Tax Hikes Coming Soon?

JUNE 20, 2016  | by NATHAN BENEFIELD

The latest budget rumors indicate legislative leadership and Gov. Wolf are negotiating a budget that would spend at least $31.5 billion and upwards of $32 billion. To put these spending numbers in perspective:

  • $31.5 billion is $1.1 billion more than net revenue.
  • An increase of $1.5 billion would be more than five times the rate of inflation and population growth.
  • In the eight years before Gov. Wolf took office, General Fund spending grew by $2.85 billion. If the legislature passes a $32 billion budget, that would equal a $2.85 billion increase in just two years.

Last year, legislative leaders demanded we determine how much is available to spend first, and then to spend within our means. This year’s negotiations are beginning with how much Gov. Wolf wants to spend and then cobbling together the taxes to pay for it.

So-called “sin taxes” may not be as destructive as broad based sales or income tax increases, but they burden low-income households, result in greater smuggling, and extract more money from families who are already overtaxed.

Rather than take more from taxpayers, lawmakers should prioritize spending, cut corporate welfare, address human services spending growth, and enact meaningful reforms for cost drivers such as pensions.


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Don't Balance the Budget on the Backs of Working People

JUNE 17, 2016  | by BOB DICK

With little time left until the new fiscal year and fewer than two weeks to avoid another budget impasse, informal budget proposals are floating throughout the state Capitol.

One proposal would authorize large spending increases and tax hikes on tobacco products—neither of which should be acceptable to taxpayers.

Growing government is what Pennsylvania has always done, with state spending rising consistently for the last 46 years. Unsurprisingly, this has put a strain on working people, who shoulder the 15th highest tax burden in the country.

Raising tobacco taxes only adds to this burden, balancing the budget the on the backs of the poor while relying on an unsustainable revenue source to meet spending projections. This is neither necessary nor fair.

Pennsylvania’s fiscal struggles don’t stem from state government taking too little out of taxpayers’ pockets but from the excessive growth of government spending. Unaddressed, this spending penchant will exacerbate the state’s fiscal, demographic, and economic troubles

Lawmakers can balance the budget by keeping spending within the parameters of the Taxpayer Protection Act index—based on inflation plus population growth. This year, the index is 1.02 percent, which would allow for a $300 million increase in government spending.

To keep spending in check, CF has proposed a litany of reforms, including:

  • Eliminating corporate welfare,
  • Reducing public employee compensation inequality,
  • Reforming welfare, and
  • Reprioritizing non-General Fund spending.

These and other measures would avoid doubling-down on the same old formula of higher taxes and unsustainable spending increases.

Pennsylvania’s job, income, and population growth has been near the bottom in the nation over the last four decades, while the costs of government have gone largely unchecked. That’s not a coincidence.

If we’re going to change Pennsylvania for the better, business as usual is not good enough.  


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Energy Mandates a Double Whammy

JUNE 17, 2016  | by ELIZABETH STELLE

Alternative energy mandates raise the cost of living and make it harder for people to find work. These are the findings of a new paper on the government's futile efforts to manage the energy sector.

According to the paper's author, Dr. Timothy J. Considine, the mandates will adversely affect Pennsylvania, raising energy costs by $700 million and eliminating 11,400 jobs by 2025.

In 2004, Pennsylvania enacted the Alternative Energy Portfolio Standards (AEPS). These mandates require 18 percent of all electricity to be generated from renewable sources by 2021.

More than 98 percent of the new renewable energy capacity for Pennsylvania is supplied by wind power. This means electricity production at coal and natural gas plants fluctuates (or cycles) to accommodate times when the wind does not blow. But cycling reduces efficiency and raises costs.

In 2013, coal remained the largest source of Pennsylvania power, followed by nuclear power at 34 percent and natural gas at 22 percent. In comparison, wind power accounts for only 1.5 percent of total generation.

The high cost of renewable energy mandates isn't unique to Pennsylvania. By 2025, the mandates will destroy more than 150,000 jobs and increase electricity costs by $23.1 billion in 12 states.

If lawmakers want to shield Pennsylvanians from this economic damage, repealing the AEPS and/or refusing to extend the program should be a top priority. Rep. Sankey offered the lastest repeal bill back in 2013. 

