In a recent interview with Stephanie Renee, host of WURD AM’s The Mojo, Nathan Benefield discussed the roots of Pennsylvania’s pension crisis and how to fix it.
Pension debt has stacked up significantly since 2001, when lawmakers retroactively increased pensions for state workers, public school teachers, and even themselves. Nate noted that an increase in pension benefits, coupled with reliance on the not-so-reliable stock market, have led to our $63 billion pension debt.
Additionally, overly optimistic assumptions that our pension investment funds will return 7.5% interest each year haven't borne out. More than a decade of underfunding our pension system has only served to push the burden of skyrocketing pension debt onto future generations.
The Department of Corrections alone owes over $3.3 billion in pension liability, while the Department of Human Services owes over $2.3 billion. The Turnpike Commission, which rounds out the list of PA’s ten agencies with the most pension debt, faces over $300 million in pension liability.
To see the impact of this debt, just look at higher tolls on the turnpike, higher tuition at state universities, and higher prices at our state-run liquor stores.
Nate explained that moving to a defined contribution plan, similar to the private sector’s 401(k) plans, would alleviate some of the pending pension trouble. Not only would it protect the system from the uncertainties of stock market returns, but it would also protect public employees and taxpayers from political influence.
Click here or listen below for the full interview:
Last week Moody’s warned an out-of-balance state budget could result in another credit downgrading. By not acting to balance the budget, Governor Wolf is aiding in the devaluation of the commonwealth's credit, something he's been quick to decry in the past.
That’s a big deal since Pennsylvania’s credit-rating is already the third worst in the country, behind Illinois and New Jersey. Philadelphia Inquirer columnist Joseph DiStefano points out that the Commonwealth pays around half a percentage point extra to borrow, compared to AAA-rated, states like Delaware and Maryland.
While the rating recognizes the fundamental economic capacity Pennsylvania has to resolve its structural budget gap and fully fund its pension liabilities . . . [it] also recognizes the hurdles it faces to do so in practice.
The coming months will be crucial. If the Commonwealth is able to balance the budget, either through revenue increases or expenditure decreases [emphasis added] or a blend of each, its credit could stabilize at the current level.
The rating agency also cites pension reform as a critical factor in an upgrade of the state’s bond rating or removal of its negative outlook.
What the rating agency doesn’t say is that higher taxes or revenue increases will slow an already sluggish economy, making it increasingly unlikely that Pennsylvania will improve its long-term fiscal situation any time soon.
The declining credit of the commonwealth is proof that we can’t sustain Harrisburg’s spending addiction.
Update: On Monday July 11th, S&P announced Pennsylvania is on its CreditWatch list. Pennlive has the story: "The CreditWatch action reflects recent developments that indicate that Pennsylvania will likely proceed into fiscal 2017 with a spending plan that is not supported by a revenue package or offsetting spending cuts to bring the budget into alignment," said S&P Global Ratings credit analyst Carol Spain in a news release, "but if lawmakers continue to negotiate and reach a balanced budget within a 90 day timeframe, we could remove the ratings from CreditWatch."
The first—House Bill 928—would impose annual spending limits on new Redevelopment Assistance Capital Program (RACP) projects and Public Improvement Projects (PIP). The second—House Bill 930—would lower the RACP debt ceiling by $50 million each year starting in 2018 until it reaches $2.95 billion in 2027. The ceiling is currently $3.45 billion, due to a similar reformed passed in 2013.
Restraining government’s borrowing power helps keep more money in the pockets of workers, who can spend it on their own needs rather than having it siphoned away to pay for government debt. Leaving spending decisions with the people who earn their money also benefits the economy.
But not everyone is convinced. Some say the bills would hurt investment in the state (paywall):
“Make no mistake about it, House Bill 928 means a reduced RACP program,” said [House Democratic Appropriations Chair Joe] Markosek. “It means less investment in our communities. It means fewer projects and ensures that inflation will eat away at the buying power of those projects. It means less matching dollars invested by businesses, and less matching dollars invested by other private entities who want to create jobs here in Pennsylvania.”
Is a reduced RACP program necessarily a bad thing? A recent Mercatus Center study authored by Dr. Adam Millsap suggests not:
Instead of spending time and energy inventing new products or improving production processes, entrepreneurs are incentivized to expend resources pursuing government grants. Since the grant is simply a transfer of resources from one group to another—in this case from taxpayers to the winning businesses—the resources spent acquiring the grant do not create new output…
Critics of debt reduction believe government spending adds to the economy. But government has no money of its own. Only taxation, borrowing, and inflation make government spending possible, and all take resources out of the private sector, hurting job and income growth.
