HARRISBURG — A report issued Monday by Gov. Tom Corbett's administration warned of higher taxes, program cuts, lower business growth and steeper borrowing costs because of the state's financial obligations toward the two large public-sector pension plans.
The budget office report said the State Employees' Retirement System and the Public School Employees' Retirement System together have an unfunded liability of $41 billion.
Growing pension costs could force spending cuts throughout the state budget, according to the report, a scenario made even worse by projections of higher spending on debt, medical assistance and prisons.
Like an oncoming tidal wave, pension costs threaten to overwhelm the general fund budget and the vital programs and services that it funds, the report says. The same dynamic is expected for public schools, said the report, which was published by Corbett's budget office.
Increasing pension contributions obligations will claim a greater and greater share of school district budgets, crowding out funding for education, whether it is direct classroom instruction, sports, facilities and maintenance, and ultimately put pressure on districts to increase property taxes, the budget office said.
The report says higher taxes should be off the table, but reductions in prospective benefits for current employees should be considered.
Corbett, a Republican, has spoken repeatedly about his desire to address the problem, which is a particular challenge because case law interpreting the state constitution has prevented curtailing pension benefits for current or retired state employees and teachers.
His office's report says, without elaboration, that the state can change components of current employees' prospective benefits to conform with prior court determinations regarding deferred compensation.
It recounts how the problem began with the 2001 law that granted retroactive pension rate increases to state workers and teachers, including even higher increases for the lawmakers.
That was followed by a cost-of-living increase for retirees, and then by restructuring the state's contributions that delayed the true cost for another decade.
The pension systems' investments were badly hammered when the technology and housing bubbles burst, and they have struggled to recover. A 2010 law made some structural changes, including less generous benefits for new hires.
The state paid nearly $1.1 billion into SERS and PSERS during the fiscal year that ended in June. That figure is projected to pass $2.2 billion next year and reach $5.1 billion by 2019.
SERS provides $2.7 billion annually in benefits; PSERS pays out $5.3 billion. About 815,000 people are members, a group that includes active employees, retirees, beneficiaries and others who are vested but inactive.
Messages seeking comment weren't immediately returned by spokespeople for the two funds, and for the office of Budget Secretary Charles Zogby.