The Bulletin -- November 29, 2012

For a Mere $41 Billion We Can Get Out of This Mess

It’s hard to imagine an upcoming budget season state lawmakers and a Governor have dreaded more. A recent independent fiscal report predicts General Fund revenues will limp in during the remainder of the fiscal year. The state will also lose federal dollars if Washington fails to ward off its own pending fiscal crisis. Additionally, a recent report from Governor Tom Corbett’s office brings focus to a fiscal catastrophe that has been rumbling our way for the past ten years -- the public pension crisis.

“Absent meaningful structural pension reform, the state’s General Fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government,” Budget Secretary Charles B. Zogby said in a statement announcing the study, the “Keystone Pension Report”. “With a clear understanding of the crisis and the challenges we confront, it is imperative that Pennsylvania finds a workable solution.”

The Independent Fiscal Office (IFO) recently estimated that Pennsylvania would end the fiscal year on June 30 with just 0.8 percent above the revenue collections anticipated at the start of the year. The news isn’t likely to improve when the Governor’s Budget Office releases its estimates for the remainder of the fiscal year in mid-December. Last year the anticipated collection figures from the Budget Office ran consistently below numbers from the IFO.
Moreover, the state could lose tens of millions in federal funds if Congress and the President don’t come to agreement on a deal regarding the so-called fiscal cliff – the convergence of the end of current tax rates with across-the-board budgetary cuts. At the same Press Club Luncheon, the Governor commented on the unpredictable budget scenario if no compromise is reached.

“When I’m sitting with my budget people working on a budget, trying to figure out what do we have, when we are going have it, what money is going to be there, what isn’t going be there, it’s absolutely frightening,” Corbett said.

The Administration’s “Keystone Pension Report” laid out the numbers, the causes, and even possible solutions for the pension system that carries a mind-boggling $41 billion in unfunded liability. The report states that contributing factors to today’s pension crisis include previously instituted expansions to retiree and member benefits, nearly a decade of state and school district underfunding of contributions, and less-than-expected investment returns. As a result, both the State Employees Retirement System (SERS) and the Pennsylvania School Employees Retirement System (PSERS) pension programs are less than 68 percent funded. A healthy pension-funding ratio is about 80 percent funded.

In addition to the unfunded status of the pension systems, the report describes the growing nature of required employer contributions needed to fund the current cost of the pension benefits, as well as addresses the unfunded liability. Contributions are expected to rise significantly in the coming decade, reducing the state’s ability to pay for mandated programs and services like medical assistance, public education, public safety, and transportation infrastructure.

“Next year’s revenue growth is expected to be nearly $819 million,” the report said. “Of that total growth, pension costs are projected to claim about 62 percent. That translates to more than $511 million that could have been spent on programs and services. Without any pension reform, the state must continue spending reductions to account for this amount in balancing its budget.”

But with troubling fiscal times comes the need for government to shed excess weight. For example, the Governor’s office believes it can move ahead with the lottery privatization without legislative approval. The Governor’s office is already moving to hand the operation of the Pennsylvania Lottery over to a private management firm.  However, liquor privation is another matter. House Floor Leader Mike Turzai (R-Allegheny) pushed for a vote on a privatization bill throughout the 2011-12 legislative, but none ever made it to the floor. At the same Pennsylvania Press Club Luncheon, the Governor he said that one of his top priorities over the 2013-14 legislative session is ending state control of the liquor system. At the luncheon, the Governor was perhaps more outspoken on liquor privatization than ever before.  “We have no business being in the business when it comes to booze,” he said.

“The fiscal situation is very challenging, but it is within our power to turn things around, starting with the sale of Pennsylvania’s Soviet-style liquor monopoly,” said PMA Executive Director David N. Taylor. “Gov. Corbett is leading Pennsylvania toward a brighter, more prosperous future by holding the line on taxes, keeping spending under control, and creating conditions for the economic growth that will bring full recovery. While the journey may be longer than we would wish, at least the difficult work of right-sizing state government is actually underway.  Now, Pennsylvania’s leaders must stay focused on that challenge and resist all of the temptations that could divert us from that path forward.”