By Jonathan J. Cooper

The Associated Press

SALEM — An Oregon Supreme Court case on public pensions and higher costs for state-funded health care will collide in 2017 to help create a massive hole in the state budget.

It’s still two years off, but the daunting scenario is already raising talk in Salem about tax increases and concerns that the state will have to shortchange top priorities like education.

Two large but temporary sources of health care funding run out in 2017, just as costs go way up for public-employee pensions and Medicaid, the publicly funded health care plan for the poor.

With more people working for higher wages as the economy improves, Oregon was relatively flush with cash this year, allowing lawmakers to maintain existing state services and invest in new or expanded programs. The total general fund and lottery spending — the part of the budget over which lawmakers have the most control — was up 13 percent, according to a summary compiled by the Legislative Fiscal Office.

Legislative budget staffers won’t do their first detailed analysis of the 2017-19 budget for several months, but the outlines of the challenge are already becoming clear.

The Oregon Supreme Court in April struck down the bulk of cuts made two years ago to Public Employees Retirement System benefits. The pension system’s financial consultants estimate that the change will cost state and local governments $345 million a year starting in 2017.

The state’s share isn’t finalized, but it will be a significant stress on the budget. And since the state also provides the bulk of funding for local school districts, lawmakers can expect to feel significant pressure to help school boards manage the higher retirement costs without raising class sizes or shortening the school year.

Other pension system changes could make the problem better or worse.

The PERS Board could opt to phase in the higher costs more slowly, saving money in the short term but raising costs in the long term. The board is also considering lowering the assumed earnings rate — the anticipated returns from investments — from its current 7.75 percent per year. The move would require higher contributions from government agencies to make up for the lower anticipated investment income.

Meanwhile, a variety of factors are combining to affect both the revenue and costs for the Oregon Health Plan, the state’s Medicaid program. Projections from earlier this year estimated it will need an additional $500 million in the 2017-19 period.

While the federal government has been paying the entire cost of covering people 386,000 people newly covered by Medicaid under President Barack Obama’s health care law, the state will have to begin sharing the costs in 2017. In the next biennium, the state’s share of the cost is projected at $369 million.

At the same time, the state will no longer receive supplemental payments from the federal government that propped up the Medicaid program for five years. In the current budget cycle, the Medicaid budget relies on $136 million in those federal funds. It also relies on a separate $145 million in one-time funds that also won’t be available in 2017.

“I’m not in panic mode yet,” said Sen. Alan Bates, a Medford Democrat who leads the legislative committee overseeing the Medicaid budget. “But … if I see a number that says the (Medicaid) population just went up 10 percent and revenue’s down 10 percent, I reserve the right to have an absolute panic attack.”

Gov. Kate Brown noted that Oregon has weathered budget crises through two recessions since 2001 and hinted that higher taxes may be part of the solution.

“I think through innovation, through delivering services more effectively and taking a hard look at our revenue that I’m confident that we can meet our future budget challenges,” Brown said in a recent interview with The Associated Press.

Our Oregon, a liberal group funded largely by public-employee unions that are affected by state budget problems, has introduced ballot measure proposals that would raise taxes on businesses or higher-income taxpayers.

Executive Director Ben Unger said Our Oregon’s proposed ballot measures aren’t driven by the looming budget shortfalls. The group hasn’t made a decision on whether to proceed with collecting the signatures needed to place the tax hikes on the 2016 ballot, he said.

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