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1 COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES 2 APPROPRIATIONS COMMITTEE HEARING
3 STATE CAPITOL HARRISBURG, PA 4 MAIN BUILDING 5 ROOM 140
6 TUESDAY, FEBRUARY 23, 2016 9:32 A.M. 7 BUDGET HEARING 8 TREASURY DEPARTMENT
9 BEFORE: HONORABLE WILLIAM ADOLPH, 10 MAJORITY CHAIRMAN HONORABLE KAREN BOBACK 11 HONORABLE JIM CHRISTIANA HONORABLE GARY DAY 12 HONORABLE GEORGE DUNBAR HONORABLE KEITH GREINER 13 HONORABLE SETH GROVE HONORABLE SUE HELM 14 HONORABLE WARREN KAMPF HONORABLE FRED KELLER 15 HONORABLE TOM KILLION HONORABLE JIM MARSHALL 16 HONORABLE KURT MASSER HONORABLE DAVE MILLARD 17 HONORABLE MARK MUSTIO HONORABLE MIKE PEIFER 18 HONORABLE JEFFREY PYLE HONORABLE MARGUERITE QUINN 19 HONORABLE CURT SONNEY HONORABLE MIKE VEREB 20 HONORABLE JOSEPH MARKOSEK, MINORITY CHAIRMAN 21 HONORABLE LESLIE ACOSTA HONORABLE MATTHEW BRADFORD 22 HONORABLE TIM BRIGGS HONORABLE DONNA BULLOCK 23 HONORABLE MARY JO DALEY HONORABLE MADELEINE DEAN 24 HONORABLE MARIA DONATUCCI HONORABLE JOHN GALLOWAY 25 2
1 BEFORE: (cont.) HONORABLE STEPHEN KINSEY 2 HONORABLE MICHAEL O'BRIEN HONORABLE MARK ROZZI 3 HONORABLE KEVIN SCHREIBER HONORABLE PETER SCHWEYER 4 ALSO IN ATTENDANCE: 5 HONORABLE KRISTIN PHILLIPS-HILL HONORABLE MATT GABLER 6 HONORABLE KERRY BENNINGHOFF HONORABLE DAVID PARKER 7 HONORABLE MARTINA WHITE HONORABLE MARK KELLER 8 HONORABLE TODD STEPHENS HONORABLE JAKE WHEATLEY 9 HONORABLE JOE PETRARCA
10 COMMITTEE STAFF PRESENT: DAVID DONLEY, MAJORITY EXECUTIVE DIRECTOR 11 RITCHIE LaFAVER, MAJORITY DEPUTY EXECUTIVE DIRECTOR CURT SCHRODER, MAJORITY CHIEF COUNSEL 12 MIRIAM FOX, MINORITY EXECUTIVE DIRECTOR TARA TREES, MINORITY CHIEF COUNSEL 13
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24 SUMMER A. MILLER, COURT REPORTER [email protected] 25 3
1 I N D E X
2 TESTIFIERS
3 NAME PAGE
4 TIMOTHY REESE 8 STATE TREASURER 5 KEITH WELKS 8 DEPUTY STATE TREASURER 6 CHRISTOPHER CRAIG 9 CHIEF COUNSEL 7
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1 P R O C E E D I N G S
2 MAJORITY CHAIRMAN ADOLPH: Thank you.
3 Good morning, everyone. I want to
4 welcome you to the second day of our budget hearings for
5 the fiscal year 2016-17.
6 I will just go over a few housekeeping
7 items. I would appreciate if you would check your
8 phones or iPads and make sure you turn them off. These
9 hearings are televised and the background does disrupt
10 the telecast. If you have conversations -- and I know
11 they do exist -- please, if it's going to be any longer
12 than a few seconds, please take your conversations
13 outside the hearing room.
14 This morning we will hear from the State
15 Treasurer followed by the Auditor General. And later in
16 the afternoon, we will hear from members of the
17 judiciary.
18 Before we begin today, I'd like to go
19 through an introduction of the Appropriations staff,
20 both Republican and Democrat.
21 My name is Bill Adolph. I'm the
22 Republican chair for the House Appropriations Committee.
23 I reside in the 165th District in Delaware County.
24 MINORITY CHAIRMAN MARKOSEK: Thank you,
25 Chairman. 5
1 Good morning, everybody. I'm State
2 Representative Joe Markosek, 25th Legislative District,
3 that includes the eastern suburbs of Allegheny County.
4 Miriam.
5 MS. FOX: I'm Miriam Fox, executive
6 director for the House Democrats.
7 REPRESENTATIVE WHEATLEY: State
8 Representative Jake Wheatley from the 19th Legislative
9 District, Allegheny County, city of Pittsburgh.
10 REPRESENTATIVE KINSEY: Good morning,
11 State Representative Stephen Kinsey, Philadelphia
12 County, 201st Legislative District.
13 REPRESENTATIVE BULLOCK: Good morning,
14 Representative Donna Bullock, 195th District,
15 Philadelphia County.
16 REPRESENTATIVE DALEY: Good morning, Mary
17 Jo Daley, Montgomery County, District 148.
18 REPRESENTATIVE DEAN: Good morning and
19 welcome, Madeleine Dean from Montgomery County, the
20 153rd.
21 REPRESENTATIVE SCHWEYER: Good morning,
22 Peter Schweyer, Representative from Lehigh County, city
23 of Allentown, 22nd District.
