Members of the Pennsylvania Institute of CPAs (PICPA) have seen the effects of the sluggish economy on their clients’ personal finances and on business growth. PICPA’s Fiscal Responsibility Task Force, using that experience, has created a guide to assist lawmakers who manage the state’s finances.
The Fiscal Responsibility Task Force report details some of the most challenging fiscal issues facing Pennsylvania and offers options to address those issues. The new report examines pensions, Act 47 (which governs financially distressed municipalities like Scranton), prevailing wage, infrastructure, efficiencies and streamlining of state government, and taxation. The report’s goal is to provide policymakers with objective, third-party CPA expertise and perspective to help address the state’s fiscal challenges. This is the PICPA’s second Task Force report.
Susan E.S. Howe, CPA, chair of the Fiscal Responsibility Task Force, said, “The Task Force offers policy options to consider in closing the budget gap, with an eye toward long-term fiscal health.”
The first section in the report covers state pensions. The Pennsylvania pension situation is dire. Together, the two public pension systems (Public School Employees Retirement System and State Employees Retirement System) have a combined unfunded liability of more than $41 billion. These unfunded liabilities are expected to grow significantly over the next 10 years. CPAs have many policy options for this issue, including maintaining the current defined benefit pension systems for existing retirees and establishing a defined contribution system for all new public school teachers, state employees, and lawmakers. They also recommend required annual plan funding, with no possibility of deferring payments.
Another area the Task Force analyzed was financially distressed municipalities (Act 47). Act 47, passed in 1987, allows communities identified as financially distressed to develop a plan to correct what is causing the distress by allowing temporary access to priority funding and the ability to levy higher tax rates. Since Act 47 went into effect, 27 municipalities have entered, while only six have exited. Of the 21 communities still under Act 47, 10 have been in the program for more than 20 years. Fiscal Responsibility Task Force members advise that time limits be placed on communities that enter the Act 47 program. They also recommend that communities examine cost-saving opportunities such as regionalizing services (police, emergency, etc.), sharing a tax base, and cooperative buying.
The Task Force also provided details and policy options on prevailing wage, taxation, infrastructure, and efficiencies and streamlining state government. PICPA’s Fiscal Responsibility Task Force report was presented to Gov. Corbett’s office and delivered to members of the General Assembly.
CPAs on Prevailing Wage:
Pennsylvania’s prevailing wage law was passed in 1961. It mandates that all contractors on public construction projects over $25,000 pay employees wages and benefits determined by the Pennsylvania Department of Labor and Industry for each occupation. The $25,000 project threshold has not been adjusted since the law was enacted. Adjusted for inflation, that threshold today would be closer to $190,000. Wages mandated by the law are usually higher — by some estimates 30 percent higher — than the pay for labor on comparable projects in the private sector.
According to U.S. Census data, Pennsylvania state and local governments spend more than $10 billion on construction. Based on wage data, prevailing wage raises the total cost of construction projects by 20 percent on average. This represents about $2 billion in extra costs for Pennsylvania taxpayers each year. School districts alone spent more than $2 billion on construction in 2008-2009. Allowing schools to opt out of the state mandate could save $400 million per year in property taxes.
* Certain public work projects should be exempt, based on a set of defined criteria.
* The project threshold of $25,000 should be increased to at least $200,000, and then indexed to CPI increases.
* Reporting requirements and compliance rules must be streamlined.
CPAs on Act 47:
Act 47 can be likened to a black hole: once a community enters it, it rarely emerges. There appears to be some success among communities that become distressed because of poor management, but communities that suffer from economic factors, such as an eroded tax base, appear to have little hope of emerging from Act 47 status under the law’s current structure.
Among PICPA-suggested policy options
* Significant cost-saving opportunities exist through greater regional cooperation in the provision of services and consolidation of administrative functions. Here are some options in this area that would enhance the effectiveness of Act 47:
* Municipalities within a pre-established region should be required to work together to obtain cost savings through cooperative buying.
* A regionalization of services (police, emergency, administrative, road services, etc.) should be examined in an effort to eliminate duplicative costs.
* Significant municipal equipment purchases should be a cooperative effort with contiguous municipalities to determine if cost sharing and equipment sharing is viable.
* Community and economic development should be coordinated among multiple municipalities to reduce costs and avoid duplication of efforts. Input of local stakeholders should be required in developing an economic improvement plan, as the stakeholders in any community have a vested interest in seeing their community succeed.
* A sharing of the tax base must be considered among municipalities when one community bears the brunt of costs for tax-exempt organizations (such as hospitals, universities, and so forth), yet the residents of adjacent communities use those facilities.
* Streamline methods to accomplish consolidations and mergers of contiguous communities. When a sole community cannot manage to be economically viable, or two communities agree that consolidation is the best course of action to remain economically viable, methods must be available to make this process possible in a reasonable time and with limited obstacles.
* Personnel-related costs are typically the largest cost element of any municipality. For a distressed municipality’s budget, it often represents 70 percent or more of the expenses. Here are some suggestions to address this area.
* Provide a process for expedited resolution to collective bargaining/arbitration issues that currently restrict a municipality’s ability to achieve cost-containment measures necessary for fiscal viability.
* Allow and encourage outsourcing to private vendors to address cost containment. Align the cost of services to similar cost of services in the nonpublic sector, and address work rule restrictions and pay rate cascading to avoid additional costs.
* Address benefit costs. Salary and benefit packages should be in line with those offered in the private sector.
* Allow for judicial review (outside of bankruptcy and subject to approval by DCED) of the termination of increased pension benefits, whether originally obtained by negotiation or arbitration, where the benefits expected to be provided exceed a predetermined threshold.
* Discourage the use of interest rate swap contracts where they are not used for sound economic reasons. We suggest that a statewide blue-ribbon panel (similar to the current Pennsylvania Intergovernmental Cooperation Authority structure) of financial and accounting experts be required to approve any public debt issue using interest rate swaps. We recommend this oversight to prevent the use of derivative contracts with small, short-term gains from burdening future taxpayers when these expensive contracts are terminated. Philadelphia, for example, is facing a $570 million cost to terminate its contracts.
* There must be a limit to the amount of time a community is permitted to participate in the Act 47 program. Communities in the program are entitled to certain benefits (increased tax rates, priority funding), and, without a specific deadline, there is little incentive to make improvements in order to leave the program. The PICPA is available to assist in discussing deadlines and possible exit incentives.