Oregon State Police Officers' Ass'n v. State

918 P.2d 765, 323 Or. 356, 1996 Ore. LEXIS 54

• Court: Oregon Supreme Court
• Decided: June 21, 1996
• Docket: 94-12-08563 CC 94C-14019, CC 94C-13963, CC 95-C10338 SC S42333 (Control), SC S42511 and SC S42355
• Status: Published

Opinions

VAN HOOMISSEN, J.

The question presented by the appeals in these four consolidated cases is whether any part of Ballot Measure 8 (1994)¹ impairs an obligation of plaintiffs’ Public Employes’ Retirement System (PERS) contract with their public employers in violation of the Contracts Clause of Article I, section 10, of the United States Constitution.² Ballot Measure 8 amended the Oregon Constitution by adding three sections to Article EX. The circuit courts held that sections 10 (six percent pick-up), 11 (guaranteed rate of return), and 12 (sick leave credit) of Article EX violate the federal Contracts Clause. We agree. We hold that sections 10, 11, and 12 of Article EX violate the Contracts Clause of the United States Constitution. Accordingly, we declare sections 10, 11, and 12 void.³

The circuit courts’ declarations that sections 10, 11, and 12 of Article EX (Ballot Measure 8) violate the federal Contracts Clause are determinations on a question of law and are reviewable de novo. See Ragsdale v. Dept. of Rev., 321 Or 216, 217, 895 P2d 1348 (1995); Post v. Oregonian Publishing Co., 268 Or 214, 222, 519 P2d 1258 (1974).

This court’s resolution of these appeals involves few relevant facts: the enactment of Ballot Measure 8 in 1994, statutes concerning public sector employees,⁴ and the existence of collective bargaining agreements and employment customs between the state⁵ and its political subdivisions and employees thereof. Those matters are discussed below.

These cases were resolved on cross motions for summary judgment.⁶ In Oregon State Police Officers’ Association v. State of Oregon (OSPOA), plaintiffs challenged sections 10, 11, and 12. The circuit court granted plaintiffs’ motions for summary judgment on their claims that all three sections violate the federal Contracts Clause and entered judgments accordingly.

In Tissue v. State of Oregon (Tissue), plaintiffs challenged only section 12.⁷ The circuit court granted plaintiffs’ motion for summary judgment on their claim that section 12 violates the federal Contracts Clause and entered judgment accordingly.

In Morgan v. State of Oregon (Morgan), plaintiffs challenged only section 10. The City of Portland filed a cross-claim for indemnity against the state, asserting that the state is responsible for any liability the city might incur as a result of the passage of Measure 8. The circuit court granted plaintiffs’ motion for summary judgment on their claim that section 10 violates the federal Contracts Clause, granted the City of Portland’s motion for summary judgment on its indemnity claim against the state, and entered judgment accordingly.

In Salem Public Employees Union v. City of Salem (SPEU), plaintiffs challenged sections 10, 11, and 12.⁸ The circuit court granted plaintiffs’ motion for summary judgment on their claims that all three sections violate the federal Contracts Clause and entered judgment accordingly.

These disputes over the applicability of the federal Contracts Clause arise from the parties’ markedly different view of Oregon pension law regarding the contract that the PERS represents.⁹ The state contends that the circuit courts erred in declaring that sections 10, 11, and 12 violate the federal Contracts Clause. Although the state acknowledges that the six percent pick-up, guaranteed rate of return, and sick leave credit are, or at least have been, terms of the PERS contract, the state argues that those contractual promises attach only for work already performed and that the state may modify unilaterally or even eliminate entirely any or all of those terms prospectively.¹⁰ The state relies primarily on Hughes v. State of Oregon, 314 Or 1, 838 P2d 1018 (1992), arguing that this court in Hughes construed Oregon pension law by recognizing a new concept of past, present, and future “accrual” of retirement benefits that permits the state unilaterally and prospectively to reduce retirement benefits that it offered and that were accepted by its employees, either when they first commenced work or at a time thereafter.

Plaintiffs respond that, under Oregon pension law, the state has entered into permanent contractual obligations to them with respect to the six percent pick-up, guaranteed rate of return, and sick leave credit. Plaintiffs further argue that those obligations vested when plaintiffs accepted or continued employment and that they may not be modified or terminated unilaterally to plaintiffs detriment during the full term of their public service employment careers.¹¹ Plaintiffs also argue that the prerequisites of a unilateral contract have accrued and that the state already has received the benefit of their reliance on the state’s promises. Plaintiffs rely primarily on Taylor v. Mult. Co. Dep. Sher. Ret. Bd., 265 Or 445, 510 P2d 339 (1973).