Moreover, reducing government debt doesn’t mean “less investment in our communities.” It means government will take less from the private sector, enabling people to invest in their own communities.
Contrary to what some say, if government doesn't do it, it doesn't mean it won't get done.
The budget impasse is creating more problems for Pennsylvanians with each passing day—already costing taxpayers at least $11 million. Gov. Wolf has been using the gridlock as an excuse to cut off a lifeline to students looking to avoid violent and failing schools. Now, the governor’s refusal to budge is affecting the state’s credit outlook.
Last week, Moody’s Investor Service revised Pennsylvania’s outlook from “stable” to “negative.” This means Moody’s believes Pennsylvania’s credit rating will likely fall (again) absent any significant reforms. A drop in the state’s credit rating will make it more expensive to borrow, leading to a higher tax bill for workers.
If you’re a regular reader of PolicyBlog, the reasons Moody’s cited for the outlook change won’t surprise you:
The negative outlook reflects the difficulty the commonwealth is likely to have closing its structural budget gap in light of the contentious political environment. Pennsylvania is more than 100 days into an impasse over its budget for fiscal 2016, which began July 1. Large tax increases in the executive budget proposal that are designed to close the commonwealth's budget gap have failed to pass, while alternatives enacted by the legislature have been vetoed. Meanwhile, ongoing expenditures exceed ongoing revenues by about $2 billion; the structural gap is higher accounting for the commonwealth's pension contribution shortfalls relative to its actuarial required contributions. Amid its extreme political gridlock, the commonwealth will be challenged to find solutions to its fiscal imbalance.
Moody’s suggests a number of possibilities to improve the outlook: raise revenue or cut spending to eliminate the structural deficit; make substantial progress toward increasing pension funding levels; and increase economic growth, which boosts revenue gains above projections.
Of these possibilities, raising revenue without tax increases, cutting government spending, and putting the pension systems on a path to sustainability make the most sense. After decades of spending growth, Pennsylvania already has one of the highest tax burdens in the country, and we have little to show for it.
By limiting the size of government, lawmakers can protect workers from government waste and create an environment where people who work hard can provide for themselves and their families.
Matt Brouillette and Rich Zeoli of Talk Radio 1210 WPHT answer questions about the Pennsylvania budget during a telephone town hall.
Matt explains how Gov. Wolf's tax plan that would smack Pennsylvanians with a tax increase "larger than the other 49 states' combined." Such a high burden for taxpayers is one of the many reasons Gov. Wolf's tax proposal received zero votes in the House.
Click here or listen below to hear more of Matt and Rich's answers.
Who killed Harrisburg?
That’s the question award-winning investigative reporter Chris Papst answers in his new book Capital Murder, which chronicles how Harrisburg became the only capital city in American history to file for bankruptcy.
The book is incredibly timely: Just last week, the home of former Harrisburg mayor Stephen Reed, who Papst calls the “head coach” of the team that presided over the city’s decline, was raided by agents from the state attorney general’s office in connection with a grand jury investigation into the city’s finances.
Listen to CF President Matt Brouillette’s conversation with Chris:
The dangers of unaccountable government, abuse of power, out of control debt, and blind trust in elected leaders are just a few of the lessons other cities should learn from Harrisburg’s unfortunate example.
The book is available in hardback and as a Kindle e-book at Amazon.com and is published by Sunbury Press.
Chris Papst now reports for WJLA in Washington D.C.
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Every Pennsylvanian’s share of state and local debt increased by 20 percent over the last twelve years. In 2002, per capita debt totaled $8,693. Today, the total is a shade under $10,450.
This trend must be reversed. Future generations should not be forced to shoulder the consequences of present-day overspending. A greater debt burden means a lower standard of living and quality of life.
|Pennsylvania State & Local Government Debt|
|Debtor||Debt Outstanding||Per Person|
|State Agencies & Authorities||$39,471,300,000||$3,087|
|Sources: Governor's Executive Budget (http://www.budget.state.pa.us) December 2014 data; PA Dept of Education (http://www.pde.state.pa.us) June 2013 data; U.S. Census Bureau (http://www.census.gov) 2012 data|
Acknowledging the importance of reining in state debt, a group of lawmakers introduced four pieces of legislation to begin chipping away at the nearly $134 billion behemoth. The following bills are the result of work done by the House GOP’s Debt Working Group:
- House Bill 928: Establishes annual borrowing limits on Redevelopment Assistance Capital Projects (RACP) and Public Improvement Projects (PIP).
