Wolf Wrong About Pensions & Downgrades

JULY 14, 2015  | by NATHAN BENEFIELD

Over the past week, Gov. Tom Wolf has been defending his vetoes of the state budget, pension reform, and liquor privatization, noting that rating agencies have been downgrading Pennsylvania's bond rating.  Wolf doesn't mention that every single downgrade cites pension liabilities as a major reason for our downgrade.

His veto of SB 1, ironically, kills a pension reform measure that ratings agencies like, while his proposal—$3 billion in new state debt via pension obligation bonds—has been panned by rating agencies.

Moody's has warned states and local governments against using pension obligation bonds:

Pension bonds are often a red flag associated with greater rigidity of long term obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future.

Over the weekend, the Washington Post and ProPublica ran a must-read story on the failed track record of pension obligation bonds, and why experts warn against using them:

If the timing is wrong, these so-called pension obligation bonds could clobber the finances of the government issuers. Pension funds and beneficiaries will be better off because pensions will be more soundly financed. But taxpayers — present and future — might be considerably worse off. They will be running huge risks and could get stuck with a massive tab. … 

"These bonds are pernicious," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "They discourage pension funding. They shift costs forward to future generations." 

The story goes on to discuss Gov. Wolf’s proposal:

In Pennsylvania, the Republican-controlled legislature would rather trim benefits than incur a hard obligation by supporting Democratic Gov. Tom Wolf’s proposal to sell $3 billion in pension bonds.

Wolf wants to pay for the bonds with $185 million a year in projected profits from expanding sales at state-owned liquor stores. On Thursday, he vetoed a Republican package that, among other things, would have converted future pensions into a less-generous 401(k)-style plan.

The alternative? Drinking up to help fund pensions, and hoping not to get a hangover from pouring billions in liquid assets down the drain.

 Likewise, Gov. Wolf should re-read the New York Times piece on pension obligation bonds from May:

The flood of cash from the bonds may also tempt officials into taking a break from their pension-funding schedule — the very action that has caused so much pension distress to begin with. Skipping annual pension contributions produces an off-balance-sheet debt that can start growing exponentially.

"These deals are being done as a budget gimmick," said Matt Fabian, a managing director at Municipal Market Advisors, who keeps a database of municipal bond defaults and other mishaps. "They should not be done at all."

In contrast, shifting new employees to a defined contribution plan—or even a hybrid or cash balance retirement plan, like the proposal Gov. Wolf vetoed—is viewed positively by ratings agencies.

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 is serious about improving our credit rating, and avoiding "gimmicks," he should drop proposals to use pension bonds and start discussing real pension reform.


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Wolf Truth Squad: Property Tax Relief Now

JULY 14, 2015  | by NATHAN BENEFIELD

In a Patriot News story, Gov. Wolf’s spokesman Jeff Sheridan commented on need for immediate “property tax relief”—comments that don’t jibe with Gov. Wolf’s actual budget proposal.

"Pennsylvanians don't need property tax relief in the fall, they need it now," Sheridan said. Well, someone should tell his boss. The governor's plan doesn't provide immediate relief or much tax relief at all:

  • Funds for property tax "relief" won’t be distributed until October 2016.
  • Families pay higher state taxes starting now (income tax increases beginning July 1 and sales tax increase in January).
  • Only 30 cents of new state taxes would go to property tax relief—with a net increase of $1,400 per family of four.

I’ll give Jeff Sheridan the benefit out of the doubt by assuming his inaccurate comments were the product of angry rage, and not a deliberate attempt to fool voters.

Notwithstanding Sheridan's comments, the reality is clear: Gov. Wolf’s proposal doesn’t deliver property tax relief now, and imposes significant new tax burdens on poor and working class families.


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Audio: Severance Tax Hurts All

JULY 13, 2015  | by JONATHAN REGINELLA

Nearly two weeks into the new fiscal year, and Pennsylvania is still without a budget after Gov. Wolf vetoed the Republicans' proposal last month.  

