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Legal fight looms over Oregon pension cuts

Jonathan j. Cooper, Associated Press

SALEM, Ore. (AP) -- Now that Oregon lawmakers have voted to cut retirement benefits for government workers, the battle moves from the Capitol to the courthouse.

A coalition of pensioners and public-employee unions already filed a lawsuit against pension cuts enacted earlier this year and plans to challenge the steeper cuts approved in a special session Wednesday.

The stakes are high for the state and local governments that fought for pension cuts to avoid steep increases in their contributions to the Public Employees Retirement System. If the cuts are struck down, they'll likely face pension costs that are even higher than they would have been had no cuts been enacted.

"They're gonna go to the courts , and a lot of us are sweating rocks over that, because if we lose those, we're in a difficult situation," said Senate President Peter Courtney, D-Salem. "So we hope we've done a good job."

Retired government workers will see their pensions grow at a slower rate. For decades, pension checks have increased at a rate of 2 percent annually. Now, the first $60,000 will increase by 1.25 percent per year and the rest will grow by 0.15 percent.

The changes reduce the pension system's unfunded liability by about a third, lowering the amount that state and local governments must contribute to make up the deficit.

If the state loses in court, however, those public employers will be back where they were before the cuts were enacted. They also likely would have to pay even more into the pension system to make up for the contributions they don't have to make while the court sorts out the legality of the cuts.

Retirees would be repaid money that they didn't receive, probably from the PERS reserve fund, which now stands at $600 million. The state also likely would be on the hook for legal fees.

The Oregon Supreme Court has ruled that pension benefits promised to public employees constitute a binding contract that cannot be breached by the Legislature. It's not always clear, however, which aspects of the pension system are considered part of the contract and which are subject to modification by the Legislature or the PERS board.

The court threw out a 2003 attempt to suspend the cost-of-living adjustment for certain retirees, ruling that annual benefit increases are part of the contract. Critics of COLA cuts say that ruling, known as the Strunk case, would render this year's COLA cuts unconstitutional.

The cuts "breach that promise by saying, 'We're going to pay you less than we promised you,'" said Greg Hartman, a lawyer for the PERS Coalition, the organization challenging them. "The promise has been in the contract for 40 years without interruption."

Proponents of changes, however, say the Strunk case isn't necessarily applicable to the current circumstances. In a letter to Gov. John Kitzhaber's chief of staff earlier this year, a lawyer for the Oregon Department of Justice said the state might be able to successfully argue that the existence of a cost-of-living adjustment is part of the contract but the amount of the adjustment can be modified.

Other legal arguments also are possible. The Justice Department memo also argued that Supreme Court justices might be convinced that the court made the wrong call in the Strunk case.

One of the justices who helped decide Strunk now says it may be "intellectually justifiable" to argue that the case was wrongly decided. W. Michael Gillette, now a partner at the Portland law firm Schwabe, Williamson and Wyatt, made the conclusion in a Feb. 26 letter to the League of Oregon Cities, which supports pension cuts.