24 REPRESENTATIVE GALLOWAY: John Galloway,
25 140th District, lower Bucks County. 6
1 REPRESENTATIVE BRIGGS: Good morning, Tim
2 Briggs, Montgomery County, 149th District.
3 REPRESENTATIVE DONATUCCI: Good morning,
4 Maria Donatucci, 185th District, Philadelphia and
5 Delaware Counties.
6 REPRESENTATIVE ACOSTA: Good morning,
7 Representative Leslie Acosta from the 197th District.
8 REPRESENTATIVE O'BRIEN: Good morning,
9 Mike O'Brien, 175th District, Philadelphia.
10 REPRESENTATIVE ROZZI: Good morning,
11 Representative Rozzi, 126th District, Berks County.
12 REPRESENTATIVE SCHREIBER: Morning, Kevin
13 Schreiber, 95th District, York County.
14 MR. DONLEY: Hi, Dave Donley, Republican
15 staff executive director to the committee.
16 MR. SCHRODER: Curt Schroder, chief
17 counsel, House Republican Appropriations Committee.
18 REPRESENTATIVE MUSTIO: Good morning,
19 sir. Representative Mark Mustio, Allegheny County, 44th
20 Legislative District.
21 REPRESENTATIVE HELM: Good morning,
22 Representative Sue Helm, 104th District of Dauphin and
23 Lebanon Counties.
24 REPRESENTATIVE BOBACK: Representative
25 Karen Boback, House District 117, Lackawanna, Luzerne, 7
1 and Wyoming Counties.
2 REPRESENTATIVE MASSER: Representative
3 Kurt Masser, 107th District, Northumberland, Montour,
4 and Columbia Counties.
5 REPRESENTATIVE DAY: Good morning,
6 Representative Gary Day from Lehigh and Berks Counties.
7 REPRESENTATIVE KAMPF: Warren Kampf,
8 157th District, Chester and Montgomery Counties.
9 REPRESENTATIVE QUINN: Good morning,
10 Marguerite Quinn from Bucks County. I represent parts
11 of central and upper Bucks.
12 REPRESENTATIVE MARSHALL: Good morning,
13 Jim Marshall, Beaver and Butler Counties.
14 REPRESENTATIVE MILLARD: Good morning,
15 David Millard, 109th District, Columbia County.
16 REPRESENTATIVE PEIFER: Good morning,
17 Mike Peifer, 139th District, Pike and Wayne Counties.
18 REPRESENTATIVE DUNBAR: Good morning,
19 George Dunbar, Westmoreland County, 56th District.
20 REPRESENTATIVE SONNEY: Good morning,
21 Curt Sonney, 4th Legislative District, Erie County.
22 REPRESENTATIVE GREINER: Good morning,
23 Keith Greiner, 43rd District, Lancaster County.
24 REPRESENTATIVE KELLER: Good morning,
25 Fred Keller, 85th District, Union and Snyder Counties. 8
1 REPRESENTATIVE PYLE: Good morning, Jeff
2 Pyle, 60th Legislative, Armstrong, Butler, and Indiana
3 Counties.
4 MAJORITY CHAIRMAN ADOLPH: Okay. Thank
5 you.
6 As you can see, the House Appropriations
7 Committee. I think we have 37 members, that's about
8 three-quarters of the size of the State Senate, so
9 certainly a diverse committee. We have Representatives
10 from all parts of the Commonwealth and they all have
11 interest, obviously, in these budget hearings and the
12 taxes and the expenses and so forth and so on.
13 Treasurer, it's nice to meet you for the
14 first time the other day.
15 STATE TREASURER REESE: Yes.
16 MAJORITY CHAIRMAN ADOLPH: Okay. And the
17 time is yours. And if you introduce -- no strangers to
18 this committee -- your staff that you have brought at
19 the table with you. Thank you.
20 STATE TREASURER REESE: Sure. Thank you.
21 To my left, I have Keith Welks.
22 Keith, do you want to say anything?
23 DEPUTY STATE TREASURER WELKS: I'm Keith
24 Welks, Deputy Treasurer for Fiscal Operations.
25 MAJORITY CHAIRMAN ADOLPH: Thank you, 9
1 Keith.
2 STATE TREASURER REESE: Christopher?
3 Christopher Craig.
4 MR. CRAIG: My name is Christopher Craig.
5 I'm chief counsel to Treasury.
6 STATE TREASURER REESE: Chairman, thank
7 you.
8 I'd like to make an opening statement,
9 very brief --
10 MAJORITY CHAIRMAN ADOLPH: Please.
11 STATE TREASURER REESE: -- so we can get
12 to questions and answers.
13 So, Mr. Chairman and members of the
14 committee, I have submitted testimony for the record and
15 would briefly like to highlight a few key points.
16 Please allow me to take a moment to thank the 350
17 talented Treasury employees for welcoming me and for
18 their service to the Commonwealth.
19 While Treasury faces increased costs
20 associated with employee compensation, it recognizes the
21 state's financial constraints. Treasury believes that
22 it will do it's best to work within the Governor's
23 budget request to fulfill it's duties.
24 The budget impasse has been a burden and
25 has created operational challenges; however, I've 10
1 managed Treasury without political bias. Since taking
2 office, I have two priorities. First, to ensure mission
3 continuity and make improvements when necessary.
4 Second, act transparently and act on legal precedent and
5 fiscal prudence to guide our actions.
6 I'm proud of Treasury's accomplishments.
7 The 529 college savings program ended 2015 with a fund
8 balance of $3.6 billion and the plan is 111-percent
9 funded. Unclaimed property collected approximately
10 $670 million due to the reduction and the dormancy
11 period. It also returned 120 million to claimants. The
12 net benefit to the general fund was about $550 million.
