Spending Cuts Missing In Pa. Budget

Spending Cuts Missing In Pa. Budget

By Leo Knepper

It looks like the General Assembly is in full-on “kick the can” mode on the budget. An article from the Patriot-News lays out the options the General Assembly is considering for closing the budget gap. None of them involve cutting spending.

One of the top contenders is using the tobacco settlement fund as collateral for a loan. Other options include expanded gambling and a “by the drink” tax for bars and restaurants on alcoholic drinks. Right now, the tax is somewhat hidden from patrons because it is collected at the wholesale level, i.e. per bottle paid by the establishment. The new proposal would move that to a per drink tax paid directly by the consumer. From the budget crafters perspective, they’re missing out on revenue because the price paid for a bottle of alcohol is much less than the price the establishment collects by selling by the glass, etc.

Another item under consideration would be to add a financial transaction tax on electricity transmissions. From the Patriot-News article:

“Senate Republicans are also vetting a new financial transactions tax that would be centered solely on the obscure business of buying and selling space on energy transmission lines.

“Pennsylvania plays host to this roughly $2.5 billion-plus market by virtue of our role as host to the business end of PJM energy grid. Some have drawn a parallel here to the state taxes collected by New York on Wall Street transactions.

“Those familiar with the issue say a 5 percent tax on this relatively small slice of PJM’s activities could net the state about $125 million per year, with minimal impact on the industry.”

Remember when Governor Corbett and the members of the General Assembly assured us that the tax they were raising on gasoline wouldn’t be passed onto consumers? That fallacious argument is rearing its head again on this tax. If this goes through, don’t be surprised to see your energy bill go up to recoup the cost.

Please, take a moment to contact the General Assembly. Tell them to get serious about cutting spending and stop the tax and spend shell game.

PS: CAP is trying to raise $5000 in the month of June. If you value our work, please make an investment in our organization today.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Spending Cuts Missing In Pa. Budget

Spending Cuts Missing In Pa. Budget

Citizens Alliance Exposes Political Scams

Citizens Alliance Exposes Political Scams

By Leo Kepper

Much has been made of the “historic” pension reform just signed by Democrat Gov. Tom Wolf. Politicos and the media are making it out to be a great compromise between Democrats and Republicans.

But our regular readers know better

Thanks to Citizens Alliance of Pennsylvania (CAP) voters are aware of just how ridiculous a claim it is to say this pension reform legislation actually solves the problem.

While the bill is a marginal improvement for taxpayers, it does little to nothing to address the $74 billion shortfall the state has for current employees, allows current General Assembly members to keep their Cadillac pension benefits, and likely adds to our state’s overall debt burden in the years to come. “Historic” indeed.

But results are what matter to Pennsylvanians, and they’re what matter to us at CAP. It’s not about who gets credit or who’s remembered a generation from now, it’s about strengthening our Commonwealth so citizens can exercise their God-given rights without government getting in the way.

Because of CAPs efforts citizens are onto the games being played in Harrisburg; they aren’t buying the hype.

Instead, they’re demanding real results on pensions and other issues.

With your support we’ll continue to make sure voters know the truth. Will you consider making an investment in our work today?

Pensions are but one obstacle our Commonwealth faces, and our only line of defense is an informed and empowered citizenry.

With your help we will continue educating voters on these issues. Together we can – and will – ensure a brighter future for Pennsylvania.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Citizens Alliance Exposes Political Scams

 

Meaningless Pension Reform Passes Pa. Senate

Meaningless Pension Reform Passes Pa. Senate

By Leo Knepper

On Monday, the Pennsylvania Senate passed SB 1 with an overwhelming majority, 40-9, vote. The House is widely expected to pass the pension “reform” legislation this week and send it to Governor Wolf’s desk; where he is widely expected to sign it. One of the things absent this year is the usual wailing and gnashing of teeth from government unions on the reform measure. An article from the Patriot-Newsexplains why:

“There is a hope that this bill, by representing another show of cooperative government between Democrat Gov. Tom Wolf and the Legislature, will help disarm a tricky issue for Wolf’s 2018 re-election effort.

“No unions are supporting Senate Bill 1, to be sure.

