Corbett turns focus to state pension predicament
HARRISBURG — Gov. Tom Corbett has added a new item to his agenda: the increasing costs of pensions covering more than 800,000 retired and current state workers and public school employees.
Aides are analyzing options to deal with the spiraling pension costs as the Republican governor surveys what could be an entire first term — and perhaps second term, too — of difficult budget-making.
"It's a big issue," Corbett said. "I've been going to school. There are legal issues that we are taking a look, at and nothing has (been) presented to me just yet, but there are approaches that may be available to be taken."
Any action won't happen until at least next year, Corbett said. But even then, legal analysts, union leaders and retirement system officials said they know of little that can be done to moderate the cost spike.
For one thing, reducing the benefits of retired or already hired employees — even requiring that they switch into a 401(k)-style plan — runs into a principle of state constitutional law. Plus, a November 2010 law that reduced benefits for newly hired state and school employees also spread the unfunded accrued liability further into the future.
That leaves little else that can be deferred.
Benefits for future employees could be reduced again, but that would have little effect on immediate costs.
Switching future employees into 401(k)-style plans — which Corbett supports — might save money further down the road. But there's no guarantee of that, said Keith Brainard, the research director for the National Association of State Retirement Administrators in Essex, Conn.
Finding a dedicated revenue stream or selling assets such as the state liquor store system could help, but it's inevitable that the state's costs must rise, said Jeffrey Clay, the executive director of the Public School Employees' Retirement System.
"There's no silver bullet, there's no magic potion, there's no magic wand that's going to solve this problem," Clay said.
Cost-of-living adjustments, a generous pension enhancement in 2001, investment losses during the recession and the dot-com bubble, two deferments and years of underfunding by the state have led to this point. For years, retirement system officials and pension specialists within the executive and legislative branches have warned that the state faced tough choices in 2012.
Meanwhile, many employees have paid more than 6 percent of their salaries into the system, and labor unions are wary of employees being scapegoated.
As it stands, the $1.1 billion that the state is paying for pension obligations this year — about 4 percent of the $27.2 billion budget — is scheduled to rise to $1.6 billion in the fiscal year beginning July 1. When Corbett campaigns for a second term as governor in 2014, he could be defending a budget that pays $3.1 billion into retirement systems.
The landscape is grimmer for the candidate who wins the 2014 gubernatorial election: Contributions are scheduled to rise to $4.3 billion just two years later.
"I equate that to a Pac-Man or a tapeworm eating up the budget," Corbett said. "I do not see the economy growing at that kind of rate — and even if it did, it would just keep us even. If we do not address this pension issue now, we will be worrying about how we pay for the pensions and won't be able to pay for other needed services."