No tax-pension deal, but lawmakers optimistic after talks with governor

SALEM, Ore. (AP) Gov. John Kitzhaber and senior state lawmakers are scheduled to continue talks Tuesday over taxes and public-employee pensions as they seek middle ground that could pave the way for a special session of the Legislature later this month.

The governor met with House and Senate leaders from both parties on Monday in a daylong session at Mahonia Hall, the governor's official residence. The discussion did not produce a deal, but Republicans and Democrats both sounded an optimistic tone afterward.

A spokesman for Kitzhaber, Tim Raphael, called it a "productive conversation" that would continue on Tuesday.

"We certainly made a lot of progress," said Rep. Mike McLane of Powell Butte, the top Republican in the House.

Months of negotiations have failed to produce a settlement that both sides could support. Many Democrats oppose steeper cuts to pension benefits for retired government workers, and tax increases are a tough sell to Republicans. But proponents say a deal would give schools badly needed funds.

Legislative leaders were scheduled to meet with rank-and-file lawmakers at previously planned meetings Monday evening.

Lawmakers have been extraordinarily close to reaching a deal before, most recently in final days of the Legislative session that ended in June, only to have it fall apart.

Standardized test scores released last week showed declining student achievement, potentially boosting momentum for a deal. State funding for schools is up over last year but hasn't kept pace with rising costs, forcing some school districts to raise class sizes or shorten the school year.

School districts along with the state and other local governments are struggling with a significant increase in their required contributions to the Public Employees Retirement System. Pension system officials say the payments will continue to rise for several years as they try to climb out from a massive hole created by investment losses in 2008, when the pension fund lost more than a quarter of its value.

Kitzhaber has said he expects a deal, if it happens, to coalesce around the same framework lawmakers have been working on for months about $5 billion in pension system savings over the next 20 years, and about $200 million in new revenue over the next two years.

Pension savings could come from some combination of lowering the annual inflation increase, lowering the interest rate used to calculate benefits for certain longtime workers and prohibiting the use of sick time and vacation days when calculating a worker's final salary.

Tax increases could come through higher corporate tax rates, a hike in tobacco taxes and limits on the use of tax deductions.

Lawmakers have also discussed cutting the tax rate for certain small businesses.

Kitzhaber met with House Speaker Tina Kotek and Senate President Peter Courtney, both Democrats, along with McLane and Sen. Ted Ferrioli, the top Republicans in the House and Senate.

Copyright 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.