Buried among the cost-containment measures state budget writers unveiled Friday was a proposal to lengthen the repayment period on Oregon's $22 billion pension fund deficit. It's a kick-the-can strategy that shifts the debt – and the associated risks – years down the road, an idea financial experts say could actually make matters worse.

The set of proposed changes to the Public Employees Retirement System that lawmakers outlined Friday bore little relationship to the two PERS reform bills that were passed earlier this month by the Senate Workforce Committee. Those bills contain a variety of specific, vetted proposals – though highly controversial - to save money and trim the system's deficit by reducing future retirement benefits.

If the past is any indication, few of those measures will be openly debated by the Ways and Means Committee, but could become part of a behind-the-scenes deal to balance the budget at the end of the session.

Budget writers unveil plans to cut state spending

In the meantime, lawmakers are set to consider a proposal that will set off alarm bells for the PERS Board and other financial experts who oversee the system. Here's how they described it: "Determine whether the amortization period is set for the appropriate length of time."

In practice, that means refinancing the state's pension debt, lengthening the repayment from its current 20 years to 25 or 30 years to reduce public employers' current costs.

Public employee unions have traditionally backed the idea, because it cuts costs without cutting employee pay or benefits. It is often likened it to refinancing a home mortgage.

The problem, according to PERS actuary, Milliman Inc., is that lengthening the amortization period to 30 years would turn the pension deficit into a so-called "negative amortization" loan. Public employers would effectively be paying only part of the interest and no principle on the debt, so the unfunded liability would actually grow for the first decade, even if the system's investment earnings hold up to assumption.

The strategy increases total debt repayment costs. And if the pension fund's investment earnings falter during that time, the deficit could jump higher.

Equally problematic: The proposal would have the legislature, with little pension expertise and a long history of making poor financial choices in that arena, overriding the authority of the PERS Board. Those five board members are fiduciaries appointed by the governor to administer the system and protect its funded status, in part by adopting conservative economic assumptions.

John Thomas, a Eugene businessman who chairs the PERS Board, says that as far as he is concerned, the idea is a non-starter.

"We've reviewed this on more than one occasion and the board is pretty specific in terms of keeping the 20-year amortization, as are our Milliman consultants," he said. "We do not think it would be in the interest of our fiduciary duty to lengthen the amortization period."

One of the proposals contained in the PERS reform bills did show up on Friday's list but was described in a fairly oblique way: "Increase current and future employees' share in retirement costs for all public employees who are members of PERS."

In fact, public employees don't currently make any contributions to the state's pension fund. The system's required 6 percent contribution from employees goes into a separate, supplementary retirement account that is owned by employees. And 70 percent of public employees have that contribution paid by their employer, a benefit first negotiated nearly 40 years ago in lieu of pay raises at the time.

Requiring new employee contributions to the pension system, or redirecting the current contribution into the pension fund, would not reduce the system's unfunded liabilities. But it would be administratively easy to handle and, in principle, could generate a lot of savings. Redirecting the existing contribution into the pension fund, for example, could generate some $1.2 billion per biennium, offsetting some of the pension cost increases being borne by employers, and ultimately taxpayers.

But in practice, it's a pay cut for employees, and would be hard fought in collective bargaining. Most current agreements contain boilerplate language that would raise employees' pay if the state decides to redirect the current employee contribution into the pension fund. So the savings are uncertain.

That may be one reason for the lack of specificity in Friday's proposal. Lawmakers said that they didn't want a loose set of preliminary ideas to set off a wave of preemptive retirements among the 20,000 Tier One PERS members who are already eligible to retire.

"We do have to be careful what we say," said Sen. Richard Devlin, D-Tualatin, "because it does have ramifications."

- Ted Sickinger

503-221-8505; @tedsickinger