No. 16	               April 30, 2015	167

          IN THE SUPREME COURT OF THE
                STATE OF OREGON

                      Everice MORO;
   Terri Domenigoni; Charles Custer; John Hawkins;
       Michael Arken; Eugene Ditter; John O’Kief;
      Michael Smith; Lane Johnson; Greg Clouser;
     Brandon Silence; Alison Vickery; and Jin Voek,
                        Petitioners,
                             v.
                  STATE OF OREGON;
                     State of Oregon,
     by and through the Department of Corrections;
              Linn County; City of Portland;
      City of Salem; Tualatin Valley Fire & Rescue;
  Estacada School District; Oregon City School District;
   Ontario School District; Beaverton School District;
    West Linn School District; Bend School District;
        and Public Employees Retirement Board,
                       Respondents,
                            and
             LEAGUE OF OREGON CITIES;
            Oregon School Boards Association;
           and Association of Oregon Counties,
                        Intervenors,
                            and
    CENTRAL OREGON IRRIGATION DISTRICT,
                     Intervenor below.
                    S061452 (Control)
               Wayne Stanley JONES,
                     Petitioner,
                          v.
     PUBLIC EMPLOYEES RETIREMENT BOARD;
         Ellen Rosenblum, Attorney General;
             and Kate Brown, Governor,
                    Respondents.
                      S061431
168	                                             Moro v. State of Oregon

                Michael D. REYNOLDS,
                        Petitioner,
                             v.
       PUBLIC EMPLOYEES RETIREMENT BOARD,
            State of Oregon; and Kate Brown,
               Governor, State of Oregon,
                      Respondents.
                         S061454
                    George A. RIEMER,
                          Petitioner,
                               v.
                   STATE OF OREGON;
                Oregon Governor Kate Brown;
          Oregon Attorney General Ellen Rosenblum;
         Oregon Public Employees Retirement Board;
       and Oregon Public Employees Retirement System,
                        Respondents.
                           S061475
                     George A. RIEMER,
                         Petitioner,
                              v.
                    STATE OF OREGON;
               Oregon Governor Kate Brown;
          Oregon Attorney General Ellen Rosenblum;
             Public Employees Retirement Board;
          and Public Employees Retirement System,
                        Respondents.
                          S061860

   On petition for judicial review of legislation.*
   Argued and submitted October 14, 2014.
   Gregory A. Hartman, Bennett, Hartman, Morris &
Kaplan, LLP, Portland, filed the briefs and argued the cause
for petitioners Everice Moro, Terri Domenigoni, Charles
______________
	   *  Senate Bill 822, signed into law May 6, 2013, and Senate Bill 861, signed
into law October 8, 2013.
Cite as 357 Or 167 (2015)	169

Custer, John Hawkins, Michael Arken, Eugene Ditter,
John O’Kief, Michael Smith, Lane Johnson, Greg Clouser,
Brandon Silence, Alison Vickery, and Jin Voek. With him on
the briefs was Aruna A. Masih.
   George A. Riemer, Sun City West, Arizona, argued the
cause and filed the briefs on behalf of himself.
   Michael D. Reynolds, Seattle, Washington, argued the
cause and filed the briefs on behalf of himself.
   Wayne Stanley Jones, North Salt Lake City, Utah, filed
the briefs on behalf of himself.
   William F. Gary, Harrang Long Gary Rudnick P.C.,
Portland, argued the cause and filed the briefs for respon-
dents Linn County, Estacada School District, Oregon City
School District, Ontario School District, West Linn School
District, Beaverton School District, Bend School District
and intervenors Oregon School Boards Association and
Association of Oregon Counties. With him on the brief was
Sharon A. Rudnick.
   Keith L. Kutler, Assistant Attorney General, Salem,
argued the cause and filed the brief for State respondents.
With him on the brief were Ellen F. Rosenblum, Attorney
General, Anna M. Joyce, Solicitor General, and Matthew J.
Merritt, Assistant Attorney General.
    Harry Auerbach, Chief Deputy City Attorney, Portland,
filed the brief for respondent City of Portland.
    Edward H. Trompke, Jordan Ramis PC, Lake Oswego,
filed the brief for respondent Tualatin Valley Fire and
Rescue.
   W. Michael Gillette, Schwabe, Williamson & Wyatt, PC,
Portland, argued the cause and filed the brief for interve-
nor League of Oregon Cities. With him on the brief were
William B. Crow, Sara Kobak, and Leora Coleman-Fire.
    Craig A. Crispin, Crispin Employment Lawyers, Portland,
filed the brief for amicus curiae AARP.
   Sarah K. Drescher, Tedesco Law Group, Portland, filed
the brief for amicus curiae International Association of Fire
Fighters.
170	                                                Moro v. State of Oregon

   Before Balmer, Chief Justice, and Kistler, Walters,
Linder, Brewer, and Baldwin, Justices, and Haselton, Chief
Judge of the Oregon Court of Appeals, Justice pro tempore.**
    BALMER, C. J.
    Brewer, J., concurred and filed an opinion.
   Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7,
8, 9, and 10, are declared unconstitutional under Article I,
section 21, of the Oregon Constitution insofar as they affect
retirement benefits earned before May 6, 2013. Oregon Laws
2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session),
are declared unconstitutional under Article I, section 21,
of the Oregon Constitution insofar as they affect retire-
ment benefits earned before October 8, 2013. Oregon Laws
2013, chapter 2, section 8 (Special Session) is declared void.
Petitioners’ requests for relief challenging Oregon Laws
2013, chapter 53, sections 11, 12, 13, 14, 15, 16, and 17, are
denied.




______________
	  **  Landau, J., did not participate in the consideration or decision of this case.
Cite as 357 Or 167 (2015)	171

     Active and retired public employees filed petitions for direct judicial review
of 2013 statutory amendments to the Public Employees Retirement System
(PERS). The amendments eliminated the payment of an income tax offset to
nonresident PERS retirees and modified the cost-of-living adjustment (COLA)
applied to PERS benefits. Held: (1) the income tax offset is not a term of the PERS
statutory contract, because it is not compensation for work performed; (2) the
benefits provided under the income tax offset are a term of a 1997 settlement
agreement, but the 2013 amendments neither impair nor breach the terms of
the settlement agreement, because the agreement expressly contemplates, and
provides a means for seeking relief for, such benefit reductions; (3) the COLA is
a term of the PERS statutory contract, reaffirming Strunk v. PERB, 338 Or 145,
108 P3d 1058 (2005); (4) the 2013 amendments do not impair petitioners’ contrac-
tual rights by modifying the COLA prospectively as to benefits that petitioners
earned on or after the effective dates of the amendments; (5) the 2013 amend-
ments impair petitioners’ contractual rights by modifying the COLA retrospec-
tively as to benefits that petitioners already had earned before the effective dates
of the amendments, thus the 2013 amendments partially violate Article I, section
21, of the Oregon Constitution; (6) eliminating payment of the income tax offset
to nonresident retirees does not violate the federal Privileges and Immunities
Clause, Article IV, section 2, clause 1, of the United States Constitution; (7) elim-
inating payment of the income tax offset to nonresident retirees does not violate
the federal Equal Protection Clause of the Fourteenth Amendment to the United
States Constitution; (8) eliminating payment of the income tax offset to nonresi-
dent retirees does not violate 4 USC section 114.
     Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10, are
declared unconstitutional under Article I, section 21, of the Oregon Constitution
insofar as they affect retirement benefits earned before May 6, 2013. Oregon
Laws 2013, chapter 2, sections 1, 2, 3, 4, 5, and 6 (Special Session), are declared
unconstitutional under Article I, section 21, of the Oregon Constitution insofar
as they affect retirement benefits earned before October 8, 2013. Oregon Laws
2013, chapter 2, section 8 (Special Session) is declared void. Petitioners’ requests
for relief challenging Oregon Laws 2013, chapter 53, sections 11, 12, 13, 14, 15,
16, and 17, are denied.
172	                                  Moro v. State of Oregon

	       BALMER, C. J.
	         Petitioners are active and retired members of the
Public Employee Retirement System (PERS) challenging
two legislative amendments aimed at reducing the cost of
retirement benefits—Senate Bill (SB) 822 (2013), which
eliminated income tax offset benefits for nonresident retir-
ees and modified the cost-of-living adjustment (COLA)
applied to PERS benefits, and SB 861 (2013), which further
modified the PERS COLA. Or Laws 2013, ch 53 (SB 822);
Or Laws 2013, ch 2 (Spec Sess) (SB 861). Petitioners raise
numerous challenges to the amendments but argue primar-
ily that the amendments impair their contractual rights and
therefore violate the state Contract Clause, Article I, sec-
tion 21, of the Oregon Constitution, and the federal Contract
Clause, Article I, section 10, clause 1, of the United States
Constitution.
	        On that issue, respondents and intervenors, which
include the State of Oregon and other public employers par-
ticipating in PERS (collectively, respondents), contend that
the amendments in SB 822 and SB 861 modify noncontrac-
tual and insubstantial PERS benefits and that, even if the
amendments impair constitutionally protected contractual
rights, the impairment is justified on public purpose grounds.
Specifically, respondents argue that the amendments were a
reasonable and necessary response to increases in employer
contribution rates required by the Public Employee
Retirement Board (the board), which administers PERS.
Those rate increases stem from the recession that caused
the PERS fund to lose 27% of its value in 2008. To make
up for those losses and to restore the funding needed to pay
future benefits, the board increased the contribution rates
imposed on respondents and other participating employers.
Respondents insist that those rate increases are sufficiently
burdensome to justify the benefit reductions and excuse any
contractual impairment that might result.
	        We have considered the parties’ arguments and
conclude that nonresident petitioners have no contractual
right to the income tax offset payments and, therefore, that
the legislature did not violate the state or federal Contract
Clauses by eliminating those payments to nonresident
Cite as 357 Or 167 (2015)	173

retirees in SB 822. We also reject petitioners’ other chal-
lenges to the elimination of the income tax offset payments
for nonresident retirees.
	        Our assessment of the COLA amendments is more
complicated. Before the amendments at issue in this case,
the COLA provisions had been in place and unchanged
for 40 years. Indeed, a substantial number of PERS retir-
ees worked their entire careers while the pre-amendment
COLA provisions were in effect and then retired. We con-
clude that petitioners have a contractual right to receive the
pre-amendment COLA for benefits that they earned before
the effective dates of the amendments—that is, benefits
that are generally attributable to work performed before the
amendments went into effect. Thus, insofar as they apply
retrospectively to benefits earned before the effective dates,
the COLA amendments impair the PERS contract and vio-
late the state Contract Clause. Petitioners, however, have no
contractual right to receive the pre-amendment COLA for
benefits that they earned on or after the effective dates of
the amendments—that is, benefits that are generally attrib-
utable to work performed after the amendments went into
effect. In the absence of specific contract rights outside the
PERS statutes, the COLA amendments do not violate the
state or federal Contract Clauses when applied to benefits
earned on or after the effective dates.
	        Further, we reject respondents’ substantiality and
public purpose arguments attempting to justify that impair-
ment. Because the COLA is compounded annually, the
COLA grows over time to become a significant part of the
PERS retirement benefits. Even seemingly small changes
to the COLA rate, like those at issue in this case, can have
a substantial impact on the value of the benefits. Although
there is no doubt that the legislature passed SB 822 and
SB 861 to address legitimate public policy concerns and
with an appropriate sensitivity to the impact that the
amendments would have on retirees, those concerns do not
establish a defense to the contractual impairment that the
amendments effect. The public purpose defense that respon-
dents ask this court to recognize imposes a high bar to jus-
tify the state’s impairment of a state contract, like PERS,
and the record in this case does not meet that standard.
174	                                                 Moro v. State of Oregon

	        We therefore hold that respondents constitutionally
may cease the income tax offset payments to nonresidents
as set out in SB 822 and that respondents also constitution-
ally may apply the COLA amendments as set out in SB 822
and SB 861 prospectively to benefits earned on or after the
effective dates of those laws, but not retrospectively to bene-
fits earned before those effective dates.1 Subject to applicable
vesting requirements, PERS members who have worked for
participating employers both before and after the relevant
effective dates are entitled to a COLA rate that is blended to
reflect the different COLA provisions applicable to benefits
earned at different times.
                            I. BACKGROUND
A.  Jurisdiction and Evidentiary Record
	        The legislature conferred original jurisdiction on this
court to determine whether SB 822 and SB 861 are invalid,
unconstitutional, or a breach of the contracts between PERS
members and their employers. See SB 822, § 19(1) (conferring
original jurisdiction on this court); SB 861, § 11(1) (same).
In furtherance of that jurisdiction, we appointed Multnomah
County Circuit Court Judge Stephen K. Bushong to act as
special master. See SB 822, § 19(6) (authorizing the court to
appoint a special master); SB 861, § 11(6) (same). As special
master, Judge Bushong presided over an evidentiary hearing
and prepared a thorough report containing his recommended
findings of fact. See Special Master’s Preliminary Report
and Recommended Findings of Fact (Apr 29, 2014) (Special
Master’s Report). The parties have not materially challenged
the special master’s recommended findings, which we have
adopted unless otherwise noted.2
	1
       Because we hold that the COLA amendments may not be applied retrospec-
tively, we also void, for the reasons set out below, 357 Or at 232-33, the provi-
sions of SB 861 allowing for certain supplemental payments to retirees that were
intended to mitigate the impact of that retrospective application.
	2
       We previously considered a motion to disqualify the sitting judges of the
Oregon Supreme Court from hearing this case and a motion to disqualify Judge
Bushong from acting as special master on the ground that those individuals
are PERS members and therefore have an interest in the outcome of this case.
Moro v. State of Oregon, 354 Or 657, 661-62, 320 P3d 539 (2014). We denied those
motions and held that the “rule of necessity” precluded disqualification. Id. at 672.
“[U]nder the ‘rule of necessity,’ if the only judges authorized by law to decide a case
all have an interest in the outcome of the case, that interest is not disqualifying
Cite as 357 Or 167 (2015)	175

B.  PERS Funding and Benefits
	        PERS has been “a contractual benefit of public
employment[ ] since 1945.” Strunk v. PERB, 338 Or 145,
157, 108 P3d 1058 (2005). Employees become PERS mem-
bers after working six months in a qualified position for
the state or other participating public employer. ORS
238.015(1); ORS 238A.100(1); ORS 238A.300(1). There are
more than 330,000 members in the PERS system, includ-
ing current employees (active members), unretired former
employees (inactive members), and retired former employ-
ees (retired members).3 And there are about 900 participat-
ing public employers, including all state departments and
agencies, all school districts, and nearly all units of local
government.
	        The board administers PERS and serves as trustee
of the Public Employee Retirement Fund (the fund), which
the board uses to pay member retirement benefits. ORS
238.660(1); see also White v. Public Employees Retirement
Board, 351 Or 426, 437-38, 268 P3d 600 (2011) (discussing
the standards for the board when serving as a trustee). As
of December 2013, the fund had approximately $68 billion
in assets. The board is responsible for ensuring that the
fund’s assets are sufficient to pay the benefits owed to PERS
members.
	        The board attempts to prefund each member’s ben-
efits by collecting contributions both from that member and
from his or her employer while the member is working. The
board then invests those contributions over the course of the
member’s career and collects the income from those invest-
ments. As a result, the board relies on three sources to gen-
erate the fund’s assets: member contributions; employer con-
tributions; and investment income. Strunk, 338 Or at 157.
Ultimately, the board must generate sufficient assets from
those three sources to equal the retirement benefits owed to
PERS members.

because judges have ‘the absolute duty’ to ‘hear and decide cases within their
jurisdiction.’ ” Id. at 667 (quoting United States v. Will, 449 US 200, 215, 101 S Ct
471, 66 L Ed 2d 392 (1980)).
	3
       We take the facts from the Special Master’s Report or other records admit-
ted by the special master as evidence in the hearing that he conducted.
176	                                   Moro v. State of Oregon

	        Some retirement plans are “defined contribution
plan[s].” See 26 USC § 414(i) (defining defined contribution
plans). A defined contribution plan defines how much the
member and employer contribute but does not promise that
a member will receive a particular amount in benefits at
retirement. Generally, the plan administrator deposits the
contributions into an account for the member and invests
those contributions. At retirement, the member’s benefit is
whatever money is in the member’s account. Consequently,
the assets of a defined contribution plan always equal the
benefits owed to members.
	        The alternative to defined contribution plans are
“defined benefit plan[s].” See 26 USC § 414(j) (defining
defined benefit plans). As the name suggests, a defined ben-
efit plan defines the benefit first, and then the plan adminis-
trator attempts to set the current contribution rates to pay for
those future benefits. Setting the proper contribution rates
often requires an administrator to make numerous projec-
tions about future events that might affect the costs of the
retirement benefit. The events that the plan administrator
needs to project depend on the nature of the defined benefits.
Those projections are often complex and frequently include
future compensation levels of members, life expectancies of
members, and future rates of return on plan investments.
The plan administrator then revises those projections as
needed to reflect the actual events that the administrator
previously projected. Those revisions indicate whether the
plan administrator previously overestimated or underesti-
mated the contributions needed to fund future benefits. If
the plan administrator overestimated, then future contribu-
tion rates will be lower. If the plan administrator underesti-
mated, then future contribution rates will be higher.
	         PERS is a defined benefit plan, although it has
some components of a defined contribution plan. See ORS
238.600(1) (“It is the intent of the Legislative Assembly
that [PERS] be qualified and maintained under sections
401(a), 414(d) and 414(k) of the Internal Revenue Code as
a tax-qualified defined benefit governmental plan.”). The
board, therefore, first determines the value of projected ben-
efits for each member and then attempts to set current con-
tribution rates so that, when invested, those contributions
Cite as 357 Or 167 (2015)	177

will grow and fully fund the benefits that the member will
receive in retirement. Member contribution rates are set by
statute at 6% of the member’s salary. ORS 238.200(1)(a);
ORS 238A.330(1).4 As a result, the board may adjust only
the employer contribution rates.
	         The board sets employer contribution rates every
biennium. Strunk, 338 Or at 159. Employer contribution
rates can consist of two components: the “normal cost” and
an amount needed to amortize any “unfunded actuarial lia-
bility.” Id. at 160. An employer’s normal cost is an “actuar-
ial estimate” of its employees’ future benefits attributable to
that biennium. Arken v. City of Portland, 351 Or 113, 122,
263 P3d 975 (2011), adh’d to on recons sub nom Robinson v.
Public Employees Retirement Board, 351 Or 404, 268 P3d
567 (2011). The normal cost, therefore, applies to only active
members.
	        On the other hand, the unfunded actuarial liabil-
ity can apply to all members, whether active, inactive, or
retired. If the board determines that the previous normal
costs that it collected will be insufficient to pay projected
future benefits, then the amount of that insufficiency is the
unfunded actuarial liability. Strunk, 338 Or at 160. When
the plan is underfunded, the board increases employer con-
tribution rates above the normal cost by adding an amount
that will reduce the unfunded actuarial liability.5 Rather
than increase employer contribution rates to eliminate the
unfunded actuarial liability in a given biennium, which
could cause contribution rates to spike, the board typically
seeks to pay down the unfunded actuarial liability over
many years.
	       Unfunded actuarial liabilities result, in part, from
uncertainties in the actuarial estimates used by the board.
For example, those actuarial estimates include calculating
	4
       Usually, employers pay for that contribution on behalf of their employees
(called the “six percent pick up”). See Strunk, 338 Or at 164 n 21 (describing
the six percent pick up); ORS 238.205(1) (authorizing employers to pick up the
employee contribution); ORS 238A.335(1) (same).
	5
      When the board determines that it previously overestimated the normal
cost, then the employer receives a financial credit reducing its current normal
cost. Strunk, 338 Or at 160.
178	                                            Moro v. State of Oregon

and applying an assumed earnings rate on investments.6
Unfunded actuarial liabilities may, therefore, result from
the board’s failure to achieve that rate of return. Historically,
PERS has depended heavily on investment income. Between
1970 and 2012, more than 72% of the funding for PERS
came from investment income.

	      The board faces further actuarial difficulties
because of the nature of benefits available to each category
of PERS member. An employee’s membership category
depends on when the employee worked for a participat-
ing employer. There are three broad categories of PERS
members: Tier One members were hired before January 1,
1996; Tier Two members were hired between January 1,
1996, and August 28, 2003; and Oregon Public Service
Retirement Plan (OPSRP) members were hired after
August 28, 2003.7

	        Tier One and Tier Two members receive a monthly
retirement benefit called a “service retirement allowance,”
which is paid for the life of the member. ORS 238.300. The
service retirement allowance is funded by member and
employer contributions. Strunk, 338 Or at 160. A member’s
contributions are deposited into a “regular account” and
invested by the board. The board credits returns on those
investments back into the member’s regular account. The
regular accounts of Tier One members are credited each
year with an amount equal to at least the assumed earnings
rate described above. Under certain conditions, the board
may, but is not required to, allocate greater amounts to
those accounts. See id. at 164-65 (describing crediting prac-
tices before and after the 2003 PERS legislation). The board
uses the employee contributions and the amounts credited
to the regular account to fund an annuity benefit that is
paid for the life of the member. Id. at 165 n 22.