Analysis of the parties’ argument under the federal Contracts Clause requires this court to determine: first, whether there is a contractual relationship between plaintiffs and the state; second, if so, the nature of the contractual promises that allegedly have been impaired; third, whether a state law (here a constitutional provision) impairs any of those contractual promises and, if so, whether the impairment is “substantial”; and fourth, if so, whether the state law creating the substantial impairment is justified by a significant and legitimate public purpose and whether the method used by the state to advance that public purpose constitutes an unnecessarily broad repudiation of its contractual obligation to private persons.¹² General Motors Corp. v. Romein, 503 US 181, 186, 112 S Ct 1105, 117 L Ed 2d 328, 337 (1992); Keystone Bituminous Coal Assoc, v. DeBenedictis, 480 US 470, 504, 107 S Ct 1232, 94 L Ed 2d 472 (1987); Energy Reserves Group Inc. v. Kansas Power & Light, 459 US 400, 411, 103 S Ct 697, 74 L Ed 2d 569 (1983); United States Trust Co. v. New Jersey, 431 US 1, 97 S Ct 1505, 52 L Ed 2d 92, reh’g den 431 US 975 (1977). See Laurence H. Tribe, American Constitutional Law, 613-28 (2d ed 1988) (discussing federal Contracts Clause); see also R. Rotunda and J. Nowak, 2 Treatise On Constitutional Law, § 15.8 (3d ed 1992) (summarizing relevant United States Supreme Court cases).

The consolidated cases on appeal do not come to this court on a clean slate, without principle or case law to guide us. Rather, these cases call for a straightforward application of well-established Oregon case law. In order to understand the essential underpinnings of that law, it is instructive to review the following cases:

In Crawford v. Teachers’ Ret. Fund Ass’n, 164 Or 77, 99 P2d 729 (1940), a retired public school teacher sought to compel the payment of an annuity that she claimed was due her on retirement. The defendant refused to pay the annuity, arguing that, because the by-laws of the association had been amended after the teacher had retired, she was required to pay more for the same benefit. The defendant conceded that, before she retired, the teacher had paid the amount required under the former by-laws. In affirming the trial court, which had ruled in favor of the teacher, this court recognized that “contractual relations” had been created between the parties:

“[W]hen there had been full performance on the part of the plaintiff, * * * her rights became vested and no subsequent change, in the by-laws could interfere with or impair such rights. Any other rule would utterly destroy all stability and security in the retirement fund plan[.]

“* * * The teacher, by continuing in the service and making contributions to the fund, has, in effect, accepted the offer of the State, through its governmental agencies, to pay an annuity upon retirement at a certain age. * * * [We are dealing] with the rights of an employee to the payment of an annuity provided for under the terms of the statute which became a part of the contract. * * * As we view it, the mere fact that part of the fund might consist of contributions by the school district would not refute the idea of contractual relationship.

‘While there is a great difference of opinion expressed by the courts relative to the question as to whether a teacher under similar retirement fund plans has acquired vested rights * * *, we think the trend of modern authority and the better-reasoned cases are to the effect that contractual relations are created and that, upon full performance by the annuitant, rights accrue which cannot be impaired by subsequent legislation * * *[.]” 164 Or at 86-88 (citations omitted).

Crawford did not decide whether an employer may unilaterally alter the terms of the retirement formula during employment, with respect to services that the employee already has performed. This court answered that question in Harryman v. Roseburg Rural Fire Prot. District, 244 Or 631, 420 P2d 51 (1966).

In Harryman, a fireman commenced work under a retirement rule that said that he was entitled to receive pay for unused sick leave on retirement if authorized by the employer, and that the system would accept unused sick leave pay as the basis for calculating the retirement benefit. The employer’s sick leave credit provision was as follows:

“One (1) day per month, up to 90 days, Cash On Termination.”

During the fireman’s employment, the employer unilaterally revoked its previous authorization for sick leave credit on retirement. At trial, the employer argued that the allowance for sick leave credit on retirement was a gratuity and, therefore, whatever right the fireman had to any credit was terminated when the employer revoked its sick leave provision. This court rejected that argument:

“When plaintiff entered upon his employment with defendant he was advised that he would receive an allowance for accumulated sick leave upon termination of employment. He accepted employment upon the assumption that the allowance for sick leave was a part of his compensation for services. Since it was a part of the inducement to accept employment, it can be regarded as a contractual term of plaintiffs employment. Defendant could not, therefore, deprive plaintiff of the allowance after he had earned it.” 244 Or at 634-35 (footnote omitted).

Accordingly, this court affirmed the trial court’s judgment for the fireman.

In Adams v. Schrunk, 6 Or App 580, 488 P2d 831, rev den (1971), the Court of Appeals applied Harryman. The employer attempted to amend its retirement plan after the plaintiffs had commenced their employment as policemen by altering, to the plaintiffs’ detriment, an existing rule governing the calculation of the period of service required for retirement. The question in Adams was whether the plaintiffs would get credit for their temporary service before their permanent appointments. The Court of Appeals concluded that the employer could not unilaterally amend the rule after the plaintiffs had commenced service so as to cut off their right to have their temporary service included in computing their eligibility for retirement. The Court of Appeals, citing Crawford, noted that Oregon had rejected the gratuity theory of pension contracts:

‘We conclude therefore that the city could not by the adoption of the amendment of 1949 cut off the right of these plaintiffs, who were then and at all times since have been permanent officers, to have included the period of their prior temporary service in computing their eligibility for retirement.” 6 Or App at 587-88.

Thus, in Adams, the Court of Appeals recognized, as Crawford had not, that a contractual right could be established before the completion of the service necessary for a pension. In Taylor, 265 Or at 450-51, this court specifically approved the holding in Adams that a contractual right could be established before the completion of the service necessary for a pension.

