Convict Mellow Wants $240 G Pension Back

Convict Mellow Wants $240 G Pension Back

By Leo Knepper

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

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

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

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

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

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

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

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

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

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

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

Convict Mellow Wants $240 G Pension Back

Convict Mellow Wants $240 G Pension Back

SERS Lowers Estimated ROI But Not Enough

SERS Lowers Estimated ROI But Not Enough

By Leo Knepper

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

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

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

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

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

SERS Lowers Estimated ROI But Not Enough

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

 

Ridiculous Public Pensions Fueled By Inflated Compensation

Ridiculous Public Pensions Fueled By Inflated Compensation

Ridiculous Public Pensions Fueled By Inflated CompensationBy Sen. Scott Wagner

The Pennsylvania State Senate held budget hearings, Feb. 23, and one of the agencies that testified in front of the Appropriations Committee was the Pennsylvania State System of Higher Education (PASSHE). 

PASSHE oversees the 14 state-owned universities which are:

1.  Bloomsburg University

2.  California University

3.  Cheyney University

4.  Clarion University

5.  East Stroudsburg University

6.  Edinboro University

7.  Indiana University

8.  Kutztown University

9.  Lock Haven University

10. Mansfield University

11. Millersville University

12. Shippensburg University

13. Slippery Rock University

14. West Chester University

The Chancellor of PASSHE appeared in front of the Appropriations Committee to answer questions.

One of my Senate Colleagues asked what the average salary was for a university professor – the Chancellor responded that it is approximately $85,000.

When it was my turn to ask questions I focused on his response of $85,000.

I stated to the Chancellor that this week PennLive.com did several stories on people employed by the state making more than $100,000.

I went on to tell the Chancellor that in the PennLive story there was reference to the swim coach at West Chester University who earned total compensation of $313,954 in 2016. And by the way, this same coach earned $420,172 in 2015.

I continued to walk the Chancellor through the compensation for the swim coach – his base salary was $77,285 and the rest of his compensation was additional income earned running summer swimming camps.

Then I asked the Chancellor this question:

When the swim coach retires will his pension be based on his base salary or his total compensation?

The Chancellor responded that it depends which pension program he is in.

Here is where my brain goes into overdrive.

I went on to say that if the pension is based on his base salary that may be reasonable, but if his pension is based on his total compensation – which I think will be the case here – that means a swim coach making over $300,000 per year could potentially get two thirds of $300,000 which is $200,000 per year for the rest of his life. 

I will research the answer to this question and get back to you with the answer. 

The $64,000 question is this –  Am I right or am I wrong?

Click on the links below to view the stories.

The story referencing the West Chester swim coach is in the second story. 

One in 14 State Government Employees Made the $100,000 Club Roster in 2016 

http://www.pennlive.com/politics/index.ssf/2017/02/one_in_14_state_government_emp.html

Meet the State Employees Who Had the Highest Earnings in 2016: $100,000 Club

http://www.pennlive.com/politics/index.ssf/2017/02/100000_club_check_out_who_the.html

We will have the answer next week.

I want to introduce another slogan:  “Harrisburg and State Government – the gifts that keeps on giving.”

Ridiculous Public Pensions Fueled By Inflated Compensation

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

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

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

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

Pension Debt Grows $15M Per Day

Pension Debt Grows $15M Per Day

By Rep. John D. McGinnis
$15 million of new pension debt each and every day over the last 15 years! That’s what our state government has dumped on the taxpayers of the Commonwealth, all the while falsely claiming to have had balanced budgets and making Pennsylvanians some of the highest taxed and most debt burdened citizens in America. No wonder the demographic projection for Pennsylvania’s future is dire.

The new pension bill that passed the House on June 14th does nothing to stop the increasing pension debt and, frankly, is a joke, albeit a cruel one. Even if all the assumptions baked into this convoluted plan hold true (and none of them likely will), the total present value of taxpayers’ “savings” over the next 35 years is about $1 billion. Compare that to the present value of the unfunded liabilities of the state pension systems, which is $70 billion and grows $1 billion every ten weeks, and you get an idea of how unserious elected officials are at addressing the single worst financial calamity in the history of Pennsylvania. Pension Debt Grows $15M Per Day

It is particularly disappointing that rank-and-file members were excluded from trying to improve the bill through the amendment process on the House floor. Using sleight-of-hand parliamentary maneuvers that would have impressed David Copperfield, and manipulating the requirement for actuarial analysis of all pension bills, House leadership shut out all meaningful reform. No House member even had a chance to look at the actuarial analysis for the stacked hybrid pension amendment before they voted on it. All other amendments were ruled out of order because the House wouldn’t wait two weeks (or two hours for that matter) to review legislation that will have a fiscal impact on the Commonwealth for more than 80 years.

In 2001 and 2002, legislators expropriated for themselves and other public sector employees a $15 billion pension surplus that belonged to taxpayers. In 2003 and again in 2010, legislators voted to divert taxpayer dollars intended for pension funding to other line items in the budget. These acts would be called theft and misappropriation of funds if it weren’t for the folks writing the law.

The upshot is that taxpayers, still shackled with paying for and indemnifying exceedingly costly public sector retirement plans, are also stuck with paying off $70 billion of pension debt. As private sector employees struggle to fund their own modest retirements, public sector employees are guaranteed the most generous retirement benefits anywhere. Who’s the master and who’s the servant in this relationship?

Supporters say the new pension bill is a step in the right direction. Folks, if you are on a beach when a tsunami is about to hit and you take one tiny step away from the ocean, it’s not going to make any difference. It is past time for the incremental approach to fixing the financial house of our state pension systems.

Supporters also say the bill will slow the deteriorating financial condition of the state pension systems. That’s not true, but even if it were, what difference would it make to drive off a cliff at 55 m.p.h. instead of 60 m.p.h.?

The governor and supporters of the stacked hybrid plan will claim that bipartisanship is alive and well in Harrisburg. The sad fact is it always has been with respect to public sector pensions. The party of stupid and the party of evil always find a way to agree to do what is both stupid and evil. Taxpayers today and into the distant future will have a hard time appreciating this “spirit” of cooperation. Or, as growing numbers of citizens are already doing, they will just leave the state.

John D. McGinnis represents the 79th District in the Pennsylvania House

Pension Debt Grows $15M Per Day