Pennsylvania Stable Rating Will Be But Temporary

Pennsylvania Stable Rating Will Be But Temporary

By Leo Knepper

Earlier this week, Moody’s upgraded Pennsylvania’s financial outlook from “negative” to “stable.”

The improvement stems from the Legislature and the Governor avoiding each other just long enough to get a budget passed.

No one in the Capitol is rejoicing, however. The looming public pensions crisis serves as a constant reminder that the Commonwealth’s credit ratings can fall at any moment. Pennsylvania Stable Rating Will Be But Temporary

Sadly, not every lawmaker in the General Assembly understands how precarious and downright dangerous this crisis is. Some lawmakers maintain their ignorance purposefully, while others simply don’t understand the math. Members of both parties, in collusion with public-sector unions and special interest groups, are all that stand in the way of genuine reform-reform that could potentially lift the Commonwealth’s financial outlook from “stable” to “positive.”

In an op-ed published last month in the Philadelphia Inquirer, actuary and business consultant Richard C. Dreyfuss provided a frank and compelling summation of the problem:

“Our $63 billion combined unfunded liability for the Public School Employee’s Retirement System (PSERS) and the State Employees’ Retirement System (SERS) is the result of underfunding, poor investment returns, and benefit enhancements. It’s measured in today’s dollars and based on a number of assumptions, including an optimistic annual investment return of 7.5 percent.”

He also provided a relatively straightforward, common-sense solution:

“Pension reform will truly be underway when all new [public employees] participate in a stand-alone, defined-contribution plan and we commit to paying off our pension debt over 20 years.”

Simple right? Well, not to House Speaker Mike Turzai.

In an op-ed published earlier this month in the Pittsburgh Post-Gazette, Turzai laid out his reasons for supporting a watered down solution known as the “stacked hybrid bill.” He says the bill would maintain “elements of the current defined benefit system, while instituting the first 401(k) system in state history.”

“Unlike other ‘reform’ proposals, the stacked hybrid approach doesn’t include arbitrage gambles, funding reductions or gimmicky quick fixes. We fully meet our funding obligations to the retirement systems.”

The hybrid plan does not “fully meet” funding obligations. Even if we switched the entire system from a defined-benefit to a defined-contribution retirement plan, that merely stops the bleeding; it won’t do anything to address the massive unfunded liability that has already accumulated. The stacked hybrid plan being promoted by state House leaders doesn’t even stop the bleeding because it maintains a defined benefit component.

This attempt at reform is, itself, a gimmick. Keeping any elements of the defined-benefit plan virtually guarantees that the unfunded liabilities will not only go unencumbered; they will continue to build.

Political courage may be in short supply these days, but numbers don’t lie. Pennsylvania taxpayers need their representatives to protect them from the “fiscal cliff” Turzai and his fellow lawmakers should know is coming.

The only solution is to stop pretending this Band-Aid of a bill is the tourniquet that will stop the bleeding and finally pass meaningful reform. The General Assembly and Governor Wolf must stop ignoring reality and pretending that half-measure reforms will stop the problem.

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

Pennsylvania Stable Rating Will Be But Temporary

IBEW Local 98 Backs Hillary

IBEW Local 98 Backs Hillary

By Leo Knepper

IBEW Local 98 Backs Hillary
The IBEW Local 98 choice.

You are probably not alone if you’ve never heard of IBEW Local 98, or John “Johnny Doc” Dougherty, Jr. However, they are names that are familiar to people who follow state politics closely, or the politics of Philadelphia. As the Philadelphia Inquirer reported in 2014, IBEW Local 98 is Pennsylvania’s largest independent source of campaign cash.

According to the 2014 article, the Local 98 spent over $25 million on political races from 2000 through May, 2014. Since then, they have spent at least another $2 million. Recipients of Johnny Doc’s largess include Supreme Court Justice Kevin Dougherty, John’s brother. The IBEW’s contributions to Justice Dougherty were over $1.5 million. Attorney General Kathleen Kane, Gov. Tom Wolf, Gov. Tom Corbett, Republican Attorney General Candidate John Rafferty, and a host of other candidates have also received contributions from the union.

