HARRISBURG – Gov. Tom Corbett and his legal staff are hoping fine distinctions in Pennsylvania case law will allow $12 billion in cuts to future pension benefits for more than 370,000 current state and school employees.
Corbett and state legislators are grappling with Pennsylvania’s unfunded pension liability of $41 billion, and the governor is taking an approach never before tested in state courts in hopes it will help the benefit reductions pass constitutional muster.
“We’ve designed our proposal in a way we believe it is constitutional, knowing that the likelihood is that that issue will ultimately be litigated in the courts,” state Budget Secretary Charles Zogby said.
More than a month after Corbett announced his plan, drawing threats of lawsuits from labor unions, the legislative response has been cool and no bill has been introduced.
The benefit cuts are the main source of savings in Corbett’s multipronged pension reform package and are expected to save an estimated $12 billion over 30 years. The package also would require new hires to enroll in a 401(k)-style plan, instead of the traditional plan, and temporarily limit annual increases in taxpayer contributions.
The governor proposes freezing benefits for current employees and replacing them with reduced benefits in 2015. When workers retire, they would receive the combined value of both sets of benefits.
The change for members of the Public School Employees’ Retirement System would occur Jan. 1, 2015; and for workers in the State Employees’ Retirement System, on July 1, 2015, officials said.
For current employees, the biggest single change in the governor’s plan is a reduction in the “multiplier,” a percentage applied to an employee’s years of service and final average salary to calculate pensions, typically from 2.5 percent to 2 percent.
Over the years, Pennsylvania courts have issued numerous rulings that have established that public pension benefits are contracts and that the state constitution protects them against changes that “impair” that contract.
In a 1984 decision central to the current debate, the state Supreme Court overturned a legislatively approved increase in employee contributions. The justices said the increase represented an unconstitutional impairment of contract because it reduced a pension’s value by forcing the employee to pay more for it.
Corbett’s legal team says past court rulings on contract impairment have weighed both the retroactive effect of benefit changes and the future impact. By freezing current benefits and locking in their value to employees, the lawyers hope to focus any challenge exclusively on future benefits – something they say neither the Legislature nor state courts has ever done.
“It’s a brand new analysis for the court,” said James Schultz, the governor’s general counsel. “In short … the (state) Supreme Court would not be put into a position where it had to overrule itself on prior precedent.”
Union leaders who have led the fight against the pension cuts said the novelty of the administration’s approach doesn’t fundamentally change the facts.
“Their legal theory doesn’t make any sense to me,” said Lynne Wilson, general counsel for the Pennsylvania State Education Association, the state’s largest teachers’ union.
David Fillman, executive director of Council 13 of the American Federation of State, County and Municipal Employees, reiterated that his union would challenge the proposal if the Legislature approved it.
Sen. Jake Corman, R-Centre, chairman of the Senate Appropriations Committee, said the governor’s plan would provide short-term savings to taxpayers but it would not make a significant dent in the already accrued unfunded liability. But he is similarly uncomfortable with such alternatives as pension bonds, which he called “a risky proposition.”
“It’s a huge issue that has to be dealt with,” Corman said. “People are finally coming to the realization that there’s no easy answer.”