Public Employee Pensions and Benefits
Public pensions

Beneath the Surface: The Pennsylvania Public Pension Saga--Ten Years Later

May 31, 2016 | Commentary by Richard Dreyfuss

Pennsylvania government employee-benefit plans operate in a vacuum. In a world where private-sector benefit cutbacks and cost reductions occur on a daily basis, state government in Harrisburg has not responded in similar fashion. In fact, instead of reducing the potential for financial disaster, actions in recent years have served to accelerate the coming crisis.

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Op-Ed: Double-Down on Reinventing Government

Imagine if Stephen King had written Green Eggs and Ham. What if Dr. Seuss had penned The Shining?

Gov. Wolf’s third budget address was an equally disorienting shift in tone and substance—almost as if the most liberal governor in the country were polishing his conservative credentials.

Record-setting income and sales tax increases? Gone. Partisan rhetoric? Mollified. Massive spending hikes? Absent.

But Wolf hasn’t completely broken from the past—he still wants $1 billion in new taxes, amounting to $315 per family of four.

Instead, Wolf targeted bureaucratic waste to close the ever-widening budget deficit, including consolidating agencies, reforming corrections programs, and streamlining government services. Laudably, he proposed reducing corporate welfare subsidies for politically-connected businesses which have failed to encourage long-term job growth.

But Wolf hasn’t completely broken from the past—he still wants $1 billion in new taxes, amounting to $315 per family of four. But the fact is, there’s no reason to demand more from taxpayers.

In the coming months, the General Assembly should take this opportunity to double-down on Wolf’s reform mindset—but do it without tax hikes. Here are three ways to help end the cycle of budget deficits for years to come.

Pension Reform

State public pensions are more than $60 billion in debt—about $5,000 for every Pennsylvania man, woman, and child.

But for ten years, government union leaders have denied the pension crisis and argued against reform. Meanwhile, state taxes and property taxes have ballooned to fund the ever-growing pension burden. School districts have laid off teachers and cut programs—even as education funding reached record high levels—as more education dollars are consumed by pension costs.

But major change could be just a few votes away. A proposal placing newly hired state workers into a new pension plan needed just three more votes to pass the House last year. The bill provided a 401(k)-type plan alongside a smaller traditional (defined benefit) plan for new hires. Although this alone would provide little immediate savings, it would shift billions in future financial risk away from taxpayers.

More than 54 percent of Pennsylvania voters want this sort of pension reform, and Wolf, though not proactively pushing for change, has said he would sign it.

Full Liquor Privatization

On a recent trip to Giant, I witnessed a couple excited to finally buy wine with their groceries—a result of last year’s marginal liquor reform. But excitement turned to frustration as they ping-ponged across the store, barred from buying wine at the regular checkout and unable buy groceries at the wine register. Pennsylvania’s government liquor monopoly and archaic alcohol laws still make no sense.

Full liquor privatization, both retail and wholesale, could deliver Pennsylvanians the convenience they want and generate between $1.1 to $1.6 billion in immediate revenue.

Indeed, grocery stores can buy wine only from the government wholesale monopoly, in which a handful of bureaucrats determine what can and can’t be sold across the state.

Full liquor privatization, both retail and wholesale, could deliver Pennsylvanians the convenience they want and generate between $1.1 to $1.6 billion in immediate revenue.

Reinvent Medicaid

Let’s face it: Medicaid doesn’t provide quality health care. Medicaid recipients experience more difficulty finding doctors and longer wait times than those with private insurance, thanks to low provider reimbursement and a maze of red tape

Yet, more than one-third of Pennsylvania’s total operating budget goes to Medicaid programs, to the tune of $27.67 billion. That’s more than PreK-12 education, higher education, transportation, and debt service combined. These costs are rising faster than the state economy, making the program unsustainable.

With talk in Washington, D.C., of block granting Medicaid to the states, lawmakers have a new opportunity to reinvent Medicaid for truly those who need it.

Florida, for example, improved the quality of Medicaid through a waiver that emphasized choice counseling, saving $161 million annually in the first five years.

Other states have requested more robust Health Savings Accounts to ease the transition from Medicaid to private health insurance. Work requirements—which in other programs have helped individuals transition out of poverty into the workforce—and sliding scale premiums are other worthwhile policy solutions that would concentrate resources on individuals most in need.

A one-year budget absent major reforms will simply kick budget-deficit can down the road. Lawmakers should view Gov. Wolf’s proposal not as a final product but as a starting point they can improve upon with reforms that will benefit all Pennsylvanians.

