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October 2013

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October 2013
October 31, 2013

Federal Government Shutdown: Lessons Learned
Federal Shutdown-Update

State government returned to business as usual after the Congress passed and the President signed legislation continuing appropriations for fiscal year 2014 and ending the 16-day federal shutdown. However, the shutdown itself highlighted the importance addressing our state’s remaining financial shortcomings.

For a number of federal programs, the Commonwealth was able to continue to draw automatic payments, those that were mandatory entitlements, those that were forward funded and those where prior year balances were still available. However, there were also many programs for which the Commonwealth could not draw payments either because the funds were not available, there were no federal employees to process the reimbursements, or the funding authorizations had expired. Had the shutdown continued much longer, the Commonwealth would likely have had to begin shutting down federal programs for which the reimbursements were not available. The primary reason is that Pennsylvania, like many other states just does not have the cash flow or available balances to cover the federal costs for any length of time. Unlike in the 1990s when states like Pennsylvania had adequate rainy day funds and significant cash balances, states could cover the costs with a high degree of confidence they would be reimbursed by the federal government, and there would be little noticeable disruption in services.

The current financial situation in the state is like many Pennsylvanians working and earning a wage living paycheck to paycheck. In this case, it is the state working for the federal government, delivering federal programs and earning its reimbursement. If the paycheck or reimbursement stops, how long can that individual or government continue making the same payments it always had before assets are completely depleted and cash balances are negative. In the case of the state, it would have been only several weeks to a few months.

The federal government shutdown lasted only 16 days, but it really highlighted the fact that state governments, Pennsylvania’s included, will have great difficulty dealing with any significant economic disruption. It proves that there is still much work to do in getting the Commonwealth’s fiscal house in order. While we made progress toward achieving structural balance, where expenditures do not exceed revenues, we are not quite there and that is a key to putting the Commonwealth in position to provide economic opportunities for its citizens and weather economic disruptions and downturns. Equally important is the need to begin to reinvest in the state’s rainy day fund again to protect us during the next economic recession or economic disruption. Structural balance and saving for a rainy day are fundamental tenants of public budgeting, and should be our focus in developing our future Commonwealth budgets.


October 16, 2013

Federal Government Shutdown
The nation is entering the third week of the federal government shutdown. While the President and Congress have begun discussions on proposals to reopen the government and raise the federal debt ceiling, the outcome of these talks and an ultimate resolution remains uncertain as does their impact on the Commonwealth. Having worked with Governor Corbett to negotiate three on-time budgets, including a first-year budget that closed an inherited $4.2 billion deficit, we understand the difficulties associated with navigating never before faced financial challenges.

As the shutdown continues, it is clear that Pennsylvania and virtually every other state are facing the same difficult decisions. States do not have cash reserves or adequate cash flow to cover the costs of federal programs for any prolonged period of time. Even for programs where we know we would be entitled to reimbursement from the federal government, a lack of cash on hand prevents us from filling the federal funding gap because the state itself would then run out of money resulting in a state government shutdown.

Governor Corbett recently sent a letter to the Pennsylvania Congressional Delegation outlining the challenges before us.

Over the past several weeks, as the shutdown approached and was then upon us, Commonwealth agencies began analyzing each federal funding stream and program. Those programs for which FY 2014 funds are available and accessible, will continue as planned. Programs that have prior year funds still available and accessible will also continue as long as funds are available. The status of programs that have funding but whose reimbursement depends on federal employees taking action, are a bit more precarious as, some are experiencing delays and others see no funding flowing. Other programs have no authorization and so there are no funds available.

Mandatory programs such as Medicaid continue to draw federal funds and operate as usual. Most education programs are forward funded and funds are available. However, there are several federally-funded programs at significant risk of shutting down if the federal government shutdown continues much longer.

The Supplemental Nutrition Assistance Program (SNAP) is a mandatory program but currently lacks an authorization. After October, funds will not be available. The Temporary Assistance for Needy Families (TANF) is also a mandatory program that lacks an authorization and states will not receive quarterly payments. As a result, the program will operate only as long as 2013 carryover funds are available. The Supplemental Food Program for Women Infants and Children (WIC) has no new appropriation and most states, including Pennsylvania, will expend all prior funds by late October. Disability determination services for Social Security are in a similar position as the Social Security Administration has indicated that states will be reimbursed for services, but also noted that states would have to find the funds to cover the costs until then. The Low Income Home Energy Assistance Program (LIHEAP) can continue only as long as carryover funds are available as there is no FY 2014 federal funding. Likewise, other programs supported by the Social Services Block Grant will also be impacted as no FY 2014 funding is available.

As a consequence of federal inaction, the Administration may have no choice but to suspend specific federal programs and services to residents of the Commonwealth given that the first priority of state resources must be to fund state programs enacted by the General Assembly. We simply cannot risk shutting down state government because state funds were diverted to operate unfunded federal programs.

The Administration will attempt to implement the suspension of any federal program with as minimal impact on the state workforce as possible. We do know some states have already furloughed federally funded state employees and others have begun issuing layoff notices to comply with contractual obligations. Here in Pennsylvania, our hope would be to avoid any furloughs because of the disruption, costs and inefficiencies involved. In addition, it is unclear how such actions might impact maintenance of effort requirements and future federal reimbursement.

In light of all the uncertainty, the one thing we do know is that all states will be faced with making some very difficult decisions in the next few weeks should the federal shutdown not be resolved. States, including Pennsylvania, will have to decide when and how to shut down federal programs or take a chance that federal programs will be reauthorized and appropriated and hope there is enough cash to get through until Washington finally takes action and the situation is resolved.






September 2013
September 6, 2013

Back to School- Clearing Up the Education Funding Myth
Governor Corbett has been maligned by critics and special interest groups as being anti-education.  The fact of the matter is that Basic Education state funding under the Corbett administration has grown significantly since taking office in 2011.

The truth is that in 2009 and 2010, then-Governor Rendell and the legislature actually reduced state funding of basic education by about $500 million.  How did they cover this reduction?  They propped up the line item with one-time federal stimulus money, knowing full well that it was only a temporary revenue stream.

Why did this happen?  The answer is quite simple.  State funding was used to fund other core government programs and services.  I’m not sure that I would have made the same decisions, but I understand the complexity of funding state programs and can rationalize the thought process.

