB 3348, § 2(3). Thus, the 
legislature clearly intended that the 1995 offset would not 
be contractual.
	
Petitioners contend that the legislative history 
establishes that the 1995 Legislative Assembly expected 
that that provision, HB 3348, §  2(3), codified as ORS 
238.362(3), would be repealed by a future legislature if the 
parties settled their then-pending litigation over the income 
	
24  The nonresident Moro petitioners contend only that the 1991 offset is 
contractual.
206	
Moro v. State of Oregon
tax exemption. And petitioners point out that the parties 
entered a settlement agreement in 1997.
	
Even if we were to credit petitioners’ reading of the leg-
islative history, we would nevertheless interpret and enforce 
the 1995 offset as it is written. Under petitioners’ interpreta-
tion, the 1995 Legislative Assembly left to future legislatures 
the decision of whether to repeal HB 3348, § 2(3). Regardless 
of whether the 1995 Legislative Assembly expected that a 
future legislature would repeal that provision, the legislature 
has not, in fact, repealed it. See Strunk, 338 Or at 178 (reject-
ing a similar interpretation of HB 3348, § 2(3)).
	
The 1991 offset requires a different analysis. The 
1991 offset includes mandatory wording without the same 
expressly noncontractual wording as the 1995 offset. See, 
e.g., SB 656, § 3(6) (stating that service retirement allow-
ances “shall be increased” according to the 1991 offset). 
Nevertheless, the context and legislative history of the 1991 
offset establish that the 1991 offset is not part of the PERS 
contract because it is not a component of the type of employ-
ment compensation benefits otherwise found in the PERS 
contract.
	
To be sure, the 1991 offset was intended to compen-
sate PERS members for the losses that they would incur 
when the state repealed the income tax exemption. See 
Ragsdale, 321 Or at 224 (so stating). But the statute itself 
was not an offer that members had accepted by rendering 
services nor was it initially supported by an exchange of 
consideration. Instead, the legislature enacted the 1991 off-
set as a type of pre-emptive damage payment to mitigate a 
claim for breach of the PERS contract that no court had yet 
sustained.
	
The legislature tied the 1991 offset to the repeal of 
the tax exemption—rather than tying it to the work that 
members performed—by preventing the payment of the 
1991 offset in any year in which the tax exemption was 
effective. SB 656, § 12(1)-(2). Further, the legislature con-
sidered the 1991 offset at the same time that it considered 
repealing the tax exemption. And prior to repealing the 
Cite as 357 Or 167 (2015)	
207
tax exemption, legislative leaders sought advice from the 
Attorney General on, among other things, whether the 
state could mitigate damages arising from that breach by 
enacting offsetting benefits. Letter of Advice dated May 10, 
1989, to Sen Kitzhaber and Rep Katz (OP-6320); see also 
Hughes, 314 Or at 19 n 22 (“Where a legislative enactment 
follows the legal advice given, before the enactment, in an 
opinion of the Attorney General, we have relied on such 
an opinion as providing an indication of the legislature’s 
purpose in enacting the measure.”). The Attorney General 
advised that the state could mitigate damages “by increas-
ing PERS benefits to offset PERS members’ increased tax 
liability caused by the breach.” Letter of Advice dated May 
10, 1989, to Sen Kitzhaber and Rep Katz (OP-6320). During 
hearings on the 1991 offset, Senate President Kitzhaber 
noted that the legislature was “trying to develop a strat-
egy that offsets the impact of the tax.” Minutes of Senate 
Committee on Labor, SB 656, SB 735, SB 1035, SB 1106, 
SB 138, SB 1041, SB 632, May 8, 1991 (testimony of Sen 
John Kitzhaber).
	
Thus, although the 1991 offset is calculated 
according to years of service, it was intended to compen-
sate PERS members for a breach of contract and not for 
their years of service. The 1991 offset was, therefore, not an 
offer to PERS members inviting them to render services. It 
was, instead, a noncontractual payment from participating 
employers to PERS members, intended to limit the amount 
of the employers’ liability if a breach of contract were later 
established.
	
Even after this court held in Hughes that imposing 
Oregon personal income tax on PERS benefits breached the 
PERS contract, the participating employers were not under 
a contractual obligation to pay the 1991 offset until the 1991 
offset was incorporated into the 1997 settlement agreement. 
Until then, the legislature remained free to change the 
statute and discontinue the mitigation payments that the 
employers had made previously. Ending those mitigation 
payments would have increased the ultimate damage award 
needed to remedy the breach, but ending those mitigation 
payments would not have given rise to a separate breach of 
208	
Moro v. State of Oregon
contract claim. As a result, we hold that the 1991 offset is 
not a term of the statutory PERS contract.25
	
Petitioners further argue that, if the 1991 offset 
and the 1995 offset are not terms of the statutory PERS 
contract, they are nevertheless terms of the 1997 settlement 
agreement that resolved the Stovall/Chess class action liti-
gation. Petitioners correctly state that the settlement agree-
ment incorporates the income tax offset statutes: “Plaintiffs 
agree to accept the remedies provided in SB 656 (1991), HB 
3349 (1995) and HB 2034 (1997) as full and complete pay-
ment for all claims raised in these consolidated actions.” 
The settlement agreement is a contract through which the 
class action plaintiffs waived their claim for the damages 
they incurred as a result of the tax-exemption repeal and, in 
return, the participating employers promised to provide the 
benefits set out in the 1991 and 1995 tax offsets.
	
Although the settlement agreement is a con-
tract, petitioners cannot assert that the legislature’s 2013 
changes to the tax offsets impair their rights under that 
contract. The settlement agreement itself contemplates 
future legislative action decreasing the benefits available 
under the tax offsets. According to the settlement agree-
ment, if the legislature decreased the benefits available 
under the tax offsets, then the legislature could avoid dis-
turbing the parties’ rights under the settlement agreement 
by enacting “an equivalent decrease in the Oregon per-
sonal income tax imposed on PERS benefits attributable 
to service rendered before” the repeal of the tax exemption. 
And if the legislature failed to similarly decrease Oregon 
tax liabilities, then the class action plaintiffs would be 
allowed to reopen the class action litigation and seek sup-
plemental relief.
	
25  Petitioners attempt to refute that conclusion by citing repeatedly from this 
court’s opinion in Ragsdale, which considered whether the 1991 offset violated the 
intergovernmental tax immunity doctrine. 321 Or at 229. In the context of con-
sidering whether the 1991 offset was a tax rebate, this court stated that, under 
the 1991 offset, “every state retiree who qualifies for benefits (based on years of 
service) will receive the benefits, regardless of the state retiree’s residency.” Id. 
at 230. Suffice it to say that Ragsdale addressed a different legal issue. Even if 
Ragsdale correctly identifies who qualified for the 1991 offset, Ragsdale sheds no 
light on whether the legislature intended to create a statutory contract when it 
enacted the offset provisions.
Cite as 357 Or 167 (2015)	
209
	
Petitioners contend that SB 822’s amendments to 
the tax offsets have not been balanced out by equivalent 
decreases in state taxes. Even if true, that would not estab-
lish an impairment of the settlement agreement. Rather, 
it would establish the contractual right to reopen the class 
action litigation. We have not been asked to consider, nor do 
we have jurisdiction to consider, the scope of that contrac-
tual right or its availability to nonresident class members. 
Therefore, we do not resolve any potential argument that the 
right to reopen the class action litigation does not extend to 
nonresident petitioners because, under both state and federal 
law, the Oregon personal income tax has been completely 
eliminated as to nonresident PERS retirees since 1996. See 4 
USC § 114(a) (preventing a state from “impos[ing] an income 
tax on any retirement income of an individual who is not a 
resident or domiciliary of such [s]tate”); ORS 316.127(9)(a) 
(“Retirement income received by a nonresident does not con-
stitute income derived from sources within this state unless 
the individual is domiciled in this state.”).26
	
Based on the foregoing, we hold that the 1991 and 
1995 offsets are not terms of the statutory PERS contract 
and, therefore, are not obligations under that contract that 
could be “impaired” for purposes of applying the Contract 
Clause. The 1991 and 1995 offsets, however, are terms of the 
1997 class action settlement agreement. But the amendments 
contained in SB 822, which reduce the benefits provided to 
nonresident retirees under that settlement agreement, nei-
ther impair nor breach the terms of that agreement, because 
the agreement expressly contemplates, and provides a means 
for seeking relief for, such benefit reductions.
c.  Was the pre-amendment COLA provision a 
term of the PERS contract?
	
As explained above, for Tier One and Tier Two mem-
bers, the pre-amendment COLA consisted of three relevant 
	
26  Oregon’s personal income tax applies to the taxable income of “every full-
time nonresident that is derived from sources within this state.” ORS 316.037(3). 
Both 4 USC section 114 and ORS 316.127(9) apply to retirement income received 
after December 31, 1995. State Taxation of Pension Income Act of 1995, Pub. L. 
No. 104–95 (HR 394), 109 Stat 979 (effective as to income derived on or after 
January 1, 1996); Or Laws 1997, ch 839, § 11 (same).
210	
Moro v. State of Oregon
subsections: the COLA requirement in subsection (1); 
the COLA cap in subsection (2); and the COLA bank in 
subsection (3). ORS 238.360 (2011). OPSRP members were 
subject to substantially the same COLA provision, except that 
they did not have a COLA bank available. ORS 238A.210 
(2011).
	
Petitioners contend that this court has already 
decided that the pre-amendment COLA provision is con-
tractual. In Strunk, this court considered a state Contract 
Clause challenge involving the same pre-amendment COLA 
provisions at issue here. 338 Or at 213. The legislative 
amendment in Strunk temporarily prevented the board 
from making COLA adjustments to the service retirement 
allowances of certain retirees. Id. This court assessed the 
merits of that challenge by first determining whether the 
same pre-amendment COLA provision at issue in this case 
“constituted a term of the PERS statutory contract[.]” Id. at 
220. We first considered the text and context of the COLA 
provision to determine whether it was a term of the PERS 
contract. The text of the pre-amendment COLA statutes is 
the same in this case as in Strunk, and the court in Strunk 
emphasized the numerous phrases indicating that the 
adjustment was mandatory:
	
“ 
‘(1)  As soon as practicable after January 1 each 
year, [the board] shall determine the percentage increase or 
decrease in the cost of living for the previous calendar year, 
based on the Consumer Price Index * 
* 
*. Prior to July 1 
each year the allowance which the member or the member’s 
beneficiary is receiving or is entitled to receive on August 1 
for the month of July shall be multiplied by the percentage 
figure determined, and the allowance for the next 12 months 
beginning July 1 adjusted to the resultant amount.’
	
“ 
‘(2)  Such increase or decrease shall not exceed two 
percent of any monthly retirement allowance in any year 
and no allowance shall be adjusted to an amount less than 
the amount to which the recipient would be entitled if no 
cost of living adjustment were authorized.’ 
”
Id. at 220-21 (quoting ORS 238.360 (2001)) (emphases in 
original; bracketed material added). This court then analo-
gized the COLA provision to the tax exemption provision in 
Hughes: “Like the tax provision analyzed in Hughes, the text 
Cite as 357 Or 167 (2015)	
211
of ORS 238.360(1) (2001) evinces a clear legislative intent 
to provide retired members with annual COLAs on their 
service retirement allowances, whenever the CPI warrants 
such COLAs.” Id. at 221. Based on that analysis, this court 
held that “the general promise embodied in ORS 238.360(1) 
(2001) was part of the statutory PERS contract[.]” Id. 
Petitioners claim that Strunk establishes a precedent that 
the pre-amendment COLA provision is contractual and ask 
us to adhere to that precedent.
	
Respondents disagree. As an initial matter, respon-
dents read Strunk narrowly as holding that only the COLA 
requirement in subsection (1) is a term of the contract. Based 
on that premise, respondents argue that the COLA cap and 
COLA bank were not addressed in Strunk and therefore this 
court should consider whether they are terms of the PERS 
contract without relying on Strunk.
	
