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CA P I TA LWAT C H PA . c o m

CAPITALWATCH VOL. 5 NO. 12

INSIDE Only one company submits final bid to run Pennsylvania Lottery PAGE 4 ‘Fiscal cliff’ adds to budget concerns for state PAGE 6 Two ousted House Democrats given caucus jobs PAGE 7 Questions and Answers: Gov. Corbett on pensions PAGE 8 Former DEP Secretary Hanger announces bid for governor PAGE 10 EDITORIALS: Liquor in super markets: Be careful what you wish for PAGE 12

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DECEMBER 2012

Corbett says AG approach will decide if he will speak to Kane’s Sandusky case investigators BY KEVIN ZWICK AND PETER L. DECOURSEY, CAPITOLWIRE

Gov. Tom Corbett said he wouldn’t offer to be interviewed as part of Attorney General-elect Kathleen Kane’s examination of her predecessors, including Corbett’s, handling of the Jerry Sandusky pedophile investigation if he thought it was “a political game.” “If I believe it’s a political game – no. If I believe that they want to know exactly what was going on when I was there and my thought process – sure,” Corbett told reporters in a wide-ranging interview on Thursday. It was one of three sessions he held with small groups of state Capitol reporters, in an unprecedented series of long and frank interviews almost midway through his term. Compared to his predecessors, Corbett devoted more time, as he discussed his first two years and next steps for nearly four hours Nov. 30. He extended his first interview of the day almost 20 minutes beyond schedule to respond to attacks on his handling of the Jerry Sandusky child sex abuse case. Corbett was on the defensive this past election cycle after the Sandusky investigation served as a rallying cry for Kane as she swept to the biggest victory margin in the history of attorney general elections, charging Corbett delayed the investigation as he ran for governor. Sandusky, a former Penn State assistant football coach, was sent to prison for 30-60 years for sexually abusing 10 boys during and after his time with the PSU football program. “I guess the question is did I tell (investigators) to do some-

Gov. Tom Corbett says he might talk with Kane investigators about the Sandusky case.

thing they shouldn’t do? They wanna ask me that question, come and ask. I’ll tell you right now – no,” Corbett said. “Why would I do that? Think about this. And I’m kinda disappointed that it hasn’t been reported. Why would I do that? I’m the guy that’s going after the child predators.” As to the question of whether the investigation should have been turned over to the FBI for a faster investigation, Corbett, a former U.S. Attorney for Western Pennsylvania, said: “We do things faster than the feds. I was a fed. I know what they’re like. We are faster than the feds.” In a strictly political sense, Corbett argued there would be no gain from delaying the investigation. “There’s no political gain for

me in not doing that. In fact, if there was political gain, it would have been to get it done before the election. Think of all the earned media – let’s look at it that way from a political campaign. “If we would have gotten the information much sooner, and been able to bring that case in let’s say June, July, August of 2010, would I’ve been subject to criticism? ‘Oh he should have waited.’ Oh, there’d been people who woulda said that. You’re doggone right there woulda been. Ok? But it would have been the right thing to do if that was the time we had the information, not to let ‘em sit aside.” Corbett said he could not have done that because the key evidence, the testimony of assistant football coach Mike McQueary,

against Sandusky, did not come until November of 2010, after he was elected governor. “The key thread of evidence, that was sorta like the thread that pulls the sweater apart, was the telephone call, the tip that went to Stacy Parks Miller, the new DA, in November of 2010, after my election. It was anonymous, and they said go talk to McQueary. And they talked to McQueary. Now by this time, I’m out of it. Even though I’m the attorney general, I turned it over to Bill (Ryan),” who served as acting attorney general until Kelly was nominated. “And I’m really not making decisions on that case because I’m preparing to move over to here. And they start following that trail. And that was the thread that unraveled the sweater.” continued on page 3

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NEWS 3

DECEMBER 2012 CAPITAL WATCH

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Corbett says AG approach will decide if he will speak to Kane’s Sandusky case investigators continued from page 1

Corbett conceded that he earned enmity from some for the probe which many Penn State fans, and there are more than 1 million in the state, feel attacked their beloved institution. “I think there are some people out there who hate me because of it, yeah,” Corbett said. “There are people out there, but I did what a prosecutor is supposed to do.” Sources also said Corbett could not have told the board before they learned of the scandal since some board members potentially might have been implicated in it. Corbett declined comment on that. Corbett began the investigation that rocked the Penn State institution, leading to NCAA sanctions against the team. Taken over by his appointed successor, Linda Kelly, she alleged a cover-up by top administrators. Corbett’s actions led to the firing of late head coach Joe Paterno, for which he received criticism both for doing that and for not doing it sooner. “I can’t worry about it,” Corbett said referring to the potential fallout from the investigation, “It’s something that … it is past. I did what was absolutely necessary,” Corbett said.

“I think there are some people out there who hate me because of it, yeah. There are people out there, but I did what a prosecutor is supposed to do,” he said. Corbett said he is now aware, that many people “tell me afterwards, ‘well, people have known that for years.’ Then excuse me, where the hell were you? Ok? And

Corbett was on the defensive this past election cycle after the Sandusky investigation served as a rallying cry for Kane as she swept to the biggest victory margin in the history of attorney general elections, charging Corbett delayed the investigation as he ran for governor. maybe the report by the child task force is going to be helpful in the future” in getting earlier reports of such illegal behavior. “But if people knew that up there for years - and I’ll tell you there’s other people that say ‘I never heard that. I never heard that.’ How he can be two different … I don’t know, that’s for you guys to investigate. I’m sure if our investigators up there knew, had they known that – maybe - but

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again they’re rumors. We can’t charge on rumors. We need people. And why do you use a grand jury investigation? Because you gotta get them comfortable, you gotta get them to give up information. [You] almost have to give them a shove. And I find it interesting that Ms. Kane would have never used a grand jury investigation.