In Taylor, the case on which plaintiffs primarily rely here, a jail matron asserted that she qualified for inclusion in Multnomah County’s retirement plan for sworn personnel. In response to her claim, Multnomah County amended its plan to delete the former definition of a covered employee, and to omit jail matrons from the new definition. The plaintiff sued to compel the county to include her in the original retirement plan. This court stated:

“Some states continue to advocate the gratuity theory of pensions. Originally, pensions came from the largess of the king and the recipient had no vested interest. An increasing number of courts are abandoning this rationale and are adopting a contract theory which looks upon a pension as part of the employee’s promised but delayed compensation for the performance of his job. Today, it can probably be said that the generally accepted theory is that of compensation and that it is possible for an employee to acquire a ‘vested’ right to a pension. See [A]nnotation, “Vested right of pensioner to pension,’ 52 ALR 2d, 437; 3 McQuillin, Municipal Corporations, 3rd ed, § 12.144.

“Oregon has joined the ranks of those rejecting the gratuity theory of pensions and has held that contractual rights to a pension can be created between the employee and the employer.” Taylor, 265 Or at 450 (citing Crawford, Adams and Harry man).

The Taylor court concluded:

“Oregon has adopted not only the contractual concept of pensions, but, also, the concept that contractual rights can arise prior to the completion of the service necessary to a pension. * * * Such rights are subject, of course, to subsequent completion of the necessary service.

“* * * The adoption of the pension plan was an offer for a unilateral contract. Such an offer can be accepted by the tender of part performance.

* * * *

“* * * [P]laintiff s tender of the contributions and acceptance of the plan terminated defendants’ power to revoke the offer, and plaintiff would be entitled to the benefits of the plan if she continued to work for the requisite period necessary for retirement.” Id. at 451-54.

The court held that the plaintiffs tender of part performance furnished consideration for the contract. Under Taylor, partial performance by the employee limited the employer’s power to revoke the offer of a retirement plan. Accordingly, because the plaintiff qualified under that plan when she first went to work, she was entitled to be included in the original plan.

The legal issue that Taylor decided was what employee response was required to make the offer of a retirement plan binding. The court’s answer was “tender of performance.” After partial performance, there was no question that a contract existed. Partial performance prevented the employer from revoking its subsidiary promise not to revoke the retirement plan that was offered when performance commenced.

In Rose City Transit v. City of Portland, 271 Or 588, 533 P2d 339 (1975), this court, citing Taylor, held that the adoption of a pension plan is an offer for a unilateral contract. The court also noted that

“[p]ension plans, disability benefits, and health insurance are extremely important today to all workers * * *. In fact, because of taxes, such benefits could become more important than salaries or salary increases.” 271 Or at 595.

In McHorse v. Portland General Electric, 268 Or 323, 331, 521 P2d 315 (1974), this court stated:

“[I]n the situation where the employee has satisfied all conditions precedent to becoming eligible for benefits under a plan, the better reasoned view is that the employee has a vested right to the benefits. This view sees the employer’s plan as an offer to the employee which can be accepted by the employee’s continued employment, and such employment constitutes the underlying consideration for the promise.”

In Gantenbein v. PERB, 33 Or App 309, 576 P2d 1257, rev den 282 Or 537 (1978), the Court of Appeals recognized that Oregon follows the rule that retirement benefits become vested at the time of acceptance of employment. Id. at 315 (citing Taylor). The court explained:

“Taylor simply holds that an employe who accepts an initial retirement plan offer has vested contractual rights under the offer which cannot be altered by a second plan put into effect after the initial plan has been accepted by the employe[.]” Id. at 316 (emphasis in original).

In Bryson v. PERB, 45 Or App 27, 30, 607 P2d 768 (1979), rev den 289 Or 107 (1980), the Court of Appeals stated:

“[I]t is without question that petitioner has a statutory and contractual right to receive retirement benefits computed at the most favorable rate applicable under laws in effect at any time during his judicial service.” (Citing Taylor.)

Finally, in Hughes, the case on which the state primarily relies here, this court interpreted a state tax statute in the context of an impairment challenge under Article I, section 21, of the Oregon Constitution, to determine whether legislative amendments to former ORS 237.201 (1989) and former 316.680(1)(d) (1989) impaired the state’s contractual obligation to members of PERS. Hughes held that, to the extent that the amendments affected pension benefits relating to pre-existing and existing work, the tax statute at issue impaired the obligations of the state’s contract, which protected accrued and accruing benefits forever. Hughes, 314 Or at 36. Hughes also held that the contractual obligation of the state in that case did not extend to benefits for work to be performed in the future and that the state could accordingly, modify its treatment of those benefits without impairing the obligation of contract. Id. Hughes specifically reaffirmed Taylor’s earlier analysis and holding with respect to Oregon pension law. Id. at 20-21.

The Tissue plaintiffs argue that Hughes was wrongly decided by this court. Although this court’s interpretation of the tax exemption statute in Hughes is open to criticism, it is the law of that case.

