SALEM — The Oregon Supreme Court ruled Thursday that a cost-of-living adjustment for public retirees cannot be changed retroactively.

The decision strikes down a change made by the Legislature in 2013 to reduce the system’s long-term liability.

The court, in a long-awaited decision, also ruled that lawmakers can change how that cost-of-living increase is applied to employees who retire after the changes were made.

The court also rejected appeals by out-of-state retirees of the Legislature’s decision to discontinue payments granted years ago to help retirees offset state income taxes.

The decision has no immediate effect on the contribution rates of the Oregon government employers that cover 95 percent of the public workforce. The Public Employee Retirement Board set the rates last fall for the 2015-17 budget cycle, which starts July 1.

But it is unclear how the decision will affect the system’s future liability, which lawmakers tried to pare with their 2013 changes.

The system has about 128,000 retirees.

Retirees and public employee unions went to court to challenge those changes. They argued that the changes violated the contract between government employers and workers.

“We conclude that petitioners have a contractual right to receive the pre-amendment COLA for benefits that they earned before the effective date of the amendments,” Chief Justice Thomas Balmer wrote for the court.

Balmer acknowledged that a dollar spent on public pensions is one that cannot go toward other services.

“The Legislature’s interest in enhancing those services is

entirely appropriate,” he wrote.

“The Legislature, however, must pursue those objectives consistently with constitutional requirements, including Oregon’s constitutional prohibition against impairing the obligations of contracts.”

Five justices joined the decision. Justice Jack Landau recused himself and did not take part.

The court rejected arguments by the state and lawyers for local governments that a more compelling “public purpose” justified breaching the contract.

“The public-purpose defense that respondents ask this court to recognize imposes a high bar to justify the state’s impairment of a state contract, like PERS, and the record in this case does not meet that standard,” Balmer wrote.

At issue are two changes made by the Legislature in 2013 to the Public Employees Retirement System, which was created in 1945 and now has about 128,000 retirees. The system has 925 government employers and covers about 95 percent of all public employees.

One change affects cost-of-living increases, which first came into effect in 1971, and which were capped at 2 percent annually in 1973.

Starting on July 1, 2014, the 2013 law applies the full 2 percent to the first $20,000 of a pension, then 1.5 percent to the next $20,000, 1 percent to the next $20,000, and .25 percent above $60,000.

The rate for 2013-14 was a fixed 1.5 percent.

The other change affects the extra payment lawmakers granted to retirees in 1991, after the state taxed public pensions in line with a decision by the U.S. Supreme Court. The change denies the extra payment to out-of-state retirees who do not pay Oregon taxes.

The changes were projected to pare the system’s future liability by $5.3 billion over the next few decades. In the current two-year budget cycle, governments are expected to save $800 million, and in 2015-17, $1 billion — unless the court reverses them.

Lawmakers in 2013 allowed for legal challenges to go directly to the Supreme Court, bypassing the circuit court and Court of Appeals.

Public employee unions, and two out-of-state retirees, challenged both changes.

The unions argued that cost-of-living increases — and the formula that determines them — are part of the contract between government employers and workers. The state argues they are not.

There are two related lawsuits; the lead plaintiff is Everice Moro of Portland, a retired school employee who is among 14 named in the main lawsuit.

The out-of-state retirees argued that discontinuance of the extra payments to them violate state and federal constitutional guarantees of equal protection under the law.

Those suits were filed by Michael Reynolds, who retired in 2003 and is living in Seattle, and George Riemer, who retired in 2006 and is living in Arizona. Reynolds is a former solicitor general, the official who represents the state in state and federal appellate courts. Riemer worked for the Oregon State Bar, and is executive director for the Arizona Commission on Judicial Conduct.

Plaintiffs hailed the ruling.

“The state made a good-faith deal with these employees, who devoted so much of their working lives to serving their communities,” said Greg Hartman, a Portland lawyer who represented 14 plaintiffs in the main case.

“Today the Supreme Court let them know that they can count on a secure retirement, and will be able to afford groceries, medical bills, car repairs, and other day-to-day living expenses which rise with inflation.”

Local government and business associations said the decision will result in higher pension costs under the Public Employees Retirement System.

The Oregon Business Association also decried the decision, and offered a statement by a leading economist, who said millions will go into public pensions rather than education and other services.

“Oregon made a generational mistake in public policy, and the court has essentially ruled that we have to live with it,” said John Tapogna, president of ECONorthwest. “That puts Oregon in a challenging economic position for the next couple of decades. Families and businesses can choose Washington, with similar amenities, but without the legacy costs of an ill-devised pension system.”