The State’s Rosy Scenarios

We live in uncertain times. This maxim is often heard in the corridors of the state Capitol where Excel spreadsheets support the marketing of new initiatives based on long-term financial assumptions. While the time horizon for many state officials is that of the upcoming state budget, others are focused on analyzing the next 30-plus years with an unabashed sense of confidence.

A review of three current Pennsylvania projects reveals that many in the Rendell administration are giddy with a sense of unbridled capitalism and optimism regarding the future of the state. So much so that they almost seem to minimize the role of government.

Perhaps there is too much bullishness for everyone’s good. Consider:

• Example 1: The proceeds from the proposed 75-year Pennsylvania Turnpike lease are presumed to be invested with the State Employees Retirement System and projected to earn an annual rate of return of 12 percent. But SERS maintains a long-term investment horizon of 8.5 percent annually for pension assets. And the national average for public pension plans is about 8 percent. Many pension plans in both the public and private sectors are lowering long-term investment expectations for a variety of macro- and micro-economic reasons.

A more realistic range, given the nature of the proposed lease, would be 6 percent to 7.5 percent. And let’s not forget that SERS this year will first have to get out of the red before it can achieve even its own projected 8.5 percent return, let alone the 12 percent return projected for the money provided by a turnpike lease. Double-digit growth in SERS investments is not likely to be achieved again anytime soon.

• Example 2: The Pennsylvania Access to Basic Care health-care reform plan recently passed the House. The plan is predicated on federal subsidies increasing at an average rate of 11.2 percent per year and an annual average per-capita growth rate in total health-care costs of 3.6 percent until 2017. Neither is likely, with a federal government deep in debt and health-care costs rising steeply (see next example).
• Example 3: To fund health-care coverage for state retirees, a significant portion of the costs are projected to increase at 7 percent in 2008, 6 percent in 2009 and 5 percent in 2010 and beyond. Ironically, the assumption for the asset growth that would cover these costs is 8.5 percent, although it is not clear what entity would invest the assets. Perhaps this will be added to the SERS charter as well.

To help stimulate the economy and produce these kinds of returns, Pennsylvania should aggressively lower tax rates. But this will prove hard, given that many politicians have a singular focus on increasing the size and scope of government under the premise that they can offer universal solutions to our many problems.

Government’s only revenue ultimately comes from the private sector, which is tasked with generating the high returns that the turnpike proceeds and other investments would require. Ironically, some would consider returns as high as 12 percent as derived from “excess profits.”

As it stands, the consistently bullish assumptions offered by state officials carry significant risks to taxpayers, risks that are not being considered or discussed. It is clear these assumptions are designed to maximize the likelihood of public support for their proposals. In all three cases, any significant unfavorable variation from their rosy projections would lead to higher taxes now or down the road.

Are we and the next generation of taxpayers prepared for this?

Sound public policy suggests we would be well-served to have a comprehensive understanding of the likely scenarios and related contingencies well before any votes are taken.

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Richard C. Dreyfuss, an actuary and pension expert, is a senior fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org) in Harrisburg.