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How can you use a grand jury investigation in a child pedophile case? Well then I guess she must be criticizing Lynne Abraham and Seth Williams” who used a grand jury to charge and convict several pedophile priests in Philadelphia. “She forgot about that one. So if it’s a one-on-one child predator, yeah - we didn’t use a grand jury for the computer stuff because we got the guy. “But a case like this - and this guy was right next to Joe Paterno - you know the saying don’t wound the tiger? You couldn’t afford to lose. If we had lost on the one case, nobody else would have come forward. And if they did, it would have been hard to charge him again, because now it would be we’re persecuting. Go get the best case you can. If it takes long it takes long.” Kane’s campaign did not respond to two requests for comment. Corbett also again criticized Penn State for not turning over e-mails and other information later turned up by the Universityhired special investigator, former FBI Chief Louis Freeh. Corbett said part of the reason Freeh was hired was because he and Kelly believed Freeh would promptly turn over any materials that investigators required to pursue criminal charges. Corbett contrasted Freeh’s conduct with that of the university, which he said hid materials that were subpoenaed by the attorney general’s office. Corbett also mocked Kane, asking whom she would have investigate the actions of a staff that will soon be her own: “It’s going to be interesting who the state investigators are going to be ‘cause they’re going to be the one’s [that were] reporting to me in the first place. I think you guys need to start questioning her on that. “You know how these investigations work. I’m not so sure they know how these investigations work. There’s a delegation. You count on the people, worksheets, my chief of staff, my chief of criminal [Frank] Fina, and the guys down there; it’s a delegation. And they worked their butts off on a number of investigations over there.” CW


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NEWS

DECEMBER 2012 CAPITAL WATCH

Only one company submits final bid to run Pennsylvania Lottery Only one company has submitted a price bid for a private management agreement with the Pennsylvania Lottery, according to a Corbett administration official. Camelot U.K., under the subsidiary Camelot Global Services PA LLC, was the only company to respond to the Corbett administration request for a priced bid on a private management agreement last week, the administration official said. Camelot, which operates the national lottery in the United Kingdom, is projecting annual profits commitments over $12 billion in the first 10 years, and over $30 billion by the 20th year, according to their submission. About $200 million of the profit commitment would come from monitor-based games, such as Keno, or online games, according to a Corbett official. Earlier this month, the Corbett administration said it was considering allowing monitor-based games in bars and taverns beginning next year, even if the state didn’t privatize the Lottery management. The Camelot bid is valid until Dec. 31, according to the Revenue Department. Two other companies in the process backed out due to protections added by the commonwealth, a Corbett official said. A bidder dropped out of the process in August and another bidder dropped out two weeks ago. “There are several additional steps to happen before a final decision is made whether to award the PMA to Camelot or not, but this is a proposal the evaluation team determined warrants a complete and detailed review.” Lottery executive director Todd Rucci said in an email to Lottery officials. “We’ll now consider the bid against historic and projected Lottery performance data to determine if the bid provides incremental profit growth above what the Lottery could achieve on its own. A full probity investigation will also be conducted into Camelot, and we continue dialogue with the union and prepare to evaluate any alternate plan the union may propose.” The lottery generated a record profit in 2011-12 of $1.06 billion, 8.7 percent higher than its previous profit record year of 2005-06. The bid structure includes $200 million to cover any loss during a transition from the current management structure at the lottery to private management, including $150 million in cash collateral and $50 million in lines of credit.

The commonwealth also will go through contractually obligated talks with the AFSCME union representatives. As part of the bidding terms and conditions issued earlier this month, the commonwealth plans to keep 70 employees, both managerial and union, for state-retained responsibilities. The AFSCME union represents 170 employees of the lottery, according to David Fillman, executive director of AFSCME Council 13. “There is no good reason to dismantle the lottery. The administration has sold out our seniors and our members without one public hearing; without any legislative oversight and without anyone knowing how they crafted the terms and cut this deal,” Fillman said. “Keep in mind that our lottery is not broken. We’ve set a record for total sales and net profit the last two years. The bottom line here is that every single dollar that this firm is paid comes at the expense of our seniors.” Pennsylvania officials say an expected increase in the number of older Pennsylvanians is projected to outpace the growth of revenue from the Pennsylvania Lottery. Between 2010 and 2020, the number of Pennsylvanians over 65 years of age is expected to grow 26.5 percent and the over 95 years of age group is expected to grow 139 percent, according to the Independent Fiscal Office. The IFO also predicted that the number of working age residents, between 20 and 64 years old, will decline 1 percent over the same time. Residents under age 20 will also decline 0.5 percent. Proceeds from the Pennsylvania Lottery are used to fund various programs that benefit senior citizens, including: property tax and rent rebates; free and reduced fare transit; long-term living services; low-cost prescription drug programs PACE and PACENET; and funding for more than 50 county Area Agencies on Aging. The Revenue Department says risk mitigation firm Kroll Advisory Solutions will investigate the company, performing background checks of Camelot’s executives, financial history, business practices and contractor integrity. The findings of the investigation will be used by the state in determining whether to undergo a private management agreement with the company. CW

Zogby says next budget could be the ‘most difficult’ Gov. Tom Corbett, who pledged to not raise taxes, will face his most difficult budget next year with cost increases of $1.3 billion and new revenues of far less, as continued belt-tightening at state agencies could add state workers to unemployment rolls and pension costs continue to rise. “I think in many respects the 2013-14 budget is going to be the most difficult budget that we’ve had thus far in what have been two very difficult budgets,” said Budget Secretary Charles Zogby. Requiring state agencies to maintain level funding for fiscal year 2013-14 will equate to a 7 percent to 8 percent cut to agency budgets due to rising personnel costs, Zogby said. He noted it is “unlikely” agencies will be able to maintain level funding without laying off or furloughing some employees. “I think we look first at vacancies if we can. And agencies are going through that now, some are in better positions to do it,” Zogby told reporters Dec. 5 at his mid-year budget briefing. “But we think certainly again collapsing vacancy funding, furloughs and layoffs may be the outcome in some areas of the spending restraint and cost-cutting efforts.” Corbett instructed state agencies to maintain level funding and said that no general fund dollars will be used to backfill reduced federal funds in the fiscal year 2013-14, Zogby noted. CW


NEWS 5

DECEMBER 2012 CAPITAL WATCH

DECEMBER 2012 CAPITAL WATCH ADVERTORIAL

NEWS 5

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6 NEWS

DECEMBER 2012 CAPITAL WATCH

‘Fiscal cliff’ adds to budget concerns for state Pennsylvania faces the loss of hundreds of millions of federal dollars if lawmakers in Washington can’t reach an agreement to prevent a mix of across-the-board spending cuts and tax increases from taking effect in January. The so-called “fiscal cliff” is a combination of the spending cuts, enacted by lawmakers during gridlocked debt ceiling negotiations in 2011, and the expiration of the Bush-era tax cuts. Gov. Tom Corbett said Pennsylvania’s possible fiscal future and the unpredictable budgeting scenario is “absolutely frightening” if federal lawmakers can’t reach a compromise. “When I’m sitting with my budget people working on a budget, trying to figure out do we have it, are we gonna have it, what money’s gonna be there, what isn’t gonna be there, is absolutely frightening,” Corbett said during the Pennsylvania Press Club luncheon Nov. 26. State budgeters say a list of federal programs exempted from the cuts, which could change dependiing on negotiations, adds to the uncertainty over which areas