“But, in the words of AFSCME District Council 13 Executive Director David Fillman, ‘we’re not throwing bombs at it.'[…] Everyone reached for this story said they want to help give Wolf something that he can call a win on this issue.”(Emphasis added)

As Mike Manzo, a lobbyist for the SEIU, stated in the same article, “I think it sets up a pretty nice narrative for the governor that on some of the issues that people thought were the most intractable in the building…He will be the governor who could achieve what no other governor could, not only on pensions, but liquor reform and money for schools (emphasis added).”

While Republicans will be technically correct about the legislation being “historic” in nature because it represents a marginal improvement for taxpayers, they are wildly overstating how much of an impact this will have on the Commonwealth’s financial future. According to a CapitolWire article (paywall):

“The actuarial note analyzing the legislation indicates there will be no pension system savings, and the risk-shifting within SB1 only matters should the systems incur significant investment shortfalls a couple decades from now. Those shortfalls, should they occur two to three decades from now, will still add more debt to our debt-ridden systems, it just won’t be quite as much added debt – the ‘historic’ savings we’re told SB1 would deliver would come at a significant cost.

“It’s pretty clear passing anything with the title ‘pension reform’ has become the goal, not passing something that’s worth passing.

“…The comparison between current law and SB1 for both the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) shows little-to-no difference regarding the impacts on employer contribution rates, pension funding ratios and the unfunded accrued liability going forward during the next three decades.“(Emphasis added)

Senate Bill 1 does not solve Pennsylvania’s pension problems. We will still have a$74 billion unfunded liability for current employees, and that number is likely to grow because there doesn’t seem to be the political will to address it. Furthermore, as Michigan illustrates, the hybrid plan can (and likely will) accumulate unfunded liabilities. Finally, the legislation permits current members of the General Assembly to continue to accrue their Cadillac pension benefits if they refuse to opt into the 401(k)-style system.

Be sure to keep all of this in mind when you’re reading the news about the “historic” pension reform and hear about it from politicians seeking your vote. Taxpayers are still on the hook for a massive amount of money and current members of the General Assembly can continue to accumulate benefits making the matter worse.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

 

Meaningless Pension Reform Passes Pa. Senate

Meaningless Pension Reform Passes Pa. Senate

Pennsylvania Repeating Michigan Mistake?

Pennsylvania Repeating Michigan Mistake?

By Leo Knepper

Some members of the Pennsylvania General Assembly continue to push a “hybrid” defined benefit (DB) and defined contribution (DC) plan as the solution to the Commonwealth’s pension problems. Senate Bill 1 is the latest iteration of this “reform” proposal. As we have previously noted, plan design changes for future employees will not address the current unfunded liability. The only way to address the unfunded liability is to modify the pension benefits for current employees or enact funding reform. Adjusting pension benefits for current employees would run into legal challenges, leaving funding reform as the more likely option.

Switching from a traditional DB pension to a hybrid plan will not solve our problems in the long run. We need to look no further than the state of Michigan to see how hybrid plans fail to live up to their promises. A recent article from CapitolWire(paywall) summarizes the situation:

“What Michigan did in 2010 is exactly what some Pennsylvania Republican lawmakers want to do for both state and public school employees starting in 2018…While some Pennsylvania lawmakers are trying to convince their colleagues to embrace a hybrid plan (in Senate Bill 1), Michigan lawmakers want to end theirs in favor of a standalone defined contribution plan…One of the sponsors of the new effort in Michigan, Rep. Thomas Albert, called the 2010 MPSERS hybrid, ‘A Band-Aid for a bullet wound,’ while Michigan’s Speaker of the House, Tom Leonard, penned a column in which he called MPSERS ‘little more than one big I.O.U., a shaky promise signed by long-gone Lansing politicians…Michigan’s historic failure to reform the pension system has been a terrible deal for the hard-working people who take care of and educate our children. It is well past time we fix that mistake and give teachers the benefits they deserve.'”(Emphasis added)

After switching to a hybrid plan, Michigan’s unfunded liability grew because lawmakers there relied on overly optimistic assumptions and continued to underfund the system. Using history as a guide, why should we think Pennsylvania would be any different? Our current unfunded liability is over $74 billion because politicians make promises and don’t have the will to pay for them. An unwillingness on the part of politicians to pay for their promises  is not just a Pennsylvania problem, as noted in a recent column from Heritage Foundation analyst.

Harrisburg’s “long-gone” politicians increased government employees’ and teachers’ pensions by 25 percent in 2001; lawmakers increased their pensions by 50 percent at the same time. This act became law with a signature from Gov. Tom Ridge and illustrates that our pension problem is bipartisan in its origin.