	6
       For many years, the board applied an 8% assumed earnings rate. In 2013,
the board lowered it to 7.75%.
	7
      Although OPSRP has a different name and appears in a different ORS
chapter, see ORS chapter 238 (setting out Tier One and Tier Two benefits) and
ORS chapter 238A (setting out OPSRP benefits), all three categories are PERS
members, see ORS 238.600(1) (“The Public Employees Retirement System con-
sists of this chapter and ORS chapter 238A.”).
Cite as 357 Or 167 (2015)	179

	        Employer contributions, and their investment
income, fund any unfunded part of the annuity owed to Tier
One and Tier Two retired members, as well as an additional
pension benefit for those members using one of three formu-
las: Full Formula; Money Match; or Pension Plus Annuity.
Id. at 160-62.8 The board uses whichever formula yields the
highest pension amount for that member. ORS 238.300. This
court previously detailed those formulas in Strunk. 338 Or
at 160-62. For present purposes, it is important to note that
the legislature intended the Full Formula, which is based on
years of service and final average salary, to be the primary
formula and the one most commonly used to determine a
member’s benefits. Id. at 185-86.
	        Those three pension formulas and the annuity are
used to calculate the service retirement allowance at the
time that a Tier One or Tier Two member retires. There
are, however, two post-retirement calculations that may
increase the benefit: a cost-of-living adjustment (COLA) and
an income tax offset. Id. at 162. Both the COLA and the
income tax offset are based on a percentage of the service
retirement allowance and are funded through employer con-
tributions. Because those benefits are central to this action,
they are described in more detail below.
	        The value of those combined benefits—the service
retirement allowance as adjusted by the COLA and the
income tax offset—is what the board attempts to project
when it sets employer contribution rates for Tier One and
Tier Two members. To do that, the board makes actuarial
projections involving a member’s career path, future earn-
ings, and life expectancy, as well as anticipated earnings on
investments. Each of those projections involves uncertainty,
making it difficult for the board to set proper contribution
rates at any given time and creating the opportunity for
unfunded actuarial liabilities.
	        The board’s crediting practices during the 1980s
and 1990s created further risks of unfunded actuar-
ial liabilities. Although the legislature expected the Full
Formula to be the primary formula, Money Match became
	8
       Pension Plus Annuity is available to only those Tier One members who con-
tributed to PERS before 1981. Strunk, 338 Or at 160.
180	                                            Moro v. State of Oregon

predominant starting in the 1990s and continuing until
2012. Money Match calculates the member’s pension based
on the value of the member’s regular account. When invest-
ment earnings significantly exceeded the assumed earn-
ings rate during the 1990s and early 2000s, the board often
credited much of those earnings to the Tier One members’
regular accounts rather than saving more of those earnings
in a reserve account used to pay the guaranteed return for
Tier One members in underperforming years. See id. at 161
n 18 (describing how Money Match became the dominant
formula). The Money Match formula, the board’s crediting
decisions, and the Tier One members’ guaranteed rate of
return combined to produce “atypical” retirement benefits
exceeding those of public employees in other jurisdictions.
Special Master’s Report at 45.
	         That combination of factors not only led to larger
benefits for members, but also exposed employers to larger
liabilities. Further, because the reserve account was under-
funded, the board had few options to address unfunded actu-
arial liabilities other than significantly increasing employer
contributions. See id. (“The design and implementation of the
Tier I Money Match program was an important, structural
contributor to the system’s financial challenges.”). Despite
requests by some public employers and media reports about
the system’s underfunding, the board did not change its
crediting and other practices.9 Moreover, until 2003, the leg-
islature did not take action to limit PERS’s obligations by
prospectively reducing benefits.
	         By 2003, PERS was only 65% funded. At that time,
the legislature responded by establishing the Individual
Account Program (IAP) and creating the third tier of mem-
bers, OPSRP. Other aspects of the 2003 legislation, as well
as administrative changes to the calculation of benefits
made by the board (after the board was reconstituted by the
2003 legislation), reduced the fund’s obligations, thus help-
ing to relieve some of the benefit liabilities.

	9
      Participating employers ultimately challenged the board’s crediting
practices—specifically related to crediting orders in 1998 and 2000—and
obtained court orders that led to the fund recouping some of those credits, as
well as to other administrative changes. See generally White, 351 Or at 430-31
(describing the employer challenges).
Cite as 357 Or 167 (2015)	181

	        Because of those legislative amendments, the con-
tributions of Tier One and Tier Two members have, since
2004, no longer been placed into their regular accounts that
fund the service retirement allowance. Instead, member
contributions are placed into a separate IAP account that
funds an IAP annuity. Although the IAP contributions are
also invested, there is no guaranteed rate of return on those
investments, even for Tier One members. Strunk, 338 Or at
164. Further, the IAP annuity is not paid for the life of the
member, and it is not subject to a COLA. Id. The IAP annu-
ity consists only of the money that exists in the member’s
IAP account at the time that the member retires. Because
the member receives only his or her contributions and the
investment income from those contributions, the IAP annu-
ity can be viewed as a defined contribution component of
the member’s retirement benefit and presents no risk of
unfunded actuarial liability.
	        The 2003 legislation creating the IAP had no ret-
rospective effect on the contributions that Tier One and
Tier Two members had already made to their regular
accounts. Those previous contributions continue to fund
service retirement allowance annuities, continue to be
used to calculate service retirement allowance pensions,
and, for Tier One members, continue to earn a guaranteed
rate of return. Id. at 193. Further, the 2003 legislation had
no impact on members who had already retired. They con-
tinue to receive the same benefits that were offered while
they were working.
	         As a result of the 2003 legislation, Tier One and
Tier Two members who have worked for a participating
employer after 2003 receive two annuities—one under IAP
and one as part of the service retirement allowance—and
they continue to receive the service retirement allowance
pension calculated under one of the three formulas noted
above. The creation of the IAP has meant that the Full
Formula is again the primary formula used to calculate ser-
vice retirement allowances for Tier One and Tier Two mem-
bers, although the percent of retirees qualifying for Money
Match remains high. See Special Master’s Report at 11-12
(stating that, as of January 2013, 45% of new retirees qual-
ified for Money Match).
182	                                              Moro v. State of Oregon

	        As noted, the 2003 legislation also created the third
tier of PERS members: OPSRP members. Their retirement
benefit is not called a service retirement allowance, although
it also consists of an annuity and a pension. The annuity is
the same IAP annuity available to Tier One and Tier Two
members who continued to work after 2003. As a result, it is
also a defined contribution component. The pension compo-
nent is a less generous version of the Full Formula based on
the member’s years of service and final average salary. ORS
238A.125(1). The OPSRP pension includes a COLA, but the
OPSRP annuity does not.
	         The 2003 reforms helped to stabilize PERS. Before
the 2003 legislation, PERS’s liabilities were growing by about
12% per year. After the 2003 legislation, PERS’s liabilities
grew by about 3 to 4% per year. Additionally, between 2003
and 2007, the fund’s investments consistently earned well
over the anticipated rate of return. After being only 65%
funded in 2003, PERS was 98% funded by December 2007
and had about $1.5 billion in unfunded actuarial liability.10
Consistently with its existing practice and policy, in early
2008, the board set the employer contribution rates for the
2009-2011 biennium, beginning July 1, 2009, based on that
December 2007 valuation. For the 2009-2011 biennium,
the board set employer contribution rates that resulted in a
system-wide average employer contribution rate of 12.4% —
that is, employers paid a combined weighted average of
12.4% of their payroll to PERS for the retirement benefits
for its past and current employees.
C.  Effect of the Recession
	      In 2008, after the board set the contribution rates
for 2009-2011, the investment market suffered historic

	10
        The numbers used in this opinion, for both the funded status and the
amount of unfunded actuarial liability, do not include “side accounts.” Side
accounts are generally lump-sum prepayments by an employer into the PERS
trust using proceeds from pension obligation bonds. PERS does not calculate the
employer’s debt obligation from those bonds, and the record does not otherwise
reflect those obligations. To the extent that an employer has paid down those debt
obligations, the numbers used in this opinion might overstate total employer lia-
bilities. But including side accounts, without including the debt obligations used
to fund those accounts, would understate the total employer liabilities. Special
Master’s Report at 13.
Cite as 357 Or 167 (2015)	183

losses. PERS’s investments lost 27% of the fund’s value in
2008. Those losses left the fund substantially underfunded.
By December 2008, one year after determining that PERS
was 98% funded, the board determined that PERS was only
71% funded and had about $16.1 billion in unfunded actuar-
ial liability.
	        To balance those losses, the board was required
to increase employer contribution rates. But, based on the
schedule for setting and implementing employer contribu-
tion rates, the next rate increase would not go into effect
until July 2011. And not all the losses would show up in that
rate schedule, because the board uses a “rate collar,” which
spreads out large rate increases over multiple biennia. In
2010, the board set the rates for the 2011-2013 biennium.
The “collared” system-wide average contribution rate set by
the board for that biennium was 16.3%. Because that rate
did not reflect all the 2008 losses, the unaccounted-for losses
increased employer contribution rates in later biennia.
	        In 2012, the board set the employer contribution rates
for the next biennium, 2013-2015, based on the December
2011 valuation. At that time, the fund’s recent investment
performance had been mixed, which left the funded status
of PERS similar to what it had been in December 2008.
Whereas PERS was 71% funded in December 2008 with
$16.1 billion in unfunded actuarial liabilities, PERS was
only 73% funded in December 2011 and maintained about
$16.3 billion in unfunded actuarial liabilities. The 2013-2015
collared rate is 21.4%. Without the statutory amendments at
issue in this case, the board projects that the rate will rise to
about 25% and will remain at that rate through 2029.11

	11
       From 1975 to 2005, average employer contribution rates were between
9.15% and 11.4%. After 2005, the rates rose because of the higher unfunded actu-
arial liabilities in the early 2000s and then were reduced as the board paid down
those liabilities: 18.89% in 2005-2007; 14.9% in 2007-2009; 12.4% in 2009-2011.
The record in this case, however, does not allow us to compare directly those
historical employer contribution rates with the current and projected employer
contribution rates. In 2013, the board adopted more conservative actuarial meth-
ods and assumptions that increase employer contribution rates by about 2.5%, at
least in the short term. A comparison to historical contribution rates may not be
useful anyway. Based on the current level of unfunded actuarial liabilities, it is
apparent that those historical rates understated the actual costs that employers
faced.
184	                                             Moro v. State of Oregon

D.  2013 Legislative Amendments
	         The legislature responded to the effect of the recent
recession on PERS with statutory amendments in 2013.
Those amendments were intended to reduce employer con-
tribution rates by reducing current and future benefits owed
to PERS members, including, specifically, retired members.
At that time, approximately 60% of the unfunded actuar-
ial liability was owed to retired members. Those statutory
amendments reflect two discrete categories of benefits: the
COLA and the income tax offset.
     1.  COLA Statutes
	       The COLA increases the benefits of retired mem-
bers to account for changes in the cost of living. It applies
to the entire service retirement allowance available to Tier
One and Tier Two members, which includes both the annu-
ity and pension components. And the COLA applies to the
pension available to OPSRP members. But the COLA does
not apply to the annuity available under the IAP for Tier
One, Tier Two, or OPSRP members. The COLA has always
been funded by employer contributions.
	       First enacted in 1971, the pre-amendment COLA
statute had three notable components: the COLA require-
ment in subsection (1); the COLA cap in subsection (2); and
the COLA bank in subsection (3).12 See ORS 238.360 (2011);

	12
        In full, the pre-amendment COLA provision that applied to Tier One and
Tier Two members provided:
    	 “(1) As soon as practicable after January 1 each year, the Public
    Employees Retirement Board shall determine the percentage increase or
    decrease in the cost-of-living for the previous calendar year, based on the
    Consumer Price Index (Portland area—all items) as published by the Bureau
    of Labor Statistics of the U.S. Department of Labor for the Portland, Oregon
    area. Prior to July 1 each year the allowance which the member or the mem-
    ber’s beneficiary is receiving or is entitled to receive on August 1 for the
    month of July shall be multiplied by the percentage figure determined, and
    the allowance for the next 12 months beginning July 1 adjusted to the resul-
    tant amount.
    	 “(2) Such increase or decrease shall not exceed two percent of any
    monthly retirement allowance in any year and no allowance shall be adjusted
    to an amount less than the amount to which the recipient would be entitled if
    no cost-of-living adjustment were authorized.
    	 “(3) The amount of any cost-of-living increase or decrease in any year
    in excess of the maximum annual retirement allowance adjustment of two
Cite as 357 Or 167 (2015)	185

ORS 238A.210 (2011); see also Or Laws 1971, ch 738, § 11
(enacting COLA).
	        The COLA requirement in subsection (1) required
the board to calculate the COLA each year according to
the Portland Consumer Price Index (CPI) and to add the
COLA to the applicable retirement benefit—whether the
service retirement allowance or the OPSRP pension ben-
efit. According to that provision, the relevant retirement
benefit “shall be multiplied by the [COLA],” and the benefit
“adjusted to the resultant amount.” ORS 238.360(1) (2011);
ORS 238A.210(1) (2011). The COLA requirement made the
COLA automatic and, by adding the COLA to the retire-
ment benefit itself, allowed the COLA to compound from
year to year. Therefore, as retired members aged, the COLA
became a larger and larger percentage of their retirement
benefit.
	        The COLA cap in subsection (2) originally limited
the COLA to increasing or decreasing the retirement benefit
by 1.5% in any year, provided that the adjusted benefit could
not be less than the original benefit calculated at the time of
retirement. See former ORS 237.060(1) (1971). In 1973, the
legislature revised the cap to allow the COLA to increase or
decrease the applicable retirement benefit by 2%. Or Laws
1973, ch 695, § 1. Before the 2013 amendments at issue in
this case, the legislature had not changed the COLA cap
since raising it in 1973.
	       The COLA “bank” referred to in subsection (3) kept
reserves of changes to the CPI that were above or below
the COLA cap. For example, if the CPI increased by 3% in
one year, then the board applied a 2% COLA to a member’s

    percent shall be accumulated from year to year and included in the computa-
    tion of increases or decreases in succeeding years.
    	   “(4)  Any increase in the allowance shall be paid from contributions of the
    public employer under ORS 238.225. Any decrease in the allowance shall be
    returned to the employer in the form of a credit against contributions of the
    employer under ORS 238.225.”
ORS 238.360 (2011), amended by Or Laws 2013, ch 53, §§ 1, 3; Or Laws 2013
(Spec Sess), ch 2, §§ 1, 3. The COLA provision that applied to OPSRP members is
substantively similar, except that it provides no COLA bank, as in subsection (3).
ORS 238A.210 (2011), amended by Or Laws 2013, ch 53, §§ 5, 7; Or Laws 2013
(Spec Sess), ch 2, § 3.
186	                                             Moro v. State of Oregon

benefit and banked the additional 1% increase so that it could
be added to the member’s COLA in later years when the CPI
was less than 2%. Since 1972, the CPI has been below 2%
in only seven years. As a result, most retired members have
substantial percentage points in their COLA banks. The
COLA bank was available to only Tier One and Tier Two
members and was not available to OPSRP members.
	        During its regular legislative session in 2013, the
legislature passed SB 822, which reduced the COLA cap
from 2% to 1.5% for 2013 and then imposed a graduated
COLA cap based on a member’s total annual retirement ben-
efit beginning in 2014.13 SB 822, §§ 1-9. SB 822 reduced the
COLA cap, but the COLA was still based on the Portland
CPI and could still be banked. After passing SB 822, the
legislature revisited the issue during a special session in
September 2013. In that special session, the legislature
passed SB 861, which made more dramatic changes to the
COLA system beginning in 2014, replacing the graduated
COLA cap of SB 822 before it went into effect. SB 861, §§ 1, 4.
SB 861 converts the COLA benefit to a fixed COLA that is
not based on the Portland CPI and is no longer subject to a
COLA cap or COLA bank. The fixed annual COLA avail-
able under SB 861 is also graduated, although it is gener-
ally lower than the previous COLA caps, providing a 1.25%
COLA on the first $60,000 of the retirement benefit and a
0.15% COLA on all benefits above $60,000.
	        To soften the impact of those changes, SB 861 also
provides for supplemental payments for retired members to
be paid from 2014 to 2019. Under SB 861, the board may
provide retired members with an annual payment of 0.25%
of their yearly retirement benefit, but not to exceed $150.
Further, members receiving less than $20,000 per year in
retirement benefits will receive a separate annual payment
of 0.25% of their yearly retirement benefit, which can total
up to $50. The supplemental payments, unlike the COLA,

	13
        For 2014, SB 822 would have imposed a 2% COLA cap on the first $20,000
of the retirement benefit; a 1.5% COLA cap on the benefit between $20,001 and
$40,000; a 1% COLA cap on the benefit between $40,001 to $60,000; and a 0.25%
COLA cap on all benefits above $60,000. As discussed in the text, the legislature
made further changes in the COLA during a 2013 special session before SB 822’s
2014 rates went into effect.
Cite as 357 Or 167 (2015)	187

are not added to the service retirement allowance or OPSRP
pension, and they are not paid directly out of employer con-
tributions. Instead, the supplemental payments are taken
from the fund’s contingency reserve. SB 861, § 8(6).
    2.  Tax Offset Statutes
	        In addition to the COLA amendments, the 2013
legislature also made changes to another post-employment
PERS benefit: the income tax offset payment. Beginning
in 1945, when the legislature first established PERS, all
PERS retirement benefits were exempt from Oregon income
tax. Oregon law provided no similar exemption for pension
benefits of federal employees. In Davis v. Michigan Dept. of
Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989),
the United States Supreme Court held that exempting state
pension benefits from taxation, but not exempting federal
pension benefits, violated the intergovernmental tax immu-
nity doctrine. Id. at 817. In Davis, the Court explained that
a state could cure that violation either “by extending the
tax exemption to retired federal employees (or to all retired
employees), or by eliminating the exemption for retired state
and local government employees.” Id. at 818.
	       In response to Davis, the legislature eliminated the
exemption for retired PERS members and began imposing
personal income taxes on PERS benefits in 1991. Affected
members sued. The next year, in Hughes v. State of Oregon,
314 Or 1, 838 P2d 1018 (1992), this court held that the tax
exemption was part of the PERS contract and that the legis-
lature had both impaired the PERS contract by eliminating
the contractual obligation to exempt retirement benefits and
breached the PERS contract by subjecting members’ retire-
ment benefits to state income tax. Id. at 31-33.
	        According to Hughes, the state could prevent mem-
bers from accruing additional tax-exempt benefits, but the
participating employers were contractually required to
provide a tax exemption for retirement benefits that were
earned while the tax exemption was in effect. Id. at 31
(“PERS retirement benefits accrued or accruing for work
performed before the effective date of that section [repealing
the tax exemption] * * * may not be taxed.”). As a result, the
legislature could make prospective changes to the tax status
188	                                            Moro v. State of Oregon

of pension benefits that members could earn going forward,
but the legislature could not make retrospective changes—
that is, could not deny tax benefits for future retirement
payments that members had earned already. Id.
	         Rather than imposing a damage award against the
employers for breaching the contract, Hughes allowed the
legislature to determine in the first instance what an appro-
priate remedy would be. Id. at 33. Dissatisfied with the legis-
lature’s efforts to craft a remedy, affected members seeking
damages brought a class action, known as the Stovall/Chess
class action litigation. That action was resolved in 1997
through a settlement agreement that incorporated certain
PERS changes that the legislature had enacted to offset the
increased tax burden facing PERS members. Those changes
were enacted as Oregon Laws 1991, ch 796 (SB 656) (1991
offset), 1995 Oregon Laws, ch 569 (HB 3349) (1995 offset),
and Oregon Laws 1997, ch 175 (HB 2034).14
	        The legislature enacted the 1991 offset at about the
same time that it repealed the tax exemption. The 1991 off-
set provides a benefit to both active and retired members
based on years of service, ranging from 1% for members with
more than 10 years of service to 4% for members with more
than 25 or 30 years of service, depending on the member’s
occupation. SB 656, § 4. Although the rate of the 1991 offset
is not based on the income tax rate and was passed before
this court’s decision in Hughes, the legislature nevertheless
intended the 1991 offset to avoid or mitigate the anticipated
damage claim that was the subject of the Hughes decision.
For that reason, the legislature included a provision that
would allow employers to avoid paying the 1991 offset if “the
retirement benefits payable under [PERS] are exempt from
Oregon personal income taxation.” SB 656, § 12(1).
	       The legislature enacted the 1995 offset in response
to the Stovall/Chess litigation, which followed the Hughes

	14
       The statutory scheme containing those laws has been renumbered and
reorganized on numerous occasions since their original codification. The rel-
evant provisions of SB 656 are currently compiled at ORS 238.366 and ORS
238.368. The relevant provisions of HB 3349 are currently compiled at ORS
238.362(3), (4)(a) and ORS 238.364. And the relevant provisions of HB 2034 are
currently compiled at ORS 238.362(1), (2), (4)(b).
Cite as 357 Or 167 (2015)	189

decision. See HB 3349, § 2(1) (noting that the benefits are “in
compensation for damages suffered by those members * * *
by reason of subjecting benefits paid * * * to Oregon personal
income taxation”). To calculate the 1995 offset, the board
applies a formula intended to negate the “maximum Oregon
personal income tax rate,” which was 9% in 1991. HB 3349,
§ 3(4)(a); see ORS 316.037(1)(a) (1991) (setting personal
income tax rates). The 1995 offset applies to only the part of
a member’s benefit that “is attributable to service rendered
by the member before October 1, 1991,” which is when the
legislature repealed the income tax exemption. HB 3349,
§ 3(4)(b); see also Vogl v. Dept. of Rev., 327 Or 193, 206-08,
960 P2d 373 (1998) (describing the enactment of the 1995
offset). Further, both the 1991 and the 1995 offsets are avail-
able to only Tier One members who established membership
in PERS before July 14, 1995. HB 3349, § 3(8). Members
eligible for both the 1991 and 1995 offset payments receive
only the higher of the two. HB 3349, § 3(1)(a).

