By CHARLES E. BEGGS The Associated Press

SALEM - The possible deficit is $4 billion. Or is it $7 billion or $13 billion, or nothing?

That's the big part of the puzzle for lawmakers as they grapple with the future of the state's public employee pension system. The picture is fraught with political hazards.

The money is huge, with $42 billion in the Public Employee Retirement System.

Estimates of whether there will be enough money to pay pension obligations over the next 40 years are wide-ranging. And proposals to shave costs with less generous benefits for new workers tend to provoke partisan scraps.

Senate President Gene Derfler has taken the Legislature's lead on the knotty issue.

A Republican and longtime Salem businessman, Derfler thinks benefits are too rich when they provide retirees three-fourths of - or in some cases more than- what they earned while working.

He plans to testify to a Senate panel Monday on a contentious bill he says would take steps toward eventually balancing the books.

Among provisions of SB134 are ones to create a so-called third tier pension plan for new employees.

Derfler also said long-range costs of the system have to be better determined. Various analysts have projected the fund will be short anywhere from $4 billion to $13 billion over the next 40 years.

"We have to get a better handle on this. We need to put together a group like Mahonia Hall," he said in a recent interview, referring to a panel formed by former Gov. Neil Goldschmidt to revise workers' compensation laws in 1990.

Mahonia Hall is the governor's residence in Salem, where the group met and drafted changes that were passed in a special legislative session that year.

House Speaker Mark Simmons backs the third-tier bill and also agrees a better fix on the problem is needed.

"The PERS system is very flush" in providing employee benefits, Simmons said.

Several features of the pension system boost costs for governments and lead to potential deficits unless employer contributions are increased.

For one thing, the 160,000 government workers hired before 1996 are guaranteed an 8 percent return on their pension accounts, regardless of earnings of the trust fund.

And an employer has to match the money in an employee's account when he or she retires.

Employees can invest up to 75 percent of their funds in a stock account, while employer contributions usually have been in more stable but lower-earning funds. So when employees retired after soaring stock values swelled their funds in 1998 and 1999, for example, employer contributions had to be increased.

A so-called Tier 2 plan, which lawmakers passed in 1995, eliminated the 8 percent return guarantee for workers hired in 1996 and later. But the employer money match features continues.

Under court rulings, lawmakers can't reduce benefits under current pension plans.

Unions often are wary of changes sought by the Legislature's Republican majority, but studying the size of the problem doesn't stir the waters much.

"The Senate president has a great idea. There's some degree of uncertainty about what's out there," said Mary Botkin, a lobbyist for the American Federation of State, County and Municipal Employees representing 21,000 government workers in Oregon.

Unions won't accept, though, creating a third class of employees with lesser pensions.

"We don't need another differentiation in benefits between people in the work place doing the same jobs," Botkin said.

Some union leaders criticize the deficit estimates and doubt if there's a big problem.

Pat West, a firefighters union lobbyist, said a PERS estimate of a potential $7 billion shortfall covered just one fund and that there's enough money in another PERS fund to avoid a deficit.

"There's a misconception that there's an unfunded liability," West said. "PERS is one of the best funded plans in the country."

Democrats, closely allied with unions, will fight creating a third pension class. A bill to do that passed in the Senate in 1999 but was crushed 40-20 in the House, when the minority Democrats held two fewer seats.

"It's dead here," said House Minority Leader Dan Gardner, D-Portland. "The third tier is purely punitive against public employees, creating different benefits for employees working alongside each other."