13 Last fiscal year, Treasury processed
14 21 million payments worth nearly $87 billion.
15 Importantly, Treasury's preaudit review prevented nearly
16 $29 million of erroneous payments. In total, there was
17 an $80 million gain in Treasury managed funds in
18 calendar year 2015. Those gains were made even while we
19 were able to reduce investment expenses by $2 million.
20 Going forward, Treasury continues to look
21 at ways to constantly lower costs, create efficiencies,
22 and improve the performance of the Commonwealth's
23 financial assets. This includes Treasury University, a
24 training program for our employees, the small business
25 initiative to help drive economic growth, and thirdly, 11
1 to improve our investment performance, reduce costs, and
2 broaden our investment prospects. Lastly, we are in
3 preliminary discussions with the administration and
4 state pension systems about how to reduce investment
5 management, redundancy, and expenses.
6 Thank you, and I'm available to answer
7 any questions you may have.
8 MAJORITY CHAIRMAN ADOLPH: Thank you,
9 Treasurer.
10 I'm going to start with the Democratic
11 chair of the committee for the first question, Chairman
12 Markosek.
13 MINORITY CHAIRMAN MARKOSEK: Thank you,
14 Chairman Adolph.
15 And good morning, Mr. Treasurer, and your
16 staff.
17 STATE TREASURER REESE: Good morning.
18 MINORITY CHAIRMAN MARKOSEK: And again, I
19 appreciate you stopping by my office to introduce
20 yourself. It was, I thought, a very productive meeting.
21 You certainly have an interesting background -- great
22 background and interesting career and we wish you all
23 the luck as you move forward here in your current
24 position.
25 STATE TREASURER REESE: Thank you. 12
1 MINORITY CHAIRMAN MARKOSEK: As the
2 Governor indicated in his budget address, his proposal
3 for the 2016-17 budget is unique considering the
4 circumstances that we're in, and those circumstances are
5 that we have yet to complete the current year's budget,
6 2015-16. And because the current year's budget is
7 unfinished, it puts you, as the Treasurer, in a very
8 difficult position.
9 I'm not going to get into the legal
10 debate here today, but from a practical standpoint,
11 there are aspects of state government that are critical
12 to the health, safety, and welfare of our citizens, and
13 therefore, must continue to be funded even during this
14 impasse. Had the General Assembly done their job,
15 passed a comprehensive and balanced budget on time -- or
16 even in last December when we all, many of us here,
17 thought we were on the cusp of an agreement -- we would
18 not be in this position.
19 So my question to you is twofold. One is
20 would you discuss from a practical standpoint -- and if
21 you have to get into the legalese, put it in layman's
22 terms if you can -- why it is necessary to make payments
23 to the state's correctional institutions in the absence
24 of a full appropriation? And the second part of the
25 question is what are the consequences if we do not 13
1 provide that funding?
2 STATE TREASURER REESE: All right. Thank
3 you.
4 This is a question -- it is the
5 overriding question for during the budget impasse. And
6 after the Governor line-item vetoed the budget -- which
7 is when it gets to my department which is safeguarding
8 moneys, paying expenses -- what are the rules for us to
9 make payments. And in this case, as we've been very
10 clear and very transparent and consistent about is that
11 we look at this on the balance of are people showing up
12 to work. That's not my call of folks going to work, but
13 I look across the state and we see thousands of
14 employees for the state going to work. And at that
15 point, we have a very clear, very clear legal precedent
16 that says if people show up to work, they have to be
17 paid.
18 Now it's not just going to work. When
19 you go to work, you have to -- it's not just paying a
20 salary is the same as going to work. If you go to work,
21 we want a return on the investment for your work, which
22 means there are certain costs associated with work. So
23 we want to make sure that -- which in our estimate is
24 when you show up and go to work is that we want to make
25 sure those expenses that are absolutely necessary to 14
1 complete those duties that we think would be a great
2 return on the investment. Having to pay that salary,
3 that was our benchmark.
4 MINORITY CHAIRMAN MARKOSEK: Okay. So
5 whether it's corrections or something else, you're
6 suggesting that -- and there is legal precedence for
7 this. What then are the consequences if we do not
8 provide the funding?
9 STATE TREASURER REESE: Well, you know --
10 MINORITY CHAIRMAN MARKOSEK: Particularly
11 in the correctional area where, obviously, it's more
12 dire, but --
13 STATE TREASURER REESE: Right.
14 MINORITY CHAIRMAN MARKOSEK: -- if you
15 can just answer that question as well.
16 STATE TREASURER REESE: Yeah. Well,
17 that's a great question and I think it has at least a
18 couple gradients to the downside meaning it doesn't
19 just -- so the worst is -- the worst possible scenario
20 is I'm not getting paid, I've been not getting paid.
21 And let's say, I'm willing to go to work for four weeks,
22 six weeks, whatever the period of time, but at is some
23 point it becomes irresponsible for me to drive to go to
24 work and not have a paycheck when my banker's not going
25 to give me -- not going allow me to defer my loan on my 15
1 mortgage, I may have a car note, I may have college
2 tuition payments, I mean I have a full life in front of
3 me. And as we know in today's environment, many of us
4 are caregivers beyond just our immediate family, so
5 there's a huge support structure associated with
6 paychecks.