In Hughes, this court reaffirmed that PERS is a contract between the state and its employees, and that public employment gives rise to certain contractual obligations that are protected by the state and federal constitutions. Id. at 17-21. The Hughes court also recognized that the state may obligate itself contractually to private individuals and that, normally, general principles of contract law govern the inquiry. Id. at 14. Importantly, Hughes recognized, albeit in dictum, that the state could undertake binding contractual obligations with its employees to include benefits that may accrue in the future for work not yet performed. Id. at 28.¹³

The common thread running through the Oregon cases cited above is that the state may undertake binding contractual obligations with its employees, including benefits that may accrue in the future for work not yet performed. Moreover, the cases recognize that the PERS pension plan is an offer for a unilateral contract which can be accepted by the tender of part performance by the employee. The Oregon line of cases is consistent with the majority of jurisdictions that have considered the issue and also is consistent with the modern view of the nature of pensions. Most jurisdictions adhering to a contract theory of pensions construe pension rights to vest on acceptance of employment or after a probationary period, with vesting encompassing not only work performed but also work that has not yet begun.¹⁴

Having examined relevant case law and the parameters of Oregon pension law, we now turn to the provisions at issue in these cases. As noted, the state does not contend that, if a contract exists, and if Measure 8 impairs that contract, the impairment is not substantial. Nor does the state argue in the light of Hughes that Measure 8 advances such significant and legitimate public purposes that, should the court conclude that Measure 8 impairs contract rights, the impairment is nevertheless justified. Our analysis, therefore, must focus on only two narrow questions: What are the contractual obligations contained in the relevant statutes and does Measure 8 impair any of those contractual obligations?

SECTION 10 — SIX PERCENT PICK-UP

Section 10 requires that public employees contribute six percent of their wages to their retirement system; prohibits the state or any political subdivision after January 1, 1995, from contracting to pay their employees’ six percent contribution; and prohibits public employers from contracting to grant pay raises to offset the effects on employees of the six percent contribution.

Before 1979, employees who were members of PERS were required to contribute a percentage of their salary to their pension plans. Former ORS 237.071 (1977).¹⁵ The contribution ranged from four to seven percent, depending on an employee’s monthly salary. The 1979 legislature enacted Oregon Laws 1979, chapter 538, section 3, which provided in part:

“[A] public employer participating in the Public Employes’ Retirement System may agree, by a written employment policy or agreement in effect on or after July 1, 1979, and terminating on or before June 30,1981, to ‘pick-up,’ assume or pay the full amount of contributions to the fund required of all or less than all active members of the system employed by the employer. If a public employer so agrees:

“(1) The rate of contribution of each employee member of the system employed by the employer who is covered by such policy or agreement shall uniformly be six percent of salary regardless of the amount of monthly salary.” Or Laws 1979, ch 538, § 3 (codified at former ORS 237.075 (1993); recodified as ORS 238.205 in 1995).¹⁶

In response to that statute, the state agreed, by contract or other means (such as city charter, in the case of certain of the public employers herein) to pay the “full amount of contributions” for public employees.

The enactment of ORS 237.075 followed lengthy negotiations between the state and employee unions, during which employees agreed to forego a requested pay raise in exchange for a right to bargain with public employers for a six percent “pick-up.” The enactment allowed the state to give employees what amounted to a six percent pay increase without increasing the state’s payments to Social Security. The agreement also had significant tax benefits for the employees.

If the state stops paying the six percent pick-up and that cost is shifted to plaintiffs, the state will reduce its PERS costs by six percent of salary. Because plaintiffs will have to pay PERS six percent of their salary, they will experience slightly more than a six percent reduction in their salaries, because pick-up amounts are not considered as income and are not taxed when contributed, whereas employees pay their contributions from their taxable income.¹⁷

In its reply brief, the state acknowledges that Taylor, on its face, is susceptible to the interpretation that plaintiffs give it, i.e., that once a public employer offers benefits plan terms to an employee, those terms remain as part of the employment contract so long as the employee continues to work for the employer. The state also recognizes that its proposed interpretation of its six percent pick-up commitment may contradict this court’s analysis and holding in Taylor. However, the state urges the court to read Taylor narrowly. The state argues that the pension promises modified by Measure 8 are nothing more than salary, which may be modified prospectively. We disagree. Measure 8 is not about salary; it is about pensions. It may bear noting that the caption of the ballot title for Measure 8 states:

“AMENDS [STATE] CONSTITUTION: PUBLIC EMPLOYEES PAY PART OF SALARY FOR PENSIONS.”

Salary and pensions are not synonymous. See Rose City Transit v. City of Portland, 271 Or 588, 595, 533 P2d 339 (1975) (pension plans may be more important than salary). We disagree with the state’s reading of Taylor and believe that, in reality, the state seeks to overrule Taylor. This court followed Taylor in Hughes, and we continue to adhere to Taylor here.

Under the Taylor analysis, and contrary to the state’s argument here, ORS 237.075, and the state’s implementation of the authority contained in that statute, promised a pension benefit that plaintiffs could realize only on retirement with sufficient years of service, that is, after rendering labor for the state. Plaintiffs accepted that offer by working. See Taylor, 265 Or at 452. The change mandated by section 10 alters the state’s contractual obligation, in violation of Taylor, by increasing plaintiffs’ cost of retirement benefits for services that, absent a lawful separation of employment, they will provide in the future. That consequence, if approved, would permit the state to retain the benefit of plaintiffs’ labor, but relieve the state of the burden of paying plaintiffs what it promised for that labor.¹⁸ That result would frustrate plaintiffs’ reasonable contractual expectations that were based on legal commitments expressly made by the state.

