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.

Cut Cost First, Thank You Joe Gale

Cut Cost First

By Leo Knepper

Last year the CAP PAC made its first major foray into county politics and it just paid dividends for residents of Montgomery County. In his race for Commissioner, Joe Gale ran as an unabashed conservative. Earlier this week Commissioner Gale took a vocal stand for those principles and saved his constituents $3.5 million.

Due to a law passed in 2013, Pennsylvania currently has the highest gasoline taxes in the country. That same law contained a provision allowing counties to enact a $5 registration fee for vehicles. Seeing an easy source of revenue, Gale’s Democratic colleagues were set to extract more money from Montgomery County taxpayers. That plan was derailed when Joe brought media attention to the pending vote. Unlike his Republican predecessor, who would “go along to get along”, Gale went to the public to make sure they were aware of the tax increase.

Cut Cost First, Thank You Joe Gale
Joe Gale actually fights for the citizens.

There is a great deal of similarity between what is happening in Montgomery County, and what typically happens in Harrisburg. Rather than looking at how to save money, elected officials enact a new fee or tax and take the money from their constituents. In this instance, the $5 per vehicle fee would purportedly go to “infrastructure” projects. While infrastructure is arguably one of the few legitimate services government should provide, taxpayers are not getting the most for their money.

As Commissioner Gale points out, and we have been talking about for years, infrastructure and other construction projects are subject to wage controls that force taxpayers to overpay for labor. These wage controls come in two basic types, an artificially calculated “prevailing wage” and project labor agreements (PLA’s). Both of these wage controls benefit organized labor and PLA’s also exclude nonunion contractors from the bidding process.

Eliminating prevailing wage and PLA’s would drastically decrease the cost of public projects and make tax dollars go much further. However, it is politically easier for elected officials to take more money from taxpayers than it is to take on organized labor.

We applaud Gale’s willingness to stand up for taxpayers. His actions tell us that the CAP PAC made a good investment in his candidacy.

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

Cut Cost First, Thank You Joe Gale

Ghost Teachers Unnecessary Tax Burden

Ghost Teachers Unnecessary Tax Burden

By Leo Knepper

The Commonwealth Foundation undertook the monumental task of acquiring and analyzing teachers’ union contracts from 499 school districts. Their main findings were shocking, but not surprising. Two of items that caught our attention were the prevalence of release time provisions and the “generosity” of healthcare benefits.

Ghost Teachers Unnecessary Tax BurdenRelease time or “ghost teacher” provisions force taxpayers to foot the bill for union activities. Roughly 20 percent of contracts across the state allow for a full release. These teachers don’t set foot in the classroom at all. Instead, they are on the district payroll and can collect a variety of benefits while they work for the union. One of the most expensive benefits that ghost teachers had received, until recently, was a taxpayer funded pension.

On the issue of health insurance benefits, in 99 districts taxpayers foot the entire bill. The workers covered under the teachers’ union contracts don’t pay anything for their premiums. In instances where teachers are required to pay toward their premium costs, they pay far less than the Pennsylvania average of $3,598 per person.

A full summary of the Commonwealth Foundation’s findings can be found on their website; the district-by-district contract details can be found here.

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

Ghost Teachers Unnecessary Tax Burden

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