	        The 1995 offset also includes two provisions relevant
to the anticipated settlement of the Stovall/Chess litigation.
First, no member may bring a new class action challeng-
ing the elimination of the tax exemption. HB 3349, § 4(a).
And second, no member acquires a contractual right to the
1995 offsets. HB 3349, § 3 (“No member of the system or
beneficiary of a member of the system shall acquire a right,
contractual or otherwise, to the increased benefits provided
by sections 3 to 10 of this Act.”). In 1997, the legislature
enacted a statute providing that, if the state decreases the
benefits provided under the 1991 and the 1995 offsets with-
out also decreasing the tax burden of PERS members, then
a plaintiff member of the Stovall/Chess class action who had
challenged the elimination of the tax exemption may reopen
that class action. HB 2034, § 4(4)(b).

	        The settlement agreement that ultimately resolved
the Stovall/Chess litigation in 1997 recognizes that the
1991 offset, the 1995 offset, and the 1997 amendments
were enacted “to provide a remedy for state income taxa-
tion of PERS benefits” and that the plaintiff PERS mem-
bers “agree[d] to accept the remedies provided in SB 656
(1991), HB 3349 (1995) and HB 2034 (1997) as full and
190	                                             Moro v. State of Oregon

complete payment for all claims raised in these consolidated
actions.” The settlement agreement further states that, if
the state reduces the benefits under those provisions with-
out an equal reduction to the Oregon personal income taxes
imposed on PERS members, then the class action may be
reopened. Id.15
	        In 2011, the legislature amended the 1995 offset,
so that it is no longer available to then-active and -inactive
members who, upon retirement, live out of state or are other-
wise not subject to Oregon personal income taxes. Or Laws
2011, ch 653, § 2. In 2013, the legislature passed SB 822,
which, in addition to the changes to the COLA system dis-
cussed above, also amended the tax offset provisions. SB
822 prohibits paying either the 1991 offset or the 1995 offset
to any retired member who is not subject to Oregon income
tax assessments, including nonresident retirees. SB 822,
§§ 11-13. That change affects more than 16,000 nonresident
PERS retirees (or other beneficiaries), which is about 14% of
benefit recipients.
E.  Effect of the 2013 Amendments
	         In March 2013, after SB 822 had been introduced,
the board’s actuary estimated the impact of the amendments
contained in that bill—viz., the first iteration of the COLA
modifications and the elimination of the tax offset payments
to nonresident PERS members. That analysis projected that
SB 822 would reduce the employer contribution rates by 2.5%
of total payroll. For the 2013-2015 biennium, it would reduce
the employer contribution rates from 21.1% to 18.6%. And
through 2029, the board projected that the pre-SB 822 rates
would be 25.5% and the post-SB 822 rates would be 23.0%.
Approximately 0.3% of the 2.5% reduction was attributable
to the elimination of the tax offsets for nonresident retir-
ees. The remaining 2.2% reduction was attributable to the
COLA modifications.
	15
       Additionally, the state faced lawsuits from federal retirees living in
Oregon who had argued that the tax offsets were in fact tax rebates that violated
Davis and the intergovernmental tax immunity doctrine. This court held that the
1991 offset did not violate the intergovernmental tax immunity doctrine but the
1995 offset did. Ragsdale v. Dept. of Rev., 321 Or 216, 229, 895 P2d 1348 (1995),
cert den, 516 US 1011, 116 S Ct 569, 133 L Ed 2d 493 (1995) (addressing the 1991
offset); Vogel, 327 Or at 211-12 (addressing the 1995 offset).
Cite as 357 Or 167 (2015)	191

	        In September 2013, the board’s actuary estimated
the impact of the additional COLA modifications in SB
861, although the analysis did not include the supplemen-
tal payments that were ultimately included in SB 861. That
analysis projected that SB 861 would reduce the projected
employer contribution rates by an additional 2.0%. As a
result, the combined effect of SB 822 and SB 861 is esti-
mated to reduce employer contribution rates by 4.5% of total
payroll through 2029, which represents about $5.3 billion
in savings, stated on a system-wide, present value basis. Of
those savings, about $390 million results from eliminating
the tax offsets for nonresident retirees.
	        Those projected savings, combined with investment
earnings that exceeded the assumed earnings rate (14.3%
in 2012 and 15.6% in 2013), reduced PERS’s unfunded
actuarial liability. In December 2013, the board’s actuary
estimated that PERS’s unfunded actuarial liability was
$8.1 billion and that PERS was 87% funded.
                       II. ANALYSIS
	        Petitioners include both active and retired Tier
One members, who are both residents of Oregon and non-
residents. They also include active Tier Two and OPSRP
members, who are all residents. Petitioners contend that SB
822 and SB 861 unconstitutionally impair their employment
contracts in violation of the state Contract Clause, Article I,
section 21, of the Oregon Constitution, and the federal
Contract Clause, Article I, section 10, clause 1, of the United
States Constitution. In the alternative, they contend that
the amendments breach their contracts and constitute an
unconstitutional taking of their property without just com-
pensation in violation of Article I, section 18, of the Oregon
Constitution, and the Fifth Amendment to the United States
Constitution. Petitioners further argue that the amend-
ments violate the state Equal Privileges or Immunities
Clause, Article I, section 20, of the Oregon Constitution,
the federal Privileges and Immunities Clause, Article IV,
section 2, clause 1, of the United States Constitution, and
the federal Equal Protection Clause of the Fourteenth
Amendment to the United States Constitution. Finally, one
petitioner argues that the amendments violate a federal
192	                                  Moro v. State of Oregon

statute, 4 USC section 114. Despite presenting those vari-
ous challenges, petitioners generally focus their arguments
on the state and federal Contract Clauses.
	        Respondents argue that the COLA and income tax
offset are not contractual and, therefore, the changes to
those statutes do not violate the state and federal Contract
Clauses. Even if those provisions are part of a contract,
respondents contend that the amendments do not substan-
tially impair the contract and are justified by a sufficient
public purpose.
	        When presented with arguments arising under
both state and federal law, we generally attempt to dispose
of the case on state law grounds before reaching questions
of federal law. Strunk, 338 Or at 171. As a result, we begin
with the state Contract Clause arguments.
A.  State Contract Clause
	        The state Contract Clause, Article I, section 21, of
the Oregon Constitution, states that “[n]o * * * law impair-
ing the obligation of contracts shall ever be passed[.]” Or
Const Art I, § 21. That provision was adopted in 1857 and
derived from the federal Contract Clause, Article I, section
10, clause 1, of the United States Constitution. See Eckles v.
State of Oregon, 306 Or 380, 389, 760 P2d 846 (1988) (trac-
ing the history of the state Contract Clause). As a result, we
have interpreted the state Contract Clause as being consis-
tent with the United States Supreme Court’s interpretation
of the federal Contract Clause in 1857. See id. at 389-90
(inferring from the history of the state Contract Clause
that “the framers of the Oregon Constitution intended to
incorporate the substance of the federal provision, as it
was then interpreted by the Supreme Court of the United
States”).
	        This court has previously recognized that, in 1857,
it was well established that the federal Contract Clause
protected only those obligations arising from contracts that
were formed before the effective date of the law being chal-
lenged. See id. at 399 n 18 (“Future private contracts, as
well, are not protected by the state and federal contracts
clauses.” (Citing Ogden v. Saunders, 25 US 213, 6 L Ed 606
Cite as 357 Or 167 (2015)	193

(1827).)); see also Local Div. 589, etc. v. Comm. of Mass., 666
F2d 618, 637 (1st Cir 1981) (Breyer, J.) (“It has been clear
since 1827 that the [federal Contract] Clause applies only
to laws with retrospective, not prospective, effect.” (Citing
Ogden, 25 US 213.)).
	        Federal courts have described that distinction as
turning on whether the law in question operates prospec-
tively or retrospectively. See, e.g., United States Trust Co. v.
New Jersey, 431 US 1, 18 n 15, 97 S Ct 1505, 52 L Ed 2d 92
(1977) (“[T]he States undoubtedly had the power to repeal
the covenant prospectively.”); Local Div. 589, etc., 666 F2d
at 637 (quoted above); see also Robertson v. Kulongoski, 359
F Supp 2d 1094, 1100 (D Or 2004), aff’d, 466 F3d 1114 (9th
Cir 2006) (“The Contract Clause does not prohibit legisla-
tion that operates prospectively.”).
	         The reason for that limitation is simple: If the con-
tract creates obligations that contravene a law in effect at
the time that the contract is entered, then the parties have
no legitimate expectation that those obligations will be
enforced. See Eckles, 306 Or at 399 n 18 (“[T]he laws in exis-
tence when a contract is formed define the obligation of the
contract.”); see also Bagley v. Mt. Bachelor, Inc., 356 Or 543,
552-53, 340 P3d 27 (2014) (“[C]ourts determine whether a
contract is illegal by determining whether it violates public
policy as expressed in relevant constitutional and statutory
provisions and in case law[.]” (citing Delaney v. Taco Time
Int’l, Inc., 297 Or 10, 681 P2d 114 (1984).))
	         We have applied that limitation expressly. For
example, in Eckles, we held that a provision of the Transfer
Act, which shifted funds from a state trust account to the
state’s general fund, violated the state Contract Clause only
“insofar as it affects * * * insurance contracts entered into
before the enactment of the Transfer Act.” Eckles, 306 Or
at 399. Nevertheless, that same provision was valid “[a]s to
subsequent contracts, including renewals of [existing] con-
tracts[.]” Id. As to those contracts entered after the law’s
effective date, the law “would define, not impair, the [par-
ties’] contractual obligations[.]” Id.
	        Similarly, in Hughes, we relied on Eckles and pro-
hibited repealing the PERS tax exemption “as it relates to
194	                                   Moro v. State of Oregon

PERS retirement benefits accrued or accruing for work per-
formed before the effective date of that [repeal].” 314 Or at
31; see also id. at 20 (“Accrued and accruing pension benefits
are protected under Oregon Law.”). As we quoted approv-
ingly from an Attorney General Opinion, “ ‘Employe[e] pen-
sion plans, whether established by law or contract, create a
contractually based vested property interest which may not
be terminated by the employer, except prospectively.’ ” Id. at
20-21 (quoting 38 Op Atty Gen 1356, 1365 (1977) (emphasis
in original)).
	        Therefore, when applying the state Contract Clause,
we consider the potential impairment of contractual obli-
gations arising only from contracts entered into before the
effective date of the law being challenged. In this case, SB
822 became effective on May 6, 2013, and SB 861 became
effective on October 8, 2013. The scope of our analysis is
defined by the obligations arising from contracts entered
before those dates.
	        Our analysis in previous cases addressing viola-
tions of the state Contract Clause has focused on the follow-
ing questions: (1) is there a contract?; (2) if so, what are its
terms?; (3) what obligations do those terms require?; and
(4) has the state impaired an obligation of that contract?
Strunk, 338 Or at 170 (citing Hughes, 314 Or at 14).
	        We normally answer those questions by apply-
ing general rules of contract law. Id. But if the state is
alleged to be a party to the contract, we supplement the
general rules of contract law with additional considerations
informed by the state’s role serving the public. Id. On the
one hand, enforcing state contracts binds the state to its
previous promises, which were made to advance its previ-
ous policy goals. Requiring the state to meet those obliga-
tions can prevent or hinder the state’s pursuit of its current
policy goals by limiting funds available to pursue those
goals. On the other hand, the state would be unable to pur-
sue its current policy goals if it were unable to bind itself
at all—that is, if it were unable to make any enforceable
promises to other parties. The state, for example, would
have a hard time finding a company to build its roads if the
state were unable to enter into an enforceable contract with
Cite as 357 Or 167 (2015)	195

a construction company, ensuring that the company would
get paid for its work. Providing parties with binding con-
tractual rights facilitates mutually beneficial exchanges,
which in turn benefit the state as much as any other party
to a contract.
	         Thus, the state may enter into contracts and be
bound by the promises contained in those contracts, so long
as the state is not “contract[ing] away its ‘police powers’ ”
or limiting its power of eminent domain. Id. at 14. Further,
we have long applied a canon of construction that disfavors
interpreting statutes as contractual promises. See Strunk,
338 Or at 171 (disfavoring statutory contracts binding the
state).16 When the legislature pursues a particular policy
by passing legislation, it does not usually intend to prevent
future legislatures from changing course. Id. For that rea-
son, “ ‘[t]he intention to surrender or suspend legislative
control over matters vitally affecting the public welfare can-
not be established by mere implication.’ ” Id. at 171 (quoting
Campbell et al. v. Aldrich et al., 159 Or 208, 213-14, 79 P2d
257 (1938)). We therefore treat a statute as a contractual
promise only if the legislature has “ ‘clearly and unmistak-
ably’ ” expressed its intent to create a contract. Id. (quoting
Campbell, 159 Or at 213-14); see Hughes, 314 Or at 14 (“[A]
state contract will not be inferred from legislation that does
not unambiguously express an intention to create a con-
tract.”). With those considerations in mind, we turn to the
questions posed above.
      1.  Is there a contract?
	        We have repeatedly held that the legislature
“intended and understood” that PERS benefits are contrac-
tual and, as a result, “PERS is a contract between [a par-
ticipating employer] and its employees.” Hughes, 314 Or at
18; see also Strunk, 338 Or at 183 (noting the contractual

	16
       We have previously noted that those limitations may not be exhaustive,
“but any further rules of this nature ‘must be found within the language or his-
tory of Article I, section 21, itself.’ ” Hughes, 314 Or at 14 (quoting Eckles, 306 Or
at 399). Federal courts recognize similar limitations and refer to them as the
“reserved powers doctrine” and the “unmistakability doctrine.” United States v.
Winstar Corp., 518 US 839, 874, 116 S Ct 2432, 135 L Ed 2d 964 (1996) (opinion of
Souter, J.).
196	                                               Moro v. State of Oregon

nature of PERS benefits).17 The parties agree that each of
the petitioners in this case has a contract with a partici-
pating employer relating to PERS benefits. Because of their
agreement on that point, the parties provide little analysis
of that question in the briefing. But the nature and scope of
that contract provide necessary context for the answers to
the other questions posed by this challenge and therefore
deserve further discussion.
	        A contract is most commonly formed by an offer, an
acceptance of that offer, and an exchange of consideration.
See Homestyle Direct, LLC v. DHS, 354 Or 253, 262, 311 P3d
487 (2013) (describing contract formation; citing Restatement
(Second) of Contracts § 17(1) (1981)).18 Ordinarily, an offer
contains a promise that will become enforceable only when
the offer is accepted. See Restatement § 24 comment a (“In
the normal case, * * * the offer itself is a promise[.]”); Richard
A. Lord, 1 Williston on Contracts § 4:7, 449 (4th ed 2007)
(defining an ordinary offer as a “conditional promise”).
	        In the employment context, an employer frequently
offers a promise of compensation in exchange for an employ-
ee’s service. The compensation can take various forms, such
as salary, bonuses, and fringe benefits. Pension benefits are
another form of compensation. Whereas, for example, salary
is compensation paid to the employee every two weeks or at
the end of each month, a pension is compensation paid to the
employee at retirement. Pension benefits therefore are “part
of the employee’s promised but delayed compensation for the
performance of his [or her] job.” Taylor v. Mult. Dep. Sher.
Ret. Bd., 265 Or 445, 450, 510 P2d 339 (1973). Regardless of
whether the pension benefit is promised by a public or pri-
vate employer, “the employee accepts a lower present wage
in order to receive a pension upon retirement[.]” Lord, 19
Williston on Contracts § 54:38 at 541.

	17
        The modification of the quote from Hughes substitutes “a participating
employer” for “the state.” The court in Hughes used “the state” as a “convenient
term[ ] for all public employers.” Hughes, 314 Or at 5 n 3.
	18
         “Consideration” is that which one party provides to the other in exchange
for entering into the contract. See Homestyle Direct, 354 Or at 262 (describing
consideration); see also Restatement § 71(2) (defining “consideration” as a perfor-
mance or return promise “sought by the promisor in exchange for his promise and
[ ] given by the promisee in exchange for that promise”).
Cite as 357 Or 167 (2015)	197

	         As a result, the contracts at issue in this case are
the employment contracts between petitioners and their
participating public employers. To the extent that each
employment contract binds a participating employer to fund
PERS benefits for its employees, we previously have referred
to those contractual obligations as the “PERS contract.” See,
e.g., Hughes, 314 Or at 6 n 5 (stating that the “ ‘PERS con-
tract’ ” refers to “the contracts [that PERS members] each
have with their respective PERS participating employers”).
	         Although the PERS contract results from an offer
and acceptance, the PERS statutes are themselves not an
offer that employees can accept. Instead, each participat-
ing employer offers a promise to its employees to provide
compensation, including PERS benefits, in exchange for
the employees’ services. See Stovall v. State of Oregon, 324
Or 92, 123, 922 P2d 646 (1996) (“[The] employers were the
entities that agreed to the terms of [the employees’] com-
pensation, including the terms relating to retirement ben-
efits.”). The PERS statutes establish that PERS benefits
are a statutorily required term in the offer that each par-
ticipating employer makes to its employees. See id. at 124
(“[P]articipating PERS employers * * * promised plaintiffs
that plaintiffs would receive, at a minimum, the retirement
compensation provided in the PERS statutes.”); see also
Restatement § 5 comment c (describing statutory contract
terms).
	        Before a participating employer’s promise of PERS
benefits becomes the PERS contract for any particular
employee, it is merely an offer that the employee can either
accept or reject. Generally, an offer, by itself, does not impose
any obligation on the offering party, who may change or
revoke an offer that has not been accepted—assuming that
the offering party is not otherwise required to leave the offer
open. See Hogan v. Alum. Lock Shingle Corp., 214 Or 218,
226, 329 P2d 271 (1958) (“[T]here is no agreement until the
offer has been accepted in accordance with its very terms.”);
see also Restatement § 24 comment a (noting that an offer is
“revocable until accepted”); Arthur Linton Corbin, 1 Corbin
on Contracts § 2.19 at 222 (Joseph M. Perillo ed., rev ed
1993) (“Any communicated change in the terms of an offer
operates as a revocation of that offer.”). But once an offer
198	                                   Moro v. State of Oregon

has been accepted, it ceases to be an offer as such; instead,
the terms of the offer become the terms of the contract. See
Restatement § 42 comment c (“Once the offeree has exercised
his power to create a contract by accepting the offer, a pur-
ported revocation is ineffective as such.”).
	        Therefore, a participating employer’s offer of PERS
benefits becomes a contract only when an employee accepts
the offer. An offer can invite two different types of accep-
tance, resulting in either a bilateral contract or a unilateral
contract. An offer for a bilateral contract invites the other
party to accept with a return promise—that is, by prom-
ising some future performance. See 1 Corbin on Contracts
§ 1.23 (describing bilateral contracts). An offer for a uni-
lateral contract invites the other party to accept with per-
formance—that is, by actually doing the performance that
the offering party seeks. See id. (describing unilateral con-
tracts). As a result, by the time that an offer for a unilateral
contract is accepted, the accepting party has already fully
performed and owes the offering party no future obligation.
Id. In that case, the resulting contract is unilateral because
only the offering party owes a legally enforceable obligation
to the other. Id.; see also Homestyle Direct, 354 Or at 268-69
(describing unilateral contracts); Mark Pettit, Jr., Modern
Unilateral Contracts, 63 B U L Rev 551, 552 (1983) (“The
distinguishing feature of the unilateral contract is that
the second party (the offeree) has not made a promise in
return.”).
	        Because the offer of PERS benefits invites employ-
ees to accept by providing current service for the employer—
rather than by promising to provide some service in the
future—the resulting PERS contract is a unilateral con-
tract. See Hughes, 314 Or at 21 (“ ‘[A]doption of the pension
plan was an offer for a unilateral contract.’ ” (Quoting Taylor,
265 Or at 452.)). In this case, petitioners have accepted the
offer by providing the services that their employers sought.
See Stovall, 324 Or at 124 (1996) (“Plaintiffs accepted [the
promised PERS benefits] by working for their employers.”);
Hughes, 314 Or at 21 n 26 (“ ‘[A]n employee pension or disabil-
ity plan may be viewed as an offer to the employee which may
be accepted by the employee’s continued employment, and
such employment constitutes the underlying consideration
Cite as 357 Or 167 (2015)	199

for the promise.’ ” (Quoting Rose City Transit Co. v. City of
Portland, 271 Or 588, 593, 533 P2d 339 (1975).)).
	        Thus, an employee earns a contractual right to the
offered PERS benefits at the time that the employee renders
his or her services to the employer.19 But merely because
the PERS contract has been formed does not mean that
the contractual relationship between the employer and the
PERS member becomes static. As long as the employer con-
tinues offering PERS benefits, PERS members can continue
accepting that offer and, thereby, earn additional contrac-
tual rights to additional PERS benefits.
	        Those concepts are difficult to apply to pension ben-
efits, because of the complex formulas often used to calcu-
late the benefits and because of the lapse of time between
the employee earning the benefit and the employer deliver-
ing the benefit. Those concepts are seen more clearly when
applied to a simpler benefit, such as salary. For example, in
State ex rel. Thomas v. Hoss, 143 Or 41, 21 P2d 234 (1933),
an employee was working for the Bureau of Labor and earn-
ing a salary of $180 per month. Id. at 42-43. In the mid-
dle of March 1933, the legislature reduced his salary to
$172 per month. Id. at 47. When the state issued his monthly
paycheck at the end of March, the state applied the lower
salary to the entire month. Id. at 42-43.
	       This court rejected the state’s contention that the
law required that the employee receive the lower salary for
the whole month, even though he had worked for half the
month while the state was offering the higher salary. Id. at
	19
        In previous decisions, this court has described the formation of the PERS
contract as conveying to the accepting employee a “vested” right to the offered
retirement benefits. See, e.g., Oregon State Police Officers’ Assn. v. State of Oregon,
323 Or 356, 380, 918 P2d 765 (1996) (OSPOA) (so stating); Hughes, 314 Or at 20
(same). However, in the pension context, “vested” has a specific meaning that is
distinct from contract formation and from benefit accrual. “Accruing” is “the rate
at which an employee earns benefits to put in [the employee’s] pension account[.]”
Central Laborers’ Pension Fund v. Heinz, 541 US 739, 749, 124 S Ct 2230, 159 L
Ed 2d 46 (2004). “Vesting” is “the process by which an employee’s already-accrued
pension account becomes irrevocably [the employee’s] property[.]” Id. Therefore, an
employee who has rendered service to a participating public employer has accepted
the employer’s offer and accrued PERS benefits even before the employee has a
vested right to the benefits. An unvested PERS member has only a limited con-
tractual right to the accrued benefits, because the employer’s obligation to provide
those benefits is conditional on the employee having a vested right to the benefits.
200	                                             Moro v. State of Oregon

