Opinion ID: 835784
Heading Depth: 2
Heading Rank: 1

Heading: PERS Before the 2003 Legislation[10]

Text: In one form or another, Oregon has provided its public employees with a retirement plan, as a contractual benefit of public employment, since 1945. Funding for the system comes from three sources: (1) employee member contributions, presently set at six percent of salary; (2) employer contributions, in an amount actuarially determined to be necessary when added to the employee member contributions to cover the cost of accrued and projected future service retirement allowances payable to retired members; and (3) investment earnings on those contributions. The assets, taken together, constitute the Public Employees Retirement Fund (the fund) and are used to pay the costs of the system: member service retirement allowances and administrative expenses. Except for variable account funds, which we discuss below, all PERS funds are commingled for investment purposes. PERB administers PERS and acts as trustee for the fund. PERB conducts its operations through a director and staff that PERB employs, and PERB administers the system in consultation with the PERS actuary. [11] PERB sets employer contribution rates, adopts actuarial equivalency factors and assumed earnings rates, establishes reserve accounts, and allocates annual earnings to accounts and reserves. The Oregon Investment Council (OIC) invests the assets of the fund. [12]
Public employees of participating employers become PERS members upon completing six months of uninterrupted service. [13] Every PERS member has a regular account in PERS. The member's regular account consists of the member's contributions to the system and earnings that PERB has credited to those contributions. In addition, in 1967, the legislature enacted an optional variable annuity account program for members who are willing to have their contributions and benefits fluctuate with the equity markets. A member who participates in the variable annuity account program has two member accounts: a regular account and a variable account. Members' contributions to their variable accounts are paid into the Variable Annuity Account and are invested solely in the Oregon Equity Fund. [14] For purposes of this litigation, there are two categories of PERS members. Tier One members are public employees who joined PERS before January 1, 1996. Tier One members are entitled to a guaranteed minimum rate of return on their regular accounts based on the assumed earnings rate. To ensure that sufficient assets exist to pay guaranteed benefits to Tier One members at the assumed earnings rate, PERS maintains a gain-loss reserve. In years when fund earnings exceed the assumed earnings rate, PERB deposits a portion of those excess earnings into the gain-loss reserve. In years when fund earnings are less than the assumed earnings rate, PERB uses funds from the reserve to make up the difference. PERS members who joined the system on or after January 1, 1996, are known as Tier Two members. Unlike Tier One members, Tier Two members have no earnings guarantee on their regular accounts and, correspondingly, do not benefit from the fund's gain-loss reserve. [15] Crediting of member accounts occurs annually as of December 31 of each calender year. At the beginning of each calendar year, PERB reviews changes in the value of the fund since the beginning of the previous year. PERB staff determines the fund's value using standard accounting methods. Based on the fund's annual growth, PERB allocates earnings to various accounts within the fund on an equal crediting basis; that is, every dollar within the fund receives the same percentage share of earnings regardless of the account to which that dollar is designated. [16] The PERS actuary also recommends the adoption of employer contribution rates in an Actuarial Valuation that usually issues as of December 31 in odd-numbered years. Employers begin paying newly established contribution rates on July 1 of the following year. Employer contribution rates consist of two components: the employer's normal cost toward payment of members' service retirement allowances and the amount necessary to amortize any unfunded actuarial liability (UAL). The normal cost component of the employer contribution rate is based on the PERS actuary's best estimate of the amount needed to pay service retirement allowances to current members in the future. The adjustment of the employer contribution rate either for UAL or actuarial surplus is based on the difference between an employer's account balance and the projected future service retirement allowances payable to its employee members. If an actuarial surplus exists, then the employer pays less than the normal cost rate. If the employer has a UAL, then PERB adds an additional, amortized charge to the employer's normal cost rate. [17]
