HARRISBURG -- State officials have been talking for months about a huge, looming financial problem regarding how to pay for increased pensions of retired state employees and public school teachers.

The unfunded pension costs will likely be in the range of $3 billion to $5 billion once the crisis hits in 2012, Gov. Ed Rendell has estimated.

Now the governor, even though he leaves office in January 2011, is developing a plan to try to resolve the pension funding crisis, a plan that involves major changes in the state's sales tax, the Pittsburgh Post-Gazette has learned.

Mr. Rendell is expected to mention the pension crisis and his proposed solution on Tuesday, when he proposes a fiscal 2010-11 budget. But the sales tax changes, which would have to be approved by the Legislature, wouldn't be used to pay for the next budget but to fund the looming pension costs, the newspaper has learned.

The sales tax is now 6 percent in 65 counties, and 7 percent in Allegheny County and 8 percent in Philadelphia. His pension solution will likely involve lowering the sales tax rate by 1 or 2 percentage points -- to 5 percent or even 4 percent statewide -- but removing dozens of current exemptions that prevent many items from being taxed.

The major exemptions, for food, clothing and drugs, would remain in place. The state Revenue Department has estimated the state could get up to $12 billion a year in added revenue if it removed dozens of other current exemptions. If the rate were lowered to 4 percent (with the added amounts for Allegheny and Philadelphia counties still in place), the additional funds would drop to about $10 billion.

Mr. Rendell has often talked about how it makes no sense, to him, to have an exemption on the sale of gold, as Pennsylvania now does. That's likely to be one of the first exemptions he suggests getting rid of.

He is expected to have a lengthy speech at some point in the coming weeks on how to deal with the pension crisis, in addition to mentioning the subject as part of his budget address Tuesday.

Mr. Rendell's spokesman, Gary Tuma, declined comment Sunday on the budget speech or the pension issue.

Since Mr. Rendell leaves office in January, state legislators would be free to ignore his pension suggestions, but that won't make the funding problem go away.

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