of the state budget would be impacted if a deal is not reached. If current negotiations between congressional leaders and the White House hit a wall, an extension of the sequester deadline is more likely to avoid program cuts, instead of adding more programs to the exemption list to avoid interests battling over what programs are included on the list. According to the Congressional Research Service, most programs on the exempt list are mandatory, and include: Social Security and Medicaid; refundable tax credits to individuals; and low-income programs such as the Children’s Health Insurance Program, some public assistance programs like Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families, and Supplemental Security Income. Some discretionary programs also are exempt, notably all programs administered by the Department of Veterans Affairs. The possible sequestration cuts would impact a wide range of an already lean state budget, according to state Budget Office spokesman Jay Pagni. “If federal dollars are cut, there is a high

probability that we will not be able to backfill with state dollars. As part of our budget instructions, we’ve alerted the agencies of this,” said Pagni. Some of those areas include some social services programs, small business development and workforce investments, some wastewater and drinking water programs, transportation, and emergency response. Negotiations have focused on finding a middle ground on taxes and preventing the sequestration cuts, which both parties

view as unpleasant. The sharp spending cuts would reduce the deficit so quickly the economy could be sent back into recession, according to the Congressional Budget Office. Corbett echoed the CBO’s prediction on Monday: “I fear for the economy. I fear for another recession.” Pennsylvania stands to lose about $60 million in federal funds in 2013 alone, according to the Independent Fiscal Office. A report from the Washington D.C.-based Tax Policy Center, cited by the IFO, estimates federal tax revenue would increase $536 billion nationally, with Pennsylvanians possibly paying $22 billion in taxes in 2013. Corbett, who attended the Republican Governors Association meeting in Las Vegas last week, said there was a “depressed feeling” between Corbett and his colleagues upon being briefed on the potential fiscal cliff impact on state budgets. Budget Secretary Charles Zogby is scheduled to give a mid-year budget briefing next month on the fiscal scenario of the commonwealth. CW

Legislators call for action to keep the doors of local organizations open Legislators, as well as representatives of local fire departments, veterans organizations and others used the last day of the 2011-12 legislative session, to sound the warning bell that community organizations across the commonwealth are at risk for closing if action isn’t taken to fix changes that take effect in February to Pennsylvania’s Small Games of Chance Act. State Reps. Peter J. Daley II, D-Fayette/ Washington, Ted Harhai, D-Westmoreland/ Fayette, Brandon Neuman, D-Washington, Rick Saccone, R-Allegheny/Washington, and Jesse White, D-Allegheny/Beaver/ Washington, as well as Sen. Tim Solobay, held a news conference at the Donora American Legion, to talk about how changes to reporting requirements, additional parameters on who and where small games of chance can be sold, and other issues will impact the fundraising activities of local fire departments, veterans organizations and others. Daley, who said he plans to re-introduce legislation (H.B. 2649 of 2011-12) to repeal the changes to the law when the legislature returns to session in January, said that the changes missed the legislative intent of helping local organizations. “The intent of the legislation was to help these organizations, and given the concerns raised, I firmly believe that the legislature missed its goal on the effort,” Daley said. “I’ve heard from literally thousands of individuals since I introduced my legislation.

“During a conversation that I had with the owner of a Pennsylvania company that produces small games of chance, I was told that the changes, as they currently are written, could mean that one of the largest Legions in the state likely will not survive. That should be a real eye opener to all of my colleagues in Harrisburg.” “The clock’s really ticking on this,” White said. “Hopefully we show up in 2013 with some bipartisan energy and help out these clubs, fire departments and veterans organizations. After all, they do a lot of good work in their communities.” Responses to a petition drive Daley conducted yielded telling concerns by local organizations: • “If any law needs repealed, it’s this one! The changes to the law if left in place will do nothing but shut down community organizations.” • “It is imperative that this bill be repealed for (our local VFD’s) survival!” • “As a member of several social clubs, this new law will severely limit our ability to donate money to many worthy causes.” • “If changes are not made, rest assured many, if not all, small local volunteer fire companies will be forced to close.” • “This law needs to be repealed, it hurts the veterans!”

Daley received more than 4,000 signatures on the petition and organizations from across the state continue to reach out to his office for copies that their group can circulate. “We want the organizations that depend on small games of chance to know that we are still working to get something through the legislature that works better,” Solobay said. “But we can’t do it without the organizations themselves reaching out to every lawmaker so they understand how important this is.” “Local organizations are worried not only about meeting new reporting requirements, but also about new constraints on who can sell tickets and where tickets can be sold,” Daley said. “These organizations have relied on the money raised by these games to keep their doors open for many years. Here we are in the midst of challenging economic times and now Harrisburg wants to dig in its heels on a shortsighted policy? Contrary to the beliefs held by some who support the changes, fraud and theft was more the exception than the rule, especially in my legislative district. For the most part, these games were conducted by your friends and neighbors from a local volunteer fire department or a veterans organization, and they were just trying to raise some money to do their part to help their community, a couple of dollars at a time.” Act 2 of 2012 made significant changes to Pennsylvania’s Small Games of Chance Act. On the positive side, it raised the prize limit to $1,000 per game and $25,000 per

week. The new law requires organizations conducting Small Games of Chance to: • Keep records of the names and addresses of any winner of more than $100; • Withhold and remit income taxes on winnings; • Report the number of W-2G forms issued; • Report total gross winning that was reported on the W-2G form; • Does not add or remove any currently legal small games of chance; • Requires that only members of the organization holding the SGOC license may sell raffle tickets; • Disallows raffle tickets to be sold at convenience stores, if the employees selling tickets don’t belong to the organization; • Disallows tickets be sold at bars or other places holding a liquor license, other than the club selling the ticket; • Allows clubs to keep 30 percent of funds for their own use; • Requires the other 70 percent to be given to organizations providing community benefit, in the calendar year in which the proceeds were obtained; • Requires SGOC license holders to open separate bank accounts. CW


