Pennsylvania budget secretary Charles Zogby

Unfunded pension liabilities and the related scrutiny of bond rating agencies hovered over Pennsylvania as state lawmakers reconvened in Harrisburg on Tuesday.

The two statewide public employee pension systems have a combined estimated $45 billion shortfall. In addition, budget secretary Charles Zogby, in last month's mid-fiscal year briefing, told reporters that pension cost growth accounts for roughly half of Pennsylvania's estimated $1.2 billion budget gap.

Election-year politics will add to the complexity.

According to Richard Dreyfuss, a senior fellow at the Manhattan Institute free-market think tank, finding consensus on pension contributions will involve considerable debate, given competing line items that will affect state and local budgets.

"Nobody wants to be a budget cutter or a tax raiser in an election year," said Dreyfuss.

Pennsylvania is among several states coping with the problem, which has come to light over the past decade. State unfunded obligations are estimated as high as $833 billion, Philadelphia consulting firm Public Financial Management Inc. said in a special report last month.

Gov. Tom Corbett's proposed overhaul last year called for switching public pension systems to a 401(k)-style plan, also called defined contribution, starting in fiscal 2015. But his proposal stalled in the state legislature, which was already juggling a crowded plate that included the governor's transportation funding bill and proposals to privatize state-run liquor stores and the state lottery.

Only the transportation bill passed, in the fall session. Corbett last week said he would drop the proposed lottery deal with Britain's Camelot Global Services LLC.

"While I'm not blaming Governor Corbett, who inherited the pension situation, his administration should be stepping up to this, as difficult as it may be," said Dreyfuss.

Dreyfuss, a business consultant and actuary who worked for Hershey Co. for 21 years, favors the 401(k) switch but said any proposal that does not begin to reduce the current deficit immediately amounts to a pseudo reform. "I'm somewhat optimistic on defined contribution, but I'm not optimistic about a proper funding policy," he said.

According to Zogby, the state faces $610 million spike in annual pension costs that breaks down to $500 million for school employees' retirement and $110 million for state employees' retirement, that agencies must absorb.

Zogby has repeatedly warned that without grasping unfunded pension liability, Pennsylvania will be in line for further rating downgrades. Fitch Ratings in July lowered Pennsylvania's general obligation bonds to AA with a negative outlook, from AA-plus. Moody's Investors Service a year earlier dropped the Keystone State to Aa2 from Aa1.

Standard & Poor's also rates Pennsylvania AA.

"The funding levels of the commonwealth's pension systems, which have been historically adequate, have materially weakened, with annual contribution levels remaining well below actuarially required levels," Fitch wrote in October, in advance of Pennsylvania's $750 million GO sale.

"Bond rating agencies, meanwhile, are attaching greater weight to pension debt, putting further downward pressure on ratings," PFM chairman and former chief executive John White said in a recent interview.

Several Pennsylvania lawmakers have their own pension-overhaul proposals, including Rep. Glen Grell, R-Hampden Township, whose suburban Harrisburg district includes many state workers.

Grell's three-point plan included issuing $9 billion of pension obligation bonds.

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