AMONG MANY bits of bad news unveiled with his proposed budget last week, Mayor Charlie Hales also had a bright spot to impart.

Beyond the slashing of programs and axing of jobs inherent in filling a $21.5 million hole, the city found significant savings. Hales' budget assumes at least $3.5 million, courtesy of a toxic fight over pension reform in Salem. Maybe more.

It's important money—a felicitous bit of breathing room amid the stifling budgetary dread of recent months. It's also deeply tenuous—suggesting some flux beneath Hales' paeans to "honest" budgeting.

"It's like sand," says Mary Botkin, a lobbyist for Oregon American Federation of State, County, and Municipal Employees (AFSCME) Council 75. "A handful of sand."

Governor John Kitzhaber on Monday, May 6, signed reforms to Oregon's Public Employees Retirement System (PERS) into law, even as AFSCME and other unions are whetting their legal blades and promising litigation.

If they succeed—and recent legal precedent indicates they might—Portland will have to pay the money back. The city will just do so down the road, through heightened payments that will be heaped upon other increasing obligations.

"There are X factors out there," says Dana Haynes, Hales' spokesman. "I can assure you that city attorneys and county attorneys all over the state are watching it closely."

Reforms to PERS, the state pension system that covers more than 200,000 public employees throughout Oregon, are coming any day. Senate Bill 822, which Kitzhaber signed Monday, reduces short-term costs by more than $800 million, a mixture of reduced cost-of-living increases for pensioners and postponed payments.

But unions say the bill's more than $400 million in cost-of-living reductions amount to a breach of PERS' contract with its members. They point to a 2005 decision by the Oregon Supreme Court—in the case of Strunk v. Public Employees Retirement Board—that rendered a past cost-of-living freeze invalid.

"It's not only similar, it's the same thing," says Greg Hartman, a lawyer for various labor unions with PERS members. "I don't think the Supreme Court is going to be very impressed with arguments that somehow try to skirt the Strunk case."

Jared Mason-Gere, a spokesman for Oregon House Speaker Tina Kotek, D-Portland, concedes the legal precedent is tough for would-be reformers.

"That's one of the reasons our leadership has proceeded as cautiously on this as they have," Mason-Gere says. "You have to find this very fine line."

All of which means Portland, while letting out a low whistle of relief in the short term, could easily find itself in another hole two years down the road.

With the new law signed, the PERS Board now will recalculate the rates that employers, like the City of Portland, need to pay out. It's an involved process, but City Budget Director Andrew Scott estimates Portland's general fund could see savings as high as $4.3 million next year, 20 percent of the hole Hales has had to fill. With reduced payments from other funds taken into account, Scott says the citywide savings from PERS reform could reach $12 million.

The city will spend that money, Scott says, knowing full well it may have to pay it back.

"Yes, that is a realistic fear," Scott says. "I don't think that fear, though, is any greater than the fear that we have a recession in the next few years. Or that stock markets fall short in terms of PERS."

All three scenarios, in fact, are distinct possibilities. Scott points out a fresh recession is always threatening to emerge, and PERS consultants are already predicting low investment returns in coming years.

Hartman expects the planned lawsuit, once filed, to be settled within 18 months, long after the PERS Board establishes pay rates for 2013 and 2014. If the reform package is ruled illegal, Portland and other cities will have to pay savings back beginning July 1, 2015—the same time rates are already expected to shoot up because of payment delays.

Which calls to mind another part of Hales' budget proposal—the near-doubling of the city's contingency fund to $3 million.

"It's not assumed you spend that money rain or shine," Hales said last week. "It's for rain."

That's a weather phenomenon Portland knows something about.