47. According to the court, “the legislature was at liberty at
any time to reduce [the salary] amount. But it is settled that
after a salary has been earned the public employee’s right
thereto becomes vested and cannot be taken away by any
legislation thereafter enacted[.]” Id. (emphasis added). The
employee, therefore, accepted the salary being offered at the
time that he rendered his services. Although he could be
paid the lower salary for the second part of the month—
because he continued working even after the state reduced
its salary offer—the employee was entitled to the higher
salary for the first part of the month, because he had been
offered the higher salary during that part of the month and
he had accepted that offer by working during that period.20
	        In effect, the court in Thomas treated the employer’s
salary offer as a continuing offer that remained open for a
series of acceptances and resulted in a series of separate
contracts. See Corbin, 1 Corbin on Contracts § 2.33 at 300
(“[A]n offer [can be] made in such terms as to create a power
to make a series of separate contracts by a series of sepa-
rate acceptances.”). The employee, therefore, first accepted
that continuing offer on his first day of work. That accep-
tance established his contractual right to the offered com-
pensation only for that day’s work. The employee repeatedly
accepted that offer each subsequent day that he worked for
the employer, establishing his additional contractual right
to compensation for each additional day’s work. But as to
future work that the employee had not yet performed, the
employee had not accepted the employer’s continuing offer,
which remained just that—an offer. See id. (“The closing
of one of these separate contracts by one acceptance leaves
the offer still revocable as to any subsequent acceptance.”).
In those circumstances, unless an employer is subject to a
legal obligation to keep that offer open, the employer can,

	20
        The United States Supreme Court reached the same result more than 80
years earlier in Butler et al. v. Pennsylvania, 51 US 402, 13 L Ed 472 (1850).
There, the Court found no violation of the federal Contract Clause when the
Pennsylvania legislature reduced the salary of certain employees who had been
appointed to positions with a fixed term at a fixed salary. Id. at 409. The Court
held that, although the legislature could change the salary going forward, “[t]he
promised compensation for services actually performed and accepted, during the
continuance of the particular agency, may undoubtedly be claimed, both upon
principles of compact and of equity[.]” Id. at 416.
Cite as 357 Or 167 (2015)	201

like other offering parties, change or revoke the unaccepted
offer of compensation for future work.
	        Similarly, the PERS offer is a continuing offer. An
employee’s acceptance of the offer does not preclude the
employee from accepting the offer further by rendering addi-
tional services. Each additional rendition of service accepts
any open offer for additional PERS benefits. The PERS con-
tract reaches only as far as a member has accepted the offer,
and a member’s acceptance reaches only as far as the work
that the member has performed.
	        That analysis reveals how and when the PERS con-
tract is formed and the scope of the PERS benefits owed:
The PERS contract binds a participating employer to com-
pensate a member for only the work that the member has
rendered and based on only the terms offered at the time
that the work was rendered, even if the employer changed
that offer over time. Cf. Corbin, 1 Corbin on Contracts § 3.16
at 387 (“The employee accepts the offer by merely continuing
to render the specified service, and becomes entitled to the
promised salary in proportion to the work actually done.”).
	        That analysis, however, does not necessarily require
a finding that the PERS offer can be changed prospectively,
like the salary offer in Thomas. The parties in this case
dispute whether, before the 2013 amendments, one of the
express or implied terms offered and accepted included a
promise that the participating employers would not change
the terms of the offer, even prospectively. See Restatement
§ 87 (describing conditions under which an offering party
has a legal obligation to leave an offer open). We resolve that
issue below. See 357 Or at 221-26.
	        For present purposes, it is sufficient to conclude
that, under the prospective/retrospective distinction that we
apply under the state Contract Clause, our analysis is lim-
ited to the potential impairment of obligations owed by the
participating employers, and earned by members through
the work they performed, before the effective dates of the
amendments at issue. That analysis includes considering
whether, before the effective date of the amendments, partic-
ipating employers were contractually obligated to keep rel-
evant parts of the PERS offer open even after the effective
202	                                 Moro v. State of Oregon

date of the amendments. We begin that analysis by deter-
mining the relevant terms of that PERS contract.
    2.  What are the terms of the contract?
	        Petitioners contend that the pre-amendment tax
offset statutes and the pre-amendment COLA statutes
are contractually enforceable terms of the PERS contract.
According to petitioners, the unmistakability doctrine—
which, as noted, requires courts to interpret statutes as
noncontractual unless the legislature’s intent to bind the
state is unmistakable—applies to only the previous ques-
tion of whether there is a contract, but does not apply to
determining the terms of a contract. Petitioners further
argue that the pre-amendment version of both the income
tax offset statutes and the COLA statutes reveal the leg-
islature’s promissory intent through their use of the term
“shall.” Respondents dispute petitioners’ arguments and
contend that the unmistakability doctrine applies to this
question and that the statutes at issue fail to furnish the
clear and unmistakable legislative intent to offer the income
tax offsets and the COLA as terms of the PERS contract.
        a.  Standards for identifying terms of the contract
	        To resolve this dispute, we first address the stan-
dard of legislative intent applied to this step. Respondents
are correct: the standard of clear and unmistakable contrac-
tual intent applies to both the question of whether there is
an offer to form a contract and also to whether a particu-
lar provision is a term of that offer. Our case law plainly
requires that result. See, e.g., Arken, 351 Or at 136 (“[T]he
terms of the statutory PERS contract are a matter of legis-
lative intent and only statutory terms that ‘unambiguously
evince[ ] an underlying promissory, contractual legisla-
tive intent’ become a part of the statutory PERS contract.”
(Quoting Hughes, 314 Or at 26.)).
	       Although respondents correctly identify the stan-
dard articulated in our case law, respondents ask us to apply
that standard by setting a much higher bar than we have
applied in the past. According to respondents, the legisla-
ture can satisfy that standard only by expressly describing
the statutory benefit as a contract, promise, or guarantee.
Cite as 357 Or 167 (2015)	203

	         Contrary to respondents’ assertions, however, our
cases discussing and applying that standard do not focus
solely on the use of such specifically promissory language.21
Instead, we have repeatedly emphasized the importance of
context at this step—namely, the context of already having
established that the parties intended to form a contract.
See, e.g., Strunk, 338 Or at 183 (“[W]e are mindful that the
‘accepted proposition of the contractual nature of PERS is
an essential background’ for our inquiry.” (Quoting Hughes,
314 Or at 22.)). Because we already have found that the leg-
islature intended PERS benefits to be part of the employer’s
contractual promise of compensation, the standard of clear
and unmistakable intent now focuses only on whether the
legislature intended a particular PERS provision to be part
of that promise.
	         As we have held in prior cases, the PERS statutory
scheme may define the terms of the PERS contract, even
though it does not use language referring directly to con-
tracts, promises, or guarantees. See, e.g., Strunk, 338 Or at
186 (finding that a member’s right to the use of a partic-
ular service retirement allowance formula is “unambigu-
ously promissory”); Hughes, 314 Or at 26 (stating that the
PERS previous tax exemption provision “unambiguously
evinces an underlying promissory, contractual legislative
intent”).22
	21
       Although it is common for courts to treat statutory public pension pro-
grams as contractual, it is “quite rare” for pension statutes to expressly refer
to contractual rights. Amy B. Monahan, Public Pension Plan Reform: The Legal
Framework, 5 Education, Finance & Policy, Minnesota Legal Studies Research,
No 10-13, 5 n 6 (2010) (“It is possible for a statute to contain explicit language
regarding the creation of a contractual relationship (see, e.g., N.J. Stat. Ann.
§ 43:13-22.33 (2009)), but this is quite rare.”).
	22
        The importance of context is well established in our case law. In Hughes,
for example, we criticized attempts to view a provision “in isolation and evaluate
whether [the provision], standing alone, demonstrates the requisite unambigu-
ous legislative intent to create a contractual obligation.” 314 Or at 23. Ignoring
the provision’s context “is not analytically proper or helpful.” Id. at 25. The court
in Hughes also reviewed numerous federal cases considering federal Contract
Clause challenges and concluded, “The constitutional protection that was
afforded to those provisions’ obligations followed from the fact that they were
part of a larger contract, not that they were promissory in and of themselves.”
Id. at 25 n 31. The court held that the same principles applied to identifying the
terms of the PERS contract. See id. (“This case presents an analogous situation
where we are faced with an underlying contract—the PERS contract—and the
question is whether the tax exemption statute is a term of that contract.”).
204	                                             Moro v. State of Oregon

	        Still, not every provision within the PERS statutory
scheme is a term in the PERS contract. See Oregon State
Police Officers’ Ass’n. v. State of Oregon, 323 Or 356, 405, 918
P2d 765 (1996) (OSPOA) (Gillette, J., specially concurring
in part and dissenting in part) (“[N]ot every statutory provi-
sion in [PERS] is a part of that contract. Instead, whether a
particular provision is part of that contract is a question of
legislative intent.” (Emphasis in original.)). Beyond noting
that doubtful cases should be resolved in favor of finding
that a provision is not a term of the contract being offered,
there are two principles that we have considered in prior
cases that guide our use of context here.23
	        First, because the PERS offer promises remuner-
ative pension benefits as compensation for employment,
the offer may include provisions that define the eligibility
for benefits or the scope of benefits. See, e.g., Hughes, 314
Or at 22-23 (assessing whether a provision was an “inte-
gral part of the PERS statutes” and whether it was “part
and parcel” with the state’s promise of pension benefits);
id. at 26 (considering the “purpose of the PERS contract”);
Eckles, 306 Or at 393 (considering that the purpose of a
disputed provision was to provide assurances “to induce
skeptical employers to participate in a state insurance sys-
tem”). Because the legislature intended PERS to be part of
an offer promising pension benefits to employees, statutes
defining eligibility for, or the scope of, those benefits may
be part of the PERS offer, unless the legislature expresses
a contrary intent.
	        That principle is based in part on the potential dis-
tinction between provisions that relate to a remunerative
aspect of PERS and those that relate to an administrative
aspect of PERS. See Strunk, 338 Or at 239 (Balmer, J., con-
curring) (noting that a “patently administrative provision”
should not be treated as contractual because the legislature
failed to provide clear and unmistakable contractual intent,
even though the change may affect actual benefits received
by some members). The PERS statutes address both the
	23
        We do not mean to suggest that there may not be other principles to con-
sider in other cases, including other PERS cases. Rather, we mean only that we
identified these two principles as relevant in prior PERS cases.
Cite as 357 Or 167 (2015)	205

participating employers’ promise of pension benefits and the
manner in which the legislature directs the board and the
employers to carry out that promise, and the PERS offer
does not necessarily include those administrative aspects of
PERS as compensation for employment.
	        Second, not all remunerative provisions are terms of
the PERS offer. Instead, a remunerative provision will be a
term of the offer only if it is mandatory, rather than optional
or discretionary. See, e.g., Strunk, 338 Or at 201 (“Notably
absent is any directive that, following such application, [the
board] must apply any remaining earnings to PERS mem-
bers’ regular accounts.” (Emphasis in original.)); Hughes,
314 Or at 26 (finding that the tax exemption provision was
a term of the offer after emphasizing that the tax exemption
provision “provided that the PERS retirement benefits ‘shall
be’ exempt from all state and local taxes”).
          b.  Were the pre-amendment tax offset provisions
              a term of the PERS contract?
	       Retired nonresident petitioners contend that the
1991 and 1995 offsets are terms of the PERS contract.24 As
described above, the bills creating those provisions have a
complicated history, which is reflected in the complex statu-
tory scheme codifying those benefits.
	         Nevertheless, determining whether the 1995 offset
is contractual is simple. The statute itself states expressly
that it is not contractual: “No member of the system or bene-
ficiary of a member of the system shall acquire a right, con-
tractual or otherwise, to the increased benefits provided by
sections 3 to 10 of this 1995 Act. “ HB 3348, § 2(3). Thus, the
legislature clearly intended that the 1995 offset would not
be contractual.
	        Petitioners contend that the legislative history
establishes that the 1995 Legislative Assembly expected
that that provision, HB 3348, § 2(3), codified as ORS
238.362(3), would be repealed by a future legislature if the
parties settled their then-pending litigation over the income
	24
      The nonresident Moro petitioners contend only that the 1991 offset is
contractual.
206	                                     Moro v. State of Oregon

tax exemption. And petitioners point out that the parties
entered a settlement agreement in 1997.
	        Even if we were to credit petitioners’ reading of the leg-
islative history, we would nevertheless interpret and enforce
the 1995 offset as it is written. Under petitioners’ interpreta-
tion, the 1995 Legislative Assembly left to future legislatures
the decision of whether to repeal HB 3348, § 2(3). Regardless
of whether the 1995 Legislative Assembly expected that a
future legislature would repeal that provision, the legislature
has not, in fact, repealed it. See Strunk, 338 Or at 178 (reject-
ing a similar interpretation of HB 3348, § 2(3)).
	        The 1991 offset requires a different analysis. The
1991 offset includes mandatory wording without the same
expressly noncontractual wording as the 1995 offset. See,
e.g., SB 656, § 3(6) (stating that service retirement allow-
ances “shall be increased” according to the 1991 offset).
Nevertheless, the context and legislative history of the 1991
offset establish that the 1991 offset is not part of the PERS
contract because it is not a component of the type of employ-
ment compensation benefits otherwise found in the PERS
contract.
	        To be sure, the 1991 offset was intended to compen-
sate PERS members for the losses that they would incur
when the state repealed the income tax exemption. See
Ragsdale, 321 Or at 224 (so stating). But the statute itself
was not an offer that members had accepted by rendering
services nor was it initially supported by an exchange of
consideration. Instead, the legislature enacted the 1991 off-
set as a type of pre-emptive damage payment to mitigate a
claim for breach of the PERS contract that no court had yet
sustained.
	        The legislature tied the 1991 offset to the repeal of
the tax exemption—rather than tying it to the work that
members performed—by preventing the payment of the
1991 offset in any year in which the tax exemption was
effective. SB 656, § 12(1)-(2). Further, the legislature con-
sidered the 1991 offset at the same time that it considered
repealing the tax exemption. And prior to repealing the
Cite as 357 Or 167 (2015)	207

tax exemption, legislative leaders sought advice from the
Attorney General on, among other things, whether the
state could mitigate damages arising from that breach by
enacting offsetting benefits. Letter of Advice dated May 10,
1989, to Sen Kitzhaber and Rep Katz (OP-6320); see also
Hughes, 314 Or at 19 n 22 (“Where a legislative enactment
follows the legal advice given, before the enactment, in an
opinion of the Attorney General, we have relied on such
an opinion as providing an indication of the legislature’s
purpose in enacting the measure.”). The Attorney General
advised that the state could mitigate damages “by increas-
ing PERS benefits to offset PERS members’ increased tax
liability caused by the breach.” Letter of Advice dated May
10, 1989, to Sen Kitzhaber and Rep Katz (OP-6320). During
hearings on the 1991 offset, Senate President Kitzhaber
noted that the legislature was “trying to develop a strat-
egy that offsets the impact of the tax.” Minutes of Senate
Committee on Labor, SB 656, SB 735, SB 1035, SB 1106,
SB 138, SB 1041, SB 632, May 8, 1991 (testimony of Sen
John Kitzhaber).
	        Thus, although the 1991 offset is calculated
according to years of service, it was intended to compen-
sate PERS members for a breach of contract and not for
their years of service. The 1991 offset was, therefore, not an
offer to PERS members inviting them to render services. It
was, instead, a noncontractual payment from participating
employers to PERS members, intended to limit the amount
of the employers’ liability if a breach of contract were later
established.
	        Even after this court held in Hughes that imposing
Oregon personal income tax on PERS benefits breached the
PERS contract, the participating employers were not under
a contractual obligation to pay the 1991 offset until the 1991
offset was incorporated into the 1997 settlement agreement.
Until then, the legislature remained free to change the
statute and discontinue the mitigation payments that the
employers had made previously. Ending those mitigation
payments would have increased the ultimate damage award
needed to remedy the breach, but ending those mitigation
payments would not have given rise to a separate breach of
208	                                                Moro v. State of Oregon

contract claim. As a result, we hold that the 1991 offset is
not a term of the statutory PERS contract.25
	        Petitioners further argue that, if the 1991 offset
and the 1995 offset are not terms of the statutory PERS
contract, they are nevertheless terms of the 1997 settlement
agreement that resolved the Stovall/Chess class action liti-
gation. Petitioners correctly state that the settlement agree-
ment incorporates the income tax offset statutes: “Plaintiffs
agree to accept the remedies provided in SB 656 (1991), HB
3349 (1995) and HB 2034 (1997) as full and complete pay-
ment for all claims raised in these consolidated actions.”
The settlement agreement is a contract through which the
class action plaintiffs waived their claim for the damages
they incurred as a result of the tax-exemption repeal and, in
return, the participating employers promised to provide the
benefits set out in the 1991 and 1995 tax offsets.
	        Although the settlement agreement is a con-
tract, petitioners cannot assert that the legislature’s 2013
changes to the tax offsets impair their rights under that
contract. The settlement agreement itself contemplates
future legislative action decreasing the benefits available
under the tax offsets. According to the settlement agree-
ment, if the legislature decreased the benefits available
under the tax offsets, then the legislature could avoid dis-
turbing the parties’ rights under the settlement agreement
by enacting “an equivalent decrease in the Oregon per-
sonal income tax imposed on PERS benefits attributable
to service rendered before” the repeal of the tax exemption.
And if the legislature failed to similarly decrease Oregon
tax liabilities, then the class action plaintiffs would be
allowed to reopen the class action litigation and seek sup-
plemental relief.

