Pension Crisis Can Be Solved

Pension Crisis Can Be Solved

By Leo Knepper

Most people have heard the term Ponzi scheme and have a vague sense that the victim of the scheme is getting ripped off. In an actual Ponzi scheme, early investors see a substantial return on their investment. What they don’t realize is that the money they are getting is money being put into the investment by new investors. The system continues working as long as enough new investors come in to pay the people who were there before them. The architect of the scheme, never admits that this is what is happening and eventually the system collapses.

As noted by Chris Comisac at Capitol Wire (paywall), the description of a Ponzi scheme and a description of the state pension system by House Minority Leader, Rep. Joe Markosek are remarkably similar. In a recent email Rep. Markosek said:

“If Pennsylvania decided that 18 blue moons from now it would no longer offer retirement benefits for teachers and state employees … And the commonwealth’s debt was still $65 billion … Taxpayers would still be ‘on the hook’ to pay that $65 billion. BUT … Teachers and state employees would no longer be contributing their share (something they’ve always done while policy officials haven’t, until this fiscal year) and it would take taxpayers even longer to pay down that bad pension puppy.”

In other words, money coming in now is paying the unfunded liability; without that new money, we wouldn’t be able to pay people who are about to retire. When Comisac followed up with Rep. Markosek’s staff, they were quick clarify the statement and make sure that everyone knew that the Representative didn’t mean it was a legalized Ponzi scheme.

It is worth looking at a longer excerpt from Comisac’s analysis to drive home exactly what is going on; the emphasis is CAP’s:

“However, the claim that closing the current defined benefit plan, either to completely eliminate the DB plan for new employees or replace it for new employees with something like a 401(k)…would bring about the collapse of the closed DB [defined benefit] plan is simply ridiculous.

“First, the systems are currently in a state of negative cash flow, meaning, just like Fox wrote, “the systems must liquidate assets to pay bills,” and that’s with no closing of the plans or changes by SERS and PSERS to their pension assumptions – just the bad funding policies the systems currently employ.

“Second, closing the system doesn’t limit cash flow into the system any more than it’s currently being limited by not closing the system.

“If the DB plans were closed, the people in that plan at the time of closure would continue to contribute to their plan (as well as their employer on their behalf), with no additional funding needed from any of the people to be hired in the future who would be in a different retirement plan.

“Of course if that closed plan employs unsustainable assumptions upon which all the contribution rates for employees and employers are based, well then there could be a big problem – but that has nothing to do with the plan being closed and everything to do with how the plan was designed.”

That last part is why CAP has been adamantly opposed to a “hybrid” pension plan that combines defined benefit (DB) and defined contribution (DC) elements. Some politicians and government union officials bring up the specter of “transition costs” as a reason to avoid switching to a pure 401k style DC plan. They’ve never once given an example of a private sector employer citing transition costs as a reason to keep offering pensions. A DC plan is the best way to protect beneficiaries and taxpayers.

As long as there is a DB plan, politicians will control what constitutes fully funding and what assumptions are made to determine liability. There is nothing to stop the General Assembly from making politically-driven assumptions about return on investment, life expectancy, and other factors that impact the liability. The further politicians deviate from reality in an attempt to enrich themselves and other government employees, the more likely it is that the money won’t be there to pay for their promises. Promising a lavish retirement is much more likely to get you votes than paying for it will. And, that bill is coming due.

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

Pension Crisis Can Be Solved

Pension Crisis Can Be Solved

Magic Wolf Claims Spending Cut With Higher Budget

Magic Wolf Claims Spending Cut With Higher Budget

By Leo Knepper

Magic Wolf Claims Spending Cut With Higher Budget By Leo Knepper
Magic man says he’s cutting while adding.

On Feb. 7, Gov. Wolf gave his latest budget address. Since he has his eye on re-election, this was the Governor’s most realistic budget to date. There are still a lot of problems with what he’s asking for, but it’s much less terrible that what he has wanted in the past.

 

For starters, Wolf acknowledges that there is room to cut spending and this is a step in the right direction. The problem arises when we look “under the hood, ” and then the cuts disappear. The state budget is made up of several different parts: the general fund, special funds, federal funds, and other funds. These various parts all add up to give us the total operating budget. The current year’s total operating budget is $80.1 billion. In his budget address, Gov. Wolf notes that there will be a $3 billion deficit next year. He purportedly solves the problem with $2 billion in spending cuts and “savings initiatives” and increases taxes by $1 billion to make up the difference.