That said, far more damaging to the education system was the short-changing to the teacher pension system by nearly $3.8 billion during the Rendell years, taking those resources away from the education system and using them in other areas of state government.  We are still living with the consequences of that decision today, as PSERS has an unfunded liability of an estimated nearly $30 billion.

When Governor Corbett took office, he increased state funding to Pennsylvania’s public schools in order to minimize the impact of the loss of federal funding and to reverse the state funding cuts made by the prior administration.  With the enactment of the 2013-14 budget, basic education funding has increased by nearly $793 million to more than $5.5 billion, the highest in Pennsylvania history.  Remember, this increase occurred following the greatest economic downturn in generations and was accomplished while confronting a $4.2 billion general fund budget deficit.  So much for being anti-education.

The chart below visually demonstrates the basic education funding dynamics over the past 12 years and clearly demonstrates Governor Corbett’s commitment to quality basic education in Pennsylvania.

image of Basic Education Funding and ARRA - Fiscal Stabilization/Education Jobs Funding .jpg






July 2013  
July 17, 2013

2013-14 Spending Plan Complete.  Now What?
Earlier this week, the House concurred on the Fiscal Code.  With its passage, the 2013-14 revenue and spending plan is now complete.  For a complete wrap up of the 2013-14 enacted budget, click here.

The Fiscal Code, the commonwealth’s spending GPS, directs spending on items contained in the General Appropriations Bill.   A copy of the Fiscal Code can be found here.

Key components of the fiscal code include spending outlines for state-related higher education, directing transfers from special funds into the General Fund for spending on programs and services, and directing $45 million to the Philadelphia School District to help the struggling school system.   While there are many positives resulting from this past spring’s legislative agenda, there are still many pieces that remain unfinished.  Among them is liquor privatization, a comprehensive transportation funding package and pension reform .

The legislature will have a full agenda when it returns after the summer break.









June 2013  
June 25, 2013

Full Disclosure
As has been widely reported the Pennsylvania Employees’ Retirement Commission has been reviewing information submitted by both SERS and PSERS, as well as the Corbett Administration regarding potential structural changes to public and school employees’ retirement plans.  This information includes actuarial reviews of proposed legislation in both the House and Senate with respect to the introduction of a defined contribution (DC) plan for new employees.

As you can imagine, there are differing opinions by the parties involved as to what the net effect of a DC plan may be for the commonwealth.   These differences are primarily attributable to judgments and assumptions made by the various actuaries.

In the interest of full disclosure, I am providing a copy of all the actuarial analyses so you can make up your own minds regarding the merits of a defined contribution plan for future employees.



June 20, 2013

Leading by Example  
This week, several newspapers from across the state published an open letter to the People of Pennsylvania written by Governor Corbett.  In this letter, the Governor outlines his argument for pension reform.  The Governor calls on members of the General Assembly to join him in enacting meaningful pension reform that sets the state pension systems on the path to stability and sustainability.  For those readers who may not have seen it, below it presented in its entirety.

To the People of Pennsylvania:

Since taking office as your Governor, I have made public pension reform one of my top legislative priorities.  Pennsylvania is in the midst of a pension crisis.  Pennsylvania’s two public pension systems, the State Employee Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS), are badly in debt.  This is a problem that was waiting for me when I took office, but one I am determined to fix.   

How bad is the problem? At the end of 2011, both systems had a combined debt of $41 billion.  At the end of 2012, that debt had increased to over $47 billion.  This equates to an increase of more than $6 billion in one year, $510 million each month, or nearly $17 million each day.  What’s worse, this debt is expected to grow to over $65 billion by 2018.  To eliminate this debt, each household in Pennsylvania would need to contribute approximately $13,000.  

The weight of this large debt will soon be felt by every taxpayer in Pennsylvania.  This is because current law requires the state and public school districts to drastically increase their contributions of state and local taxpayer funds to SERS and PSERS in order to help lower it. 

For example, for fiscal year 2010-2011, the Commonwealth’s General Fund contributed $518 million in state taxpayer dollars to SERS and PSERS.  By fiscal year 2017-2018, that contribution of state taxpayer dollars is expected to rise to $3.359 billion, a staggering 548% increase.  This same dynamic will also play out at a local level, where more than one-third of public school districts have applied for exceptions to increase property taxes above normal limits.  For most of these school districts, increasing pension costs are to blame. 

At its core, the root cause of the public pension crisis in Pennsylvania is the type of plan afforded to state and public school employees, which is called a defined benefit plan.  This plan is archaic by today’s standards, because it guarantees public employees a specific benefit upon retirement, regardless of investment performance.  By contrast, most workers employed in the private sector have a defined contribution plan, commonly referred to as a 401(k), or no retirement plan at all.  Under a defined contribution plan, retirement benefits are determined by employer and employee contributions and the actual return earned on investments.

Under my pension reform plan, new state and public school employees will be enrolled in a defined contribution plan, rather than a defined benefit plan.  In my view, conversion from a defined benefit plan to a defined contribution plan is the most responsible way to provide an adequate retirement for state and public school employees, while shielding the taxpayers from bearing the burden of contributing billions to help balance an outdated and expensive defined benefit plan that has become increasingly rare in the private sector.  Moreover, as I have said countless times, my plan does nothing to affect the benefits of retirees or the benefits of current employees that have already been earned.  

So count me in.  As Governor, I pledge to you that if the General Assembly passes pension reform, I will gladly join new state and public school employees as a member of the new defined contribution system. Together, we can solve this pension crisis and make Pennsylvania a better and less expensive place to live, work, and raise a family.


June 12, 2013

Calls to Action  
Pension Reform Needed Now
Mark S. Singel

There are 24 million active and retired members of state pension systems. Prior to 2008, most of these beneficiaries and future participants of retirement plans felt secure with their retirement plans because of steady contributions from states and stable market conditions that assured that pension assets would grow, not decline. As the economy tightened, states deliberately withheld contributions to funds to pay for other priorities. Pension fund investments in securities teetered and crashed in 2008. These forces combined to plunge pension funds into a hole nationally that may be as high as $3 trillion dollars.

In Pennsylvania, we are looking at a financial abyss of $41 billion with projections that the unfunded liabilities of our own pension funds may reach as high as $60 billion in the next few years.