	25
        Petitioners attempt to refute that conclusion by citing repeatedly from this
court’s opinion in Ragsdale, which considered whether the 1991 offset violated the
intergovernmental tax immunity doctrine. 321 Or at 229. In the context of con-
sidering whether the 1991 offset was a tax rebate, this court stated that, under
the 1991 offset, “every state retiree who qualifies for benefits (based on years of
service) will receive the benefits, regardless of the state retiree’s residency.” Id.
at 230. Suffice it to say that Ragsdale addressed a different legal issue. Even if
Ragsdale correctly identifies who qualified for the 1991 offset, Ragsdale sheds no
light on whether the legislature intended to create a statutory contract when it
enacted the offset provisions.
Cite as 357 Or 167 (2015)	209

	        Petitioners contend that SB 822’s amendments to
the tax offsets have not been balanced out by equivalent
decreases in state taxes. Even if true, that would not estab-
lish an impairment of the settlement agreement. Rather,
it would establish the contractual right to reopen the class
action litigation. We have not been asked to consider, nor do
we have jurisdiction to consider, the scope of that contrac-
tual right or its availability to nonresident class members.
Therefore, we do not resolve any potential argument that the
right to reopen the class action litigation does not extend to
nonresident petitioners because, under both state and federal
law, the Oregon personal income tax has been completely
eliminated as to nonresident PERS retirees since 1996. See 4
USC § 114(a) (preventing a state from “impos[ing] an income
tax on any retirement income of an individual who is not a
resident or domiciliary of such [s]tate”); ORS 316.127(9)(a)
(“Retirement income received by a nonresident does not con-
stitute income derived from sources within this state unless
the individual is domiciled in this state.”).26
	        Based on the foregoing, we hold that the 1991 and
1995 offsets are not terms of the statutory PERS contract
and, therefore, are not obligations under that contract that
could be “impaired” for purposes of applying the Contract
Clause. The 1991 and 1995 offsets, however, are terms of the
1997 class action settlement agreement. But the amendments
contained in SB 822, which reduce the benefits provided to
nonresident retirees under that settlement agreement, nei-
ther impair nor breach the terms of that agreement, because
the agreement expressly contemplates, and provides a means
for seeking relief for, such benefit reductions.
           c.  Was the pre-amendment COLA provision a
               term of the PERS contract?
	        As explained above, for Tier One and Tier Two mem-
bers, the pre-amendment COLA consisted of three relevant

	26
        Oregon’s personal income tax applies to the taxable income of “every full-
time nonresident that is derived from sources within this state.” ORS 316.037(3).
Both 4 USC section 114 and ORS 316.127(9) apply to retirement income received
after December 31, 1995. State Taxation of Pension Income Act of 1995, Pub. L.
No. 104–95 (HR 394), 109 Stat 979 (effective as to income derived on or after
January 1, 1996); Or Laws 1997, ch 839, § 11 (same).
210	                                     Moro v. State of Oregon

subsections: the COLA requirement in subsection (1);
the COLA cap in subsection (2); and the COLA bank in
subsection (3). ORS 238.360 (2011). OPSRP members were
subject to substantially the same COLA provision, except that
they did not have a COLA bank available. ORS 238A.210
(2011).
	        Petitioners contend that this court has already
decided that the pre-amendment COLA provision is con-
tractual. In Strunk, this court considered a state Contract
Clause challenge involving the same pre-amendment COLA
provisions at issue here. 338 Or at 213. The legislative
amendment in Strunk temporarily prevented the board
from making COLA adjustments to the service retirement
allowances of certain retirees. Id. This court assessed the
merits of that challenge by first determining whether the
same pre-amendment COLA provision at issue in this case
“constituted a term of the PERS statutory contract[.]” Id. at
220. We first considered the text and context of the COLA
provision to determine whether it was a term of the PERS
contract. The text of the pre-amendment COLA statutes is
the same in this case as in Strunk, and the court in Strunk
emphasized the numerous phrases indicating that the
adjustment was mandatory:
   	 “  ‘(1)  As soon as practicable after January 1 each
   year, [the board] shall determine the percentage increase or
   decrease in the cost of living for the previous calendar year,
   based on the Consumer Price Index * * *. Prior to July 1
   each year the allowance which the member or the member’s
   beneficiary is receiving or is entitled to receive on August 1
   for the month of July shall be multiplied by the percentage
   figure determined, and the allowance for the next 12 months
   beginning July 1 adjusted to the resultant amount.’
   	 “ ‘(2)  Such increase or decrease shall not exceed two
   percent of any monthly retirement allowance in any year
   and no allowance shall be adjusted to an amount less than
   the amount to which the recipient would be entitled if no
   cost of living adjustment were authorized.’ ”
Id. at 220-21 (quoting ORS 238.360 (2001)) (emphases in
original; bracketed material added). This court then analo-
gized the COLA provision to the tax exemption provision in
Hughes: “Like the tax provision analyzed in Hughes, the text
Cite as 357 Or 167 (2015)	211

of ORS 238.360(1) (2001) evinces a clear legislative intent
to provide retired members with annual COLAs on their
service retirement allowances, whenever the CPI warrants
such COLAs.” Id. at 221. Based on that analysis, this court
held that “the general promise embodied in ORS 238.360(1)
(2001) was part of the statutory PERS contract[.]” Id.
Petitioners claim that Strunk establishes a precedent that
the pre-amendment COLA provision is contractual and ask
us to adhere to that precedent.
	       Respondents disagree. As an initial matter, respon-
dents read Strunk narrowly as holding that only the COLA
requirement in subsection (1) is a term of the contract. Based
on that premise, respondents argue that the COLA cap and
COLA bank were not addressed in Strunk and therefore this
court should consider whether they are terms of the PERS
contract without relying on Strunk.
	        Respondents’ narrow reading of Strunk fails,
because it does not account for the incongruity that would
result from treating the COLA requirement in subsection
(1) as contractual but treating the COLA cap and the COLA
bank as noncontractual. For example, the COLA require-
ment in subsection (1) ties the COLA to the CPI without
limitation. If the CPI went up 7%, then under subsection
(1) each retiree would receive a 7% COLA. If that limitless
COLA requirement were really the only contractual aspect
of the COLA provision, then the COLA cap would actually
breach the PERS contract by limiting the COLA. That is not
the result that respondents seek.
	        It is also not what the legislature intended. In the
original COLA statutes passed in 1971 and 1973, the COLA
requirement expressly referred to and incorporated the
COLA cap.27 See former Or Laws 1971, ch 738, § 11; Or Laws
	27
       Under former ORS 237.060 (1971), the relevant subsections were set out
in reverse order. The COLA cap was contained in subsection (1), and the COLA
requirement was in subsection (2). Former ORS 237.060(1)-(2) (1971). At that
time, the COLA requirement incorporated the COLA cap by stating, “Prior to
July 1 each year the allowance which the member is receiving or is entitled to
receive on August 1 for the month of July shall be multiplied by the percentage
figure determined, and subject to subsection (1) of this section, the member’s allow-
ance for the next 12 months beginning July 1 adjusted to the resultant amount.”
Former ORS 237.060(2) (1971) (emphasis added).
212	                                              Moro v. State of Oregon

1973, ch 695, § 1. In 1989, through an amendment that was
not intended to impact the substance of the COLA provi-
sion, the legislature removed that cross-reference but moved
the COLA cap into another subsection. See Or Laws 1989,
ch 799, § 2 (re-organizing the COLA provision and moving
the COLA cap); see also Strunk, 338 Or at 221 (noting that
the “substance” of the COLA requirement and COLA cap
has “remained unchanged, notwithstanding other interim
amendments”). The legislature, therefore, intended that the
COLA requirement would operate together with the COLA
cap. Further, because the COLA bank merely directs the
board on how to apply the COLA cap, the COLA bank must
be interpreted consistently with the COLA cap.
	        Respondents nevertheless argue that, because
the COLA cap restricts the amount of COLA that employ-
ees can receive, it was intended to benefit employers and
is therefore distinct from any employee benefit that might
otherwise be created by the COLA requirement. But that
argument improperly frames the question.28 As noted, a pro-
vision is most often a term of the PERS contract if the provi-
sion determines the eligibility for, or scope of, a mandatory
PERS benefit. Regardless of whether the COLA cap benefits
employers or employees, the COLA cap clearly determines
the scope of the COLA requirement, and the COLA require-
ment was intended to benefit employees.
	        We conclude, therefore, that the legislature intended
the COLA requirement to be read with both the COLA cap
and the COLA bank as determining the overall value of
the COLA benefit. If the COLA requirement is contractual,
as we held in Strunk, then the COLA cap and COLA bank
are also contractual. We therefore read Strunk as providing
precedential authority for treating the COLA requirement,
the COLA cap, and the COLA bank of ORS 238.360 (2011)
as terms of the PERS offer.

	28
        Further, it is improper to assume that the COLA cap benefits only employ-
ers. Whether a particular COLA cap benefits employers or employees depends on
the alternatives. Employers may benefit from a COLA cap of plus or minus 2%
if the alternative is a limitless COLA. But at the time the legislature passed the
COLA cap of plus or minus 2%, the alternative was the existing COLA cap of plus
or minus 1.5%. Or Laws 1973, ch 695, § 1. The legislative history indicates that
increasing the COLA cap to plus or minus 2% was intended to benefit employees.
Cite as 357 Or 167 (2015)	213

	         Given that precedent, respondents ask us to dis-
avow our analysis of the COLA provision in Strunk. As
the parties seeking disavowal, respondents must “affirma-
tively persuad[e] us that we should abandon that prece-
dent.” Farmers Ins. Co. v. Mowry, 350 Or 686, 692, 261 P3d
1 (2011). Departing from precedent may be justified “when
a party affirmatively demonstrates that ‘an earlier case was
inadequately considered or wrong when it was decided.’ ” Id.
at 693. However, departing from prior precedent comes at
the cost of “predictability, fairness, and efficiency.” Id. As a
result, “[w]e will not depart from established precedent sim-
ply because the ‘personal policy preference[s]’ of the mem-
bers of the court may differ from those of our predecessors
who decided the earlier case.” Id. at 698.

	         Respondents contend that this court in Strunk inad-
equately considered the issue of whether the pre-amendment
COLA provision was part of the PERS contract. We disagree.
Although the analysis in Strunk is brief, it demonstrates suf-
ficient consideration of the issue. In Strunk, we largely relied
on the similarities between the pre-amendment COLA pro-
vision and the tax exemption provision at issue in Hughes.
Strunk, 338 Or at 221. Both provisions set out financial ben-
efits, and both use mandatory wording. Hughes, 314 Or at
26 (noting that the tax exemption statute stated that PERS
benefits “ ‘shall be’ ” exempt from income taxes (quoting ORS
237.201 (1989))); ORS 238.360(1) (2001) (stating that the
board “shall” calculate the COLA and that the COLA “shall
be” added to the service retirement allowance). Strunk does
not contain more analysis of that issue, but Hughes con-
tains an extensive analysis of why those factors are salient.
Hughes, 314 Or at 22-27. The court’s heavy reliance on
Hughes in Strunk does not mean that the court failed to ade-
quately consider the issue.

	        Respondents further argue that the legislative his-
tory of the COLA provision demonstrates that Strunk was
wrong at the time that it was decided. When the state began
offering PERS pension benefits in 1945, that offer included
no mechanism for automatically adjusting the benefits for
inflation. Or Laws 1945, ch 401. The service retirement
allowance calculated at the time of retirement was to remain
214	                                   Moro v. State of Oregon

unchanged. Thus, as time went on, inflation diminished the
purchasing power of the service retirement allowance.
	        In 1963, the legislature attempted to offset those
losses by authorizing the board to distribute money to
retirees from investment returns earned in excess of the
assumed interest rate. Or Laws 1963, ch 608, § 9. The stat-
ute described that plan as a “dividend payment system.”
Id. The board was not, however, required to make any pay-
ments under that system. Instead, the board had discretion
whether to do so. Id. (“The board * * * may distribute * * * net
interest received through investment of the fund in excess of
the assumed rate of interest.” (Emphasis added.)). The sys-
tem was not only discretionary, but it was also conditioned
on the fund’s investments generating returns in excess of
the assumed earnings rate. Id. Further, any payments that
the board made under that system were one-time payments
that did not affect the retiree’s service retirement allowance
going forward. Id.
	        That system was in effect from 1964 to 1971. During
that time, the board authorized one payment per year to
retirees, in addition to the 12 monthly checks that retirees
received for their retirement allowance. Those additional
checks issued under the dividend repayment program were
known as “thirteenth checks.” See Special Master’s Report
at 20 (describing the history of the dividend repayment pro-
gram). In 1964, retirees received a thirteenth check equal to
one month of the retiree’s retirement allowance. Id. at 20-21.
The checks grew and, by 1971, were equal to 3.5 times the
retiree’s monthly retirement allowance. Id. at 21. Those
checks, however, did not increase a retiree’s service retire-
ment allowance and thus did not have the effect of “com-
pounding” that the later COLA provision had.
	        In 1971, the legislature repealed the discretion-
ary dividend payment system and enacted the COLA sys-
tem currently at issue. Or Laws 1971, ch 738, §§ 8, 11. As
noted above, the 1971 COLA provision imposed a COLA cap
of plus or minus 1.5%. Or Laws 1971, ch 738, § 11(1). The
1973 legislature increased the COLA cap to plus or minus
2%. Or Laws 1973, ch 695, § 1. Other than that increase in
Cite as 357 Or 167 (2015)	215

the COLA cap, the COLA system enacted in 1971 is sub-
stantively the same as the pre-amendment COLA provision
in effect until the 2013 amendments at issue in this case.
Despite enacting the COLA statute, the legislature still
provided discretionary ad hoc adjustments to service retire-
ment allowances from time to time, to help protect the pur-
chasing power of the retirement allowances.
	        Respondents contend that that legislative history
establishes that the COLA system is not a term of the PERS
contract. According to respondents, the original dividend
payment system was not a term of the contract for two rea-
sons. First, the benefits were discretionary rather than
mandatory. Second, the benefits were gratuitous, because
they were new benefits granted to individuals who were
already retired and who thus could not have accepted an
offer for new benefits by working. Respondents then argue
that the legislature intended the COLA system to be simply
a continuation of the discretionary and gratuitous dividend
payment system.
	        The conclusions that respondents draw from the
legislative history do not withstand scrutiny. Respondents
are correct that the original dividend system was discretion-
ary and gratuitous, but they are incorrect that the COLA
system is simply a continuation of the earlier scheme. The
COLA system is materially distinct from the dividend pay-
ment system. First, in contrast to the discretionary dividend
payment system, the COLA system is mandatory. Under the
pre-amendment COLA system, the board was required to
determine the percentage increase or decrease in the cost of
living for the previous year based on the CPI and required
to adjust service retirement allowances accordingly. ORS
238.360(1) (2011) (so stating). By enacting the COLA sys-
tem, the legislature made the board’s function ministerial
and the application of the COLA automatic.
	       Second, the fact that the pre-amendment COLA
system required employers to fund new benefits for some
individuals who were already retired does not mean that
the COLA benefit was not part of the employers’ offer to
current or future employees who could accept the offer by
working. Instead, it means only that the employers’ offer of
216	                                  Moro v. State of Oregon

COLA benefits was not accepted by the individuals who had
already retired and, therefore, that those retirees did not
have a contractual right to the COLA. There is no doubt that
one of the goals of the COLA statute was to benefit then-cur-
rent retirees. But that goal is not inconsistent with the goal
of also providing greater financial benefits (and an incentive
to begin or continue employment) to individuals who had
not yet retired and who could accept a pension offer that
included COLA benefits.
	        Further, despite enacting the COLA system in 1971,
the legislature continued to make additional discretionary
ad hoc payments during periods of particularly high infla-
tion. As a result, employees could reasonably expect that the
COLA statute codified some minimum automatic protection
of the purchasing power of their future benefits that was
separate from any discretionary and gratuitous ad hoc ben-
efits that the legislature might otherwise provide.
	        Other material distinctions support our conclusion
that the COLA benefits were not merely a continuation of
the discretionary dividend payment benefits. For example,
whereas the dividend payments were supplemental pay-
ments that had no effect on how the board calculated the ser-
vice retirement allowance, the COLA is not a supplemental
payment and instead directly adjusts the service retirement
allowance itself. ORS 238.360(1) (2011) (“Prior to July 1
each year the allowance which the member or the member’s
beneficiary is receiving or is entitled to receive on August 1
for the month of July shall be multiplied by the percent-
age figure determined, and the allowance for the next 12
months beginning July adjusted to the resultant amount.”).
Therefore, the board, as directed by statute, incorporates
the COLA into the formula used for determining each retir-
ee’s service retirement allowance, and, after multiplying by
the appropriate interest rate, the “resultant amount” is the
“allowance.”
	        Additionally, the legislature funded the COLA
increases through current employer contributions rather
than rely on investment returns that exceed the assumed
interest rate in given year, which had been used to fund the
dividend payments. ORS 238.360(4) (2011) (COLA increases
Cite as 357 Or 167 (2015)	217

paid by employer). Those employer contributions are actu-
arially determined in an effort to prefund an employee’s
service retirement allowance before the employee retires.
See Strunk, 338 Or at 160 (stating that employer contribu-
tion rates are based in part on “the PERS actuary’s best
estimate of the amount needed to pay service retirement
allowances to current members in the future”). The COLA,
as noted above, is part of the service retirement allowance
employees will receive during their retirement. In fact, the
COLA is one of the actuarial assumptions that the board
uses to project the service retirement allowance of cur-
rent employees and determine the employer contribution
rates. See, e.g., Oregon Public Employees Retirement System
Actuarial Valuation 65 (Dec 13, 2013) (listing the statutory
“Cost-of-Living Adjustments” as an actuarial assumption);
see also id. at 21, 39 (noting that employer contributions are
based on actuarial assumptions). As a result, unlike the div-
idend payment program, employers pay for benefits under
the COLA system in exactly the same manner as the other
components of the service retirement allowance.
	        We therefore reject respondents’ reading of the leg-
islative history of the COLA provisions and conclude that
nothing to which we have been directed by respondents
undermines our prior conclusion in Strunk that the COLA
is a term of the PERS offer.29
	       Finally, respondents argue that, even if Strunk
controls and this court applies that decision here, Strunk
reaches only Tier One and Tier Two members, under ORS
238.360 (2011), and should not be extended to OPSRP mem-
bers, under ORS 238A.210 (2011). Respondents are correct
that Strunk does not address OPSRP members directly. In
arguing that OPSRP members are distinct from Tier One
and Tier Two members, respondents do not rely on differ-
ences in the COLA statutes applicable to each category of
	29
         That conclusion is consistent with federal law holding that a COLA is a
term of a pension contract protected under ERISA. See, e.g., Hickey v. Chicago
Truck Drivers Union, 980 F2d 465, 469 (7th Cir 1992) (“A participant’s right to
have his basic benefit adjusted for changes in the cost-of-living accrued each year
along with the right to the basic benefit. A participant’s entitlement to his or her
normal retirement benefit included, as one component, the right to have the ben-
efits adjusted pursuant to the COLA provision.”).
218	                                    Moro v. State of Oregon

members. As noted above, the COLA statute applicable to
OPSRP members is substantially similar to the COLA stat-
ute applicable to Tier One and Tier Two members, except
that OPSRP members do not have access to the COLA bank.
Compare ORS 238.360 (2011) (providing COLA benefits to
Tier One and Tier Two members) with ORS 238A.210 (2011)
(providing COLA benefits to OPSRP members). Instead,
respondents rely on a reservation of rights provision, ORS
238A.470, that the legislature applied to OPSRP members
but not to Tier One and Tier Two members. That provision
states:
   	 “The Legislative Assembly may change the benefits
   payable to [OPSRP members] * * *, as long as the change
   applies only to benefits attributable to service performed
   and salary earned on or after the date the change is made.”
ORS 238A.470.
	        We have not had occasion to interpret ORS 238A.470.
Respondents interpret the provision as setting up a distinc-
tion between prospective and retrospective changes to ben-
efits. According to respondents, the reservation of rights
allows the legislature to make only prospective changes to
benefits that are “attributable to service performance and
salary earned,” ORS 238A.470, and therefore limits the leg-
islature’s ability to make retrospective changes to those ben-
efits. Respondents further contend that that limitation does
not apply to benefits that are not “attributable to service per-
formance and salary earned,” id., and that the legislature is
free to make any changes to such benefits, even retrospec-
tive changes. Respondents then argue that COLA benefits
for OPSRP members are attributable to the CPI and are not
attributable to service performed or salary earned. Under
that reading, the legislature reserved the right to make any
change, without limitation, to the OPSRP COLA benefit. A
consequence of that reasoning is that any promise contained
in the pre-amendment COLA provision would be illusory, and
therefore not contractual, because the legislature retained
the discretion to retrospectively eliminate the benefit.
	       Respondents’ argument does not fit the word-
ing of the reservation of rights provision set out in ORS
238A.470. In the context of that provision, the phrase “as
Cite as 357 Or 167 (2015)	219

long as” means “provided that,” Webster’s Third New Int’l
Dictionary 129 (unabridged ed 2002), and serves the same
function as the phrase “if and only if,” Rodney Huddleston
and Geoffrey K. Pullum, The Cambridge Grammar of the
English Language 758 (2002). As a result, the legisla-
ture reserved the right to change benefits if and only if
the change applies to benefits “attributable to service per-
formed and salary earned on or after the date the change
is made.” ORS 238A.470. If COLA benefits are not “attrib-
utable to service performed and salary earned,” as respon-
dents contend, then ORS 238A.470 would not authorize
the legislature to make any changes to the COLA benefit,
whether prospective or retrospective.
	        Regardless, COLA benefits are “attributable to
service performed,” and therefore, under the only plausible
reading of ORS 238A.470, they may be changed only pro-
spectively. A benefit is attributable to service performed if
the employee acquires a right to that benefit as a result of
service performed. In that sense, the benefit is payable to
the OPSRP member because of the service that the member
performed. Respondents’ position confuses the rate of the
benefit and the right to receive the benefit. The rate of the
benefit is set by the combination of the CPI and the COLA
cap, but the employee’s right to receive the benefit is a result
of the service performed.
	       As a result, we conclude that the pre-amendment
COLA provisions are terms of the PERS contract for each
category of PERS members, whether Tier One, Tier Two, or
OPSRP.
    3.  What obligations do those terms provide?
	        Because the 1991 and 1995 offsets are not part
of the PERS contract or otherwise capable of legislative
impairment, we do not need to consider those provisions
further. But the pre-amendment COLA statutes are part of
the PERS contract. As a result, we turn now to identify-
ing the participating employers’ obligations under the PERS
contract. “It is those obligations that set the conditions that
the legislature may not in the future alter without conse-
quence.” Strunk, 338 Or at 201.
220	                                  Moro v. State of Oregon