Let’s direct our attention to Gov. Wolf’s spending “cuts.” If the current budget is $80.1 billion and the Governor’s proposed budget cuts $2 billion in spending, the proposed budget should be $78.1 billion. Here is where the magical math comes into play. Instead of being $78.1 billion, the Governor’s proposed budget is $81 billion, an increase in spending of nearly $900 million. How does a $2 billion cut turn into a $900 million spending increase?

The purported spending cuts turn into a spending increase due to “baseline budgeting.” In baseline budgeting, the previous year’s budget is the starting point and the next budget increases from that point by a certain percentage. In other words, politicians like Gov. Wolf can claim they are cutting spending, but in reality, they are only increasing it by a smaller percentage than they wanted. It’s the equivalent of Orwellian newspeak. Gov. Wolf and others rely on the ignorance of taxpayers to get away with it.

If the Commonwealth spent $2 billion less next year than they are this year, then there wouldn’t be any need to discuss tax increases. Please, contact Gov. Wolf and the General Assembly immediately. Tell them that cutting spending means cutting spending and not making it grow more slowly.

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

Magic Wolf Claims Spending Cut With Higher Budget

Wolf Prison Closing Political Move

Wolf Prison Closing Political Move

By Leo Knepper

As surely as night turns to day, politicians make decisions to improve their chances of re-election. For Governor Wolf, that means a proposal to close two state prisons. Just like his move to close Unemployment Compensation call centers was politically charged, Wolf’s decision to close prisons is also politically motivated, and it isn’t just Republicans who are making that complaint:

Wolf Prison Closing Political Move
Can this man do anything right?

“On Monday, another budget fight took shape during a Senate hearing in which Democratic and Republican lawmakers accused Wolf of playing politics with the safety and economic security of their communities…

“‘Why does this decision have to be made so fast?'” asked Sen. Wayne Fontana, D-Allegheny, whose district includes a prison in Pittsburgh.

“The facilities have to be empty by July 1 to to [sic] meet the full budget savings in the 2017-18 fiscal year, [Corrections Secretary] Wetzel replied.

“‘That’s the political reason,’ retorted Fontana, who said he did not believe the savings estimates if the prison employees are offered jobs elsewhere.”

Governor Wolf is trying to erase from voter’s minds his last two years of tax and spend budgets by proposing modest spending cuts. His targets thus far have been smart from a political perspective: two prisons, two mental hospitals, and reduced spending on economic development are targets that were sure to garner objections from Republican lawmakers. With a $2 billion deficit, Wolf is proposing small cuts that his opponents will object to; giving him the opportunity later to say “I tried to make spending cuts, but the General Assembly wouldn’t let me. I guess we’ll have to raise taxes.”

If we ignore the Governor’s political motivation in closing the prisons specifically, does it make sense from a policy perspective?

Although the union representing Corrections Officers would disagree, closing the prisons is the right choice from a fiscal standpoint. According to the Commonwealth Foundation, the Pennsylvania state prison system will be 92 percent full if two prisons are closed; that allows enough room for an uptick in the inmate population.

Now that the floodgates are opening for cost cutting, we hope that the next item on the chopping block is the $250 million from the “Race Horse Development Fund.”

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

Wolf Prison Closing Political Move

Altoona Call Center Was Most Efficient And Is Now Closed

Altoona Call Center Was Most Efficient And Is Now Closed

By Leo Knepper

In November, the Wolf administration announced that they would be laying off 600 employees from unemployment call centers across the state. The official line is that the layoffs were due to the Senate’s failure to pass legislation funding the call centers. On the surface that explanation makes sense. However, it becomes less likely when you consider that the Governor had redirected billions of dollars in state funding during the extended budget process in 2015. It is also an odd “coincidence” that four of the seven call centers selected for closure were in Republican Senatorial Districts.

Altoona Call Center Was Most Efficient And Is Now Closed
He closed unemployment call center rated most efficient.

When that coincidence was pointed out to the Department of Labor and Industry, their spokeswoman flatly denied that politics played any role in the selection process. According to the Patriot-News, Governor Wolf stated that the closure decisions were “”based on a series of variables, including performance, capacity, efficiency, and ability of the centers to handle increased call volume.” Now information has come out refuting those claims as well.