- House Bill 929: Brings transparency to the debt issuance process by requiring the governor to provide a detailed report to the General Assembly describing the capital budget projects financed with debt.
- House Bill 930: Lowers the RACP debt ceiling by $50 million each year starting in 2018 until it reaches $2.95 billion in 2027. A similar reform passed back in 2013.
- House Bill 931: Requires legislative approval before entering into a leased-back debt or installment purchase agreement.
Earlier today, Senators Camera Bartolotta and Mike Folmer and Rep. Tim Krieger announced their intentions to usher in an era of fiscal responsibility with the Taxpayer Protection Act (TPA) and Taxpayer Protection Amendment.
The TPA would limit government spending to inflation and population growth. Any revenue above this cap would be used to pay down pension liabilities, replenish the "Rainy Day Fund," and provide tax relief to working Pennsylvanians. These reforms would shield families from out-of-control spending growth that hinders job creation, promotes "brain drain," and stymies personal income growth.
Since 1970, state government spending has risen nearly $14,000 per family, leaving residents with the tenth-highest tax burden in the country to pay for it all.
This gargantuan growth in government has not stimulated Pennsylvania's economy. Pennsylvania ranks a depressing 49th in job growth, a dubious 48th in population growth, and a dismal 45th in personal income growth since 1991.
Had TPA spending controls been in effect since 2003, taxpayers would have saved $28.7 billion over the past decade—or nearly $9,200 per family of four. The TPA is just one of many crucial steps that would move us toward a balanced budget and put Pennsylvania back on the road to prosperity.
CF's Nate Benefield commented:
It's time to protect Pennsylvanians' ability to live, work, and prosper within the commonwealth with the Taxpayer Protection Act
This year, Pennsylvania lawmakers have the formidable task of eliminating a projected $1.7 billion budget deficit. Bob Dick, a CF policy analyst, spoke with Gary Sutton about what can be done to step towards a balanced budget.
A crucial first step is protecting families and business from unfair tax increases. As Bob points out, the “tax burden on Pennsylvanians in general is the tenth highest in the country—adding more to that burden is just not fair, and it makes it harder for working families to make ends meet.”
Avoiding overspending—by cutting unnecessary burdens like corporate welfare—is another vital step in balancing the budget. Though it has proven to be an ineffective means to stimulate job growth, Pennsylvania tops the charts in corporate welfare.
Bob describes how eliminating this wasteful spending would save taxpayers around $675 million.
Listen to some of Bob’s interview with Gary Sutton on WSBA 910 AM as he describes balancing the budget in more detail:
The Gary Sutton Show airs daily on WSBA 910AM in the York area.
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Every man, woman and child in Pennsylvania owes just over $10,000 in state and local debt. Today, the state House made another positive step towards reducing that debt burden. HB 2420 passed the chamber on a 114-82 vote. A related bill, HB 2419 has advanced from committee and awaits a floor vote when the legislature is next in on October 6.
HB 2420, sponsored by Rep. Kerry Benninghoff, would reduce the state's borrowing for the RACP programs by $50 million each year beginning in 2018-19 until it reaches $2.95 billion. Last year, RACP's debt limit was reduced from $4.05 billion to $3.45 billion.
RACP allows taxpayer-backed borrowing for private projects, like sports stadiums and corporate headquarters. RACP has a long history of funding questionable projects such as the Arlen Specter Library, the bankrupt August Wilson Center in Pittsburgh and a $3 million grant to the Second Mile, the charity founded by convicted child molester Jerry Sandusky.
HB 2419 sponsored by Rep. Mike Turzai would cap the annual borrowing for new projects beginning in 2015-16. Specifically, the bill would cap:
- Redevelopment Assistance Capital Projects, known as RACP, at $125 million
- Flood Control Projects at $25 million
- Highway Projects at $25 million
- Public Improvement Projects at $350 million
- Transportation Assistance Projects at $175 million
House lawmakers should be commended for tackling Pennsylvania’s borrowing problem, and recognizing that RACP subsidies crowd out private investment and prevent broad-based tax reduction to stimulate job growth for all.
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