Respondents’ narrow reading of Strunk fails, 
because it does not account for the incongruity that would 
result from treating the COLA requirement in subsection 
(1) as contractual but treating the COLA cap and the COLA 
bank as noncontractual. For example, the COLA require-
ment in subsection (1) ties the COLA to the CPI without 
limitation. If the CPI went up 7%, then under subsection 
(1) each retiree would receive a 7% COLA. If that limitless 
COLA requirement were really the only contractual aspect 
of the COLA provision, then the COLA cap would actually 
breach the PERS contract by limiting the COLA. That is not 
the result that respondents seek.
	
It is also not what the legislature intended. In the 
original COLA statutes passed in 1971 and 1973, the COLA 
requirement expressly referred to and incorporated the 
COLA cap.27 See former Or Laws 1971, ch 738, § 11; Or Laws 
	
27  Under former ORS 237.060 (1971), the relevant subsections were set out 
in reverse order. The COLA cap was contained in subsection (1), and the COLA 
requirement was in subsection (2). Former ORS 237.060(1)-(2) (1971). At that 
time, the COLA requirement incorporated the COLA cap by stating, “Prior to 
July 1 each year the allowance which the member is receiving or is entitled to 
receive on August 1 for the month of July shall be multiplied by the percentage 
figure determined, and subject to subsection (1) of this section, the member’s allow-
ance for the next 12 months beginning July 1 adjusted to the resultant amount.” 
Former ORS 237.060(2) (1971) (emphasis added).
212	
Moro v. State of Oregon
1973, ch 695, § 1. In 1989, through an amendment that was 
not intended to impact the substance of the COLA provi-
sion, the legislature removed that cross-reference but moved 
the COLA cap into another subsection. See Or Laws 1989, 
ch 799, § 2 (re-organizing the COLA provision and moving 
the COLA cap); see also Strunk, 338 Or at 221 (noting that 
the “substance” of the COLA requirement and COLA cap 
has “remained unchanged, notwithstanding other interim 
amendments”). The legislature, therefore, intended that the 
COLA requirement would operate together with the COLA 
cap. Further, because the COLA bank merely directs the 
board on how to apply the COLA cap, the COLA bank must 
be interpreted consistently with the COLA cap.
	
Respondents nevertheless argue that, because 
the COLA cap restricts the amount of COLA that employ-
ees can receive, it was intended to benefit employers and 
is therefore distinct from any employee benefit that might 
otherwise be created by the COLA requirement. But that 
argument improperly frames the question.28 As noted, a pro-
vision is most often a term of the PERS contract if the provi-
sion determines the eligibility for, or scope of, a mandatory 
PERS benefit. Regardless of whether the COLA cap benefits 
employers or employees, the COLA cap clearly determines 
the scope of the COLA requirement, and the COLA require-
ment was intended to benefit employees.
	
We conclude, therefore, that the legislature intended 
the COLA requirement to be read with both the COLA cap 
and the COLA bank as determining the overall value of 
the COLA benefit. If the COLA requirement is contractual, 
as we held in Strunk, then the COLA cap and COLA bank 
are also contractual. We therefore read Strunk as providing 
precedential authority for treating the COLA requirement, 
the COLA cap, and the COLA bank of ORS 238.360 (2011) 
as terms of the PERS offer.
	
28  Further, it is improper to assume that the COLA cap benefits only employ-
ers. Whether a particular COLA cap benefits employers or employees depends on 
the alternatives. Employers may benefit from a COLA cap of plus or minus 2% 
if the alternative is a limitless COLA. But at the time the legislature passed the 
COLA cap of plus or minus 2%, the alternative was the existing COLA cap of plus 
or minus 1.5%. Or Laws 1973, ch 695, § 1. The legislative history indicates that 
increasing the COLA cap to plus or minus 2% was intended to benefit employees.
Cite as 357 Or 167 (2015)	
213
	
Given that precedent, respondents ask us to dis-
avow our analysis of the COLA provision in Strunk. As 
the parties seeking disavowal, respondents must “affirma-
tively persuad[e] us that we should abandon that prece-
dent.” Farmers Ins. Co. v. Mowry, 350 Or 686, 692, 261 P3d 
1 (2011). Departing from precedent may be justified “when 
a party affirmatively demonstrates that ‘an earlier case was 
inadequately considered or wrong when it was decided.’ 
” Id. 
at 693. However, departing from prior precedent comes at 
the cost of “predictability, fairness, and efficiency.” Id. As a 
result, “[w]e will not depart from established precedent sim-
ply because the ‘personal policy preference[s]’ of the mem-
bers of the court may differ from those of our predecessors 
who decided the earlier case.” Id. at 698.
	
Respondents contend that this court in Strunk inad-
equately considered the issue of whether the pre-amendment 
COLA provision was part of the PERS contract. We disagree. 
Although the analysis in Strunk is brief, it demonstrates suf-
ficient consideration of the issue. In Strunk, we largely relied 
on the similarities between the pre-amendment COLA pro-
vision and the tax exemption provision at issue in Hughes. 
Strunk, 338 Or at 221. Both provisions set out financial ben-
efits, and both use mandatory wording. Hughes, 314 Or at 
26 (noting that the tax exemption statute stated that PERS 
benefits “ 
‘shall be’ 
” exempt from income taxes (quoting ORS 
237.201 (1989))); ORS 238.360(1) (2001) (stating that the 
board “shall” calculate the COLA and that the COLA “shall 
be” added to the service retirement allowance). Strunk does 
not contain more analysis of that issue, but Hughes con-
tains an extensive analysis of why those factors are salient. 
Hughes, 314 Or at 22-27. The court’s heavy reliance on 
Hughes in Strunk does not mean that the court failed to ade-
quately consider the issue.
	
Respondents further argue that the legislative his-
tory of the COLA provision demonstrates that Strunk was 
wrong at the time that it was decided. When the state began 
offering PERS pension benefits in 1945, that offer included 
no mechanism for automatically adjusting the benefits for 
inflation. Or Laws 1945, ch  401. The service retirement 
allowance calculated at the time of retirement was to remain 
214	
Moro v. State of Oregon
unchanged. Thus, as time went on, inflation diminished the 
purchasing power of the service retirement allowance.
	
In 1963, the legislature attempted to offset those 
losses by authorizing the board to distribute money to 
retirees from investment returns earned in excess of the 
assumed interest rate. Or Laws 1963, ch 608, § 9. The stat-
ute described that plan as a “dividend payment system.” 
Id. The board was not, however, required to make any pay-
ments under that system. Instead, the board had discretion 
whether to do so. Id. (“The board * 
* 
* may distribute * 
* 
* net 
interest received through investment of the fund in excess of 
the assumed rate of interest.” (Emphasis added.)). The sys-
tem was not only discretionary, but it was also conditioned 
on the fund’s investments generating returns in excess of 
the assumed earnings rate. Id. Further, any payments that 
the board made under that system were one-time payments 
that did not affect the retiree’s service retirement allowance 
going forward. Id.
	
That system was in effect from 1964 to 1971. During 
that time, the board authorized one payment per year to 
retirees, in addition to the 12 monthly checks that retirees 
received for their retirement allowance. Those additional 
checks issued under the dividend repayment program were 
known as “thirteenth checks.” See Special Master’s Report 
at 20 (describing the history of the dividend repayment pro-
gram). In 1964, retirees received a thirteenth check equal to 
one month of the retiree’s retirement allowance. Id. at 20-21. 
The checks grew and, by 1971, were equal to 3.5 times the 
retiree’s monthly retirement allowance. Id. at 21. Those 
checks, however, did not increase a retiree’s service retire-
ment allowance and thus did not have the effect of “com-
pounding” that the later COLA provision had.
	
In 1971, the legislature repealed the discretion-
ary dividend payment system and enacted the COLA sys-
tem currently at issue. Or Laws 1971, ch 738, §§ 8, 11. As 
noted above, the 1971 COLA provision imposed a COLA cap 
of plus or minus 1.5%. Or Laws 1971, ch 738, § 11(1). The 
1973 legislature increased the COLA cap to plus or minus 
2%. Or Laws 1973, ch 695, § 1. Other than that increase in 
Cite as 357 Or 167 (2015)	
215
the COLA cap, the COLA system enacted in 1971 is sub-
stantively the same as the pre-amendment COLA provision 
in effect until the 2013 amendments at issue in this case. 
Despite enacting the COLA statute, the legislature still 
provided discretionary ad hoc adjustments to service retire-
ment allowances from time to time, to help protect the pur-
chasing power of the retirement allowances.
	
Respondents contend that that legislative history 
establishes that the COLA system is not a term of the PERS 
contract. According to respondents, the original dividend 
payment system was not a term of the contract for two rea-
sons. First, the benefits were discretionary rather than 
mandatory. Second, the benefits were gratuitous, because 
they were new benefits granted to individuals who were 
already retired and who thus could not have accepted an 
offer for new benefits by working. Respondents then argue 
that the legislature intended the COLA system to be simply 
a continuation of the discretionary and gratuitous dividend 
payment system.
	
The conclusions that respondents draw from the 
legislative history do not withstand scrutiny. Respondents 
are correct that the original dividend system was discretion-
ary and gratuitous, but they are incorrect that the COLA 
system is simply a continuation of the earlier scheme. The 
COLA system is materially distinct from the dividend pay-
ment system. First, in contrast to the discretionary dividend 
payment system, the COLA system is mandatory. Under the 
pre-amendment COLA system, the board was required to 
determine the percentage increase or decrease in the cost of 
living for the previous year based on the CPI and required 
to adjust service retirement allowances accordingly. ORS 
238.360(1) (2011) (so stating). By enacting the COLA sys-
tem, the legislature made the board’s function ministerial 
and the application of the COLA automatic.
	
Second, the fact that the pre-amendment COLA 
system required employers to fund new benefits for some 
individuals who were already retired does not mean that 
the COLA benefit was not part of the employers’ offer to 
current or future employees who could accept the offer by 
working. Instead, it means only that the employers’ offer of 
216	
Moro v. State of Oregon
COLA benefits was not accepted by the individuals who had 
already retired and, therefore, that those retirees did not 
have a contractual right to the COLA. There is no doubt that 
one of the goals of the COLA statute was to benefit then-cur-
rent retirees. But that goal is not inconsistent with the goal 
of also providing greater financial benefits (and an incentive 
to begin or continue employment) to individuals who had 
not yet retired and who could accept a pension offer that 
included COLA benefits.
	
Further, despite enacting the COLA system in 1971, 
the legislature continued to make additional discretionary 
ad hoc payments during periods of particularly high infla-
tion. As a result, employees could reasonably expect that the 
COLA statute codified some minimum automatic protection 
of the purchasing power of their future benefits that was 
separate from any discretionary and gratuitous ad hoc ben-
efits that the legislature might otherwise provide.
	
Other material distinctions support our conclusion 
that the COLA benefits were not merely a continuation of 
the discretionary dividend payment benefits. For example, 
whereas the dividend payments were supplemental pay-
ments that had no effect on how the board calculated the ser-
vice retirement allowance, the COLA is not a supplemental 
payment and instead directly adjusts the service retirement 
allowance itself. ORS 238.360(1) (2011) (“Prior to July 1 
each year the allowance which the member or the member’s 
beneficiary is receiving or is entitled to receive on August 1 
for the month of July shall be multiplied by the percent-
age figure determined, and the allowance for the next 12 
months beginning July adjusted to the resultant amount.”). 
Therefore, the board, as directed by statute, incorporates 
the COLA into the formula used for determining each retir-
ee’s service retirement allowance, and, after multiplying by 
the appropriate interest rate, the “resultant amount” is the 
“allowance.”
	
Additionally, the legislature funded the COLA 
increases through current employer contributions rather 
than rely on investment returns that exceed the assumed 
interest rate in given year, which had been used to fund the 
dividend payments. ORS 238.360(4) (2011) (COLA increases 
Cite as 357 Or 167 (2015)	
217
paid by employer). Those employer contributions are actu-
arially determined in an effort to prefund an employee’s 
service retirement allowance before the employee retires. 
See Strunk, 338 Or at 160 (stating that employer contribu-
tion rates are based in part on “the PERS actuary’s best 
estimate of the amount needed to pay service retirement 
allowances to current members in the future”). The COLA, 
as noted above, is part of the service retirement allowance 
employees will receive during their retirement. In fact, the 
COLA is one of the actuarial assumptions that the board 
uses to project the service retirement allowance of cur-
rent employees and determine the employer contribution 
rates. See, e.g., Oregon Public Employees Retirement System 
Actuarial Valuation 65 (Dec 13, 2013) (listing the statutory 
“Cost-of-Living Adjustments” as an actuarial assumption); 
see also id. at 21, 39 (noting that employer contributions are 
based on actuarial assumptions). As a result, unlike the div-
idend payment program, employers pay for benefits under 
the COLA system in exactly the same manner as the other 
components of the service retirement allowance.
	