Once offered and accepted, a pension promise made by the state is not a mirage (something seen in the distance that disappears before the employee reaches retirement). Nullification of an express term of plaintiffs’ PERS contract with the state is an impairment for purposes of Contract Clause analysis. Allied Structural Steel Co. v. Spannaus, 438 US 234, 247, 98 S Ct 2716, 57 L Ed 2d 727 (1978). Section 10 expressly and substantially changes the state’s contractual promise to plaintiffs with respect to the cost of their participation in the PERS retirement plan and the benefits that they will receive on retirement. Under section 10, the cost of participation to the employee increases while the benefits that the employee ultimately will receive on retirement decrease. Unquestionably, section 10 impairs the obligation of plaintiffs’ PERS contract.

The statutory pension system and the relationship between the state and its employees clearly established a contractual obligation to provide an undiminished level of benefits at a fixed cost. Under section 10, because plaintiffs must pay six percent more, the value of their PERS pension contract has been diminished unilaterally. A contrary holding would serve notice on any person who might consider embarking on a career in public service that the state’s promises could well prove to be worthless, even after the employees had given consideration for those promises in the form of partial performance. The most basic purposes of the Contracts Clause, as well as the notions of fundamental fairness that transcend the clause itself, point to these simple principles: the state must keep its promises, and it may depart therefrom only for a significant and legitimate public purpose. United States Trust Co., 431 US at 26. No significant and legitimate public purpose is present here. The impairment resulting from section 10 is substantial. We hold that the circuit courts did not err in concluding that section 10 violates the federal Contracts Clause.

Justice Gillette’s dissent as to section 10 would treat the six percent pick-up and former ORS 237.075 in isolation, outside of the broader context of the parties’ PERS pension contract. The fatal flaw in that analysis is that it “errs in failing to consider the significance of context.” Hughes, 314 Or at 21 n 27. The six percent pick-up is an integral part of the underlying PERS pension contract. Unilateral termination of the six percent pick-up term of the PERS pension contract materially changes that underlying pension contract to plaintiffs’ detriment and, thus, frustrates plaintiffs’ reasonable reliance on the offer the state made to them and which they accepted by the tender of part performance. Id. at 20-21.

STATE CONSTITUTIONAL DEBT LIMITATION

The state argues that any promise by the state to create a future debt obligation from currently unappropriated, nonspecial funds monies, however express and unambiguous, would violate Article XI, sections 7 and 10, of the Oregon Constitution (debt limitation).¹⁹

The state argues:

“The state could not legally or validly promise employees that the state would continue for future fiscal periods to pick-up employee contributions, or to grant credit for sick leave. To do so would be to contract to pay money in the future from funds not currently appropriated or available for that purpose, which would violate constitutional debt limitations. Contracts ánd agreements should be construed to be valid when possible. Any doubt, therefore, as to whether express and unambiguous language of promise appears, where the commitment of future general fund dollars [sic], should be resolved in favor of finding no such promise to have been made.”

The Public Employes’ Retirement Fund (PERF) is a statutory trust fund, separate and distinct from the General Fund. PERF is fully funded on a pay-as-you-go basis by employer and employee contributions and interest on its investments. Because full payment is made in the present, the pension benefits at issue in these cases do not create a future debt obligation. Moreover, the state acknowledges in its brief that it has recourse under its employment agreements to separate employees before any violation of the debt limitation would occur. Thus, Article XI, sections 7 and 10, are not implicated here.

SECTION 11 — GUARANTEED RATE OF RETURN

The 1975 legislature enacted ORS 237.277, which provides in part:

“(2) The individual account for an employee member of the system shall be examined each year. If the individual account is credited with earnings for the previous year in an amount less than the earnings that would have been credited pursuant to the assumed interest rate for that year determined by the board, the amount of the difference shall be credited to the individual account and charged to a reserve account in the fund established for the purpose.” (Recodified as ORS 238.255 in 1995.)

The effect of ORS 237.277 was to guarantee a minimum rate of return on the individual account of each PERS member. Section 11 prohibits the state or any political subdivision from contracting to guarantee any rate of interest or return on monies in a retirement plan or system established by law.

Although the state concedes, and we agree, that the guaranteed minimum rate of return became a contractual obligation of the state under PERS, the state relies on the same arguments that it made in its defense of section 10. We reject those arguments for the reasons identified above in our discussion of section 10. Once the employee performs services in reliance on the employer’s promise to afford a particular benefit on retirement, the employer is contractually bound to honor that obligation. Taylor, 265 Or at 451-52; Harryman, 244 Or at 634-35. The state’s promise, as material, included employee access to the return rate procedure described in ORS 237.277. Section 11 would cancel that obligation after employees partially performed their services. Moreover, section 11 impairs the obligation of contract stated in ORS 237.277, because it would entirely eliminate that obligation with respect to employee contributions to PERS made by current employees for work performed both before and after the effective date of Measure 8. Hughes', Taylor.

As with section 10, the impairment resulting from section 11 is substantial and not justified by any significant and legitimate public purpose within the meaning of federal impairment analysis. As noted, the state does not argue otherwise. We hold that the circuit courts did not err in concluding that section 11 violates the federal Contracts Clause.

As to section 11, this court is unanimous in holding that that section is void, albeit on different grounds.

