UPDATE 1-Pension reform, layoffs in proposed Pennsylvania budget

Tue Feb 5, 2013 8:45pm EST

By Mark Shade

HARRISBURG, Penn. Feb 5 (Reuters) - The commonwealth of Pennsylvania, a latecomer to major public pension reform, would enroll new hires in a defined contribution plan but limit increases in the state's own contributions, under a proposal unveiled on Tuesday by Governor Tom Corbett.

By mid-2012, most states had proposed new changes to their pension systems amid ballooning costs and stagnant revenues. But Pennsylvania had not made changes since 2010, when it increased the retirement age to 65 for most employees.

Corbett, a Republican, said in July that he intended to propose reforms, but he didn't reveal details until he presented his fiscal 2014 budget on Tuesday.

The state's two public pension funds, one for public school employees and another for state employees, have total unfunded liabilities of $41 billion and are, combined, funded at about 68 percent. An 80 percent funding level is considered healthy.

Without changes, pension costs are projected to eat up about 60 percent of all new revenues in the fiscal 2014 budget, or more than $500 million that could be spent on critical services, according to budget documents.

"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 in his budget address.

LAYOFFS, NO MEDICAID EXPANSION

Corbett also asked state lawmakers on Tuesday for layoffs, transportation investments and a $90 million increase in basic education funding in his proposed budget.

The Republican governor's $28.4 billion blueprint, if approved by lawmakers, is $679 million, or about 2.4 percent, higher than the current budget and includes no tax increases.

Corbett said he will not expand Pennsylvania's Medicaid system under federal healthcare reform because it lacks flexibility and would cost the state $1 billion through fiscal 2106 to implement.

He also proposed 400 layoffs, in part by consolidating state health centers and by closing New Castle Youth Development Center.

Pennsylvania's constitution requires a balanced budget to be adopted by June 30.

His budget also seeks to boost transportation funding. He proposed gradually removing the cap on a state tax on wholesale oil distributors, which could generate $5.3 billion over five years if approved.

The new revenue, the governor said, would help pay for road, bridge and other transportation infrastructure improvements.

And in keeping with announcements in the weeks leading up to his budget presentation, Corbett said he wants to privatize the management of the Pennsylvania Lottery, sell the state's liquor stores, and provide nearly $15 million to train about 300 new state police troopers.

STATE, LOCAL CONTRIBUTIONS CAPPED

Corbett's pension proposal would not affect benefits already accrued by current employees, nor will retirees lose any benefits.

The plan would, however, reduce future pension benefits for current employees by changing a factor in the equation used to determine benefits.

An employee's future benefits are usually calculated by multiplying years of service, annual salary and a fixed number, in this case 2.5 percent.

Corbett's proposal would reduce that number to 2 percent and require current employees to pay more if they wanted to make up the difference.

And new employees would be automatically enrolled in a 401(a) plan that would require them to contribute at least 6.25 percent of their salary.

Rick Bloomingdale, president of the Pennsylvania AFL-CIO, said Corbett is looking to cure the pension crisis on the backs of current employees.

"(They are) short-changing the commitment they've made to the workers that work for the state of Pennsylvania and the school district employees. They have an obligation. They made a promise to these people," Bloomingdale said.

The AFL-CIO is the largest U.S. federation of trade unions.

While it pushes some of the state's pension problem onto current and future employees, Corbett's plan also eases the burden, temporarily, for the state and local governments, some of which have faced serious fiscal challenges during the U.S. recovery.

The 2010 state law put a so-called "collar" on how much public employers would have to increase pension contributions each year, with annual increases that would not rise by more than 4.5 percent after fiscal 2013.

Corbett's new plan would push off that target rate increase to ease pressure on state and local budgets. For fiscal 2014, the increase would be limited to just 2.25 percent, rising 0.5 percentage point annually until reaching 4.5 percent or until the rate is equal to the employer's annual required contribution.

Asked whether capping contribution increases would perpetuate the state's unfunded liability, Corbett spokeswoman Christine Cronkright said people have to look at the whole package.

"We have looked at this very holistically in terms of what we need now, and what we need down the road to be able to help solve this problem in the long term," she said. "You can't just look at this portion of the plan ... without looking at the rest of it."

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