	         As discussed above, the state Contract Clause pro-
hibits laws impairing obligations that arise from contracts
formed before the law’s effective date. PERS members accept
their employers’ offers of PERS benefits by rendering ser-
vices to their employers. Like the employee in Thomas who
repeatedly accepted his employer’s continuing offer of salary
each day that he worked, PERS members repeatedly accept
their employers’ PERS offers by continuing to work and
thereby earn additional contractual rights to PERS bene-
fits for that additional work. For example, if an employer
offers, and continues offering, two PERS members the same
compensation package, including PERS benefits, then—
assuming all other things are equal—the employee who
works longer will have a contractual right to a larger retire-
ment benefit under PERS.
	        This court relied on Thomas, and applied the
same analysis, to assess the PERS tax exemption provi-
sion in Hughes. 314 Or at 29 n 33 (citing Thomas, 143 Or
41). Because all PERS offers before October 1991 included
a tax exemption benefit, employees who had rendered ser-
vices before October 1991 had accepted that offer and had
accrued a contractual right to tax-exempt PERS benefits.
Id. at 29. That acceptance, however, protected only the part
of the service retirement allowance that was earned before
the exemption was repealed in October 1991. Id. Therefore,
in Hughes, by the time that the legislature repealed the
PERS tax exemption, PERS members already had a con-
tractual right to their accrued service retirement allowance
that would not be subject to state income taxes, even though
the employees had not yet retired and did not yet know the
value of their service retirement allowance.
	        Similarly, in this case, by the time that the leg-
islature enacted SB 822 and SB 861, modifying the pre-
amendment COLA provisions, PERS members already had
a contractual right to their accrued retirement benefits that
would be subject to the pre-amendment COLA. Hughes,
therefore, establishes a contractual obligation applicable in
this case: Members are entitled to have the pre-amendment
COLA applied to accrued PERS benefits earned before the
COLA amendments went into effect.
Cite as 357 Or 167 (2015)	221

	         The remaining question is whether the participat-
ing employers’ obligations extend beyond that baseline, viz.,
whether the participating employers were prohibited from
revoking the offer of the pre-amendment COLA benefits.
If the employers are required to continue offering the pre-
amendment benefits, then members might be allowed to
accept that offer on a continuing basis by performance until
they retire and to accrue additional retirement benefits sub-
ject to the pre-amendment COLA.
	        Our case law has not consistently answered that
remaining question.30 As noted, Hughes allowed the employ-
ers to revoke the offer of tax-exempt PERS benefits for future
work after finding no legislative intent to make the offer
irrevocable. Hughes, 314 Or at 28 (“The statute does not,
however, refer to PERS retirement benefits that may accrue
in the future. Had it chosen to do so, the legislature could
have dealt with future benefits, but it did not.”). Although the
PERS members had accrued a right to receive, at retirement,
a tax-exempt service retirement allowance for the years that
they had worked before the tax exemption was repealed, the
right that they accrued did not require the employers to
continue offering tax-exempt service retirement allowances.
For that reason, participating employers could change, and
thus revoke, the offer of tax-exempt PERS benefits. Id. at 29
(“[T]he state promised that all PERS retirement benefits
that have accrued or are accruing for work performed so long
as former ORS 237.201 remained in effect * * * are exempt
from state and local taxation forever. * * * [But the] state has
no contractual obligation not to tax unaccrued PERS retire-
ment benefits for work performed after the effective date of
the Act[.]”). Revoking the offer of tax-exempt PERS benefits,
however, precluded only the accrual of additional tax-exempt
service retirement allowances. Employees who accepted the
PERS offer before the repeal and who additionally accepted
the PERS offer after the appeal would therefore receive a
	30
       Other courts similarly have struggled with this issue. See McGrath v.
Rhode Island Retirement Bd., etc., 88 F3d 12, 17 (1st Cir 1996) (collecting cases
and stating that”[t]hough the principle that a pension plan represents an implied-
in-fact unilateral contract is fairly well settled and has been applied repeatedly to
state and municipal pension plans, there is significant disagreement about when
contractually enforceable rights accrue under such plans” (internal citations and
footnote omitted)).
222	                                  Moro v. State of Oregon

service retirement allowance that was only partially exempt
from state taxes.
	          We applied a similar analysis in Strunk, which
upheld PERS amendments that affected the rate at which
retirement benefits would accrue for only future work. See,
e.g., 338 Or at 193 (rejecting “claims that the redirection of
PERS members’ future contributions to the IAP, as set out
in the 2003 PERS legislation, either breaches or impairs
a contractual obligation of the PERS contract” (emphasis
added)); id. at 213 (affirming amendments to “discontinue
permitting PERS members to contribute to their variable
accounts”). The court in Strunk recognized that an offer for
a particular PERS benefit could be irrevocable only if the
irrevocability is an express term of the offer. See id. at 192
n 40 (“The predicate question—which we determine to be
dispositive in these cases—is whether the contract offer that
the particular pension plan presents contains such a prom-
ise, i.e., a promise that extends over the life of a covered
member’s service.” (First emphasis added; second emphasis
in original.)); see also Restatement § 25 (“An option contract
is a promise which meets the requirements for the formation
of a contract and limits the promisor’s power to revoke an
offer.”); Restatement § 87(1)(a) (“An offer is binding as an
option contract if it * * * is made irrevocable by statute.”).
The court in Strunk found no such words.
	        This court, nevertheless, reached the opposite con-
clusion in OSPOA, 323 Or 356, which was decided after
Hughes but before Strunk. The court in OSPOA concluded
that an offer for pension benefits is irrevocable not because
the irrevocability was an express term of the offer, but
because the irrevocability was an implied term of the offer.
According to OSPOA, a right to pension benefits, includ-
ing PERS benefits, “vest[s] on acceptance of employment[,]
* * * with vesting encompassing not only work performed
but also work that has not yet begun.” Id. at 371 (emphasis
added). In reaching that conclusion, the court in OSPOA
relied extensively on Taylor, in which this court had found
an offer for pension benefits to be impliedly irrevocable as
to an employee who attempted to participate in the pen-
sion plan. See id. at 368 (“ ‘The adoption of the pension plan
was an offer for a unilateral contract. Such an offer can be
Cite as 357 Or 167 (2015)	223

accepted by the tender of part performance. * * * [P]lain-
tiff’s tender of [part performance] terminated defendants’
power to revoke the offer[.]’ ” (Quoting Taylor, 265 Or 445,
452-53.)).
	         Taylor, however, is distinguishable from both
OSPOA and this case. Taylor addressed the vesting of pen-
sion benefits that had already accrued. In Taylor, a correc-
tions officer was eligible to participate in her employer’s pen-
sion plan, which required employees to work for 20 years
before vesting. 265 Or at 450.31 The employee tendered her
salary contributions after her first year of eligibility, but
her employer refused to receive them and then amended the
pension ordinance to exclude corrections officers from the
plan. Id. This court recognized the potential problem when
an offer for a unilateral contract proposes an acceptance that
takes time to complete. When the performance necessary to
accept the offer takes time to complete, there is a concern
that the offering party will revoke the offer after receiving
partial performance but before receiving the complete per-
formance necessary to form the unilateral contract.32
	        To address that concern, this court held in Taylor that,
because of the time that it would take the employee to vest
the benefits that she should have accrued, the offer contained
an implied term that prevented the employer from revoking
the employee’s opportunity to vest those benefits. Id. at 452.
That holding is consistent with rules of general contract law
that an offer is impliedly irrevocable if the invited form of
acceptance takes time to complete and the accepting party is
attempting to complete the acceptance. See Restatement § 45
(describing the formation of an implied option contract). That
type of implied irrevocability might apply, for example, if it
takes an employee a year to satisfy the conditions necessary
for a retention bonus. See, e.g., Walker v. American Optical
	31
        See also Multnomah Cnty., Or, Ordinance No. 25 (July 10, 1969) (describ-
ing eligibility for pension) (provided in Respondent’s Answering Brief at 9, Taylor
v. Mult. Dep. Sher. Ret. Bd., 11 Or App 488, 502 P2d 601 (1972)).
	32
        See Lord, 1 Williston on Contracts § 5:13 at 987 (“As a theoretical matter,
when an offeror makes an offer to enter into a unilateral contract, he or she
should be free to withdraw the offer at any time until performance has been com-
pleted by the offeree. However, great injustice may arise if the offeror’s power of
revocation continues so long.”).
224	                                              Moro v. State of Oregon

Corp., 265 Or 327, 330-31, 509 P2d 439 (1973) (assessing the
formation of a retention bonus contract).
	        None of the claims in OSPOA, however, involved
conditions that took time to complete, such as the vesting
requirement in Taylor. OSPOA, nevertheless, relied on
Taylor and treated all pension offers as irrevocable, rea-
soning that participating employers “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.” OSPOA,
323 Or at 374 (emphasis in original). But OSPOA’s analy-
sis establishes only that PERS is an offer for a unilat-
eral contract. As discussed above, a unilateral contract is
always formed only after the accepting party has completed
the performance sought by the offering party. The fact
that PERS is a unilateral contract simply means that the
employee is not contractually bound to carry out some future
performance—that is, there is nothing in the terms of the
PERS contract obligating the employee to continue working
for the employer.33 But the implied term of irrevocability
recognized in Taylor does not apply to all offers of unilat-
eral contracts; instead, it applies to only those offers that
are accepted by performance that takes time to complete.
Taylor, 265 Or at 452-53.34
	        Unlike the vesting requirement at issue in Taylor,
the COLA benefit at issue in this case does not impose condi-
tions on acceptance that take time to complete. As discussed
above, the COLA benefit accrues incrementally as a PERS
member renders additional service to his or her employer.
	33
       Other terms of the employment agreement certainly could obligate the
employee to continue working for a specified period. But no such term is required
by the PERS contract. And this case does not present facts that would allow us to
consider how the statutory irrevocability of the COLA benefits would apply to an
employment contract that sets an employee’s rate of compensation for a specified
period of time, often called a “term contract.”
	34
       Most employment relationships, including at-will employment relation-
ships, are governed by such unilateral contracts. See, e.g., Lord, 19 Williston on
Contracts § 54:8 at 368 (“In fact, it has been said that most employment contracts
are unilateral, and this seems clearly to be the case with an at-will employment
relationship.” (Footnote omitted.)); Pettit, 63 B U L Rev at 559-60 (“Cases aris-
ing from the employer-employee relationship now comprise the largest and most
important group of cases in which courts invoke the concept of the unilateral
contract.”).
Cite as 357 Or 167 (2015)	225

The member’s work continually and serially completes the
performance necessary to accrue the benefits attributable to
that work, thus eliminating the concern of uncompensated
work that drove this court’s analysis in Taylor.
	In Strunk, this court attempted to distance itself
from OSPOA by limiting OSPOA to the specific statutes at
issue in that case. See Strunk, 338 Or at 191-92 (“[N]othing
about the court’s interpretation of the statutory provisions
at issue in OSPOA mandates a conclusion different from the
one that we have reached after analyzing the text and con-
text of ORS 238.300 (2001).”). But the decision in OSPOA
did not rely on the wording of the specific statutes at issue
in that case. Instead, OSPOA prohibited prospective amend-
ments based on a particular view of pension plans that is
not supported by Taylor and is inconsistent with our earlier
decision in Hughes, with our later decision in Strunk, and
with the analysis set out above. As a result, we go a step
further than we did in Strunk and disavow the reasoning
that we applied in OSPOA.35
	        Even under the reasoning of Hughes and Strunk,
participating employers may nevertheless be required to
continue to offer the pre-amendment COLA benefit if the
irrevocability is an express term of the contractual rights
that the employees accrued before the effective dates of SB
822 and SB 861. Petitioners contend that the employers are
obligated to continue offering the pre-amendment COLA
benefits to all employees who began to work when those ben-
efits were in effect. In support of that position, they point
to numerous places where the pre-amendment COLA provi-
sions use mandatory language, such as “shall.” See, e.g., ORS
238.360(1) (2011) (directing that the member’s retirement
service allowance “shall be multiplied by the percentage fig-
ure determined, and the allowance for the next 12 months
beginning July 1 adjusted to the resultant amount”).
	        The legislature’s use of “shall,” without more, is
plainly insufficient to establish the irrevocability of an offer.
Although this court has considered the use of “shall” as a
	35
       Our holding disavows only the reasoning applied by this court in OSPOA.
Our holding does not reach, and we have not been asked to consider, the prec-
edential value of OSPOA as it relates to the specific benefits at issue in that case.
226	                                   Moro v. State of Oregon

factor that can weigh in favor of finding a statutory contract
offer, see, e.g., Hughes, 314 Or at 23 (applying statute pro-
viding that PERS benefits “shall be exempt” from Oregon
income tax (quoting former ORS 237.201 (1989)), the use of
“shall,” without more, has not been used to establish irrevo-
cability, see, e.g., id. at 29 (allowing participating employers
to prospectively revoke their offer of tax-free PERS benefits).
Consider, for instance, an employer’s promise that it “shall”
pay a potential employee $3,000 per month. That promise
does not expressly provide that the employer will not change
the employee’s compensation in the future, nor can we imply
from the word “shall” a promise to maintain that salary
without change.
	        The insufficiency of that argument is reinforced by
the concerns that we set out at the beginning of our Contract
Clause analysis—namely, that legislatures generally do not
intend to bind future legislatures. An irrevocable statu-
tory offer—particularly one that could involve potentially
decades of new and significant financial liabilities—would
deviate widely from that general presumption.
	         We therefore reject petitioners’ claim that the
COLA is an irrevocable term of the PERS offer that cannot
be changed prospectively. We agree with respondents that
the COLA provisions do not include a promise to apply any
specific COLA to increase retirement benefits for work that
is yet to be performed.
    4.  Has the state impaired an obligation of the contract?
	       As we have just discussed, participating employers
are contractually obligated to provide members with the
pre-amendment COLA benefits for benefits earned before
the amendments became effective. Although the participat-
ing employers can change the COLA offer as to benefits that
might accrue in the future, they cannot change the COLA
contract as to benefits that have already accrued.
	        SB 822 reduced the COLA cap from plus or minus
2% to plus or minus 1.5% for 2013, and, beginning in 2014,
SB 861 eliminated the COLA cap and bank and imposed
a fixed rate of 1.25% on benefits received by retired mem-
bers up to $60,000 and a fixed rate of 0.15% on retirement
Cite as 357 Or 167 (2015)	227

income in excess of $60,000. SB 822 and SB 861 apply those
new COLA rates to all PERS benefits, without regard to
whether the benefits were earned before the effective dates
of those provisions. Because SB 822 and SB 861 would apply
to benefits earned before their effective dates, petitioners
contend that SB 822 and SB 861 retrospectively modify and
reduce the participating employers’ contractual obligations
with respect to COLA benefits and therefore impair obliga-
tions of their PERS contracts. See Strunk, 338 Or at 170 (“As
to the determination whether newer legislation amounts to
an impairment of a preexisting statutory contractual obli-
gation, the court focused on whether the legislation would
change or eliminate the state’s obligation under that con-
tract.” (citing Eckles, 360 Or at 399-400.)).
	        Respondents dispute the assertion that the COLA
amendments necessarily will reduce the benefits to PERS
members (and the obligations of the participating employ-
ers) and argue that SB 822 and SB 861 might, in fact,
benefit some PERS members. The pre-amendment COLA
depends on the Portland CPI and is variable, although it
cannot go below the service retirement allowance or the
OPSRP pension calculated at the time of a member’s retire-
ment. The amended COLA provision in SB 861 is a fixed
COLA at 1.25% and does not depend on the Portland CPI.
Respondents assert that it is possible that, under certain
economic conditions where the cost of living decreases or
increases a small amount only, some petitioners might be
better off under the amended COLA.
	        We reject respondents’ argument, because the record
in this case does not support it. In the evidentiary hearing
before the special master, the parties largely agreed on the
appropriate economic assumptions to use when projecting
the effect of SB 822 and SB 861 and the present value of the
changes. Although the parties reached different conclusions
as to the extent of the adverse financial effect on the benefits
PERS members will receive, they agreed that the effect will
be adverse. The contrary theoretical possibilities asserted
by respondents are insufficient to overcome the evidence
in the record. As a result, we agree with petitioners that
SB 822 and SB 861 impair the participating employers’
contractual obligations to apply the pre-amendment COLA
228	                                  Moro v. State of Oregon

provisions to PERS benefits earned before the effective dates
of those amendments.
	        Respondents further invite this court to incorporate
a substantiality requirement into our standard for deter-
mining whether an asserted “impairment” is constitution-
ally cognizable. The impairment identified in this case—the
application of the COLA amendments to benefits earned
before the amendments—is, according to respondents, an
insubstantial impairment and therefore should not be pro-
tected by the state Contract Clause.
	In Strunk, the court stated expressly that whether
the state Contract Clause protects parties from only “sub-
stantial” impairments remained an open question. Strunk,
338 Or at 206. The court did not reach the legal question of
whether to impose a substantiality requirement, because
the court found that, even if there were a substantial-
ity requirement, it would be satisfied in that case. Id. at
206-07.
	        We encounter the same circumstance here. The
record does not establish exactly how much money PERS
members would lose if the COLA amendments were allowed
to apply retrospectively. However, the record establishes that
the combined effect of COLA amendments in SB 822 and
SB 861 likely would be substantial. The pre-amendment
COLA provision generally would add 2% per year to the
value of a member’s retirement benefit. With annual com-
pounding, by the tenth year of retirement, the COLA can
make up about 20% of the retirement benefit (setting aside
any tax offset payments). And by the fourteenth year of
retirement, under the same conditions, the COLA can make
up about 30% of the retirement benefit. The record estab-
lishes that the COLA amendments would reduce petitioners’
cumulative retirement benefits by about 8 to 10%. The
record is therefore sufficient to establish that the impair-
ment in this case is substantial.
	       Finally, respondents contend that, in this case,
impairment is justified as reasonable and necessary for an
important public purpose. Respondents ask us to incorpo-
rate the federal public purpose defense into the application
Cite as 357 Or 167 (2015)	229

of the state Contract Clause. Under federal law, the pub-
lic purpose defense is an extension of the reserved powers
doctrine that we described earlier. See 357 Or at 195 n 16.
Under that standard, a sufficient public purpose may justify
the impairment of a state contract in two circumstances.
First, the state can impair a contract if adhering to it would
require the state to “surrender[ ] an essential attribute
of its sovereignty.” United States Trust Co., 431 US at 23.
Although it is not clear exactly what those attributes are, it
is clear that they do not include that state’s power to “bind
itself in the future exercise of the taxing and spending pow-
ers.” Id. at 24.
   “Whatever the propriety of a State’s binding itself to a
   future course of conduct in other contexts, the power to
   enter into effective financial contracts cannot be ques-
   tioned. Any financial obligation could be regarded in theory
   as a relinquishment of the State’s spending power, since
   money spent to repay debts is not available for other pur-
   poses. Similarly, the taxing power may have to be exercised
   if debts are to be repaid. Notwithstanding these effects, the
   Court has regularly held that the States are bound by their
   debt contracts.”
Id. Because the case before us involves the financial obliga-
tions of public employers, this case “as a threshold matter
may not be said automatically to fall within the reserved
powers that cannot be contracted away.” Id. at 24-25.
	        Second, laws that substantially impair contracts
may nevertheless be valid if the impairment is “reasonable
and necessary to serve an important public purpose.” Id. at
25. That requires, to some extent, balancing various policy
considerations, but it is a balancing with the scales weighed
against allowing the state to impair its own contractual
obligations. “[I]n reviewing economic and social regulation,
* * * courts properly defer to legislative judgment as to the
necessity and reasonableness of a particular measure.” Id.
at 22-23. Nevertheless,
   “complete deference to a legislative assessment of rea-
   sonableness 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
230	                                   Moro v. State of Oregon

   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.”
Id. at 26. In United States Trust Co., the United States
Supreme Court considered whether a more targeted mod-
ification to the contract would suffice and whether the
states could have achieved the same policy goals through
alternative means that avoided modifying the contracts
completely. Id. at 30. According to the Court, “a State is not
completely free to consider impairing the obligations of its
own contracts on a par with other policy alternatives.” Id.
at 30-31.
	        In this case, if we were to adopt that public pur-
pose defense, it would fail because respondents cannot elim-
inate, and largely do not consider, any alternative means for
achieving the very loosely defined policy goals put forward.
Those goals broadly relate to providing public agencies with
more money to provide better public services. The briefing
focuses on public safety and education.
	        Respondents’ desire for additional funding for those
services is not tied to any specifically identifiable deficien-
cies resulting from the current funding levels. Increasing
the quality of public safety and education services is always
desirable. Those are certainly appropriate targets of public
concern and legislative action. Respondents point out that
the COLA amendments will allow public employers to hire
more teachers, police officers, and others needed to carry out
those important functions. But the inquiry under the pro-
posed public purpose defense is not what the agencies can
do with additional funding; instead, the inquiry under the
proposed public purpose defense is whether the current level
of funding is so inadequate as to justify allowing the state to
avoid its own financial obligations. The record that respon-
dents have presented fails to establish that inadequacy.
	        Moreover, even if respondents had identified specific
public service deficiencies resulting from the current level of
funding, they have not demonstrated that those deficiencies
could not be remedied through funding from other sources.
Respondents assert that the state’s ability to generate tax
revenue is limited because it must keep taxes sufficiently
Cite as 357 Or 167 (2015)	231

low and services sufficiently high to avoid discouraging peo-
ple and businesses from moving to other states—those peo-
ple and businesses are the base that the state draws taxes
from. But respondents never compare Oregon’s tax burden
to other states. The record establishes that, in Oregon, state
taxes per capita are 11.8% below the national average. And
as a percent of gross state product, Oregon’s taxes per capita
are 14.8% below the national average. See Strunk, 338 Or at
207 (rejecting a similar public purpose argument because,
among other reasons, “ ‘Oregon’s state tax burden currently
is approximately .7 percent less than the national average’ ”
(citation omitted)). Assuming, without deciding, that we
could recognize a public purpose defense in appropriate cir-
cumstances, respondents have failed to demonstrate those
circumstances here. We therefore need not adopt respon-
dents’ public purpose defense.
    5.  Disposition of COLA amendments
	        Although we conclude that the legislature cannot
change the COLA retrospectively, for PERS benefits already
earned, it can change the COLA prospectively, for benefits
earned by PERS members on or after the effective date of
the amendments. The 2013 PERS amendments do not dis-
tinguish between those prospective and retrospective appli-
cations. That raises the issue of whether this court must
hold the amendments void in whole or only to the extent that
they apply retrospectively to benefits already earned.
	        In previous cases involving state Contract Clause
challenges, we have applied the prospective/retrospective
distinction, and, although concluding that retrospective
application was unconstitutional, we have nevertheless
upheld the statutes at issue for purposes of prospective
application, even when the statutes themselves failed to dis-
tinguish between prospective and retrospective applications.
See, e.g., Hughes, 314 Or at 31 (concluding that the elim-
ination of an obligation not to tax PERS benefits violated
the Contract Clause only “as it relates to PERS retirement
benefits accrued or accruing for work performed before the
effective date of that [law]”); Eckles, 306 Or at 399 (allowing
otherwise violative statute to be applied “[a]s to subsequent
contracts, including renewals of [existing] contracts”).
232	                                              Moro v. State of Oregon