NEWS 7

DECEMBER 2012 CAPITAL WATCH

Two ousted House Democrats given caucus jobs Two embattled lawmakers who did not hold on to their seats in the state House of Representatives have received plum posts with the House Democratic Caucus. Rep. Joe Brennan, D-Lehigh, who decided against re-election amid charges of domestic violence and drunk driving, so the party could replace him for the Nov. 6 election, and Rep. Ken Smith, D-Lackawanna, who was dogged by tax issues with his family-owned restaurant in south Scranton, are both set to start their new jobs with the caucus on Dec. 3. That is just after their current salaries end on Nov. 30. Brennan will be a research analyst in the Legislative Policy and Research Office, and Smith will join the Office of Member Services where he will assist on a short-term basis in helping the unusually large group of incoming new lawmakers, according to House Democratic spokesman Bill Patton. Both will be making $72,000 per year, a decrease of their previous salary as lawmakers of $82,026. They will continue to receive the same health benefits, for which both members and staff are eligible. The new positions are considered an extension of their time of service as state employees and both will continue to pay into the State Employees Retirement System. Hiring troubled lawmakers who drop out of an election to make way for a more viable candidate is nothing new and not exclusive to one caucus. It’s done to avoid scenarios where the seat could flip parties as a result of a tainted candidate, like when former Rep. Gene McGill, R-Montgomery, was ousted by a Democrat after the pay raise controversy. Both Brennan and Smith served three terms in the state House of Representatives. Both of them will be considered regular caucus employees, assigned to work in Harrisburg, and both are subject to the same expectations as other caucus employees, Patton said. Brennan’s 14 years as a top aide and researcher for his predecessor in the House – former state Democratic Party chairman and state Rep. T.J. Rooney – makes him qualified for his researcher position, Patton said. Brennan, who served three terms in the state House of Representatives, was charged for assaulting his wife at his home in Lehigh County, then driving from the scene drunk in mid-August. Brennan announced he was not seeking re-election after the Aug. 13 deadline to voluntarily withdraw from the ballot, forcing the court to make the decision. The state Democratic Party supported the court removal of his name from the ballot, fueling speculation that he agreed to drop out of the race to put a more viable candidate on the ballot for his job offering with the caucus, observers said. In past practices, lawmakers who stepped down for the good of the party were awarded with their legislative salary and benefits, as was the case with former Rep. Joe Gladeck, R- Montgomery. Gladeck retired in 2000 after his girlfriend accused him of shoving her repeatedly. Police were called, but his girlfriend didn’t press charges. Gladeck dropped out of the race and was replaced on the ballot by current GOP Rep. Kate Harper. Shortly after, Gladeck was hired by the House Republican Caucus to consult on re-districting efforts. CW

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8 NEWS

DECEMBER 2012 CAPITAL WATCH

Governor Corbett says reforming the state’s pension system which is $40 billion underfunded is his top priority for the new year

QA &

GOV. CORBETT ON PENSIONS Gov. Tom Corbett said he plans to sit down with legislators prior to announcing a plan to address the state’s pension problems. In a wide-ranging interview on Nov. 30 with Capitol reporters, Corbett said his plan could include alternative retirement plans for current state employees, while changing the retirement plans for future workers to a private account.

more money for education, but it was probably used in pensions. And at the same time, keep in mind, the school districts have to match it. That’s a lot of money they have to come up with. So we have to fix it. But it’s pension not just for the teachers, it’s pensions for the state employees also. Capital Watch: You’re going to sit down, unlike previous years, with leaders of both parties? Gov. Corbett: Starting with Republicans…. I want to sit

down with both of them. (ahead of time). You know what always happens, if we’re thinking something, I know that when they walk out of here, you all will know exactly what was said in here, and you know how anathema that is to me. Capital Watch: So what you going to do about that? Gov. Corbett: You’ll find out.

Capital Watch: Are you planning to sit down with legislators to hash out a plan before announcing a plan on pensions? Gov. Corbett: Absolutely. There is no silver bullet to this.

There’s gonna have to be agreement on what is done. What we’re trying to do is paint what the problem is. Identify the problem. We’re in that process. It is much worse then anybody thought. I think you all are starting to take a look at it. You heard me say ‘it’s the tapeworm of the budget,’ it continues to eat away at the budget. If you do round numbers in this year’s budget, almost all the revenue in this year’s budget really went to pensions. So people say, ‘I need more money for education.’ Well they got

Capital Watch: Budget Office report and future employees… Gov. Corbett: It is amazing how many pension plans we

have. We have more pension plans in Pennsylvania, I think …, than the rest of the country combined. The rest of the country combined. So I think they’re going to have to look at what we do. And if they like what we do, follow it. This is already happened, these reductions. Look at the private sector. Look at the labor unions on the private side. They’ve already gone through this. They understand that when you don’t have the money, you can’t have the pension plans continue to take so much out of the taxpayers’ pocket.


NEWS 9

DECEMBER 2012 CAPITAL WATCH

Capital Watch: Hasn’t conventional wisdom always been in the public sector pensions are sacrosanct? Gov. Corbett: We’re not talking about

those who have accrued their pension already at this point. What we’ve said is new employees, maybe more junior people, offer them an alternative. These are just things being looked at. I know [Pennsylvania State Education Association] is out there saying we’re gonna take their pension. Have you ever heard me say that? Ever?

Capital Watch: Aren’t you looking at future benefits for current employees? Gov. Corbett: what we are looking at

are the future employees first, OK?

Capital Watch: But you also mentioned junior employees. There’s a big distinction … Gov. Corbett: Creating an alternative

for them to go over to that if they wish. We’re not talking, especially the ones who are vested, we haven’t said anything about taking anybody who’s vested, anything. But I’ve seen one of the flyers that say ‘we’re gonna take their pensions.’ Capital Watch: the idea of possibly freezing the defined benefit plan… Gov. Corbett: We haven’t said that. Capital Watch: But is that a possible option? Gov. Corbett: I guess it’s an option. It

hasn’t come to me yet. I’m not saying it is an option or it isn’t. You could say there’s a possibility. I’m not one way or the other on that right now. We’re looking at what other states have done. Other state’s may have done that. Right now, I think the first thing to do is say the future employees have to go to a different plan. That’s battle. Capital Watch: But isn’t the real saving to be had, the cause, the current employees? Are you looking at some portion of those? Gov. Corbett: Sure, I’ll give you

one area. The use of overtime as part of the formula, would be one. And that’s contractual.

Capital Watch: How about cutting the multiplier for folks going forward? Gov. Corbett: You could cut the multiplier for folks going forward. Even if they vested. They still have the benefit of that period when they had the higher multiplier, but I’m saying you, legally, can you do that? I believe you can. Would the Legislature do it? Well, …who’s ox is being gored on that one? Capital Watch: Would you look to reducing the multiplier to legislative employees, judges,

as well as executive branch employees? Gov. Corbett: Yes. Now, judges might

be impossible to do, I don’t know. … Because of their ‘you can’t touch us once you give us a benefit’… Whatever we do is going to be everyone across the board. We’re not going to carve anybody out, expect maybe the judges.

Capital Watch: Why not? Gov. Corbett: Because you all have

written thoroughly about it, and correctly so. Capital Watch: Why not include it and let it be challenged in court? Gov. Corbett: I’m not saying we

wouldn’t do that. I’m just saying, is

If you do round numbers in this year’s budget, almost all the revenue in this year’s budget really went to pensions. So people say, ‘I need more money for education.’ Well they got more money for education, but it was probably used in pensions. And at the same time, keep in mind, the school districts have to match it. That’s a lot of money they have to come up with. So we have to fix it.