The only way to remove political gamesmanship from the equation is for the Commonwealth to adopt a straight 401(k) DC-type plan and enact pension reform to address our current unfunded liabilities. Leadership in the House and Senate like to point out that Governor Wolf wouldn’t sign legislation establishing a DC plan. If they were smart, they would put it on his desk anyway, let the Wolf veto it, and then work to elect a governor who would enact the kind of reform Pennsylvania needs.

Please, take 30 seconds to email the General Assembly about pension reform.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Pennsylvania Repeating Michigan Mistake?

Pennsylvania Repeating Michigan Mistake?

Pa School Districts Reserves Are $4.4 B

Pa School Districts Reserves Are $4.4 B

By Leo Knepper

The amount of money held by school districts in “reserve” has more than doubled over the last 10 years according to a new report by the Commonwealth Foundation. At the end of the 2015-2016 school year, district reserves were over $4.4 billion. According to that same report, there were 13 school districts who held more than 20 percent of their budget in reserves and requested property tax increases well above the limit established by the Department of Education. Not only did they request higher taxes, they did it between eight and ten times in a ten year period. In other words, the school districts could operate on their savings accounts for more than 20 percent of the year, but still wanted taxpayers to pad the accounts even more.

One of the names on the list, Lower Merion School District, has been sued by local taxpayers for their budget practices. A Commonwealth Judge found their budget practices so egregious that the district was ordered to roll back their 2016 tax increase. despite a $56 million reserve fund, Lower Merion is seeking a tax increase again this year that exceeds the state cap.

The worst offenders among schools seeking unnecessary tax increases are not confined geographically. Rather, it seems that there is a systemic problem among school boards. It is hard to argue against keeping a rainy day fund in reserve. At some point, the reserve fund becomes an insult to taxpayers. Although school district finances do not garner the same attention as national, or even state-level scandals, understanding how they are spending your money is vital.

To see how your local school district stacks up, take a few minutes and review the financial data collected by the Department of Education. You will probably be surprised by what you find.

PS-The Senate will begin working to advance pension reform legislation later this week. Their legislation does not include funding reform at this point. Please, take a moment and contact the General Assembly about this important issue.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Pa School Districts Reserves Are $4.4 B

Pa School Districts Reserves Are $4.4 B

Convict Mellow Wants $240 G Pension Back

Convict Mellow Wants $240 G Pension Back

By Leo Knepper

In 2012, former Senator Robert Mellow was sentenced to 16 months in prison, three years parole, and ordered to pay nearly $150,000 in fines and restitution. Now he wants his $20,000 per month pension back.

Although one lawmaker having a pension of $240,000 per year is one of the causes of the pension system’s $74 billion unfunded liability, lets focus on Mellow’s legal argument. According to Pennsylvania state law, a state employee forfeits their pension if convicted of any one of 23 specific state crimes. The law also stipulates, “no public official…shall be entitled to receive any retirement or other benefit or payment of any kind except a return of the contribution paid into any pension fund without interest, if such public official or public employee is convicted or pleads guilty or no defense to any crime related to public office or public employment.” (Emphasis added)

According to an article published by the Philadelphia Inquirer, Mellow’s lawyers are arguing that since he was convicted of the federal charge of conspiracy and conspiracy is not one of the crimes listed, he should have his pension restored. According to the same Inquirer article:

“A similar argument has worked before. In 1999, Commonwealth Court reversed the pension forfeiture of a corrections officer who pleaded guilty to a federal charge of making a false declaration before a grand jury, finding that SERS was wrong to conclude the crime was “substantially the same” as the Pennsylvania crime of perjury.”

With this legal precedent in hand, Mellow’s lawyers would be negligent not to argue that he should have his pension restored. However, that doesn’t mean that they have a good case. As with most things legal, the devil is in the details. According to the press release from the FBI announcing Mellow’s sentencing:

“Mellow, in his capacity as a state senator and the Democratic Leader during 2006 through 2010, conspired with others to misuse the staff and resources of the Pennsylvania Senate for political fund-raising and campaign purposes.

“As part of the scheme, Mellow caused and knowingly permitted, through willful blindness, the submission to the chief clerk of the senate of false job classification and reclassification forms and memos for senate staff who performed political fundraising and campaign work while being compensated by the senate.