We therefore reject respondents’ reading of the leg-
islative history of the COLA provisions and conclude that 
nothing to which we have been directed by respondents 
undermines our prior conclusion in Strunk that the COLA 
is a term of the PERS offer.29
	
Finally, respondents argue that, even if Strunk 
controls and this court applies that decision here, Strunk 
reaches only Tier One and Tier Two members, under ORS 
238.360 (2011), and should not be extended to OPSRP mem-
bers, under ORS 238A.210 (2011). Respondents are correct 
that Strunk does not address OPSRP members directly. In 
arguing that OPSRP members are distinct from Tier One 
and Tier Two members, respondents do not rely on differ-
ences in the COLA statutes applicable to each category of 
	
29  That conclusion is consistent with federal law holding that a COLA is a 
term of a pension contract protected under ERISA. See, e.g., Hickey v. Chicago 
Truck Drivers Union, 980 F2d 465, 469 (7th Cir 1992) (“A participant’s right to 
have his basic benefit adjusted for changes in the cost-of-living accrued each year 
along with the right to the basic benefit. A participant’s entitlement to his or her 
normal retirement benefit included, as one component, the right to have the ben-
efits adjusted pursuant to the COLA provision.”).
218	
Moro v. State of Oregon
members. As noted above, the COLA statute applicable to 
OPSRP members is substantially similar to the COLA stat-
ute applicable to Tier One and Tier Two members, except 
that OPSRP members do not have access to the COLA bank. 
Compare ORS 238.360 (2011) (providing COLA benefits to 
Tier One and Tier Two members) with ORS 238A.210 (2011) 
(providing COLA benefits to OPSRP members). Instead, 
respondents rely on a reservation of rights provision, ORS 
238A.470, that the legislature applied to OPSRP members 
but not to Tier One and Tier Two members. That provision 
states:
	
“The Legislative Assembly may change the benefits 
payable to [OPSRP members] * 
* 
*, as long as the change 
applies only to benefits attributable to service performed 
and salary earned on or after the date the change is made.”
ORS 238A.470.
	
We have not had occasion to interpret ORS 238A.470. 
Respondents interpret the provision as setting up a distinc-
tion between prospective and retrospective changes to ben-
efits. According to respondents, the reservation of rights 
allows the legislature to make only prospective changes to 
benefits that are “attributable to service performance and 
salary earned,” ORS 238A.470, and therefore limits the leg-
islature’s ability to make retrospective changes to those ben-
efits. Respondents further contend that that limitation does 
not apply to benefits that are not “attributable to service per-
formance and salary earned,” id., and that the legislature is 
free to make any changes to such benefits, even retrospec-
tive changes. Respondents then argue that COLA benefits 
for OPSRP members are attributable to the CPI and are not 
attributable to service performed or salary earned. Under 
that reading, the legislature reserved the right to make any 
change, without limitation, to the OPSRP COLA benefit. A 
consequence of that reasoning is that any promise contained 
in the pre-amendment COLA provision would be illusory, and 
therefore not contractual, because the legislature retained 
the discretion to retrospectively eliminate the benefit.
	
Respondents’ argument does not fit the word-
ing of the reservation of rights provision set out in ORS 
238A.470. In the context of that provision, the phrase “as 
Cite as 357 Or 167 (2015)	
219
long as” means “provided that,” Webster’s Third New Int’l 
Dictionary 129 (unabridged ed 2002), and serves the same 
function as the phrase “if and only if,” Rodney Huddleston 
and Geoffrey K. Pullum, The Cambridge Grammar of the 
English Language 758 (2002). As a result, the legisla-
ture reserved the right to change benefits if and only if 
the change applies to benefits “attributable to service per-
formed and salary earned on or after the date the change 
is made.” ORS 238A.470. If COLA benefits are not “attrib-
utable to service performed and salary earned,” as respon-
dents contend, then ORS 238A.470 would not authorize 
the legislature to make any changes to the COLA benefit, 
whether prospective or retrospective.
	
Regardless, COLA benefits are “attributable to 
service performed,” and therefore, under the only plausible 
reading of ORS 238A.470, they may be changed only pro-
spectively. A benefit is attributable to service performed if 
the employee acquires a right to that benefit as a result of 
service performed. In that sense, the benefit is payable to 
the OPSRP member because of the service that the member 
performed. Respondents’ position confuses the rate of the 
benefit and the right to receive the benefit. The rate of the 
benefit is set by the combination of the CPI and the COLA 
cap, but the employee’s right to receive the benefit is a result 
of the service performed.
	
As a result, we conclude that the pre-amendment 
COLA provisions are terms of the PERS contract for each 
category of PERS members, whether Tier One, Tier Two, or 
OPSRP.
3.  What obligations do those terms provide?
	
Because the 1991 and 1995 offsets are not part 
of the PERS contract or otherwise capable of legislative 
impairment, we do not need to consider those provisions 
further. But the pre-amendment COLA statutes are part of 
the PERS contract. As a result, we turn now to identify-
ing the participating employers’ obligations under the PERS 
contract. “It is those obligations that set the conditions that 
the legislature may not in the future alter without conse-
quence.” Strunk, 338 Or at 201.
220	
Moro v. State of Oregon
	
As discussed above, the state Contract Clause pro-
hibits laws impairing obligations that arise from contracts 
formed before the law’s effective date. PERS members accept 
their employers’ offers of PERS benefits by rendering ser-
vices to their employers. Like the employee in Thomas who 
repeatedly accepted his employer’s continuing offer of salary 
each day that he worked, PERS members repeatedly accept 
their employers’ PERS offers by continuing to work and 
thereby earn additional contractual rights to PERS bene-
fits for that additional work. For example, if an employer 
offers, and continues offering, two PERS members the same 
compensation package, including PERS benefits, then—
assuming all other things are equal—the employee who 
works longer will have a contractual right to a larger retire-
ment benefit under PERS.
	
This court relied on Thomas, and applied the 
same analysis, to assess the PERS tax exemption provi-
sion in Hughes. 314 Or at 29 n 33 (citing Thomas, 143 Or 
41). Because all PERS offers before October 1991 included 
a tax exemption benefit, employees who had rendered ser-
vices before October 1991 had accepted that offer and had 
accrued a contractual right to tax-exempt PERS benefits. 
Id. at 29. That acceptance, however, protected only the part 
of the service retirement allowance that was earned before 
the exemption was repealed in October 1991. Id. Therefore, 
in Hughes, by the time that the legislature repealed the 
PERS tax exemption, PERS members already had a con-
tractual right to their accrued service retirement allowance 
that would not be subject to state income taxes, even though 
the employees had not yet retired and did not yet know the 
value of their service retirement allowance.
	
Similarly, in this case, by the time that the leg-
islature enacted SB 822 and SB 861, modifying the pre-
amendment COLA provisions, PERS members already had 
a contractual right to their accrued retirement benefits that 
would be subject to the pre-amendment COLA. Hughes, 
therefore, establishes a contractual obligation applicable in 
this case: Members are entitled to have the pre-amendment 
COLA applied to accrued PERS benefits earned before the 
COLA amendments went into effect.
Cite as 357 Or 167 (2015)	
221
	
The remaining question is whether the participat-
ing employers’ obligations extend beyond that baseline, viz., 
whether the participating employers were prohibited from 
revoking the offer of the pre-amendment COLA benefits. 
If the employers are required to continue offering the pre-
amendment benefits, then members might be allowed to 
accept that offer on a continuing basis by performance until 
they retire and to accrue additional retirement benefits sub-
ject to the pre-amendment COLA.
	
Our case law has not consistently answered that 
remaining question.30 As noted, Hughes allowed the employ-
ers to revoke the offer of tax-exempt PERS benefits for future 
work after finding no legislative intent to make the offer 
irrevocable. Hughes, 314 Or at 28 (“The statute does not, 
however, refer to PERS retirement benefits that may accrue 
in the future. Had it chosen to do so, the legislature could 
have dealt with future benefits, but it did not.”). Although the 
PERS members had accrued a right to receive, at retirement, 
a tax-exempt service retirement allowance for the years that 
they had worked before the tax exemption was repealed, the 
right that they accrued did not require the employers to 
continue offering tax-exempt service retirement allowances. 
For that reason, participating employers could change, and 
thus revoke, the offer of tax-exempt PERS benefits. Id. at 29 
(“[T]he state promised that all PERS retirement benefits 
that have accrued or are accruing for work performed so long 
as former ORS 237.201 remained in effect * 
* 
* are exempt 
from state and local taxation forever. * 
* 
* [But the] state has 
no contractual obligation not to tax unaccrued PERS retire-
ment benefits for work performed after the effective date of 
the Act[.]”). Revoking the offer of tax-exempt PERS benefits, 
however, precluded only the accrual of additional tax-exempt 
service retirement allowances. Employees who accepted the 
PERS offer before the repeal and who additionally accepted 
the PERS offer after the appeal would therefore receive a 
	
30  Other courts similarly have struggled with this issue. See McGrath v. 
Rhode Island Retirement Bd., etc., 88 F3d 12, 17 (1st Cir 1996) (collecting cases 
and stating that”[t]hough the principle that a pension plan represents an implied-
in-fact unilateral contract is fairly well settled and has been applied repeatedly to 
state and municipal pension plans, there is significant disagreement about when 
contractually enforceable rights accrue under such plans” (internal citations and 
footnote omitted)).
222	
Moro v. State of Oregon
service retirement allowance that was only partially exempt 
from state taxes.
	
We applied a similar analysis in Strunk, which 
upheld PERS amendments that affected the rate at which 
retirement benefits would accrue for only future work. See, 
e.g., 338 Or at 193 (rejecting “claims that the redirection of 
PERS members’ future contributions to the IAP, as set out 
in the 2003 PERS legislation, either breaches or impairs 
a contractual obligation of the PERS contract” (emphasis 
added)); id. at 213 (affirming amendments to “discontinue 
permitting PERS members to contribute to their variable 
accounts”). The court in Strunk recognized that an offer for 
a particular PERS benefit could be irrevocable only if the 
irrevocability is an express term of the offer. See id. at 192 
n 40 (“The predicate question—which we determine to be 
dispositive in these cases—is whether the contract offer that 
the particular pension plan presents contains such a prom-
ise, i.e., a promise that extends over the life of a covered 
member’s service.” (First emphasis added; second emphasis 
in original.)); see also Restatement § 25 (“An option contract 
is a promise which meets the requirements for the formation 
of a contract and limits the promisor’s power to revoke an 
offer.”); Restatement §  87(1)(a) (“An offer is binding as an 
option contract if it * 
* 
* is made irrevocable by statute.”). 
The court in Strunk found no such words.
	
This court, nevertheless, reached the opposite con-
clusion in OSPOA, 323 Or 356, which was decided after 
Hughes but before Strunk. The court in OSPOA concluded 
that an offer for pension benefits is irrevocable not because 
the irrevocability was an express term of the offer, but 
because the irrevocability was an implied term of the offer. 
According to OSPOA, a right to pension benefits, includ-
ing PERS benefits, “vest[s] on acceptance of employment[,] 
* 
* 
* with vesting encompassing not only work performed 
but also work that has not yet begun.” Id. at 371 (emphasis 
added). In reaching that conclusion, the court in OSPOA 
relied extensively on Taylor, in which this court had found 
an offer for pension benefits to be impliedly irrevocable as 
to an employee who attempted to participate in the pen-
sion plan. See id. at 368 (“ 
‘The adoption of the pension plan 
was an offer for a unilateral contract. Such an offer can be 
Cite as 357 Or 167 (2015)	
223
accepted by the tender of part performance. * 
* 
* [P]lain-
tiff’s tender of [part performance] terminated defendants’ 
power to revoke the offer[.]’ 
” (Quoting Taylor, 265 Or 445, 
452-53.)).
	
