Kitzhaber, key lawmakers meet on tax-pension deal

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SALEM, Ore. -- Gov. John Kitzhaber is meeting with House and Senate leaders on Monday in an attempt to reach an agreement on tax increases and public employee pension cuts.

The meeting at Mahonia Hall, the governor's official residence, is aimed at finding middle ground that could pave the way for a special session on Sept. 30.

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.

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.

The governor is meeting with House Speaker Tina Kotek and Senate President Peter Courtney, both Democrats, along with Rep. Mike McLane and Sen. Ted Ferrioli, the top Republicans in the House and Senate.