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Governor calls for Pa. pension overhaul

Peter Jackson, Associated Press

HARRISBURG, Pa. (AP) -- Gov. Tom Corbett laid out a strategy Tuesday for reining in pension costs for Pennsylvania state and school employees that would reduce future benefits for current workers and require new hires to participate in a defined-contribution plan.

In his annual budget speech, the Republican told lawmakers that resolving problems that have saddled the two major pension funds with a combined $41 billion unfunded liability would be "the single most important thing we do for decades to come."

"The entire system of state pensions has become a mountain of debt, and the avalanche could bury our economic growth, swallow up benefits for our elderly, education for our children, and transportation for our economy," Corbett said.

But speedy approval appeared unlikely, with legislators from both parties questioning the constitutionality of a central part of the governor's plan and unions vowing to fight in court if it is approved.

"He's asking the General Assembly to pass unconstitutional changes to public employee pensions as a fundamental part of his budget, which is just bad policy. You can't spend money you don't have and may never be able to get," said Wythe Keever of the state's largest teacher union, the Pennsylvania State Education Association.

Corbett proposed three changes to the Public School Employees' Retirement System and the State Employees' Retirement System, which together include more than 800,000 active and retired members. Benefits for people who are already retired would not be affected.

One proposal would immediately cut future benefits for current employees by reducing the "multiplier," a percentage applied to an employee's years of service and final average salary to calculate pensions, typically from 2.5 percent to 2 percent. For example, someone with 20 years of service and a multiplier of 2 percent is eligible for a pension equal to 40 percent of his or her final average salary.

Under Corbett's proposal, employees could retain the higher multiplier by paying higher contributions.

Unions contend that such changes amount to an unconstitutional limit on employees' right to earn future pension credits, based on prior court rulings.

"Definitely we're going to go to court on that," if the proposal is approved, said David Fillman, executive director of AFSCME Council 13, the largest state-employee union.

For new hires, Corbett wants mandatory enrollment in a 401(a) defined-contribution retirement savings plan. They would have to contribute at least 6.25 percent of their salary and employers would make a 4 percent contribution.

The state budget office could not estimate the projected savings from the proposed reduction in benefit and creation of the defined-contribution plan. Calculations were incomplete Tuesday, spokesman Jay Pagni said.

Corbett's third proposal would limit annual increases in the employers' — taxpayers' — share of funding the pension funds to 2.25 percent of payroll, instead of the 4.5 percent that is scheduled to take effect next year.

For SERS members, for example, that means this year's rate of 11.5 percent would increase to 13.75 percent instead of 16 percent. In subsequent years, the annual increase would be limited to 0.5 percent until it reaches 4.5 percent or the annual required contribution rate, according to the budget office.

The $175 million that the proposal is expected to save next year has already been subtracted from agencies' proposed budgets for next year, officials said. Over five years, that proposal is expected to save the state nearly $2 billion and save school districts and local education agencies more than $1 billion.

Critics said it amounted to deferring costs that ultimately must be paid.

State Treasurer Rob McCord, a Democrat, criticized Corbett's reliance on savings from pension changes that haven't happened yet as a "fiscal steroid."

McCord, who is considered a potential challenger to Corbett's 2014 re-election bid, said he would negotiate a deal with labor unions and lawmakers that is financially and legally sound. He said he would consider issuing a pension bond that would deal with the unfunded liability at a low interest rate.

Senate Republican leaders did not immediately embrace Corbett's proposal.

"We're just at the beginning of the process. But it's too early to say which proposal we will be trying to move forward," said Senate Majority Leader Dominic Pileggi, R-Delaware. "I think there's consensus that we need to have a very serious conversation about whether or not our current pension system is sustainable without change. And there's substantial question about whether or not it is."