Taylor, however, is distinguishable from both 
OSPOA and this case. Taylor addressed the vesting of pen-
sion benefits that had already accrued. In Taylor, a correc-
tions officer was eligible to participate in her employer’s pen-
sion plan, which required employees to work for 20 years 
before vesting. 265 Or at 450.31 The employee tendered her 
salary contributions after her first year of eligibility, but 
her employer refused to receive them and then amended the 
pension ordinance to exclude corrections officers from the 
plan. Id. This court recognized the potential problem when 
an offer for a unilateral contract proposes an acceptance that 
takes time to complete. When the performance necessary to 
accept the offer takes time to complete, there is a concern 
that the offering party will revoke the offer after receiving 
partial performance but before receiving the complete per-
formance necessary to form the unilateral contract.32
	
To address that concern, this court held in Taylor that, 
because of the time that it would take the employee to vest 
the benefits that she should have accrued, the offer contained 
an implied term that prevented the employer from revoking 
the employee’s opportunity to vest those benefits. Id. at 452. 
That holding is consistent with rules of general contract law 
that an offer is impliedly irrevocable if the invited form of 
acceptance takes time to complete and the accepting party is 
attempting to complete the acceptance. See Restatement § 45 
(describing the formation of an implied option contract). That 
type of implied irrevocability might apply, for example, if it 
takes an employee a year to satisfy the conditions necessary 
for a retention bonus. See, e.g., Walker v. American Optical 
	
31  See also Multnomah Cnty., Or, Ordinance No. 25 (July 10, 1969) (describ-
ing eligibility for pension) (provided in Respondent’s Answering Brief at 9, Taylor 
v. Mult. Dep. Sher. Ret. Bd., 11 Or App 488, 502 P2d 601 (1972)).
	
32  See Lord, 1 Williston on Contracts § 5:13 at 987 (“As a theoretical matter, 
when an offeror makes an offer to enter into a unilateral contract, he or she 
should be free to withdraw the offer at any time until performance has been com-
pleted by the offeree. However, great injustice may arise if the offeror’s power of 
revocation continues so long.”).
224	
Moro v. State of Oregon
Corp., 265 Or 327, 330-31, 509 P2d 439 (1973) (assessing the 
formation of a retention bonus contract).
	
None of the claims in OSPOA, however, involved 
conditions that took time to complete, such as the vesting 
requirement in Taylor. OSPOA, nevertheless, relied on 
Taylor and treated all pension offers as irrevocable, rea-
soning that participating employers “promised a pension 
benefit that plaintiffs could realize only on retirement with 
sufficient years of service, that is, after rendering labor for 
the state. Plaintiffs accepted that offer by working.” OSPOA, 
323 Or at 374 (emphasis in original). But OSPOA’s analy-
sis establishes only that PERS is an offer for a unilat-
eral contract. As discussed above, a unilateral contract is 
always formed only after the accepting party has completed 
the performance sought by the offering party. The fact 
that PERS is a unilateral contract simply means that the 
employee is not contractually bound to carry out some future 
performance—that is, there is nothing in the terms of the 
PERS contract obligating the employee to continue working 
for the employer.33 But the implied term of irrevocability 
recognized in Taylor does not apply to all offers of unilat-
eral contracts; instead, it applies to only those offers that 
are accepted by performance that takes time to complete. 
Taylor, 265 Or at 452-53.34
	
Unlike the vesting requirement at issue in Taylor, 
the COLA benefit at issue in this case does not impose condi-
tions on acceptance that take time to complete. As discussed 
above, the COLA benefit accrues incrementally as a PERS 
member renders additional service to his or her employer. 
	
33  Other terms of the employment agreement certainly could obligate the 
employee to continue working for a specified period. But no such term is required 
by the PERS contract. And this case does not present facts that would allow us to 
consider how the statutory irrevocability of the COLA benefits would apply to an 
employment contract that sets an employee’s rate of compensation for a specified 
period of time, often called a “term contract.”
	
34  Most employment relationships, including at-will employment relation-
ships, are governed by such unilateral contracts. See, e.g., Lord, 19 Williston on 
Contracts § 54:8 at 368 (“In fact, it has been said that most employment contracts 
are unilateral, and this seems clearly to be the case with an at-will employment 
relationship.” (Footnote omitted.)); Pettit, 63 B U L Rev at 559-60 (“Cases aris-
ing from the employer-employee relationship now comprise the largest and most 
important group of cases in which courts invoke the concept of the unilateral 
contract.”).
Cite as 357 Or 167 (2015)	
225
The member’s work continually and serially completes the 
performance necessary to accrue the benefits attributable to 
that work, thus eliminating the concern of uncompensated 
work that drove this court’s analysis in Taylor.
	
In Strunk, this court attempted to distance itself 
from OSPOA by limiting OSPOA to the specific statutes at 
issue in that case. See Strunk, 338 Or at 191-92 (“[N]othing 
about the court’s interpretation of the statutory provisions 
at issue in OSPOA mandates a conclusion different from the 
one that we have reached after analyzing the text and con-
text of ORS 238.300 (2001).”). But the decision in OSPOA 
did not rely on the wording of the specific statutes at issue 
in that case. Instead, OSPOA prohibited prospective amend-
ments based on a particular view of pension plans that is 
not supported by Taylor and is inconsistent with our earlier 
decision in Hughes, with our later decision in Strunk, and 
with the analysis set out above. As a result, we go a step 
further than we did in Strunk and disavow the reasoning 
that we applied in OSPOA.35
	
Even under the reasoning of Hughes and Strunk, 
participating employers may nevertheless be required to 
continue to offer the pre-amendment COLA benefit if the 
irrevocability is an express term of the contractual rights 
that the employees accrued before the effective dates of SB 
822 and SB 861. Petitioners contend that the employers are 
obligated to continue offering the pre-amendment COLA 
benefits to all employees who began to work when those ben-
efits were in effect. In support of that position, they point 
to numerous places where the pre-amendment COLA provi-
sions use mandatory language, such as “shall.” See, e.g., ORS 
238.360(1) (2011) (directing that the member’s retirement 
service allowance “shall be multiplied by the percentage fig-
ure determined, and the allowance for the next 12 months 
beginning July 1 adjusted to the resultant amount”).
	
The legislature’s use of “shall,” without more, is 
plainly insufficient to establish the irrevocability of an offer. 
Although this court has considered the use of “shall” as a 
	
35  Our holding disavows only the reasoning applied by this court in OSPOA. 
Our holding does not reach, and we have not been asked to consider, the prec-
edential value of OSPOA as it relates to the specific benefits at issue in that case.
226	
Moro v. State of Oregon
factor that can weigh in favor of finding a statutory contract 
offer, see, e.g., Hughes, 314 Or at 23 (applying statute pro-
viding that PERS benefits “shall be exempt” from Oregon 
income tax (quoting former ORS 237.201 (1989)), the use of 
“shall,” without more, has not been used to establish irrevo-
cability, see, e.g., id. at 29 (allowing participating employers 
to prospectively revoke their offer of tax-free PERS benefits). 
Consider, for instance, an employer’s promise that it “shall” 
pay a potential employee $3,000 per month. That promise 
does not expressly provide that the employer will not change 
the employee’s compensation in the future, nor can we imply 
from the word “shall” a promise to maintain that salary 
without change.
	
The insufficiency of that argument is reinforced by 
the concerns that we set out at the beginning of our Contract 
Clause analysis—namely, that legislatures generally do not 
intend to bind future legislatures. An irrevocable statu-
tory offer—particularly one that could involve potentially 
decades of new and significant financial liabilities—would 
deviate widely from that general presumption.
	
We therefore reject petitioners’ claim that the 
COLA is an irrevocable term of the PERS offer that cannot 
be changed prospectively. We agree with respondents that 
the COLA provisions do not include a promise to apply any 
specific COLA to increase retirement benefits for work that 
is yet to be performed.
4.  Has the state impaired an obligation of the contract?
	
As we have just discussed, participating employers 
are contractually obligated to provide members with the 
pre-amendment COLA benefits for benefits earned before 
the amendments became effective. Although the participat-
ing employers can change the COLA offer as to benefits that 
might accrue in the future, they cannot change the COLA 
contract as to benefits that have already accrued.
	
SB 822 reduced the COLA cap from plus or minus 
2% to plus or minus 1.5% for 2013, and, beginning in 2014, 
SB 861 eliminated the COLA cap and bank and imposed 
a fixed rate of 1.25% on benefits received by retired mem-
bers up to $60,000 and a fixed rate of 0.15% on retirement 
Cite as 357 Or 167 (2015)	
227
income in excess of $60,000. SB 822 and SB 861 apply those 
new COLA rates to all PERS benefits, without regard to 
whether the benefits were earned before the effective dates 
of those provisions. Because SB 822 and SB 861 would apply 
to benefits earned before their effective dates, petitioners 
contend that SB 822 and SB 861 retrospectively modify and 
reduce the participating employers’ contractual obligations 
with respect to COLA benefits and therefore impair obliga-
tions of their PERS contracts. See Strunk, 338 Or at 170 (“As 
to the determination whether newer legislation amounts to 
an impairment of a preexisting statutory contractual obli-
gation, the court focused on whether the legislation would 
change or eliminate the state’s obligation under that con-
tract.” (citing Eckles, 360 Or at 399-400.)).
	
Respondents dispute the assertion that the COLA 
amendments necessarily will reduce the benefits to PERS 
members (and the obligations of the participating employ-
ers) and argue that SB 822 and SB 861 might, in fact, 
benefit some PERS members. The pre-amendment COLA 
depends on the Portland CPI and is variable, although it 
cannot go below the service retirement allowance or the 
OPSRP pension calculated at the time of a member’s retire-
ment. The amended COLA provision in SB 861 is a fixed 
COLA at 1.25% and does not depend on the Portland CPI. 
Respondents assert that it is possible that, under certain 
economic conditions where the cost of living decreases or 
increases a small amount only, some petitioners might be 
better off under the amended COLA.
	
We reject respondents’ argument, because the record 
in this case does not support it. In the evidentiary hearing 
before the special master, the parties largely agreed on the 
appropriate economic assumptions to use when projecting 
the effect of SB 822 and SB 861 and the present value of the 
changes. Although the parties reached different conclusions 
as to the extent of the adverse financial effect on the benefits 
PERS members will receive, they agreed that the effect will 
be adverse. The contrary theoretical possibilities asserted 
by respondents are insufficient to overcome the evidence 
in the record. As a result, we agree with petitioners that 
SB 822 and SB 861 impair the participating employers’ 
contractual obligations to apply the pre-amendment COLA 
228	
Moro v. State of Oregon
provisions to PERS benefits earned before the effective dates 
of those amendments.
	
Respondents further invite this court to incorporate 
a substantiality requirement into our standard for deter-
mining whether an asserted “impairment” is constitution-
ally cognizable. The impairment identified in this case—the 
application of the COLA amendments to benefits earned 
before the amendments—is, according to respondents, an 
insubstantial impairment and therefore should not be pro-
tected by the state Contract Clause.
	
In Strunk, the court stated expressly that whether 
the state Contract Clause protects parties from only “sub-
stantial” impairments remained an open question. Strunk, 
338 Or at 206. The court did not reach the legal question of 
whether to impose a substantiality requirement, because 
the court found that, even if there were a substantial-
ity requirement, it would be satisfied in that case. Id. at 
206-07.
	
We encounter the same circumstance here. The 
record does not establish exactly how much money PERS 
members would lose if the COLA amendments were allowed 
to apply retrospectively. However, the record establishes that 
the combined effect of COLA amendments in SB 822 and 
SB 861 likely would be substantial. The pre-amendment 
COLA provision generally would add 2% per year to the 
value of a member’s retirement benefit. With annual com-
pounding, by the tenth year of retirement, the COLA can 
make up about 20% of the retirement benefit (setting aside 
any tax offset payments). And by the fourteenth year of 
retirement, under the same conditions, the COLA can make 
up about 30% of the retirement benefit. The record estab-
lishes that the COLA amendments would reduce petitioners’ 
cumulative retirement benefits by about 8 to 10%. The 
record is therefore sufficient to establish that the impair-
ment in this case is substantial.
	