According to the Inquirer:

“Federal authorities executed search warrants at more than half a dozen locations, including Dougherty’s house in South Philadelphia, his sister’s home next door, the Local 98 hall at 17th and Spring Garden Streets, and the Mount Laurel home of union president Brian Burrows.

“At midday at union headquarters, agents removed at least a hundred boxes of paperwork, along with several computer hard drives, loading them into a yellow Penske truck. The scene was repeated shortly after 3 p.m., as boxes, computer hard drives, and a laptop were carried from the union business office nearby.

“Seized were bank records, invoices, credit card records, and tax forms, a person familiar with the investigation said… a person familiar with the investigation said it focused on the union’s finances and its involvement in the political campaigns of Mayor Kenney and state Supreme Court Justice Kevin Dougherty, who is Dougherty’s brother. Federal authorities are also scrutinizing Dougherty’s finances and taxes, the source said.”

A citizen reporter was quick enough to capture one of the raids on video.

It isn’t without irony that the IBEW office is emblazoned with banners extolling Hillary Clinton for President. In April, Hillary Clinton had a sit-down meeting with John Dougherty.

This investigation could have far-reaching implications for federal, state and local politics. We will keep you posted about further developments as they occur.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

IBEW Local 98 Backs Hillary

Revenue Scheme Failing In Pa.

Revenue Scheme Failing In Pa.

By Leo Knepper

In the search for revenue to cover the General Assembly’s insatiable need for more spending, the legislature looked for new sources of revenue and taxes. Ignoring the $200 million that they borrowed from other funds, the ill-conceived choices they made are already falling through. Revenue Scheme Failing In Pa.

Lawmakers thought they had a sure winner when they decided to sell casinos licenses to sell alcohol between 2 a.m. and 6 a.m.; they were wrong. Casinos have scoffed at the $1 million license fee. One casino spokesman stated that they likely wouldn’t take the license if it was free. This lack of interest from casinos for the 24-hour liquor licenses creates an immediate $12 million hole.

The second hole opening up is even more tragic. In their abject greed, the General Assembly levied a 40 percent wholesale tax on electronic cigarette and “vaping” supplies. Adding insult to injury, the new tax applies to merchandise that is already in stock. As one small business owner noted:

“‘It’s almost as if the tax was designed to kill small business,’ said Chris Hughes, owner of Fat Cat Vapor Shop in Montoursville.

“Hughes estimated that he would have to cut the state a $40,000 check for the $100,000 in inventory he currently has on hand.”

Because Mr. Hughes does not have the ability to send the government a $40,000, he is liquidating his inventory and going out of business. Now the state will lose the tax revenue Mr. Hughes’s business was generating and the new taxes the General Assembly had counted on to fill in the budget deficit.

These problems could have been avoided if the legislature and the Governor had made an attempt to rein in spending. Instead, they added to the corporate welfare budget at the expense of small businesses. Now business owners like Mr. Hughes closing shop because of legislative greed.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Revenue Scheme Failing In Pa.

Ghost Teachers Lose, Taxpayers Win

Ghost Teachers Lose, Taxpayers Win

By Leo Knepper

It is fairly common and legal in Pennsylvania for teachers to engage in union activity while continuing to collect their teaching salary. The practice, officially known as “release time”, is written into union contracts all over the commonwealth. In addition to receiving a taxpayer-funded salary, these ghost teachers were also accruing time in the Pennsylvania School Employees’ Retirement System (PSERS). In other words, some union officials who had not set foot in a classroom for years were increasing the value of their pension at taxpayers’ expense. That arrangement may finally be coming to an end. Ghost Teachers Lose, Taxpayers Win

In late June, PSERS revoked the pension credit accumulated by a ghost teacher in Allentown. Furthermore, PSERS ruled that the past two union heads had accrued more than $1 million in pension benefits illegally. An article published by Watchdog.org details PSERS findings:

“PSERS concluded, ‘an active member is permitted to receive retirement credit while working for a collective bargaining organization provided: (1) at least half the members of the organization are members of PSERS; (2) the employer approves the leave; (3) the collective bargaining organization reimburses the employer for the member’s salary and benefits; (4) the member works full-time; and (5) the employer reports only the salary the member would have earned as a school employee.'”

