Gov. Kate Brown rolled out a financially and politically ambitious proposal Friday to rein in increasing public pension costs for schools over the next 15 years by diverting various state revenue streams, limiting tax rebates and requiring public employees to contribute to their pension benefits.

The “everyone-sacrifices-something” proposal is an effort to ensure that any new corporate tax money lawmakers dedicate to schools will actually make it into the classroom, and not be swallowed up by the pension system to backfill its growing deficit.

Elements of Brown’s proposal have been on the table since last year, when she successfully lobbied legislators to divert a defined set of state revenues into an account at the Public Employees Retirement System to help offset school districts’ pension contributions. But the framework she unveiled Friday is far more expansive and includes a variety of elements that pension reform advocates have been promoting for years.

Brown said Friday that her approach reflected a pension crisis brewing “just over the horizon.” But her willingness to embrace solutions that are anathema to both public employee unions and business groups may also be testament to the fact that in her final term as governor, she is newly freed to step on this third-rail of Oregon politics without risking her reelection prospects.

In testimony Friday before a Ways and Means subcommittee, Brown told lawmakers that Oregon was sitting on the same precipice it faced twelve years ago, before the great recession, only the pension fund’s financial condition is far worse today.

In 2007, she noted, the pension fund was more than fully funded, but the subsequent financial downturn ripped a hole in the system’s funded status from which it has yet to recover. The system’s unfunded liability today is almost $27 billion, even after 10 years of economic expansion and a string of strong returns in the pension fund’s investments.

“We are at the height of our economic growth and we know another recession is coming at some point,” she said. "Except this time, our system is not adequately funded. The system is ill-prepared for the next inevitable economic downturn, which will put both public sector budgets and retirement security of employees in serious jeopardy,” she said.

Brown’s proposal includes a broad range of options for lawmakers to consider. And while it is focused on protecting one group of employers – school districts – the employee cost sharing and other elements of the proposal could also help state agencies, municipalities and other government employers around the state struggling with pension cost increases.

The governor’s plan calls on lawmakers to create a dedicated account that would be invested alongside regular pension assets and drawn down gradually to offset schools’ increasing pension costs. She wants to seed the School District Offset Account with $800 million in one-time revenues.

Nik Blosser, the governor’s chief of staff, told lawmakers Friday that there were a number of options to generate that money:

· Cap the personal kicker tax rebates that taxpayers are forecast to receive when they file their 2020 taxes. The governor is proposing to maintain the first $100 in rebates to each eligible taxpayer and send the rest to the school account. That could raise an estimated $400 to $500 million and would require a supermajority vote in the Legislature.

· Transfer nearly $500 million of the $2 billion capital surplus at SAIF Corp, a state-owned workers’ compensation insurance company, to the school fund. This could be accomplished with a simple majority vote of the Legislature.

· Transfer $100 million in general/lottery funds that the governor included in her proposed budget, plus an estimated $83.3 million in tax revenues from the repatriation of corporate profits formerly held abroad that was stimulated by federal tax reforms passed in 2017.

· Place a temporary surcharge on all state fees and licenses.

On top of those one-time sources, the governor wants to redirect $1.6 billion in state revenues to the fund over the next 15 years. Those include tax dollars that lawmakers already agreed to divert to help schools in 2018. But the governor wants to extend the period they would be dedicated to the school district account from six to 15 years. That would give a significant boost to the fund, but take a substantial if unpredictable source of tax revenue out of the general fund for the foreseeable future. They include:

· Capital gains and estate tax revenues that exceed a rolling historical average. The governor’s office said that could raise $1.4 billion over 15 years, the largest source of money in the plan.

· Interest on unclaimed property held by the Department of State Lands and state debt collections exceeding historical averages. The governor’s office estimates that could raise $185 million over 15 years.

Another key plank of the governor’s proposal is to institute pension contributions from employees. Employees don’t contribute to their pension benefits today, making Oregon an outlier among state retirement plans. Instead, employees’ 6 percent retirement contributions go into a supplementary defined contribution plan similar to a 401(k).

The governor’s plan calls for active Tier 1 and 2 members of PERS – those hired before August 28, 2003 and still working – to contribute 3 percent of their pay to an account that would help pay for their pension benefits. Employees’ first $20,000 in salary would be exempt from the contribution.

Those hired after that date, called Tier 3 or OPSRP members, would contribute 1.5 percent of their pay after exempting the first $20,000 in salary.