Last Friday, Senator John Eichelberger and Senator Scott Wagner visited the Altoona Call Center. He had some interesting thoughts on the visit:

The Altoona Center is rated as the most efficient center with the lowest cost per call, they are the only office trained to handle a federal displaced workers program, and their building is one of two owned by the Commonwealth; the remainder of the Call Center buildings are leased. Most businesses would not close their most productive office, nor would they shut down an operation in a building they’re stuck with instead of closing one where they can get out of a lease.  Some of the employees feel that after the layoff, claim filing will become severely backed up and take out their anger on state legislators.  The real question is whether or not that is the strategy of the Wolf administration.  If their plan is to inflict enough pain on people who just lost their jobs simply to leverage the House and Senate, that smacks of the “Bridgegate” charges in New Jersey.” (Emphasis added)

The New Jersey Bridgegate scandal involved Governor Christie’s staff closing lanes of a local bridge to punish his political opponents. Considering how much heartburn some Republicans in the General Assembly are causing Governor Wolf, there are certainly some interesting parallels to the closure of the call centers and the Bridgegate Scandal in New Jersey. Senator Wagner and the Senate have submitted right-to-know requests for communications related to the closures and we’ll be curious to see what they find.

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

Altoona Call Center Was Most Efficient And Is Now Closed

GOP Proclaim Budget Goals First Please

GOP Proclaim Budget Goals First Please

By Leo Knepper

In November, Pennsylvania voters handed Republicans in the General Assembly historic majorities. In the Senate, the Republicans have a veto-proof majority. Across the Capitol, the Republicans in the House have a 40-vote advantage. The coming New Year also portends an impending battle over the next budget. Governor Wolf has already demonstrated his willingness to use state employees as leverage in a public relations battle with the General Assembly; there is no indication that his approach will change. With a $1.7 billion revenue shortfall projected for next year, what should the General Assembly do? GOP Proclaim Budget Goals First Please

If Republicans in the General Assembly were smart, they would upend a long-standing budget tradition and go on offense. Typically, the budget season is kicked off by the Governor’s budget address to the General Assembly. In his first budget address, Governor Wolf laid out a laundry list of progressive/liberal policy goals he wanted in his first budget. In his second address, he scolded the General Assembly for not giving him any of what he asked for in his first budget. Keep in mind, the Governor’s policy priorities came with a hefty price tag and would have required a massive tax increase.

In the coming year, the General Assembly should ignore tradition and preempt the Governor’s budget address with a plan of their own. That isn’t to say they should release a statement with the usual platitudes about protecting taxpayers. Rather, the House and Senate Republicans should have an entire budget and revenue plan prepared and release it ahead of the Governor. A preemptive General Assembly budget would force the Governor to play defense rather than the usual offensive position granted to governors.

To be successful and fiscally responsible, the General Assembly must address the revenue side of the equation first. Although it sounds strange, and it does defy logic, the General Assembly typically decides how much they’re going to spend and then cobbles together a tax package to pay for it. By determining the revenue ceiling first, the General Assembly would force the Governor to give a detailed account of who he would tax to pay for his almost certainly higher number. Providing exact numbers for how the funds would be dispersed also forces Department Heads to justify any amount above the General Assemblies stated budget when hearings commence.

Republican leadership must also avoid the trap, which they frequently fall into, of crafting a package “that the Governor will sign.” No matter how generous the General Assembly is with tax dollars, the Governor will want more. Instead, leadership would do well to work with their caucus members and craft a plan that they are satisfied with otherwise, the entire effort will be for naught.

Voters gave Republicans historic majorities in the General Assembly in 2017. The question now is, what will Republicans do with it? Will they squander the opportunity, or will they make the hard choices that voters are trusting them to make?
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

GOP Proclaim Budget Goals First Please

Tom Wolf Shameless Politics

Tom Wolf Shameless Politics

By Leo Knepper

Tom Wolf Shameless Politics
Shameless and cruel

In mid-November, Governor Wolf announced that the Department of Labor and Industry would be laying off employees. According to the Governor, this was due to the intransigence of Senate Republicans in their refusal to pass legislation funding unemployment call centers. On the other hand, Senate Republicans argue that the problem was the Governor’s unwillingness to answer their questions about funding.

Who is in the wrong?

Senator Scott Wagner makes a convincing argument in a column published by the York Daily Record:

“This project [the call centers] was fed approximately $240 million over the last four years with zero accountability. Now the senate is being pressured into throwing another $57.5 million down a black hole without any questions being asked.

