Public Employee Pensions and Benefits
Gov. Wolf has a history of trying to fire individuals who won’t kowtow to his agenda. He tried to remove Erik Arneson as head of the independent Office of Open Records—a move the state Supreme Court ruled illegal; he replaced David Meckley as the chief recovery officer in York; and he demoted Bill Green as chair of the School Reform Commission in Philadelphia.
Now, Wolf is targeting the Public Employee Retirement Commission (PERC), trying to shut down the entire agency. What’s PERC’s great ‘crime’? Apparently, evaluating pension legislation before lawmakers vote on it. In other words, if Wolf can eliminate PERC, he can effectively roadblock pension reform.
But there’s a problem. The law establishes PERC as an independent agency to evaluate state pension systems and legislation and offer cost and benefit assessments. While PERC members are appointed by legislative leaders and the governor, Wolf has no legal authority to unilaterally disband PERC. But Wolf seems focused on retribution against PERC for refusing to bow to his dictates.
As Capitolwire (paywall) reported last month, when Wolf line-item vetoed PERC’s funding:
According to the aforementioned sources, the Wolf administration wanted PERC to hold a meeting early in December, well before the commission could have an actuarial analysis done on the pension reform proposal…
In the absence of an analysis done by Milliman, PERC’s contracted actuarial firm, the commission was supposed to accept the figures offered by the pension systems and the Wolf administration.
[PERC Executive Director Jim] McAneny refused to do that – allowing Milliman to subsequently find a few errors within the legislation, including one that erased an estimated $630 million in long-term savings – instead pushing for his agency to do one of its many important jobs. However, his decision appears to have put in jeopardy PERC’s ability to do much of anything going forward.
PERC’s function as an independent arbiter serves—and protects—taxpayers. Relying solely on actuaries who are on the payroll of the same system they’re charged with evaluating is hardly a winning strategy for government accountability.
Wolf’s dictatorial actions clearly undermine the prospect for future pension reform, while sending the clear message: If you don’t do the governor’s bidding, he will simply eliminate your job.
Last year, Gov. Tom Wolf promised he would take state government in a "different direction" and grow the middle class. He pledged to do this by making Pennsylvania a magnet for private sector entrepreneurs without giving massive tax breaks to special interests.
Throughout 2015, the governor has strayed from those promises by vetoing a budget that held the line on taxes, privatized liquor and made an effort to protect the state's credit ratings through pension reform.
Of course, a new year provides new opportunities…or should we say a fresh start. So with the new year in mind, here are five resolutions the governor can work toward to deliver on his promises to Pennsylvanians:
Resolution #1: Return to the campaign promise not to raise taxes on working people.
As a candidate, Tom Wolf promised to protect low and middle-income people from a tax increase, but in 2015, he broke that promise. Fortunately, the governor has an opportunity to stand on the side of an overtaxed working class, and prevent policies that will expedite the exodus of Pennsylvanians.
Resolution #2: Level the playing field and cut spending on corporate welfare programs.
Unbelievably, government spending has increased in 44 of the last 45 budget years. Cutting down or eliminating nearly $700 million in corporate welfare is a great way to save tax dollars and level the playing field for all Pennsylvanians.
Resolution #3: Deliver property tax relief by signing real pension reform.
Over the past year, the governor highlighted the onerous property tax system in Pennsylvania and proposed a tax shift to help, but such a shift does not solve the real problem: school budgets squeezed by pension costs.
To provide relief to homeowners, we need comprehensive pension reform that stops adding new debt and provides a method to pay down existing debt. That means converting to a 401k-type system and finding additional revenue (either through spending cuts or non-tax revenue sources) to pay for the more than $53 billion in benefits promised to public employees.
Resolution #4: Make government work smarter by getting out of the booze business.
Selling wine and liquor is not a function of state government. Government booze control leads to higher prices, fewer choices, less convenience, an inefficient bureaucracy. Selling the state stores would be a windfall for both taxpayers and consumers alike.
Resolution #5: Create "government that works" by increasing transparency and ensuring taxpayer resources are not used for politics.