Capital Watch: You mean that seriously ‘except the judges,’ you’re not facetious there? Gov. Corbett: The judges have an

opinion out there that once they have something, you can’t take that away from them. … it was the pay-raise one. I don’t know if that applies to pension. We’ll take a look at it.

that the possibility, the one exemption? That would be the possibility the one exemption. But, the employees, the teachers, staff, Legislature, us, yeah. Capital Watch: Whatever you do to achieve significant savings, are you pretty well resigned that it would be a court fight?

Gov. Corbett: Sure. Unfortunately,

but yeah. … We have to do something, otherwise, we’ll be taxing solely to pay pensions at some point. I don’t think that’s what we wanna do. There were mistakes made in the past, increasing the multiplier, there were some years, I believe and you could check on this, that they didn’t fund the pension at all when they had lots of money. The time when you should double down, pay more into it, they didn’t fund it. And that’s what I’m having to deal with. I’m not complaining about it. We’re gonna deal with it. But if you look at it, those kind of mistakes, or they underfunded it, or expected rates of return higher than they should. And the one that nobody could predict – and this is part of the problem with saying ‘well we didn’t have to pay this year, the stock market is doing real well’ – boom the stock market goes down. Kinda a perfect storm of pensions. It didn’t hit just Pennsylvania, it hit the entire country. We are $41 billion underfunded in Pennsylvania. California is ridiculously high. It’s one of the reasons you see people leaving California. Large groups of people and companies are leaving California. CW


10 NEWS

DECEMBER 2012 CAPITAL WATCH

Former DEP Secretary Hanger announces bid for governor BY KEVIN ZWICK, CAPITOLWIRE

Former DEP Secretary John Hanger officially kicked off his campaign for governor Wednesday, nearly a year-and-a-half before the primary election in May 2014. Hanger, a Democrat, says he will focus on making public education a top priority, and supports a severance tax on Marcellus Shale drilling. “The first thing about a budget process is that it is a prioritization. The money is not limitless. There’s a limited amount of funds, and you gotta decide what’s your most important priority. Right now, we have a governor who’s put education at the bottom of the heap. I will be the exact opposite. Education is gonna be the top priority for funds that are available. “I’m also willing to talk about new revenues. I haven’t signed the Grover Norquist tax pledge. I’ve said publicly that I support a drilling tax,” he said. Gov. Tom Corbett spokesman Kevin Harley said state funding for public education is at its highest level under Corbett. “Education is the highest priority in the budget under Gov. Corbett…. Forty cents of every state dollar goes to education. In fact today, we spend $27 billion on educa-

tion on the federal, state and local level in Pennsylvania,” Harley said. The 55-year-old Hanger is a Harrisburgbased lawyer at Eckert Seamans law firm. He is the first candidate to formally announce his bid for the governorship, although he is likely to face a number of other Democrats in the May 2014 primary election. Corbett hasn’t announced his re-election campaign, but has said he has no intentions of breaking the state’s long tradition of reelecting sitting governors to a second term. Hanger’s speech on Nov. 30 was heavy on the energy, utility and environmental policy areas from where he draws his record and experience. Hanger supports a severance tax on Marcellus Shale drilling in Pennsylvania, a sharp contrast between himself and Corbett. Pennsylvania is on course to being the third biggest energy producer and the only state without a severance tax on natural gas drilling, he said. Harley dismissed a severance tax as “unwise and unworkable,” noting the impact fee instituted under Corbett generated $205 million in the first year compared to a severance tax proposed during

John Hanger

Rendell’s tenure that would have produced $100 million. Rendell’s proposed severance tax projected $500 million per year by fiscal year 2014-15. Hanger also supports alternative energy like wind and solar, touting his work on a number of alternative energy laws passed in Pennsylvania, like the Alternative Energy Portfolio Standards Act, and the Alternative

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Fuels Act passed while DEP secretary. He also said he would continue to expand the Growing Greener environmental preservation program, which was began under Gov. Tom Ridge and expanded under Rendell. Although most of his experience comes from his energy and utility background, he says he’s well read on education issues facing the state, noting he favors technical training and higher education equally, a theme echoed by Corbett and his panel on postsecondary education. Hanger was vague on one of the biggest issues facing Pennsylvania that could wreak havoc on future budgets: the pension crisis. “The pension crisis is a real crisis. It is a very serious issue that should not be politicized. And very frankly, I’m going to be studying that issue and working to provide answers to a very difficult problem,” Hanger said. The General Fund contribution for pensions in the first budget after the 2014 election is projected to be $2.8 billion. The state’s unfunded liability is currently $41 billion and is projected to increase to $65 billion in five years. Corbett’s budget office recently issued a report on pensions, and the governor plans to work with the Legislature and stakeholders to develop a plan. Hanger supports gay marriage and is pro-choice on abortion, issues key to the Democratic base. He also supports Attorney General-elect Kathleen Kane’s plans to review the state’s handling of the Jerry Sandusky child sex abuse case under then-Attorney General Corbett. Hanger also supports medicinal marijuana use, saying it is “cruel” and “an assault on liberty” to withhold the treatment from patients if they have a prescription from a doctor. Hanger was appointed to serve as Secretary of the Department of Environmental Protection under Rendell in 2008. He was a commissioner on the Public Utility Commission from 1993 to 1998. Between holding those two positions, Hanger founded the environmental organization Citizens for Pennsylvania’s Future, also known as PennFuture. Jan Jarrett, a former president and CEO of PennFuture who left the organization earlier this year, is among a number of volunteers on Hanger’s campaign team. Hanger won’t be the only Democrat positioning to face Corbett in the fall of 2014. Although no one has made public commitments, talk among Democratic insiders about potential contenders include U.S. Sen. Bob Casey, but some say he’s unlikely to run after his re-election to the U.S. Senate earlier this month. Other top choices among state Democrats include state Treasurer Rob McCord, former U.S. Rep. and Senate candidate Joe Sestak, businessman and former state Revenue Secretary Tom Wolf of York County, and Tom Knox of Philadelphia. CW


NEWS 11

DECEMBER 2012 CAPITAL WATCH

Don’t sell out our seniors BY DAVE FILLMAN

Last month’s record-setting Powerball prize of $588 million spurred millions of hopeful players to plunk down $2 million or more for the chance at the winning ticket of a lifetime. And why not, right? The odds are extraordinary but a mere $2 wager is worth it. In short: the risk is worth the reward. Unfortunately for Pennsylvania and millions of seniors, the Corbett administration is playing an entirely different type of lottery game and the risk is enormous: at stake is $1 billion or more in funds for life-saving programs for seniors. Gov. Corbett wants to privatize management of the lottery and is pursuing a deal with a company called Camelot, which is based in the United Kingdom. The administration recently announced that Camelot submitted the winning bid – actually the only bid - and could take over our lottery by Dec. 31. There are more questions than answers right now about this deal and newspapers across the state have called for public hearings and legislative oversight. But we do know that our lottery is delivering huge dividends to our state. Lottery sales went up by 8.5 percent last year – a

