Caught By The Light

A firestorm is brewing in the Legislature and elsewhere over HB 2456.  The story goes like this:  the originally proposed bill would have removed the income tax subsidy from PERS current and future retirees who live in states other than Oregon and who pay no Oregon Income Tax.  Before the bill came up for review in the House Business and Labor Committee, OPRI decided that the original bill was unacceptable, and quite probably illegal.  Nevertheless, the bill original bill seemed to be getting traction, and OPRI decided to introduce an amended bill that would make the punitive and illegal parts of the original HB 2456 go away.  Their changes, encapsulated in what was known as the dash 7 amendments,  made the bill prospective only and would apply to those PERS members who retired on or after 12/31/11 and who did not reside in Oregon when they received monthly benefits.  After reading the Legislative Counsel's thoughts on the legality of the original HB 2456, the House Business and Labor Committee voted HB 2456-7 (the OPRI version) out unanimously.  The bill then went to the Ways and Means Committee (since it involves money), where it has sat for some time now as more pressing bills were considered.  Since the dash-7 bill has arrived at the Ways and Means Committee, several things have happened.   The most significant change was the Portland City Club's long-gestating report on the state of PERS.  This was followed today by the Oregonian's scathing editorial calling out the Legislature and the Governor to do something about PERS before the session ended.  Given where everything is in the Legislature and with less than a month before the Legislature calls sine die, the pressure is ratcheting up to do something to get a handle on PERS.

I will have a separate post identifying all the factual errors, distortions, and faulty assumptions in the belated City Club Report, but I want to focus on one element that is suddenly regaining traction.  The City Club report (and this was repeated in the Oregonian) still cites the $72 million savings that would occur if the income tax subsidy were eliminated for all PERS retirees, not just those retiring after 12/31/11.  Notwithstanding the legal analyses that show the post facto application to existing retirees to be a breach of contract, the more significant point is that the bill in its original form will not save anything close to $72 million.  That figure was from PERS who simply estimated the savings from not paying the subsidy to anyone living out of state as of a date certain.  That figure did not include implementation costs, enforcement costs, administrative overhead, and the difficulties of turning the subsidy on and off again for members who pass back and forth through Oregon residence.  If we are lucky, the net savings on a heavily reprogrammed HB2456 will be about 25% of the amount estimated by PERS - about $18 million - before taking into account the legal expenses involved to defend the breach of contract.  While this might be viewed as being better than a "hit in the head", it is far cry from the amount reported by the City Club and repeated by the Oregonian.  It is really disturbing when numbers get repeated uncritically from one source to another all because researchers and writers fail to ask the right questions.

The real problem with the original HB 2456 is a legal one.  Given the tests typically applied by the Oregon Supreme Court to whether a change is permissible or not, the set of guidelines used comes from none other than the Hughes case, which involved the income tax subsidy in the first place. It would be ironic, to say the least, that PERS and the Legislature find itself back in court trying to undermine part of the agreement put into place following the Hughes decision regarding the income tax subsidy.  The Legislative Counsel has already weighed in on this and concluded that HB 2456, as originally written, would be a retroactive change to a PERS agreement and would, therefore, be considered a breach of contract.  The reason the revised bill was introduced in the first place was to avoid that very trap of passing a sweeping bill that would be overturned by the Oregon Supreme Court as a breach of a retiree's contract.  Once a retiree starts to receive the tax subsidy, which is backed up by a piece of paper called a Notice of Entitlement, PERS is on the hook to continue to pay the subsidy.  Nothing in existing law gives PERS or the Legislature the right to turn off the subsidy in the future.

The dash 7 version of HB 2456 is before the Ways and Means Committee.  The belated City Club Report and the bashing by the Oregonian have gotten members of the Ways and Means Committee stirred up and, according to rumor, members want to revise the bill again back to what it was before the Dash 7 amendment was passed unanimously.  While the dash 7 amendment doesn't save a lot of money in the near term, there is probably a considerably windfall over time.  More importantly, the dash 7 amendment doesn't have the critical legal flaws that the original HB 2456 bill had.

Most people don't ask my advice (OK, some do), but I'm going to offer the Legislature some advice here.  Stay far away from the original HB 2456 or any revisions of the dash 7 version that try to put back provisions that were taken out.  It has been almost 10 years since mistakes from the 2003 Legislature are finally being sorted out because of all the litigation spawned.  The Legislative Leadership promised that the 2011 Legislature would not pass out any bills that would lead to the kind of legal limbo that a great deal of the 2003 Legislation ended up with.  An original version of HB 2456 would flat out contradict that promise and would lead back to the legal chaos that has dominated the last decade.  If you must pass a bill, the dash 7 version of HB 2456 is legally the safest way to go and, while it won't save much in the short run, the long run savings may be more than you think.  On the other hand, passage of the unrevised HB 2456 would lead immediately to legal stasis and would continue to mess with retirees'  heads and tie up the courts for years.  The original HB 2456 is bad and probably illegal public policy.