7 So what could possibly happen is I cannot
8 see myself showing up to work if I'm not getting paid
9 after a certain period of time. You know, that's -- I
10 mean, that's just human life, human nature.
11 And then as you can imagine, then there's
12 a snowball effect to that, right? You possibly could
13 say, as an organization, maybe we have to take loans,
14 but then you get into very arbitrary sort of
15 inconsistent financial measurements on how do I stay
16 afloat during a period of time where there's really no
17 allocation -- excuse me, no appropriation of money for
18 me? And that's less clear as you can hear. It's very
19 unclear, very choppy, and it gets rather personal very
20 quickly.
21 MINORITY CHAIRMAN MARKOSEK: Okay. Thank
22 you.
23 I'm sure the members have a lot of
24 questions here for you this morning, so I'm going to
25 move along. 16
1 Thank you very much, Mr. Chairman.
2 MAJORITY CHAIRMAN ADOLPH: Thank you,
3 Chairman Markosek.
4 I'm just going to follow up on where
5 Chairman Markosek started.
6 I'm sure most members of the general
7 assembly were surprised when the Governor blue-lined
8 corrections. Were you?
9 STATE TREASURER REESE: I honestly can't
10 say I was surprised because I had no opinion on that
11 area. I would say that where we were is -- I've been
12 very clear out there saying that I have no decision in
13 the budget negotiation, I'm not on the legislative side,
14 I'm not on the administration. My mandate is very clear
15 and it remained independent; to remain an independent
16 and an objective voice to allow you to do and battle the
17 way you see fit.
18 But once it comes into our domain, which
19 is payments, that became my decision. Everything else
20 will be a personal opinion.
21 MAJORITY CHAIRMAN ADOLPH: I can
22 understand your decision. I don't understand the
23 Governor's blue-lining of corrections.
24 STATE TREASURER REESE: Yes.
25 MAJORITY CHAIRMAN ADOLPH: And maybe we 17
1 will get an answer eventually, okay.
2 Who determines what expenses concerning
3 health and welfare, you know, on a daily basis? Is that
4 your decision or is that -- is that coming from the
5 administration?
6 STATE TREASURER REESE: I think that's a
7 combination. In fiscal review, Keith -- bureau plays an
8 important role on the preaudit side because we did block
9 payments, every payment didn't go through.
10 Keith, is there anything more
11 extrapolation on how we can arrive at --
12 DEPUTY STATE TREASURER WELKS: Yes. To
13 build on what the Treasurer said very briefly, Treasury
14 is a reactive agency with regard -- sorry -- is a
15 reactive agency --
16 MAJORITY CHAIRMAN ADOLPH: Keith, just
17 pull it towards you. Thank you.
18 DEPUTY STATE TREASURER WELKS: Yes. Got
19 it. Thank you very much. Wouldn't want to lose these
20 depthless words.
21 Treasury is a reactive agency. We do not
22 originate any of these payments. So in the first
23 instance, we are not making decisions about what
24 payments should be submitted to us through requisition
25 for payment regardless of whether we're during a budget 18
1 impasse, pre-impasse, post-impasse, whether there's an
2 impasse, doesn't matter. We can only pay those bills or
3 other charges that are submitted to us by an agency.
4 In the normal process, an agency --
5 whether it's corrections or human services, education --
6 originates a bill, it's approved by the agency head,
7 it's submitted to comptroller operations -- which is
8 part of the Office of the Budget -- it's reviewed there
9 and has to be approved by the head of comptroller
10 operations, the auditor for the Commonwealth as it were
11 under the fiscal code, and then it comes to us. At that
12 point, our charge is to determine, through the Fiscal
13 Review Bureau that the Treasurer described, whether the
14 request for payment appears to be lawful and correct.
15 If it does appear to be lawful and correct, we approve
16 it, pay it, and the Treasurer issues his warrant for the
17 payment.
18 MAJORITY CHAIRMAN ADOLPH: Okay. I'm
19 trying to figure out, you know, how you determine that
20 child-care subsidy payments should continue, but
21 payments for children and youth services should not be
22 paid. Who made that determination during this impasse?
23 STATE TREASURER REESE: I'm not quite
24 sure of that answer.
25 DEPUTY STATE TREASURER WELKS: I'd have 19
1 to double-check, but I do not believe those were
2 submitted to us.
3 STATE TREASURER REESE: Right.
4 DEPUTY STATE TREASURER WELKS: And
5 therefore, the determination was not not to pay them,
6 because we had nothing in front of us. If there was a
7 determination, it would have been made by the
8 administration as to whether or not --
9 MAJORITY CHAIRMAN ADOLPH: Before it got
10 to your --
11 STATE TREASURER REESE: Right.
12 DEPUTY STATE TREASURER WELKS: -- to
13 submit -- but it didn't get to us, that's right. It's
14 not before it got to us, it just didn't get to us.
15 MAJORITY CHAIRMAN ADOLPH: So this would
16 be a better question to ask the administration.
17 STATE TREASURER REESE: Yes.
18 MAJORITY CHAIRMAN ADOLPH: I understand
19 that, I understand that. Thank you.
20 It's a -- we always invite the sitting
21 chairs of the House standing committees to join us,
22 okay.
23 With us today is Chairman Jake Wheatley,
24 the Democratic chair of the House Finance Committee.
25 And, Chairman Wheatley, the mic is yours. 20
1 REPRESENTATIVE WHEATLEY: Thank you,
2 Mr. Chairman. And good morning, Mr. Secretary --
3 Treasurer.
4 I wanted to get your -- just so I'm clear
5 on your role -- you are like the Commonwealth, you pay
6 our bills, you kind of oversee some of our credit and
7 debt, kind of manage our processes that way.