Some legislators point to the Act 120 pension fix that was enacted in 2010 and believe that it adequately addresses the problem. Nothing could be further from the truth. The “fix” contained in Act 120 actually placed additional burdens on every school district in the state. What this means is that, unless substantive pension reforms are made now, school districts will be faced with their own $1 billion shortfall. They will be forced to make drastic cuts in their own budgets – meaning firing teachers, cutting kindergarten and pre-school programs, trimming course offerings – OR increase property taxes.

Make no mistake about it: a vote against pension reform in 2013 is a vote for tax increases at the school district level in the very near future.

State workers point out that they are not the cause of the problem. This is true. Workers have been putting their own portion of the contributions into the system for years. But, because of bad decisions on benefits and underfunding by state officials over the years, combined with market realities that exacerbated the debt, the current structure is simply unsustainable.

Walking away from the reality of the pension crisis would be irresponsible. Worse, it would force the state and school districts to cut into the bones of vital services to meet pension obligations that will only grow worse.

The Governor has proposed a dramatic change from the so-called defined benefit arrangement for state employees to a defined contribution plan for new employees that would shift the risks of market swings from employer to employee. While this has become the standard system throughout the private sector, it does present some realities that must be considered.

It may be that a revised system that “stops the bleeding” but does not place the onus entirely on workers is possible. For example, a "cash balance plan" is a type of defined benefit plan that incorporates the minimum benefit of a traditional DB plan with the transparent, predictable cost and flexibility of a defined contribution (DC) plan. At least one proposal has surfaced that is seeking this middle ground.

Other tweaks that should be considered in order to save the system may include:

- Extending the service years required for benefits eligibility

- Increasing employee contributions

- Adding anti-spiking provisions

Whatever the final package looks like, one thing is absolutely clear: the legislature cannot afford to do nothing. Pension reform is an urgent problem in need of statesmanlike solutions.

With other “big ticket” items like transportation funding, liquor sales, and the General Fund budget deadline looming, it is possible, and, perhaps predictable, that legislators will walk away from the tough decisions on pension reform.

Their constituents deserve better. They deserve elected officials who square their shoulders and tackle pension reform head-on. The consequences of taking no action are severe for all Pennsylvanians. I am convinced that voters will come to understand what is at stake in the weeks ahead and demand that their elected officials rise to the occasion.

Mark S. Singel is the President of the Winter Group, a Harrisburg-based government affairs and consulting firm. He served as the Lieutenant Governor under Governor Robert P. Casey and, for a period of six months in 1993, served as Acting Governor.


June 10, 2013

Taking Pension Reform to the Streets  
As I continue to spread the message of pension reform, it has occurred to me that the more we explain the issue to the hard working people of Pennsylvania, the more it resonates to homeowners and taxpayers.  Many have commented that pension reform is an inside game in Harrisburg.  That it doesn’t matter to the general public. It should.

Without pension reform, the tough choices we now confront will continue.  Without reform, we risk leaving today’s mess to our children.  Failing to act will affect the education of our kids, the care for our most vulnerable and the public safety of all of us.

I recently spoke at a couple of pension forums sponsored by the Harrisburg Patriot-News and the Fordham Institute and The National Council on Teacher Quality.  It was great to see so many people from the general public in attendance.  It shows that this isn’t just an inside game. It demonstrates to me that the people of Pennsylvania want meaningful change.  It gives me hope that our government can make that happen.

The forums were a wonderful opportunity for the audience to see several different sides of the issue.

Understandably, each has its own perspective.  Regardless of being for or against, the Governor, the legislature, unions, and employees are having a much-needed dialogue on public pensions.

The recent discussion is important for all to see.  To view this discussion click the image below.

Click here to watch the discussion on pernsion reform.

To view the Fordham Institute and National Council on Teacher Quality pension forum click here.

For more information on the Governor's pension reform plan, click here.







May 2013  
May 30, 2013

Pension Reform Gets Public Hearing
Yesterday, I had the privilege to testify before the Senate Finance Committee about the pension crisis in Pennsylvania and the Governor's plan for pension reform, as embodied in SB 922 and HB 1350. This was a great opportunity to publicly review the components of reform as well as to dispel any myths surrounding pension reform efforts.  For more information on the Governor Corbett's Pension Reform Plan, click here.

Testimony of Charles B. Zogby
Secretary of the Budget
Commonwealth of Pennsylvania
Senate Finance Committee

Good Morning. Thank you Chairman Brubaker, Chairman Blake, and the members of the Senate Finance Committee for holding this hearing to discuss the pension crisis burdening Pennsylvania. I appreciate the opportunity to speak today to explain the Governor’s Pension Reform proposal, as introduced in SB 922, address several myths about the proposal, and answer any questions the committee may have on this issue.

First, it is important to understand the crisis we are facing. Taxpayers should be deeply concerned.
Pennsylvania’s two public pension systems, the State Employee Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS), are severely underfunded. At the end of 2011, both systems had a combined unfunded liability of $41 billion. At the end of 2012, that had increased to over $47 billion. That increase amounts to $510 million each month, or nearly $17 million for each day that we do nothing to fix this problem. What’s worse, unfunded liability is expected to grow to over $65 billion by 2018. Each Pennsylvania household’s share of this debt is nearly $13,000.

In FY 2013-2014, General Fund contributions are expected to amount to $1.6 billion into SERS and PSERS. By FY 2017-2018, the taxpayers’ bill to SERS and PSERS is expected to rise to $3.35 billion in General Fund contributions.

Mounting year-over-year pension contribution costs will continue to erode the ability to fund core government services and programs such as public safety, human services, and infrastructure improvements. This year, more than 60 cents of every new General Fund revenue dollar will be spent on employer pension contributions. This will force both the commonwealth and local school districts to make difficult choices, including reducing services or laying off employees just to make ends meet. According to the Pennsylvania Association of School Business Officials (PASBO): “Pension reform is a critical and immediate need in order to prevent more significant cuts to school programs and personnel… The Governor’s proposal is an important step forward in addressing the pension crisis schools are now experiencing.” This is evidenced by the fact that more than one in every three school districts have petitioned the state to raise property taxes above the inflationary rate this year just to cover pension-related costs.

