Category: Pension

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

Tobash Plan Bad Pension Reform

Tobash Plan Bad Pension Reform Tobash Plan Bad Pension Reform

By Leo Knepper

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

As we noted last year:

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

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

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

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

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

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

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

Tobash Plan Bad Pension Reform

Corruption Caused Pension Crisis

Corruption Caused Pension Crisis

By Leo Knepper Corruption Caused Pension Crisis

No matter what pension plan design reforms the legislature enacts for future employees, the Commonwealth will still have a massive unfunded liability. The unfunded liability is the result of over-promising retirement benefits, poor investment performance, investment performance, but mostly a willful redirection of necessary pension contributions by the Pennsylvania government to other purposes. This gross negligence on the part of elected officials has been bipartisan. It started with the 2001 pension increase signed into law (Act 9) by Governor Ridge and continued through the Rendell years when he signed legislation that purposefully underfunded the pension systems (Act 40 in 2003 and Act 120 in 2010).

Decades of mismanagement have resulted in a combined $63.3 billion in unfunded liabilities, based on the market value of assets. The longer the unfunded liability persists, the worse it becomes. It’s helpful to look at the unfunded liability as a loan. This “loan” has a 7.5 percent annual rate. In Year 1, the principal is $63.3 billion. If no payments are made, the amount due increases to $68 billion next year, then $73.2 the following year and so on. In other words, the unfunded liability grows year after year unless the payment made exceeds interest and the cost of newly earned benefits.  And, just like any other loan we need to be making payments on the principal.

The loan example conveys the basics of the problem. Rep. John McGinnis (R-79) introduced HB 900 last year to address the unfunded liability. In his co-sponsorship memorandum, McGinnis states:

“Right now, just the annual interest on the pension debt is over $4 billion, equivalent to the full yearly salary and benefits for over 50,000 teachers.  The situation is so dire that there are likely scenarios where the pension assets will become exhausted in the next 8 to 15 years.  When that happens, benefits paid to retirees may well consume 40 percent to 50 percent of the general fund.  The consequences for our future only get worse as we delay dealing effectively with this problem.

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

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

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

Corruption Caused Pension Crisis

PSERS Loses Money

PSERS Loses Money




PSERS Loses Money

By Leo Knepper

The Pennsylvania Public Schools Employee Retirement System (PSERS), released its 2015 performance results last week, and they weren’t good. PSERS assumes a 7.5 percent rate each year to avoid appearing even more underfunded than its publically stated $44 BILLION in unfunded liabilities. For 2015, PSERS lost nearly 1.8 percent. When we’re dealing with billions of dollars, the difference between the pension plan’s expected returns and actual returns is a substantial amount of money.

Last year’s loss comes despite PSERS spending a small fortune on “active” fund managers who are supposed to anticipate future market conditions and invest resources accordingly. As noted by the Philadelphia Inquirer:

“PSERS’s extra losses reflected its unusually large bets on commodity fund managers. The system posted a 33 percent loss for funds invested in “Master Limited Partnerships” (typically oil and gas investments), an 18 percent loss for commodities investments, and an 8 percent loss in “risk parity” investments, which can look a lot like hedge fund strategies.”

No fund manager can outperform the market every time, and this isn’t just the opinion of CAP. It a position widely held by well-respected academics and folks like Warren Buffet.

The previously mentioned Inquirer article notes that Montgomery County adopted a low-cost index fund investment approach two years ago. Last year, they substantially outperformed PSERS with a modest .3 percent return on investments. Montgomery County’s performance was not a fluke. In his book “Future Forsaken”, John McGinnis compares PSERS performance (and the others SERS system) to an index fund approach. He found that the low-cost option outperformed the current actively management funds across a thirty-year time horizon.

On top of outperforming active managers, switching to lower cost index funds could save taxpayers $750 million per year. Given the facts, there is no reason for the state’s pension systems to maintain the status quo and every reason to explore alternatives to protect taxpayers and future retirees.

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

PSERS Loses Money

Pension Deal Fails Endangering Budget

Pension Deal Fails Endangering Budget
Ego-driven irresponsibility

Pension Deal Fails — Pennlive.com has reported that a pension reform plan that was integral part of a deal for Pennsylvania to finally pass a budget Gov. Wolf would be willing to sign has failed.

The vote in the Pennsylvania House was 149-52 against. The Senate was demanding the reform to agree to significant tax hikes sought by Wolf.

The state’s pension system is horribly underfunded and the  reform sought — moving FUTURE  state government and school employees into a pension system that combined a down-sized guaranteed benefit plan with a 401(k)-style plan — was extremely mild but still a necessary step in the right direction.

The legislature passed a budget in June which was vetoed by Wolf. Wolf also vetoed a stopgap budget in September. The man is an epitome of ego-driven irresponsibility.

Pension Deal Fails Endangering Budget

Harrisburg Shareholders Report Is Bleak

Harrisburg Shareholders Report Is Bleak  By Sen. Scott WagnerHarrisburg Shareholders Report Is Bleak

I would like to give everyone an end of year report on Harrisburg and some observations I have made since I joined the PA State Senate in April of 2014.

My belief as a private sector business owner is that it is critical to tell people what they need to hear, not what they want to hear.

In other words, this is my report to the shareholders of PA.

I have 35 years experience in the private sector so I feel I have a high level of common sense.

