Last month, Gov. John Kitzhaber tried to force two ancient enemies—public-employee unions and the Oregon Republican Party—to strike a "grand bargain" on pension reform and taxes.

He failed, despite holding more power than ever.

"Nobody in this state has ever had more political capital than he does right now," says Senate Minority Leader Ted Ferrioli (R-John Day).  

But Ferrioli says Kitzhaber is in danger of squandering that capital.

In early July, Kitzhaber began setting the framework for a special legislative session to make further cuts to the Public Employee Retirement System. But he's made little progress and gotten sidetracked with an effort to revive the multibillion-dollar Columbia River Crossing project.

His failure to convince lawmakers to make further PERS cuts would not only threaten Kitzhaber's ability to pay for his health-care and education reforms, it would increase the chances of brutal 2014 ballot-measure wars. 

As Kitzhaber dawdles, both Republicans and Democrats have calcified back into rigid positions.

Since the regular session ended July 8, Ferrioli and the Senate GOP's point man on PERS and tax reform, Sen. Larry George (R-Sherwood), say they've repeatedly asked to meet with Kitzhaber to no avail.

"He is the one who made PERS a big issue," George says. "We said we'd go there with him and I thought it would be relatively easy to make a deal. But that's all changed."

Public-employee unions, which seemed resigned to deeper PERS cuts in June, have stiffened their opposition.

"We'll lobby hard against any more cuts," says Joe Baessler, statewide political director for the American Federation of State County and Municipal Employees. "It's really hard to keep coming back to public employees as the solution for the state's financial problems."

In a recent statewide tour, Kitzhaber emphasized the urgency of PERS cuts and new revenue for K-12 schools, telling audiences it would save the jobs of 2,000 teachers.

Kitzhaber's spokesman, Tim Raphael, says the governor is fully engaged with all stakeholders and in making his case to the public. "He is absolutely committed to getting a PERS and revenue package done," Raphael says.

George negotiated with Kitzhaber in the final days of the session to broker $5 billion in PERS cuts and a package of small-business tax cuts and new taxes that would have netted $200 million in new revenue.

Now George says he's mystified by Kitzhaber's approach, which includes new ideas, such as potential capital-gains and property-tax cuts to offset revenue increases, instead of the small-business tax relief Republicans favor. Kitzhaber is also pursuing a so-far unsuccessful strategy of trying to peel off two GOP senators to vote with Democrats on taxes and PERS (Democrats control the Senate 16-14 but need 18 votes to raise taxes). 

Time is running short for Kitzhaber, because the consensus in Salem is that if major PERS changes are to happen, they must go through before next year's elections.

Making a significant reduction in future pension obligations could also help Democrats and their public-employee union supporters on another front: 2014 ballot measures.

Today, the union-backed group Our Oregon has tax increases pointed at next year's ballot. Conservatives are pushing measures that would slash public-employee unions' political activity.

"We'd just like to see Oregon be a better place to do business," says Stimson Lumber CEO Andrew Miller. "It seems the governor's lost control, and that puts at risk everything that's important to him."

A PERS deal could deflate anti-union sentiments and  avert the class warfare that accompanied the passage of 2010 tax increases.

"The governor sees enormous downside to the state in divisive ballot measures," Raphael says.

But even as the PERS dance continues, Kitzhaber is  also expending political capital to revive the CRC, which appeared to die in the Washington Senate earlier this summer.

Many lawmakers, including several who voted unenthusiastically for it during the session, see the CRC as a costly distraction. Kitzhaber wants funding in place for an Oregon-only CRC project by Sept. 30.

Senate President Peter Courtney (D-Salem) says he's cautioned Kitzhaber and House Speaker Tina Kotek (D-Portland), also a strong CRC backer, not to complicate a special session by trying to address the CRC and PERS.

A veteran of 17 special sessions, including one that lasted 34 days, Courtney says he hopes Kitzhaber can pull together a tightly focused, brief session. 

"I'm terrified of special sessions," Courtney says. "If you get in there and don't know exactly what you’re doing, it’s horrible.”