Structural deficiencies in our public pensions threaten the long-term stability and sustainability of the systems, putting hard working public and school employees’ futures at risk. Crushing pension debt will most assuredly result in the downgrade of the commonwealth’s credit rating, costing taxpayers more to fund much needed infrastructure projects that keep Pennsylvania moving.

Recent analyses from the major credit rating agencies point to increased pension contributions and the growing unfunded liability in the public pension systems as major threats to Pennsylvania’s economic recovery and future.

Fitch Ratings points to a negative rating outlook and reflects its concern with “expected significant growth in annual pension funding obligations”. It also states that maintaining the current “AA+” rating will “depend upon the commonwealth’s ability to stabilize the downward trajectory in pension funding levels while continuing a commitment towards fiscal balance and replenishing reserves.” Standard & Poor’s notes that it has “the potential…to lower the state rating to ‘AA-’ in the next two years in the absence of meaningful pension reform efforts or significant economic growth that would help mitigate the impact of growing pension costs on Pennsylvania.”

In short, if we do nothing about pensions now, the commonwealth will struggle in the future to do the things that will keep our communities competitive and vibrant places to live, play and work. But today you will hear testimony that the plan put forth in SB 922 will do more harm than good. That it will cost the commonwealth more than the status quo, and that it will bleed the systems dry of crucial funding, leaving us in a worse position than we are now.

The arguments made by special interests in Harrisburg are intended to muddy the waters, instill fear and spread mistruths in the hope that enough noise against good public policy will stall its progress. They look to prevent responsible governing from happening in the first place.

The problem is that the status quo is no longer sustainable. Anyone who takes a serious look at the crushing costs associated with doing nothing regarding our pensions cannot honestly conclude our current path is the correct one.

Pennsylvania can no longer hedge its bets on the hope of a rebounding stock market to help us grow out of the problem. The mountain of pension debt we now have is expected to grow significantly. It is becoming increasingly difficult to balance the needs of the citizenry with the costs of our pensions. This legislation looks to curb both. In fact, its passage would result in less debt and that debt being paid off sooner than current law. It will save taxpayers nearly $12 billion in contributions and more than $40 billion in plan costs over the next 30 years. Equally as important, SB 922 will introduce reforms including a defined contribution plan for new employees that will ensure that current situation we face can never repeat itself again.

Given the mistruths currently being spread, I’d like to simply outline what SB 922 does and does not do.

What SB 922 does:
New employees will be enrolled in a 401(a) defined contribution plan, ensuring an adequate retirement benefit for all employees while providing fiscal sustainability for the taxpayers moving forward. This plan will:

  • Provide employees with the tools and resources to make wise investment decisions.
  • Provide for mandatory and automatic enrollment to ensure all employees have an adequate retirement benefit.
  • Provide for a short-term vesting period that is fair to employees.
  • Provide a 4% employer contribution rate, with higher contributions for hazardous duty employees and the State Police, at 5.5% and 12.2% respectively.  
  • Shift the risk away from the Commonwealth, and, most importantly the taxpayers, to prevent future unfunded liabilities.

Future pension benefits for current employees will be adjusted through several reforms, including:

  • Adjustments to the calculation of pensionable income, placing a cap on pensionable income at the Social Security wage base, implementing a final average salary calculation based on 5 years, instead of 3, and holding the growth of pensionable income to a 110% average of the prior 4 years.
  • Ensuring the calculation of the current Option 4 withdrawal of employee contributions correctly reflects the full actuarial value of the funds withdrawn from the system, modifying the future monthly annuity payments. It will not impact the lump sum withdrawal.
  • Reducing the multiplier by 0.5% for all employees currently above the 2.0 level (except for those that bought up under Act 120). Employees will have the option to buy-up and retain the higher multiplier.  

The commonwealth will taper employer contributions over the short-term for budgetary relief and institute long-term reforms that will reduce commonwealth risk and address the unfunded liability of the pension systems. The rate increase by which the commonwealth’s contribution is calculated will be reduced by 2.25% in 2013-14, increasing by 0.5% per year until it reaches 4.5% or until the rate is equal to the annual required contribution rate. 

What SB 922 does not do:

  • SB 922 will not impact the benefits of current retirees in any way. Not one penny. 
  • Current employees will not see any changes to benefits they have already earned.
  • SB 922 will not put future employees’ retirement benefits at risk.
  • The defined contribution plan in SB 922 will not increase the cost of the system. In fact, our independent actuarial consultants have indicated that implementing the defined contribution plan for new employees will generate $2.6 billion in savings over the next 30 years.
  • Introduction of a defined contribution plan will not cut off funding to the defined benefit plan. The reality is, we will continue to make billions of dollars in annual contributions to pay down the unfunded liability over the next several decades.

In addition, you will hear testimony later this morning regarding the use of pension obligation bonds (POBs). I will simply note that our proposal does not call for the use of POBs as a mechanism to deal with this crisis. Although the issuance of a POB could reduce the unfunded liability of the pension funds, it would negatively impact the general fund by significantly increasing required debt service payments. Issuing POBs in the hope that investment returns would outpace our debt service payments carries a significant level of risk that must be carefully evaluated.

The Governor and I have spent months traveling across this commonwealth, making the case for pension reform to the taxpayers of Pennsylvania. It has been well-received. I applaud Senator Brubaker, Representative Ross in the House, the SB 922 co-sponsors and the members of this Committee for having foresight and courage to tackle this mounting crisis. Together, we must act now. 

Good governing is putting forth real solutions to difficult problems. And good governing must continue to be this administration’s and this legislature’s business and sole focus. Thank you. I’ll be happy to answer any question you have.


May 14, 2013

A Little Light Reading  
I found the following article informative.  It clearly articulates that pension reform is needed and Pennsylvania can not rely on the status quo. Reprinted by permission from Capitolwire.

POINT OF ORDER: Act 120 can't be the only answer to PA's pension crisis.


A Capitolwire Column

By Chris Comisac
Deputy Bureau Chief

HARRISBURG (May 14) - Last week I wrote several stories related to Pennsylvania’s pension plans for state employees and school employees.

Those stories touched upon several important aspects of the current unfunded pension liability Pennsylvania’s taxpayers will have to pay to the State Employees’ Retirement System (SERS) and Public School Employees’ Retirement System (PSERS) over the next several years: The liability is currently more than $47 billion and is projected to eventually grow to $65 billion.

