Another budgetary storm is brewing in Oregon's public pension system, according to figures shared Friday with the pension system's board and the five-member citizens panel that oversees its investments.

The siren has already gone off on the first wave, which will crash over schools, municipalities and state agencies in 2017 due to the Oregon Supreme Court's recent rejection of most of the pension benefit cuts enacted by the Legislature in 2013 .

The system's actuary. Milliman Inc., on Friday estimated the price of restoring the 2 percent cost-of-living adjustments for members who retired before the legislation was passed: $345 million per year starting in 2017.

The increase would be even higher, but the pension system plans to defer part of it until 2019 to dampen the impact on public services. That only adds to costs. Public agencies' payments to PERS could rise by another $125 million a year in 2019.

The budget impact will be much higher on school districts than state and local governments, as schools have a much higher unfunded pension liability relative to the payroll that is taxed to pay it off.

The projected rate increases also assume the state will continue earning 7.75 percent annual returns on the pension fund's investments.

That's the next problem. The PERS Board expects to lower the projected rate of return because consultants don't think the portfolio, as currently structured, will deliver that much. The board is currently considering a quarter or half percentage point cut in the assumed rate.

The investments could earn more than 7.75 percent. Regardless, a change in the long-term assumption for investment returns - which cover more than 70 percent of system costs - means more money needs to come from employers and taxpayers to fund the system. The impact of the rate changes currently contemplated would raise public employer costs by $165 to $330 million per year.

Taken together, the court decision and investment return reduction could be a $1 billion-plus budget problem for schools, municipalities and state agencies in 2017-2019 biennium.

According to Treasurer Ted Wheeler, the news is potentially worse. Wheeler used the joint meeting of the PERS Board and the Oregon Investment Council as an opportunity to tee up on the Legislature for failing to pass a bill to restructure Treasury's investment division. Without that restructuring, he said, Treasury is left without adequate staff, the budgetary flexibility and the proper governance structure to responsibly manage the increasingly complex PERS portfolio.

As a result, he said, the Oregon Investment Council will need to reduce risk in the portfolio. That will mean lower returns, he said, and even higher required contributions from public agencies.

Wheeler and members of the council have unsuccessfully pushed successive versions of the bill for three legislative sessions, gradually adding more oversight provisions and paring back its proposed autonomy. The latest version would establish Treasury's investment management division as a separate state agency that reports to the Oregon Investment Council rather than the treasurer. With control over its own budget - which comes from the pension fund, not the state general fund - the agency would add staff as needed, they say. But the budget would still be subject to Legislative oversight.

Immediate staffing needs, they say, include additional personnel to improve compliance and risk management. But the grand plan is to eventually bring more of the pension fund's money management in house, instead of paying Wall Street firms for that work. According to Treasury, that could save $1 billion over 20 years - big savings for a system that desperately needs the money.

Wheeler and the rest of the Oregon Investment Council have been stepping up the rhetoric in an effort to get their restructuring bill a hearing in the last five weeks of this Legislative session.

"I think we need to move on and reallocate" the portfolio, Wheeler said Friday. "It's a first-rate tragedy that legislative leadership has chosen not to take up the Investment Modernization Act. They've missed an opportunity."

In reality, Wheeler said, there is only one legislator holding up the bill: Senate President Peter Courtney, D-Salem.

"No one in the Legislature seems willing to buck him," Wheeler said. "By standing with the Senate president, they're standing in opposition to schools, local governments and state agencies that will see their budgets repeatedly impacted by the Legislature's failure to act. "

Courtney said in an interview Friday afternoon that he's ready to give Treasury's investment division all the staff it's asked for - 24 new positions and a $7.3 million budget boost. But in light of debacles like Cover Oregon, he's still convinced the Legislature needs oversight over the division.

Courtney said the division has done "a remarkable job" managing the pension money, but now seeks for a transformational change in a highly technical area.

"I'm just not willing to take this Herculean leap," he said. "I'm not interested in that bill. I don't support that bill."

He does, however, support the Treasury's request for more staff. "Let's get these people hired right now and see what effect that has," he said.

Friday's PERS Board meeting held some good news for some 130,000 retirees in the system. They will all get a 2 percent cost of living increase on Aug. 1.

PERS also will pay 120,000 retirees in October to make up for reduced pension benefits the past two years now ruled to be illegal. Another 10,00 members whose catch-up payments involve more complicated calculations will be paid by next January.

- Ted Sickinger

tsickinger@oregonian.com

503-221-8505; @tedsickinger