PSERS’s ruling is great news for taxpayers. Teachers who are working exclusively for the union have no business being paid by taxpayers or collecting a taxpayer funded pension. The union is appealing the decision; we will let you know what ultimately happens.

Ghost Teachers Lose, Taxpayers Win

Irresponsible Budget Indicates Incompetent Legislators

Irresponsible Budget Indicates Incompetent Legislators

By Leo Knepper

The irresponsible budget passed by the General Assembly became law without the Governor’s signature early Tuesday morning (July 12). Because spending exceeds revenue projections, the budget was not balanced. Pennsylvania’s constitution requires a balanced budget. The imbalance was corrected, at taxpayers’ expense, on Wednesday.

Irresponsible Budget Indicates Incompetent LegislatorsOn a somewhat positive note, the increased taxes on heating bills was not part of the tax increase. However, there was a lot not to like about the legislation. To satisfy the General Assembly’s insatiable need for spending increases, taxes were raised on tobacco products, e-cigarettes, and digital downloads (music, movies, apps, etc.) among other things. The Pittsburgh Tribune-Review has a full list of the tax increases and sources of additional revenue.

Here are the roll call votes for the House and Senate.

Ed Notes: Of the 31 Republicans in the 50-member Pennsylvania Senate, 17 voted against the tax hikes including Delaware County Republicans Tom McGarrigle (R-26) and Tom Killion (R-9). Andy Dinniman of the 19th District was the only Democrat to vote against the bill. Kudos to them.

Of the 118 Republicans in the 203-member State House, 54 voted for the bill including Delaware County Republicans Bill Adolph (165), Steve Barrar (160), Nick Miccarelli (R-162) and James Santora (R-163). Republican Chris Quinn, who won a special election, July 12, to fill the 168th District seat vacated by Killion for his Senate run, did not vote as he had not yet been sworn in. Of the 84 House Democrats, 11 voted against the bill including, believe it or not, Delaware County Democrat Leanne Krueger-Braneky (D-161).  Mr. Conservative Steve Barrar, mull that one around.

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

HB 1690 Is Mild Liquor Reform

HB 1690 Is Mild Liquor Reform HB 1690 Is Mild Liquor Reform

By Leo Knepper

On Tuesday, (June 7) the Pennsylvania House overwhelmingly passed HB 1690 to modernize Pennsylvania’s Prohibition-era alcohol sales. The bill passed the Senate in December of 2015. By all indications, Governor Wolf will sign the legislation into law. If HB 1690 is signed, it will make the purchase of wine and beer somewhat more convenient for consumers.

The biggest changes will be that some grocery stores will now be able to sell wine in addition to beer if they have a separate checkout area. Also, some gas stations meeting specific criteria will also be able to sell beer.

Gas stations will require special approval from the PLCB and must have a separate checkout area for beer purchases. Unfortunately, the PLCB will still control wholesale of wine and spirits. State stores will still be the only show in town when it comes to making the purchase of spirits. Furthermore, the PLCB will now be able to engage in promotional pricing to encourage increased consumption of alcohol, but they will also be charged with enforcing the law and encouraging “responsible” consumption.

One final negative we came across when reviewing the fiscal notes for the legislation was the inclusion of $2 million in corporate welfare. Pennsylvania government will now be able to award up to $1 million in grants to increase the production of wine and an additional $1 million in grants to increase the production of beer and malt beverages. Oddly enough, Pennsylvania became the number one craft beer producer in the country earlier this year without any government assistance. Keep this $2 million over the course of the upcoming budget debate when you hear someone say spending has been cut to the bone.

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

HB 1690 Is Mild Liquor Reform

Pennsylvania Baseline Budgeting Must End

Pennsylvania Baseline Budgeting Must End

By Leo Knepper Pennsylvania Baseline Budgeting Must End

Some Pennsylvania legislators are proposing revolutionary changes to the state budget process.

And, by revolutionary we mean doing something that the private sector has been doing for decades.

On Tuesday, the “Taxpayers Caucus” released a report highlighting over $3 billion dollars in potential savings this year. Many of the items have been discussed separately in the past, but this is the first time anyone has compiled them in one place. In reviewing the report, there were items related to the budget process that stood out in terms the scope of the changes proposed.