The governor, whose own­ budget proposal didn't receive a single vote in the House, cited the lack of severance tax as one of the reasons for his veto. Keep in mind, this is a tax that would destroy jobs and raise energy costs for poorer families.

Elizabeth Stelle, CF’s director of policy analysis, was on WSBA’s The Gary Sutton Show to discuss the pitfalls of raising taxes on the natural gas industry. 

Gov. Wolf’s camp claims the gas industry doesn’t pay its fair share of taxes. Not true. As Elizabeth points out, Pennsylvania already imposes an Impact Fee and “many other taxes, fees, and regulations that put a very heavy burden on the drilling industry."

The severance tax would drive away investment in the state and result in 4,138 fewer private sector jobs in 2017. It would also hit poor and working class families with $180 million more in higher utility taxes.

To listen to Elizabeth's conversation with Gary Sutton, check out the link below.

The Gary Sutton Show airs daily on WSBA 910AM in the York area.

Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.

For mobile listening, get the SoundCloud iPhone and Android apps.


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America Works (On Misleading the Public)

JULY 13, 2015  | by BOB DICK, NATHAN BENEFIELD

Tell the Truth

America Works USA, an affiliate of the union-funded Democratic Governors Association, recently launched an ad campaign in support of Gov. Wolf’s effort to raise taxes on middle- and low-income people.

The group, bolstered by a war chest of at least $500,000, took to the airwaves with radio and TV ads slamming the Republican budget and touting Gov. Wolf’s budget as a practical alternative. Regrettably, the ads are chock-full of misinformation. Although the ads aren’t very long, we identified seven erroneous claims, each of which are corrected below.

Claim #1: The Republicans’ budget lets oil and gas drillers “of the hook.”

Reality: According to America Works, Republicans let the natural gas industry of the hook because they refused to impose higher taxes on the industry. Never mind gas drillers already pay taxes applicable to every other Pennsylvania industry ($318 million in taxes since 2009). They also pay an Impact Fee, which generated more than $800 million in revenue since 2011. According to the Independent Fiscal Office, the 2015 Impact Fee is equivalent to a 4.7 percent effective tax rate, placing drillers firmly on the hook.

Claim #2: The Republican budget proposal fails to fund education.

Reality: Putting aside the notion that more education spending produces better academic achievement (there’s no correlation), the Republican budget includes $370 million dollars in additional spending on K-12 education. The budget vetoed by Gov. Wolf would have increased support of public schools to more than $10.4 billion—a new record high—for the 2015-2016 budget year.

Claim #3: The budget deepens the deficit.

Reality: Baked into the “deficit” number is projected increases in government spending. A real deficit is when government spending exceeds tax revenue. There’s no reason why lawmakers can’t slow the growth of spending and reform the cost drivers in the budget to ensure it’s balanced for next year. But if lawmakers must choose between prioritizing all spending and even use one-time revenues or raising taxes, the first option is preferable.

Claim #4: Gov. Wolf is fighting for a middle-class budget that lowers property taxes.

Reality: The governor’s budget raises taxes on Pennsylvanians of all income levels, according to the Independent Fiscal Office. The governor’s promise of property tax relief only provides 30 cents of relief for every dollar in new taxes—with a net increase of $1,400 per family of four—while simply shifting the tax burden and failing to address ballooning local pension payments driving up property taxes.

Claim #5: The governor makes oil and gas companies pay up to fund schools.

RealityNone of the proposed severance tax revenue is dedicated for education spending—though much of it is earmarked for other projects, including corporate welfare for alternative energy companies.
And according to the governor’s own estimates, his income tax and sales tax increases will cost taxpayers several times more than his severance tax. His proposal collects more funding from taxing health care services and day care than from taxing natural gas.

Claim #6: Pennsylvania ranks 44th in state support for education.

Reality: Pennsylvania ranks near the national average in state funding per student. Overall, Pennsylvania ranks 10th in total funding per student—at $15,000, which is nearly $3,000 above the national average. Moreover, total school district spending reached an all-time high in 2013-14, at $26.1 billion. State aid to school districts is also at a record high.