8 So yesterday, we learned from the IFO
9 that we are faced with, in 2016-2017, a structural
10 budget deficit of about $1.8 billion that could possibly
11 grow to $2.63 billion if we don't find or do something
12 to significantly address it. In your role as the
13 department that kind of oversees our payments, are you
14 seeing any reactions in the bond market or in our
15 abilities to extend credit or to get credit and so to
16 speak? Are you seeing any indications based off of our
17 long-term inability to address the structural hole?
18 STATE TREASURER REESE: Right. Thank
19 you.
20 Well, first of all in the market, I think
21 we're still investment grade, but we're in a lower end
22 of investment grade.
23 REPRESENTATIVE WHEATLEY: And what does
24 that mean as it relates to cost to the taxpayers?
25 STATE TREASURER REESE: Well, an 21
1 investment grade, but on the lower end means that you're
2 not getting the best rates, but you're getting decent
3 rates. The concern is if you fall below investment
4 grade, and that's when the cost to borrow becomes
5 higher.
6 When I look at this issue around -- well,
7 I can tell you right now on our -- the loan we had to
8 provide to the general fund is roughly over a billion
9 dollars now, so it's a very real issue. It's an issue
10 that I think every member of this House of
11 Representatives is aware of. I think the -- when you
12 look at, as I have, the issue over the last several
13 years, the magnitude of the negative balance amount is
14 growing, and that's a key indicater. If you have
15 growing negative borrowing -- and luckily the Treasury
16 is in the position to provide those funds on a loan and
17 do it at a decent, honest return to our taxpayers. We
18 are charging .06-percent interest. It's working, but
19 there will be a time where Treasury may not be able to
20 provide those moneys our general fund.
21 You know, there's something -- you have
22 to do something. You have to look at this -- in finance
23 and money, it's a wholistic thing. It's not --
24 sometimes you do one thing and it has an unintended
25 consequence on another area because that's just the way 22
1 things work.
2 When I look at this issue, I look at also
3 the fact that goodwill is involved. And the best
4 example I can give all of you around funds and bonds and
5 ratings is just an example of a family member, a family
6 member that you have who constantly borrows money from
7 you, but never pays you back. Now I'm not saying that's
8 us, right, but just use this analogy, okay? And they
9 come back, they haven't paid you in the past. Let's say
10 it's been a few years, let's say it's been 10 years, but
11 they come back and ask you for more money, money again,
12 but it's even more, okay? What are you going to do?
13 That's sort of the rating effect.
14 Now, if that person has shown that they
15 are starting to get their life together, that they're
16 not quite there, but they're working to get their life
17 together, you perhaps may say, you look like you're
18 doing the right thing, I'll extend that credit, and
19 that's what I call goodwill. That's something I had --
20 we spoke about, it was in my written testimony.
21 So even if we're at this point today, we
22 have to make sure that our goodwill goes into effect in
23 the bond market so that people see that not only we've
24 had these issues, we created these issues, but we're
25 willing to get our lives together so that, you know, 23
1 that uncle will give you that loan.
2 So this is how I take and make that
3 example.
4 REPRESENTATIVE WHEATLEY: So just so I'm
5 clear, you said a lot in there, just so I'm clear and
6 for our listeners and viewers at home, you're
7 functioning as our kind of fallback bank, so to speak,
8 for us not being able to do what we need to do on a
9 day-to-day?
10 STATE TREASURER REESE: Yes.
11 REPRESENTATIVE WHEATLEY: So essentially
12 we're coming to our bank --
13 STATE TREASURER REESE: Yes.
14 REPRESENTATIVE WHEATLEY: -- our
15 Treasury, and we're saying, I want to borrow to pay for
16 the day-to-day expenses of what we have going on and I
17 may be able to pay you back in six months, but I might
18 not be able to.
19 And what you're saying is -- and this is
20 not a new occurrence, this has probably been taking
21 place a period of years -- but eventually, if we keep
22 acting that way, it will become a point where you as the
23 bank just wouldn't be able to do it. And when you went
24 to market to try to float this, the market may not give
25 us the best rates because we don't show a history of 24
1 being able to do courageous things and pay for our
2 day-to-day or even make the real difficult decisions to
3 figure out how we're going to make these long-term
4 investments. Is that what you're saying?
5 STATE TREASURER REESE: That's what I'm
6 saying; in effect, that's what I'm saying.
7 REPRESENTATIVE WHEATLEY: And so at some
8 point -- and I think Governor Wolf talked about that
9 point coming sooner rather than later -- we have to,
10 meaning the general assembly as well as the
11 administration, get in a room and decide how we will
12 address this $1.86 billion in a real way and not look to
13 come to our bank for our day-to-day expenses.
14 STATE TREASURER REESE: Yes. And I also
15 add that as a financier in markets before I got here and
16 in any market I look at, I am not trying to tell you how
17 to do what you need to do. I never -- that's not my
18 decision and that's not my role.
19 We just look at -- objectively, look at
20 the facts, and based on the facts, we're saying does
21 this make sense, are you making the moves? That's what
22 the market is doing when the market looks at these
23 issues.
24 There are three issues that the bond
25 market cites -- pension liability, unfunded balance, and 25
1 what we call general goodwill, are we trying to work on
2 this? And I think that it's not just one lever, there's
3 three levers. You have to choose what lever and show
4 that you're making financial progress or you're making
5 progress so that you are that family member who has
6 finally said I got my act together, I'm on the right
7 path. That's all we're talking about.