There are three formulas available for calculating a PERS member's service retirement allowance, commonly known as the Pension Plus Annuity, the Full Formula, and the Money Match. The Pension Plus Annuity, which is available to only members who contributed to PERS before August 21, 1981, consists of the sum of an annuity component and a pension component. The annuity component is composed of the actuarial equivalent of the member's account balances at retirement. The pension component, funded by the employer, is equal to one percent of the member's final average salary (1.35 percent for legislators and police and fire employees) for each service year. The Full Formula also includes an annuity component composed of the actuarial equivalent of the member's account balances at retirement and a pension component; however, the pension component is calculated differently than under the Pension Plus Annuity. The Full Formula first calculates a member's service retirement allowance by multiplying the member's final average salary by a factor set at 1.67 percent (two percent for legislators, police officers, and firefighters) and then multiplying the resulting figure by the member's years of membership. That service retirement allowance then is funded using the actuarial equivalent of the member's account balances at retirement (the annuity component) and employer contributions required to make up the difference (the pension component). Under the Money Match, a member's service retirement allowance is calculated by determining the sum of the actuarial equivalent of the member's account balances at retirement (the annuity component) and then adding a sum in an equal amount that is charged to the employer, i.e., the match (the pension component). The resulting service retirement allowance therefore amounts to twice the actuarial equivalent of the member's account balances at retirement. At retirement, a PERS member receives a service retirement allowance based on the formula that produces the highest pension amount among the foregoing three alternative formulas. [18] By the late 1980s, members who retired with 30 years of creditable service received service retirement allowances equal to approximately 63 percent of their final average salaries. By the early 1990s, that figure had increased to 66 percent and, between 1996 and 2002, had increased to 85 percent. In 2000, the average PERS retired member with 30 years of creditable service retired at the age of 53 with a service retirement allowance equal to 106 percent of the member's final average salary. [19] Regardless of the formula used to determine a retired member's service retirement allowance, PERS historically has increased such allowances through annual cost-of-living adjustments (COLAs). COLAs are based on the Consumer Price Index and are capped at two percent of each member's allowance. If the index increases by more than two percent for the year, then the increase above two percent is banked and may be added to the member's COLA in later years when the index increases by less than two percent. Finally, in addition to the benefits described above, members who retired before 1991 receive an increase in benefits to remedy unlawful taxation on retirement income benefits attributable to service before 1991. See generally Hughes v. State of Oregon, 314 Or. 1, 838 P.2d 1018 (1992) (legislature's repeal of income tax exemption statute as to PERS members' retirement benefits constituted breach of PERS contract, requiring legislatively created remedy). When a PERS member retires, PERB transfers the member's account balances to the Benefits-In-Force reserve account (BIF), together with an amount from the employer's accumulated contributions. The amount transferred from the employer's account is that which PERB has determined is necessary to pay the member's service retirement allowance. PERB also regularly trues up the BIF by recalculating the funds necessary to pay all expected service retirement allowances for retired members. If PERB's actuary determines that the BIF is insufficient to pay those allowances, then PERB deducts from all employer accounts the amounts necessary to eliminate the deficiency. Conversely, if the BIF is overfunded, then PERB adds the overage to all employer accounts. For accounting purposes, PERB does not make adjustments to individual employer accounts; instead, PERB maintains a balancing account that shows the actuary's trueing up calculations.
The fiscal status of the fund following poor investment performances in 2000, 2001, and 2002  together with significant growth in fund liabilities and employer contribution rates  was the primary motivator of the 2003 PERS legislation. See generally Or Laws 2003, ch 67 (preamble). Those considerations provided much of the focus of the parties' advocacy before the Special Master and this court. As context for the issues that we resolve in these cases, we set out the following brief discussion of the fund's financial status, which we take from the Special Master's report: For the 2001-03 biennium, the [S]tate of Oregon's general fund and lottery budget was approximately $11 billion. Oregon's local governments will collect approximately $17.8 billion in own-source revenues in fiscal year 2003-04. In comparison, at the end of 2002, the fund had a total UAL of more than $15 billion [based on the fair market value of fund assets]. In January 2003, the UAL reached $16.41 billion. During the 2003 legislative session, the UAL exceeded $17 billion, but it had declined to $12.7 billion by July 2003. Between 1991 and 2000, the nation experienced the longest sustained period of economic growth in its history. During that time, the average investment return on the fund was approximately 15 percent per year. However, over that same period, the system's funded ratio, which compares the value of fund assets to projected liabilities, declined. In 1991, the fund's value equaled the amount of its projected future liabilities. By 2001, the value of the fund's assets equaled 89 percent of its projected future liabilities. In 2002, based on then-current actuarial assumptions, the PERS actuary projected that PERS liabilities would increase from approximately $45 billion in 2001 to approximately $65 billion by 2007. In 2002, the actuary also projected that the funded ratio would remain below 80 percent until 2010 and that the funded ratio probably would not equal 100 percent until 2027. In early 2003, that ratio declined to 65.4 percent. (Footnote omitted.)