Corbett wants to confront pension costs 'tapeworm'

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Posted: Saturday, May 5, 2012 12:25 pm

Associated Press | 2 comments

HARRISBURG, Pa. (AP) — . 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 Wednesday. "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, labor union leaders and retirement system officials say 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 called the "impairment of contracts" doctrine.

Plus, a November 2010 law that reduced benefits for newly hired state and school employees also deferred billions of dollars — blunting what would have been an even steeper spike — by spreading the unfunded accrued liability farther 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 farther 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.

In the short-term, officials and labor union leaders said, it could have the same effect as would shutting down the existing defined benefit pension plan altogether, aggravating the spike in costs because pension payments must accelerate to make up for the salary contributions that won't be coming from the new employees.

Things like finding a dedicated revenue stream or selling assets like the state liquor store system also 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.

The pension spike didn't happen overnight.

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 or 7 percent of their salaries into the system and labor unions are wary of their employees being scapegoated.

For Corbett, who campaigned in 2010 on a pledge not to raise taxes, the problem is especially daunting. He's under bipartisan pressure to come up with more money for Pennsylvania's transportation systems, and he's taking heat for a couple of billion dollars in cuts in the current budget as well as proposed cuts to funding for public schools, universities and services for the poor, disabled and others who depend on social services.

As it stands now, 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."

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