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posted by Nathan Benefield | 11:03 AM

Employee Compensation Drives Spending Growth

PennLive released a list of state government employees earning more than $100,000 in salary today. While the list should open some eyes, it doesn’t capture the full cost of state employees. Employee benefits, not salaries, are the bigger cost-driver.

In the past year alone, total compensation per state worker increased by more than $4,400even though the average salary per employee declined

In 2015-16, total compensation per state worker reached more than $97,000 per employee, driven by skyrocketing employee benefits over the past decade. While state employee salaries have risen by 1.4 percent since 2007 (in inflation-adjusted dollars), average benefits per employee have increased by an astonishing 76.8 percent.

Benefits per employee now represent 80 percent of the cost of salary—a stunning figure compared to the private sector norm of 43.2 percent.

Commonwealth Agency Employment & Compensation (Inflation-Adjusted 2016 Dollars)

Source: Office of Administration, "2017 State Government Workforce Statistics."  The report details statistics for agencies under the PA governor's jurisdiction.

The biggest increases in the past year were in pension and retiree health care costs. Employee health care and workers’ compensation have also increased dramatically over the past decade.

This puts added strain on the state budget and highlights the pressing need for transformative pension reform. Even though there are 4,200 fewer employees under the governor’s jurisdiction, the total cost for these employees grew by $2.1 billion in the last ten years.

See the chart below for more details.

Lawmakers can address this disparity and rein in the costs of government by bringing public employee benefits in line with the private sector.

For example, moving all new employees to a 401(k)-style retirement plan, which is what is offered to most private sector workers, will lower future costs while offering employees more control over their retirements.  

Promoting parity between private and public sector medical plans is another way to close the compensation gap. According to data obtained from the Office of Administration, public employee contributions are projected to cover approximately 11.3 percent of state health care expenditures. In contrast, private sector employees pay about 20 percent for their share of insurance coverage. 

Aligning public sector benefits with those found in the private sector can help reduce compensation inequality and prevent more tax hikes on working families.

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posted by Nathan Benefield | 09:59 AM

Examining the Staggering Cost of Pensions

CF senior policy analyst James Paul recently spoke with WURD Radio’s Stephanie Renee on Pennsylvania’s skyrocketing pension costs—and what can be done about them. Pennsylvania’s unfunded pension liability stands at more than $60 billion dollars, two times the annual General Fund budget, and it keeps growing. In short, state government is making promises it can’t keep.

Pension costs are also eating up new education funding. State spending on education has risen every year since 2010, and this year it is at an all-time high. Yet, pensions costs are taking a bigger and bigger chunk of education funding—meaning dollars targeted to education aren’t going to the classroom.

James explains that the answer is structural reform to our pension system. Switching to a defined contribution system will allow portability and affordability, giving employees more choice and helping protect taxpayers in the long run.

Click here or listen below!

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posted by Don Lim | 00:22 PM

Watch for Sweeping Changes Outside the Beltway

The political landscape has experienced a seismic shift, and it isn't centered in Washington DC. This past weekend Kyle Peterson of the Wall Street Journal highlighted Pennsylvania and six other states poised to transform their state and, in turn, our nation.

"The dynamic has shifted considerably," CF president & CEO Charles Mitchell says in Peterson's article, The Spoils of the Republican State Conquest.

Charles notes issues like meaningful pension reform are not only possible in the upcoming legislative session but probable. And paycheck protection—while once "laughed out of the room"—may land on the governor's desk.

Four of the seven states briefly profiled focus on labor reform as a necessary component of restoring economic opportunity. Any labor reform that prevents union executives from imposing their will on workers is essential to putting Pennsylvania back on the path to prosperity.

Tax reform was also a recurring theme in the article. In Pennsylvania, pension reform is, in many ways, a tax reform issue. After all, surging pension costs are a key driver of rising property taxes and yearly budget shortfalls that lead to tax hikes. So any effort to reform the tax code will likely require spending restraint.

Overall, the WSJ's highlight of CF as a frontline fighter for free-markets is an incredible endorsement of our mission and a compliment to every lawmaker working to pass the reforms that will improve the lives of all Pennsylvanians.

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posted by Elizabeth Stelle | 03:20 PM

Who Pays for SEPTA?

Mass Transit

News reports today indicate SEPTA (the public transit agency serving the Philadelphia region) came to an agreement with the Transportation Workers Union Local 234—ending a six-day strike just before election day.