Of course, it’s also assumed that massive taxpayer contributions – if the state makes its required contributions and no more costs are added to the systems - for more than two decades will eventually eliminate the liability.

However, if pension investments fail to yield expected returns – which some economists believe could happen - the liability will grow and require even larger taxpayer contributions; if state employee and school employee payrolls don’t grow as expected (and they actually contracted the last two years), that could also result in greater costs to taxpayers.

Gov. Tom Corbett and some state lawmakers have offered proposals – a few of which might run afoul of the state Supreme Court – they claim will not only reduce the unfunded liability, but eventually transition the state to a pension system in which state taxpayers are no longer responsible for making up the difference between the pension benefits promised to state and school employees and the funding that resides in the pension system to pay for those benefits.

But there are others who argue - either because they oppose more changes to the pension system or aren't, right now, interested in doing the difficult work of making changes - there’s no need to change the current pension system, since lawmakers not too long ago made alterations that are saving the state billions of dollars.

“In Act 120 of November 2010, an overwhelming bi-partisan majority of Pennsylvania House and Senate members already enacted pension reform that significantly lowered the 2012-13 spike in pension contributions,” said the Keystone Research Center’s Steve Herzenberg in testimony presented during a recent state House hearing about pensions. “For FY 2012/13, Act 120 will save the Commonwealth approximately $2.2 billion ($1.4 billion contribution to PSERS and $813 million to SERS) and school districts approximately $1.1 billion.”

The Pennsylvania AFL-CIO has an even larger estimate of the overall savings for the current fiscal year: $2.7 billion.

Act 120 was a response to an expected spike in employer – in this case taxpayer – contributions to the pension systems. For this year alone, without Act 120, the total payments would have been around $4.75 billion.

So what Act 120 did was put what the state owes its pension systems on a new repayment schedule. Additionally, since the repayment amounts for that new schedule were deemed to be too high in the initial years, the law “collared” the contribution rates in the first few years, lowering what the state would have to pay.

Those “savings” – the difference between what the state would have owed pre-Act 120 and what the state now owes – actually added to what the state owes the pension plans: $13.1 billion, according to House Democratic Appropriations Committee staff.

But Act 120 did contain several changes to how pension benefits will be calculated for new hires. Those changes are projected, over the course of the next three decades, to save $33 billion.

However, in addition to the $13.1 billion in Act 120 costs associated with the collars, the law contains another $17.1 billion in costs, meaning Act 120 when it was signed into law saved a net total of $2.9 billion.

But as I wrote last week, when the pension systems altered their assumptions for their investment rates of return – from 8 percent down to 7.5 percent – that added $6.7 billion to the unfunded liability projection. So while Act 120 assumed it would save a net $2.9 billion if investment returns were 8 percent, when the return rate is lowered to 7.5 percent, Act 120 doesn’t yield a net savings: The state is projected to have to pay an additional $3.8 billion.

Now SERS and PSERS point out their investments have historically yielded more than 7.5 percent. In fact, while writing last week’s stories, SERS spokesperson Heather Tyler noted that SERS, in its most recent fiscal year, experienced a 12-percent rate of return that added $1 billion to the pension fund that had not been anticipated. PSERS, while not coming close – 3.43 percent - to 7.5 percent in its most recent year of returns, explained it has reported – over the prior three-year period – an average return in excess of 12.5 percent.

But that’s history; some market analysts - including Wilshire Associates, which is a respected source of information for most pension plans - say expecting anything more than 6.5 percent on investment returns during the next 10 years is being overly hopeful. 

Given that, maybe we should be a bit concerned the claims about Act 120 are too optimistic?

Yes, the law did make changes, to pensions for new hires, that could eventually help to reduce some of the cost of the current pension system; but that, again, is based on aforementioned assumptions holding true.

This would appear to buttress lawmakers who suggest Act 120 was only the first step at fixing the state’s pension systems.

The governor’s plan is just one potential next step, but it also contains some controversial components, such as additional contribution collars that would increase the pension unfunded liability. 

While it’s true the Corbett plan intends to pay for the $3 billion cost of those proposed collars – which the administration notes will end up saving $11.5 billion in contributions - over the next 30 years, there’s no guarantee some of the cost-saving changes sought by the governor - those affecting existing employees - would withstand a court challenge, which could then saddle state taxpayers with more pension debt. 

But suggesting we should just let Act 120 continue to “work” does not appear to be a long-term solution state taxpayers can afford.


May 9, 2013

Busting the Myth of Pension Plan Transition Costs
In the previous post, we busted the special interests’ myth that Governor Corbett’s pension reform proposal to move future employees into a 401(k)-style retirement plan will destabilize the current defined benefit (DB) plans by “cutting off” funding to those plans.  The special interests claim this is part of the transition cost in moving to a new plan, but as we saw, this claim is not true for two very simple reasons.

First, even with a new 401(k)-style plan for future employees, funding is not “cut off” as the state will still be contributing billions of dollars each and every year to current DB plan to fund benefits for current employees and pay down the unfunded liability.  Second, the simple fact is that an employee’s contributions go to fund the benefits that employee is earning as they work.  New employee contributions fund their own benefits not those of other employees’ benefits or even retirees.

Another claim the special interests make about transition costs is to argue that the move to a 401(k)-style plan for new employees will decrease investment earnings for the current retirement funds. Closing the current DB plan, they assert, will force investment managers to shift plan assets from riskier, higher return investments to lower return, safer investments.

This shift, the story goes, will lead to a drop in investment earnings, resulting in both an increase in the state’s (employer’s) costs as well as increase in the unfunded liability.  The implication seems to be that this shift and all its ugly consequences will be swift and immediate.  Once again, however, these claims are wrong.

The Keystone Pension Report, which the Budget Office issued last fall and you can find here discussed the role of investment returns in our pension systems.  The Report recognized that both the state and public school employees’ retirement systems rely overwhelming on investments returns as their primary source of funding, with nearly 71 cents of every dollar derived from investment earnings.  The Report also addressed the role that investments returns have in determining what is known as the employer’s normal cost for benefits, noting that if investment returns are higher than the systems’ assumed rate of return (7.5 percent)  then employer costs will be lower, and if returns are lower than expected then employer costs will be higher.

