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Corbett: Pennsylvania Must Overhaul Pension System


Pennsylvania Gov. Tom Corbett on Tuesday called for a pension overhaul that he said would save $41 billion in unfunded liabilities.

Under the plan — which he introduced to the state legislature in Harrisburg along with his proposed $28.4 billion budget for the 2013-14 fiscal year — Pennsylvania would create a 401(k)-style retirement benefit for future employees, and adjust the calculations for future benefits for current employees. Corbett added that he would not allow any benefit cuts to existing retirees.

The latter provision might make the proposal more viable, according to Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

“It’s not a takeaway from existing workers, so it’s pretty palatable and saleable. I think it’s a positive proposal, but it won’t have any significant effect on funding levels for many years,” Schankel said.

Future pension benefits for current employees would be reduced, making contribution withdrawals actuarially neutral and reducing the multiplier by 0.5% for all employees now above the 2% multiplier level.

Current employees could contribute a higher amount to keep the 2.5 multiplier. Pension collars would drop to 2.25% in 2013-14, increasing by 0.5% annually until the collars reach 4.5%, or the collared rate equals the annual required contribution rate.

Corbett’s budget office has calculated that without changes, pension costs would consume about 60% of all new revenues in the upcoming fiscal year. State budget secretary Charles Zogby estimates the changes would save $175 million in fiscal 2013-14.

Moody’s Investors Service cited pension burdens among other factors last July when it downgraded Pennsylvania’s general obligation bonds to Aa2 from Aa1. Fitch Ratings and Standard & Poor’s assign AA-plus and AA ratings, respectively.

Unfunded pension liabilities also hover over many other states. Among other changes, Rhode Island in 2011 created a hybrid plan merging conventional public defined-benefit pension plans with 401(k)-style plans. Five public-sector unions are challenging the law in court.

Two weeks ago, Standard & Poor’s downgraded Illinois over its inability to pare down $95 billion of obligations.

“Most governors have been communicating with each other on ways to reform pension plans, so [Corbett’s] plan is not new or unique,” said David Fiorenza, a Villanova School of Business professor. “If the plan does not change current retirees’ benefits and looks to form a 401(k)-style plan, similar to private industry, then a portion of the plan will become law.”

Fiorenza added that Corbett could achieve parts of his proposals through executive orders.

Other key initiatives to Corbett’s budget, which is up about $680 million, or 2.4%, include a plan to inject nearly $2 billion of extra funding into the state’s transportation system.

The Republican governor wants to cut the flat tax on gas at the pump by 17% over two years; he is also asking the General Assembly to phase out over five years a cap on taxes that oil and gas companies pay.

“The transportation and pension proposals are both good. Transportation will have a greater impact in terms of helping the economy,” said Schankel. “It’s an important investment in the future and to some extent it will help create jobs. Pennsylvania’s economy is growing, but not by leaps and bounds,”

Fiorenza, a former CFO of Radnor Township, Pa., said the legislature will wait to hear the impact of Corbett’s transportation infrastructure proposal on city and municipal government budgets, compared with the funding they now receive from the liquid fuels tax.

“In theory, his proposal makes economic sense until you look at the winners and losers in the long run,” Fiorenza said.

Harrisburg City Councilman Brad Koplinski, a Democrat who said this week he will run for lieutenant governor, was critical of Corbett. "It was difficult to watch," he said. "I don't understand how his numbers will add up. The infrastructure funding is still insufficient and we're still selling out our lottery and liquor stores."

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