Intelligencer Journal/Lancaster New Era

Corbett targets budget tapeworm Gov. Tom Corbett's third budget address slated for today will not shy away from big issues.

Editorials

The governor will attempt to begin closing the state's $3.5 billion transportation funding gap, try again to privatize the $2 billion-per-year wine and spirits industry and tackle what he has called the "tapeworm that's eating the state budget."

The tapeworm is a $41 billion unfunded liability in the pension funds of Pennsylvania public school teachers and state employees. That tapeworm has been fed by three key items.

In order, from least to most significant, those items are:

n Underfunding the "employer contribution" (state taxpayers' share of payments to the retirement funds of the state's teachers and state employees) during the first decade of this century.

n The stock market's failure to maintain the roughly 8 percent growth lawmakers expected when they increased pensions in 2001, and promised that "normal" stock market returns would make the boost cost-free to taxpayers.

n The 2001 decision by the Legislature to boost lawmakers' pensions by 50 percent and teachers and state employees' pensions by 25 percent.

The pension benefit boosts of 2001 were both risky and unnecessary. The pensions of state employees and teachers, and especially of state lawmakers, were already more than generous before the legal holdup that occurred around 7 p.m. on an April evening months before 9/11. Looking back with a calculator in hand, the Legislature's midnight pay raise of July 2005 (which occurred around 2 a.m.) was peanuts in comparison.

The pension tapeworm's appetite is estimated to grow from $1.5 billion in the fiscal year that ends in June to nearly $3 billion in 2014-15, and more than $5 billion by 2019-20. In the current fiscal year, payments to the state's two largest pension funds will account for more than 5 percent of the state budget, growing two and three times in size in coming years. School districts are responsible for half of all payments to teachers' retirement, so homeowners' pain will not end with the state budget pinch.

The Corbett administration has been saying that something has to give, and hinting that education funds might suffer if no solution to the pension crisis can be found. Given that K-12 education funding is more than a third of the state budget, it almost goes without saying that any significant cost increase is likely to affect state funding for public schools.

The governor and his aides in recent days have been talking about a plan that, if legal and achievable, would go beyond reducing the burden on taxpayers by shifting future hires to 401(k)-style plans. It would reduce the pensions of current employees by reducing the multiplier applied to future earnings and reducing or eliminating credit for overtime pay. Those two reforms together would go a long way to reducing the pension gap, given that a state pension is calculated by averaging the employee's or teacher's highest earning years and multiplying that average by the years of service and the multiplier.

Unions say courts would strike down any plan that reduces the multiplier as a breach of contract, an argument Corbett rejects. Given the mess the state is in, and the fairness of reducing overly generous pension benefits, Corbett's gamble is worth taking.

The pension tapeworm's appetite is estimated to grow to more than $5 billion by 2019-20.