Government should not grant any private organization unfair political privileges. This includes using taxpayer resources for the collection of political money. A true “transparency governor” will end these favors and restore accountability to taxpayers.
To strengthen our state and give Pennsylvania a real fresh start, these are five resolutions worth keeping.
Last week, Gov. Wolf once again resorted to defending his latest budget vetoes citing the fear of credit rating downgrades. Oddly, he seems to miss that pension reform and pension funding are mentioned eight times in the latest memo from S&P.
In fact, in every credit downgrade, rating agencies mention our pension crisis and the need for reform.
- Here is Moody’s in 2012: “Rapidly growing pension contributions will absorb much of the commonwealth's financial flexibility over the next five years.”
- In 2013, Fitch echoed this concern, citing “Sizable increases in [pension] contributions,” and expressing the fear that it is “unclear if any pension reform will be enacted.”
- S&P said much of the same in 2014, citing “inaction on pension reform” and questioning the political appetite for tackling the issue: “It is unclear to us whether the state has the willingness to address its significant pension issues.”
- And again in 2014, Moody’s writes that “Material reduction in long-term liabilities, including unfunded pension liabilities” could make the ratings go back up.
To be clear, these ratings reports also cite a structural imbalance—though one which can be solved by reducing spending or addressing the cost drivers (including pensions) in the budget. Most credit downgrades also provide warnings about Pennsylvania’s slow economic growth—a problem that will only be made worse, not better, by raising taxes.
Nonetheless, every credit warning has cited our pension liability and the need for pension reform.
But what kinds of reform will improve our credit rating? As we’ve noted here many times before, it isn’t pension obligation bonds—a solution favored by Gov. Wolf.
Financial experts warn that pension bonds would only weaken our fiscal condition. Moody’s actually called pension obligation bonds a “red flag.” Earlier this year, Fitch issued a very strong warning against pension bonds:
Pension obligation bonds (POBs) will not correct unsustainable benefit and contribution practices and are not a form of pension reform, Fitch Ratings says. Issuing POBs is neutral for some governments' credit quality and negative for others.
In contrast moving new employees to a defined contribution plan (like a 401k) or even a "hybrid" plan is seen as a positive financial move. Here is S&P on the subject of moving to a new plan design in a 2014 report:
According to NCSL, between 2012 and 2014, 17 states and Puerto Rico passed 43 bills related to defined contributions, cash balance, or hybrid plans. Among these are Kentucky, Louisiana, Tennessee, and Virginia. Earlier this month, Oklahoma became the 18th state to join the ranks after Gov. Mary Fallin signed a bill that moves future employees of the state's non-hazardous plans to a 401(k) defined contribution plan. …
We believe that such reforms, despite potentially adding more near-term budgetary costs, can be important components of a government's overall liability management and contribute to greater plan affordability over time.
If Gov. Wolf truly wants to work on improving our credit rating, he needs to support real pension reform.
First, it drops collars by restoring the state contribution. Collars could add about $500 million to taxpayers’ pension liability. Second, it reinstates the requirement for an actuarial note, or estimate of the bill’s cost.
The House version also changes how current employees can participate in the new system. Under the Senate plan, current lawmakers would be put into the new system after their next election, but they could opt out. No other current workers could participate in the new system.
Under the House language, any current employee, including lawmakers, can opt into the new system.
As we've noted before, this pension reform bill fails to fully remove politics from pensions, but takes an important step in that direction. Under a hybrid system, only the defined benefit component would be subject to political manipulation.
Here's a quick summary of the current pension reform proposal:
- A side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component.
- Changes apply to PSERS employees in 2017 and SERS employees in 2018.
- An anti-spiking provision to end the practice of excessive overtime at the end of one's career to dramatically increase pension payments.
- Changes to the lump sum payment option to ensure taxpayer costs will not increase if an employee chooses to receive benefits in a lump sum.
- A risk sharing provision to reduce, but not eliminate, risk for taxpayers due to investment losses.
Yesterday the State Senate passed a revised pension reform bill (SB 1082) including a side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component. The changes apply to PSERS employees in 2017 and SERS employees in 2018. This reform is weaker than SB 1 (vetoed by the governor) and while a step in the right direction, it doesn’t get the politics out of pensions.
