Opinion ID: 1286488
Heading Depth: 2
Heading Rank: 2

Heading: Local Defendants' Liabilities as Participating PERS Employers.

Text: Our disposition of local defendants' contract arguments does not resolve all of plaintiffs' claims. Plaintiffs argue that they had contracts of employment with their political subdivision employers; that one of the terms of those contracts was that they would receive PERS retirement benefits free from state income taxation; and that local defendants have breached those contract terms. Plaintiffs seek damages for that breach. Plaintiffs also seek a declaration as to who ultimately is liable to them for the breach. Local defendants argue that they cannot be held responsible for a breach of contract to provide retirement benefits free from state income taxation. They reason that only the state determines what income is taxed. They then conclude that only the state may breach a contract term that provides that income (or benefits) will be free from taxation. Local defendants misconstrue the nature of their obligation under PERS. Accordingly, they misunderstand their obligation to contribute to PERS and their obligation to their employees. A PERS participating employer is required to contribute to PERS such amounts as are actuarially computed to be necessary, as determined by [PERB], to adequately provide the benefits to be provided by the contributions of the employer under this chapter. ORS 238.225. See generally ORS 238.225 (delineating a participating employer's duties to contribute). Participating PERS employers also are obligated to contribute their pro rata share of amounts necessary to maintain the administrative expenses of PERS. ORS 238.610(1) & (3). The employee of a participating employer is then entitled to receive retirement benefits in proportion to that employee's individual contributions and the contributions of employers. ORS 238.300(1) & (2). Employer contributions are placed in PERF, which is a trust fund, separate and distinct from the General Fund, established for the purpose of providing benefits to PERS members. ORS 238.660(1). Participating PERS employers have no proprietary interest in the fund or in the contributions made to the fund. ORS 238.660(2). In other words, participating employers contribute to the fund not for their own sake, but for the sake of their employees. Under the PERS statutes, then, with regard to PERS participating employers, a two-step system exists for the collection and distribution of PERS monies. At the first step, PERB determines the amounts necessary to provide PERS members of a participating employer with their benefits, as well as to provide for the pro rata share of administrative expenses of PERS. PERB assesses the resulting amount against the participating employer. The employer then contributes the assessed amount to PERF. At the second step, when an employee of a participating PERS employer retires, PERB distributes those benefits to the employee. When the PERS statutes are viewed in that light, local defendants' argument, that the state is under an obligation to fund plaintiffs' Hughes remedy for retirees who worked for local defendants, loses viability. The participating employer, be it a local government or an agency or department of the state, always is responsible for covering its share of its employees' retirement compensation and of the administrative expenses of PERS. The statutes thus suggest (and always have suggested) that the compensation that flows to employees in the form of retirement benefits flows from the participating employers, albeit indirectly. The extent to which a participating PERS employer is obligated to contribute to PERS depends on PERB's determination of how much is needed to fund the system to comport with the benefits delineated in the pertinent PERS statutes. See ORS 238.225 (so stating). That amount is not static, but depends on various factors. As to some of those factors, the legislature has no control ( e.g., the rate of return that PERF earns on its investments). As to others, the legislature (with constitutional limits) has exclusive control ( e.g., the level of benefits to which a PERS member is entitled). See Ragsdale v. Dept. of Rev., 321 Or. 216, 231, 895 P.2d 1348 ([t]he state is entitled to raise the level of taxable compensation of [PERS members], for whatever reason, including to compensate them for a change in the tax laws that results in a decreased level of net after-tax income (emphasis in original)), cert. den., ___ U.S. ___, 116 S.Ct. 569, 133 L.Ed.2d 493 (1995); but see Oregon State Police Officers' Assn. v. State of Oregon, 323 Or. 356, 371, 918 P.2d 765 (1996) (under federal Contracts Clause, state cannot diminish vested pension rights after acceptance of employment). What is static under the PERS statutes is a participating employer's obligation to pay to PERF amounts sufficient to cover that employer's obligation to fund its employees' retirement benefits and to administer PERS. That obligation was part of the PERS statutes before the passage of SB 656 and HB 3349. See ORS 237.081 (1989) (duty to fund PERS benefits); ORS 237.291(1) & (2) (1989) (duty to fund administrative needs of PERS). Moreover, the means by which monies are distributed to retirees has not changed. See ORS 237.147 (1989) (describing distribution). The nature of PERF as a trust fund and the PERS participating employer's lack of proprietary interest in that fund were existing aspects of PERS before the passage of the 1991 and 1995 acts. See ORS 237.271(1) & (2) (1989) (providing that PERS is a trust fund and that participating employers have no proprietary interest in that fund). In other words, under PERS, before the enactment of the 1991 and 1995 acts challenged by local defendants, local defendants were obligated to fund PERS on behalf of their employees and to fund the administrative needs of PERS. They had to contribute amounts determined by PERB, to support payment levels set by the legislature. Neither the amount that participating employers were obligated to fund, nor the amount that retirees were entitled to receive, was fixed by those statutes. Rather, participating employers were under an obligation to fund their employees' benefits in amounts determined by PERB to cover benefit levels set by the legislature. Accordingly, we agree with plaintiffs that their own employers, including the state where appropriate, were the entities that were obligated to fund their retirement compensation. Their own employers were the entities that agreed to the terms of their compensation, including the terms relating to retirement benefits. That is no less true by reason of legal requirements setting some terms of compensation by statute. (An employer that hires an employee is responsible for paying the minimum wage, even though it is the state or the federal government that sets that wage by statute). [14] That conclusion answers the question of which partythe state or local defendants was obligated to provide plaintiffs with tax-free PERS benefits. As we have explained, participating PERS employers provide and fund the benefits; PERF and PERB act as a conduit through which those benefits pass. The retirees' former employer, whether the employer be a local government or the state in its capacity as a participating PERS employer, must pay to PERF whatever those retirees are entitled to receive. See above, 324 Or. at 121-22, 922 P.2d at 661-62 (discussing operation of PERS statutes). We note that, under basic principles of contract law, if A makes a promise to B that C will perform a certain act, and if C does not so perform, A is liable to B for C's failure to perform. See McGrath v. Electrical Const. Co., 230 Or. 295, 304, 364 P.2d 604, 370 P.2d 231 (1962) (One who makes a promise which can not be performed without the cooperation of a third person is not excused from performance because of inability to secure the required cooperation.); see also Restatement (Second) of Contracts § 71 cmt. e, illus 14, at 176 (1981) (stating that consideration may flow from one person to another for performance by a third person). Regardless of the reason that led local defendants to participate in PERS, local defendants, as participating PERS employers, themselves promised plaintiffs that plaintiffs would receive, at a minimum, the retirement compensation provided in the PERS statutes. Plaintiffs accepted that term by working for their employers. See Hughes, 314 Or. at 20, 838 P.2d 1018 (PERS constituted an offer for a unilateral contract). See also Or. Const., Art. XI, § 8 (The State shall never assume the debts of any county, town, or other corporation whatever, unless such debts, shall have been created to repel invasion, suppress insurrection, or defend the State in a war.); Stoppenback v. Multnomah County, 71 Or. 493, 502, 142 P. 832 (1914) (Article XI, section 8, relates to a class of debts in contracting which the state originally takes no part). In conclusion, local defendants are liable to plaintiffs for the breach of contract identified in Hughes. The trial court erred when it dismissed plaintiffs' claims for breach of contract against local defendants.