SALEM — State Rep. Bill Kennemer, R-Oregon City, calls it a “bit of a hot potato.” Sen. Frank Morse, R-Albany, calls it “the issue that no one knows what to do with.”

It is the Oregon Public Employees Retirement System, and its growing price tag is a significant problem for lawmakers, who will consider dozens of cost-containment bills this session.

Left unchecked, the pension plan could soon consume more than a quarter of many public agencies’ payrolls. Growth in the cost of PERS to the state payroll as well as state funding for public school districts will run in the hundreds of millions over the next two-year budget. Forced to devote more money to PERS, many government agencies are expected to cut staff and services.

“It’s eating our K-12 schools,” Morse said. “It’s eating our local government. It’s eating state government.”

The PERS system relies on investment profits for much of its funding and on employer contributions for most of the rest. So, if the stock market goes down, retirement costs for public agencies go up.

Wall Street has rebounded somewhat from the plunge that triggered much of the projected boost in PERS costs to the state. The PERS fund’s investments grew in value by 12.62 percent last year, a better-than-expected mark.

Still, Rep. Jason Conger, R-Bend, says that given the state’s bleak budget outlook, lawmakers have no choice but to look at PERS. He sits on a key state House committee, Business and Labor, that will hear all PERS reform bills.

“It’s like everything else that is a significant cost-driver in the budget: It has to be a focus because of the challenges we’re trying to confront,” he said.

Republicans have been most aggressive in attacking the system, while defending it is a top priority for the public employee unions that are key allies of the Democratic Party.

It is perhaps a measure of the buzz around the need for PERS changes that House Democratic Majority Leader Dave Hunt, D-Gladstone, said recently that some reforms are definitely called for. He said, however, that those reforms must recognize that many parts of the state’s retirement system are subject to collective bargaining — referring to the negotiations that lead to state and school employee labor contracts. For Oregon, those negotiations begin this month.

Past PERS reform efforts, including the 2003 legislative reforms, have been partially or entirely undone by the courts, Hunt noted.

“We’ve learned a lot from the Legislature overreaching in 2003, and having those actions thrown out in court,” he said. “So I think you will see PERS reform that is actually reasonable and legal.”

But Hunt also appeared to downplay the need for major reforms. He pointed out that PERS investments have been so successful that the system is now 88 percent funded, making Oregon “one of the best funded PERS systems in the country.”

Three reform ideas

Three ideas in particular look to see action on the PERS front:

• Reject PERS cost increases: Instead of boosting its payments into the PERS fund, the state could reject the PERS board’s adopted cost hikes and instead pay the same amount it did in the last budget. This is like if you postponed paying a bill — your debt won’t go away, but you can still buy groceries. For Oregon, it would forestall some cuts to state services, but result in growth in the state’s unfunded future retirement costs.

The state Legislative Fiscal Office says the state could save $127 million in the coming budget by doing this. Morse says he’s asked the Legislature’s lawyers to double-check that the move would pass muster with the courts.

• Cut benefits for retirees who leave Oregon: Oregon long ago agreed to pay retirees extra to cover their cost of state taxes but neglected to account for what happens when they leave the state. There’s now a bipartisan push to change that by passing a bill to end those extra payments, a move that could save $43 million in the coming budget, according to Hunt.

• Put down the “pickup:” Like many local governments and school boards, Oregon has agreed to “pick up” the employee portion of PERS contributions, amounting to 6 percent of payroll. Known as the “6 percent pickup,” this is the biggest part of PERS that can be addressed outside collective bargaining, according to some lawmakers. Not everyone agrees — state employees say they made concessions in exchange for the pickup and argue that removing it would require contract negotiations.

“In fairness to unions and the union employees, they made concessions,” Morse said. “It was essentially a trade.”

In any event, several bills take aim at the pickup, and Gov. John Kitzhaber has made no secret of his desire to at least cut the portion of state pickup — if not eliminate it altogether — at the collective bargaining table.

‘Too early to tell’?

Despite the momentum toward PERS reform, it’s unclear what the outcome will be.

The state’s official revenue forecast is scheduled to be updated twice before the Legislature adopts a budget. Many lawmakers are expressing hope that some recent upward trends for the economy will result in an improved budget picture.

“We are coming out of this global recession,” said Rep. Peter Buckley, D-Ashland, at a recent news conference.

That may explain why public employee unions that have historically opposed reducing retirement benefits don’t appear to be panicking yet. If revenue projections grow, it could take the steam out of reform efforts.

“I think it’s too early to tell what (legislation) is really going to move on the PERS front,” said Arthur Towers, the top lobbyist for the union that represents most state workers, Service Employees International Union Local 503.

And, like Hunt, he downplayed the need for major reforms, pointing to the recent gains in PERS investment returns, meaning that the state’s retirement obligations are now 88 percent funded.

“So we don’t have a PERS problem. We have a state budget problem,” he said.

Sen. Chris Telfer, R-Bend, does not agree. She has joined Conger in co-sponsoring a bill that would let agencies stop paying the 6 percent pickup. But she says the two are already facing potential legal pitfalls, according to the Legislature’s lawyers.

“Legislative counsel doesn’t think it will hold up in court,” she said.

Out of committee

Besides the legal obstacles, major reforms such as the Telfer/Conger bill face a major potential bottleneck in the House in the Business and Labor Committee that Conger sits on. That is because of a decision by House leadership to run all PERS bills through that committee.

Though the committee is split evenly between Democrats and Republicans, the Democrats’ co-chair, Mike Schaufler, D-Happy Valley, is one of the unions’ staunchest allies in Salem, meaning he will help set the agenda for which bills receive hearings.

Not only that, but unlike in the past, it may be more difficult to move bills out of House committees without broad support. Thanks to a change in House rules this year — one spearheaded, coincidentally, by Republicans — a simple majority vote at the committee level will not be enough to advance bills to the next committee or chamber. Instead, two members from each party must support any bill for it to advance.

Kennemer, the committee’s Republican co-chair, says the reality is that many PERS reform bills won’t receive hearings. Given the limited time available this session, he wants to make sure those bills have a chance at passing.

“I’m not particularly interested in having grandstand hearings that are symbolic,” he said.

So he hopes the leadership of both chambers enters into a dialogue with Kitzhaber to see what’s realistic.

“Let’s be serious about this, and be consistent” with the evenly split House, Kennemer said. “Let’s see if there’s some common ground here.”

But, he predicted, “It won’t be easy.”