8 REPRESENTATIVE WHEATLEY: And I would
9 like to quantify this because you -- and we're speaking
10 in the terms of if we are separated from the citizens we
11 represent, because ultimately all of this goes back to
12 citizens paying for these decisions or lack thereof.
13 And so, what is the cost of us borrowing
14 or getting money from you even if we pay it back?
15 There's a cost, I'm assuming, an additional cost that
16 someone is going to have to pay and I'm assuming that
17 someone will ultimately be the taxpayer. What is that
18 cost?
19 STATE TREASURER REESE: Well, we are
20 charging you a very modest interest rate, as I said
21 .06 percent, which is better -- from our investment, we
22 are making better than if we had it just sitting in a
23 T-bill. We are getting a return that's not egregious,
24 okay, it's not a 5-percent interest rate. It's a modest
25 interest rate because it's cash. We have a lot of cash 26
1 sitting in depository banks and fixed income to allow us
2 to pay bills on an immediate basis.
3 So we are not talking about trying to
4 make outrageous amounts of money, but I think what
5 you're talking about is fiduciary responsibility. I
6 look at this no different than a shareholder meeting and
7 you are representing the citizens of the Commonwealth
8 and I'm giving you a shareholder report. And so what
9 I'm trying to let you know is the status of the
10 operations of the business from a financial standpoint.
11 So we are going to charge you, we're not going to charge
12 you a lot.
13 But I think more importantly, over a
14 decade ago I believe, there were enough assets in the
15 general fund that sort of a surplus where you could pay
16 these ebbs and flows by selling some of our assets and
17 paying. Now we're using financing to pay. So we
18 shifted the paradigm from having positive assets on our
19 balance sheets to be able to pay for our expenses to now
20 that we don't have enough positive assets on our balance
21 sheets that I have to give you a loan on our capital to
22 pay those expenses.
23 And so you just really want to pay
24 attention to that. That's all I'm saying. You want to
25 pay attention to that as you would at home and the fact 27
1 that you constantly have to dig into a home line of
2 credit and you can never get it to zero because you
3 constantly have to borrow against it.
4 REPRESENTATIVE WHEATLEY: And I want to
5 thank you for that response.
6 And thank you, Mr. Chairman, for the
7 time. Thanks.
8 MAJORITY CHAIRMAN ADOLPH: Thank you,
9 Chairman Wheatley.
10 Representative Mark Mustio.
11 REPRESENTATIVE MUSTIO: Thank you.
12 I just wanted to follow up on some of
13 what Representative Wheatley's comments were. And your
14 analogy I thought was well stated.
15 And I wanted to, I guess, talk -- you
16 talked about the confidence in the markets. I think
17 what we have is we want to make sure that there's
18 confidence with the taxpayers, that they have confidence
19 that the decisions that are being made to spend their
20 money are the right ones. And I think that's where we
21 have, right now, a little difference of opinion.
22 This general assembly passed a gas tax.
23 You know, it's not like all Republicans were against
24 raising taxes, right? But there was a sense out
25 there -- at least from my ability to communicate to my 28
1 constituents and certainly outside parties had made it
2 pretty clear that Governor Corbett cut, right? There
3 was a sense that there were cuts being made and bridges
4 needed to be repaired and roads needed to be repaired.
5 But when Governor Wolf was elected, he proposed, you
6 know, an $8 billion tax increase to fill a hole that was
7 maybe 1.4 billion, so that confidence kind of went away.
8 It's like, oh my gosh, there's a spending machine that's
9 coming down the road. So then it becomes our job to
10 make sure that things are being done correctly.
11 And I would like to make the analogy
12 that, perhaps, down the road -- the bridges and the
13 roads are what you just referred to a little earlier --
14 that we're going to be spending some money over here
15 with higher interest rates. I think that's a valid
16 point, but we want to make sure -- I want to make sure
17 for my constituents that we're spending money wisely and
18 we're not just asking them to fork over $8 billion to
19 fill a hole that is a lot less than that.
20 Does that make sense to you? Do you
21 understand where I'm going with the confidence for the
22 taxpayer?
23 STATE TREASURER REESE: Yeah. I think
24 this falls into an often overused word I try to shrug
25 away from, which is, like, financial literacy, right? 29
1 There are -- there are roughly 11,
2 12 million citizens in Pennsylvania. The level of
3 financial acumen, the level of financial security is so
4 varied, is very varied. And when you get into complex
5 matters like this, extremely complex, very important
6 matters, very important, extremely complex -- we just
7 came through the second depression, okay, the great
8 depression in 2008. Okay, it was huge. These are --
9 there is a collective consciousness in Pennsylvania on
10 an individualized basis of people who had to go through
11 a lot to get to where they need to be, to get their
12 mortgage, to get their house in order, okay, and so it
13 causes fear, it causes trepidation.
14 I think what we have to do -- but I'm
15 also a private equity guy. I've built my own business
16 from scratch. I had to do it with my own money. If I
17 didn't make a return, I couldn't pay for college, and I
18 did it for 23 years. And I have -- I had to be bold
19 too, so I'm not just saying fear, I'm saying we have to
20 be bold.
21 I'm not saying -- whatever the number is,
22 I'm saying that we must, as a body, be bold because you
23 have to realize that almost everything that is the
24 financial markets today, not quite, was created after
25 the first depression because you had to be bold. You 30
1 couldn't go back to the horse and buggy, right? So we
2 got to automobiles, we got to transistor radios, we got
3 to landing on the moon. So we also have to make sure
4 that we also don't shrink, do not shrink, let's be bold.