Claim #7: Pennsylvania is the only major gas producing state that doesn’t charge oil and gas drillers an extraction tax.

Reality: Pennsylvania has an extraction tax. It’s call an Impact Fee. Additionally, Pennsylvania has one of the highest overall tax burdens of all the oil- and natural gas-producing states. Other states, like Texas and Wyoming, do not have any personal or corporate income tax. Alaska uses its severance tax to give rebates to residents. Any apples-to-apples comparison must consider the total tax burden.


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Gov. Wolf's False Facts on Facebook

JULY 10, 2015  | by MATTHEW BROUILLETTE

Governor Tom Wolf made it clear that he didn’t like anything in the budget that the General Assembly put on his desk on June 30—even though it mirrored about two-thirds of his proposed spending plans.

The vetoed budget didn’t include his highest-in-the-nation income, sales, tobacco, and energy tax increases—proposals that failed to get either Democrat or Republican support in the House on June 1 with a 0-193 vote.

As the governor uses TV and radio ads to push for his massive tax increases, he continues to try to vindicate his budget veto with deceptive half-truths. Take the arguments in his recent Facebook meme titled “The Republican Budget.”

Wolf Republican Budget Meme Small

  • “...only $8 million more for public schools...” Gov. Wolf can argue that more money is needed for public education. That’s a subjective debate. But to say the vetoed budget only provided $8 million more is false. The vetoed budget increased spending in preK-12 education by $370 million.

    State spending in the public schools is already at an all time high. Overall, Pennsylvania ranks 10th in total funding per student—at $15,000, which is nearly $3,000 above the national average.
  • “...handouts for oil and gas drillers...” First of all, “oil” isn’t even part of the Wolf natural gas tax proposal. What “handouts” is the Governor talking about? The natural gas industry gets no state subsidies. Ironically, the only handout is in the governor's proposal to earmark severance tax money to subsidize “alternative energy” companies that can’t compete.

    In reality, natural gas companies already pay every tax every other business pays in Pennsylvania, in addition to a severance tax that is called an “Impact Fee.”
  • “...unbalanced and creates a $3 billion deficit...” “Deficits” only occur when you spend more money than you have. The state runs into this problem when spending outpaces tax revenues. Gov. Wolf can create a “deficit” by simply disagreeing with revenue assumptions made in the vetoed budget.

    Indeed, the Governor’s very own budget shows that even after imposing $12 billion in new and higher taxes, he will run “deficits” in the coming years.
  • “...one-time revenues...” They should! When a family or business runs short on cash, they look in every cupboard, sofa cushion, and office to find more money. Unlike Gov. Wolf, families and businesses don’t have a taxpayer paycheck they can raid.

    Instead of vilifying, we should applaud the General Assembly for using “one-time revenues” rather than raising taxes on low and middle income families. Better yet, they've started to address budget cost drivers, like pensions.
  • “...no property tax relief...” In what world is raising income, sales and other taxes to the tune of $12 billion to give back less than $4 billion called “relief”? Most people would call that a tax hike.

Gov. Wolf is entitled to his own opinions, but being deceptive and disingenuous with facts is hardly becoming of “a new kind of governor".


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Wolf Repeating Same Mistakes of the Past

JULY 9, 2015  | by NATHAN BENEFIELD

Earlier this week, we pointed out how Gov. Tom Wolf's veto of liquor privatization—using talking points from union leaders to justify his action—didn't make much sense.

Wolf’s reasoning can be summarized as this:

We shouldn't get rid of a "government asset." Prices will go up if we privatize. Despite rampant corruption at the agency, we should keep state control and "modernize" the asset.

This mirrors almost exactly the arguments made against leasing the Pennsylvania Turnpike eight years ago:

We shouldn't get rid of a "government asset." Tolls will go up if we privatize. Despite rampant corruption at the agency, we should keep state control and "monetize" the asset.

