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But key leaders don't foresee issue on 2016 agenda.

Oregon’s major business groups want lawmakers to start dealing with rising public pension costs as early as the session that opens Feb. 1.

Although those costs start to kick in with the 2017-19 budget cycle — 18 months away — advocates say it’s not too early to whittle down an unfunded liability projected at $18 billion over the next few decades.

“If we do nothing, 100 percent of the burden falls on taxpayers, government services and their ability to undertake reinvestment in budgets going forward,” says Tim Nesbitt, currently a consultant for the Oregon Business Plan.

Nesbitt is a former president of the Oregon AFL-CIO labor federation and an adviser to two governors.

Nesbitt also says that public employees themselves will be hurt by a system that diverts dollars from government services into ever-higher pension contributions.

”When we think of all those effects, public employees are not only workers who care about the quality of the services they deliver, they are also citizens who care about the ability to invest and do better in our education system and all the other things that make a difference for Oregonians.”

But Democratic Gov. Kate Brown and Democratic legislative leaders gave no indication at the recent Oregon Business Summit that the issue would be on their 2016 agenda.

Senate President Peter Courtney, D-Salem, did refer to it indirectly when he warned against a looming tug-of-war between business groups and public employee unions, which seek to qualify a multibillion-dollar tax increase on business for the 2016 general election.

Among the Oregon Business Plan backers are Associated Oregon Industries, Oregon Business Council, Oregon Business Association and Portland Business Alliance. The plan lists soaring public pension costs among the “headwinds” to Oregon’s economic and social progress.

Republican Sen. Tim Knopp of Bend, who as House majority leader in 2003 helped lead successful efforts to change the public pension system, says he’s willing to try again.

“It needs to happen because it’s the right thing to do,” Knopp said at a panel discussion during the summit.

“I would rather work on other issues that people are concerned about, but this issue, if it’s not resolved, will crush our government.”

He said he was surprised by the results of a survey in his district that placed the issue first.

“What it is going to take is the public — moms and dads and grandparents of school kids — talking about it,” he says.

Effects on budgets

According to the Public Employees Retirement System, pension contributions by government employers are projected to jump from $2 billion to $2.8 billion in the 2017-19 budget cycle. The resulting increase to the next state budget would be around $500 million — greater than state government’s actual share — because the state budget also picks up the lion’s share of school district operating costs.

Two other panel members say projected increases in contributions to PERS, which covers about 95 percent of Oregon’s public workers, will eat deeply into what they can spend over the next several two-year budget cycles.

Cheri Helt, co-chair of the Bend-La Pine School Board, says pension costs will jump from the current 16 percent of payroll to 20 percent in 2017-19, and to 25 percent in the cycle afterward.

“It makes it difficult to start to have conversations about 2017 … before a dollar goes into any one of our classrooms,” Helt says.

Jamie Moffitt, vice president and chief financial officer for the University of Oregon, says rising pension costs will eat up 40 percent — about 2 percentage points — of the 5.5 percent average annual increase in tuition.

“We are trying to keep tuition as low as possible, we are trying to keep these universities accessible and affordable for students,” she says. “But these costs are very challenging when we look at our budget.”

Problem and proposals

An April 30 decision by the Oregon Supreme Court is the impetus for much of the higher costs. The justices ruled that lawmakers could pare cost-of-living increases for public retirees — but those reductions could not apply to benefits earned before the 2013 legislation took effect. The court ruled in a challenge brought by public employee unions.

The decision boosted the system’s unfunded actuarial liability by a projected $5 billion. Together with other factors, it drove the longterm liability from $9 billion to $18 billion.

“It is a problem that has not been made easier to solve equitably by the Supreme Court decision,” Nesbitt says. “There are still solutions … but they would lock in whatever has been earned to date.”

For the 925 government employers in the system — state government, counties, cities, schools and special districts — contribution rates are projected to jump from an average of 18 percent to between 27 and 30 percent of payrolls by 2021-23.

According to Steve Rodeman, PERS executive director, employer contributions must cover any gap between state earnings on PERS investments and benefits paid out to retirees.

While Oregon and Washington have similar public pension liabilities — Washington’s is actually greater — Washington has a personal income base more than twice that of Oregon, says John Tapogna, president of the Portland firm ECONorthwest.

He also says Oregon ranks at the bottom of the states for public employee contributions to their pensions. Many government employers have picked up their employee tab, even after 2003, when lawmakers created an Individual Account Program separate from the main PERS fund. (Some employees chose to contribute in exchange for pay increases from employers.)

Among the proposals floated by business groups — and included in a 2011 report by the City Club of Portland — are ways to establish cost-sharing by current public employees.

“That is the reality of legacy costs,” Nesbitt says. “They are unfair. They end up shifting from one generation to another the costs that should have been borne by an earlier generation. But that is the problem we have to solve.”

Lawmakers could require employee contributions to support the PERS fund, redirect to future pension benefits some or all of the 6 percent employee contribution that now goes into the Individual Account Program, or redirect those contributions from pre-2003 public employees into their own benefits.

Such measures might cut as much as $1.2 billion off the projected higher payroll costs, although Knopp says he hopes PERS will come up with a more precise estimate from its actuarial consultant Milliman.

Another measure would employ lower market rates, instead of the system’s assumed rate of return that is currently at 7.5 percent, to calculate the annuities paid out under Money Match to public retirees. Knopp says that step would result in a $1 billion savings over time.

Politics and prospects

Knopp acknowledges that PERS changes are not politically comfortable for Democrats, who draw strong support from public employee unions.

When Knopp helped lead the 2003 overhaul, the House was controlled by Republicans, and the Senate was in a 15-15 tie. Knopp’s counterpart as leader of the Senate committee, Democrat Tony Corcoran of Cottage Grove, was shunned by unions afterward and left union employment for a state job from which he has since retired. The top Democrat on Knopp’s committee, Greg Macpherson of Lake Oswego, lost a 2008 bid for attorney general in part because unions funded his primary opponent, who took no stance on the changes.

Democratic Gov. Ted Kulongoski, who signed the overhaul, did survive union opposition to win re-election in 2006.

But Knopp says that public employees have a vested interest in a financially sound pension system, particularly given the ups and downs of investments that account for 70 cents of every dollar paid out in benefits. That investment fund dropped in each of Oregon’s two most recent economic downturns — including a 27 percent loss between late 2007 and early 2009.

“The reason to fix the system — and I have said this multiple times — is that ultimately, this system is going to crash,” he says. “What you heard is a relatively positive statement about where we are. It could get a lot worse.”

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