HARRISBURG - Gov. Tom Corbett will meet with the General Assembly over the next several weeks to hammer out potential solutions to the looming pension crisis that Pennsylvania, like other states, faces.
But "there is no silver bullet to address it," Corbett said.
The governor and his staff - in a meeting with representatives of Ogden Newspapers, including the Mirror, at the Governor's Mansion on Monday - outlined what they believe to be the causes of the pension crisis, potential consequences and some of the options they will explore to meet the dilemma head-on.
The state currently faces a $41 billion unfunded pension liability.
If nothing is done to fix the pension problem, each Pennsylvania household's share of this unfunded liability will be $8,000
Even though the market was one of the driving factors in derailing pension funding, the market cannot be the sole mode of recovery, even if it was in a healthy upswing for the next 20 years, Deputy Budget Secretary Pete Tartline said.
Fact Box
Pension systems
There are two separate pension systems administered by the state.
The State Employees' Retirement System (SERS) manages the retirement system for most public employees in the executive, legislative and judicial branches. The Public School Employees' Retirement System (PSERS) manages the retirement system for all public school employees, according to a state pension report.
There are more than 815,000 members in both systems and pay out about $8 billion annually in retirement benefits to over 300,000 retirees and beneficiaries.
In the SERS system, the state and independent entities pay all of the employer contributions for public employees; for PSERS, the state and local school districts together share the employer contribution costs. For this, the state generally pays 50 percent of the employer contribution cost, based on the wealth in the school districts, according to the report.
Employees also pay into their system. Most employees contribute 6.25 percent in the SERS; with PSERS, most contribute 7.5 percent. Combined last year, employees paid nearly $1.4 billion.
However, in both of these plans, the state, and ultimately the taxpayer, shoulders the entire investment risk of the plan. When investment returns fall short of expected results, the state's employer contribution rate increases to cover the entire shortfall, according to the report.
Corbett said he has remained true to the issues he ran on and will continue to do so.
"I ran on a simple thing: more jobs, less taxes," Corbett said.
He cited the 175,000 new jobs in the private sector created during his administration and said he does not want to fix the pension crisis by raising taxes.
Along with examining how the other 49 states are reforming their pension systems, Pennsylvania will look at creating possible structural changes to the systems: benefit changes to employees; accrual, retirement age and other factors; and risk-sharing opportunities, Tartline said.
As part of their pension reform efforts, several states have increased member contributions and retirement age and changed their basic pension formula, including years of service and salary calculations can lend stability, according to the 2012 Keystone Pension Report produced by Budget Secretary Charles Zogby.
Pension reform and relief is key to addressing the public funding crisis, which is driven by rapidly rising pension costs, according to the report.
Ultimately, it is the taxpayer who shoulders the cost of the system through their tax dollars.
Core programs are also in jeopardy due to the pension crisis.
"The Commonwealth's growing pension obligations are crowding out funding for their children's basic and higher education, public safety, health, human services, the maintenance and repair of roads and bridges, environmental protection and other core governmental programs," according to the report.
So without doing harm to retirees, respecting current employees and without raising taxes, the Corbett administration seeks to work with the Legislature to stem the tide of oncoming fiscal and budgetary consequences.
What it comes down to is what are they going to fund, Budget office spokesman Jay Pagni said.
"The administration and Legislature must come together and address this," he said, adding that changes must be addressed legislatively because the pension system is a statute.
The projected revenue increase for the fiscal year 2013-14 budget is $818,700 in the General Fund, but the expenses column outweighs the revenue at $1.315 billion - and 62 percent of the revenue goes toward pension growth. The items that make up the expenses include medical assistance, debt service, corrections, and largest of all, pension systems.
The pension systems are essentially the only item they can really influence; the rest are rather static, Tartline explained. Pensions are also the main factors that cause the budget to increase, he said.
If nothing is done to reform the pension systems, nearly two-thirds of the General Fund revenue growth will "go out the door to pensions" in fiscal year 2015-16, Pagni said.
Corbett described it as a "tapeworm" or "Pac-Man" eating away at the state's budget, an acknowledgment that growing pension costs are severely undercutting the state's ability to fund essential programs and services.
Despite the essential role pension funding plays in the budget, Corbett said he does not rank his priorities.
As the various programs compete for limited tax dollars, the state must first pay capital debt service obligations; next, pension obligations; and third, any federally mandated match for entitlement programs, according to the report.
Only after all these obligations are met can funding go to other programs and services.
Once the above programs are paid, there aren't enough dollars left to fully fund the remaining General Fund programs, which means having to cut as much as $500 million to balance the budget for 2013-14.
While there is no agreement on what the structural changes will be, it is conceivable to change the benefits structure for new and current employees, effecting short- and long-term budgetary relief, Corbett said.
Act 120 of 2010 was the first successful effort at curbing rising pension costs in Pennsylvania.
It provided short-term funding relief; reduced pension benefits for new employees; increased retirement age to 65 for new employees; and implemented an innovative "shared risk" provision for new employees that increased employee contributions if the actual investment returns fall below assumed returns, according to the pension report.
The State Employees Retirement System and the Public School Employees Retirement System combined are just under 68 percent funded. The $41 billion total unfunded liability is "essentially a state debt owed to state workers and public school employees," according to the report.
"The goal is to maintain contributions so it is 80 percent or above and so it does not artificially inflate what the investment rate may be," Tartline explained.
One of the problems driving the pension crisis train is there wasn't enough shared risk between the state and employees, Tartline said. They need to create a system in which there is shared risk so the state is "off the hook," he said.
Rhode Island recently took a more aggressive approach to fixing their pension problem and created a sort of hybrid, looking at all employees, effectively taking on "the whole nut," Tartline said.
Corbett will analyze Rhode Island, along with other states, which have embarked on pension reform. It may take more than one solution; 36 states are using more than one strategy to change their systems.
Pension reform will not be easy, but it is achievable, Corbett said.
