Fiscal strategies for Pa.

The No. 1 priority of Pennsylvania's next governor must be to halt worsening budget crises in Harrisburg and tackle a huge, looming shortfall in the state's employee pension funds.

On this, the candidates agree.

The six Democrats and Republicans said in interviews that whatever grand ambitions the new chief executive might have, such programs might have to wait until financial problems were dealt with.

"This is the biggest issue for the foreseeable future," said Attorney General Tom Corbett, the favorite in a two-man GOP primary May 18. "We are going to be looking at considerably less money coming into state coffers."

Allegheny County Executive Dan Onorato, the poll leader among four Democratic candidates, put it this way: "I think we all agree that for the first year, maybe the first 24 months, the financial crisis will be front and center for the next governor."

With tax revenue falling in the aftermath of the recession, Pennsylvania already needs to close a $1 billion budget gap for the current fiscal year, which ends June 30.

Even if the economy recovers and revenue increases, Pennsylvania, like other states, next year will start to lose the federal stimulus money that Gov. Rendell has used mainly to stave off cuts in Medicaid and education.

The Rendell administration has said: "The end of the stimulus program will leave Pennsylvania in a precarious financial situation in budget year 2011-12. The lack of these funds will create a $2.3 billion gap that will need to be closed by further service efficiencies, program cuts, and new state revenue growth."

And that is only the beginning of the coming financial problems.

Pennsylvania will have to start making up for years of deliberate underfunding in its pension system for state workers and teachers. This will require several billion dollars more in state contributions in each of the next few years, with the most dramatic increases starting in 2012.

One reason for the shortfall is a 25 percent pension hike the legislature granted in 2001 to state workers. The legislators gave themselves a 50 percent bump, while they were at it.

Much of the state's share of this burden is just now coming due.

Three candidates for governor - Democratic State Sen. Anthony Hardy Williams, Republican State Rep. Sam Rohrer, and Democratic Auditor General Jack Wagner, who was a state senator at the time - voted for the pension boosts.

All now agree with the other candidates that benefits might have to be scaled back because taxpayers won't be able to afford massively higher bills in years ahead.

Said Williams: "I voted for it because, at the time, we were told we could afford it. And we can't. So we have to reverse it."

Asked how he'd solve the problem, Williams sighed.

"That's a bear," he said.

Addressing the overall budget, the six candidates said the state could not tax its way out of its problems, but must make significant cutbacks.

Corbett and Rohrer have signed "no-tax" pledges.

The Democrats all said they'd support a new tax on drilling in the vast Marcellus Shale gas fields. Several also agreed with a Rendell proposal to tax cigars.

While not ruling out other taxes, the Democrats mostly ducked such questions as if they were flying snowballs.

Only Montgomery County Commissioner Joe Hoeffel said he'd favor any new, broad-based tax. He proposes a graduated income tax, replacing the flat tax of 3.07 percent, to help double state spending on roads and bridges.

While Republicans say tax cuts would spur economic growth, Hoeffel says growth would come from upgrading infrastructure.

Hoeffel also was the one candidate to agree with Rendell's plan to raise spending 4.1 percent next year, mostly to provide more money for education.

Rendell, in February, called for a cut in the sales tax from 6 percent to 4 percent, but said he wanted to extend it to dozens of goods and services not now taxed. Legislators have been cool to that proposal, and so were most of the candidates for governor.

In interviews and written comments to The Inquirer, the candidates explained how they'd address financial issues.

Here is what they said:

Wagner

The former senator from Pittsburgh noted that the state budget had gone from $20.7 billion when Rendell took office in 2003 to $27.8 billion, a 34 percent increase. "We need to do everything humanly possible to cut costs," he said.

He said money could be saved by eliminating "waste, fraud, and abuse," and he pointed to his audit showing that $300 million could be saved annually with tighter Medicaid controls.

He wants to reduce the 203-member House and 50-member Senate, and said he was "open-minded" to scaling down or eliminating state agencies. He did not specify.