	        We reach the same result in this case. The prospec-
tive application of the 2013 amendments is still consistent
with the legislative intent behind the amendments, because
it provides employers with long-term savings, although less
savings than an application that would also apply retrospec-
tively. Therefore, PERS members who have earned a con-
tractual right to PERS benefits by working for participating
employers both before and after the relevant effective dates
will be entitled to receive during retirement a blended COLA
rate that reflects the different COLA provisions applicable
to benefits earned at different times.36
	        Additionally, we hold that the supplemental pay-
ments provided for in SB 861 cannot be severed from the
unconstitutional application of SB 861 and are, therefore,
void in whole, even though the supplemental payment provi-
sion itself is not unconstitutional. Through ORS 174.040, the
legislature expressed its intent that, if a statute is partially
unconstitutional, then the remaining constitutional parts of
the statute will “remain in force unless * * * [t]he remaining
parts are so essentially and inseparably connected with and
dependent upon the unconstitutional part that it is appar-
ent that the remaining parts would not have been enacted
without the unconstitutional part.” ORS 174.040(2); see also
Outdoor Media Dimensions v. Dept. of Transportation, 340
Or 275, 300-01, 132 P3d 5 (2006) (illustrating principle);
Skinner v. Davis, 156 Or 174, 189-90, 67 P2d 176 (1937) (stat-
ing that it is “obvious” that the legislature did not intend for
those remaining parts with “no application or meaning” to
continue in full force and effect).
	        As described above, SB 861 provides retired mem-
bers with up to $200 annually in supplemental payments to
mitigate the impact of the reductions to the COLA benefit
resulting from the amendments in SB 861. SB 861, § 8. The
legislature intended the supplemental payments, which were
to be paid through 2019, to lessen the short-term impact

	36
        We do not decide, nor have we been asked to decide, the proper manner for
calculating an appropriate blended rate. See, e.g., ORS 238.364(5) (calculating
the blended rate resulting from the tax exemption repeal by “divid[ing] the num-
ber of years of creditable service performed before [the repeal of the tax exemp-
tion], by the total number of years of creditable service during which the pension
income was earned”).
Cite as 357 Or 167 (2015)	233

that the COLA amendments would have had on currently
retired members or on members who will retire before 2019.
Our holding in this case, which allows only the prospec-
tive application of the COLA amendments, already serves
that function: the COLA rates applied to retired members
will not be affected at all by the 2013 COLA amendments,
and the COLA rates applied to active members who retire
before 2019 will be affected only very minimally. If the sup-
plemental payments were to continue, then the members
just identified would effectively receive an increase in total
benefits that the legislature did not intend; by contrast, the
legislature’s intent in enacting SB 861 was to reduce—not
to increase—the retirement benefits being paid to those
members. We therefore hold that the supplemental payment
provision, SB 861, § 8, cannot be severed from the unconsti-
tutional application of the COLA reductions in SB 861.
B.  Other Claims
	        Nonresident petitioners assert other constitutional
and statutory arguments challenging the elimination of the
tax offsets. Most of petitioners’ remaining constitutional
arguments—under the federal Contract Clause, Article I,
section 10, clause 1, of the United States Constitution; and
the state and federal Takings Clause, Article I, section 18,
of the Oregon Constitution, and the Fifth Amendment to the
United States Constitution—are disposed of based on our
holding above that the tax offsets are not terms of the stat-
utory PERS contract and that the Stovall/Chess settlement
agreement has not been breached or impaired. See Strunk,
338 Or at 237-38 (disposing of similar arguments on similar
grounds).
	        Petitioners also argue that repealing the tax off-
set payments based on state of residence violates the fed-
eral Privileges and Immunities Clause and federal Equal
Protection Clause. The Privileges and Immunities Clause
requires “substantial equality of treatment” for both resi-
dents and nonresidents of the taxing state. Austin v. New
Hampshire, 420 US 656, 665, 95 S Ct 1191, 43 L Ed 2d 530
(1975). In this case, nonresidents are not subjected to the tax
that the tax offsets are intended to offset. As a result, pro-
hibiting payment of the tax offsets to nonresidents does not
234	                                  Moro v. State of Oregon

upset the substantial equality between residents and non-
residents. For similar reasons, providing the tax offsets to
only those who must pay the tax does not violate the Equal
Protection Clause. Residency classifications do not trig-
ger strict scrutiny and are assessed under a rational basis
review. “The Constitution does not * * * presume distinctions
between residents and nonresidents of a local neighborhood
to be invidious. The Equal Protection Clause requires only
that the distinction drawn * * * rationally promote the regu-
lation’s objectives.” Arlington County Board v. Richards, 434
US 5, 7, 98 S Ct 24, 54 L Ed 2d 4 (1977). Where the objec-
tive is to remedy damages resulting from the imposition of
Oregon income tax, it is rational to provide that remedy to
only those who suffer the damages by paying Oregon income
tax.
	        Finally, petitioner Reynolds argues that eliminating
the tax offsets for nonresidents violates 4 USC section 114(a),
which provides, “No State may impose an income tax on any
retirement income of an individual who is not a resident or
domiciliary of such State (as determined under the laws of
such State).” Reynolds contends that removing a tax rebate
that was paid to nonresidents is the equivalent of impos-
ing an income tax on nonresidents. Regardless of whether
the tax offsets are tax rebates as to Oregon residents, they
are not tax rebates as to nonresidents, because nonresidents
do not pay the tax that the tax offsets would otherwise be
rebating. Repealing the tax offsets does not remove a tax
rebate or impose an income tax on nonresidents.
                    III. CONCLUSION
	        We recognize the many public policy concerns that
were the impetus for the 2013 PERS amendments. When
public employers have to pay higher PERS contribution
rates without additional funding, they have less money to
pay for current services provided by police officers, teachers,
and other employees delivering critical services to the pub-
lic. The legislature’s interest in enhancing those services is
entirely appropriate.
	        The legislature, however, must pursue those
objectives consistently with constitutional requirements,
Cite as 357 Or 167 (2015)	235

including Oregon’s constitutional prohibition against
impairing the obligations of contracts. We have concluded
that the pre-amendment COLA provisions were part of the
PERS contract and therefore are protected by the state
Contract Clause. Those provisions have remained largely
unchanged for 40 years. They were part of the compen-
sation that public employees—many of whom are now
retired—were promised in exchange for the work that they
already have performed.
	        We understand that the legislature sought to struc-
ture the COLA changes in a way that was sensitive to the
effect that those changes would have retirees, by reducing
the existing COLA the least for retirees with the smallest
PERS benefits, while reducing the existing COLA the most
for benefits above $60,000. Those can be appropriate fac-
tors to consider when determining the compensation that
should be offered in exchange for services, but they do not
change the employers’ contractual obligations that arose
when the employers offered retirement benefits that employ-
ees accepted by working for their employers.
	        In summary, we hold that the 1991 and 1995 income
tax offsets are not part of the PERS contract and that SB
822 does not impair or breach the Stovall/Chess settlement
agreement. Therefore, the amendments to the 1991 and
1995 income tax offsets in SB 822 do not violate the state
Contract Clause or the other constitutional provisions or
statutes that petitioners have raised. We further hold that
SB 822 and SB 861 are constitutionally permissible insofar
as they apply to benefits that members earn on or after the
effective dates of those laws. But SB 822 and SB 861 uncon-
stitutionally impair the contract rights of PERS members
insofar as they apply to benefits that members earned before
the effective dates of those laws. As a result, PERS members
who earned benefits subject to different COLA rates will
receive PERS benefits during retirement that are subject to
a COLA rate that is blended to account for different COLA
rates that have been earned.
	        Oregon Laws 2013, chapter 53, sections 1, 2, 3, 4,
5, 6, 7, 8, 9, and 10, are declared unconstitutional under
Article I, section 21, of the Oregon Constitution insofar as
236	                                    Moro v. State of Oregon

they affect retirement benefits earned before May 6, 2013.
Oregon Laws 2013, chapter 2, sections 1, 2, 3, 4, 5, and 6
(Special Session), are declared unconstitutional under
Article I, section 21, of the Oregon Constitution insofar
as they affect retirement benefits earned before October
8, 2013. Oregon Laws 2013, chapter 2, section 8 (Special
Session) is declared void. Petitioners’ requests for relief chal-
lenging Oregon Laws 2013, chapter 53, sections 11, 12, 13,
14, 15, 16, and 17, are denied.

	        BREWER, J., concurring.

	        Although I concur in the majority’s analysis and
conclusions, I write separately to emphasize what I believe
to be the proper framework for the statutory contract inter-
pretation analysis in claims under Article I, section 21, of
the Oregon Constitution, where the legislature has made
statutory changes to retirement benefits for members of the
Public Employees Retirement System (PERS). I will con-
fine my attention to two central determinations under that
analysis: First, what standards apply for identifying terms
of the PERS contract; and second, what obligations do those
terms provide? Because they present the more challenging
issues in this case, I focus exclusively on the disputed COLA
benefits.

	        When the PERS system is the subject of judicial
scrutiny, this court’s role is neither policy-setting nor man-
agerial. Our responsibility is to interpret legislative enact-
ments and the Oregon and United States Constitutions and
to apply those sources of law to the circumstances presented
in specific cases. To a significant extent, the strength of
Oregon’s public pension system rests on policy choices made
by the other two branches of government and on their polit-
ical will to satisfy prior legislative commitments to active
members, retirees, and public employers. That said, because
of mixed and sometimes unclear messages that this court
has conveyed in some of its prior decisions, we bear a mea-
sure of responsibility for the uncertainty that the other
branches have faced when, from time to time, they have
reexamined the benefit structure of the PERS system. What
the court can do in this case, within the inherent limitations
Cite as 357 Or 167 (2015)	237

of the adversary system, is provide more clear guidance
with respect to the governing legal principles. I commend
the majority for undertaking to do so.
	        With that acknowledgement, I turn to the question
of what standards apply for identifying terms of the PERS
contract. The majority describes an overarching standard
for identifying the terms of that contract in terms of “unmis-
takability.” See Moro v. State, 357 Or 167, 195, ___ P3d ___
(2015) (citing Hughes v. State of Oregon, 314 Or 1, 14, 838
P2d 1018 (1992) (a government contract will not be inferred
from legislation that does not unambiguously express an
intention to create one)); see also Eckles v. State of Oregon,
306 Or 380, 397-99, 760 P2d 846 (1988), appeal dismissed,
490 US 1032, 109 S Ct 1928, 104 L Ed 2d 400 (1989) (same).1
It further concludes that determining whether a particular
legislative assembly unmistakably intended for a benefit
to be a term of the PERS contract requires an examina-
tion of statutory text and context. Id. at 203. It then sets
out two guiding principles for making the determination:
(1) whether the state’s offer is limited to provisions that
define eligibility for or the scope of remunerative pension
benefits, id. at 204; and (2) only mandatory remunerative
provisions are terms of the state’s offer, id. at 205. The major-
ity then ultimately concludes that the COLA cap and COLA
bank provisions set out in ORS 238.360(2) and (3) (2011) are
contractual promises because both provisions confer remu-
nerative benefits and both conferrals are expressed in man-
datory terms. Id. at 214-19. In determining that the COLA
bank and COLA cap are remunerative benefits, the majority
focuses on the fact that those benefits are incorporated into
the statutory formula used to determine a member’s service
retirement allowance and that they are funded through cur-
rent employer contributions, not employee contributions or
investment returns. Id. at 216-17.
	        That formulation of the test—as the court has
applied it in this case and others—strikes me as being more
of a traditional statutory construction analysis than a true

	1
       That requirement—lack of ambiguity—applies not only to the existence of
a contract, but also to “the extent of the obligation created” by the contract, that
is, whether its terms encompass a particular promise. Eckles, 306 Or at 397.
238	                                             Moro v. State of Oregon

application of an unmistakability principle. Traditional, but
with a twist, in that it appears to set out a near-presumption
that any remunerative pension benefit that is provided in
mandatory statutory terms will be treated as part of the
PERS contract. To be sure, the majority refers to statutory
context, but it focuses primarily on the mandatory and
remunerative aspects of the statutory text in arriving at its
conclusion.
	        There is inherent tension in an approach that nods
at unmistakability but actually seems to require some-
thing else. Undoubtedly, there are instances in which an
enacting legislature has conferred a remunerative pension
benefit in mandatory terms without fully considering the
impact of that decision on the authority of future legisla-
tures.2 Moreover, this court employs a looser standard than
unmistakability when identifying the terms of a pension
contract that an employee accepts by entering into public
employment. Specifically, this court has consistently held
that a public pension plan is an offer for a unilateral con-
tract that can be accepted by the tender of part performance
by the employee, even without the employee’s reliance on the
employer’s promise to provide particular benefits. Hughes,
314 Or at 20-21; Taylor v. Mult. Dep. Sher. Ret. Bd., 265 Or
445, 451-52, 510 P2d 339 (1973) (holding that an employee
had a right to retirement benefits even though the public
employee “did not undertake employment * * * with the
expectation that she would be entitled” to the benefits and
did not “continue[ ] her employment * * * upon the expec-
tation [that] she would receive the advantageous pension
authorized” by the employer).
	        In short, despite its adherence to the principle of
unmistakable intent, the majority has followed an approach
that primarily focuses on the two questions described above:
(1) does the statute confer a remunerative benefit; and (2) is
that conferral expressed in mandatory terms? Because the
answer to both questions in this case is yes, the majority

	2
       And, as the majority notes, not every statutory usage of the words “shall”
or “will” means that an enacting legislature meant to forever bind future legis-
latures to a particular benefit package. Sometimes, the use of such words can be
meant merely to direct an administrative act by an executive agency.
Cite as 357 Or 167 (2015)	239

concludes that the disputed COLA benefits are terms of the
PERS contract.
	        None of this should come as a surprise in light of
this court’s construction of ORS 238.360(1) (2001) in Strunk
v. PERB, 338 Or 145, 108 P3d 1058 (2005). In fact, unless
the court were to overrule Strunk, any conclusion other
than the one that the majority reaches would be difficult
to explain. Although some tensions persist in the court’s
analytical framework for identifying terms of the PERS
contract, I agree with the majority that defendants have
not shown that this court’s decision in Strunk should be
disavowed. To the contrary, because, as elaborated below, a
mandatory remunerative benefit generally is nonforfeitable
once earned through the performance of work, this court’s
conclusion that the COLA benefit at issue in Strunk was a
term of the PERS contract was correct.
	        Things get more complicated when the majority
answers the next question about ORS 238.360(2) and (3)
(2011), that is, what obligations did those subsections pro-
vide? As that question is posed in this case, the issue is
whether the disputed COLA benefits are modifiable and, if
so, to what extent? In answering that question, the majority
likens those benefits to the repealed tax exemption at issue
in Hughes. According to the majority,
   “in this case, by the time that the legislature enacted SB
   822 and SB 861, modifying the pre-amendment COLA pro-
   visions, PERS members already had a contractual right to
   their accrued retirement benefits that would be subject to
   the pre-amendment COLA. Hughes, therefore, establishes
   a contractual obligation applicable in this case: Members
   are entitled to have the pre-amendment COLA applied to
   accrued PERS benefits earned before the COLA amend-
   ments went into effect.”
Id. at 220. Thus, the majority concludes that COLA bene-
fits that accrued before the amendments went into effect are
not modifiable. In determining whether the disputed benefits
are prospectively modifiable, the majority sets out two guide-
lines: (1) mandatory language is insufficient to establish
nonmodifiability, id. at 225-26; and (2) “legislatures gener-
ally do not intend to bind future legislatures,” id. at 226. The
240	                                    Moro v. State of Oregon

majority ultimately concludes “that the COLA provisions do
not include a promise to apply any specific COLA to increase
retirement benefits for work that is yet to be performed.” Id.
	        Note the juxtaposition here between the analyses
of whether the COLA benefits are terms of the PERS con-
tract and whether and to what extent they are prospectively
nonmodifiable benefits. In answering the first question, the
majority concludes that legislative use of mandatory lan-
guage is critical, whereas, in answering the second, it states
that the use of such language, “without more, is plainly
insufficient to establish the irrevocability of an offer.” Id. In
other words, the majority holds that mandatory language is
a strong indication that a remunerative benefit is contrac-
tual, but not that a remunerative benefit is prospectively
nonmodifiable. That distinction is not necessarily an obvi-
ous one. Yet, it has some force.
	        The pivotal inquiry in deciding whether and to
what extent a PERS benefit is prospectively modifiable is
one of legislative intent. However, this court has not been
consistent in assigning significance to a determination of
actual legislative intent in the modifiability analysis. In
Oregon State Police Officers’ Assn. v. State of Oregon, 323 Or
356, 375-76, 918 P2d 765 (1996) (OSPOA), for example, the
court held—without engaging in a traditional statutory con-
struction analysis—that PERS members irrevocably were
entitled to the employer “pick-up” benefit of the statutory
contract upon their initial acceptance of employment. Id. at
376 (because “[t]he six percent pick-up is an integral part of
the underlying PERS pension contract,” its unilateral ter-
mination “materially changes that underlying pension con-
tract 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”). In
Hughes and Strunk, on the other hand, the court examined
each pertinent statutory provision in detail to determine the
existence and extent of a legislative promise not to modify
remunerative benefits. I agree with the majority that it is
virtually impossible to reconcile those distinct approaches.
	       To resolve the tension in this court’s decisions, it
is essential to clarify both the role of the text and context
Cite as 357 Or 167 (2015)	241

of a statutory promise and the role of general employment
contract principles in determining the prospective modifi-
ability of a PERS benefit. In Hughes, the relevant statutory
text drew a line between benefits that had accrued or were
accruing and those that had not yet accrued. See 314 Or at
7. That factor played an important role in the court’s analy-
sis. Id. at 20, 27-28. However, in resolving the plaintiffs’
claim, this court did not rely solely on that text or its stat-
utory context. In addition, it referred to contract principles
that it purported to draw, in part, from an Oregon Attorney
General’s opinion:
    “Oregon’s Attorney General articulated this contractual
    nature of pension benefits as follows:
    “ 
     ‘Employee pension plans, whether established by law
    or contract, create a contractually based vested property
    interest which may not be terminated by the employer,
    except prospectively. The employer offers payment of future
    pension benefits as part of compensation for work currently
    performed. Employees accept and earn such future benefits
    by performing current labor.’ ” 38 Op Att’y Gen 1356, 1365
    (1977).”
Hughes, 314 Or at 20-21 (emphasis in Hughes).
	       Interestingly, the authority that the Attorney
General cited for the quoted proposition was drawn from
this court’s decision in Taylor, 265 Or at 454:
    “As applied to the present circumstances, [the] plaintiff’s
    tender of the contributions and acceptance of the plan ter-
    minated [the] defendants’ power to revoke the offer, and
    [the] plaintiff would be entitled to the benefits of the plan
    if she continued to work for the requisite period necessary
    for retirement.”
That conclusion does not support the proposition for which
the court in Hughes cited the Attorney General’s opinion.3
	3
       Nor do principles used in determining whether the obligation of a contract
has been unconstitutionally impaired directly support the proposition set out
in Hughes. The question here is not whether a retroactive modification of the
COLA promises in the PERS contract would be unconstitutional, but whether
those promises—either by their own terms or based on contract principles—are
prospectively modifiable. It was the issue of unconstitutionality, not statutory
contract interpretation, that this court briefly addressed in State ex rel. Thomas
v. Hoss, 143 Or 41, 21 P2d 234 (1933), a decision to which the majority devotes
242	                                              Moro v. State of Oregon