The bill's defined benefit component includes:
- 4% employee contribution rate for PSERS; 3% employee contribution rate for SERS
- Benefit accrual of 1% of final salary (this represents about half the benefit for post-Act 120 hires under the current defined benefit plan)
- PSERS employer benefits vest after 5 years; SERS vest after 10 years
The defined contribution component includes:
- 3.5% employee contribution for PSERS; 3.25% employee contribution for SERS (option for additional employee contributions)
- Employer contribution rate of 2.5%
- A portable benefit for employees
- Employee contributions vest immediately, employer contributions after 3 years.
Here’s the good news:
- Real savings: SB 1082 provides real savings by closing loop-holes that inflate pensions for current employees. The anti-spiking provision alters the pension formula’s final average salary calculation to end the practice of excessive overtime at the end of one's career to dramatically increase pension payments. Changes to the lump sum payment option ensures taxpayer costs will not increase if an employee chooses to receive their benefits in a lump sum.
- Limits taxpayer risk: A risk sharing provision reduces, but does not eliminate, risk for taxpayers due to potential investment losses. This provision periodically adjusts the employee contribution rate in the event of poor investment performance by PSERS and SERS.
- Begins to empower employees: SB 1082 takes an important step forward by establishing defined contribution plan that will protect workers' pensions from political manipulation.
The bad news:
- Continues to underfund pensions: The bill reduces “collared” contribution rates, which further underfunds the plan and adds an estimated $500 million to the unfunded liability.
- Lacks transparency and passed illegally: The bill suspends the law that all pension bills have an actuarial note attached before a vote is held. Actuarial notes summarize any changes and estimate the cost to taxpayers. This is a stunning lack of transparency.
- Keeps the politics in pensions: The pension bill includes a few reforms, but continues to allow political forces to overpromise and underfund the pension system, leaving taxpayers on the hook.
It's also worth noting an important change for lawmakers. They will be switched to the hybrid pension plan upon reelection, but they will have the option to remain in the old defined benefit system.
Pennsylvania must transition state workers to defined contribution plans. The commonwealth owes $53 billion in unfunded pension debt, and that number grows every year. Only full reform will get politics out of the pension system—making it more fair, more reliable and sustainable.
Now that the Pennsylvania Senate has begun passing legislation, taxpayers can finally see what’s in Gov. Wolf’s “framework” for a new budget. Based on the passage of SB 1073 and SB 1082 today in the Senate, here are five things we know about the budget framework:
1. Excessive Spending Growth. The $30.788 billion budget represents spending growth of 5.4 percent over last year’s budget. Even including items shifted off budget last year, this amounts to an increase of $500 million more than inflation and population growth.
2. WAMs are back. The budget passed by the Senate includes a $103 million increase (51 percent) in Community and Economic Development spending. This includes several line-items identified as WAMs and eliminated in previous budgets.
WAMs (or “walking around money”) are slush funds used for special projects, usually controlled by legislative leaders. In the past, they’ve been used to buy votes and have been the abused with rampant corruption.
3. Problematic pension reform. The revised pension bill included a side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component. This reform is weaker than SB 1 (vetoed by the governor) and while a step in the right direction, doesn’t get the politics out of pensions.
Here’s the positive: For current employees, the legislation would alter the calculations for “lump sum withdrawals” (the money employees can take in one single payment when they retire, with a reduced pension) and the calculation of “average final salary.”
On the negative side, the bill underfunds pensions. The proposal reduces collared contribution rates, which further underfunds the pension plan and adds an estimated $500 million to its unfunded liability.
Moreover, the bill suspends the provision that all pension bills have an actuarial note attached before being voted on. Actuarial notes summarize any changes that would occur and estimate the cost to taxpayers. This is a stunning lack of transparency.
4. No privatization in “liquor privatization.” The Senate liquor plan—which has been reported on but not yet passed—strips out many of the components of “privatization.” For starters, it would retain the government monopoly over the wholesale side—every retailer would still have to buy wine and spirits from the PLCB. Instead, there would be a “study” to recommend whether the state should privatize wholesale liquor sales.