The most interesting thing was the proposal to modify the budget process completely. Although this change did not have a dollar amount attached to it, following the report’s recommendations could save taxpayers billions over the medium term. Specifically, the report called for Pennsylvania to shift from “baseline budgeting” to a hybrid budget process comprised of performance-based budgeting and priority-based budgeting. Discussions about budgeting processes are usually enough to make one’s eyes glaze over, but switching to a hybrid budgeting process would represent a radical shift in how the Commonwealth spends your money.

Baseline budgeting is a simple (and terrible) way to allocate resources. What it means is that an agency or department looks at what their budget was this year and assumes that they will get a certain percentage more next year. Baseline budgeting means that spending will essentially never decrease. Furthermore, it is how agencies can claim that their funding got cut even though they got more money year over year.

Let’s say Agency X received $1 million last year. Their assumption is that they will get 5 percent more this year, or $1.05 million. Instead, the legislature increases Agency X’s budget by “only” 3 percent, to $1.03 million. Under baseline budgeting Agency X would now state that their funding was “cut”, but in reality, they just got a smaller increase.

In contrast, performance- and priority-based hybrid system eliminates the assumption that Agency X will automatically get more money, and more importantly it raises the possibility that the funding might go away entirely if the programs it administers aren’t performing as well as alternatives or if the priorities of the Commonwealth change. Most programs run by the state and federal government do not have a clear objective, or if they do there is very little information available on what progress is being made to achieve that goal. Economic Development, i.e. corporate welfare, and social welfare programs are notoriously bad at setting objectives and measuring performance. A real world example would be for a business to invest in all new servers to reduce downtime, but never measuring the downtime to see if it worked.

Priority-based budgeting is what CAP called for during the last few budget cycles. It is similar to how families budget. They know their income and make financial decisions based on the amount of money they have, which is a stark contrast to how government typically operates. The government generally decides how much to spend and then tries to figure out where to get the necessary money.

The changes proposed by the Taxpayer Caucus would drastically alter the culture of government from one of entitlement to one of results. The budgeting process is not particularly exciting and does not make good headlines. However, the basic assumptions underlying the allocation of resources affects Pennsylvanians in a profound way, and it is worth examining carefully.

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

Pennsylvania Baseline Budgeting Must End

Tobash Plan Bad Pension Reform

Tobash Plan Bad Pension Reform Tobash Plan Bad Pension Reform

By Leo Knepper

There are times when we can almost repost an old blog verbatim, and this is one of those times. On May 17, the House State Government Committee voted HB 1499 out of committee to the floor of the House; this is the third iteration of bad pension legislation.

As we noted last year:

“The Tobash plan was introduced last year [2014] as an amendment to HB 1353. At that time, it set up a ‘stacked’ retirement benefit system. The first $50,000 in state employee pay is eligible for a traditional pension; beyond that there is a 401(k) style plan. It is worth noting that the average state employee salary was $52,655 for 2014. In other words, the Tobash plan as introduced last year would have had impacted very few future employees. According to actuarial analysis done last year, 98.8% of the ‘savings’ projected under the Tobash plan is 15 years or farther into the future, which is a pretty big problem since SERS and PSERS are on course to be bankrupt in 15 years.”

The current version of the Tobash plan has all of the same problems and does not address the pension problem in any meaningful way. Instead, it is a reform in name only.

By their very nature defined benefit pension plans leave employees at the mercy of politicians. The current pension systems have a combined unfunded liability of more than $60 billion because elected officials are loath to make hard decisions when it comes to paying for the promises that they’ve made. HB 1499 does nothing to protect new employees or members of the current system. It creates an illusion of reform designed to avoid making government union bosses too angry and appease taxpayers who don’t have time to look into the legislation beyond the “pension reform” headline.

In their analysis of the legislation, the Commonwealth Foundation found further problems with the plan design:

“Moreover, this model provides poor plan design for workers. Public employees should be contributing more toward a defined contribution plan at the front end of their career to give their investments time to grow. Under a stacked hybrid, workers invest more in a defined contribution plan as they near retirement.

“Research shows defined contribution plans provide stable and substantial retirements when workers invest over their career.”