5 So that's my opinion on that matter.
6 REPRESENTATIVE MUSTIO: All right. Thank
7 you.
8 Thank you, Mr. Chairman.
9 MAJORITY CHAIRMAN ADOLPH: Thank you.
10 Representative Kinsey.
11 REPRESENTATIVE KINSEY: Thank you, Mr.
12 Chairman.
13 Welcome again, Mr. Treasurer.
14 You mentioned earlier that you remain
15 independent, objective, and I appreciate you sharing
16 that with us. But the question I have might involve
17 calling upon your investment and business expertise.
18 We've heard repeated warnings from
19 independent rating agencies that the Commonwealth has to
20 address the structural deficit. And we talked about
21 that somewhat yesterday throughout the course of
22 hearings with other departments. And in order to fix
23 the -- or address the structural deficit, you know,
24 there has been debate on the House floor with different
25 ideals. Some of the ideals and some of our opinions 31
1 have been sort of quick fix and gimmicks, which we
2 believe can only make the problem worse.
3 And I guess what I'm asking you is -- and
4 I don't want to say -- I want to use this term, can you
5 give an outside perspective, but you're not the outside
6 any longer, you've been here for eight months. But is
7 there some way that you can give us, again, an
8 independent perspective as it relates to why it's
9 important to get our fiscal house in order and what
10 sustainable matters or consequences will we face if we
11 really don't address that structural deficit that's been
12 looming out there?
13 STATE TREASURER REESE: Well, I think
14 first of all, there's a level of anxiety across
15 everyone, every legislative member, the administration,
16 citizens. When you are not fiscally balanced, if you
17 are financially not whole, you -- first of all, it just
18 gets into you, it bothers you. You're not quite stable.
19 Your decision-makings become challenged. You sort of
20 operate from a view of I don't have it so, you know, let
21 me see how I can affect -- it affects your
22 decision-making. That's the first part about being in
23 that order.
24 The second part about this area is that
25 it's been quite a period of time that we've been in 32
1 this -- from my understanding, that we've been in this
2 issue where we've had this financial concern. Now we
3 all know it started back a couple Governors ago and
4 everyone has said we all share the blame in how it's
5 affected us because the biggest thing is the pension.
6 Unfunded liability is driving a lot of the cost towards
7 the cash that we have going in the general fund having,
8 you know, to pay into the pension liability.
9 It's something that you really want to
10 fix because it'll allow you to look at how we will
11 govern and manage the Commonwealth going forward in the
12 21st century a lot differently to tackle issues that we
13 can't really fully address. Education, health care,
14 infrastructure, I mean, these are critical to every
15 county. I don't know anyone who doesn't want to do the
16 right thing, but you're not in the position. You're now
17 having to make decisions against one -- against each
18 other. And so there's a battle, it creates internal
19 conflict.
20 So when I look at it -- so there are --
21 those are just sort of the very optical things and the
22 things that occur. You want to be whole, you want to be
23 in a situation where you get back to some level of
24 normalcy. The challenge, the real challenge is how can
25 you do it and how soon can you do it and how can you do 33
1 it in a way that allows you to fund the priorities that
2 you need to fund? And that -- I don't have the complete
3 answer, but I do know that without it, you'll
4 consistently be in this situation where you're robbing
5 Peter to pay Paul.
6 REPRESENTATIVE KINSEY: Great. Well
7 thank you for sharing that.
8 Let me switch to another question real
9 quick, investment pools 198 and 99.
10 STATE TREASURER REESE: Yes.
11 REPRESENTATIVE KINSEY: With Investment
12 Pool 99, I believe that's a high investment or high
13 return?
14 STATE TREASURER REESE: No.
15 REPRESENTATIVE KINSEY: Okay. Can you
16 explain?
17 STATE TREASURER REESE: Well, 99 is cash.
18 REPRESENTATIVE KINSEY: 99 is cash.
19 STATE TREASURER REESE: Pool 99 is our
20 cash. It's our ability to pay the bills and we have to
21 keep that in a highly liquidatable state. Pool 198 is
22 cash like, it has to be liquidatable. We try to keep
23 the high liquidatable state, but we can't put it in
24 long-term investments. So we try to get a better return
25 on our cash by sort of using past experience and 34
1 understand how much cash is needed to manage the
2 operations of the state, pay the bills, but then we have
3 some that sits into, that can get a little more of a
4 bump on our cash and that's an effective cash strategy.
5 REPRESENTATIVE KINSEY: Okay, great.
6 Thank you.
7 Thank you, Mr. Chairman.
8 MAJORITY CHAIRMAN ADOLPH: Thank you,
9 Representative.
10 Representative Jim Marshall.
11 REPRESENTATIVE MARSHALL: Thank you, Mr.
12 Chairman.
13 Good morning, Treasurer.
14 Today I'd like to talk about achieving a
15 better life for families that have individuals with
16 disabilities. There is legislation that's in the
17 general assembly currently, Senate Bill 897 and House
18 Bill 1319, which was my legislation that would create an
19 account for families with disabilities.
20 In the process of drafting that
21 legislation, I worked with the Department of Treasury on
22 start-up money. What would that start-up money need to
23 be? And at the time we talked about a number of
24 1.5 million. I believe your budget includes a
25 $4 million request if that legislation were enacted for 35
1 a start-up. Can you give me details on that?