SECTION 12 — SICK LEAVE CREDIT

The 1973 legislature enacted ORS 237.153, which provided in part:

“Upon the request by a public employer that its employees be compensated for accumulated unused sick leave with pay in the form of increased retirement benefits upon service or disability retirement, the board shall establish a procedure for adding to the gross amount of salary used in determining ‘final average salary’ * * * the monetary value of one-half of the accumulated unused sick leave of each retiring employee of the requesting public employer and shall establish his benefits on the basis of a final average salary reflecting that addition.” (Recodified as ORS 238.350 in 1955.)

The sick leave credit provisions of ORS 237.153 evince a clear and unambiguous intention of the legislature for the state to become contractually obligated to plaintiffs in the event that the state requested participation in the sick leave credit program. The state made the request contemplated by the statute. Section 12 prohibits the state or any political subdivision from using employees’ accumulated, unused sick leave to increase retirement benefits for any employees retiring after January 1,1995.

We note a parallel between Harryman and the sick leave credit and guaranteed rate of return provisions at issue in these cases. The sick leave credit that section 12 nullifies is akin to the employer’s sick leave credit authorization in Harryman. Although the employer in Harryman had a legal right to cancel its sick leave credit authorization at any time, this court held that the relevant question was whether the authorization was in effect at the start of the plaintiffs employment. Partial performance by the employee bound the employer to honor the contractual obligation that was in place at the commencement of the plaintiffs employment, thus preventing a unilateral change by the employer to the plaintiffs detriment during the period of his employment.

The state concedes, and we agree, that the sick leave credit became a contractual obligation of the state under PERS. The state defends section 12 with the same arguments that it made in its defense of section 10. For the reasons stated above, we again reject those arguments. Plaintiffs provided labor in good faith reliance on the state’s promise that they would receive enhanced retirement benefits on account of accumulated unused sick leave. Section 12 would relieve the state of its contractual obligation to provide that promised benefit, even though the employees already have provided consideration for the promise by refraining from using the maximum permissible sick leave. Section 12 impairs the state’s contractual obligation to plaintiffs.

As with sections 10 and 11, the impairment is substantial and not justified by any significant and legitimate public purpose within the meaning of federal impairment analysis. As noted, the state does not argue otherwise. Accordingly, we hold that the circuit courts did not err in concluding that section 12 violates the federal Contracts Clause.

As to section 12, this court is unanimous in holding that that section is void, albeit on different grounds.

SECTION 13 — SEVERABILITY CLAUSE

Section 13 of Article IX provides:

“If any part of Sections 10,11 or 12 of this Article is held to be unconstitutional under the Federal or State Constitutions, the remaining parts shall not be affected and shall remain in full force and effect.”

See City University v. Oregon Office of Educ. Policy, 320 Or 422, 885 P2d 701 (1994) (discussing severability of part of a statute held unconstitutional). Because each substantive section of Ballot Measure 8 is an unconstitutional impairment of a vested contractual obligation of the state to plaintiffs, we conclude that no section can be saved.

CITY OF PORTLAND’S CROSS-CLAIM

The state contends that the circuit court in Morgan erred in granting the City of Portland’s motion for summary judgment on the City’s cross-claim for indemnity. We agree. The state is not obligated to indemnify the City of Portland for any damages, including attorney fees, that the City is required to pay the Morgan plaintiffs. The legislature has not, outside the context of a tort claim, authorized an indemnity action by a political subdivision against the state, and courts are not empowered to expand the legislature’s chosen indemnification policies by exposing the state, in its sovereign capacity, to liabilities that it has not expressly undertaken. Accordingly, we hold that the circuit court erred in Morgan in granting the City of Portland’s motion for summary judgment and in denying the state’s motion for summary judgment on the City’s cross-claim for indemnification.

CONCLUSION

In summary, PERS is a contract between the state and its employees. Hughes, 314 Or at 18. The enactment of the PERS scheme in 1953 created constitutionally protected rights in PERS members. Id. PERS constitutes an offer by the state to its employees for a unilateral contract that may be accepted by the tender of part performance by those employees. Id. at 20-21. The PERS pension plan becomes vested in the state’s employees on acceptance of employment. Id. The six percent pick-up, guaranteed rate of return, and sick leave credit are integral terms of plaintiffs’ PERS pension contracts; they also are contractual obligations of the state under plaintiffs’ PERS contracts. The amount of and manner in which an employee of the state contributes to the PERS pension plan is part and parcel of that employee’s PERS pension contract. It is, in essence, a binding contractual obligation as to the purchase price for the anticipated benefits to be received on completion of the employees’ PERS-covered public service.

We hold that sections 10, 11, and 12 of Article IX substantially impair the state’s contractual obligations to plaintiffs in violation of the federal Contracts Clause and that the impairment is not justified by any significant and legitimate public purpose. Accordingly, we declare sections 10, 11, and 12 of Article IX (Ballot Measure 8) void.

The judgments of the circuit courts in OSPOA, Tissue, and SPEU are affirmed. The judgment in Morgan on the City of Portland’s cross-claim is reversed and is remanded to the circuit court for entry of a judgment for the State of Oregon on the City’s cross-claim; otherwise affirmed.