Pay Less with Dave Fillman

gambling in PA, then so be it. The point is you do not have to give a blank check to a private operator to do that. So, why privatize? The process says a lot about this proposal and voters need to understand what is going on. Lawmakers in both parties have complained publicly that they do not have enough information about the proposed deal that is being cut or the potential impact on senior programs. The administration says that a decision must be made by Dec. 31st or Camelot will

The lottery continues to help seniors in every corner of the state – and it helps every single taxpayer as well, whether or not they ever buy a ticket. new record. Net revenue last year was $1.06 billion – that’s $100 million more than the previous year and also a new record. The lottery continues to help seniors in every corner of the state – and it helps every single taxpayer as well, whether or not they ever buy a ticket. Our lottery is the only one in the nation that earmarks all profits for programs for seniors. The lottery helps pay for prescription drugs; transportation; senior centers, long-term care; and property tax rebates – to name just a few benefits. The state has tapped the lottery fund to supplement Medicaid nursing home funding. In the current state budget, a record $309 million will be moved from the lottery to help underwrite this vital care while helping to plug a hole that taxpayers might otherwise be on the hook for. Every dollar that goes to the private operator comes out of these programs. That just doesn’t make any sense. The deal with Camelot clears the way for online gambling, Keno and other games. Under current law, however, the lottery can expand as needed to drive up revenue. If the private side can start keno and start online games without the legislature having anything to say about it – then the administration should be able to go the same route with the current lottery management. If the goal is to expand dramatically

withdraw its bid. This sounds like a pitch for year-end clearance sale for sofas or color TVs. Our seniors deserve better. The administration maintains that it can make this sweeping change without seeking approval from the legislature and, right now, it appears that there will be no legislative oversight at all – not even a hearing. Pennsylvania is not the first state to go down this path and the result in Illinois, a ‘leader’ in this latest privatization push, is grappling with a legal nightmare. According to The Chicago Tribune, Northstar Lottery Group the company that was hired to take over that state’s lottery could owe Illinois taxpayers between $28 million and $36 million in penalties for underperformance. Illinois and the company are headed to a costly and timeconsuming arbitration process to try and clean the mess up. Gov. Corbett and his administration owe it to our seniors and every taxpayer in the state to open the doors and involve lawmakers and citizens in this process. There is no good reason for the secrecy and the rush to judgment. This deal might be wonderful for Camelot but if it cannot stand up to public scrutiny then odds are very good that the deal will stink for Pennsylvanians. CW Dave Fillman is Executive Director of AFSCME Council 13.

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12 OPINION

DECEMBER 2012 CAPITAL WATCH

Editorial

Liquor in super markets: Be careful what you wish for Christmas is coming and Gov. Tom Corbett has submitted his gift wish list to Santa Claus. At the top, we are reliably informed, is “privatizing the state liquor stores in 2013.” According to Santa’s elves, he’s getting lots of identical requests from supermarket and drugstore chain owners and big box store operators. There are lots and lots of people, apparently, who would like a liquor store license in their stocking – not to mention millions of customers who think it would be peachy keen to be able to put whiskey and wine at into the same shopping cart with their arugula and brie. (They do that in New York State, you know. Seagrams and Yellow Tail right in the same cart with Laughing Cow and Wonder Bread – oh, no, scratch the Wonder Bread. Better make that Holsum.)Well, you’ve heard this before but it bears repeating: Be careful what you wish for. The problem is that even among the advocates for privatization, the reason and the methods vary from special interest group to special interest group. And, those differ from the motivations shared by most consumers. Most Republicans believe that we should get out of the liquor business because government shouldn’t hog enterprises that could be performed by the private sector. So far, so good. But most Republicans – and a sizable chunk of Democrats – also believe the state store system has huge, untapped economic value because it’s a monopoly. If any of Pennsylvania’s eight million or so adults over age 21 want a drink of wine or liquor, it’s gotta come through the state store system. It’s a monopoly, folks, and you know what a monopoly can do? Name the sales price. Like it or lump it. What are you going to do? Drive to Maryland or New Jersey for a bottle of wine or booze? (Okay, there are quite a few folks who do that. But for most it’s an intolerable inconvenience, so they pay the monopoly price.) In reality, Pennsylvania liquor store prices are very competitive with free market liquor stores in neighboring states and, in some cases, lower. A great deal depends of the private liquor store’s size, management structure, dollar volume and ability to shift costs from liquor products to other commodities (say groceries or cosmetics or sundries). It’s pretty clear, though what the consumer’s vision of state store privatization is: • Lower prices in privately-owned stores across the board, not just on sale items • Utter convenience – not just the availability of liquor in some drug stores or supermarkets but pretty much anywhere there is a cash register. • Rationalization of product availability – not just liquor and wine but beer, too, in the same place you can buy groceries. • Huge and comprehensive selection – lots of every kind of booze and wine and beer in many sizes from lots of countries On the other side, more or less, are people who have a vested interest in the way the booze system operates today: • Beer distributors want to keep the number of outlets selling beer by the case to a minimum (there are 1,300 case sales “distributors licenses” in existence today compared to 625 liquor store outlets and they fear allowing supermarkets into the takeout beer business would oversaturate the market and drive them out of business)

• Bars and taprooms don’t want supermarkets selling beer by the six-pack or case. • Beer wholesalers (importing distributors) worry about any wide scale changes in the system and, particularly are worried about the potential supermarkets to require “shelving allowances” or other product placement fees • Distillers and vineyards worry about the increased cost of having to sell to a variety of wholesalers instead of just one – the PA Liquor Control Board. (Yes, it’s a monopoly, but it sure cuts down on marketing costs.) • Even big box stores and grocery chains don’t want to see a huge expansion in the number of licensed liquor outlets. Oversaturation of the market will decrease the value of any given license. (Right now, 600 stores serve an average of 13.000 adults each. Double the number of licenses, that “captive market” for each license is cut in half.)

