Category: Leo Knepper

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

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