Pennsylvania Gov. Tom Corbett on Tuesday proposed a $29.4 billion budget that includes a renewed call to tweak the pension system for state employees.
In his budget address to the legislature, Corbett, a Republican seeking a second term this year, called pension overhaul "a crucial reform that would provide the state with even more to invest."
The governor, while short on particulars, called on Democrats to compromise on a solution to what he called "a $50 billion problem."
He said this year's $1.5 billion in pension costs for state and school district workers could balloon to more than $4 billion in a few years.
"I was happy to see pension reform in there," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. "Long-term it's the most important thing for the state and it's something the credit agencies watch."
Escalating unfunded pension liabilities have hurt Pennsylvania's standing with the bond rating companies. Fitch Ratings cited pension liability last July when it lowered Pennsylvania's general obligation bonds to AA with a negative outlook.
Moody's Investors Service a year earlier dropped the Keystone State to Aa2 from Aa1. Standard & Poor's rates Pennsylvania AA.
Although skeptics question whether the state can enact pension overhaul during an election year, "I think it's possible," Schankel said. "Generally the legislature is somewhat conservative on fiscal matters and they know it has to be done. Certainly Illinois did something."
Richard Dreyfuss, a senior fellow at the Manhattan Institute for Policy Research, remains doubtful. "The end game is to put less money into an already funded pension plan and I find that problematic, because the whole pension system is unsustainable," he said from Hershey, Pa. "This has bond-rating implications."
Corbett's pension overhaul proposal last year stalled in the legislature. It would have created a 401(k)-style retirement benefit for future employees and adjusted future benefit calculations for current employees. It would not have allowed any benefit cuts to existing retirees.
"I ask you to work with me in the coming months to find a solution. We must fix this," Corbett told lawmakers. "Billions in new debt to our state is the cost of doing nothing. The only question is whether we will do it now, when it's still a manageable problem, or let others do it later, when it's an all-out crisis."
Corbett, who only scored a 23% favorability rating last month in a poll by Franklin & Marshall College of Lancaster, Pa., called for a $10 million increase in pre-kindergarten and an additional $341 million in block-grant funding, among other educational initiatives. They restore some of the budget cuts of 2011, Corbett's first year, which Democrats criticized as too draconian.
Corbett also proposed a "Healthy Pennsylvania" initiative involving changes to Pennsylvania's Medicaid program that he said would save $125 million through benefit cuts to working, healthy adults. The federal government must approve a waiver request.
"It's a partial step, but I would like to see the state sign up for the Medicaid program under the Affordable Care Act," said Schankel.
"Other areas to expand revenues will be the implementation of tavern games and Keno for the Pennsylvania lottery system," said Villanova School of Business professor David Fiorenza, former chief financial officer of Radnor Township, Pa. "He has already been successful in increasing the gasoline excise tax for the next few years to help the aging infrastructure of the commonwealth."
Corbett said nothing about the state-run lottery on Tuesday - five weeks ago he dropped his efforts to privatize the lottery through a 20-year, $35 billion deal with Britain's Camelot Global Systems after state Attorney General Kathleen Kane called the contract unconstitutional.
The governor, however, called again as he did last year for privatizing state-run liquor stores, saying the state loses $80 million annually to neighboring states such as New Jersey, Delaware and Maryland.
Corbett cited Harrisburg's recovery efforts in his speech. The 49,000-population capital city, on the cusp of bankruptcy for two years, crafted a plan late in 2013 that erased $600 million of debt. State-appointed receiver William Lynch, he said, "has put Harrisburg on a path to a better, brighter future."