Category: Pension

Lawmaker Leaving With $120K Pension

By Leo Knepper

Heading into the election season, 14 Pennsylvania lawmakers, so far, have announced that they will be retiring at the end of their term in December. It is worth noting that for one of them, their annual pension payment will exceed their current salary by roughly $30,000.

By our calculations, Representative Thomas R. Caltagirone will be walking out the door with an annual pension payment of roughly $120,000. In addition to this golden parachute, he will also receive lifetime health insurance benefits “generously” subsidized by taxpayers. With only limited exceptions, private-sector employees are offered a defined-contribution retirement plan, such as a 401(k). On average, they can expect to retire with a nest egg that provides them with 50 to 75 percent of their final salary. 

Why do Harrisburg’s politicians remain such a costly anomaly? Because they determine their own salary and benefits. In the Pension Grab of 2001, Caltagirone voted to increase his pension by 50 percent. This pension increase, signed into law by Governor Ridge, is one of the primary reasons the Commonwealth’s pension system is in dire financial condition. (For a list of all of the lawmakers who voted for the pension hike, see this blog post on our website.)

Rep. Caltagirone is the only member of the Golden Parachute Club, i.e., lawmakers whose pensions will equal or exceed their current salary, to announce his retirement so far this year. Getting to the Golden Parachute level requires lawmakers to “serve” in the legislature for 35 years or more and be enrolled in the pre-2017 pension program.

According to our research, the other members of the Golden Parachute Club are Representatives Bob Freeman (D-Bethlehem) and Tony DeLuca (D-Pittsburgh). Senator David Argall (R-Lake Hauto) will be joining the Club in November of 2020, provided he remains in office, and there are all indications that he will be sticking around.

There is no limit to how large the legislators’ defined-benefit pension can grow, so long as they stay in office. The Golden Parachute is the most corrupting influence on members of the General Assembly. It makes them prioritize their re-election above everything else, even the well-being of their constituents and the financial health of the Commonwealth

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

Lawmaker Leaving With $120K Pension

Meaningless Pension Reform Passes Pa. Senate

By Leo Knepper

On Monday, the Pennsylvania Senate passed SB 1 with an overwhelming majority, 40-9, vote. The House is widely expected to pass the pension “reform” legislation this week and send it to Governor Wolf’s desk; where he is widely expected to sign it. One of the things absent this year is the usual wailing and gnashing of teeth from government unions on the reform measure. An article from the Patriot-Newsexplains why:

“There is a hope that this bill, by representing another show of cooperative government between Democrat Gov. Tom Wolf and the Legislature, will help disarm a tricky issue for Wolf’s 2018 re-election effort.

“No unions are supporting Senate Bill 1, to be sure.

“But, in the words of AFSCME District Council 13 Executive Director David Fillman, ‘we’re not throwing bombs at it.'[…] Everyone reached for this story said they want to help give Wolf something that he can call a win on this issue.”(Emphasis added)

As Mike Manzo, a lobbyist for the SEIU, stated in the same article, “I think it sets up a pretty nice narrative for the governor that on some of the issues that people thought were the most intractable in the building…He will be the governor who could achieve what no other governor could, not only on pensions, but liquor reform and money for schools (emphasis added).”

While Republicans will be technically correct about the legislation being “historic” in nature because it represents a marginal improvement for taxpayers, they are wildly overstating how much of an impact this will have on the Commonwealth’s financial future. According to a CapitolWire article (paywall):

“The actuarial note analyzing the legislation indicates there will be no pension system savings, and the risk-shifting within SB1 only matters should the systems incur significant investment shortfalls a couple decades from now. Those shortfalls, should they occur two to three decades from now, will still add more debt to our debt-ridden systems, it just won’t be quite as much added debt – the ‘historic’ savings we’re told SB1 would deliver would come at a significant cost.

“It’s pretty clear passing anything with the title ‘pension reform’ has become the goal, not passing something that’s worth passing.

