LOS ANGELES — Oregon can manage the immediate impact of the Oregon State Supreme Court's restoration of retirement cost-of-living adjustments, Fitch Ratings said in a May 6 report.
Last week's Oregon Supreme Court decision to restore a 2% COLA to approximately 120,000 state retirees and employees who were members prior to a 2013 law change is expected to lower the state's Public Employees Retirement System funded ratio and raise ongoing required contributions, according to Fitch.
The state estimates its portion of PERS's liability to be funded at 97% before the court's decision.
"The court ruled that it was legal to reduce COLAs for services accrued after the 2013 reforms as they were not contractually guaranteed," according to Fitch. "This decision contrasts with other rulings across the country where COLA changes have been upheld by courts under the principle that COLAs differ from core retirement benefits." Oregon will be able to manage the immediate impact of the court's restoration of the COLA as it has reserve funds available for retroactive payments and other sources of flexibility, according to Fitch. Before the Supreme Court's decision, PERS had projected plan savings over time of approximately $5 billion from this and other pension reform efforts; a share of these savings is expected to remain in place as the court upheld other parts of the legislation, Fitch analysts said.
Funded ratios have also been bolstered in recent years by strong investment results and Fitch expects the state's portion to remain well-funded, albeit at a lower level than it was before the court decision. Fitch said the state has two potential sources for funding these payments. "There are approximately $600 million in PERS's contingency funds which could offset retroactive payments. And, the state could redirect a portion of a likely personal income tax credit from the current biennium," according to the report.
PERS contribution rates for the next biennium, July 1, 2015 through June 30, 2017, have already been set by the pension system, but Fitch said they could be adjusted, subject to applicable rate collars. Any adjustment would have a financial impact on the budget currently being debated in the legislature. Contribution rates for subsequent biennia will include the required COLAs, according to the report.