Finally, respondents contend that, in this case, 
impairment is justified as reasonable and necessary for an 
important public purpose. Respondents ask us to incorpo-
rate the federal public purpose defense into the application 
Cite as 357 Or 167 (2015)	
229
of the state Contract Clause. Under federal law, the pub-
lic purpose defense is an extension of the reserved powers 
doctrine that we described earlier. See 357 Or at 195 n 16. 
Under that standard, a sufficient public purpose may justify 
the impairment of a state contract in two circumstances. 
First, the state can impair a contract if adhering to it would 
require the state to “surrender[ 
] an essential attribute 
of its sovereignty.” United States Trust Co., 431 US at 23. 
Although it is not clear exactly what those attributes are, it 
is clear that they do not include that state’s power to “bind 
itself in the future exercise of the taxing and spending pow-
ers.” Id. at 24.
“Whatever the propriety of a State’s binding itself to a 
future course of conduct in other contexts, the power to 
enter into effective financial contracts cannot be ques-
tioned. Any financial obligation could be regarded in theory 
as a relinquishment of the State’s spending power, since 
money spent to repay debts is not available for other pur-
poses. Similarly, the taxing power may have to be exercised 
if debts are to be repaid. Notwithstanding these effects, the 
Court has regularly held that the States are bound by their 
debt contracts.”
Id. Because the case before us involves the financial obliga-
tions of public employers, this case “as a threshold matter 
may not be said automatically to fall within the reserved 
powers that cannot be contracted away.” Id. at 24-25.
	
Second, laws that substantially impair contracts 
may nevertheless be valid if the impairment is “reasonable 
and necessary to serve an important public purpose.” Id. at 
25. That requires, to some extent, balancing various policy 
considerations, but it is a balancing with the scales weighed 
against allowing the state to impair its own contractual 
obligations. “[I]n reviewing economic and social regulation, 
* 
* 
* courts properly defer to legislative judgment as to the 
necessity and reasonableness of a particular measure.” Id. 
at 22-23. Nevertheless,
“complete deference to a legislative assessment of rea-
sonableness and necessity is not appropriate because the 
State’s self-interest is at stake. A governmental entity can 
always find a use for extra money, especially when taxes do 
not have to be raised. If a State could reduce its financial 
230	
Moro v. State of Oregon
obligations whenever it wanted to spend the money for what 
it regarded as an important public purpose, the Contract 
Clause would provide no protection at all.”
Id. at 26. In United States Trust Co., the United States 
Supreme Court considered whether a more targeted mod-
ification to the contract would suffice and whether the 
states could have achieved the same policy goals through 
alternative means that avoided modifying the contracts 
completely. Id. at 30. According to the Court, “a State is not 
completely free to consider impairing the obligations of its 
own contracts on a par with other policy alternatives.” Id. 
at 30-31.
	
In this case, if we were to adopt that public pur-
pose defense, it would fail because respondents cannot elim-
inate, and largely do not consider, any alternative means for 
achieving the very loosely defined policy goals put forward. 
Those goals broadly relate to providing public agencies with 
more money to provide better public services. The briefing 
focuses on public safety and education.
	
Respondents’ desire for additional funding for those 
services is not tied to any specifically identifiable deficien-
cies resulting from the current funding levels. Increasing 
the quality of public safety and education services is always 
desirable. Those are certainly appropriate targets of public 
concern and legislative action. Respondents point out that 
the COLA amendments will allow public employers to hire 
more teachers, police officers, and others needed to carry out 
those important functions. But the inquiry under the pro-
posed public purpose defense is not what the agencies can 
do with additional funding; instead, the inquiry under the 
proposed public purpose defense is whether the current level 
of funding is so inadequate as to justify allowing the state to 
avoid its own financial obligations. The record that respon-
dents have presented fails to establish that inadequacy.
	
Moreover, even if respondents had identified specific 
public service deficiencies resulting from the current level of 
funding, they have not demonstrated that those deficiencies 
could not be remedied through funding from other sources. 
Respondents assert that the state’s ability to generate tax 
revenue is limited because it must keep taxes sufficiently 
Cite as 357 Or 167 (2015)	
231
low and services sufficiently high to avoid discouraging peo-
ple and businesses from moving to other states—those peo-
ple and businesses are the base that the state draws taxes 
from. But respondents never compare Oregon’s tax burden 
to other states. The record establishes that, in Oregon, state 
taxes per capita are 11.8% below the national average. And 
as a percent of gross state product, Oregon’s taxes per capita 
are 14.8% below the national average. See Strunk, 338 Or at 
207 (rejecting a similar public purpose argument because, 
among other reasons, “ 
‘Oregon’s state tax burden currently 
is approximately .7 percent less than the national average’ 
” 
(citation omitted)). Assuming, without deciding, that we 
could recognize a public purpose defense in appropriate cir-
cumstances, respondents have failed to demonstrate those 
circumstances here. We therefore need not adopt respon-
dents’ public purpose defense.
5.  Disposition of COLA amendments
	
Although we conclude that the legislature cannot 
change the COLA retrospectively, for PERS benefits already 
earned, it can change the COLA prospectively, for benefits 
earned by PERS members on or after the effective date of 
the amendments. The 2013 PERS amendments do not dis-
tinguish between those prospective and retrospective appli-
cations. That raises the issue of whether this court must 
hold the amendments void in whole or only to the extent that 
they apply retrospectively to benefits already earned.
	
In previous cases involving state Contract Clause 
challenges, we have applied the prospective/retrospective 
distinction, and, although concluding that retrospective 
application was unconstitutional, we have nevertheless 
upheld the statutes at issue for purposes of prospective 
application, even when the statutes themselves failed to dis-
tinguish between prospective and retrospective applications. 
See, e.g., Hughes, 314 Or at 31 (concluding that the elim-
ination of an obligation not to tax PERS benefits violated 
the Contract Clause only “as it relates to PERS retirement 
benefits accrued or accruing for work performed before the 
effective date of that [law]”); Eckles, 306 Or at 399 (allowing 
otherwise violative statute to be applied “[a]s to subsequent 
contracts, including renewals of [existing] contracts”).
232	
Moro v. State of Oregon
	
We reach the same result in this case. The prospec-
tive application of the 2013 amendments is still consistent 
with the legislative intent behind the amendments, because 
it provides employers with long-term savings, although less 
savings than an application that would also apply retrospec-
tively. Therefore, PERS members who have earned a con-
tractual right to PERS benefits by working for participating 
employers both before and after the relevant effective dates 
will be entitled to receive during retirement a blended COLA 
rate that reflects the different COLA provisions applicable 
to benefits earned at different times.36
	
Additionally, we hold that the supplemental pay-
ments provided for in SB 861 cannot be severed from the 
unconstitutional application of SB 861 and are, therefore, 
void in whole, even though the supplemental payment provi-
sion itself is not unconstitutional. Through ORS 174.040, the 
legislature expressed its intent that, if a statute is partially 
unconstitutional, then the remaining constitutional parts of 
the statute will “remain in force unless * 
* 
* [t]he remaining 
parts are so essentially and inseparably connected with and 
dependent upon the unconstitutional part that it is appar-
ent that the remaining parts would not have been enacted 
without the unconstitutional part.” ORS 174.040(2); see also 
Outdoor Media Dimensions v. Dept. of Transportation, 340 
Or 275, 300-01, 132 P3d 5 (2006) (illustrating principle); 
Skinner v. Davis, 156 Or 174, 189-90, 67 P2d 176 (1937) (stat-
ing that it is “obvious” that the legislature did not intend for 
those remaining parts with “no application or meaning” to 
continue in full force and effect).
	
As described above, SB 861 provides retired mem-
bers with up to $200 annually in supplemental payments to 
mitigate the impact of the reductions to the COLA benefit 
resulting from the amendments in SB 861. SB 861, § 8. The 
legislature intended the supplemental payments, which were 
to be paid through 2019, to lessen the short-term impact 
	
36  We do not decide, nor have we been asked to decide, the proper manner for 
calculating an appropriate blended rate. See, e.g., ORS 238.364(5) (calculating 
the blended rate resulting from the tax exemption repeal by “divid[ing] the num-
ber of years of creditable service performed before [the repeal of the tax exemp-
tion], by the total number of years of creditable service during which the pension 
income was earned”).
Cite as 357 Or 167 (2015)	
233
that the COLA amendments would have had on currently 
retired members or on members who will retire before 2019. 
Our holding in this case, which allows only the prospec-
tive application of the COLA amendments, already serves 
that function: the COLA rates applied to retired members 
will not be affected at all by the 2013 COLA amendments, 
and the COLA rates applied to active members who retire 
before 2019 will be affected only very minimally. If the sup-
plemental payments were to continue, then the members 
just identified would effectively receive an increase in total 
benefits that the legislature did not intend; by contrast, the 
legislature’s intent in enacting SB 861 was to reduce—not 
to increase—the retirement benefits being paid to those 
members. We therefore hold that the supplemental payment 
provision, SB 861, § 8, cannot be severed from the unconsti-
tutional application of the COLA reductions in SB 861.
B.  Other Claims
	
Nonresident petitioners assert other constitutional 
and statutory arguments challenging the elimination of the 
tax offsets. Most of petitioners’ remaining constitutional 
arguments—under the federal Contract Clause, Article  I, 
section 10, clause 1, of the United States Constitution; and 
the state and federal Takings Clause, Article I, section 18, 
of the Oregon Constitution, and the Fifth Amendment to the 
United States Constitution—are disposed of based on our 
holding above that the tax offsets are not terms of the stat-
utory PERS contract and that the Stovall/Chess settlement 
agreement has not been breached or impaired. See Strunk, 
338 Or at 237-38 (disposing of similar arguments on similar 
grounds).
	
Petitioners also argue that repealing the tax off-
set payments based on state of residence violates the fed-
eral Privileges and Immunities Clause and federal Equal 
Protection Clause. The Privileges and Immunities Clause 
requires “substantial equality of treatment” for both resi-
dents and nonresidents of the taxing state. Austin v. New 
Hampshire, 420 US 656, 665, 95 S Ct 1191, 43 L Ed 2d 530 
(1975). In this case, nonresidents are not subjected to the tax 
that the tax offsets are intended to offset. As a result, pro-
hibiting payment of the tax offsets to nonresidents does not 
234	
Moro v. State of Oregon
upset the substantial equality between residents and non-
residents. For similar reasons, providing the tax offsets to 
only those who must pay the tax does not violate the Equal 
Protection Clause. Residency classifications do not trig-
ger strict scrutiny and are assessed under a rational basis 
review. “The Constitution does not * 
* 
* presume distinctions 
between residents and nonresidents of a local neighborhood 
to be invidious. The Equal Protection Clause requires only 
that the distinction drawn * 
* 
* rationally promote the regu-
lation’s objectives.” Arlington County Board v. Richards, 434 
US 5, 7, 98 S Ct 24, 54 L Ed 2d 4 (1977). Where the objec-
tive is to remedy damages resulting from the imposition of 
Oregon income tax, it is rational to provide that remedy to 
only those who suffer the damages by paying Oregon income 
tax.
	
Finally, petitioner Reynolds argues that eliminating 
the tax offsets for nonresidents violates 4 USC section 114(a), 
which provides, “No State may impose an income tax on any 
retirement income of an individual who is not a resident or 
domiciliary of such State (as determined under the laws of 
such State).” Reynolds contends that removing a tax rebate 
that was paid to nonresidents is the equivalent of impos-
ing an income tax on nonresidents. Regardless of whether 
the tax offsets are tax rebates as to Oregon residents, they 
are not tax rebates as to nonresidents, because nonresidents 
do not pay the tax that the tax offsets would otherwise be 
rebating. Repealing the tax offsets does not remove a tax 
rebate or impose an income tax on nonresidents.
III.  CONCLUSION
	
We recognize the many public policy concerns that 
were the impetus for the 2013 PERS amendments. When 
public employers have to pay higher PERS contribution 
rates without additional funding, they have less money to 
pay for current services provided by police officers, teachers, 
and other employees delivering critical services to the pub-
lic. The legislature’s interest in enhancing those services is 
entirely appropriate.
	