“In 2006, the Commonwealth of Pennsylvania signed a $106.9 million contract with IBM to be completed in 2009.

“IBM’s contract was to give the state a new computer system to track employee wages, employer taxes, handle unemployment claims, appeals, and payments.

“In July of 2013, the state terminated the contract with IBM because it was $60 million over budget. The $60 million was in addition to the $106.9 million initial contract, and it was 42 months late. What happened with this contract? Who was held accountable for the cancelled IBM contract?

“Later in 2013, the Legislature voted to allocate $60 million per year for four years, and that ends at the end of this year. This was for the same project that was contracted with IBM and then cancelled.

“So let’s recap for taxpayers – $106 million plus another $60 million for IBM.  Add the last four years of $60 million per year for a total of $240 million – all for a grand total of more than $400 million in taxpayer money.”

Senator Wagner is right to question the lack of results from $400 million in taxpayer spending and this line of inquiry is long overdue. You can bet that there will be more confrontations between the Governor and the General Assembly in the coming year. According to the Independent Fiscal Office, there will be a $1.7 billion deficit in the 2017-2018 budget year. The General Assembly must take a close look at past spending in terms of amount and efficacy. If they don’t, Pennsylvanians will face higher tax bills in the future.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Tom Wolf Shameless Politics

Frankenpension Means Failure

Frankenpension Means Failure

By Leo Knepper

A House and Senate conference committee in the Pennsylvania Legislature is taking another shot at  pension reform. In keeping with the Halloween spirit, they have resurrected their hybrid pension proposal one more time in an attempt to achieve “pension reform” by decree.

Unfortunately, this over-engineered proposal with many exempted employee groups will likely offer insignificant savings when measured in today’s dollars and by itself will do nothing to address the ever-increasing unfunded liability. The “everything will be fine” 30-year scenario touted by some, should be tempered by others who reference the risk of plan insolvency occurring over the next 15 to 20 years.

Frankenpension Means FailureIn fact, CAP continues to seek a single example in the US private-sector where such a similar plan design arrangement exists.
As we’ve noted on multiple occasions, the hybrid plan does not offer any meaningful protection for taxpayers particularly since the defined-benefit plan can always be retroactively increased. The House has been trying to sell this bad plan design since 2014. Every iteration since that time has gotten progressively worse. The “new and improved” stacked hybrid plan is no exception.

In an attempt to placate conservatives, the conference committee proposal will likely include a defined contribution option for new employees. On the surface, the inclusion of a defined contribution plan would seem to be a positive development. However, it does create a problem. As Rep. John McGinnis noted to Capitolwire (paywall):

“With multiple plans, one will do better than the others and in the future the members in the plans that are not performing as well will pressure elected officials for redress and will likely get it.”

As noted, this proposal does not address the $60+ billion in unfunded pension liabilities that currently saddle taxpayers. Furthermore, it is unlikely that the “reforms” in the pension proposal will include changes to how funds are managed and the annual expected rate of return assumption. Pennsylvania’s pension plans assume a 7.5 percent annual rate of return (PSERS adjusted their expectations to 7.25 percent starting in July). In an attempt to meet this optimistic goal, the pension plans use active fund managers instead of investing in index funds or other passive management strategies. Using active fund managers costs taxpayers $750 million per year. Last year that cost resulted in a 0.4 percent return for PSERS and a 1.29 percent return for SERS.

Underwhelming returns on investments and chronic underfunding of the pension plans and benefit improvements by politicians have created a mess for taxpayers in the form of massive unfunded liabilities. The pension reform proposals being bandied about do nothing to address those problems, nor do they adequately protect taxpayers. Instead, the conference committee’s Rube Goldberg reform proposal gives politicians the ability to tell voters that they “did something.” Pennsylvania’s current and future taxpayers who will be tasked with bailing out the system deserve real reform; not smoke and mirrors.

For those policymakers seeking a straightforward comprehensive solution to our ongoing pension woes, you should go no further than to read our recent blog post which highlights a recent op-ed authored by actuary Richard C. Dreyfuss.

Please take action now.

