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Dan Lawler

From our Summer 2019 e-newsletter

On June 11, 2019, Governor Kate Brown signed SB 1049, which aims to reduce unfunded liability in the Public Employees Retirement System (PERS), which currently sits at over $25 billion dollars. The law introduces a number of measures to help fund the system, including changes to PERS member contributions that will begin taking place in 2020. In response, public sector unions claim that the bill unfairly saddles public employees with the cost of supporting PERS and some have even issued demands to bargain over the impacts of the bill. Cities, counties and districts should familiarize themselves with the changes that SB 1049 makes to PERS to prepare for and respond to these demands as they become more frequent. However, cities, counties and districts should also be aware that litigation over the measure’s constitutionality is likely to occur, potentially delaying or preventing its implementation.

Summary of Changes under SB 1049

Individual Account Program (IAP) Redirect

SB 1049 creates Employee Pension Stability Accounts (EPSAs) that PERS will draw from to help reduce the system’s unfunded liability. Starting on July 1, 2020, PERS members shall contribute to an EPSA in the following manner:

• Tier One/Two: All active Tier One and Tier Two members whose salaries exceed $2,500 per month shall contribute 2.5% of their salaries to an EPSA. The 2.5% salary redirect will be drawn from the 6% of salary that employees already contribute to their IAP accounts[1], while the remaining 3.5% of salary will go to the IAP accounts. However, members can make voluntary, after-tax contributions of the 2.5% into their IAP accounts to achieve the full, 6% contribution.
• OPSRP: All active OPSRP members that earn at least $2,500 per month must make contributions in the manner described above, except that their EPSA contribution is only 0.75% of salary taken from the full, 6% IAP contribution.

SB 1049’s IAP Redirect does not affect money deposited in employees’ IAP accounts prior to July 1, 2020, but is still expected to reduce a 30-year employee’s overall retirement income by 1 to 2 percent. SB 1049 also provides that the IAP Redirect will cease if the system achieves 90% funding.

Work After Retirement Changes

SB 1049 will remove the 1,039-hour and 600-hour Work After Retirement limits for Tier One/Two and OPSRP retirees, respectively, for the years 2020 through 2024. These members can work and continue their current pension benefits without an hour limitation, but they may not accrue any new pension benefits beyond those they already receive. However, members that retired earlier than normal retirement age may only work and continue their benefits without an hour limitation if the date of their employment is more than six months after their retirement date. Cities, counties, and districts should be aware that under SB 1049’s work-back program, they must contribute the percentage of the retired member’s wages that would be contributed if the member were an active member of PERS starting January 1, 2020. The Board will then apply these contributions to the public employer’s liabilities.

Miscellaneous Changes

In addition to the changes detailed above, SB 1049 also does the following.

• Section 20 allows PERS employers making lump sum payments to accounts under ORS 238.229 to choose the year in which to begin using the payments to offset PERS contributions that the employer would otherwise be required to make for the liabilities against which the lump sum payment is applied.
• Section 23 requires employers to seek an independent financial analysis before issuing new pension obligation bonds under ORS 238.694.
• Section 28 extends the amortization period and minimum payment schedule for unfunded liability to a total of 22 years, generating short-term cost savings by reducing required annual PERS contributions. This action is expected to account for about three quarters of the total savings per budget cycle that SB 1049 is intended to generate.
• Sections 39 and 40 cap the final average salary that an employee’s benefit can be based on at $195,000.
• Sections 43 through 45a direct the Oregon State Lottery Commission and Department of Administrative Services to transfer proceeds from sports betting games to the Employer Incentive Fund to help provide a 25% match for contributions to PERS that exceed the employer’s required contribution.
• Sections 58 and 59 appropriate $100 million dollars from the General Fund to the PERS Employer Incentive Fund to help provide a 25% match for employer contributions to PERS that exceed the employer’s required contribution.

Litigation Looms

Opponents of SB 1049 have been vocal about challenging the measure in court and may target the provisions that redirect members’ IAP contributions to EPSAs. To expedite the potential challenge and review, Section 65 of SB 1049 confers jurisdiction on the Oregon Supreme Court (the Court) to determine whether the law breaches any contracts between PERS members and employers or whether the law violates any provisions of the Oregon or U.S. Constitutions. Section 65 allows any person who is or will be adversely affected by the law to file a petition for review with the Court and requires the Court to allow PERS employers to intervene in the proceeding. SB 1049 also prioritizes the proceedings authorized in Section 65 over all other matters that the Court will hear. Despite the provisions for expedited review, public employers can expect resolution of the contract and constitutionality issues to take years, though the law and its requirements will remain in effect until and unless the Court rules otherwise.

Legislator Walkout Threatens SB 1049 Funding

On June 20, 2019, the Oregon House of Representatives passed HB 5032, which would limit and direct PERS Limited Budget expenditures for the implementation of SB 1049. If the Oregon Senate passes the measure, PERS will be able to spend the following amounts on personnel and resources from 2019 to 2021 to implement SB 1049 and its Core Retirement Systems Applications program:

1) Project management and administration:                     $2,500,000

2) Quality assurance and testing:                                         $2,500,000

3) Information technology applications:                           $25,992,000

4) Operational implementation:                                           $7,567,714

5) Contingency reserve:                                                            $500,000

Though the Senate was likely to pass HB 5032, eleven senators walked out of the Legislature on June 20 and left the state to protest HB 2020’s cap and trade program. Until the legislators return, the Senate will not have the quorum required to conduct official business and will not be able to pass any bills. With the 2019 Regular Session scheduled to end on June 30, legislators and citizens worry that the Legislature will not be able to pass budget measures and funding directives, including HB 5032, that state agencies need to operate. Though Governor Brown sent state police to retrieve the legislators and threatened to convene a special legislative session if they do not return by June 30, the walkout could prevent passage of HB 5032. If the Legislature does not pass HB 5032, PERS will likely experience significant strains on the funding, staffing, and capacity to implement SB 1049, stretching the PERS General Fund even more thin and exacerbating the system’s issues with unfunded liability.

We hope this article provides a helpful primer for cities, counties and districts on SB 1049 and the changes it makes to employer and employee obligations under PERS. If you have any further questions about SB 1049 or other employment matters, please feel free to call us.

[1] In most jurisdictions, PERS employers already pay the full 6% IAP contribution on behalf of their employees.