Last year, Washington State made the switch from government-owned liquor stores to private enterprise. This year, the talk from Seattle to Spokane is about “liquor sticker shock.” Guess what, after the state added on new taxes to ensure that the divestiture of the liquor system was a money maker for the state, the cost of most booze went up. Because Harrisburg will never be able to swing a sale of state store licenses without being able to guarantee a big windfall for the Commonwealth, the Washington experience could well be duplicated here. Which raises the “last but not least” barrier to state store privatization – opposition from labor unions who see 3,500 good-paying jobs with benefits on the line. All of which leads us to wonder whether Santa is saying right now, “Gee, I wonder if that Corbett fellow might not be better off with a nice pair of mittens. He’ll be thanking me later.” CW


OPINION 13

DECEMBER 2012 CAPITAL WATCH

SP&R was first firm to show close race for president BY JIM LEE

C E N T R A L

49-45. Although this was one of the only polls to show Romney ahead, the fact that he was not over fifty percent in a state as Democratic as Pennsylvania meant Obama could not be counted out. Plus, the movement towards Romney was consistent with other polls showing significant movement towards Romney after a strong debate performance Oct. 3. Even the average lead for the President (according to realclearpolitics.com) narrowed to less than five points in late October—leading many to finally declare the race a “tossup.” Finally, our last independent poll, commissioned by the Pittsburgh Tribune Review and conducted Oct. 29-31, showed Obama and Romney tied at 47-47, with 5 percent undecided. While it is true this poll differed by 5 points from Obama’s eventual margin, SP&R was perhaps the only firm to accurately peg Romney’s margin at 47 percent. Furthermore, national exit polling confirms voters who made up their minds in the last week of the election voted overwhelmingly for Obama. Since more than 8 in 10, or 82 percent of all undecided voters in our last poll were Democrats and Independents, it is entirely plausible they ultimately cast ballots for Obama – allowing him to over perform our poll by 5 points. Recently, the Democratic State Committee accused our firm of deliberately skewing our polls to benefit Republicans and Mitt Romney. This is nothing more

P E N N S Y L V A N I A

than a reckless attempt by a partisan political group to smear our firm’s reputation. The reason SP&R has earned a solid reputation since we were founded more than 12 years ago is due to our accurate record of public polling even in years benefiting Democrats. In 2010, SP&R’s poll for ABC27 (WHTM-TV) in the 17th Congressional District (Con. Holden v. his GOP challenger) showed Democrat Holden ahead by double digits, close to his 12-point win on Election Day. A second poll in May 2010 for the Pittsburgh Tribune Review in the hotly contested, 12th Congressional District Special Election (Critz v. Burns) showed Democrat Mark Critz leading his GOP challenger handily. This poll was widely criticized by top Republican officials at the state and federal level. Critz won the election easily, thus validating our poll. So in light of these favorable polls for Democrats, where was the recognition from the Democratic State Committee two years ago? The answer is they were silent, which proves their current charges are nothing more than a partisan attempt to smear an otherwise reputable firm like ours. So perhaps Dem. State Chairman Burns is lashing out at us because he is trying to take attention away from the fact that despite higher turnout favoring Democrats this year, he failed miserably to net even a single seat in the Democratic House of Representatives, where Republicans maintained their 111-

Y O U T H

B A L L E T

seat majority due to a superior campaign operation. It is commonly-known that SP&R polls for many House Republicans. Plus, if our polls favored Republicans this year, this would not explain why our last poll before the Election also showed Democratic Attorney General candidate Kathleen Kane leading her Republican opponent by double digits – a fact conveniently omitted by the Democrats in their latest smear campaign. The final presidential results show Obama carried Pennsylvania by only 5 points; not 8, 10 or more as suggested from other Democratic-leaning polling firms in September. Moreover, Pennsylvania turned out to be the fifth closest state lost by Romney in the entire country, not far behind losing margins for Romney in Ohio, Florida, Virginia and Colorado. This is why New York Times blogger Nate Silver in a Nov. 25 article entitled “PA Could Be Path Forward for GOP,” recently discussed how PA—and not other states— was what he called the true “tipping point” that probably cemented Obama’s Electoral College victory. Anyone reviewing the accuracy of all of SP&R’s presidential polling leading up to the election will be pleased to know that our polling was, and turned out to be, closer than the other polling firms were stating. CW Jim Lee is President of Voter Survey Service, a division of Susquehanna Polling and Research, Inc.

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Susquehanna Polling and Research, a Harrisburg-based polling firm for both candidates for public office and numerous corporate clients, had an accurate record of polling leading up to the presidential election, and we were perhaps the first firm to show the Presidential race would be competitive– long before others showed the race tightening in October. In our three, main independent polls SP&R showed a close race well within Obama’s 5-point, 52-47 margin. In our Sept. 18-20 poll (on behalf of the Pittsburgh Tribune Review), Obama led Romney by 2 points, or 47-45. However, according to all other publiclyreleased September polling compiled by realclearpolitics.com, Obama led by an average of nine points, with some firms showing Obama leading by as many as twelve. We said at the time a double-digit margin for Obama was unrealistic, and that it was highly unlikely the President would carry the Keystone State by anything near his 10-point margin in 2008 due to the current polarized electorate and high unemployment. So, our September poll was the first to show the race competitive when others showed double digit margins for Obama. Our October poll conducted Oct. 4-6 showed a similar 2-point margin for Obama, thus validating our September poll. A second October poll commissioned by our client the Republican State Committee of Pennsylvania, showed Romney leading

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14 OPINION

NOVEMBER 2012 CAPITAL WATCH

Go ahead and re-name DPW, but don’t expect that to change much BY CHRIS COMISAC

“What’s in a name? That which we call a rose by any other name would smell as sweet.” --Romeo and Juliet (II, ii, 1-2) There is a renewed effort afoot to change the name of the state Department of Public Welfare, and its supporters say it’s a way to change the department. State Rep. Tom Murt, R-Montgomery, recently wrote in an opinion piece, published in the Doylestown Intelligencer, that the department should have its name changed to the Department of Human Services. Wrote Murt: “Changing DPW’s name would more accurately reflect the department’s mission, which is to ‘promote, improve and sustain the quality of family life, break the cycle of dependency and protect and serve Pennsylvania’s most vulnerable citizens.’” Murt, who has authored legislation to make the change, argues correctly that only a small percentage of the department’s efforts involve direct cash assistance to individuals. But are direct cash payments the only form of “welfare?” The Merriam-Webster Dictionary defines “welfare” as “aid in the form of money or necessities for those in need” as well as “an agency or program through which such aid is distributed.” With health care - and other supports - a big necessity in anyone’s life, it seems pretty clear that’s exactly what Secretary Gary

