Pennsylvania Gov. Tom Corbett's budget office indicated that the governor may attempt to reduce the pensions of current public employees, a politically volatile and legally questionable solution to what has become a $41 billion unfunded liability.
In a new report on the state's two large public-sector pensions, the budget office warned of the potential for higher taxes, program cuts, lower business growth and steeper borrowing costs because of the state's financial obligations toward the State Employees' Retirement System and the Public School Employees' Retirement System.
The financial pressures from the pension systems have loomed over state finances for more than a decade, and Corbett, a Republican, repeatedly has spoken of a desire to make changes to them.
The report says higher taxes "should be off the table," but reductions in prospective benefits for current employees should be considered.
Case law interpreting the state constitution has prevented curtailing pension benefits for current or retired state employees and teachers, but the new report states, without elaboration, that the state can change components of current employees' prospective benefits "to conform with prior court determinations regarding deferred compensation."
Budget office spokesman Jay Pagni said he could not provide examples of those "prior court determinations," but said the administration was researching changes enacted in other states.
"We believe there is the ability that we can look at certain aspects of a current employee's prospective deferred compensation, their retirement," he said.
The head of Council 13 of the American Federation of State, County and Municipal Employees, which represents 45,000 state workers, said any move to reduce a current employee's right to earn future pension credits would be challenged in court.
"I'm curious myself as far as what they're looking to do, and I'm hoping before they start off on that path that there will be a meeting of the principals," said Council 13's David Fillman.
SERS press secretary Pam Hile said she was unsure what potential changes the administration has in mind. She said current retirees and others within the pension system should know that no changes have occurred so far.
"It's hard to say what they are going to do," Hile said. "I don't know."
A spokeswoman for PSERS, the teachers' union, said they had no information about what was meant by the phrase "prior court determinations regarding deferred compensation."
Growing pension costs could force spending cuts throughout the state budget, according to the report, a scenario made even worse by projections of higher spending on debt, medical assistance and prisons.
"Like an oncoming tidal wave, pension costs threaten to overwhelm the general fund budget and the vital programs and services that it funds," the report says. The same dynamic is expected for public schools, said the report.
"Increasing pension contributions obligations will claim a greater and greater share of school district budgets, crowding out funding for education, whether it is direct classroom instruction, sports, facilities and maintenance, and ultimately put pressure on districts to increase property taxes," the budget office said.
The report recounts how the problem began with the 2001 law that granted retroactive pension rate increases to state workers and teachers, including even higher increases for the lawmakers.
That was followed by a cost-of-living increase for retirees, and then by restructuring the state's contributions that delayed the true cost for another decade.
The pension systems' investments were badly hammered when the technology and housing bubbles burst, and they have struggled to recover. A 2010 law made some structural changes, including less generous benefits for new hires.
The state paid nearly $1.1 billion into SERS and PSERS during the fiscal year that ended in June. That figure is projected to pass $2.2 billion next year and reach $5.1 billion by 2019.
SERS provides $2.7 billion annually in benefits; PSERS pays out $5.3 billion. About 815,000 people are members, a group that includes active employees, retirees, beneficiaries and others who are vested but inactive.
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