A proposed lease of the Pennsylvania Turnpike, proposed by Governor Ed Rendell and supported by the Commonwealth Foundation, would have netted Pennsylvania $12.8 billion in upfront lease payments. It would also have capped toll increases (after a planned increase in 2008) to 2.5 percent per year. Instead, lawmakers passed Act 44 of 2007 to "monetize" the Turnpike, requiring annual payments to the state funded by new debt (and backed by higher tolls).

This week, the Pennsylvania Turnpike Commission announced that tolls would increase by 6 percent next year, and 4.5 percent every single year through 2044. Cash tolls have already more than doubled since 2008, and there is no end in sight to increases.

The cost of a one-way car ride from Ohio to New Jersey has gone from $21.40 in 2004 to $48.90 next year.

Turnpike Tolls to 2044

Instead of leasing the Turnpike and receiving $12 billion in upfront funding with a cap on toll increase, Pennsylvanians instead have a massive increase in their debt and skyrocketing tolls.

Gov. Wolf is repeating the same mistakes of the past.

Instead of a liquor privatization plan that would generate additional revenue for the state—while providing consumers greater choice, convenience, and, yes, lower prices—Wolf is pushing for "modernization" which literally calls for raising prices on wine and liquor products.


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When Desperation Sets In

JULY 9, 2015  | by JAMES PAUL

This is what desperation looks like.

Gov. Tom Wolf recently visited Downingtown Area School District and claimed the no-tax-increase budget he recently vetoed "includes only $8 million for education—that’s less than 3 cents, per child, per day."

Where to begin? To start, let’s clarify that the Republican budget spends more than $10.4 billion—that’s billion, with a B—in support of public schools. Gov. Wolf’s $8 million figure is misleading because it refers only to the increase over the previous fiscal year. 

The $8 million figure also happens to be false. The budget Wolf vetoed includes $100 million in new Basic Education spending, $20 million in new Special Education spending, $30 million in new early education spending, $50 million in new higher education spending, and $573 million more for school pensions. Sure, these totals are less than Gov. Wolf requested in his March budget proposal—a spending and tax package that was voted down 0-193—but the Republican plan spends money the state can actually afford.

As for the "3 cents, per child, per day" remark? It’s a cute talking point from a governor who, as PennLive recently described him, acts "less like a chief executive and more like a perpetual candidate."

But it tell us nothing. If, for example, we applied the same math to the mythical "billion dollar education cut" often decried by the governor, it would amount to a reduction of 3 dollars, per child, per day. Keep in mind, too, that this "cut" is a complete fabrication.

Over the past week, we've learned the Wolf administration is fixated on tax increases, adept at parroting union talking points, and prone to dividing by large denominators. The time has come to retire from campaign mode and face reality.


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Reprehensible

JULY 9, 2015  | by NATHAN BENEFIELD

In the Philadelphia Inquirer earlier this week, Gov. Tom Wolf uses strong rhetoric about his desire for a large severance tax increase. 

The governor responded by calling it "reprehensible" that the GOP had not agreed to impose a new tax on natural gas drillers, new money the governor wants to use for public schools.

Let’s be clear about a few things:

  1. Wolf's severance tax isn’t dedicated to education, as Dennis Owens of ABC 27 points out. It is earmarked for corporate welfare for "alternative energy subsidies" among other things, but not for public schools.

    Moreover, the vast majority of Wolf's tax increase are via income and sales tax hikes. In other words, his plan would generate more money from taxing health care and day care than natural gas.

  2. Gas drillers are already taxed. They paid more than $800 million in impact fee taxes from 2011 to 2014 and $318 million in other state taxes since 2009. Drilling companies pay the same taxes as every other business in Pennsylvania.

  3. Our analysis of Wolf’s proposed severance tax finds it would result in 4,138 fewer private sector jobs in fiscal year 2017.