If Tobash’s “reform” is the best the General Assembly can muster, taxpayers are in for a double-dose of trouble. Senate Majority Leader Jake Corman (R-34) has indicated his willingness to trade a tax increase for an “overhaul” of the pension system. There is no need for a tax increase. The Legislature needs to prioritize spending. Furthermore, taxpayers should be livid that Corman would trade their hard earned money for reform that, at this point, will do little to nothing for solving the pension problem now or in the future.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

Tobash Plan Bad Pension Reform

Corruption Caused Pension Crisis

Corruption Caused Pension Crisis

By Leo Knepper Corruption Caused Pension Crisis

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, investment performance, 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 $63.3 billion in unfunded liabilities, 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. This “loan” has a 7.5 percent annual rate. In Year 1, the principal is $63.3 billion. If no payments are made, the amount due increases to $68 billion next year, then $73.2 the following year and so on. 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 (R-79) introduced HB 900 last year to address the unfunded liability. In his co-sponsorship memorandum, McGinnis states:

“Right now, just the annual interest on the pension debt is over $4 billion, equivalent to the full yearly salary and benefits for over 50,000 teachers.  The situation is so dire that 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.

“The right approach is to follow the recommendation of the 2014 Blue Ribbon Panel on Public Pension Funding commissioned by the Society of Actuaries and commit ourselves to paying off the current UALs [unfunded accrued liabilities] of SERS and PSERS over 20 years with level dollar funding.  It is not just the responsible thing to do after more than 10 years of serious underfunding–it is absolutely necessary to prevent substantial and irreversible harm to the future of Pennsylvania.”

We can avert the fiscal catastrophe. However, every day the General Assembly does not act, the unfunded liability grows. HB 900 is currently in the House State Government Committee. Please, contact your representative today at this link and urge them to take action.

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

Corruption Caused Pension Crisis

DEP Math Doesn’t Add Up

DEP  Math Doesn’t Add Up

By Leo KnepperDEP  Math Doesn't Add Up

 

First, a little background. In 2010, the EPA in Washington, DC imposed regulations governing nutrients that made their way into the Chesapeake Bay. The Susquehanna River is part of the Chesapeake Bay Watershed; giving the EPA authority over nearly half of Pennsylvania’s landmass due to the various tributaries feeding into the Susquehanna. The cost to Pennsylvania taxpayers to meet the EPA’s mandates will be nearly $5.6 billion over the next 10 years under the current reduction system. Here is where the Secretary of the Department of Environmental Protection (DEP), John Quigley comes into play.

Earlier in March, Quigley was questioned about the cost savings Pennsylvania taxpayers might enjoy if the nutrient reduction targets were achieved using competitive bidding via the private sector versus the current model that is driven by large-scale government infrastructure spending. A rebuttal from The Coalition for Affordable Bay Solutions (CABS) neatly summarized the duplicity of Quigley’s response:

“…[I]f $2 per lb. nitrogen reduction credits from riparian buffers are available to meet the Bay mandate . . . [then] the total cost to meet the 24 million lbs. of nitrogen mandates would be $48 million annually. Yet the Secretary continues to state that the most reliable estimate of the resources required to meet the mandate is $5.6 billion including operations and maintenance through 2025.”

The numbers that Quigley uses to argue against competitive bidding total $480 million over 10 years, but at the same time, he is stating that the DEP needs more money because the cost will be $5.6 billion in the same period. Both statements cannot be true.

In further researching the subject, we reviewed a 2013 report completed by the Legislative Budget and Finance Committee (LCBF) that found using a competitive bid process would reduce the cost to taxpayers by 80-85 percent versus maintaining the status quo. It is no surprise that the competitive bidding option would save taxpayers money. However, it is unfortunate that the Secretary of the DEP would oppose a more cost effective method for complying with a federal mandate.

Unless the EPA reverses course on Chesapeake Bay Watershed requirements, Pennsylvania taxpayers will have to pay to comply. The question is how much money it will take to comply. To reduce costs, Pennsylvania must embrace a competitive bidding program. Currently, there is legislation in the Senate (SB 724) that would set up the necessary legal framework. We will monitor the legislation and keep you informed on its progress.
Mr. Knepper is executive director of Citizens Alliance of Pennsylvania.

DEP  Math Doesn’t Add Up