The agreement terms are not available, but SEPTA Chairman Pat Deon says:

It provides for wage increases, pension improvements, and maintains health care coverage levels while addressing rising costs.

Who will pay for this?

Currently, 49 percent of SEPTA’s operating budget comes from state taxpayers—almost double the average among transit systems nationally. In addition, 60 percent of SEPTA’s capital budget (i.e., funding for infrastructure improvement and new trains and buses) comes from the state.

What most people may not realize is most of this funding doesn’t come directly from taxes—though both the sales tax and lottery revenue subsidize transit systems. Rather, more than $925 million in driver charges, including Turnpike tolls and vehicle fees, are diverted to transit agencies, primarily SEPTA.

The Philadelphia Inquirer reports SEPTA will pay for the additional costs of the new agreement “out of its budget.”

Deon, who credited Evans with helping resolve the impasse, said SEPTA had the money in its budget to pay for the deal, and no new funds were needed. 

So, we can expect SEPTA won’t ask for an increased state subsidy? Or maybe will even refund some of the excess revenue to state taxpayers and motorists? Right?

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posted by Nathan Benefield | 10:01 AM

Missed Opportunities: Fall Legislative Session

Three critical bills stalled last week amidst a flurry of last minute legislative activity. Failure to reform pensions, repeal the e-cigarette tax, and prohibit ghost teaching were missed opportunities that will compound challenges facing lawmakers in 2017.

Pension Reform

A compromise proposal to place newly-hired state workers into a hybrid pension plan fell three votes short of passage in the House. The bill provided a 401(k) component paired with a smaller defined benefit component. Employees could also choose to opt-in to an entirely 401(k)-style plan, providing ultimate portability and retirement control. Although the legislation provided little in immediate cost savings, it shifted future financial risk away from taxpayers and provided a predictable system for measuring costs. 

Union leaders and lobbyists campaigned hard against the bill, and it was narrowly defeated without seeing a vote. 

Reducing the E-Cigarette Tax

Revising the punitive e-cigarette / vape tax from a 40% retroactive wholesale tax to a 5 cents per milliliter tax failed to advance in the House. Meanwhile, the Senate was reluctant to add any session days to send the bill to Gov. Wolf. This inaction will eliminate thousands of jobs and bring in far less revenue than the $13 million originally projected.

Vape businesses are already beginning to close

Expelling Ghost Teachers

Lawmakers were unable to prohibit release time provisions that enable unions to pluck teachers from the classroom to perform union work on school time. These ghost teachers continue earn salaries, rack up pension benefits, and accrue seniority while working for the union. Worse, the union may not be formally required to reimburse school districts for these costs. In other words, resources are being diverted from the classroom to line the pockets of a private organization. Strictly limiting the practice of ghost teaching, as would HB 2125, would have saved taxpayers millions and corrected an obvious injustice. 

HB 2125 will be reintroduced next session.

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posted by Elizabeth Stelle, James Paul | 11:35 AM

State Pension Reform This Week?

Pension reform talks are in full swing as state lawmakers finish up their fall session. The latest pension proposal offers a side-by-side hybrid system for new employees, including new lawmakers and judges, beginning January 2018. The hybrid consists of a defined benefit component (at half the benefit of current employees) and a defined contribution component, like a 401k.

Alternatively, new employees could choose a defined contribution only option.

This represents a significant improvement over Governor Wolf's proposed stacked hybrid plan. And it's an improvement on the side-by-side hybrid approved by the State Senate in December, which was linked to a $1.8 billion tax increase.

Here's a rough breakdown of the major components:

Component Proposed Side-by-Side Hybrid December Proposed Side-by-Side Hybrid
  PSERS SERS PSERS SERS
DB Employee Contribution 4.5% or 5.5% 4% or 5% 4% 3%
Benefit Accrual Rate 1% or 1.25% of final salary 1% or 1.25% of final salary 1% of final salary 1% of final salary
DC Employee Contribution 3% 3.5% 3.5% 3.25%
DC Employer Contribution 2% 2% 2.5% 2.5%
 
Optional DC Only Employee Contribution  7.5% 7.5%    
Optional DC Only Employer Contribution 2% 3.5%    

The proposal also closes loopholes that inflate pensions. Those reforms include altering the final average salary calculation to prevent the use of excessive overtime at the end of one's career to increase pension payments and ensuring the lump sum payment option is revenue neutral. The latter reform applies to current and future employees.

This doesn't get pensions out of politics, but any reform that reduces the influence of politics on the pension system—while creating a model for further improvement—represents a step in the right direction.