This monopoly gives a few bureaucrats power to determine what can be sold in Pennsylvania, maintains the conflict of interest whereby the state sells and controls alcohol, and has led to numerous cases of corruption and bribes.
Restaurants and bars would be able to sell wine (and only wine) to-go, while beer distributors would also be able to sell wine and spirits. There would be no new liquor licenses for grocery stores or other private retailers. State stores would remain open in perpetuity.
5. Higher Taxes. We know there will be higher taxes. We know this will include some broad-based tax increase to generate the $600-$700 million needed to pay for the spending.
We don’t know what taxes will go up. There is no agreement on a tax plan; that is, the Senate passed a budget without the revenues to pay for it.
It’s unclear if there is support in the Senate to pass a tax hike, and very clear signs there isn’t support in the House for a tax hike of this magnitude.
A few weeks ago Clairton became the second Pennsylvania city to leave the Act 47 program for distressed municipalities. Nanticoke was the first city to leave earlier this year.
Instrumental in both Clairton and Nanticoke's success was the cities' ability to renegotiate employee contracts and reform their broken pension systems.
Passed in 1987, municipalities with an Act 47 designation struggle to reconcile declining working populations with burgeoning pension costs and debt. To date, 12 cities are designated as distressed.
Cities across the commonwealth are trapped in broken pension plans, putting their finances in a percarious position. Legislation before the State Senate, HB 414, would provide these places with relief by reforming pensions for new hires. Cities could choose between defined-benefit and cash balance plans, while current employees and retirees will retain their benefits.
Like Pennsylvania's cities, rising pension payments are squeezing the budgets of school districts, and the state, which has approximately $53 billion in unfunded liabilities.
Good pension reform is one of the keys to revitalizing not just cities like Clairton but the entire state of Pennsylvania.
How would you feel if your employer took funds meant for your health insurance and spent them on partisan politics? Sadly, this is a reality for thousands of teachers in Philadelphia.
Evan Grossman of Watchdog.org has the story:
Every year, the [School District of Philadelphia] is bound by its contract with the Philadelphia Federation of Teachers to pay more than $69 million for employee health care benefits.
The payments come in increments of $167.41 per teacher every two weeks during the school year, adding up to some $4,352 annually for each of the PFT’s 16,000 members. Those funds come from a pool of state and local taxes. The PFT’s Health and Welfare Fund receives a chunk of that money, which is earmarked for supplemental benefits, such as dental and vision, along with other programs like life insurance and its annual educational conference, which will be held in March 2016.
The Watchdog investigation found that more than $6 million from that fund was loaned, interest-free, to the union’s bleeding building fund, where it appears to have been spent on building maintenance and upgrades. According to Internal Revenue Service filings completed by the union, that money may never be paid back.
Part of the cash, loaned in five separate installments, was also used to subsidize the rent of the Jewish Labor Committee.
While teachers are working hard in the classroom, the Philadelphia Federation of Teachers (PFT) is secretly draining their insurance fund to subsidize politics and facilities upgrades.
Philadelphia is one of only two school districts in the state where teachers enjoy no-cost health insurance—generous benefits unheard of in the private sector. When Philadelphia’s School Reform Commission attempted to restore fiscal sanity to the money-bleeding district by asking for modest health cost sharing, the union responded with a lawsuit. The union’s refusal to accept even minor health care concessions is more remarkable given that millions of dollars from the Health and Welfare Fund are not even spent on health insurance.
As long as the Health and Welfare Fund serves as a slush fund for political activity, union leaders will fight tooth and nail to retain their unique taxpayer-funded health care privileges.
Of course, this isn’t the first time PFT leadership has used students and teachers as pawns in a larger political game. And it likely won’t be last—at least until government unions are more transparent in their operations and more accountable to their membership.
When you assume an investment return rate of 7.5 percent and your actual returns are 3.04 percent you have a problem. If you are the Pennsylvania Public School Employees' Retirement System you have a BIG problem.