The legislature, however, must pursue those 
objectives consistently with constitutional requirements, 
Cite as 357 Or 167 (2015)	
235
including Oregon’s constitutional prohibition against 
impairing the obligations of contracts. We have concluded 
that the pre-amendment COLA provisions were part of the 
PERS contract and therefore are protected by the state 
Contract Clause. Those provisions have remained largely 
unchanged for 40 years. They were part of the compen-
sation that public employees—many of whom are now 
retired—were promised in exchange for the work that they 
already have performed.
	
We understand that the legislature sought to struc-
ture the COLA changes in a way that was sensitive to the 
effect that those changes would have retirees, by reducing 
the existing COLA the least for retirees with the smallest 
PERS benefits, while reducing the existing COLA the most 
for benefits above $60,000. Those can be appropriate fac-
tors to consider when determining the compensation that 
should be offered in exchange for services, but they do not 
change the employers’ contractual obligations that arose 
when the employers offered retirement benefits that employ-
ees accepted by working for their employers.
	
In summary, we hold that the 1991 and 1995 income 
tax offsets are not part of the PERS contract and that SB 
822 does not impair or breach the Stovall/Chess settlement 
agreement. Therefore, the amendments to the 1991 and 
1995 income tax offsets in SB 822 do not violate the state 
Contract Clause or the other constitutional provisions or 
statutes that petitioners have raised. We further hold that 
SB 822 and SB 861 are constitutionally permissible insofar 
as they apply to benefits that members earn on or after the 
effective dates of those laws. But SB 822 and SB 861 uncon-
stitutionally impair the contract rights of PERS members 
insofar as they apply to benefits that members earned before 
the effective dates of those laws. As a result, PERS members 
who earned benefits subject to different COLA rates will 
receive PERS benefits during retirement that are subject to 
a COLA rate that is blended to account for different COLA 
rates that have been earned.
	
Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 
5, 6, 7, 8, 9, and 10, are declared unconstitutional under 
Article I, section 21, of the Oregon Constitution insofar as 
236	
Moro v. State of Oregon
they affect retirement benefits earned before May 6, 2013. 
Oregon Laws 2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 
(Special Session), are declared unconstitutional under 
Article  I, section 21, of the Oregon Constitution insofar 
as they affect retirement benefits earned before October 
8, 2013. Oregon Laws 2013, chapter 2, section 8 (Special 
Session) is declared void. Petitioners’ requests for relief chal-
lenging Oregon Laws 2013, chapter 53, sections 11, 12, 13, 
14, 15, 16, and 17, are denied.
	
BREWER, J., concurring.
	
Although I concur in the majority’s analysis and 
conclusions, I write separately to emphasize what I believe 
to be the proper framework for the statutory contract inter-
pretation analysis in claims under Article I, section 21, of 
the Oregon Constitution, where the legislature has made 
statutory changes to retirement benefits for members of the 
Public Employees Retirement System (PERS). I will con-
fine my attention to two central determinations under that 
analysis: First, what standards apply for identifying terms 
of the PERS contract; and second, what obligations do those 
terms provide? Because they present the more challenging 
issues in this case, I focus exclusively on the disputed COLA 
benefits.
	
When the PERS system is the subject of judicial 
scrutiny, this court’s role is neither policy-setting nor man-
agerial. Our responsibility is to interpret legislative enact-
ments and the Oregon and United States Constitutions and 
to apply those sources of law to the circumstances presented 
in specific cases. To a significant extent, the strength of 
Oregon’s public pension system rests on policy choices made 
by the other two branches of government and on their polit-
ical will to satisfy prior legislative commitments to active 
members, retirees, and public employers. That said, because 
of mixed and sometimes unclear messages that this court 
has conveyed in some of its prior decisions, we bear a mea-
sure of responsibility for the uncertainty that the other 
branches have faced when, from time to time, they have 
reexamined the benefit structure of the PERS system. What 
the court can do in this case, within the inherent limitations 
Cite as 357 Or 167 (2015)	
237
of the adversary system, is provide more clear guidance 
with respect to the governing legal principles. I commend 
the majority for undertaking to do so.
	
With that acknowledgement, I turn to the question 
of what standards apply for identifying terms of the PERS 
contract. The majority describes an overarching standard 
for identifying the terms of that contract in terms of “unmis-
takability.” See Moro v. State, 357 Or 167, 195, ___ P3d ___ 
(2015) (citing Hughes v. State of Oregon, 314 Or 1, 14, 838 
P2d 1018 (1992) (a government contract will not be inferred 
from legislation that does not unambiguously express an 
intention to create one)); see also Eckles v. State of Oregon, 
306 Or 380, 397-99, 760 P2d 846 (1988), appeal dismissed, 
490 US 1032, 109 S Ct 1928, 104 L Ed 2d 400 (1989) (same).1 
It further concludes that determining whether a particular 
legislative assembly unmistakably intended for a benefit 
to be a term of the PERS contract requires an examina-
tion of statutory text and context. Id. at 203. It then sets 
out two guiding principles for making the determination: 
(1) whether the state’s offer is limited to provisions that 
define eligibility for or the scope of remunerative pension 
benefits, id. at 204; and (2) only mandatory remunerative 
provisions are terms of the state’s offer, id. at 205. The major-
ity then ultimately concludes that the COLA cap and COLA 
bank provisions set out in ORS 238.360(2) and (3) (2011) are 
contractual promises because both provisions confer remu-
nerative benefits and both conferrals are expressed in man-
datory terms. Id. at 214-19. In determining that the COLA 
bank and COLA cap are remunerative benefits, the majority 
focuses on the fact that those benefits are incorporated into 
the statutory formula used to determine a member’s service 
retirement allowance and that they are funded through cur-
rent employer contributions, not employee contributions or 
investment returns. Id. at 216-17.
	
That formulation of the test—as the court has 
applied it in this case and others—strikes me as being more 
of a traditional statutory construction analysis than a true 
	
1  That requirement—lack of ambiguity—applies not only to the existence of 
a contract, but also to “the extent of the obligation created” by the contract, that 
is, whether its terms encompass a particular promise. Eckles, 306 Or at 397.
238	
Moro v. State of Oregon
application of an unmistakability principle. Traditional, but 
with a twist, in that it appears to set out a near-presumption 
that any remunerative pension benefit that is provided in 
mandatory statutory terms will be treated as part of the 
PERS contract. To be sure, the majority refers to statutory 
context, but it focuses primarily on the mandatory and 
remunerative aspects of the statutory text in arriving at its 
conclusion.
	
There is inherent tension in an approach that nods 
at unmistakability but actually seems to require some-
thing else. Undoubtedly, there are instances in which an 
enacting legislature has conferred a remunerative pension 
benefit in mandatory terms without fully considering the 
impact of that decision on the authority of future legisla-
tures.2 Moreover, this court employs a looser standard than 
unmistakability when identifying the terms of a pension 
contract that an employee accepts by entering into public 
employment. Specifically, this court has consistently held 
that a public pension plan is an offer for a unilateral con-
tract that can be accepted by the tender of part performance 
by the employee, even without the employee’s reliance on the 
employer’s promise to provide particular benefits. Hughes, 
314 Or at 20-21; Taylor v. Mult. Dep. Sher. Ret. Bd., 265 Or 
445, 451-52, 510 P2d 339 (1973) (holding that an employee 
had a right to retirement benefits even though the public 
employee “did not undertake employment * 
* 
* with the 
expectation that she would be entitled” to the benefits and 
did not “continue[ 
] her employment * 
* 
* upon the expec-
tation [that] she would receive the advantageous pension 
authorized” by the employer).
	
In short, despite its adherence to the principle of 
unmistakable intent, the majority has followed an approach 
that primarily focuses on the two questions described above: 
(1) does the statute confer a remunerative benefit; and (2) is 
that conferral expressed in mandatory terms? Because the 
answer to both questions in this case is yes, the majority 
	
2  And, as the majority notes, not every statutory usage of the words “shall” 
or “will” means that an enacting legislature meant to forever bind future legis-
latures to a particular benefit package. Sometimes, the use of such words can be 
meant merely to direct an administrative act by an executive agency.
Cite as 357 Or 167 (2015)	
239
concludes that the disputed COLA benefits are terms of the 
PERS contract.
	
None of this should come as a surprise in light of 
this court’s construction of ORS 238.360(1) (2001) in Strunk 
v. PERB, 338 Or 145, 108 P3d 1058 (2005). In fact, unless 
the court were to overrule Strunk, any conclusion other 
than the one that the majority reaches would be difficult 
to explain. Although some tensions persist in the court’s 
analytical framework for identifying terms of the PERS 
contract, I agree with the majority that defendants have 
not shown that this court’s decision in Strunk should be 
disavowed. To the contrary, because, as elaborated below, a 
mandatory remunerative benefit generally is nonforfeitable 
once earned through the performance of work, this court’s 
conclusion that the COLA benefit at issue in Strunk was a 
term of the PERS contract was correct.
	
Things get more complicated when the majority 
answers the next question about ORS 238.360(2) and (3) 
(2011), that is, what obligations did those subsections pro-
vide? As that question is posed in this case, the issue is 
whether the disputed COLA benefits are modifiable and, if 
so, to what extent? In answering that question, the majority 
likens those benefits to the repealed tax exemption at issue 
in Hughes. According to the majority,
“in this case, by the time that the legislature enacted SB 
822 and SB 861, modifying the pre-amendment COLA pro-
visions, PERS members already had a contractual right to 
their accrued retirement benefits that would be subject to 
the pre-amendment COLA. Hughes, therefore, establishes 
a contractual obligation applicable in this case: Members 
are entitled to have the pre-amendment COLA applied to 
accrued PERS benefits earned before the COLA amend-
ments went into effect.”
Id. at 220. Thus, the majority concludes that COLA bene-
fits that accrued before the amendments went into effect are 
not modifiable. In determining whether the disputed benefits 
are prospectively modifiable, the majority sets out two guide-
lines: (1) mandatory language is insufficient to establish 
nonmodifiability, id. at 225-26; and (2) “legislatures gener-
ally do not intend to bind future legislatures,” id. at 226. The 
240	
Moro v. State of Oregon
majority ultimately concludes “that the COLA provisions do 
not include a promise to apply any specific COLA to increase 
retirement benefits for work that is yet to be performed.” Id.
	
Note the juxtaposition here between the analyses 
of whether the COLA benefits are terms of the PERS con-
tract and whether and to what extent they are prospectively 
nonmodifiable benefits. In answering the first question, the 
majority concludes that legislative use of mandatory lan-
guage is critical, whereas, in answering the second, it states 
that the use of such language, “without more, is plainly 
insufficient to establish the irrevocability of an offer.” Id. In 
other words, the majority holds that mandatory language is 
a strong indication that a remunerative benefit is contrac-
tual, but not that a remunerative benefit is prospectively 
nonmodifiable. That distinction is not necessarily an obvi-
ous one. Yet, it has some force.
	
The pivotal inquiry in deciding whether and to 
what extent a PERS benefit is prospectively modifiable is 
one of legislative intent. However, this court has not been 
consistent in assigning significance to a determination of 
actual legislative intent in the modifiability analysis. In 
Oregon State Police Officers’ Assn. v. State of Oregon, 323 Or 
356, 375-76, 918 P2d 765 (1996) (OSPOA), for example, the 
court held—without engaging in a traditional statutory con-
struction analysis—that PERS members irrevocably were 
entitled to the employer “pick-up” benefit of the statutory 
contract upon their initial acceptance of employment. Id. at 
376 (because “[t]he six percent pick-up is an integral part of 
the underlying PERS pension contract,” its unilateral ter-
mination “materially changes that underlying pension con-
tract 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”). In 
Hughes and Strunk, on the other hand, the court examined 
each pertinent statutory provision in detail to determine the 
existence and extent of a legislative promise not to modify 
remunerative benefits. I agree with the majority that it is 
virtually impossible to reconcile those distinct approaches.
	
