HARRISBURG - Escalating public pension costs loom large over the anticipated battle for setting spending priorities in next year's state budget.
State tax revenues are bouncing back from the recession-caused shortfalls of 2009 through 2011 and one issue facing Gov. Tom Corbett and lawmakers is whether the lion's share of an emerging surplus will go to pay pension obligations for hundreds of thousands of state government and public school employees and retirees or restore state funding for education and social service programs hit with cuts in recent years.
Corbett said he wants to reduce pension costs to free up money and put it back into shrunken programs.
"If we don't do it, it's going to be very difficult to fund the things we'd like to," Corbett said during a recent meeting with the Scranton Times-Tribune editorial board.
Corbett plans to unveil a proposal to curb pension costs when he delivers his third budget address Feb. 5.
"It's a false choice," said House Democratic Appropriations Chairman Joseph Markosek, D-25, Monroeville, referring to the governor linking pension cuts with restoring funding for programs.
Markosek said a state law enacted in 2010 to spread out the payments of a pension cost spike and cut benefits for new state government and school district employees should be given time to work.
"It was widely viewed as a responsible solution to this problem," he said.
The numbers driving this debate involve the contributions that employers - in this case the state government and school districts - provide to augment what employees contribute to their pensions.
Pension contributions will continue to increase, thus crowding out other spending needs, said state Budget Secretary Charles Zogby.
The state employer contribution to the State Employees' Retirement System and Public School Employees' Retirement System will increase by $511 million in fiscal 2013-14, according to the budget office. Costs for health care for medical assistance recipients, debt service and corrections are also projected to increase.
Several factors are seen as contributing to what Corbett calls a "pension crisis," including a wave of retirements of baby boomers, financially unsupported benefit increases enacted under state laws a decade ago, poor returns on investment earnings which make up 70 percent of pension funding and employer contribution rates that were set lower under state law than they should have been, according to the budget office.
Corbett's pension proposal is shaped in part by statements from state officials and pension fund managers that Pennsylvania can't legally reduce pension benefits for current and retired employees because the state Constitution and case law define them as a contract between the state and its employed that can't be impaired.
Zogby suggested the contract definition may not apply to pension formulas and benefits not yet earned by an employee. Potential proposed changes include not counting overtime pay as pension earnings and adjusting how the final years of salaries are calculated, he said.
Republican senators have proposed putting new hires for state government and school districts under a defined contribution pension plan similar to 401(k) plans in the private sector. This proposal, if enacted, would end the current traditional defined benefit plan for those hired after a future date.
"I am willing to consider a future transition to a defined contribution plan over the current defined benefit plan if and only if I am assured that we make such transition with no adverse impact on current state employees or state pension beneficiaries," said Sen. John Blake, D-22, Archbald, ranking Democrat on the Senate Finance Committee, which will consider pension issues. "I will not support a so-called 'pension reform' that breaks promises make to our educators or to our state workforce ..."
Corbett was aware of the pension cost problems when he took office two years ago, Markosek said, but he has given state tax credits anyway to businesses and continued to phase out the state Capital Stock and Franchise Tax, which results in less revenue going to state coffers.
"He continued on that path when we have asked everyone else to take cuts - to take freezes," Markosek said.
Pennsylvania experienced a similar pension crisis 30 years ago that was solved through increased employer contributions and better investment returns as the economy improved, Markosek said.
The 2010 law provides a road map to achieve the same result by "remortgaging" the pension debt and producing savings that cut new employee benefits by 60 percent, he said.