  4. Everyone—including poor and working class families—would pay more for a severance tax increase. The Independent Fiscal Office finds that households earning less than $100,000 will pay $180 million more annually in higher utility bills as a result of Gov. Wolf's proposal. 

Destroying jobs and making poor families pay higher energy bills—that's what is truly reprehensible.


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Audio: Gov. Wolf's Vetoes Keep the Status Quo Alive

JULY 8, 2015  | by JONATHAN REGINELLA

Gov. Wolf promised to be a governor who would eliminate Pennsylvania’s destructive status quo. So how did he respond when state legislators put a budget without tax increases, a bill to privatize the liquor business and a bill to give more funding to schools on his desk?

Gov. Wolf promptly scribbled his veto pen across all of them, ensuring the status quo lives on.

Matt Brouillette spoke with WPHT’s Rich Zeoli about Gov. Wolf’s decision to veto all of these bills.

He explains Gov. Wolf executed his veto power to “take care” of public sector unions (his biggest campaign contributors) while ignoring the concerns of average Pennsylvanians.

Matt clarifies why Gov. Wolf’s own budget plan got zero votes in the House, saying it “presented spending and tax increases that exceed the other 49 states combined”. Gov. Wolf needs to lose the “my way or the highway” attitude and start chipping away at the status quo rather than allowing it to continue.

Click here or listen below to hear more.

Rich Zeoli appears on WPHT weekdays from 3 pm – 6 pm.

Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.

And for mobile listening, get the SoundCloud iPhone and Android apps.


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Fixated on Tax Increases

JULY 8, 2015  | by BOB DICK

At the end of last month, Gov. Wolf vetoed the Republicans’ budget, criticizing it for failing to meet his lofty goals of closing the structural deficit, increasing education funding through higher energy taxes, and providing property tax relief to homeowners. Those goals come with hefty price, primarily more taxes for Pennsylvanians at all income levels.

Here’s why: If we concede (we shouldn’t) the severance tax won’t hurt people in low and middle income households, it still won’t raise enough revenue to pay for the governor’s education proposals, let alone his plan to reduce property taxes or close the deficit. To raise enough revenue for all three priorities, he needs broad-based tax increases, which Republicans have ruled out.

Amazingly, after the governor's budget proposal was defeated in the House by a vote of 0-193, he remains steadfast in his commitment to raising taxes, according to his spokesman Jeff Sheridan:

Right now, there has not been any better ideas presented to us than increasing the personal income tax, increasing the sales tax, while providing the property tax relief that was not included in their budget

The governor has drawn a line in the sand: Either tax low and middle income families or Pennsylvania continues to operate without a budget. His position is puzzling considering he campaigned on protecting low and middle income people from tax hikes.

Not only is Gov. Wolf breaking one of his core campaign promises, but his position won’t fix what he sees as some of the state’s biggest problems:

The structural deficit: His own budget plan—and the gigantic tax increase accompanying it—won’t eliminate the structural deficit. According to the Wolf Administration’s own calculations, by 2016-2017, the state would face a $318 million deficit under his plan.

Severance tax/education funding: The governor wants to impose a severance tax on the natural gas industry. He’s too late. Pennsylvania already has a severance tax, but it’s described as an impact fee. And according to the Independent Fiscal Office, it’s the equivalent of an effective 4.7 percent tax rate on production. The revenue raised from the tax rate is just one of the many taxes the natural gas industry pays.

Yet the governor continues push for an even higher severance tax to "restore education funding cuts of the last four years." There are two problems with this narrative. One, education spending is at its highest level ever. Two, there is no link between higher levels of education spending and academic achievement.

Property tax relief: Providing property tax relief through tax shifting treats the symptom instead of the disease. Property taxes are on the rise because education spending is ballooning. If the state shifts the tax burden, but doesn’t control education spending, taxpayers will continue to take a hit, just in a different pocket.

Gov. Wolf can break the budget impasse and provide Pennsylvanians the “fresh start” he promised during the campaign, but he’ll need to abandon his fixation on the stale policies of the past.


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