Assoicated Press
SALEM - A new analysis shows taxpayers may have to pay billions of dollars over the next 40 years to cover shortfalls in Oregon's retirement plan for public employees hired before 1996. Although the pension agency's findings are tentative and incomplete, the new numbers - one computer run predicted a $7.3 billion deficit - have reignited a debate in the Legislature about Oregon's retirement system.

"We have failed the taxpayers on this issue," Senate President Gene Derfler, R-Salem, said.

Jim Voytko, executive director of the Public Employees Retirement System, said the analysis uncovers some serious issues involving the $42 billion public employees' fund.

"We're not trying to frighten people. We're just trying to understand how it works," Voytko said. "The time to think about this is now, not later. If we wait 10 or 15 years, we won't have time to undo the consequences."

Pension officials, however, cautioned that cutting benefits now, and punishing future workers, won't solve problems with the existing system. They suggest that an analysis of the entire pension system may erase any potential shortfalls.

"I don't want to see people panicking over something that's probably not real," said Rich Peppers, a lobbyist for the Oregon Public Employees Union.

Public employees and government critics have battled over the public pension system for years. Employee unions defend its high cost, saying workers have given up wage increases in exchange for better benefits.

In 1994, voters narrowly approved a ballot measure sponsored by tax activist Bill Sizemore requiring employees to contribute 6 percent of their salary toward retirement. Employers generally had paid the contribution as a benefit. The Oregon Supreme Court threw out the measure, saying employees had a contractual right to employers paying the contribution.

In 1999, huge stock market returns allowed many workers to retire with higher annual incomes than they had while working. Public employees retired in droves, and employer rates soared. Some cities saw their pension costs increase 30 percent in one year.

The computer analysis Voytko's staff prepared with the help of consultant ECO Northwest provides the first detailed analysis of what could happen as the Tier I program winds down in the next four decades. The program covers about 160,000 state, school district and local government employees hired before 1996.

Under the program, employees are guaranteed an 8 percent return on their retirement accounts each year, regardless of how much the retirement trust fund earns. Employers are required to match employees' accounts when they retire. The 1995 Legislature repealed the 8 percent guarantee for new employees, but the "Money Match" benefit continues for these Tier II workers.

In other words, Tier I employees do well when the economy falters, and they do very well when it soars.

Economist Randall Pozdena, chairman of the Oregon Investment Council, which decides how to invest the public employees' fund, said the program is a recipe for disaster. The only way to keep the plan out of the red is to put all earnings of more than 8 percent in good years into a reserve account to pay the guarantee in bad years, he said.

"You've already dug your grave; it's just a matter of when you fall into it," he said.