“Mellow conspired with others to misuse senate staff and resources to raise hundreds of thousands of dollars for an organization known as the Friends of Bob Mellow and the Democratic State Senate Campaign Committee and to support political candidates and causes throughout Pennsylvania.”

Based on the emphasized text, it sounds like Mellow clearly violated the clause in the forfeiture law highlighting crimes “related to public office.” The state employee pension board will vote on whether or not to restore Mellow’s pension. Regardless of that decision, someone will be appealing it to the courts and judges will ultimately decide the fate of Mellow’s pension.

We will keep you posted as the process moves forward, but you should not expect a speedy resolution.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Convict Mellow Wants $240 G Pension Back

Convict Mellow Wants $240 G Pension Back

SERS Lowers Estimated ROI But Not Enough

SERS Lowers Estimated ROI But Not Enough

By Leo Knepper

Last week the State Employee Retirement System (SERS) took a baby step toward reality and lowered their estimated return on investment (ROI). SERS moved their estimated ROI from 7.5 percent to 7.25 percent. The SERS change matches a move made by the other state-managed retirement fund, PSERS, last year. Adjusting the estimates added about $3 billion to Pennsylvania’s unfunded pension liabilities. These changes don’t go far enough, unfortunately.

A 2014 “Blue Ribbon” report from the Society of Actuaries stated that the rate of return for public sector pension funds would be closer to 6.4 percent for the next 10 years. Actuarial assumptions may sound dull and boring. However, the assumptions that the state-run pension plans make in valuing their assets have real world consequences for taxpayers and reflect a major problem with the defined benefit (DB) model.

Because the assumptions used to determine the value of the pension plan assets and liabilities are influenced by politics, it is easy for politicians to make generous promises and then make legal whatever flawed assumptions they want to use to improve the outlook. Furthermore, they can change the laws to purposely underfund pension contributions (something they’ve done twice in the last 15 years) to pass a “balanced” budget.

By assuming an unreasonable ROI, SERS and PSERS are hiding over $15 billion in additional unfunded liabilities from taxpayers and lawmakers. An accurate picture of how challenging the pension funding situation is is a necessary part of discussing how to solve the problem. Imagine having a broken leg but asking a doctor to fix the problem using an x-ray of your arm, and that is what the state pension funds are doing by being overly optimistic about their ROI.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

SERS Lowers Estimated ROI But Not Enough

SEIU Gets $134.9 Million State Pact

SEIU Gets $134.9 Million State Pact

By Leo Knepper

Suppose that a business owner gave a politician nearly $1 million in campaign contributions and then received a $134.9 million contract. What kind of reaction would expect from the media? Most people would expect wall to wall news coverage and calls for an investigation. If the dollar amounts stayed the same, but instead of a business, the contract went to a public sector/government union why should the public be any less outraged?

Late last week, Service Employees International Union Local 668 (SEIU) signed off on a lucrative three-year contract that they negotiated with Governor Tom Wolf last year. Over three years, the contract will cost taxpayers $134.9 million. When you consider additional pension payments and resulting liabilities from the deal, the price goes up even further over the long term.

The SEIU’s PAC was the largest union contributor to the Governor’s 2014 election campaign. Direct spending and contributions by the PAC totaled nearly $1 million. If you add in the “volunteer” work and get out the vote efforts by the union, the value of the SEIU’s contributions are even greater. SEIU members will see a $5,000 salary increase per year under the new contract. Because the union dues are a based on a percentage of the member’s salary, the SEIU will financially benefit from the new deal as well. If this contract comes as news to you, you’re probably not alone. Despite the union’s generosity in terms of time and financial contributions to Governor Wolf, the labor agreement generated very little press.

In fact, the SEIU contract is only the latest in a long line of campaign contributors who have negotiated with the Governor. Every major government union in Pennsylvania supported the Governor, and will likely support his reelection. Under the current system, unions are on both sides of the negotiating table. Franklin D. Roosevelt opposed government employee unions for this very reason.

The media rightly scrutinizes government contracts with most private vendors who are political donors. Why don’t they pay the same attention to government unions who happened to be the biggest political spenders in the state?