The next step is tackling the monstrous $60-plus billion pension liability driving tax hikes.

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posted by Elizabeth Stelle | 11:23 AM

Pennsylvanians Want Pension Reform

A majority of Pennsylvanians want pension reform. In a poll conducted from October 4th to 9th, 54 percent of voters supported placing new state employees in a 401(k)-style retirement plan. Pension reform isn't a partisan issue: 67 percent of Republicans, 51 percent of Independents and a plurality of Democrats are in favor.

Lawmakers appear to be obliging voters. According to Capitolwire (subscription), legislative leaders are considering a side-by-side hybrid plan for new employees. The proposal is similar to the plan defeated in December, which was linked to a major tax hike.

As we've noted before, this type of pension reform fails to fully remove politics from pensions, but takes an important step in the right direction. Under a hybrid system, new employees enroll in a defined contribution plan and a defined benefit plan. Only the defined benefit component would be subject to political manipulation.

The details of the plan are still murky, but pension reform that moves towards a defined contribution, or 401(k)-style plan, is an improvement upon the status quo.

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posted by Elizabeth Stelle | 00:54 PM

Abysmal Investment Returns for Pension Fund, Taxpayers on the Hook

In the past six years, Pennsylvania taxpayers’ unfunded pension liability has more than doubled from less than $30 billion to $63 billion.

While the legislative debate over reform continues, Pennsylvania taxpayers and state workers are sinking deeper into the pension crisis. A recent Moody’s report on state pension liabilities concludes states with large gaps, like Pennsylvania, will be forced to direct more money toward their pension systems just to keep unfunded liabilities from growing. That means fewer dollars for schools, roads, and other basic services.

A big reason for the growing funding gap is lower than expected investment returns.

The State Employee Retirement System (SERS) assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. In the first half of 2016, SERS reported a 2 percent investment return.

The much larger Pennsylvania State Education Retirement System (PSERS) isn’t fairing much better. The fund earned just 1.29 percent for the fiscal year, ending June 30th. Recognizing the reality of today’s economy, the system reduced their assumed rate of return from 7.5 percent to 7.25 percent starting July 2016.

Unfortunately, Governor Wolf vetoed reform back in June 2015 which included a defined contribution, alongside a “cash-balance plan”, for new employees only. This legislation was itself a compromise from a straight 401k-style plan that would provide adequate retirement benefits while being, by definition, fully funded.

By December, the Senate crafted a side-by-side hybrid pension model. The hybrid model allowed new employees have both a (smaller) defined benefit pension and a defined contribution plan from dollar one. While less than ideal, the plan would significantly reduce taxpayer risk, a step in the right direction.

In June, a different reform proposal passed the state house. This stacked-hybrid plan includes a defined benefit plan for workers until they reach $50,000 in salary (or 25 years of service), followed by a defined contribution plan. However, the $50,000 threshold would increase by 3 percent annually--greatly limits the number and extent of employees participating in the defined contribution plan. 

There’s no question pension reform is urgent. Lawmakers must prioritize proposals with a stronger defined contribution component while preventing political manipulation of pension payments. Anything less will keep government budgets squeezed and taxpayers exposed to tremendous risk.

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posted by Elizabeth Stelle | 03:54 PM

Pennsylvania Deficit Watch: October 2016

Pennsylvania Deficit Watch

Pennsylvania’s state budget is three months old and showing signs of a major budget deficit.

Actual revenue collections are already behind $218.5 million through the first quarter, according to the Pennsylvania Department of Revenue. In July, the legislature passed and Gov. Wolf signed a $1.3 billion revenue package, which includes $650 million in higher taxes, to help pay for a $1.6 billion increase in government spending.

The revenue assumptions built into the billion dollar package are now proving optimistic. The chart below shows revenue collections lagging official estimates in each of the first three months.

 

In August, the Independent Fiscal Office identified problems with certain revenue projections used to balance the budget—at least on paper. Here are their major assumptions:

  • The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists. 
  • IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
  • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
  • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year. 

Moreover, the budget was unbalanced from the start. The budget counts on $260 million in one-time revenue and transfers from other funds, and a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.

Borrowing money to pay our bills is the very definition of unbalanced.

If current revenue trends continue, lawmakers and the governor will need to focus on reducing government spending to balance the budget. Such as,

As the fiscal year progresses, and more revenue collections are announced, we will continue to update our Deficit Watch.

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posted by Bob Dick | 04:39 PM

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