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Oregon Supreme Court Maps Path to Avoid Open Ended Statutory Contracts

Over the last several years the State of Oregon and its local governments have been faced with serious challenges to their ability to rein in the spiraling costs of employee benefits.  The most prominent of these is the current PERS mess.  This problem has its genesis in well-intentioned legislative actions taken years ago to provide public employees medical and retirement benefits.  As the cost of these benefit programs spiraled out of control, attempts to rein them in have been met with arguments that the statute or ordinance providing the benefit was a contract enforceable by the employees.  Typically the employees won this argument.

James v. Clackamas County contains all the above elements.  In the mid-80’s Clackamas County adopted an ordinance to provide health care benefits to retired sheriff’s office command officers during the gap between retirement and Medicare eligibility.  The key difference? A wise County Counsel anticipated this promise may become too expensive to keep.  The solution? The ordinance created a fund to pay the benefits which received a fixed percentage of command officers’ compensation.  It also made the payment of benefits contingent on an adequate balance in the fund.

Fast-forward 20 years.  The increase in healthcare costs quickly outpaces the fund’s ability to pay.  Despite various stopgap efforts by the County, by March 2005 the fund balance was insufficient to pay that month’s premiums.  In response, the County abolished the fund, creating a new one that provided more limited benefits.

James, a retired command officer, sued claiming breach of contract.  The trial court agreed with James, but the Oregon Court of Appeals reversed.  The Oregon Supreme Court accepted James’ petition for review, setting up today’s decision. In it Justice Balmer applies basic rules of contract construction to resolve the dispute. According to the court:

“. . .  the 1985 contract created a fund to provide insurance benefits to certain retirees and that it expressly made the obligation to pay the 1985 level of benefits contingent on the availability of ‘sufficient funding in said fund’ to provide those benefits. The source of that ‘funding,’ according to the contract, was the county’s payment into the fund of one percent of compensation paid to current command officers, increased to three percent by the 1989 county board order. By March 2005, the Command Officers Fund did not have sufficient funds to pay the next month’s insurance premium under the 1985 contract. Because the funding in the Command Officers Fund was not sufficient to provide the 1985 level of benefits, the county was not contractually obligated to provide those benefits. Accordingly, the county’s failure to provide that level of benefits was not a breach of its contract.”

Note: Counsel representing governmental entities should review their clients’ legislative enactments for promises of this nature and consider having them amended to provide for a similar limit on benefits not yet vested.

Disclosure: The author represented the Clackamas County at trial, and assisted with briefing before the Court of Appeals. Susan Marmaduke, of Harrang Long Gary Rudnick P.C., represented the county in the successful appeal, both before the Court of Appeals and in the Supreme Court.  Hats off to Susan!  Hats off also to Dave Anderson, who advised the County on the fund transition and took an active role in this litigation.