APPENDIX

Ballot Measure 8 provides:

“AN ACT

“Be it enacted by the People of the State of Oregon:

“Paragraph 1. The Oregon Constitution is amended by creating new Sections to be added and made part of Article IX, such sections to read:

“Section 10. (1) Notwithstanding any existing State or Federal laws, an employee of the State of Oregon or any political subdivision of the state who is a member of a retirement system or plan established by law, charter or ordinance, or who will receive a retirement benefit from a system or plan offered by the state or a political subdivision of the state, must contribute to the system or plan an amount equal to six percent of their salary or gross wage.

“(2) On or after January 1,1995, the state and political subdivisions of the state shall not thereafter contract or otherwise agree to make any payment or contribution to a retirement system or plan that would have the effect of relieving an employee, regardless of when that employee was employed, of the obligation imposed by subsection (1) of this section.

“(3) On or after J anuary 1,1995, the state and political subdivisions of the state shall not thereafter contract or otherwise agree to increase any salary, benefit or other compensation payable to an employee for the purpose of offsetting or compensating an employee for the obligation imposed by subsection (1) of this section.

“Section 11. (1) Neither the state nor any political subdivision of the state shall contract to guarantee any rate of interest or return on the funds in a retirement system or plan established by law, charter or ordinance for the benefit of an employee of the state or political subdivision of the state.

“Section 12. (1) Notwithstanding any existing Federal or State law, the retirement benefits of an employee of the state or any political subdivision of the state retiring on or after January 1, 1995, shall not in any way be increased as a result of or due to unused sick leave.

“Section 13. If any part of Sections 10,11 or 12 of this Article is held to be unconstitutional under the Federal or State Constitution, the remaining parts shall not be affected and shall remain in full force and effect.”

Ballot Measure 8 was approved by the voters at the November 8, 1994, General Election, and its effective date was December 8, 1994.

1 The text of Ballot Measure 8 is reproduced in the appendix to this opinion.

2 Article I, section 10, clause 1, of the United States Constitution provides in part:

“No State shall * * * pass any * * * Law impairing the Obligation of Contracts!.]”

Article I, section 21, of the Oregon Constitution embodies a similar prohibition.

3 All the justices of this court are members of the Public Employes’ Retirement System (PERS). Thus, each justice may have some financial interest in the outcome of these cases. Notwithstanding, the “rule of necessity” authorizes this court to adjudicate these claims. See Hughes v. State of Oregon, 314 Or 1, 5 n 2, 838 P2d 1018 (1992).

4 After the 1995 legislative session, PERS statutes were recodified. Citations to the PERS statutes in this opinion are to the statutes that were in force at the time Measure 8 was approved by the people.

5 When we use the word “state” in this opinion, we refer to all public employers that are parties to these cases.

6 Plaintiffs challenged Ballot Measure 8 on various constitutional, statutory, and common law grounds. This opinion addresses only plaintiffs’ claim that Ballot Measure 8 violates the federal Contracts Clause, because that was the basis for summary judgment in each of these cases.

Atiyeh v. State of Oregon, 323 Or 413, 918 P2d 795 (1996) and Oregon Education Association v. Keisling, 323 Or 429, 918 P2d 803 (1996) also involve challenges to Ballot Measure 8 on other grounds. In the light of the majority’s result in these consolidated cases, those two cases are dismissed this date as moot.

7 Plaintiff Cullivan belongs to the Portland Fire and Police Disability and Retirement Plan (FPDR), which is not part of the PERS retirement system. FPDR is authorized by the Charter of the City of Portland.

8 Plaintiff Miller is not a member of the bargaining unit that SPEU represents and he is otherwise unrepresented in connection with collective bargaining issues.

9 PERS is a statewide defined benefit retirement plan that is administered by the trustee Public Employes’ Retirement Board. ORS ch 237. The Public Employes’ Retirement Fund (PERF) is an express statutory trust fund, separate and distinct from the state’s General Fund. ORS 237.271. See ORS 237.271(2) (“The State of Oregon and other public employers that make contributions to the fund have no proprietary interest in the fund or in the contributions made to the fund by them”); see also Sprague v. Straub, 252 Or 507, 521-22, 451 P2d 49 (1969) (the state has no proprietary interest in PERF). The State Treasurer holds the PERF as a mere custodian. PERS investments are managed by the Oregon Investment Council. ORS 293.701 et seq. Benefits paid by PERS are funded from three sources: employee contributions (either withheld from employees’ salaries or paid by employers on behalf of employees); employer contributions; and earnings from the investment of those funds. At the time that Measure 8 was adopted, the PERF had adequate funds to pay all retirement benefits accrued and accruing in PERS.

10 The 1995 Oregon legislature established a different level of benefits for people who begin their public employment on or after January 1, 1996. Or Laws 1995, ch 654. That level is called Tier Two. It has a higher normal retirement age, no guaranteed return on investments, no use of vacation pay to increase benefits, and disability retirement benefits are offset by any payments from workers’ compensation. The 1995 amendments do not affect the benefits of PERS members employed before January 1, 1996.

11 In this context, the concept of‘Vesting” refers to the point in time after which employees cannot lose particular benefit rights, even if they stop working in a covered position.

12 The state’s opening brief asserts:

“The state does not contend in this case that if a contract exists, and if Measure 8 impairs that contract, the impairment is not substantial. Nor does the state argue in the light of Hughes that Measure 8 advances such significant and legitimate public purposes that, should the court conclude Measure 8 impairs contract rights, the impairment is nevertheless justified.”

