Warnings about Oregon’s public pension system have been relentlessly consistent for nearly two decades. But a deficit of roughly $26 billion, seesawing financial markets and years of political inaction continue to drive painful cost increases for schools, municipalities and government employers across the state.

The pension system’s appetite for more dollars is the backdrop to every budget discussion. It was a wedge issue in the 2018 governor’s race. And it will lurk around the legislative session that starts Tuesday, even if Democrats decide not to take up legislation to tackle the problem.

Even as Gov. Kate Brown proposes $2 billion in new taxes to fund schools, much and potentially all of that money could eventually disappear into the pension system, leaving little for Brown’s promise of smaller classes, more teachers or a longer school year.

Now a new alarm is ringing, one that’s triggering a different conversation among the folks who manage the pension fund’s investments. On the surface, it’s about structuring the investment portfolio to meet growing needs. But dig a little deeper, and it’s also about the basic solvency of the pension plan.

The problem is cash flow, or more accurately, negative cash flow.

In plain terms, that means PERS pays out far more than it takes in before investment earnings. The situation, given the projected growth of benefit payments, is unprecedented and important enough to affect the “long-term viability of the plan,” said Rukaiyah Adams, chair of the Oregon Investment Council, the citizens panel that oversees pension fund investments.

“No OIC has ever had to face this issue,” she said. “No governor or treasurer has had to face this issue. So, we’re approaching it with measured, analytical care.”

Already, some financial experts think it unlikely that public employers will ever “pay off” the pension deficit. Others see the system approaching a financial precipice that, without drastic measures, could eventually leave Oregon looking like Illinois, whose pension system is on the verge of insolvency.

Allen Alley, a former tech executive, Republican gubernatorial candidate and technology investor, suggests that policymakers stop focusing on the actuarial mumbo jumbo and the complex accounting, and start looking at the actual cash flowing out of the system. Bottom line, he calculates, public employers’ collective bill for retirement benefits over the next three decades will be about $225 billion. That’s just for existing employees. New employees will increase the bill.

“As a CEO of a company, you think about cash,” he said. “What’s the check I have to write and where’s that money going to come from?”

Last year, Oregon’s Public Employee Retirement System took in roughly $1.4 billion in contributions from employers to fund employees’ pension benefits. Over the same period, it paid out $4.7 billion in pension benefits. That $3.3 billion mismatch is called negative operating cash flow.

That’s not an inherently bad thing. Many mature pension systems are cash flow negative. But when PERS writes its monthly checks to retirees, the money needs to come from somewhere.

That somewhere is the pension trust fund, and the investment earnings it throws off. In recent years, those earnings have covered nearly three-quarters of the cost of PERS benefits. Across the public pension landscape, that makes Oregon’s system more dependent on investment earnings than all but a handful of systems.

But PERS’ benefit payments aren’t static. They are stair-stepping higher every year as more public employees head for retirement. As it stands, about a third of active public employees and inactive members entitled to a future PERS benefit are eligible to retire. Consequently, annual benefit payments are projected to grow to more than $6 billion by 2024, more than $7 billion by 2029 and $8 billion by 2035.

The immediate question facing state investment managers is whether and how to restructure the portfolio to meet those increasing cash needs. But longer term, the question is the same one facing most retirees: How much cash can it afford to spend every year without dipping into the seed corn, and potentially exhausting the fund.

Here’s another conundrum: accomplishing the first objective may undermine the second.

But first things first. To date, the PERS portfolio has been structured to maximize returns for the pension fund. Over time, state investment managers have delivered, piling money into leveraged buyouts, real estate partnerships and distressed debt funds that have generated the excess returns needed to fund PERS’ growing benefit bill while keeping contributions from employers relatively reasonable. Right now, more than 40 percent of the PERS portfolio is spread across a variety of those “alternative investments.”

Optimizing the portfolio for cash needs, says Adams, the OIC chair, is an entirely different objective. And by definition, it may mean dialing down investments in the private partnerships that have traditionally delivered the extra juice on returns. That’s because those are illiquid investments, often locking up cash for 10 years or more.

During the last recession, many pension plans were forced to sell their illiquid alternative investments at deep discounts on secondary markets to raise cash. Oregon’s pension managers want to avoid that kind of “liquidity crunch.”

“It’s definitely an issue for the council to consider,” said Treasurer Tobias Read. “I feel good about the fact that we’re taking this seriously. We have the capacity to be thoughtful about it. We don’t have to make drastic changes.”

If the OIC does shift more of its investments into liquid assets – and it will be looking hard at that question this year – it could put new pressure on the PERS Board this July to reduce its assumption about what those investments will earn. That’s currently 7.2 percent annually, an estimate many experts think is inflated in today’s low interest rate environment.

That’s not just an academic exercise. Lowering the assumption would increase the present value of the system’s future benefit payments as well as its funding deficit, requiring higher contributions from employers – exactly the situation that Brown and other lawmakers are looking to avoid. In fact, Brown has pledged to stabilize schools’ contribution rates, though she hasn’t said how.

Oregon politicians take comfort in the fact that Oregon PERS, unlike many public pension systems around the country, is not in severe distress. It is better funded than many state systems, and its actuarial assumptions are more conservative.

But not all the comparisons are favorable.

Last year, the Pew Charitable Trusts issued an analysis comparing cash flows in public pension systems across the country. It found that Oregon PERS’ negative cash flow as a percentage of its assets (before investment earnings) was higher than all but five state pension systems, at negative 5 percent in 2016. So, before investment earnings, cash outlays consumed 5 percent of its assets. That number bounces around, but the cash flow has been on an increasingly negative trend line.

That makes Oregon’s plan more vulnerable to market volatility, magnifying the impact of poor investment returns. In years of poor investment performance, like last year, the fund eats itself. And if the balance gets low enough, from a big market correction or a series of years with low returns, it might not throw off enough cash to backfill the annual cash flow deficit and, potentially, could undermine the plan’s solvency.

That’s not an issue yet. But as the Pew study noted, the gap between returns on safe investments and state pension plans’ assumed returns are the highest in decades.

“Independent analyses suggest that states can assume returns of about 6.5 percent a year for at least the next 10 years; 5 percent or lower returns are a real possibility over the next 20 years,” the study said.

Oregon’s Legislative Fiscal Office took its own look at the issue in December. Its analysis noted that Pew had actually underestimated the ratio of PERS negative cash flow to its assets in 2016. But it concluded that the system had little liquidity or solvency risk, because PERS is still assuming its investments will earn more money each year – 7.2 percent – than the drain on its assets: 5.2 percent of assets. Assets increased in 2017, for example, when the fund earned 15.3 percent and contributions went up.

Randall Pozdena, an economist with EcoNorthwest, previously served on the Oregon Investment Council. He was sounding the alarm about the structural deficit created in the pension system in the run up to the 2000 dot.com bust. He’s unconvinced by the state analysis.

“The assumption is that you’ll earn the assumed rate every year as new cash, and that will paper over the negative cash flow,” he said. “That’s simplistic logic.”

The reality, he says, is that this is the longest bull market in history. At this point, he says, it’s hard to see where the productivity growth will come from to sustain market returns.

“The liquidity and solvency risks are significant,” he said.

Adams, the OIC chair, said the panel will begin that analysis with a review of its private equity portfolio later this month, then expand to consider liquidity needs, expected returns and the volatility of returns.

“If benefits remain the same, and employer contributions plus earnings cannot cover the cash needs of the plan, [we] as responsible investors have to face that reality and manage the assets accordingly,” she said.