HARRISBURG -- Gov. Tom Corbett's proposal of sweeping changes to the statewide public employee retirement systems has been greeted by leading Republican legislators as a pension-reform starting point -- but one that requires legal and actuarial backup before they would proceed.
With both state payments and the unfunded liability of the systems on the rise, Republican leaders on pensions in the House and Senate are intent on change. But as they consider the governor's plan, they are seeking evidence that the state could win a legal battle promised by labor unions -- and that, even with success in court, the numbers add up to a long-term solution.
In his budget address last week, Mr. Corbett delivered the broad outlines of a plan that would transform the future of the state worker and school employee pension systems.
The administration contends that changes to the benefits of current workers, a transition to a defined-contribution plan for future hires and limits on state obligations for several years are needed to head off steep increases in state contributions and pay down an unfunded liability of more than $40 billion. Under Mr. Corbett's proposal, the state would stop the flow of new entries into the State Employees' Retirement System and Public School Employees' Retirement System during 2015 by enrolling new hires into 401(k)-style defined-contribution plans. At the same time, the systems would alter how it calculates the future benefits of current employees. The proposal would not attempt to change benefits already accrued, whether by current workers or retirees.
The administration says that the long-term savings of the two steps justify deferring a portion of upcoming payments by suppressing the annual increase in employer contributions. Lowering the cap on annual employer increases from 4.5 percent to 2.25 percent next year, and then allowing this so-called collar to gradually rise in the coming years, would save the state $175 million and local education agencies $138 million next year, according to the administration.
Word of Mr. Corbett's intention to propose amending the benefits of current employees was greeted with promises of lawsuits by labor leaders, who say a pair of 1984 decisions by the Pennsylvania Supreme Court safeguard the contract terms of any worker already hired.
The cases followed a 1983 law raising employee contribution rates. Employee unions challenged the law, and the courts agreed, finding that the protection of contracts in the Pennsylvania Constitution does not allow the state to unilaterally devalue the benefits in an employee contract.
The rulings meant workers were owed tens of millions of dollars in refunds, according to news accounts at the time.
"What these cases say is the governor can't do what he's proposing," said Lynne Wilson, general counsel to the Pennsylvania State Education Association, the state's largest teachers union. "It impairs the contracts of existing participants in the system."
Labor leaders say they are certain they would prevail in court. Republican legislators, too, have said that case law appears to bar the state from handing down unwanted changes in benefits for current workers, though those who spoke after the governor's proposal left room to be persuaded.
"The reforms that he's proposed, the current employees' part of it, clearly will be constitutionally questionable and be challenged," said Sen. Jake Corman, R-Centre and chairman of the Appropriations Committee, after the budget address. "And so therefore, if that's the case, do we go ahead and lower the collar, knowing that it's now out of our hands and into the courts' hands?"
He said legislators should listen to Mr. Corbett's explanation of his plan.
"At this point we let him come out and make his case, and how this is constitutional and how this is a smart decision," he said. "I don't think we have an opinion on that as of yet."
So far, Mr. Corbett has declined to publicly articulate that case, though he says his attorneys are convinced the changes are permitted by law.
"I'm not going to get into my lawyers' arguments," he told reporters Wednesday, one day after making his proposal. "The lawyers sat down. We believe it will be a battle. We believe it's constitutional."
The governor and top administration officials have argued that without pension reform, the impending spike in employer contributions will claim money needed for core state functions, such as public education.
Democrats contend the state already righted its pension systems through changes, made in 2010, that they say will restore the systems to healthy funding ratios before the next generation of workers. In the meantime, they say the state is obligated to acquire the funds -- whether through business taxes or other sources -- to make its payments.
"Clearly what we are not open to is a reduction in the benefits that our current employees receive," said Senate Minority Leader Jay Costa, D-Forest Hills. "We believe that is not lawful, and it thrusts the onus of the state's failure to properly fund our pension system onto the backs of our current employees."
In the House, Rep. Glen Grell, R-Cumberland, said a pensions task force that he heads is awaiting the actuarial data behind the governor's plan. Mr. Grell said he needs to see that the combination of proposals would fully address the unfunded liability of the systems over the next 20 to 30 years.
"If we're going to do pension reform, we don't want to do something that gets us through two, five, six years," he said. "We want to do something that over time addresses the entire unfunded liability."
As of June 30, 2012, actuaries reported that the Public School Employee's Retirement System had an unfunded liability of $29.5 billion and a funded ratio of 66.4 percent. Preliminary estimates for 2012 give the State Employees' Retirement System an unfunded liability of $17.9 billion and a funded ratio of 58.6 percent.
Both sides attribute the pension debt to a combination of investment losses, suppressed employer contributions and enhancement of member benefits.
In the Senate, Republican leaders have backed a proposal that, like that of the governor, would enroll new workers in a defined contribution system. Mr. Grell said it's too soon to say what route is best for future employees, but that he doubts the state can make up its unfunded liability just by instituting a new plan for them.
"If current employees' benefits, prospectively, cannot be touched, then the commonwealth and the school districts will have to offer a very stark pension plan to new employees, if that's the only place we can look to come up with the savings" he said. "And we want to avoid that."
If Pennsylvania does attempt to change future benefits for current workers, Mr. Grell said, the state could argue in court that the enormity of its pension obligations would prevent it from performing core functions of government.
Karen Langley: firstname.lastname@example.org or 717-787-2141. Laura Olson contributed.