To resolve the tension in this court’s decisions, it 
is essential to clarify both the role of the text and context 
Cite as 357 Or 167 (2015)	
241
of a statutory promise and the role of general employment 
contract principles in determining the prospective modifi-
ability of a PERS benefit. In Hughes, the relevant statutory 
text drew a line between benefits that had accrued or were 
accruing and those that had not yet accrued. See 314 Or at 
7. That factor played an important role in the court’s analy-
sis. Id. at 20, 27-28. However, in resolving the plaintiffs’ 
claim, this court did not rely solely on that text or its stat-
utory context. In addition, it referred to contract principles 
that it purported to draw, in part, from an Oregon Attorney 
General’s opinion:
“Oregon’s Attorney General articulated this contractual 
nature of pension benefits as follows:
“ 
‘Employee pension plans, whether established by law 
or contract, create a contractually based vested property 
interest which may not be terminated by the employer, 
except prospectively. The employer offers payment of future 
pension benefits as part of compensation for work currently 
performed. Employees accept and earn such future benefits 
by performing current labor.’ 
” 38 Op Att’y Gen 1356, 1365 
(1977).”
Hughes, 314 Or at 20-21 (emphasis in Hughes).
	
Interestingly, the authority that the Attorney 
General cited for the quoted proposition was drawn from 
this court’s decision in Taylor, 265 Or at 454:
“As applied to the present circumstances, [the] plaintiff’s 
tender of the contributions and acceptance of the plan ter-
minated [the] defendants’ power to revoke the offer, and 
[the] plaintiff would be entitled to the benefits of the plan 
if she continued to work for the requisite period necessary 
for retirement.”
That conclusion does not support the proposition for which 
the court in Hughes cited the Attorney General’s opinion.3 
	
3  Nor do principles used in determining whether the obligation of a contract 
has been unconstitutionally impaired directly support the proposition set out 
in Hughes. The question here is not whether a retroactive modification of the 
COLA promises in the PERS contract would be unconstitutional, but whether 
those promises—either by their own terms or based on contract principles—are 
prospectively modifiable. It was the issue of unconstitutionality, not statutory 
contract interpretation, that this court briefly addressed in State ex rel. Thomas 
v. Hoss, 143 Or 41, 21 P2d 234 (1933), a decision to which the majority devotes 
242	
Moro v. State of Oregon
However, there is other authority from this court that does 
support the principle of prospective modifiability set out in 
Hughes.
	
In the absence of an agreement to the contrary, 
an employer generally has the right to modify employment 
benefits—if they have not been earned by previous service. 
State ex rel Roberts v. Public Finance Co., 294 Or 713, 716-19, 
662 P2d 330 (1983). And, an employee ordinarily impliedly 
accepts a modification in the terms of employment by con-
tinuing employment after the modification takes effect. 
Mail-Well Envelope Co. v. Saley, 262 Or 143, 152, 497 P2d 
364 (1972); Page v. Kay Woolen Mill Co., 168 Or 434, 439, 
123 P2d 982 (1942). In short, employment benefits that are 
accredited and accumulate as service is performed generally 
are prospectively modifiable unless the employer’s promise 
is more durable.
	
This court somewhat regularly—if not consistently— 
has applied that general employment contract principle 
in the public employment benefit setting. In Harryman 
v. Roseburg Fire Dist., 244 Or 631, 420 P2d 51 (1966), for 
example, the defendant employer adopted a sick leave pol-
icy that provided for cash in lieu of accumulated sick leave 
upon termination from employment. The plaintiff employee 
had accumulated 47 days of sick leave when the employer 
revoked the policy. Sometime after that revocation, the 
employee was terminated. When the employee requested 
the cash in lieu of his accumulated 47 days of sick leave, the 
employer refused, contending, among other things, that it 
some attention. Moro, 357 Or at 199-201, 220. This court in Hughes mentioned 
Thomas in a footnote:
“In that case, this court held that the plaintiff’s salary earned before the 
effective date of a 1933 law, which reduced employees’ salaries, could not be 
affected by the law because of the Contract Clause of Article I, section 21, 
of the Oregon Constitution. The court held, however, that the then-new law 
could reduce plaintiff’s salary prospectively. 143 Or at 47.”
Hughes, 314 Or at 29 n 33. In its own words, this court in Thomas held that “after 
a salary has been earned[,] the public employee’s right thereto becomes vested 
and cannot be taken away by any legislation thereafter enacted.” Thomas, 143 Or 
at 47. Although that holding recognized the constitutional distinction between 
retroactive and prospective modification of remunerative employment benefits, 
the court in Thomas did not discuss the statutory construction or contract prin-
ciples underlying that distinction, much less consider how to determine whether, 
by its terms, a benefit is prospectively modifiable.
Cite as 357 Or 167 (2015)	
243
was not obligated to pay because the sick leave policy had 
been revoked before the employee’s termination. This court 
held that the employer could not escape its obligation to com-
ply with its promise to pay sick leave:
“When plaintiff entered upon his employment with defen-
dant 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; emphasis added).
	
Later, in Strunk, this court rejected the petitioners’ 
argument that their rights to certain retirement benefits 
became irrevocable when they began employment:
“In their reply brief, petitioners also argue that this court’s 
decision in [Taylor] ‘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 sys-
tem, 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 prom-
ise that extends over the life of a covered member’s service.”
338 Or at 192 n 40 (emphasis removed). Thus, this court 
has applied—in public employment benefit settings gener-
ally and in determining the nature and extent of obligations 
included in the statutory PERS contract—the contract prin-
ciple that remunerative benefits that are earned and accu-
mulate as service is performed are prospectively modifiable 
unless the employer’s initial offer of employment included a 
different promise, for example, a promise that extends over 
the life of the employee’s service.4
	
4  As an example of such a promise, the parties to an employment agreement 
can agree—expressly or by implication—at the outset of employment that the 
employer will not modify or eliminate an employee’s eligibility for benefits in the 
future. In Taylor, the defendant employer adopted a retirement benefits policy 
244	
Moro v. State of Oregon
	
As can be seen from the foregoing discussion, iden-
tifying the nature and extent of an obligation of the PERS 
contract requires the application of statutory construction 
principles because PERS is a legislative contract. That 
inquiry also involves the application of employment contract 
principles, to the extent that a statutory construction analy-
sis does not fully identify the nature and extent of the par-
ties’ rights and obligations. The beginning place, though, 
is the statute itself. See Arken v. City of Portland, 351 Or 
113, 139, 263 P3d 975 (2011), adh’d to on recons sub nom 
Robinson v. Public Employees Retirement Board, 351 Or 404, 
268 P3d 567 (2011) (so holding).
	
To set the stage for the application of those prin-
ciples to the COLA benefits in this case, there must be a 
common understanding of three key concepts: First, what it 
means for a PERS member to be “vested”; second, how bene-
fits are earned; and third, what it means for earned benefits 
to “accrue.” The answers to each of those questions will vary 
depending on the terms of the contract and the nature of the 
promised benefit.
	
As used in the PERS statutes, “vest” is a term that 
refers to a member’s irrevocable eligibility to receive bene-
fits. For Tier One and Tier Two employees, “vested means 
being an active member of the system in each of five calendar 
years.” ORS 238.005(30).5 A member who is not vested can 
suffer a forfeiture of benefits if the conditions for eligibility 
that applied to the plaintiff employee’s position. The employee continued work-
ing for the employer for nine months, at which time the employer amended the 
retirement policy to exclude the employee’s position. When the employee claimed 
the right to participate in the retirement plan, the employer refused, arguing 
that, among other things, the amendment of the retirement policy precluded her 
participation in it. This court disagreed, holding that the policy included an irre-
vocable promise (or offer) that the employee would be able to vest in benefits and 
that the employee had accepted the offer by undertaking to perform the vesting 
condition of long-term service. Taylor, 265 Or at 450-51. Taylor had nothing to do 
with the prospective modifiability of a benefit. Rather, it was about vesting. The 
benefit remained available for eligible employees; it simply was impermissibly 
revoked with respect to the plaintiff.
	
5  For OPSRP members, vested status is more restrictive. ORS 238A.115 pro-
vides, in part:
	
“(1)  Except as provided in subsection (2) of this section, a member of the 
pension program becomes vested in the pension program on the earliest of 
the following dates:
Cite as 357 Or 167 (2015)	
245
are not fulfilled. Thus, for example, ORS 238.095(2) pro-
vides, generally speaking, that “an inactive member ceases 
to be a member of the system if the member is not vested 
and is inactive for a period of five consecutive years.” On the 
other hand, if an inactive member
“who is a vested member of the system and who has not 
attained earliest service retirement age is separated, for 
any reason other than death or disability, from all service 
entitling the employee to membership in the system, the 
member account, if any, of the member shall remain to the 
member’s credit in the fund unless the member elects to 
withdraw it and there shall be paid such death benefits as 
this chapter provides; or a disability retirement allowance 
or, after attaining earliest service retirement age, a ser-
vice retirement allowance, either of which shall consist of 
the allowance provided in ORS 238.300, but actuarially 
reduced based on the member’s then attained age.”
ORS 238.425. Thus, the statutory meaning of “vest” in the 
PERS system refers to a member’s irrevocable eligibility to 
receive retirement benefits. That meaning is consistent with 
the concept of vesting as this court described it in McHorse 
v. Portland General Electric, 268 Or 323, 331, 521 P2d 315 
(1974):
“[I]t would seem that in the situation where the employee 
has satisfied all conditions precedent to becoming eligible 
for benefits under a plan, the better reasoned view is that 
the employee has a vested right to the benefits. This view 
sees the employer’s plan as an offer to the employee which 
can be accepted by the employee’s continued employment, 
and such employment constitutes the underlying consider-
ation for the promise.”
	
Vesting must be distinguished from the earning of 
benefits. To “earn” means “to receive as equitable return for 
work done or services rendered” or to “have accredited to one 
as remuneration.” Webster’s Third New Int’l Dictionary 714 
(unabridged ed 2002). To “remunerate” means to “pay an 
	
“(a)  The date on which the member completes at least 600 hours of ser-
vice in each of five calendar years. The five calendar years need not be con-
secutive, but are subject to the provisions of subsection (3) of this section.
	
“(b)  The date on which an active member reaches the normal retirement 
age for the member under ORS 238A.160.”
246	
Moro v. State of Oregon
equivalent for” or to “compensate.” Id. at 1921. Thus, to say 
that a member is vested in the PERS system does not deter-
mine the amount of benefits that a member has earned—
either at retirement or upon earlier termination of member-
ship in the system—as compensation for services rendered. 
That determination depends on how and the extent to which 
the benefits have been accredited to a member over time, 
that is, to what extent the benefits have “accrued.” See id. 
at 13 (defining “accrue” as “to be periodically accumulated 
in the process of time”). In most employment relationships, 
including in the PERS system, an employee receives credit 
for and accumulates compensation and other remunerative 
benefits based on the incremental performance of service. 
Thus, ordinarily, a vested PERS member will earn and 
accrue more benefits the longer he or she works.
	
Unfortunately, this court in OSPOA did not care-
fully distinguish among the concepts of vesting and the 
earning and accrual of benefits, when, among other things, 
it said:
“Most jurisdictions adhering to a contract theory of pen-
sions construe pension rights to vest on acceptance of 
employment or after a probationary period, with vesting 
encompassing not only work performed but also work that 
has not yet begun.”
323 Or at 371. Vesting generally does not encompass “work 
that has not yet begun” in the sense that it necessarily enti-
tles a member to earn benefits by performing future work. 
Rather, as discussed, vesting refers to a PERS member’s 
irrevocable eligibility to receive benefits under the terms of 
the statutory contract. And, also as discussed above, in the 
absence of a promise to provide a benefit that extends over 
the life of a covered member’s service, the legislature pro-
spectively may modify a PERS benefit if it has not yet been 
earned.
	