In his paper, The Transition Cost Mirage – False Arguments Distract from Real Pension Reform Debates, which was attached to the last post as suggested reading, the author Josh B. McGee, Ph.D. addresses both claims made by the special interests, arguing:

“The claim that a closed fund must shift to more conservative investments is based on a misunderstanding of portfolio theory. The level of risk a government is willing to take with its pension investments should be independent of whether the plan is open or closed.  A government should be willing to accept the same level of pension investment risk regardless of whether plan assets are growing or shrinking. The myth of time diversification was debunked many years ago by Nobel laureate Paul Samuelson.

Regarding investment liquidity, a closed plan will need to move to more liquid investments at the very end of its existence to make benefit payments, but this change in asset allocation does not need to happen until the last few years of a plan’s existence when the remaining asset base is small. Given the small size of the affected asset base and the fact that only a relatively small portion of pension assets are in illiquid investments to begin with, the effect of a shift to more liquid investments will have a trivial effect on overall plan cost. The cost of transitioning to more liquid investments is not only trivial relative to overall plan cost, but is also orders of magnitude smaller than the potential downside risk of the current system, a fact that is surprisingly absent from these discussions.”

One measure to determine whether a change in investment return assumptions is warranted is to look at what is called the “liquidity ratio” of the funds, meaning the amount of annual benefit payments as a percent of market value.  Here we turn to analysis done by the actuarial firm Milliman, who the Governor’s Budget Office engaged to help develop the Governor’s pension reform proposal.  According the retirement systems, Milliman is regarded as a “very reputable”, “well-recognized” actuarial firm with “good standards.”

Milliman’s analysis shows that the liquidity ratio, under both the current baseline and the Governor’s reform proposal, is expected to increase (peaking at 12.9% under the baseline in 2017 and 13.2% under the Governor’s proposal in 2016) and then decreases as significant unfunded liability contributions are made to the systems.  In fact, under the Governor’s proposal, the liquidity ratio is expected to be lower than the current level of 11.1% towards the end of the 30-year projection period.  The point is that if the systems deem today’s current asset allocation as appropriate to meet liquidity needs, it should remain an appropriate allocation decades from now  when the liquidity ratio is lower and the health of the systems is much improved.  Again, contrary to the special interests claim, moving to a DC plan for new employees will not, in and of itself, decrease investment earnings for the retirement systems. 









April 2013
April 29, 2013

Switching to a Defined Contribution Pension System Saves You Money
The special interest critics of Governor Corbett’s Pension Reform Plan have made so many misleading, distorted, and outright untruthful claims about the Governor’s Plan it is hard to know just where to begin to set the record straight. Today, we take aim at the special interests and their baseless claims to help Pennsylvanians sort through the fact and fiction of the Governor’s Plan.

An often repeated though inaccurate claim made by the special interests is that the Governor’s proposal to move all future state and public school employees into a defined contribution (DC) retirement plan--that is, a 401(a) plan very similar to a 401(k) plan that is the primary retirement plan for the vast majority of private sector employees-- is that such a move would result in significant “transition costs” so as to make any move cost prohibitive. As we shall see, the argument takes many forms, none of which hold up under careful scrutiny. But the goal of the special interests isn’t really a reasoned debate on pension reform, it is about stopping reform from ever taking place. 

So let’s examine the transition cost claim.

The first form the transition cost claim takes is the argument that by moving future employees into a DC plan the Governor’s plan will destabilize the current defined benefit (DB) plan because it “cuts off” funding to those plans. Under this novel theory, the lack of future employee contributions “cuts off” a critical source of funding to the retirement systems, thus threatening the health of the systems. The only problem is that it is simply not true.

First, note the language of the special interest critics. Their “cut off” argument suggests to the average reader that somehow the state and local school districts would no longer be making any contributions to the current retirement systems- zero- implying that the retirement systems would be starved for cash just when they need it the most. But as the chart below demonstrates, under the Governor’s plan total General Fund contributions to the retirement systems will continue to grow, rising to $5.6 billion in 2035 from just over $1.1 billion today, an over $4.5 billion increase. Some starvation!  

Second, contributions made by new employees are to fund benefits earned by those same employees as those benefits accrue.  The employer is responsible for all other funding.  Importantly, NO PORTION OF ONE EMPLOYEE’S CONTRIBUTIONS ARE BEING USED TO FUND BENEFITS EARNED BY ANOTHER EMPLOYEE – OR RETIREE.  The only way to preserve the benefits for current employees is to make them affordable such that the Commonwealth, School districts and ultimately, the taxpayers, can make the contributions required to pay for the benefits paid to current retirees and employees.  Without reforms, this will be extremely difficult to do.

Funding is not “cut off” – the employers still pay the full actuarial rate on all payroll, so for DC members, the excess on top of the DC rate goes to pay down the unfunded liability.

For more information, search the web for “defined contribution transition costs”. There are hundreds of resources debunking this argument.

Selected Reading Transition_Cost_Policy_brief.pdf


April 10, 2013

PA Receives Favorable Bond Rating; Pension Reform Key to the Future  
Last week, the commonwealth successfully issued $950 million in general obligation bonds for the first series of 2013.  The proceeds of this bond sale allow the commonwealth to finance its public capital projects, provide grants to local water and sewer projects and provide funding for Growing Greener—a grant program aimed at addressing critical environmental concerns across the state.

Every Commonwealth General Obligation Bond funds a portion of the total cost of literally thousands of current, ongoing capital projects.  Due to the volume of approved capital projects currently underway (literally over 1,500 capital projects), the Commonwealth issues its bonds to fund likely cash requirements of the various bond-funded programs on a four to six month basis.  This approach allows the Commonwealth to keep borrowing costs and the relative size of each bond issue to a minimum.  It also requires the timely issuance of bonds to ensure that there is no interruption in project funding due to a lack of bond proceeds.

The most recent sale yielded the lowest interest rate ever—less than 3 percent.  Because of the Commonwealth’s low debt burden and strong fiscal management of capital debt, we are able to enjoy such an astounding interest rate.  In addition, Fitch Ratings, Moody’s Investor Service and Standard & Poors have acknowledged the commonwealth’s relatively strong financial position when rating our bonds.