I tell people I have been in the Harrisburg sausage factory for 20 months.

I have searched high and low to find the health department inspection report to tell me when the last health inspection took place (I think it has been some time since the last health inspection – possibly over 25 years ago).

Sausage routinely drops on the floor in Harrisburg.

The standard practice is to pick up the sausage on the floor and put it back on the packing line.

What the heck…. no one will notice.

For almost 40 years things have been done in Harrisburg the same way – so why change?

Or more simply put…..Harrisburg is a rudderless ship without a real captain.

In the private sector business world the owner is usually in the building – this is not the case in Harrisburg.

I want to be clear to everyone……people from both political parties are responsible for the current mess in Harrisburg.

There are countless things that are simply wrong.

For example, there are almost 1,000 people receiving annual state pension payouts that are over $100,000 per year ………..in fact the top two pension recipients are both former Penn State Administrators.

The top person receiving a government pension gets $477,000 per year.

The number two person receiving a pension gets $455,000 per year.

Even more disturbing is that of the top 25 people on the list of almost 1,000 people receiving annual state pensions of $100,000 or more per year, 13 are former Penn State employees.

This year’s budget is expected to give Penn State – $263 Million Dollars.

Last year Penn State received $214 Million Dollars.

The current practice in Harrisburg is to give Penn State more money each year so the fat cats get fatter.

Does anyone see this as simply wrong?

Here is another example – In the last 12 months two former Senate employees left the Senate and cashed in on unused vacation days, sick days and personal time – the first person walked away with a check for $112,000 and the second person walked away with $110,000.

In the private sector business world most companies have a use it or lose it policy.

Does anyone think this policy is being abused and wrong …….and should the current Harrisburg policy be stopped?

Everyone is watching the current budget disaster.

In this year’s budget, the Philadelphia school district will receive $101 Million Dollars more in funding than they received last year.

I can absolutely guarantee you that not one nickel of the additional $101 Million Dollars will find its way into the classroom.

Did you know that Philadelphia school teachers do not pay anything toward their health insurance?

In the private sector business world most employees pay 23 -25% of their monthly health care costs.

Some private sector employees pay more than 25% toward their monthly health care costs.

The additional $101 Million Dollars going to the Philadelphia Schools will get sucked up by rising health care costs and wage increases and step up salary adjustments that the union will demand.

Of course the rest will go toward pensions…..simply put….. the children in Philadelphia that this money is to help….. …..get shafted once again!!

Harrisburg has given truckloads of money to Philadelphia Schools over the last 12 years.

Have the drop-out rates fallen? Have graduation rates risen? The answer is NO!!

For almost 30 years I have collected phrases that have been helpful to me in business.

Here are a few – if only they could be applied in Harrisburg.

1. My Favorite – “Align your expectations with reality”.

2. “You don’t know what you don’t know.”

3. “If it doesn’t get measured – It can’t be managed!”

4. “If you don’t give enough attention to what deserves attention – at some point it will take a lot of attention.”

No one takes ownership in Harrisburg – why would they – it’s just a job.

There is zero accountability.

When I say you don’t know what you don’t know, it applies to many people in the Capitol who come out of high school or college and got a job in government without any real world experience……it also applies to many elected officials.

These same people are inside the Capitol cooking up regulations and policies.

These same people are working on the budget and calculating tax increases.

These same people have never experienced a recession in the private sector business world when major cutbacks and decisions had to be made to survive and not end up in bankruptcy.

On measuring – I can tell you this – not ONE single thing is measured in Harrisburg like we do in the private sector business world.

Harrisburg is a monster that will continue to eat money by the truckloads and will get fatter if we continue to feed it!

I have been through at least five recessions over my private sector business career – surviving a recession meant cutting expenses and making tough decisions including layoffs of personnel – it was not a time when price increases could be passed on to customers.

Harrisburg needs to…..and must go on a diet.

The time is now to trim the trees in Harrisburg.

Everyone talks about corruption, disclosure and conflict of interest in Harrisburg – here is an example of one of the worst cases and it is state wide.

In PA we have 500 school districts.

Each school district has an independent volunteer school board. Most school boards have nine members. These school boards negotiate wage increases, benefit increases and finally the same school boards set the step up program.

What is the step up program? It works like this.

– A teacher comes out of college and receives a starting salary of approximately $50,000 per year
– This teacher needs additional education credits to advance their career
– The number is around 24 credits
– As credits are earned the teachers annual salary goes up

In my home district after filing right to know requests, I discovered one teacher who started with an annual salary of $50,000 and within five years earned all 24 credits and fast tracked to a $90,000 annual salary.

And by the way the costs for the extra credits are paid for by the school district.

I will wrap up on this point.

As I mentioned earlier most school boards have nine board members. I can guarantee you this – at least one third of the members and maybe up to two thirds of the members on the school boards state wide are either teachers, married to a teacher, have children who are teachers, or have a brother or sister who are teachers.

The PSEA (Pennsylvania State Education Association) has a tremendous amount of power and influence in Harrisburg……they have been very clever to make sure that friends of teachers are loaded on school boards across PA.

Does this smell like corruption and conflict of interest to you?

You tell me….
Sen. Wagner represents the 28th District in the Pennsylvania Senate.

 

Harrisburg Shareholders Report Is Bleak