Costs of Pennsylvania RPS in 2013 dollars (millions)

 

 2016 

 2020 

 2025 

 2030 

 2035 

 2040 

RPS Legacy Costs

 

 

 

 

 

 

Direct

$210

$206

$201

$196

$192

$187

Cycling Costs

$20

$28

$31

$32

$33

$35

less Fuel Costs

$57

$60

$64

$66

$68

$71

Net RPS Legacy Costs

$173

$174

$168

$162

$156

$150

New RPS Costs

 

 

 

 

 

 

Direct

$324

$544

$622

$651

$680

$710

Cycling Costs

$21

$29

$32

$33

$34

$36

less Fuel Costs

$216

$384

$437

$463

$490

$523

less NGCC Costs

$3

$0

$12

$12

$12

$13

Net New RPS Costs

$125

$189

$206

$209

$212

$210

RPS Tax Subsidies

$203

$291

$326

$343

$361

$379

Total RPS Cost

$502

$654

$701

$715

$729

$741

 


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PA's Long Tradition of Faux Pension Reform

JUNE 16, 2016  | by ELIZABETH STELLE

Pennsylvania's pension problem is nothing new. Over the years, lawmakers have tried to salvage the fundamentally broken system instead of creating a system that works. The latest attempt, SB 1071, passed the state House this week.

Like Act 120 of 2010 and Act 40 of 2003, this legislation makes cosmetic changes and promises modest savings that will never materialize.

Pennsylvania's pension plan for teachers and state workers is failing because defined benefit pension plans are vulnerable to swings in the stock market and political whims, leaving taxpayers with a huge bill. In the past six years, our unfunded pension liability has grown from less than $30 billion to $63 billion.

Instead of addressing the retirement systems' exposure to politics and stock market swings, SB 1071 leaves a defined benefit plan in place until a worker reaches $50,000 in salary or 25 years of service. Stacked on top of the defined benefit plan is a defined contribution plan (similar to a 401k), but the $50,000 threshold increases by three percent each year.

Public labor unions could easily accelerate this threshold in the future, lobby to defer payments or increase the multiplier. After all, the original proposal called for a 1% yearly increase.

If that's not a red flag, the cost of the plan should have you scratching your head. The PERC actuarial note claims $5 billion in savings over 30 years, but the savings amounts to just $1 billion in present value terms. A drop in the bucket.

In fact, SB 1071's insignificant savings were wiped out after PSERS announced they are reducing their assumed investment rate of return from 7.5% to 7.25%. This change instantly adds upwards of $2.5 billion to taxpayers' tab.

It's clear SB 1071 is not a step in the right direction. Rather, it's the latest in a long line of pension reform efforts that sweep Pennsylvania's pension problems under the rug.

The next step for SB 1071 is consideration in the state Senate. However, the Senate seems less than keen to advance the bill in its current form. Senate Majority Leader Jake Corman noted, "I'm not going to pat myself on the back and say, 'I did pension reform' and end up accomplishing nothing."

Senator Camera Bartolotta expressed her reservations as well, saying, “We need to put some more teeth into it, we really do.”

There's no easy way to fix our pension system, but going back on our promises to state workers or saddling future generations with debt isn't an option.


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School Districts Amass Record Reserve Funds

JUNE 15, 2016  | by JAMES PAUL

Is your local school board planning to raise property taxes despite holding millions in reserve funds? For many Pennsylvania school districts, the answer may be “yes.”  

Check out CF's sortable, searchable database of fund balances for Pennsylvania’s 500 school districts in the 2014-15 school year. It is important to note these figures predate the 9 month budget impasse, during which Gov. Wolf held school districts hostage in an attempt to extract record-high tax hikes from families and businesses.

Many districts were forced to dip into their reserves last year, as a result of Gov. Wolf's actions. (Next summer's financial reports will reveal how much districts were forced to "spend down"). But the sheer size of reserve funding in certain school districts is staggering—especially given the constant drumbeat that Pennslyvania schools are "underfunded." 

A district’s fund balance—what it owns minus it what it owes—is comprised of assigned, committed, and unassigned funds. Assigned and committed reserves are available funds designated for a specific purpose, while unassigned funds are available for any purpose.

State law requires that districts seeking tax hikes limit their unassigned fund balances to 8 to 12 percent of total spending. Our sortable database includes the total fund balance for each district, as well as each district’s total expenditures in 2014-15. It also includes each district’s fund balance as a percentage of total expenditures.

Auditor General Eugene DePasquale, speaking to Jan Murphy of Pennlive, says it is excessive to maintain a fund balance greater than 20 percent of total expenditures:

More than 300 of the 747 districts, charter schools and career and technical centers included in the department's data had fund balances topping 20 percent of their total expenditures, which is where state Auditor General Eugene DePasquale said he believes the line should be drawn.

