Opinion ID: 1192606
Heading Depth: 1
Heading Rank: 4

Heading: Employer Pays Annuity Purchase Amounts

Text: As established in 1953, PERS provides benefits based on length of service and also on a separate annuity purchased during employment. The portion of the benefits based on length of service as a public employee applies a percentage factor for each year of creditable service. The employee's highest salary level for the final years of public employment is then multiplied by that factor. This portion is referred to as the service credit portion of retirement benefits. The employer, a state or local government unit, has paid to the PERS retirement system a percentage of all its gross wages in order to finance the service credit portion of retirement benefits. The other portion of retirement benefits is a type of refund annuity. Sometimes called a money-purchase contract, the annuity is purchased with money that is paid to the system as an employee works month by month. That money paid in is invested and earns interest. Principal and interest continue to be invested, and the amount available to pay the annuity in the future grows in relation to the rate of investment return and the length of time over which interest is received and contributions of principal continue. Initially, public employees of state and local governments paid a percentage of their individual salaries to PERS. PERS uses those funds to establish and invest in the annuities of individual employees. For example, a person publicly employed during July of 1954 paid in six percent of his or her gross salary to PERS, which received the money in trust, and the money was then used by PERS to purchase an annuity for the employee in the form of a promise to pay money in the future. However, as to the employee just described, during the period of employment the source of the funds to pay for the employee's purchase of the employee's annuity was changed by an agreement between the governmental employer and the employee. That contractual agreement was statutorily authorized and was designed to save the taxpayers money. In 1979, the legislature provided that any public employer, including the state, could contract to assume or pay the employee's contributions to the funds to purchase an annuity, contributions that the statutes previously had required to be paid to PERS by its employee members. [3] Thus, the annuity or money-purchase portion of the plan, as well as the service credit portion of the plan, could be paid for by the employer, whereas the annuity portion previously had been required to be paid for by the employee. In 1979, double-digit annual inflation was present in the national economy. At that time, a very substantial increase in the number of base-pay dollars was necessary just to stay even in terms of purchasing power of every person's salary or income. Public employees, thus, could and did make a very good case for increasing their base-pay rate. However, the state also was pressed for funds. In response to reasonable requests for base-pay increase, the governor and other government leaders agreed on a money-saving plan. To increase salaries to partially keep pace with the escalating consumer price index but to do so using fewer tax dollars, the state and local governments promised to pay to PERS the money needed to purchase annuities on behalf of state and local government employees. Prior thereto, those employees purchased the same annuities by monthly contributions to PERS made from their salaries after taxes. Previously, therefore, it had cost the employees eight to nine percent of their gross salary to buy their annuity, because they were using after-tax dollars to make the purchase. Because the state's purchase was with funds that had not been subjected to state or federal income taxes, the same amount of annuity could be purchased for six percent of wages that otherwise would have cost eight to nine percent had the state first paid the money to each employee and the employee had then paid state and local taxes on the money received and thereafter had purchased the annuity with the net. If the government bought the annuity instead of paying the base-wage increase, the government saved two to three percent of all its wage costs but the same level of annuity benefit was acquired. Under the annuity pick-up plan, public employees would continue to receive the lower number of base-wage dollars rather than a raise, but would receive the same value in annuity benefits as they would have received had the base rate been increased and the annuity purchase money paid by them out of net, after-tax, salary or wages. Thereafter, in order to save taxpayer funds, a statutorily authorized contract between the government and its employees was entered. The contract required that the governmental employer pay for the individual annuity instead of the employee's purchasing it with dollars that the employee could only use after paying taxes on them. Six percent of gross wages, paid by the employer, brought the same amount of annuity benefit as had required eight to nine percent when purchased with the after-tax net. The government received an additional tax-saving benefit from the 1979 plan because many, if not all, payroll taxes are owed and payable by employers based on a percentage of the gross wages of their employees. By paying the annuity contribution rather than giving their employees a raise, the governmental employer saved payroll tax money because payroll taxes were paid on a lower total amount of wages. Examples of payroll percentage taxes are unemployment insurance, social security, and state workers' compensation insurance. The mutually beneficial contract has benefited the state and other participating governments by hundreds of millions of dollars in payroll savings since 1979. When the state adopted the statute authorizing bilateral agreements for a public employee to payor pick-upthe six percent of salary that formerly was paid by the public employee to purchase a future annuity for the employee, it entered that contractual arrangement to obtain a substantial benefit for the state and, therefore, for its taxpayers, as just explained. Other public employers who entered that contractual arrangement authorized by statute also did so because of the substantial benefit that taxpayers of that level of government thereby obtained. Taxpayers were saved hundreds of millions of dollars since 1979, because the base salary of all employees remained lower because the state purchased the same amount of annuity with six percent of gross wages that would have cost eight to nine percent of gross wages of the individual employee after recognizing the reduction in spendable wages represented by taxes on such wages. 3. Sick Leave Savings Credited to Increase Final Average Salary. In 1973, the legislature made provision for compensating for unused sick leave in the form of retirement benefits. The compensation took the form of adding one-half of the value of the government's savings from unused sick leave to the gross amount of salary used to determine final average salary against which a percentage factor for the number of years of creditable service is to be multiplied. This provision is, with subsequent amendments, codified as ORS 238.350, and was formerly numbered ORS 237.153.