A dramatic rise in compensation costs for Oregon's public employees during the next five years could force significant reductions in the number of people providing key public services, according to a new study from Portland State University's Center for Public Service.

The study found that compensation costs are far outpacing projected revenue growth, and in the absence of some extraordinary windfall - perhaps from new taxes - the mismatch will leave state government employers with little alternative but to reduce their workforce, perhaps by as much as 10 percent.

The cost increases are being driven in large part by the spike in government employers' required contributions to the state's underfunded pension system, which are expected to nearly double as a percentage of payroll over the next five years. At the end of that period, many jurisdictions, including some school districts, will be spending more than $4,000 in retirement costs for every $10,000 they spend on base salaries.

Coupled with rising health insurance costs, cost of living raises and regular "step" increases for employees, the study projected that the total compensation costs for a typical public employee will climb 30 percent in the next five years, or at an annual compound rate above 5 percent.

Individual government employers have varying capacities to absorb that kind of inflation, the study noted. Some, like utility districts, can raise fees in response to increased costs. But property tax-dependent cities and counties are constitutionally limited in their ability to generate new revenue. And the state already is facing a $1.8 billion general fund deficit in the next two-year budget cycle, which will cap money available for schools and state agencies.

If the state experiences an economic downturn during the next few years, or the pension system's investment earnings fall below expectations, the situation could be exacerbated.

The number of state and local government jobs fell by 3 percent after the 2008 financial crisis, from 270,000 in 2009 to 261,000 in 2013, the study said. But that drop was mitigated by the availability of federal recovery funds and a big drop in pension contribution rates in the 2009-2011 biennium. This time around, the budget impact will be more incremental, but bigger, the study said.

The single biggest component of most local government budgets is people, and the Center for Public Service has spent the past five years developing a calculator and benchmarking service for public employers to measure, project and compare their compensation costs.

Phil Keisling, a former secretary of state who now directs PSU's Center for Public Service, acknowledged that the model was built on assumptions that are unpredictable. But he said they were drawn directly from PERS and other sources, and were reasonable. Put together, he said, the cost increases add up to an unprecedented squeeze, particularly on cities and counties.

"I put in it the spirit of you can't manage what you don't measure," Keisling said. "The policy debate will rage. We're not making recommendations. But whatever your views on this, it would be absolutely remiss to fail to recognize what the landscape looks like out there."

- Ted Sickinger

tsickinger@oregonian.com

503-221--8505;@tedsickinger