"It is a judgment call as to what is too high," DePasquale said. "Certainly anything that is above 20 percent, clearly that's where you start to question it."

In fact, there are 21 districts who have socked away over 50 percent (!) of their total expenditures in reserve. When looking only at unassigned fund balances, 36 districts have over 20 percent of total expenditures squirreled away.

These figures should be eye-opening to anyone who believes Pennsylvania schools are unfunded—and they should be a wakeup call for school board officials who instinctively seek higher taxes from state or local taxpayers.

Check out CF's sortable, searchable database.

 

 

 

Largest Fund Balances
As % of Expenditures

District

County

%

Southern Fulton

Fulton

84.93%

Northwestern

Erie

78.07%

Union

Clarion

76.26%

Brockway Area

Jefferson

75.64%

Salisbury-Elk Lick

Somerset

73.26%

West Jefferson Hills

Allegheny

71.67%

Commodore Perry

Mercer

70.94%

Forbes Road

Fulton

65.60%

Iroquois

Erie

63.70%

Central Cambria

Cambria

60.61%

 

Largest Fund Balances

District

County

$

Pittsburgh

Allegheny

 $   198,989,522

Lower Merion

Montgomery

 $      55,974,232

Altoona Area

Blair

 $      53,772,084

East Stroudsburg Area

Monroe

 $      47,573,171

Pocono Mountain

Monroe

 $      45,944,586

Neshaminy

Bucks

 $      41,351,622

Abington

Montgomery

 $      39,627,474

Reading

Berks

 $      36,985,138

Allentown City

Lehigh

 $      36,444,773

North Penn

Montgomery 

 $      36,343,484

 
 

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Local School District Leads the Way on Transparency

JUNE 14, 2016  | by BOB DICK

The Quakertown Community School Board (QCSB) is scrapping a conventional collective bargaining practice.

Normally, unions and public employers don’t reveal the details of a collective bargaining agreement (CBA) until after the final vote. The QCSB decided to do things differently. The board published an online summary of its agreement with the district’s union weeks before the final ratification vote.

The Pittsburgh School Board made a similar decision last month. Both instances prove to be the exception rather than the rule. In case after case, labor pacts are usually ratified without any public debate.

Lack of transparency was also a staple of collective bargaining at the state level. That’s about to change. With the passage of SB 644—now Act 15—state contracts cannot be ratified until the Independent Fiscal Office (IFO) assesses their costs. The new law represents a welcome change for taxpayers who have been kept in the dark about the components of state contracts for far too long.

Act 15 takes effect today and the timing could not be better as the Wolf administration is currently negotiating labor contracts. An IFO assessment of these contracts is especially important as state government’s costs continue to balloon. While public employee pay has risen by 5.6% since 2006, average benefits per employee have increased by an astonishing 71.2%, bringing the total average compensation to nearly $93,000 per employee. Transparency can help control these costs.

These recent developments are encouraging, but further reforms are needed. SB 645—requiring the public posting of school district CBAs before they’re ratified—is once such reform.

Quakertown and Pittsburgh schools show local officials don’t have to seek permission from state lawmakers for this commonsense reform.


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What PA's New Fair Funding Formula Means for Education

JUNE 13, 2016  | by CATHERINE FITZHUGH, HUNTER AHRENS

Governor Wolf recently signed into law a fair funding formula which disburses new state education dollars to each school district based on enrollment numbers, the number of students from low-income families, and the number of students who are English language learners.

Before this formula, each district received the same funding from one year to the next, regardless of enrollment changes or the characteristics of the student body. This formula will apply to all new education dollars.

CF's James Paul recently spoke with WAEB’s Bobby “Gunther” Walsh to discuss the new funding formula and what it means for school districts.

James notes the formula needs to be respected in the future and should not be tampered with via ad hoc appropriations.

 


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Corporate Welfare: The New Budget Hostage

JUNE 10, 2016  | by BOB DICK

Gov. Wolf is withholding approval of corporate welfare projects until lawmakers agree to advance his legislative agenda.

According to a Pittsburgh Tribune-Review story, administration aides told Senate Republicans no economic development grants would be approved until lawmakers present Gov. Wolf with an acceptable budget.

