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Governor's budget takes three-prong approach to pension fund problem

Published On: Feb 06 2013 12:22:34 PM EST   Updated On: Feb 06 2013 05:44:01 PM EST

Governor Tom Corbett's latest budget proposal takes a three-prong approach to reining in Pennsylvania's pension contributions -- a situation which he says has reached the crisis stage.

But even if his plan achieves its ultimate aims, the state is in for some rough sledding financially over the next two decades, according to information supplied by administration officials on Tuesday, when Corbett unveiled his budget.

Still, administration officials say the changes could result in almost $2 billion in savings for the state over the next five years, and $1 billion for school districts during the same period.


At the moment, administration officials say, state pension plans are $41 billion short of being funded, and that number will grow to $65 billion by 2018.

If nothing is done, they say, it will take at least two decades for the unfunded liability to drop below the current $41 billion shortfall.

That would mean large tax increases every year to meet pension obligations, or deep cuts in state programs and services, or both, they say.

According to administration officials, Corbett's pension reform plan would slow the steep rise in unfunded liability expected over the next five years; bring down the number to current levels by 2030, and eliminate it by 2040.

The first part of Corbett's reform plan would require all new state employees to be moved to a 401(a) defined contribution plan, starting in 2015.

Budget secretary Charles Zogby explained that a 401(a) "is a 401(k) for government employees." Corbett said in his budget address that the 401(a) "will be consistent with the retirement packages currently enjoyed almost universally by private sector employees."

Enrollment in the plan would be automatic and contributions would be mandatory, and employees would be vested in four years.

This change will shift risk away from the state and taxpayers and prevent future unfunded liabilities, administration officials said.

The second part of the reform plan would change the way future benefits are calculated for current employees.

The changes include setting an employee's final salary by averaging the amount he or she was paid the previous five years; tying the top amount that can be used to determine a pension to the top of the Social Security wage base, which is $113,700 for 2013, and capping the amount of an employee's pension to 110 percent of his or her average salary over the last four years of work.

Also, if an employee decides to withdraw all of his or her contributions to the account in a lump sum, the pension payment will be based on the amount remaining in the account.

The final part of Corbett's plan calls for cutting the state's mandated contribution to employees' pension accounts in half -- from 4.5 to 2.25 percent -- in the 2013-14 fiscal year.

The amount would increase by half a percentage point each year until it reaches 4.5 percent.

Corbett pledged in his address that he "will not allow any cuts to any of our retirees," or permit what current employees have earned "to be diminished in any way."

But the governor knows his proposals face an uphill climb -- he recently said it would take "an unprecedented collaboration" among the administration, the Legislature, the unions representing state and school employees and the workers themselves to get the reforms done.

From the governor's vantage point, time is of the essence. "The longer we wait the more disruptive the solution will become," Corbett said as he explained his budget to state lawmakers. "So please, let us act now."