State's Pension Costs to Wreck Balanced Budget in Coming Years

By Eric Boehm | PA Independent

HARRISBURG—Pennsylvania can expect modest economic growth over the next five years, but it will be surpassed by a surge in state pension costs that begin this year.

An annual economic and budgetary projection from the state’s Independent Fiscal Office, a state equivalent of the Congressional Budget Office, forecasts 0.8 percent revenue growth this year and 3 percent annual growth for the state’s revenues in the next five year.  Pension costs are projected to climb by 46 percent in this year’s budget and 42 percent in next year’s budget.

“The increase in pension contributions is estimated to be about $500 million per year for the next several years,” said Mark Ryan, deputy director of the IFO.

According to the report, those costs will consume 9.6 percent of the state budget by 2017—up from 4.2 percent of the budget this year.

In comparison to the skyrocketing pension costs, non-pension budgetary expenses are anticipated to climb by only 2.5 percent over the next five years—meaning they would be sustained by the expected 3 percent annual growth in tax revenues if pension costs were not a factor.

Those low growth rates are the “new normal,” said Ryan, and are due to modest growth of the labor market, declining revenues from sales taxes, demographic trends and the lack of any expected booms in housing or the stock market.

By fiscal year 2017-18, pension costs will drive the state towards spending $753 million more than it takes in, according to the IFO report.

The growing pension costs are the result of three events in the last decade: increased pension payouts, a reduction in the state’s contribution rate, and the economic collapse of 2008.

Expected pension costs would grow larger if the state’s two pension funds – the Public School Employees Retirement System, or PSERS, and the State Employees Retirement System, or SERS—do not meet their annual expected earnings of 7.5 percent, a figure some economists believe to be overly rosy.

Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Chester, said pension reform would stand with transportation funding as the top two priorities in the new legislative session that opens on January 1.

Randy Albright, executive director for state Sen. Vincent Hughes, D-Philadelphia, minority chairman of the Senate Appropriations Committee, said significant pension reform had been accomplished in 2010 and discussions for any additional changes had yet to begin.