With those principles in mind, I turn to the ques-
tion of whether defendants’ promises to provide the COLA 
cap and COLA bank benefits extend over the life of plain-
tiffs’ service and, therefore, are nonmodifiable. As will be 
shown, the statutory text and context of ORS 238.360(2) 
and (3) (2011) describe how the disputed COLA benefits are 
Cite as 357 Or 167 (2015)	
247
earned and accrued, but they contain no promise of prospec-
tive irrevocability. Under ORS 238.360(2) and (3) (2011), a 
public employer’s COLA cap and COLA bank obligations are 
directly tied to a member’s monthly and annual retirement 
allowances. A member’s service retirement allowance based 
on the life pension component that is at issue in these cases 
is calculated from a formula that includes as its only vari-
ables the member’s number of years of membership in PERS 
and his or her “final average salary.” ORS 238.300(2)(a)(B).6 
A member’s number of years of membership accumulates 
as work is performed; thus, that variable is directly tied to 
earned and accrued remuneration for past service. However, 
the other retirement allowance variable, the member’s “final 
average salary,” is not so easily characterized, at least with 
respect to active members. “Final average salary” means 
the greater of the following:
	
“(a)  The average salary per calendar year paid by one 
or more participating public employers to an employee who 
is an active member of the system in three of the calendar 
years of membership before the effective date of retirement 
	
6  ORS 238.300 provides, in part:
	
“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:
	
“* 
* 
* 
* 
*
	
“(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, 
if any, under subsection (1) of this section and the annuity, if any, provided on 
the same basis and payable from the Variable Annuity Account, both annu-
ities considered on a refund basis, results in a total of:
	
“(A)  For service as a police officer or firefighter, two percent of final aver-
age 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 other than a police officer or firefighter, including ser-
vice as a 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 or firefighter before the effective date of retirement.
	
“* 
* 
* 
* 
*
	
“(c)  As used in this subsection, ‘number of years of membership’ means 
the number of full years of creditable service plus any remaining fraction of 
a year of creditable service. 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.”
248	
Moro v. State of Oregon
of the employee, in which three years the employee was 
paid the highest salary. The three calendar years in which 
the employee was paid the largest total salary may include 
calendar years in which the employee was employed for less 
than a full calendar year. If the number of calendar years 
of active membership before the effective date of retirement 
of the employee is three or fewer, the final average salary 
for the employee is the average salary per calendar year 
paid by one or more participating public employers to the 
employee in all of those years, without regard to whether 
the employee was employed for the full calendar year.
	
“(b)  One-third of the total salary paid by a participat-
ing public employer to an employee who is an active mem-
ber of the system in the last 36 calendar months of active 
membership before the effective date of retirement of the 
employee.”
ORS 238.005(9).
	
Insofar as retired members are concerned, both 
variables that determine the amount of COLA benefits— 
number of years of membership and final average salary—are 
directly attributable to their performance of pre-retirement 
service. Based on the holdings in Hughes and Strunk, those 
members have fully earned and accrued the disputed COLA 
benefits. The tax-exemption repeal in Hughes involved a 
change that, in violation of ORS 237.201 (1989), would have 
eliminated an earned benefit if it applied to previously per-
formed service. Hughes, 314 Or at 31. The situation in Hughes 
was analogous to the challenge to the COLA amendment in 
Strunk in the sense that the amendment in Strunk applied 
to only certain retirees who had fully earned and accrued 
the benefit at issue there through previous service. Strunk, 
338 Or at 221-24. Similarly, in this case, retired employees 
have fully earned and accrued the disputed COLA benefits 
based on their number of years of membership and their 
final average salaries. Accordingly, in my view, Hughes and 
Strunk control the analysis here with respect to retired 
PERS members. With respect to those members, the dis-
puted COLA benefits are not modifiable at all.
	
The analysis for active members is somewhat dif-
ferent. Because those members will continue to earn and 
accrue COLA benefits as they perform future service, it is 
Cite as 357 Or 167 (2015)	
249
necessary to determine whether the enacting legislature 
intended to preclude future legislatures from modifying 
their COLA benefits prospectively. Apart from the use of 
mandatory language, I discern nothing in the text or con-
text of ORS 238.360 (2011) that indicates such an intent.
	
Calculating final average salary for a member who 
has not retired is, by definition, impossible. The question is 
what, if any, significance attaches to that fact in the modifi-
ability analysis. The answer, in my view, is not much. Active 
members accumulate years of membership and, through 
past service, they also have the functional equivalent of a 
pre-amendment final average salary. Thus, in substance, 
the statutory variables that determine a retired member’s 
COLA benefits also exist, at least in proxy form, for active 
members. A proxy amount for final average salary, when 
coupled with an active member’s number of years of mem-
bership to the effective date of the statutory amendment, 
will result in a proportionately protected COLA benefit upon 
retirement. Nothing about the lack of a final average salary 
for active members suggests that the enacting legislature 
intended for the disputed COLA benefits to be prospectively 
nonmodifiable with respect to those members.
	
It follows, based on the gap-filling contract princi-
ples set out in Hughes and Strunk, that, in the absence of a 
legislative promise that the disputed COLA benefits would 
not be modified prospectively, the 2013 amendment to ORS 
238.360(2) and (3) did not breach the PERS contract with 
respect to benefits to be earned and accrued by active mem-
bers after the effective date of the amendment.
	
That conclusion is consistent with the broader stat-
utory framework of the PERS system. In particular, ORS 
238.600 provides:
	
“(1)  A system of retirement and of benefits at retire-
ment or death for employees of public employers hereby is 
established and shall be known as the Public Employees 
Retirement System. The Public Employees Retirement 
System consists of this chapter and ORS chapter 238A. It 
is the intent of the Legislative Assembly that the system 
be qualified and maintained under sections 401(a), 414(d) 
and 414(k) of the Internal Revenue Code as a tax-qualified 
defined benefit governmental plan.
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Moro v. State of Oregon
	
“(2)  If the Public Employees Retirement System is ter-
minated, or if contributions may no longer be made to the 
system, each member of the system has a nonforfeitable 
right to the benefits that the member has accrued as of the 
date of the termination, or as of the date that contributions 
may no longer be made to the system, to the extent that 
those benefits are funded.”
(Emphasis added.) Subsection (2) was added to ORS 238.600 
by the 1999 Legislative Assembly. 1999 Or Laws, ch  217, 
§  9. At a hearing before the House General Government 
Committee on May 18, 1999, Steve Delaney, the legisla-
tive liaison for PERS, testified that the bill was intended 
to ensure that the PERS system was in compliance with 
the Employee Retirement Income Security Act (ERISA), 29 
USC § 1001 et seq., and the tax exemption requirements of 
the Internal Revenue Code (IRC) for qualified retirement 
plans.
	
I recognize that, as a subsequently enacted statute, 
ORS 238.600(2) does not indicate what, if anything, the 
1971 and 1973 Legislative Assemblies intended with respect 
to the prospective modifiability of the earliest statutory 
COLA benefit provisions. See Holcomb v. Sunderland, 321 
Or 99, 105, 894 P2d 457 (1995) (“The proper inquiry focuses 
on what the legislature intended at the time of enactment 
and discounts later events.”). Furthermore, as this court 
noted in Strunk, it is particularly important to ascertain 
the intent of the correct legislature when analyzing statutes 
to determine their contractual nature and extent because 
“the fundamental purpose behind such contracts is to bind 
future legislative action.” Strunk, 338 Or at 189. Moreover, 
because this case does not involve a plan termination, ORS 
238.600(2) is not directly relevant. That said, the relation-
ship between the PERS system and federal pension and tax 
law requirements is critical to the viability of the system, 
and, significantly, nothing in the legislative history of ORS 
238.600(2) indicates that the 1999 Legislative Assembly 
thought that its enactment constituted a substantive change 
in the benefit structure of that system. Accordingly, the fact 
that that provision states that “accrued” PERS benefits are 
nonforfeitable in the event of a plan termination provides a 
lens through which to assess the prospective modifiability 
Cite as 357 Or 167 (2015)	
251
of the disputed COLA benefits in this case. For that reason, 
I briefly discuss the relationship between ORS 238.600(2), 
ORS 238.360, and the anti-cutback requirements of federal 
law.
	
Because ORS 238.600(2) was enacted to comply 
with federal law, its use of the concept of “accrued” benefits 
must be understood in light of the meaning of that term 
under ERISA. As will be shown, the meaning of “accrued 
benefits” under ERISA generally comports with the idea, 
expressed above, that PERS benefits accrue—that is, accu-
mulate periodically—as they are earned through the perfor-
mance of covered service.
	
The central purpose of ERISA is to protect “employ-
ees’ justified expectations of receiving the benefits their 
employers promise them.” Central Laborers’ Pension Fund 
v. Heinz, 541 US 739, 743, 124 S Ct 2230, 159 L Ed 2d 46 
(2004). Thus, ERISA’s anti-cutback rule prohibits pension 
plan amendments that decrease plan participants’ “accrued 
benefits.” 29 USC § 1054(g) (2006); see also Central Laborers’, 
541 US at 744. The anti-cutback rule also appears in the 
Internal Revenue Code in materially identical form and dis-
qualifies from tax-exempt status pension plans that violate 
its conditions. IRC § 411(d)(6); see also IRC § 401(a) (defin-
ing a qualified pension plan under ERISA); IRC §  411(a) 
(disqualifying from coverage under IRC §  401(a) pension 
plans which do not provide that an employee’s rights to nor-
mal retirement benefits be “nonforfeitable”); IRC §  501(a) 
(granting tax-exempt status to qualified pension plans). The 
parallel ERISA and IRC provisions serve the same function, 
which is to safeguard benefits that an employee has earned 
over time by fulfillment of a plan’s conditions. See Central 
Laborers’, 541 US at 743, 746. Once a participant performs 
work in exchange for a promised benefit, that is enough, 
other things being the same, to generate the sort of “justi-
fied expectation[ 
]” that the anti-cutback rule is designed to 
protect. Id. at 743.
	
Because only an “accrued benefit” is protected by 
the anti-cutback rule, the scope of the rule depends on the 
meaning of that term. In relevant part, the IRC defines 
an “accrued benefit” under a defined benefit plan as “the 
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Moro v. State of Oregon
employee’s accrued benefit determined under the plan and 
* 
* 
* expressed in the form of an annual benefit commencing 
at normal retirement age.” IRC § 411(a)(7)(A)(i). Under the 
federal scheme, a promised benefit must correspond to cur-
rent employment in order for that benefit to “accrue[ 
],” just 
in the sense that the promise of a benefit must predate an 
individual’s retirement or termination. See, e.g., Williams v. 
Rohm & Haas Pension Plan, 497 F3d 710, 714 (7th Cir 2007) 
(holding that COLA was an “accrued benefit” where promise 
of COLA predated the plaintiffs’ retirement). Where, under 
state law, a COLA benefit is tied to a member’s earned and 
accrued monthly retirement allowance as a means for main-
taining the real value of the allowance, the COLA is a part of 
the accrued benefit under ERISA that ordinarily cannot be 
decreased after the employee has earned it through service 
to which it is attributable. See 29 USC § 1054(g)(1); Sheet 
Metal Workers’ Nat’l Pension Fund v. CIR, 318 F3d 599, 603 
(4th Cir 2003) (“accrued benefit” accumulates during an 
employee’s service so as to become part of employee’s legiti-
mate expectations at retirement under the terms of the plan 
then in effect).
	
The COLA cap and COLA bank benefits provided 
by former ORS 238.360(2) and (3) (2011) accumulate based 
on a member’s number of years of membership in PERS and 
the member’s final average salary. They are inseparably 
tied to a member’s service retirement allowance as a means 
of maintaining the real value of that benefit. Therefore, the 
disputed COLA benefits are “accrued” and nonforfeitable for 
purposes of ORS 238.600(2), but only insofar as they are 
attributable to service performed by a member before the 
effective date of the 2013 Legislative Assembly’s amend-
ment to ORS 238.360(2) and (3).
	
To summarize: Retired PERS members have fully 
earned and accrued the disputed COLA benefits based on 
their number of years of membership and their final average 
salaries. Accordingly, the disputed benefits are not modifi-
able with respect to those petitioners who are retired mem-
bers. In addition, active members have earned and accrued 
the disputed COLA benefits based on their number of years 
of membership and a proxy for their final average salaries on 
the effective date of the 2013 amendment to ORS 238.360(2) 
Cite as 357 Or 167 (2015)	
253
and (3). However, in the absence of a legislative promise 
not to prospectively modify those benefits, the 2013 COLA 
amendment did not breach—let alone impair—active mem-
bers’ contractual rights to COLA benefits with respect to 
service performed after the effective date of the amendment.
	
I join in the majority’s analysis of the other issues in 
this case. Accordingly, I respectfully concur.