Frankenpension Means Failure

Happy Birthday William Penn

Happy Birthday William Penn

By Leo Knepper

On Oct. 14, 1644, Pennsylvania’s founder William Penn was born in London, England. Penn had a rebellious streak and was a man who was ahead of his time. Ivan Martin’s introduction to Penn’s book No Cross, No Crown provides a brief account of his life. By limiting himself to the highlights, Martin manages to condense Penn’s life to a mere seventeen pages.  Happy Birthday William Penn

Despite being born into an aristocratic family, Penn was kicked out of Oxford at the age of 17. At the age of 24, he was imprisoned in the Tower of London. Penn was imprisoned for his writings, which attacked the doctrines of the Church of England. The Bishop of London ordered Penn’s indefinite imprisonment until he recanted his previous statements in writing. Instead, he used the supply of paper and ink to write No Cross, No Crown. Penn spent eight months in the Tower before he was released; without recanting. Essentially, Penn spent eight months in an unheated cell in solitary confinement for his religious beliefs. One of his more famous quotes neatly encapsulates his personal philosophy, “Right is right, even if everyone is against it, and wrong is wrong, even if everyone is for it.”

Penn’s numerous encounters with the courts and persecution by English authorities inspired many of the innovations he included in Pennsylvania’s first Constitution. Penn used the Constitution to limit the power of government, a novel idea at the time. He was the progenitor for many of the liberties enumerated in the United States Constitution and Bill of Rights including a free press, trial by jury, religious tolerance, and the amendment process itself. Penn also insisted on low taxes. His focus on freedom and free enterprise led to an explosion of growth for Penn’s Woods.

William Penn’s guiding principles and dedication to his “Holy Experiment” paid dividends for Pennsylvania’s earliest settlers and American’s today.

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

Happy Birthday William Penn

Pennsylvania Spends, Gets Bad Roads

Pennsylvania Spends, Gets Bad Roads

By Leo Knepper

Lowman Henry, last week, discussed the slow-motion fiscal train wreck that the Pennsylvania Turnpike faces. At the end of August, we noted that Montgomery County Commissioner Joe Gale was pushing back against his colleagues who were trying to enact a new tax on County drivers. In both instances, readers noted that it was only natural for Pennsylvania to spend so much on road work due to the volume of roadways the state maintained.

It is reasonable to argue that there is a direct relationship between the miles of road and the funds required to maintain those same roads. However, that argument ignores the issue of whether or not the money is spent efficiently. In the case of the Turnpike, some of the funds it sends to PennDOT are used to subsidize mass transit, which are some of the most inefficiently operated systems in the state. Furthermore, people should pay for the services they use. If someone uses mass transit, the ticket price should cover the cost. Likewise, tolls from the Turnpike should fund the Turnpike.

Returning to the original issue of whether or not the taxes being collected to spend on roadwork are being spent efficiently by PennDOT, one way to determine the answer to this question is to look at spending on a per mile basis. According to the Reason Foundation’s Annual Highway Report, Pennsylvania spends more per mile than 27 other states, $160,477. Regarding overall efficiency, the Report calculated that Pennsylvania’s overall rank was 39th when road conditions and other measures were taken into account.

Taxpayers and drivers shouldn’t expect an improvement in Pennsylvania’s standing next year. The Report relied on 2013 data, meaning it was before the gas tax increase enacted by Governor Corbett. As we noted in 2013, the General Assembly’s failure to reform how transportation dollars were spent would result in even more waste. We fully expect that prediction to be born out in the future.

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

Pennsylvania Spends, Gets Bad Roads

Pennsylvania Spends, Gets Bad Roads

Wallet Guarding Time Looms

Wallet Guarding Time Looms

By Leo Knepper
In early August we mentioned that the “balanced” budget passed by the General Assembly was falling apart. At present, not one casino applied for the $1 million liquor license authorizing them to sell liquor twenty-four hours a day. Also, the tax that General Assembly levied on electronic cigarettes is going to bankrupt small businesses.

Wallet Guarding Time LoomsWhen the General Assembly returns later this month, the House and Senate will be looking for ways to fill the holes. The smart thing to do would be to cut spending and trim back corporate welfare. For example, does Pennsylvania really need a $4 million tax credit to attract big name performers to second tier cities? Or, $250 million for a race horse development fund?

The taxpayer friendly answer is no.

The average Pennsylvanian does not benefit from the various flavors of crony capitalism baked into state spending. Unfortunately, that doesn’t stop the General Assembly from adding new items “economic development” programs without concern for the people paying the bill.

As we learn more about the tax options being considered by the House and Senate, the Citizens Alliance of Pennsylvania will pass that information along to you.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.