HARRISBURG -- It's an iceberg on the horizon. A vicious Pac-Man chomping larger and larger chunks out of the state's upcoming spending plans. A massive gorilla lurking the hallways of the Pennsylvania Capitol.
The commonwealth's pension liability for public employees is about to make state budgeting even more of a nightmare, and Republican Gov. Tom Corbett has put pension reform next on his to-do list.
"It cannot wait," Mr. Corbett told a recent crowd of local officials in Hershey. "If we [wait], this budget battle that we go through is going to be totally driven not by increasing jobs, not by reducing taxes, not by giving money to education or to welfare recipients who may need it. It's going to be driven by how much we have to contribute to pensions."
That's a precarious position for a politician determined not to break his pledge against hiking taxes. At the end of the last fiscal year, Pennsylvania's pension funds for state employees and for school employees were underfunded by at least $37 billion -- a massive financial gap to bridge without new revenues.
That figure represents the difference between the value of pension benefits earned by state employees and teachers, and the amount of assets that the state has to cover those costs.
Even with the revised payment plan approved in 2010, the state's obligation will increase dramatically in the coming years. The current budget accounts for $1.1 billion in pension payments, a cost that spikes to more than $4 billion annually by 2016.
"Does anybody here see the economy growing fast enough just to cover the pension increase?" Mr. Corbett asked during his Hershey appearance earlier this month. "So we have a problem. We have an iceberg right in front of us."
So how did the problem rise to a level where the commonwealth owes its pension funds more than what it spends on the annual operating budget?
In short, lawmakers rewarded themselves and other public employees in 2001 following flush years, investment returns were overestimated despite too-small state payments, and the 2008 recession annihilated extra dollars that were supposed to pay for expanded benefits.
"There's nothing inherently wrong with defined-benefit plans, and defined-contribution plans are not the universal answer," said Richard Dreyfuss, a senior fellow with the Harrisburg-based Commonwealth Foundation think tank. "But when you put politics and defined-benefit pension plans together, you've got a big problem. There's too much of a temptation to overpromise and underfund."
Mr. Dreyfuss points to the 2001 vote to increase lawmaker pensions by 50 percent and those of state employees by 25 percent as the beginning of the snowball. That boost was extended to retirees in 2002, followed by actions the next year to keep the state's share of those costs low.
That's not to say that the blame falls solely on state lawmakers and those managing the pension funds. Mr. Dreyfuss projects that nearly half of the unfunded liability can be attributed to the market's turbulence and resulting investment losses.
The General Assembly did attempt a partial fix with a 2010 bill that changed requirements for new employees and spread out the increasing costs across a longer time period.
"Act 120 bought us some time, and that time is coming to an end," said state Rep. Scott Boyd, a Republican from Lancaster County.
He's introduced one of several reform proposals in the state House. Under his proposal, the state would create a "cash balance" plan, which would provide retiring employees with an annuity equal their contributions and the state's contributions, plus 4 percent interest.
The pension system would remain for current employees, who would be offered incentives to switch.
Other proposals would enroll all new employees in a 401(k)-style plan, give current employees the option of enrolling in that type of plan, or switch the pensions for legislators to a 401(k) plan.
Just switching to those types of plans, which remove the risk of committing to providing a certain level of benefits, is helpful moving forward but doesn't resolve the system's current shortfall, said David Fillman, executive director of AFSCME Council 13, which represents the bulk of the state's unionized workforce.
He said employees have consistently paid their share, and regardless of what solution it pursues, the state must continue to uphold its obligation to current employees.
"We knew this 10 years ago, we knew this was coming," Mr. Fillman said. "When your bills come due and you don't want to talk about raising revenue, you've got a real problem on your hands."
Mr. Fillman did quip that he's heard one creative proposal: a plan from state Rep. Paul Clymer, a Bucks County Republican, would charge casino-goers a $2 entrance fee and direct the proceeds toward pension costs.
The one thing officials, labor leaders and analysts do seem to agree on is that the day of reckoning is fast approaching. Top Republicans in the Legislature also reflect the governor's view that the impact of pension costs must be addressed, potentially as soon as this fall.
"The unfunded liability is a 2,400-pound gorilla in the room that just isn't going to go away," Mr. Boyd said. "The state can't file for bankruptcy. We have a responsibility that we have to deal with."
Harrisburg Bureau Chief Laura Olson: email@example.com or 1-717-787-4254. First Published May 21, 2012 12:00 AM