Longer school years? Smaller classes? More counselors, science and music classes?

Those are some of the ideas kicking around Salem as lawmakers contemplate how to spend a proposed $2 billion business tax hike for schools. The money could be a welcome boost for Oregon educators, parents and kids, who have endured nearly 20 years of schools funding well below the national average.

However, if the governor and Legislature don’t act to insulate schools then Oregon’s pension crisis will consume a quarter of the tax hike over the next two-year budget cycle and far more in later years, according to an analysis the Oregon Business Council issued last week, based on forecasts from the state’s pension actuary.

That could leave educators back where they are today, watching funds needed for these education reforms siphoned off to cover their share of the state’s nearly $27 billion deficit in the Oregon’s Public Employee Retirement System, universally known as PERS.

“I think it’d be better to be honest about it. If you’re not going to do PERS reform you should just be honest about it, say this is a PERS tax,” said Jeremy Rogers, vice president with the Oregon Business Council. “I would have to imagine that doesn’t poll as well.”

Gov. Kate Brown’s office says it hasn’t taken a detailed look at the business council’s numbers. But it rejects as a “false premise” the notion that the state can’t meet its soaring pension obligations and boost school funding, too.

“Choosing between investing in kids and honoring Oregon’s obligations to public employees, such as teachers and firefighters, is a false choice,” said Kate Kondayen, Brown’s press secretary. “The governor is working hard with legislators and stakeholders around the state and across the aisle to accomplish both goals.”

Insulating Oregon schools

While Kondayen didn’t respond to inquiries about what the governor is doing to meet both needs, Brown has said for months she wants $2 billion in new business taxes to support schools, to be spread over the state’s two-year budget cycle.

Oregon schools could certainly use the money. Nationally, Oregon ranks in the bottom quarter of per-student funding, around 9 percent below the national average. With an additional $2 billion the state would be about 6 percent above average.

A legislative subcommittee in Salem is vetting various proposals to boost business taxes to come up with the $2 billion in the next two-year budget cycle. The group will meet again on Tuesday in Salem.

If lawmakers approve the tax hike, they have at least two clear options for insulating the new money from being consumed by rising pension costs:

They could designate the tax hike just for schools, leaving other government agencies to fend for themselves as their own pension obligations continue to climb.

They could establish a huge side account, from some other funding source, to pay down schools’ pension obligations. That would protect schools from rising pension costs in future years and enable them to direct more of the new taxes to classrooms.

Let’s start with the first option, sending all the new taxes to schools.

In that scenario, schools would keep several hundred million dollars of the additional $1 billion in each year of the two-year budget cycle – even accounting for the rising pension costs. Still, pensions would take a big bite: a quarter of the new tax in the coming budget cycle, and nearly half of the new revenue as early as 2023.

That’s the simple math reflected in the fact that Oregon’s pension costs are rising much faster than even the rosiest forecasts of economic growth.

The outlook may sound bleak but it may actually be a best-case scenario. It assumes business tax collections would increase by a robust 5 percent annually over the coming decade, raising the value of new business tax collections to nearly $3.3 billion during the budget cycle ending in 2031. It also assumes the pension fund’s investment portfolio delivers an unabated stream of hearty returns.

If either forecast fails to materialize, perhaps because of a recession, the tax hike would do far less to cover rising pension costs. And the effects of any one down period would cascade forward into future years, making a bad situation worse.

That’s why state officials are considering the second level of protection.

The governor has been exploring options to protect schools from future pension cost increases. One alternative would be a massive side account, which schools districts could draw from to cover their rising pension costs. That would likely require $3 billion in addition to the business tax increase already under discussion, and maybe more.

“I’m hopeful that the governor comes out with some one-time type solutions,” said John Larson, president of the Oregon Education Association, the state’s main teachers union. He said any new taxes should be earmarked for the classroom, not for the pension deficit.

“She’s talking about a number of things,” Larson said, “and we’re willing to listen to those.”

Indeed, The Oregonian/OregonLive reported last month that Brown is exploring the possibility of tapping a $1.9 billion surplus in the state’s workers compensation agency, SAIF Corp., to bankroll that education savings account.

That strategy could provide a substantial down payment on the side-account to protect education. But it might face legal challenges, and Oregon Republicans, businesses and SAIF itself have all denounced the idea.

Brown has also suggested she might be open to increasing the amount public employees would be required to pay toward their retirement benefits to partially offset rising employer contributions, including schools. That change would eat into those public employees’ pay or future retirement benefits or likely both.

Meanwhile, lawmakers have floated the idea of redirecting the $724 million “kicker” rebate Oregon taxpayers are due to receive next year to help pay down the state’s pension debt. Oregonians cherish their unique tax rebate, though, and any effort to divert it could end up before voters who might reject it.

Unintended consequences

Jim Green, executive director of the Oregon School Boards Association, said he expects that if the tax hike passes then lawmakers would offer districts a list of alternatives for how they can spend their money. Districts may be able to choose from a menu of spending options that might include longer school years, smaller class sizes, more counselors, more science programs.

“If they’re going to raise money they’re going to want to buy those things,” Green said.

Setting guides for what districts can spend the money on would provide assurance it goes toward purposes the Legislature supports. But it could create unintended consequences if the tax passes without additional funds to offset future pension costs.

Even if all the new taxes go to schools, and none to other state agencies, the share of new taxes consumed by pension costs would continue to climb. That’s because the state consistently fails to pay down the structural deficit created by outsized promised to public employees going back decades.

The Oregon Business Council’s analysis suggests rising pension obligations would eat up more than half of the tax increase within a decade, leaving less for schools to spend on other purposes.

As those pension costs grow in future years, school districts would be obliged to pay for them using money the state hasn’t earmarked for specific programs. So while the new tax would fund some additional educational programing and services, rising pension costs would require cuts elsewhere in schools’ budgets.

Schools have limited options for making such reductions from their general fund, Green said, and none are good.

“You’re either going to cut staff or you’re going to cut instructional days,” he said. “Tough choices.”

Oregonian reporter Ted Sickinger contributed to this report.

-- Mike Rogoway; twitter: @rogoway; 503-294-7699