Each points to strong fiscal management under Governor Corbett.  Recent improvements including two on-time budgets, improved jobs outlooks, balancing revenue shortfalls and a reduced reliance on non-recurring revenues have helped receive the second highest rating from all three services.  With that said, however, all three rating agencies point to increased pension contributions and growing unfunded liability in the public pension systems as having potentially negative impact on the commonwealth’s ratings, and in turn, could affect the interest rate the state pays to fund its capital debt.

Standard & Poors notes that it has “the potential…to lower the state rating to” AA-‘ in the next two years in the absence of meaningful pension reform efforts or significant economic growth that would help mitigate the impact of growing pension costs on Pennsylvania.”    Moody’s has echoed these concerns, stating “the commonwealth will experience significant budgetary pressure over the next five years as the pension contribution increases...the unfunded liability is projected to grow to $65 billion from the current $41 billion, materially increasing the commonwealth’s adjusted debt ratio.”

So what does this really mean for the taxpayer of Pennsylvania?  It could mean that fewer infrastructure improvements can be made because they will be more expensive.  It means that programs and services suffer as more money is diverted away from core government programs toward paying  higher interest rates.

A similar dynamic is playing out in school districts where funding for the delivery of education is being squeezed out by annual pension contribution costs.  And it is expected to only get worse.

In February, Governor Corbett introduced a comprehensive pension reform package that would not only  address the short-term budgetary pressure of rapidly  growing pension related costs, but also addresses the long term stability and sustainability of the commonwealth’s two public pension systems.  In the coming months, as the legislature debates and negotiates the budget, it will also be tackling pension reform.  I urge all Pennsylvanian to contact their legislators to tell them to institute meaningful pension reform…because the consequence of doing nothing will most assuredly impact all aspects of state governance.

For more information of Pennsylvania’s recent General Obligation Bond Issuance:
Official Statement
Fitch Ratings Letter
Moody’s Ratings Letter
Standard & Poors Ratings Letter

For more information on Pension Reform in Pennsylvania:
Keystone Pension Report
Governor’s Pension Proposal Fact Sheet
Pension Media Walkthrough
Selected Editorials Document

For more information on Governor Corbett’s Pension Reform plan, click here .






March 2013
March 27, 2013

It Sounds Almost Too Good to be True
The debate about expanding Medicaid and Health Care Coverage in Pennsylvania continues to rage on.  Proponents of expanding Medicaid maintain that it will bring “free” federal dollars into the state and expand healthcare for those adults without it at little or no cost to the commonwealth.  It sounds almost too good to be true.  It actually may be.

Opponents of the expansion believe that expansion could, in fact, cost the state nearly $221 million when all is said and done.  Additionally, expanding the Medicaid program as proposed in the federal Affordable Care Act would make all adults 19-64 at or below 133% of the federal poverty limit eligible for Medicaid.  That’s about 800,000 new enrollees, or 1 in 4 Pennsylvanians. 

This expansion could also result in new enrollees coming on to the Medicaid rolls due to employees dropping workers from company-sponsored health plans or by themselves dropping coverage.  They make the argument that they would rather let the taxpayer pay for coverage rather than being held responsible.

So, how is this actually free to you and me?

Currently, Pennsylvania is one of 14 states that has chosen not to initially participate in the expansion of Medicaid.  The system is not sustainable as it is.  The numbers touted by expansion proponents are a questionable proposition.  With that said, Governor Corbett has not closed the expansion door entirely. 

Yet, he has posed very important questions to the federal government about the parameters, flexibility and the commonwealth’s ultimate obligations with respect to the administration of an expanded system.    For example, the commonwealth is seeking clarity on if Pennsylvania is an expansion state.  The answer to this could result in a difference of hundreds of millions of dollars.

These are questions, he believes, that must be answered before a definitive decision can be made.

On April 2, Governor Corbett travels to Washington, DC to discuss Pennsylvania’s possible expansion with Health and Human Services Director Kathleen Sebelius and will be asking these very same questions.  After all, it’s all of our money at stake.

For more information on Medicaid expansion, visit the following resources:

March 15, 2013

The Various Perspectives of Pension Reform
Pension reform continues to be a key topic of discussion throughout the commonwealth.  As we move forward with budget negotiations, pension reform will be debated in the halls of the Capitol over the next several months.  While there are various approaches to pension reform, there is common agreement that something needs to be done to stem the rising tide of pension contribution costs in the short term and provide for the stability of the systems in the longer term.

Over the past two weeks, I presented the Governor’s pension reform package to the General Assembly members, their staffs, and to the media.  Many have criticized the Governor’s plan. 

Many alternative ideas have been broached, and suggestions have been made as to how to reform the system:  Should we float Pension obligation bonds?  Will the transition to a defined contribution plan be more costly than the system we have?  We can grow our way out of the problem, why do anything?

Below are several resources that you can review to help you make your own decisions regarding the case for pension reform.

The Keystone Pension Report

Pension Reform Walkthrough

Press Clip:  Pension Bond Risks

Press Clip: Pension Bonds Risky or Smart?

Press Clip:  The Lost Decade of 401(k) Investment Returns

Laura and John Arnold Foundation Transition Cost Brief  






February 2013
February 15, 2013

2013-14 Proposed Budget  
Two years ago, Governor Corbett presented a budget that was stark in contrast to the one he proposes this year.  At the time it was apparent to nearly all in the General Assembly and for that matter, the entire commonwealth, that our then current course was unsustainable.

Inheriting a mess, Governor Corbett immediately got to work on getting our state’s fiscal house in order.  Over the past two years, the Governor’s budgets have done exactly what he told Pennsylvania voters he would do -- impose fiscal discipline and make state government live within its means by bringing spending in line with revenues and not raising taxes on families and businesses.

These past two budgets have transformed state government, making it a leaner and more agile one than the Governor found it. Spending is focused on the must do’s, not the nice to haves.  Productivity is up, costs have been reduced.

We’ve impacted nearly every line item in the budget through reductions, mergers, efficiencies, and even outright eliminations, saving more than $1 billion.  We’ve cut administrative spending by 6 percent and reforms to our fleet and travel programs have both reduced costs and enhanced accountability.  The size of the state’s workforce has also been reduced by over 1,800 positions, a number that will only grow going forward. 

