HARRISBURG - Pennsylvania will face significant fiscal challenges next year trying to absorb $1.7 billion in additional costs and not having enough tax revenue to cover them, Budget Secretary Charles Zogby warned Wednesday.

Large increases in public pension and medical assistance costs will outpace state tax revenue growth, thereby helping to create this hurdle to balancing the next state budget for fiscal 2014-15, said Zogby.

Zogby's briefing is an opening move in a budget debate that will last into early summer. Gov. Tom Corbett will give his fourth budget address in early February.

The knotty fiscal problems described by Zogby surface during an election year when Corbett, House lawmakers and senators representing even-numbered districts are on the ballot.

The governor doesn't think state tax hikes, a natural gas severance tax or a new round of cuts to education and social programs are the solutions to this problem, said Zogby. But he is open to considering other options such as reducing public pension costs and delaying the end of a state business tax.

Several major cost drivers are a $500 million spike in state payments to cover school district employee pensions, $110 million spike for state government employee pensions and $600 million increase for medical assistance.

Also creating headaches are a $300 million cut in the federal matching grant for medical assistance and a legal ruling that could reduce Pennsylvania's annual payment from tobacco companies by $180 million. The payment supports a number of health care programs.

These cost increases will be partially offset by a projected $800 million increase in state tax revenue above the current $28.3 billion budget.

The state will get some new revenue from legalizing several small games of chance for taverns and further proposals to expand gambling could be on the table. The Senate just authorized a study of casino gambling and proposals to legalize keno for the Pennsylvania Lottery are being considered by that chamber.

Zogby voiced optimism that agreement can be reached with lawmakers next year on a plan to tackle pension costs for school district and state government employees and reduce a spike in taxpayer support for those pensions. That goal eluded Corbett this year.

Zogby cited bills sponsored by Reps. Mike Tobash, R-125, Pottsville, and Glenn Grell, R-87, Mechanicsburg, as having potential to address the problem.

Tobash proposes a hybrid plan for new school district and state government employees that combines elements of the traditional defined-benefit pension and defined-contribution pension.

Grell's bill would give current school district and state government employees a voluntary option of contributing less to their pensions in exchange for having their pensions calculated on the five highest salary years instead of the current three highest years.

Senate Democratic leaders urged the governor to consider their revenue proposals, including a full-fledged expansion of Medicaid to cover the uninsured bringing $400 million in federal aid, modernizing operations at the state liquor stores for $125 million and a tax on smokeless tobacco products to compensate for the smaller tobacco payment.

"The governor is trying to make employee retirement benefits a budgetary issue," said House Democratic Appropriations Chairman Joseph Markosek, D-25, Monroeville. "However, his $1.2 billion in business tax breaks have exacerbated the state's current fiscal situation."

Contact the writer: rswift@timesshamrock.com