DN Editorial: IN THE RED ZONE

Posted: February 19, 2013

GOV. CORBETT was wise to step back from the threat he made to tie any increase in state aid for public schools to the Legislature passing the pension reforms he is seeking.

That line in the sand was drawn by the governor and his top aides before he presented his budget. Last week, the governor erased that line. He said he wouldn't presume to tell the Legislature what to do.

His budget, Corbett said, is "now over in their camp. . . . We've made our proposal, now they get to massage it."

The ultimate solution, though, is going to require more than a massage. Pension reform - a subject whose ability to enthrall is in inverse proportion to its importance - is critical. The two funds that pay pensions to state employees and teachers are seriously in the red. The state pays out $8 billion a year to the 300,000 retirees covered by the two funds. But, the funds have a combined $41 billion long-term deficit. Something has to give.

To bolster the funds, the state and local school districts are going to have to dig deep and come up with more money each year in contributions. In the School District of Philadelphia, those additional payments will amount to $44 million this year. They will rise in each of the next five years, even though the state helps defray the cost of districts' contributions.

Billionaire investor Warren Buffett once said that public pensions were a huge explosive with a very long fuse.

Well, that fuse is getting shorter. In Pennsylvania, for instance, while tax revenues are projected to increase by $818 million in the new fiscal year, the state's payments to the pension funds will rise by $511 million. That leaves only $307 million to fund all increases in spending in the rest of government.

How did we get into this mess? There's enough blame to go around. Public employees criticize government for stinting on contributions, diverting the money instead to other programs. Government managers criticize the generosity of the pensions, for early-retirement provisions, for clauses that call for medical benefits to continue even after workers retire.

The main culprit is the economy. Employer and employee contributions are pooled and invested, often in stock and bond markets. For years, earnings kept the funds afloat. In 2001, Pennsylvania even had a surplus and decided to cash in by raising benefits by 20 percent - on the assumption the funds would continue to earn money in the double digits. Then, along came two recessions. The value of the funds sank.

Corbett has proposed a plan with two major thrusts: One is to make new employees join 401(k) plans instead of giving them a guaranteed "defined benefit" pension from the state. The other is to lower the multiplier used to determine pensions by 20 percent in all future years for current state employees. The pensions of retirees will not be touched.

The Legislature should consider taking these steps. The fuse is only getting shorter - it won't be pretty when the bomb goes off.

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