Gov. Kate Brown is considering selling the state’s workers compensation insurance corporation or tapping its substantial capital surplus to hold down future pension costs for school districts around the state, according to documents obtained by The Oregonian/OregonLive under a public records request.

The idea is still tentative, the records indicate, and it’s not clear it would raise enough money to accomplish the goal on its own. But if Brown moves forward with such a plan, it would be her boldest move yet to rein in the runaway costs of the Public Employees Retirement System. It’s also one that would face substantial blowback from the business community.

Chris Pair, a spokesman for the governor’s office, said Monday that “our office will not be providing comment.”

The proposal to tap SAIF, the state’s 100-year-old employer-funded workers compensation agency, was initially floated in 2017 by a task force Brown set up to look for ways to reduce PERS’ mammoth unfunded liability. That liability now stands at about $26.6 billion.

At the time, the idea of selling SAIF or tapping its surplus was staunchly opposed in some quarters of the business community. Oregon businesses enjoy some of the cheapest workers compensation rates in the country, and employers who are policyholders of SAIF receive large annual dividends from investment earnings on the capital surplus that the governor may look to tap.

Transferring that surplus or selling the company might raise costs for workers compensation, erasing one of the few competitive advantages that Oregon offers business, opponents have said.

At the same time, schools, municipalities and public agencies around the state are wallowing in pension debts and the relentless cost increases they are driving. Collectively, school districts have a funding deficit with PERS of more than $9 billion. They face a $375 million increase in their pension costs in the next two-year budget cycle and potentially much larger cost increases in the following biennium.

This at a time when Brown has been promising to increase school funding to lengthen the school year, bring down class sizes and address Oregon’s high school graduation rates, which are the second lowest in the country. Critics have said it would be a mistake to pump billions more into schools when much of that money would go to increased pension costs, not to the classroom.

Brown has already acted on one of the PERS debt-reduction task force’s suggestions, setting up new “side accounts” at PERS that could, if adequately capitalized, offset some of the contribution increases employers are facing. One of the accounts is for the benefit of schools, which will be funded solely by the state. The other is designed as an incentive fund for all public employers that aims to provide a 25 percent match on new funds that employers deposit with the pension system.

The problem is that the side accounts are only minimally funded so far. And while Brown included another $100 million appropriation for the school fund in her proposed budget, that is really a drop in the bucket. PERS’ actuary estimates that contribution rates will go up by about 7 percent of payroll in 2021 -- the systemwide equivalent of $1.6 billion -- if PERS’ investments deliver their assumed rate of return of 7.2 percent this year.

PERS has calculated that it will take a side account deposit of about $435 million to offset each percentage point increase in schools’ contribution rates. That implies that Brown might need to inject about $3 billion into the school fund to hold pension costs constant in 2021. That comes on top of the $2 billion she’s looking to provide in new funding for 2019-21 by raising corporate taxes.

SAIF was established as a state agency in 1914 and was made a public corporation in 1980, with a board appointed by the governor. Its non-taxable status gives it a big leg up in the marketplace, and it underwrites more than half the workers compensation market in Oregon. That competitive advantage irks competitors, but in 2004, voters decisively rejected a ballot measure supported by Liberty Northwest Insurance Corp. that would have abolished SAIF.

In 2017, SAIF took in almost $526 million in premiums and had $393 million in losses and underwriting expenses. Its $133 million underwriting profit, coupled with another $171 million in investment income, enabled the company to pay back policy holders 30 percent of their premiums - $160 million - while growing its already substantial capital surplus to nearly $1.9 billion.

In fact, SAIF has paid those “dividends” every year since 2010, returning more than $1 billion to policyholders while watching its surplus continue to grow.

SAIF is subject to minimum capital and surplus requirements established by the National Association of Insurance Commissioners. According to an annual independent audit, its minimum capital and surplus amount was $314.3 million at the end of 2017. That compares to an actual “net position” of $2.1 billion in the audit, or a $1.9 billion surplus listed in SAIF’s annual report.

SAIF officials were not available Monday to explain the difference, but the surplus is a potentially attractive asset to backstop the struggling pension system. Records obtained by The Oregonian/OregonLive show that the governor, along with her chief of staff, Nik Blosser, and her legislative director, Elana Pirtle-Guiney, met on Jan. 10 with retired insurance executive and University of Oregon booster Pat Kilkenny as well as John von Schlegell, a founder of the Portland-based private equity firm Endeavour Capital, to discuss ways to reduce the pension system’s unfunded liability.

Emails and Blosser’s notes from the meeting show that those options included selling SAIF or tapping its capital surplus. (Emails from Von Schlegell also mentioned another option raised by the PERS task force – privatizing the state’s liquor retailing monopoly.)

Blosser’s notes indicate that based on SAIF’s current capital surplus and loss ratios, the state could take $1.4 billion from its surplus to fund PERS without changing its operating model. A sale of the company might garner a premium, the notes said.

Following the Jan. 10 meeting, Kilkenny also put the governor’s office in touch with Tony Ursano, president of TigerRisk Partners, an insurance mergers and acquisition specialist out of New York.

“We would love an opportunity to come out to Salem and introduce ourselves, our firm and our preliminary perspectives on SAIF,” Ursano said in a Jan. 17 email to Blosser. “I believe we are uniquely positioned to offer the State of Oregon insightful, thoughtful and objective advice about the strategic alternatives available to SAIF.”

Emails indicate that the follow-up meeting may have taken place in early February and included Oregon’s chief financial officer George Naughton and his team.

Business groups are prepared to push back on such a proposal.

Mike Salsgiver, executive director of the Associated General Contractors of Oregon, said his members would oppose any effort to use SAIF’s mandated reserves to pay down a structural deficit in the pension system.

“We do not support sweeping accounts to pay off a debt the state has incurred” elsewhere, he said. “You could do that and you still wouldn’t solve the problem. It doesn’t make sense to use a program that’s working well to address a much deeper structural problem.”

Sandra McDonough, chief executive of the state’s biggest business organization, Oregon Business & Industry, said she met with the governor last week and asked about the strategy for containing pension costs, but got few details and no mention of SAIF.

“We would be concerned with any proposal that would undermine the fiscal integrity of SAIF,” she said. “We’ve told the governor we look forward to talking through what she’s thinking about. She indicated she’d have something relatively soon.”

Correction: An earlier version of this story said the new PERS side accounts for public employers were still empty. They have received only minimal funding so far.