The governor can offer this ultimatum because he must approve Redevelopment Assistance Capital Program (RACP) grants. RACP uses borrowed funds—with interest covered by taxpayers—to finance economic development projects.

The economic impact of RACP is questionable at best. Generally, states spending the most on economic development, AKA corporate welfare, see their economies grow at a slower rate than states spending the least.

Corporate welfare’s ineffectiveness is not the only strike against it. It also concentrates power in Harrisburg. The Tribune-Review story perfectly encapsulates why this is a problem. No one person should have the power to pressure legislators into voting for higher taxes by withholding approval of local projects. 

Pennsylvania must move away from a system that relies—at least in part—on politics to drive economic decision-making. Two pieces of legislation awaiting action in the Senate, HB 928 and HB 930, move Pennsylvania in the right direction. The bills impose debt and spending limits on RACP and Public Improvement Projects.

Reducing government debt and restraining its ability to grant corporate handouts is the moral and practical way to grow our economy.


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Latest Plan Could Grow the Pension Iceberg

JUNE 10, 2016  | by ELIZABETH STELLE

On the heels of bipartisan wine reform, the PA House is reportedly considering a pension reform plan that could actually increase pension costs.

Known as a stacked-hybrid plan, the current bill retains the current defined benefit plan on first $50,000 of salary or 25 years of service. Salary earned above $50,000 would apply to a defined contribution plan.

However, Democrats have floated an amendment to increase the defined benefit limit to $70,000 in salary and index the threshold to the national average wage, further minimizing the critical defined contribution component.

In their actuarial analysis, PERC estimates the Democratic-favored amendment would cost more than the current pension plans.

Even if this amendment fails, it would be relatively easy to revisit in future years, allowing another way to politicize pension benefits.

Lower than expected investment returns could also wipe out any savings under a stacked-hybrid plan. This week SERS reported disappointing first quarter returns of 0.7 percent, a far cry from the assumed yearly return rate of 7.5 percent. These poor investment returns mean taxpayers shoulder the burden of additional costs.

As noted in Rick Dreyfuss's latest policy memo, the failure to enact pension reform over the last decade led to a $60 billion unfunded pension liability—which families will be paying for generations.

Both the pension reform bill vetoed by Governor Wolf and the plan negotiated in December, as part of the infamous framework budget, are somewhat better alternatives to this stacked-hybrid plan.

Passing pension reform under Governor Wolf will require compromise. But the closer we can move to a defined contribution plan—a proven model that provides substantial retirements and cannot be underfunded—the better taxpayers and state workers will be protected.


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5 Reasons to Continue the Push for Liquor Privatization

JUNE 9, 2016  | by ELIZABETH STELLE

Some lawmakers and the media have labeled the latest liquor reforms as "historic" and "sweeping." The Patriot-News described the reform as the "most substantial overhaul of Pennsylvania's liquor system since Prohibition became law."

We won't go quite that far, wine in select grocery stores is not exactly groundbreaking.

Is there more convenience? Sure. But it doesn't take much to improve on the incredibly inconvenient and corrupt Pennsylvania Liquor Control Board (PLCB).

Here are five reasons Pennsylvanians should view Act 39 as the first step toward full privatization.

1. Wine in select stores. Grocery and convenience stores currently allowed to sell beer will now be able to sell wine. But that's only an estimated 300 to 350 stores in the entire state. Moreover, you'll be limited to purchasing four bottles of wine at a time. And the wine must be purchased from the PLCB. In other words, bureaucrats will still control your wine selection.

2. Beer in gas stations. The law codifies a PLCB decision to allow gas stations with prepared foods to sell beer if they meet PLCB requirements. Just nine gas stations have been approved thus far. If you are lucky enough to be near one of these gas stations, you'll still need to purchase your beer and gas at separate counters.

3. Wine delivery. Finally Pennsylvanians will be able to order wine from other states and have it delivered directly to their door, instead of a PLCB store. Though, a licensee authorized to deliver wine will be limited in the amount they can ship.

4. Expanded PLCB store hours. The PLCB will have the power to keep state stores open longer on Sundays and holidays.

5. Variable pricing. The law allows state stores to arbitrarily increase (or decrease) prices on their best-selling products, thereby costing consumers even more.

These changes (excluding variable pricing) are positive, but they don't go far enough.

The government-run liquor system has led to product shortages, inconvenience for entrepreneurs, and outright neglect of their property. As long as government maintains its wholesale monopoly on wine and liquor, mismanagement and inconvenience will be the status quo.


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