Oregon pension proposals face uncertain legal road

SALEM, Ore. (AP) — Oregon lawmakers looking to cut public-employee pension benefits face a difficult political and legal balance as they try to find a plan that saves money and can get through the Legislature and survive a challenge to the state Supreme Court.

Democratic leaders have proposed cutting the annual cost-of-living increases for retired government workers. Sen. Richard Devlin of Tualatin, one of the two Democrats who lead budget discussions, compares the effort to threading a needle in the dark, because a workable pension cut is a very small target to hit.

Public pensions will cost taxpayers at all levels of government $2.9 billion over the next two years, an increase of $900 million over the last two years — making it a bright target for elected officials who would rather spend the money on reducing class sizes in public schools. The board that oversees the pension system is trying to dig out from devastating investment losses that wiped out more than a quarter of the system's revenue.

The work is complicated by a 2005 Oregon Supreme Court case that stems from the Legislature's last attempt to cut public-employee pension benefits. The court threw out a provision that froze cost-of-living adjustments for certain retirees, ruling that a COLA was part of a binding contract.

Opponents of pension cuts argue that the 2005 decision prohibits cuts to the COLA. Proponents say they might be able to legally limit the size of a COLA as long as all workers earn one. Lawyers have come to different conclusions on that issue, and any legislation affecting the COLA is certain to end up in front of the state Supreme Court.

In a memo to Gov. John Kitzhaber's office, a lawyer for the state Department of Justice concluded that the 2005 decision may have left a small opening to cap the COLA. The lawyer, Keith Kutler, chief of the tax and finance section, also argued that Supreme Court justices might be convinced that the court made the wrong call in 2005.

One of the justices who made that decision now says Kutler may have an "intellectually justifiable argument." 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.

"I'm inclined now to think that it may have been mistaken and that DOJ has a good argument," Gillette told The Associated Press this week.

"I'm not claiming I'm any smarter now than I was then," Gillette added. "As a citizen who can say what he thinks as a citizen, my feeling is we may have missed it."

Kitzhaber proposed capping the cost-of-living adjustment so it applies only to the first $24,000 per year of income.

Devlin and Rep. Peter Buckley, an Ashland Democrat who leads budget work in the House, on Monday proposed a graduated cost-of-living increase, with a smaller hike on higher incomes. Their proposal would save less money than Kitzhaber's, but they reason that it may be more likely to survive a court challenge. They said they're still working out details.

They also propose eliminating — for retirees living out of Oregon — a tax break intended to cover Oregon income taxes.

Together, the lawmakers' proposals are estimated to save all state and local governments about $450 million in the next two-year budget.

Devlin and Buckley also propose saving governments another $350 million by delaying contributions until future years.

Public-employee unions are opposed. They argue it's illegal and would lead to substantial legal fees.

Copyright 2013 The Associated Press.