He was the only Democrat opposed to Rendell's cigar tax, saying it could drive away three cigar-makers in the state.

To fix the pension system, Wagner said, "all options need to be on the table." He hesitated to say what benefits might have to be cut, but said older workers would be protected. He embraced one idea that has been widely mentioned: requiring 10 years of service before an employee qualifies for a pension, up from five.

Williams

The three-term senator from Philadelphia said he would call a special legislative session to address financial issues.

"If we are to avoid new broad-based taxes on Pennsylvania residents, difficult spending decisions will need to be made, and new revenue sources will have to be identified," he said.

With red ink leaking everywhere, he said, he could not support more money for education. He said he would consider changing the formula by which schools get state aid, which is weighted toward poorer districts. Poverty indexes would still be considered. But so would "academic outcomes," he said, adding: "You can't just send money without some accountability."

Williams said he might favor a Rendell proposal to cut the corporate net-income tax, now 9.9 percent. But, like other Democrats, he said he could so do only if the state removed loopholes that let some corporations pay little or no tax.

The pension crisis, he said, might force teachers and state workers to go back to pre-2001 benefits. New employees might feel the impact the most. "It does look to me," he said, "like their package is going to be different."

Onorato

As chief executive of Allegheny County, which includes Pittsburgh, Onorato said he'd had to deal with similar financial issues. He said the first task must be to identify cuts.

He was the only gubernatorial candidate interested in Rendell's proposal to cut the sales tax but broaden its application. But he said he would have to "examine the impact that it would have on businesses."

Onorato said he would not look at new taxes except as "a last resort."

He wasn't ready to write off stimulus money. He said he would urge Congress to "ensure that the federal government continues to provide appropriate state budget relief until the national economy recovers."

He has promised teachers that he would continue to support a defined-benefit pension plan of the sort they now have. But he said he might have to cut the size of benefits.

He agreed with other candidates that new employees should have to work 10 years to qualify for benefits.

Hoeffel

Hoeffel said his proposals for spending increases were justified because he had identified where he would gain new revenue.

"By switching to a graduated income tax and closing corporate tax loopholes, we will increase general revenue," he said.

Hoeffel said he agreed that pensions had to be modified. But he said he would oppose any effort to replace the defined-benefit pension that state workers receive with a 401(k)-type plan, known as a defined-contribution plan.

Other states have found that defined-contribution plans can backfire on the financial health of the older pension system, which must remain in place for retired workers. The money will have to come from the general fund, he said.

Corbett

Having taken the no-tax pledge, Corbett could be somewhat boxed in if elected governor. But he would be on the same page as the GOP-controlled Senate, which has blocked Rendell's tax proposals in recent budgets.

Corbett said he believed he could find savings to make up for a billion dollars, or two, in lost revenue. But he did not say what he would cut.

"You may see it as a reduction in money given to education - not necessarily to the classroom, but to other areas of education," Corbett said.

His plan for the corporate tax is to roll it back to 6.99 percent over six years, a bigger cut than proposed by Rendell.

He's adamant, on pension issues, that there must be "a shift away from a defined-benefit plan" and toward a plan in which the state makes retirement contributions as it goes along, but doesn't promise anything for the future.

Corbett said the formula for determining present-plan benefits must go back to what it was in 2001.

Rohrer

Of all the candidates, Rohrer was most specific in saying what he'd do to cut spending.

The 17-year legislator from Berks County proposes to cut state spending 10 percent, largely across the board. He said the impact would be felt most heavily in the departments that spent the most money: education, welfare, and corrections.

"There isn't any department of any business that I know of that can't endure a 10 percent budget cut," Rohrer said.

In education, he proposes to eliminate requirements for the Pennsylvania System of School Assessment tests, which students often spend weeks preparing for and taking. He said that, "if push comes to shove," he'd consider cutting the basic state subsidy.

On pensions, Rohrer agreed with Corbett that a 401(k)-type plan would be necessary for at least some employees.