However, there is other authority from this court that does
support the principle of prospective modifiability set out in
Hughes.
	        In the absence of an agreement to the contrary,
an employer generally has the right to modify employment
benefits—if they have not been earned by previous service.
State ex rel Roberts v. Public Finance Co., 294 Or 713, 716-19,
662 P2d 330 (1983). And, an employee ordinarily impliedly
accepts a modification in the terms of employment by con-
tinuing employment after the modification takes effect.
Mail-Well Envelope Co. v. Saley, 262 Or 143, 152, 497 P2d
364 (1972); Page v. Kay Woolen Mill Co., 168 Or 434, 439,
123 P2d 982 (1942). In short, employment benefits that are
accredited and accumulate as service is performed generally
are prospectively modifiable unless the employer’s promise
is more durable.
	        This court somewhat regularly—if not consistently—
has applied that general employment contract principle
in the public employment benefit setting. In Harryman
v. Roseburg Fire Dist., 244 Or 631, 420 P2d 51 (1966), for
example, the defendant employer adopted a sick leave pol-
icy that provided for cash in lieu of accumulated sick leave
upon termination from employment. The plaintiff employee
had accumulated 47 days of sick leave when the employer
revoked the policy. Sometime after that revocation, the
employee was terminated. When the employee requested
the cash in lieu of his accumulated 47 days of sick leave, the
employer refused, contending, among other things, that it

some attention. Moro, 357 Or at 199-201, 220. This court in Hughes mentioned
Thomas in a footnote:
     “In that case, this court held that the plaintiff’s salary earned before the
     effective date of a 1933 law, which reduced employees’ salaries, could not be
     affected by the law because of the Contract Clause of Article I, section 21,
     of the Oregon Constitution. The court held, however, that the then-new law
     could reduce plaintiff’s salary prospectively. 143 Or at 47.”
Hughes, 314 Or at 29 n 33. In its own words, this court in Thomas held that “after
a salary has been earned[,] the public employee’s right thereto becomes vested
and cannot be taken away by any legislation thereafter enacted.” Thomas, 143 Or
at 47. Although that holding recognized the constitutional distinction between
retroactive and prospective modification of remunerative employment benefits,
the court in Thomas did not discuss the statutory construction or contract prin-
ciples underlying that distinction, much less consider how to determine whether,
by its terms, a benefit is prospectively modifiable.
Cite as 357 Or 167 (2015)	243

was not obligated to pay because the sick leave policy had
been revoked before the employee’s termination. This court
held that the employer could not escape its obligation to com-
ply with its promise to pay sick leave:
    “When plaintiff entered upon his employment with defen-
    dant 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
    plaintiff’s employment. Defendant could not, therefore,
    deprive plaintiff of the allowance after he had earned it.”
Id. at 634-35 (footnote omitted; emphasis added).
	      Later, in Strunk, this court rejected the petitioners’
argument that their rights to certain retirement benefits
became irrevocable when they began employment:
    “In their reply brief, petitioners also argue that this court’s
    decision in [Taylor] ‘is a much more pivotal case in this
    court’s developing analysis of pension benefits than is
    OSPOA.’ In Taylor, which involved a county retirement sys-
    tem, the court acknowledged that ‘contractual rights can
    arise prior to the completion of the service necessary to a
    pension.’ 265 Or at 451. Of course they can. The predicate
    question—which we determine to be dispositive in these
    cases—is whether the contract offer that the particular
    pension plan presents contains such a promise, i.e., a prom-
    ise that extends over the life of a covered member’s service.”
338 Or at 192 n 40 (emphasis removed). Thus, this court
has applied—in public employment benefit settings gener-
ally and in determining the nature and extent of obligations
included in the statutory PERS contract—the contract prin-
ciple that remunerative benefits that are earned and accu-
mulate as service is performed are prospectively modifiable
unless the employer’s initial offer of employment included a
different promise, for example, a promise that extends over
the life of the employee’s service.4
	4
      As an example of such a promise, the parties to an employment agreement
can agree—expressly or by implication—at the outset of employment that the
employer will not modify or eliminate an employee’s eligibility for benefits in the
future. In Taylor, the defendant employer adopted a retirement benefits policy
244	                                                Moro v. State of Oregon

	        As can be seen from the foregoing discussion, iden-
tifying the nature and extent of an obligation of the PERS
contract requires the application of statutory construction
principles because PERS is a legislative contract. That
inquiry also involves the application of employment contract
principles, to the extent that a statutory construction analy-
sis does not fully identify the nature and extent of the par-
ties’ rights and obligations. The beginning place, though,
is the statute itself. See Arken v. City of Portland, 351 Or
113, 139, 263 P3d 975 (2011), adh’d to on recons sub nom
Robinson v. Public Employees Retirement Board, 351 Or 404,
268 P3d 567 (2011) (so holding).
	         To set the stage for the application of those prin-
ciples to the COLA benefits in this case, there must be a
common understanding of three key concepts: First, what it
means for a PERS member to be “vested”; second, how bene-
fits are earned; and third, what it means for earned benefits
to “accrue.” The answers to each of those questions will vary
depending on the terms of the contract and the nature of the
promised benefit.
	        As used in the PERS statutes, “vest” is a term that
refers to a member’s irrevocable eligibility to receive bene-
fits. For Tier One and Tier Two employees, “vested means
being an active member of the system in each of five calendar
years.” ORS 238.005(30).5 A member who is not vested can
suffer a forfeiture of benefits if the conditions for eligibility

that applied to the plaintiff employee’s position. The employee continued work-
ing for the employer for nine months, at which time the employer amended the
retirement policy to exclude the employee’s position. When the employee claimed
the right to participate in the retirement plan, the employer refused, arguing
that, among other things, the amendment of the retirement policy precluded her
participation in it. This court disagreed, holding that the policy included an irre-
vocable promise (or offer) that the employee would be able to vest in benefits and
that the employee had accepted the offer by undertaking to perform the vesting
condition of long-term service. Taylor, 265 Or at 450-51. Taylor had nothing to do
with the prospective modifiability of a benefit. Rather, it was about vesting. The
benefit remained available for eligible employees; it simply was impermissibly
revoked with respect to the plaintiff.
	5
        For OPSRP members, vested status is more restrictive. ORS 238A.115 pro-
vides, in part:
    	     “(1)  Except as provided in subsection (2) of this section, a member of the
    pension program becomes vested in the pension program on the earliest of
    the following dates:
Cite as 357 Or 167 (2015)	245

are not fulfilled. Thus, for example, ORS 238.095(2) pro-
vides, generally speaking, that “an inactive member ceases
to be a member of the system if the member is not vested
and is inactive for a period of five consecutive years.” On the
other hand, if an inactive member
   “who is a vested member of the system and who has not
   attained earliest service retirement age is separated, for
   any reason other than death or disability, from all service
   entitling the employee to membership in the system, the
   member account, if any, of the member shall remain to the
   member’s credit in the fund unless the member elects to
   withdraw it and there shall be paid such death benefits as
   this chapter provides; or a disability retirement allowance
   or, after attaining earliest service retirement age, a ser-
   vice retirement allowance, either of which shall consist of
   the allowance provided in ORS 238.300, but actuarially
   reduced based on the member’s then attained age.”
ORS 238.425. Thus, the statutory meaning of “vest” in the
PERS system refers to a member’s irrevocable eligibility to
receive retirement benefits. That meaning is consistent with
the concept of vesting as this court described it in McHorse
v. Portland General Electric, 268 Or 323, 331, 521 P2d 315
(1974):
   “[I]t would seem that in 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 consider-
   ation for the promise.”
	        Vesting must be distinguished from the earning of
benefits. To “earn” means “to receive as equitable return for
work done or services rendered” or to “have accredited to one
as remuneration.” Webster’s Third New Int’l Dictionary 714
(unabridged ed 2002). To “remunerate” means to “pay an

   	   “(a)  The date on which the member completes at least 600 hours of ser-
   vice in each of five calendar years. The five calendar years need not be con-
   secutive, but are subject to the provisions of subsection (3) of this section.
   	   “(b)  The date on which an active member reaches the normal retirement
   age for the member under ORS 238A.160.”
246	                                  Moro v. State of Oregon

equivalent for” or to “compensate.” Id. at 1921. Thus, to say
that a member is vested in the PERS system does not deter-
mine the amount of benefits that a member has earned—
either at retirement or upon earlier termination of member-
ship in the system—as compensation for services rendered.
That determination depends on how and the extent to which
the benefits have been accredited to a member over time,
that is, to what extent the benefits have “accrued.” See id.
at 13 (defining “accrue” as “to be periodically accumulated
in the process of time”). In most employment relationships,
including in the PERS system, an employee receives credit
for and accumulates compensation and other remunerative
benefits based on the incremental performance of service.
Thus, ordinarily, a vested PERS member will earn and
accrue more benefits the longer he or she works.
	        Unfortunately, this court in OSPOA did not care-
fully distinguish among the concepts of vesting and the
earning and accrual of benefits, when, among other things,
it said:
   “Most jurisdictions adhering to a contract theory of pen-
   sions 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.”
323 Or at 371. Vesting generally does not encompass “work
that has not yet begun” in the sense that it necessarily enti-
tles a member to earn benefits by performing future work.
Rather, as discussed, vesting refers to a PERS member’s
irrevocable eligibility to receive benefits under the terms of
the statutory contract. And, also as discussed above, in the
absence of a promise to provide a benefit that extends over
the life of a covered member’s service, the legislature pro-
spectively may modify a PERS benefit if it has not yet been
earned.
	         With those principles in mind, I turn to the ques-
tion of whether defendants’ promises to provide the COLA
cap and COLA bank benefits extend over the life of plain-
tiffs’ service and, therefore, are nonmodifiable. As will be
shown, the statutory text and context of ORS 238.360(2)
and (3) (2011) describe how the disputed COLA benefits are
Cite as 357 Or 167 (2015)	247

earned and accrued, but they contain no promise of prospec-
tive irrevocability. Under ORS 238.360(2) and (3) (2011), a
public employer’s COLA cap and COLA bank obligations are
directly tied to a member’s monthly and annual retirement
allowances. A member’s service retirement allowance based
on the life pension component that is at issue in these cases
is calculated from a formula that includes as its only vari-
ables the member’s number of years of membership in PERS
and his or her “final average salary.” ORS 238.300(2)(a)(B).6
A member’s number of years of membership accumulates
as work is performed; thus, that variable is directly tied to
earned and accrued remuneration for past service. However,
the other retirement allowance variable, the member’s “final
average salary,” is not so easily characterized, at least with
respect to active members. “Final average salary” means
the greater of the following:
   	 “(a)  The average salary per calendar year paid by one
   or more participating public employers to an employee who
   is an active member of the system in three of the calendar
   years of membership before the effective date of retirement

	6
       ORS 238.300 provides, in part:
   	 “Upon retiring from service at normal retirement age or thereafter, a
   member of the system shall receive a service retirement allowance which
   shall consist of the following annuity and pensions:
   	    “* * * * *
   	 “(2)(a) A life pension (nonrefund) for current service provided by the
   contributions of employers, which pension, subject to paragraph (b) of this
   subsection, shall be an amount which, when added to the sum of the annuity,
   if any, under subsection (1) of this section and the annuity, if any, provided on
   the same basis and payable from the Variable Annuity Account, both annu-
   ities considered on a refund basis, results in a total of:
   	    “(A)  For service as a police officer or firefighter, two percent of final aver-
   age salary multiplied by the number of years of membership in the system as
   a police officer or firefighter before the effective date of retirement.
   	    “(B)  For service as other than a police officer or firefighter, including ser-
   vice as a member of the Legislative Assembly, 1.67 percent of final average
   salary multiplied by the number of years of membership in the system as
   other than a police officer or firefighter before the effective date of retirement.
   	    “* * * * *
   	    “(c)  As used in this subsection, ‘number of years of membership’ means
   the number of full years of creditable service plus any remaining fraction of
   a year of creditable service. Except as otherwise provided in this paragraph,
   in determining a remaining fraction a full month shall be considered as one-
   twelfth of a year and a major fraction of a month shall be considered as a full
   month.”
248	                                    Moro v. State of Oregon

   of the employee, in which three years the employee was
   paid the highest salary. The three calendar years in which
   the employee was paid the largest total salary may include
   calendar years in which the employee was employed for less
   than a full calendar year. If the number of calendar years
   of active membership before the effective date of retirement
   of the employee is three or fewer, the final average salary
   for the employee is the average salary per calendar year
   paid by one or more participating public employers to the
   employee in all of those years, without regard to whether
   the employee was employed for the full calendar year.
   	 “(b)  One-third of the total salary paid by a participat-
   ing public employer to an employee who is an active mem-
   ber of the system in the last 36 calendar months of active
   membership before the effective date of retirement of the
   employee.”
ORS 238.005(9).
	        Insofar as retired members are concerned, both
variables that determine the amount of COLA benefits—
number of years of membership and final average salary—are
directly attributable to their performance of pre-retirement
service. Based on the holdings in Hughes and Strunk, those
members have fully earned and accrued the disputed COLA
benefits. The tax-exemption repeal in Hughes involved a
change that, in violation of ORS 237.201 (1989), would have
eliminated an earned benefit if it applied to previously per-
formed service. Hughes, 314 Or at 31. The situation in Hughes
was analogous to the challenge to the COLA amendment in
Strunk in the sense that the amendment in Strunk applied
to only certain retirees who had fully earned and accrued
the benefit at issue there through previous service. Strunk,
338 Or at 221-24. Similarly, in this case, retired employees
have fully earned and accrued the disputed COLA benefits
based on their number of years of membership and their
final average salaries. Accordingly, in my view, Hughes and
Strunk control the analysis here with respect to retired
PERS members. With respect to those members, the dis-
puted COLA benefits are not modifiable at all.
	        The analysis for active members is somewhat dif-
ferent. Because those members will continue to earn and
accrue COLA benefits as they perform future service, it is
Cite as 357 Or 167 (2015)	249

necessary to determine whether the enacting legislature
intended to preclude future legislatures from modifying
their COLA benefits prospectively. Apart from the use of
mandatory language, I discern nothing in the text or con-
text of ORS 238.360 (2011) that indicates such an intent.
	        Calculating final average salary for a member who
has not retired is, by definition, impossible. The question is
what, if any, significance attaches to that fact in the modifi-
ability analysis. The answer, in my view, is not much. Active
members accumulate years of membership and, through
past service, they also have the functional equivalent of a
pre-amendment final average salary. Thus, in substance,
the statutory variables that determine a retired member’s
COLA benefits also exist, at least in proxy form, for active
members. A proxy amount for final average salary, when
coupled with an active member’s number of years of mem-
bership to the effective date of the statutory amendment,
will result in a proportionately protected COLA benefit upon
retirement. Nothing about the lack of a final average salary
for active members suggests that the enacting legislature
intended for the disputed COLA benefits to be prospectively
nonmodifiable with respect to those members.
	        It follows, based on the gap-filling contract princi-
ples set out in Hughes and Strunk, that, in the absence of a
legislative promise that the disputed COLA benefits would
not be modified prospectively, the 2013 amendment to ORS
238.360(2) and (3) did not breach the PERS contract with
respect to benefits to be earned and accrued by active mem-
bers after the effective date of the amendment.
	        That conclusion is consistent with the broader stat-
utory framework of the PERS system. In particular, ORS
238.600 provides:
   	 “(1) A system of retirement and of benefits at retire-
   ment or death for employees of public employers hereby is
   established and shall be known as the Public Employees
   Retirement System. The Public Employees Retirement
   System consists of this chapter and ORS chapter 238A. It
   is the intent of the Legislative Assembly that the system
   be qualified and maintained under sections 401(a), 414(d)
   and 414(k) of the Internal Revenue Code as a tax-qualified
   defined benefit governmental plan.
250	                                     Moro v. State of Oregon

   	 “(2)  If the Public Employees Retirement System is ter-
   minated, or if contributions may no longer be made to the
   system, each member of the system has a nonforfeitable
   right to the benefits that the member has accrued as of the
   date of the termination, or as of the date that contributions
   may no longer be made to the system, to the extent that
   those benefits are funded.”
(Emphasis added.) Subsection (2) was added to ORS 238.600
by the 1999 Legislative Assembly. 1999 Or Laws, ch 217,
§ 9. At a hearing before the House General Government
Committee on May 18, 1999, Steve Delaney, the legisla-
tive liaison for PERS, testified that the bill was intended
to ensure that the PERS system was in compliance with
the Employee Retirement Income Security Act (ERISA), 29
USC § 1001 et seq., and the tax exemption requirements of
the Internal Revenue Code (IRC) for qualified retirement
plans.
	        I recognize that, as a subsequently enacted statute,
ORS 238.600(2) does not indicate what, if anything, the
1971 and 1973 Legislative Assemblies intended with respect
to the prospective modifiability of the earliest statutory
COLA benefit provisions. See Holcomb v. Sunderland, 321
Or 99, 105, 894 P2d 457 (1995) (“The proper inquiry focuses
on what the legislature intended at the time of enactment
and discounts later events.”). Furthermore, as this court
noted in Strunk, it is particularly important to ascertain
the intent of the correct legislature when analyzing statutes
to determine their contractual nature and extent because
“the fundamental purpose behind such contracts is to bind
future legislative action.” Strunk, 338 Or at 189. Moreover,
because this case does not involve a plan termination, ORS
238.600(2) is not directly relevant. That said, the relation-
ship between the PERS system and federal pension and tax
law requirements is critical to the viability of the system,
and, significantly, nothing in the legislative history of ORS
238.600(2) indicates that the 1999 Legislative Assembly
thought that its enactment constituted a substantive change
in the benefit structure of that system. Accordingly, the fact
that that provision states that “accrued” PERS benefits are
nonforfeitable in the event of a plan termination provides a
lens through which to assess the prospective modifiability
Cite as 357 Or 167 (2015)	251

of the disputed COLA benefits in this case. For that reason,
I briefly discuss the relationship between ORS 238.600(2),
ORS 238.360, and the anti-cutback requirements of federal
law.
	        Because ORS 238.600(2) was enacted to comply
with federal law, its use of the concept of “accrued” benefits
must be understood in light of the meaning of that term
under ERISA. As will be shown, the meaning of “accrued
benefits” under ERISA generally comports with the idea,
expressed above, that PERS benefits accrue—that is, accu-
mulate periodically—as they are earned through the perfor-
mance of covered service.
	        The central purpose of ERISA is to protect “employ-
ees’ justified expectations of receiving the benefits their
employers promise them.” Central Laborers’ Pension Fund
v. Heinz, 541 US 739, 743, 124 S Ct 2230, 159 L Ed 2d 46
(2004). Thus, ERISA’s anti-cutback rule prohibits pension
plan amendments that decrease plan participants’ “accrued
benefits.” 29 USC § 1054(g) (2006); see also Central Laborers’,
541 US at 744. The anti-cutback rule also appears in the
Internal Revenue Code in materially identical form and dis-
qualifies from tax-exempt status pension plans that violate
its conditions. IRC § 411(d)(6); see also IRC § 401(a) (defin-
ing a qualified pension plan under ERISA); IRC § 411(a)
(disqualifying from coverage under IRC § 401(a) pension
plans which do not provide that an employee’s rights to nor-
mal retirement benefits be “nonforfeitable”); IRC § 501(a)
(granting tax-exempt status to qualified pension plans). The
parallel ERISA and IRC provisions serve the same function,
which is to safeguard benefits that an employee has earned
over time by fulfillment of a plan’s conditions. See Central
Laborers’, 541 US at 743, 746. Once a participant performs
work in exchange for a promised benefit, that is enough,
other things being the same, to generate the sort of “justi-
fied expectation[ ]” that the anti-cutback rule is designed to
protect. Id. at 743.
	       Because only an “accrued benefit” is protected by
the anti-cutback rule, the scope of the rule depends on the
meaning of that term. In relevant part, the IRC defines
an “accrued benefit” under a defined benefit plan as “the
252	                                  Moro v. State of Oregon

employee’s accrued benefit determined under the plan and
* * * expressed in the form of an annual benefit commencing
at normal retirement age.” IRC § 411(a)(7)(A)(i). Under the
federal scheme, a promised benefit must correspond to cur-
rent employment in order for that benefit to “accrue[ ],” just
in the sense that the promise of a benefit must predate an
individual’s retirement or termination. See, e.g., Williams v.
Rohm & Haas Pension Plan, 497 F3d 710, 714 (7th Cir 2007)
(holding that COLA was an “accrued benefit” where promise
of COLA predated the plaintiffs’ retirement). Where, under
state law, a COLA benefit is tied to a member’s earned and
accrued monthly retirement allowance as a means for main-
taining the real value of the allowance, the COLA is a part of
the accrued benefit under ERISA that ordinarily cannot be
decreased after the employee has earned it through service
to which it is attributable. See 29 USC § 1054(g)(1); Sheet
Metal Workers’ Nat’l Pension Fund v. CIR, 318 F3d 599, 603
(4th Cir 2003) (“accrued benefit” accumulates during an
employee’s service so as to become part of employee’s legiti-
mate expectations at retirement under the terms of the plan
then in effect).
	        The COLA cap and COLA bank benefits provided
by former ORS 238.360(2) and (3) (2011) accumulate based
on a member’s number of years of membership in PERS and
the member’s final average salary. They are inseparably
tied to a member’s service retirement allowance as a means
of maintaining the real value of that benefit. Therefore, the
disputed COLA benefits are “accrued” and nonforfeitable for
purposes of ORS 238.600(2), but only insofar as they are
attributable to service performed by a member before the
effective date of the 2013 Legislative Assembly’s amend-
ment to ORS 238.360(2) and (3).
	        To summarize: Retired PERS members have fully
earned and accrued the disputed COLA benefits based on
their number of years of membership and their final average
salaries. Accordingly, the disputed benefits are not modifi-
able with respect to those petitioners who are retired mem-
bers. In addition, active members have earned and accrued
the disputed COLA benefits based on their number of years
of membership and a proxy for their final average salaries on
the effective date of the 2013 amendment to ORS 238.360(2)
Cite as 357 Or 167 (2015)	253

and (3). However, in the absence of a legislative promise
not to prospectively modify those benefits, the 2013 COLA
amendment did not breach—let alone impair—active mem-
bers’ contractual rights to COLA benefits with respect to
service performed after the effective date of the amendment.
	        I join in the majority’s analysis of the other issues in
this case. Accordingly, I respectfully concur.
