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The state Supreme Court’s legal reasoning could foretell possible impacts pension reform suits might have in Illinois and New Jersey.
Perhaps foreshadowing negative rulings in other states, the Oregon Supreme Court last week struck down a hard-fought 2013 law that reduced, temporarily as it turns out, pension obligations to state and local retirees and current workers.
And in a comment released Tuesday, Moody’s Investors Service said the ruling was “credit negative” for Oregon and its municipal jurisdictions, implying higher borrowing costs unless a new fix is found.
The 2013 law negotiated by legislative leaders and then-Gov. John Kitzhaber ordered cuts in cost-of-living adjustments (COLAs), affecting not only 128,000 current public-sector employees but also amounts credited to pension accounts of current employees.
Both state workers and employees of all local governments participate in the Oregon Public Employees Retirement System (OPERS). The reforms cut COLAs from a maximum of 2 percent to 1.25 percent on up to $60,000 in pension income, and to 0.15 percent on higher amounts.
State officials said the ruling would eliminate about $5 billion in savings the reforms were supposed to deliver. According to Moody’s, the OPERS unfunded liability will increase from $2.5 billion before the court ruled to about $8 billion.
Pensioners who brought the suit were delighted that most of their demands were met. “It’s not everything, but it’s hard to feel bad about restoring $4 billion-plus of benefits to members, both retired or active,” Greg Hartman, a lawyer representing OPERS beneficiaries told The Bulletin, a newspaper serving Bend and central Oregon.
Public officials were less sanguine. Democratic Gov. Kate Brown said in a statement that she’s reviewing the decision and “assessing next steps.”
Beyond the increase in unfunded liabilities, the court ruling will mean a hefty increase in state and local contributions to OPERS, Moody’s observed. The state will have to increase its employer contributions to 17.1 percent of payroll starting in the 2017-19 budgeting cycle, Moody’s projects—up from 11 percent. This will cost the state $319 million in that period, and will grow by 3.75 percent annually, Moody’s forecasts.
As for Oregon’s local governments, the situation seems even worse. Contribution rates will rise from 11 percent in 2015-17 to 16 percent in 2017-2019, Moody’s projects. But the agency also observes that “many of Oregon’s local governments have outsized pension burdens—“substantially exceeding U.S. medians.”
The Oregon problem is tough, but it pales in comparison to the challenges facing other state and local public pension systems. Recent studies suggest, for example, that the huge public pension plans in California are in far deeper trouble than they’ve acknowledged so far.
And if the reasoning adopted by the Oregon Supreme Court is followed by courts in New Jersey and Illinois, those states could also end up in a big mess. Said the May 5 Moody’s report:
One of Oregon’s unsuccessful legal arguments is similar to one advanced by the State of Illinois, whose own pension reforms the state supreme court is currently considering. Illinois has also argued that public necessity justifies its impairment of contractual pension promises. The Oregon court rejected this argument, and the Illinois court’s decision is still pending. Illinois’ reforms have yet to be implemented, stayed for the time by a court order.
In worse condition than the state is the city of Chicago, where reforms are also under legal challenge. In a gloomy report issued on May 1, the ratings agency said of Chicago’s outlook:
Without the increased payments that current statutes require of the city, the plans will continue to liquidate assets to pay benefits. As the plans approach insolvency, risks to the city's solvency will grow.
In New Jersey, an adverse public pension ruling could further damage Gov. Chris Christie’s already-flagging presidential hopes. He has run on his fiscal record. But the Oregon court’s “requirement that OPERS must now repay reduced COLA benefits from the past two years highlights the similar risk facing the State of New Jersey from its own pension litigation,” Moody’s asserted in its May 5 statement. “New Jersey eliminated COLA benefits in 2011, a more far-reaching reform than Oregon’s partial reduction of COLA benefits. The legality of those reforms has been challenged, but not yet ruled on by the New Jersey supreme court.”