Those changes could bring in about $100 million per biennium starting in the two-year budget cycle that begins in July 2021, and increase gradually from there.

That’s a less aggressive cost-sharing approach than advocated by some business groups. But it is structured in a way that differentiates between older and newer employees, whose pension benefits are significantly different – along with the unfunded liability associated with providing them.

“We are all in this together: taxpayers, elected officials, school board members, and public employees,” Brown told lawmakers. “We must have a commitment to shared responsibility to set us on a different path, and do so this session.

“If we do nothing on PERS this session, there will be cuts to teaching positions, and no one wants to see that.”

Educators’ reaction was swift. “We are shocked to hear of Governor Kate Brown’s proposal to cut salaries for educators,” the Oregon Education Association said in a statement. “At a time when lawmakers are finally making real strides toward investing in our schools, Governor Brown has decided to ask educators take a personal financial loss. This is an unbelievable betrayal of the values all Oregonians hold.”

Brown’s proposal would not, in fact, affect employees’ take-home pay, but redirect their existing retirement contributions. The proposal would trim employees’ retirement benefits, however, and the negative reaction was echoed by other employee groups, one of which raised the specter of legal action.

“This convoluted, confusing and ill-conceived proposal also raises serious constitutional and legal issues that would send the state into court for another lengthy and expensive lawsuit,” said a statement from the PERS Coalition of public employees.

Reaction from the business community was mixed. The governor’s proposal to tap SAIF’s surplus is provoking particular angst, and could lead to another legal fight, though the governor’s office believes it is on solid legal ground.

“You can be certain that raiding hundreds of millions of dollars from SAIF’s reserves will negatively impact worker safety and accident prevention,” said Mike Salsgiver, executive director of the Associated General Contractors, Oregon-Columbia Chapter. “That means higher rates for employers, reduced benefits for workers, or fewer investments in accident prevention. Any way you cut it, Oregon small businesses and workers lose.”

The state’s largest business group, Oregon Business & Industry, said it would “strongly oppose this effort to raid SAIF to bail out PERS. The PERS solution should stand on its own.”

Other business groups were more sanguine. Tim Nesbitt, a former labor leader who has been consulting with the Oregon Business Council on possible pension reforms for years, said Brown’s plan contained “the right components for meaningful reform.” But he said they would only relieve cost pressures for schools, and wouldn’t address the pension system’s drain on other public services.

“PERS is a statewide problem,” he said, “and we need statewide solutions to protect essential public services.”

A group of Oregon’s largest employers, staffed by Nesbitt, have filed two ballot measures that would establish 401(k) programs for new employees and institute stiffer employee contributions than contemplated by the governor’s plan.

Nevertheless, Brown’s proposal could help public employers besides schools trim their pension contributions. The cost sharing program, for example, could presumably apply to all public employees, not just teachers, and could reduce every employer’s required contributions.

Brown also proposed a number of other tweaks to the system that could apply statewide. They include allowing all employers to prepay their pension contributions at the beginning of the year, versus monthly, which could improve investment returns and eventually reduce contributions. She also wants employers who rehire retirees to continue paying retirement contributions on those workers, which would accelerate repayment of employers’ unfunded liabilities.

Aside from politics, the economics of Brown’s plan depend on a variety of financial assumptions, including the ability of Oregon Treasury investment managers to continue generating strong returns on existing pension assets as well as deposits in the new school account. Some of the proposed revenue streams are volatile -- particularly capital gains -- and there is no guarantee they will generate the expected dollars.

But Blosser, Brown’s chief of staff, noted that the governor’s proposal is the only one on the table that could stabilize pension costs for all K-12 school districts, providing some certainty on budgeting and the use of future tax proceeds dedicated to schools.

“If there’s another plan that doesn’t increase the unfunded liability, we’ll look at it,” Blosser said, dismissing a set of kick-the-can proposals before legislators that would, among other things, extend the payback period of the pension deficit and actually make the problem worse.

All told, the plan announced Friday would divert up to $3.3 billion to offset schools’ pension cost increases. Based on cash flow projections from the governor’s office, some combination of the identified revenue streams could be sufficient to meet the governor’s overriding goal: holding schools pension costs constant starting in 2021.

Brown told lawmakers Friday that she would be meeting with educators, legislators and others over the next several weeks to get feedback on her plan.

“I am certainly open to changes,” she said, “but I am not open to inaction.”

-- Ted Sickinger

tsickinger@oregonian.com