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

SEIU Gets $134.9 Million State Pact
Who cares about the taxpayer? Ha ha, not me.
SEIU Gets $134.9 Million State Pact

 

Pension Reform Must Include Funding Reform

Pension Reform Must Include Funding Reform

By Leo Knepper

No matter what pension plan design reforms the legislature enacts for future employees, the Commonwealth will still have a massive unfunded liability. The unfunded liability is the result of over-promising retirement benefits, poor investment performance, optimistic investment return assumptions, but mostly a willful redirection of necessary pension contributions by the Pennsylvania government to other purposes. This gross negligence on the part of elected officials has been bipartisan. It started with the 2001 pension increase signed into law (Act 9) by Governor Ridge and continued through the Rendell years when he signed legislation that purposefully underfunded the pension systems (Act 40 in 2003 and Act 120 in 2010).

Decades of mismanagement have resulted in a combined unfunded liabilities currently estimated at over $75 billion, based on the market value of assets. The longer the unfunded liability persists, the worse it becomes. It’s helpful to look at the unfunded liability as a loan. The annual interest cost on this “loan” is over $5.4B per year. In other words, the unfunded liability grows year after year unless the payment made exceeds interest and the cost of newly earned benefits.  And, just like any other loan we need to be making payments on the principal.

The loan example conveys the basics of the problem. Rep. John McGinnis introduced HB 778 this year to address the unfunded liability. In his co-sponsorship memorandum, McGinnis states:

When Act 120 was passed, the liabilities of PSERS exceeded the market value of its assets by $33.4 billion with a corresponding funding ratio of 57.8 percent. At the close of FY 2016, the PSERS unfunded liability was 50 percent larger at $50.1 billion with a funding ratio of 49.9 percent. Similarly, the liabilities of SERS exceeded the market value of its assets at the end of 2010 by $13.3 billion, with a corresponding funding ratio of 66.1 percent; five years later, the SERS unfunded liability had grown to $20.3 billion, with a funding ratio of 56.2 percent. 

There are likely scenarios where the pension assets will become exhausted in the next 8 to 15 years.  When that happens, benefits paid to retirees may well consume 40 percent  to 50 percent of the general fund.  The consequences for our future only get worse as we delay dealing effectively with this problem. Unless funding reform like HB 778 is included with pension reform, it is unlikely that Pennsylvania will avoid this looming fiscal catastrophe.

Every day the General Assembly does not act, the unfunded liability grows. HB 778 is currently in the House State Government Committee. Please, contact your representative today and urge them to take action.

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Pension Reform Must Include Funding Reform

Pension Reform Must Include Funding Reform

 

Minimum Wage Hike Hurts Poor

Minimum Wage Hike Hurts Poor

By Leo Knepper

Increasing the minimum wage will hurt the people who can least afford it.

To solve the budget deficit, Governor Wolf’s mathematically magical budget also includes an increase in the minimum wage. He is advocating an increase from $7.25 to $12 per hour. The Governor claims that raising the minimum wage to $12 would generate $95 million in additional tax revenue. There are numerous reasons to be skeptical of this claim and a positive impact of the minimum wage in general.

Advocating for a higher minimum wage plays well with the public as a whole, but it ignores the reality that the real minimum wage is $0.

As the minimum wage increases, automation becomes more cost effective in a larger number of settings. In response to $15 per hour minimum wages in several cities, McDonald’s and Wendy’s have rolled out self-serve kiosks to replace the workers who were taking orders. The government bodies who thought they would reap the rewards of higher wages to tax now tax nothing. Furthermore, there is now a cost to taxpayers for government benefits for the newly unemployed.

While the trend toward automation for low-skill positions is relatively new in fast food, the impact of higher minimum wages on the lowest skilled workers has been the subject of years of research. In reviewing the data, the Federal Reserve Bank of San Francisco found that “the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers-with possibly larger adverse effects than earlier research suggested.”

A multitude of unintended consequences come from a government mandated versus market-based wage. After a ballot measure increasing the minimum wage passed in Washington state child care costs skyrocketed. Another concern is that the minimum wage will have a disproportionately larger adverse effect on smaller business than larger ones. Who would have an easier time paying for higher labor costs, Walmart or your local hardware store?

No one wants their neighbor to live in poverty. However, the minimum wage and increases in it are not the way to address the problems of poverty or increasing tax revenues. An increase in the minimum wage would cost some people their jobs, shutter small businesses, and drive up consumer costs in Pennsylvania. And, none of those things are good for the Commonwealth.

PS: Have you contacted the General Assembly and Governor about the budget yet?

Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Minimum Wage Hike Hurts Poor

Minimum Wage Hike Hurts Poor