See United States Trust Co. v. New Jersey, 431 US 1, 25-26, 97 S Ct 1505, 52 L Ed 2d 92 (1977) (“The Contract Clause is not an absolute bar to subsequent modification of a State’s own financial obligations. As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose. In applying this standard, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State’s self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all”) (footnote omitted)). See also Richard A. Epstein, Toward a Revitalization of the Contract Clause, 51 U Chi L Rev 703, 719 (1984) (arguing that “[t]o allow a state to repudiate its contracts unilaterally * * * is to invite the very abuses of factual coalition that the contract clause was designed to prevent, for we can be sure that almost every repudiation will provide benefits to some groups at the expense of others”).

In November 1995, the state refunded about $157 million to personal income taxpayers and gave tax credits of about $166 million to corporate income and excise taxpayers with respect to their 1995 income tax obligations pursuant to ORS 291.349 (2 percent surplus “kicker” statute).

¹³

“Indeed, it is common knowledge that the state makes such promises in its collective bargaining agreements, negotiated generally every two years, which include promises for work not yet performed, but to be performed during the period of the collective bargaining agreements.”

14 See, e.g., Yeazell v. Copins, 98 Ariz 109, 402 P2d 541 (1965) (holding that a legislative amendment that prospectively increased employee contributions was an unlawful impairment of contract); see also Calabro v. City of Omaha, 247 Neb 955, 531 NW2d 541 (1995); Assoc of State College Faculty v. Pennsylvannia, 505 Pa 369, 479 A2d 962 (1984); Singer v. City of Topeka, 227 Kan 356, 607 P2d 467 (1980); Marvel v. Dannemann, 490 F Supp 170 (D Del 1980) (applying Delaware contract law); Opinion of the Justices, 364 Mass 847, 303 NE2d 320 (1973); Bakenhus v. City of Seattle, 48 Wash 2d 695, 296 P2d 536 (1956); Allen v. City of Long Beach, 45 Cal 2d 128, 287 P2d 765 (1955); Bowles v. Washington Department of Retirement Systems, 121 Wash 2d 52, 847 P2d 440 (1993); Betts v. Board of Administration, 21 Cal 3d 859, 582 P2d 614 (1978); Petras v. State Bd. of Pension Trustees, 464 A2d 894 (1983); Jones v. Cheney, 253 Ark 926, 489 SW2d 785 (1973).

15 Renumbered ORS 238.200 in 1995.

16 When the 1979 legislature authorized the pick-up, it expressly limited the authorization to continue the pick-up to a two-year period terminating in 1981. However, the statute was amended in 1981 to remove the sunset provision. Or Laws 1981, ch 373, § 1. With respect to plaintiffs’ challenge to section 10, the pickup was carried over into subsequent collective bargaining agreements until the passage of Ballot Measure 8 in 1994.

17 Eliminating the pick-up also would reduce plaintiffs’ salary used to compute final PERS pension benefits, because PERS includes the six percent pick-up in the salary used to compute a “Final Average Salary.” See former ORS 237.075(2) and (3) (1993) (so stating). Eliminating the pick-up would reduce plaintiffs’ computation salary by six percent, thus resulting in lower retirement benefits for plaintiffs.

18 Cases from other jurisdictions that follow a contractual view of public pensions likewise have concluded that legislative enactments that increased the level of public employee contributions, without providing offsetting benefits, violated either the state or federal contract clauses. See, e.g., Booth v. Sims, 193 W Va 323, 456 SE2d 167 (1994) (stating that a modification of a pension statute that increased employee contribution from six percent to nine percent of income, and that did not offer offsetting new benefits, would impair pension contract); McDermott v. Regan, 82 NY2d 354, 624 NE2d 985 (1993) (statute changing the funding method for state retirement system violated the impairment of contracts clause of state constitution); Assoc, of State College Faculty (holding that a modification of a pension statute that increased employee contribution by 1.25 percent of income, and that did not offer any corresponding new benefits, was an impairment of a pension contract); Singer (same holding with regard to doubling of employee pension contributions); Opinion of the Justices (same holding with regard to increasing employee pension contributions from five percent to seven percent); Allen (same holding with regard to increasing employee contribution from two percent to ten percent of income). See also Marvel (concluding that a statutory amendment that had the effect of requiring a public employee’s pension contribution to increase from 1.1 percent to 4.3 percent of salary was an impairment of contract). Cases cited in full above at note 15.

19 Article XI, section 7, of the Oregon Constitution, provides in part:

“The Legislative Assembly shall not lend the credit of the state nor in any manner create any debt or liabilities which shall singly or in the aggregate with previous debts or liabilities exceed the sum of fifty thousand dollars, except in case of war or to repel invasion or suppress insurrection or to build and maintain permanent roads; * * * and every contract of indebtedness entered into or assumed by or on behalf of the state in violation of the provisions of this section shall be void and of no effect.”

Article XI, section 10, of the Oregon Constitution, provides:

“No county shall create any debt or liabilities which shall singly or in the aggregate, with previous debts or liabilities, exceed the sum of $5,000; provided, however, counties may incur bonded indebtedness in excess of such $5,000 limitation to carry out purposes authorized by statute, such bonded indebtedness not to exceed limits fixed by the statute.”