“…The comparison between current law and SB1 for both the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) shows little-to-no difference regarding the impacts on employer contribution rates, pension funding ratios and the unfunded accrued liability going forward during the next three decades.“(Emphasis added)

Senate Bill 1 does not solve Pennsylvania’s pension problems. We will still have a$74 billion unfunded liability for current employees, and that number is likely to grow because there doesn’t seem to be the political will to address it. Furthermore, as Michigan illustrates, the hybrid plan can (and likely will) accumulate unfunded liabilities. Finally, the legislation permits current members of the General Assembly to continue to accrue their Cadillac pension benefits if they refuse to opt into the 401(k)-style system.

Be sure to keep all of this in mind when you’re reading the news about the “historic” pension reform and hear about it from politicians seeking your vote. Taxpayers are still on the hook for a massive amount of money and current members of the General Assembly can continue to accumulate benefits making the matter worse.

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

 

Meaningless Pension Reform Passes Pa. Senate

Pennsylvania Repeating Michigan Mistake?

By Leo Knepper

Some members of the Pennsylvania General Assembly continue to push a “hybrid” defined benefit (DB) and defined contribution (DC) plan as the solution to the Commonwealth’s pension problems. Senate Bill 1 is the latest iteration of this “reform” proposal. As we have previously noted, plan design changes for future employees will not address the current unfunded liability. The only way to address the unfunded liability is to modify the pension benefits for current employees or enact funding reform. Adjusting pension benefits for current employees would run into legal challenges, leaving funding reform as the more likely option.

Switching from a traditional DB pension to a hybrid plan will not solve our problems in the long run. We need to look no further than the state of Michigan to see how hybrid plans fail to live up to their promises. A recent article from CapitolWire(paywall) summarizes the situation:

“What Michigan did in 2010 is exactly what some Pennsylvania Republican lawmakers want to do for both state and public school employees starting in 2018…While some Pennsylvania lawmakers are trying to convince their colleagues to embrace a hybrid plan (in Senate Bill 1), Michigan lawmakers want to end theirs in favor of a standalone defined contribution plan…One of the sponsors of the new effort in Michigan, Rep. Thomas Albert, called the 2010 MPSERS hybrid, ‘A Band-Aid for a bullet wound,’ while Michigan’s Speaker of the House, Tom Leonard, penned a column in which he called MPSERS ‘little more than one big I.O.U., a shaky promise signed by long-gone Lansing politicians…Michigan’s historic failure to reform the pension system has been a terrible deal for the hard-working people who take care of and educate our children. It is well past time we fix that mistake and give teachers the benefits they deserve.'”(Emphasis added)

After switching to a hybrid plan, Michigan’s unfunded liability grew because lawmakers there relied on overly optimistic assumptions and continued to underfund the system. Using history as a guide, why should we think Pennsylvania would be any different? Our current unfunded liability is over $74 billion because politicians make promises and don’t have the will to pay for them. An unwillingness on the part of politicians to pay for their promises  is not just a Pennsylvania problem, as noted in a recent column from Heritage Foundation analyst.

Harrisburg’s “long-gone” politicians increased government employees’ and teachers’ pensions by 25 percent in 2001; lawmakers increased their pensions by 50 percent at the same time. This act became law with a signature from Gov. Tom Ridge and illustrates that our pension problem is bipartisan in its origin.

The only way to remove political gamesmanship from the equation is for the Commonwealth to adopt a straight 401(k) DC-type plan and enact pension reform to address our current unfunded liabilities. Leadership in the House and Senate like to point out that Governor Wolf wouldn’t sign legislation establishing a DC plan. If they were smart, they would put it on his desk anyway, let the Wolf veto it, and then work to elect a governor who would enact the kind of reform Pennsylvania needs.

Please, take 30 seconds to email the General Assembly about pension reform.

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

Pennsylvania Repeating Michigan Mistake?

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

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.

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 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