Through reforms to the Commonwealth’s capital plan we are also better managing debt and have brought new debt issuance in better alignment with debt retirement.  And in the not too distant future we will see the dividends of the Governor’s reforms to the Redevelopment Assistance Program with its new focus on job creation and economic development.

The Governor has made tough choices to be sure —some not so popular.  And as I am sure he’d be the first to tell you, we are not done yet for there are still challenges ahead that we must confront.  But I am here to say that all the hard work and fiscal discipline is paying off, and that we are beginning to enter a new era of rebuilding and reinvestment.

This year’s budget will further advance the progress towards getting our fiscal house in order.

Whether the issue is transportation, state store privatization, or pension reform, it will be a budget that continues to challenge us to think differently as to how we best meet the public’s needs and deliver on the core functions of government.   In the new normal period post-Great Recession, it is a budget that recognizes that nothing comes easy and that reforms and reinvestments are inextricably linked.

That is clearly the equation in the case of pensions, to cite just one example.  With pension costs growing by over half a billion dollars every year for the next three years, and total contributions slated to grow from $1 billion to $3 billion in the next four years, reform is essential to avoiding deep, immediate, and yes, painful cuts in the General Fund both in the coming budget as well as in the future. 

The road the last two years have not always been easy.  Indeed, it’s been a difficult and oftentimes demanding journey that has not been without sacrifice.

But the hard work, the sweat equity of fiscal discipline is beginning to pay off and we are turning a corner to a new destination, one of rebuilding and reinvestment that promises a better future for every Pennsylvania.

For a copy of this year’s budget proposal and outlines of key initiatives, click here.






December 2012
December 14, 2012

A Little Budget Houskeeping  
This week, the Governor and I presented Pennsylvania’s Mid-Year Budget Briefing to the General Assembly.  You may remember Pennsylvania enacted a $27.66 billion budget in June.  This represented a 1.7% increase over FY 2011-12. It included a continued phase –out of the Capital Stock and Franchise Tax, an expansion of the Education Improvement Tax Credit (EITC), and the implementation of EITC 2.0.  We’ve been supportive.  We increased basic education spending, as well as bolstered the Accountability Block Grant, supporting full-day kindergarten.  Economic development activities and work force investment programs also saw increases.

We’ve been innovative.  We’ve been able to restructure our Unemployment Compensation debt, saving more than $380 million annually in interest cost, and will be able save employers over $150 million over the life of the bond.  We’re exploring the possibility of contracting with a private manager to run the Pennsylvania Lottery, producing a potential $1.2 billion in annual profit to be used for programs for older Pennsylvanians. 

We’ve been fiscally prudent. We’ve reduced our administrative spending for personnel, fleet and travel expenses.

We must continue to be realistic.  While revenues are slightly up ($59 million above latest estimate) and we’ve grown private sector jobs by over 105,000 in the last two years, we are not out of the woods yet.  Even though the signs are there that the Pennsylvania economy is improving, we are not yet on solid ground. 

In the development of this year’s upcoming budget, we’ve asked agencies to continue to be innovative and fiscally prudent.  We have asked agencies to maintain level funding and to recognize that we cannot, as a state, backfill any federal shortages.  This will be particularly difficult with mandatory federal line items cuts due to sequestration.  Again, we must wait and see what may be the impact to our programs and services.

We are also very mindful of the fiscal pressure that our growing pension and other mandated program costs are placing upon the budget.  We expect that increases in pension, medical assistance, corrections and debt service will continue to dwarf any revenues we may see at the end of the year.  Only time will tell what the true implications for FY 2013-14 will be.

In the meantime, we will continue to be fiscally conservative, to be innovative in finding areas of increased efficiency and lower spending, and to balance the need to fund both our core programs and services and meet our growing pension obligations. 

For more perspective on the state of the FY 2012-13 budget, click here.  A copy of the Keystone Pension Report can be found here.






November 2012
November 2012

Welcome to Budget Sense  
Here I will regularly report on budget and policy issues that affect   Pennsylvania.  Many times, key insight into ongoing fiscal issues can get lost due to media spin, a cacophony of debate, or by lack of interest by the news media and others.  The goal of Budget Sense is to provide you, the reader, with an honest look at the fiscal policy issues affecting the national and state economy, shaping decisions made here and in Washington.



Fiscal Cliff  
In the news and in political circles, the talk of late is around the looming fiscal cliff.  We reach the cliff when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Basically, the cliff consists of nearly $7 trillion in tax increases and mandatory spending cuts (sequestration) over the next decade.  The end of a payroll tax holiday and extended unemployment benefits; the expiration of the Bush-era tax cuts; and the onset of reimbursement reductions to Medicare providers all are essential topics in the discussion that will be occurring over the next several weeks. In addition, nearly 1,000 budget line items, including defense programs and Medicare are targeted/slated for automatic cuts.  In addition, it will be necessary to raise the debt ceiling-the nation’s legal borrowing limit-early next year.

In the coming weeks, lawmakers will need to make tough choices.  None of the options are pretty, but unfortunately, something must be done:

  • They can cancel some or all of the scheduled tax increases and spending cuts, adding to our already large deficit and debt.  This ultimately increases the odds that the United States could face a crisis similar to the one occurring in Greece, Ireland and other European countries. The good news is that more than likely Americans won’t be hit in the wallet or receive less in the way of government programs and services.  The flipside is that the United States' debt will continue to grow.

  • They can do nothing and let the current policy scheduled for the beginning of 2013 go into effect. The downside is that the number of tax increases and spending cuts weigh heavily on growth and could possibly drive the economy back into a recession. On a positive note, the deficit, as a percentage of the nation’s Gross Domestic Product would be cut in half.

  • A middle-ground, approach would be that they take a course of action that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

For Pennsylvania, the spending cut side of the fiscal cliff (sequestration) could have a major effect on programs and services delivered by the commonwealth.  These cuts could total several hundreds of millions.  What programs, and to what extent, the cuts would be felt, however, is unknown as the exemption list for spending cuts keeps changing.  Suffice it to say, programs such as education, transportation and medical assistance could feel the pinch of severe cuts should a compromise not be reached.

The Federal Funds Information for States is a great resource to get a glimpse into what sequestration may mean for Pennsylvania. Check out the November 1012 report, Fiscal Threats to States in a Nutshell.

A good general news piece on the fiscal cliff can be found here:  




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