Alexander’s Public Welfare Department does on a daily basis, beyond its minimal cash assistance efforts. Even by Mr. Murt’s own explanation, that’s the department’s role. In contrast “human services” has no formal dictionary definition; it simply means what people want it to mean. And that’s fine. You can change the name, but don’t think it changes what the department does or will continue to do. Take, for example, Medicaid, which consumes $6.3 billion in state dollars, or 23.25 percent, of the state’s General Fund budget, and is the largest portion of the department’s safety-net efforts: • It insures 17 percent of Pennsylvanians, or 2.1 million individuals statewide – it insured 1.8 million in 2000; • It now covers 35 percent of all children and funds nearly half of all births, including providing necessary care for very sick infants; • It finances the care of 65 percent of all elderly residents being cared for in the state’s nursing homes; and • In the past decade, Medicaid spending increased 83 percent compared to a 45.4 percent increase in Pennsylva-

nians’ personal income. The Pennsylvania Independent Fiscal Office estimates Medicaid spending will grow about five times as fast as state General Fund revenue during the next three years. To further his argument, Murt, in his editorial, focuses on a specific department plan, which has since been put on hold to develop a better plan, to seek copayments from certain families who do not financially qualify for Medicaid. Those families, because of state policy implemented in 1998, receive Medicaid services, free of charge, for their child or children who have mental or physical disabilities. “In Harrisburg, we just witnessed a striking, dangerous example of how lumping vital human services under ‘welfare’ can produce disastrous results,” wrote Murt. “In the interest of ‘reforming welfare,’ DPW proposed installing copayments for families with children who have behavioral, mental or medical health problems. These children are entitled to receive human and health services under Medicaid.” They are entitled because of a 1998 state policy, and Pennsylvania is the only state to have such a policy. A policy the Legislature, in 2011, authorized the depart-

ment to change in an effort to ensure those who can afford to pay something toward the free care they receive do, unlike now. Was it the best plan? No. However, it was the only plan, at the time, the federal government would allow the state to pursue. But in early October, the department decided to delay – until further notice –the co-payment plan in the hopes of developing, in cooperation with affected stakeholders, a sliding premium payment plan. Just as a bit of clarification, 60 percent of the families that would have been impacted by the co-payment plan have household incomes greater than $60,000 and nearly 40 percent have incomes greater than $80,000 (some far greater) – none of them pay for the Medicaid services they receive. There’s no denying that most individuals receiving Medicaid services can’t afford things society has decided they are entitled to receive: health care, nursing homes and other services. However, they don’t pay for those services, other than maybe a few nominal co-payments, if that. Those services might not be a direct cash payment, but the cost to taxpayers of all Medicaid services rendered in Pennsylvania is still easily quantified, and they are currently worth more than $16 billion when state and federal funding for those services are considered. When people don’t have to pay for the “human services” they receive, and the rest of us pay out of our own pockets for similar services while also helping to fund “human services,” that’s still ‘welfare,’ even if you’re calling it “human services” or anything else. Murt, and many others, also argue the term “welfare” stigmatizes the people who make use of the department’s services. “These are Pennsylvanians who need and deserve our help,” writes Murt. “Stigmatizing the elderly or disabled is not what good Pennsylvanians do.” Stigmatization is certainly possible, and a shame. There appears to be no harm in changing the department’s name in an attempt to address that, other than whatever costs are involved with the switch. But if the name-changing crowd thinks a new moniker is going to change how most people perceive the programs run by the DPW, DHS or whatever it’s ultimately called, don’t be so sure the rose is going to smell any sweeter - particularly if the number receiving services continues to rise and the cost of the programs continues to grow much faster than state revenues and personal incomes. CW


OPINION 15

DECEMBER 2012 CAPITAL WATCH

Behavior science: Why investors underperform market averages SCOTT C. WEAVER, CFP, CFS, CAS

Investor behavior erodes the returns of even the best investments. Improving your behavior is just as important if not more important than the performance of your chosen investment. According to the 2012 edition of Dalbar’s Quantative Analysis of Investor Behavior, the average equity investor underperformed the S&P by 7.85% and over a 20 year period from 1/1/92 – 12/31/11, the average investor underperformed the market by 4.32%. Irrational behavior and repeated errors have been identified as the main contributors. By identifying these investor shortfalls, I hope to help you, our readers, navigate these uncertain markets from a behavioral financial perspective. In the past decade, a tremendous amount of research shows logical inconsistencies and foibles that plague investors. These include: • Underestimating market risk • Overconfidence • Recency • Risk Aversion Mytopia • Emotions – Fear and Greed Underestimating Market Risk Most investors don’t understand the magnitude of market risk before it occurs. Once realized, the loss then tweaks an emotional reaction not an analytical one. At this point, cyclical losses occur. Investors often buy high and sell low.

Over emphasis on the possibility of short term loss is referred to as Risk Aversion Mytopia. The irony of the above example is investors are losing money on a real return basis after tax and after inflation. Risk Aversion Mytopia freezes investors like a deer in headlights even if the fear of loss is perceived or real. What is different about QE3 versus QE1 and QE2 is the Federal Reserve put no limits on how much money it is willing to print. They will print money until unemployment is around 7% and the economy has turned around. Given this sluggish economy, at some point, investors may have to assume some risk to get a positive real return. Emotions – Fear and Greed When the good Lord was building our bodies, He/She installed both fear and greed into our brains. And for good reasons, the survival of our species depended on the ability to recognize danger and opportunity. Unfortunately, what served us well fleeing the lions, tigers and bears, does not serve

us well investing in the 21st Century. I tell my clients, if possible, take the emotion out of investing. Knowledge will assist you a lot better. Fear and greed will wreak havoc on your emotions as well as your portfolio. Other summary points of investor negative actions are: • Investors are often very pessimistic after markets go down and over optimistic after markets go up. They give too little weight to long-term fundamentals. • Time horizons have become very short. When I began my career in 1980, time horizons were at least 5 years for a retirement objective. Now the same retirement goal has investors looking at markets performance in time frames of less than a year. Market cycles need time to cycle out. Learn more, panic less. Loss of patience and more emotion is an investment environment just waiting to implode your portfolio. Happy Investing!

Risk Aversion Mytopia QE3 by the Federal Reserve, in part, is designed to force investors out of safe investments and into the market. Even with interest rates at near zero on the time deposits, money markets and savings accounts, investors still maintain billions of dollars in these non-performing assets.

Source: Personal experience and previous education as a Certified Fund Specialist, Certified Annuity Specialist and a Certified Planner has afforded Scott a lot of information and experience on investment styles. As managing money, Scott utilizes the above on a constant basis. This information is provided for informational purposes only. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security by the Academic Wealth Strategies or NEXT Financial Group, Inc. Any opinions expressed herein are subject to change without notice. Past performance is not a guarantee of future results.

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Overconfidence Recent research in this area is quite amazing. It seems the more difficult and complex the assignment, the more overconfident we become, many times to our detriment. Studies suggest the longer it takes to get feedback from our decisions, the greater the over confidence becomes. Recency As a CERTIFIED FINANCIAL PLANNER™ professional, I see recency often. People overweigh recent events, good or bad, and extrapolate them far into the future. They ignore historical data. I use the example of a water skier behind a boat. The skier represents the markets, big swings in either direction. The boat represents the market fundamentals. The skier will not continue in a far left or far right position indefinitely. The skier will eventually return to the boat. Market extremes are no different. They don’t last forever, and fundamentals will eventually prevail.

Scott C. Weaver, CFP, CFS, CAS

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Capital Watch December 2012  

The December 2012 issue of Capital Watch.

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