This week, PSERS announced an investment return of 3.04 percent for the 2015 fiscal year. In other words, local school districts and state taxpayers will have to find even more cash to make good on retirement promises.
The PSERS system already carries a $35 billion unfunded liability, $39 billion if you look at the market value of assets rather than the actuarial value of assets. This shortfall will add roughly $2 billion to these deficit figures, when the official results are released this December.
Experts note the system's 7.5 percent return on investment assumption is overly optimistic. Chris Comisac over at Capitolwire (subscription) explains:
Wilshire Associates, an independent investment management firm . . . calculated the median return of public plans with more than $5 billion in assets at 3.4 percent, meaning PSERS fell short of that median level.
. . . since the most recent financial market meltdown in 2008-09, PSERS hasn’t had investment returns actuarially valued above 6 percent, with a few below 5 percent. Meaning that since 2008-09, PSERS’ investment returns have fallen short of their target, increasing the system’s unfunded liability.
PSERS is disguising how broken the pension system is by operating under the current investment return assumptions. Without substantial pension reform including compliant funding policies, the unfunded liability will continue to increase and stretch school districts and gobble up state tax dollars, leaving less and less for the rest of state government.
The one silver lining is lower investment fees. For the second year PSERS’ investment expenses have declined, from $558 million in FY 2012-2013 to $455 million in FY 2014-2015, an 18 percent reduction. But $100 million in savings pales in comparison to a liability growing by billions each year.
PSERS overly optimistic investment return assumptions are just one more example of how the system is broken. Pension reform isn't an option as budget negotiations continue; it's a necessity.
Last week, Gov. Wolf unveiled new, bad policy ideas—to slightly adjust a misguided pension proposal, and to propose a private manager to a government run liquor monopoly.
But just as it was with the fabled wardrobe-challenged emperor, we aren't the only ones who have seen through the Governor's new clothes. Editorial boards across Pennsylvania have pointed out Wolf's new proposals are transparent and immaterial.
Lehigh Valley Live writes (emphasis added)
Instead of offering a real compromise, Wolf dredged up what can only be called Reform Lite — privatizing the management of the liquor system (but not the ownership or the workforce). He also came down in price on his hybrid pension proposal, saying that the earnings of new state employees over $75,000 would be shifted to a defined-contribution pension plan (down from his earlier ceiling of $100,000).
Leasing the Liquor Control Board's management function to a private firm 10 to 25 years, as Wolf proposes, is worse than doing nothing, because it would prevent conversion to a market-driven system during that time. Nothing in Wolf's offer would greatly increase service or selection, or reduce prices. The unionized sales force would stay in place. So would the number of stores. Wolf's idea to extend beer and wine sales to convenience stores and restaurants is tepid at best, and pits government against private enterprise.
The Pittsburgh Post-Gazette adds (emphasis mine):
The plan is a loser. It privatizes nothing. What’s worse is that by projecting an aura of private operation it could perpetuate Pennsylvania’s antiquated system for far longer. The state needs to get out of the liquor business, once and for all, as soon as possible, without the use of Tom Wolf’s smoke and mirrors.
The Bucks County Courier Times editorializes (emphasis mine):
Now that we’ve gotten an unvarnished look at those “historic” reforms, here’s our take: phony-baloney “reforms” that create the appearance of movement for a Democratic governor locked in a budget impasse with Republican legislative leaders.
Lastly, Lancaster Online pans the proposal, urging Wolf to look to real liquor store privatization:
Forget his proposal last week to offer a long-term lease to manage the state liquor stores; private firms would bid on a contract to manage the system, which would stay under state ownership.
If Gov. Wolf can make a deal with Republican leaders that would make good on his promise to boost funding for Pennsylvania’s public schools, he should choose our children over the unions that oppose privatizing our state-owned liquor stores. If he fails to do so, he could lose the support of those who elected him because they’re rightly frustrated with the human costs of the ongoing budget impasse.
Gov. Wolf may have trotted out new clothes last week, but they don't cover up the bad policies he started with.
Total Records: 283
Who are We?
The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation transforms free-market ideas into public policies so all Pennsylvanians can flourish.