2 STATE TREASURER REESE: I can't give you
3 the full breakdown of it, I don't have that. I'd have to
4 pull it out, I can have someone sort through that now.
5 But in general, what we looked at -- we
6 look at to achieve a better life is putting the full
7 program into place which includes creating a back-office
8 infrastructure, being able to manage it as such as we
9 did on a 529 plan, some personnel -- additional
10 personnel costs around that is included in that number.
11 But I can give you at another point a full breakdown on
12 that 4 million.
13 REPRESENTATIVE MARSHALL: Thank you.
14 Yes. If you could get back to me on
15 that.
16 At some point would that program be fully
17 funded by the individuals that are participating?
18 STATE TREASURER REESE: Well, that's the
19 second point. That's a great question because that's
20 the second part of the equation -- is we're looking at
21 right now -- with ABLE that -- when you look at
22 Pennsylvania and our disabled population, where we've
23 been able to achieve great things with our 529 program
24 to become fully funded, can you become fully -- get to
25 that same actuarial status with ABLE? We haven't 36
1 determined that yet, but we are looking at a possibility
2 of consolidating our back-office operations across
3 multiple states as well so that we can achieve better
4 economies of the scale on those associated costs.
5 REPRESENTATIVE MARSHALL: Okay, thank
6 you.
7 STATE TREASURER REESE: So it's one or
8 the other.
9 REPRESENTATIVE MARSHALL: And if I could
10 follow up on that.
11 There's actually a collision, ABLE
12 collision, and there's so many families with
13 disabilities that are hopeful for this legislation. Do
14 you have plans? Does the department have plans on
15 working with the disability community? And if this
16 legislation does pass, do you think the Department of
17 Treasury would take part in getting the word out about
18 these accounts?
19 STATE TREASURER REESE: Well, that's a
20 great question. First of all, I fully support ABLE. I
21 see the benefits as well and especially to those
22 families who are caregivers and loved ones who are
23 disabled themselves.
24 We have been very outspoken and out on a
25 forefront because our Treasury Department has been on 37
1 the forefront working with the federal legislation
2 around this. So we have developed those networks
3 throughout the Commonwealth with the support and
4 caregiver community and identified those so that when we
5 roll this out, we're going to be highly effective by
6 using that network to support the outreach campaign.
7 REPRESENTATIVE MARSHALL: Okay, thank you
8 very much.
9 I'll look forward to working with you and
10 your department to make sure that this legislation works
11 out for those families.
12 STATE TREASURER REESE: Thank you.
13 REPRESENTATIVE MARSHALL: Thank you.
14 MAJORITY CHAIRMAN ADOLPH: Thank you,
15 Representative.
16 Representative Mike O'Brien.
17 REPRESENTATIVE O'BRIEN: Thank you, Mr.
18 Chairman.
19 And thank you for joining us today,
20 Mr. Secretary. I'm over here in the corner. I like to
21 hide.
22 You know, it seems this morning that this
23 committee has had great interest in two interests and
24 that happens to be the questions that I had wanted to
25 ask you. One dealing with the loans that the Treasury 38
1 has given, and certainly, I think that deserves to be
2 mentioned a second time and the ABLE program. And on
3 both you did a really good job, but you've proven
4 yourself in the private sector and during your time as
5 Treasurer of having a good business expertise and field
6 and you've brought that to Treasury.
7 So as an outside guy, I want you to talk
8 to us about some of the independent ratings on the
9 Commonwealth dealing with how we're dealing with our
10 deficit, how we rely on one-time fixes, and what happens
11 if we fail to get our house in order. What's your
12 perspective on that, sir?
13 STATE TREASURER REESE: Yes. Thank you.
14 You know, it is clearly a problem, it is
15 a problem. You don't want to -- and what I mean is to
16 plug you -- the concept of just a plug, a numerical plug
17 which is what a fix is -- it's a plug, it's to fill a
18 hole. And the idea of -- if you -- finding capital to
19 plug a hole is good if you need it for a one-time
20 experience and you need to say this is how we get
21 through, but it's problematic if that becomes your
22 normal operating process because that -- assuming that
23 is money has to come from somewhere.
24 We gave a great example of how we have to
25 provide a loan to the general fund and I've also given 39
1 you an example of how that loan has grown larger. For
2 example, in 2013 the loan amount was 600,000; in 2014 it
3 was 900,000; in January 2014, 900,000; in
4 September 2014, eight months later, it's 1.5 billion;
5 and 1/6/2016, it's 2 billion.
6 So it's not just that it's getting
7 larger, but you can see the periods and the cycles are
8 collapsing quicker. So it's telling you, it's not
9 just -- I mean, I understand cash flow. I understand if
10 you're selling a company and you have cash flow, you
11 have uneven cash flow because products being sold, cash
12 is coming in at various cycles. That's why we use debt.
13 Debt is an appropriate vehicle for that. But debt is
14 now financing operations, that's the difference.
15 When debt is financing operations, you're
16 not getting growth. You really wanted to use debt for
17 growth. Debt is an appropriate vehicle to grow
18 something, but debt to operate a business is extremely
19 problematic. That's what the market sees, it's
20 transparent. It's here in black and white.
21 So there's no stronger statement that I
22 can make than that. That your cycles, the velocity of
23 the loans are increasing and the magnitude of the loans
24 are increasing -- problematic. And it's not financing
25 growth, it's financing just to pay bills. That's a 40
1 problem.
2 REPRESENTATIVE O'BRIEN: So in short,
3 maxing out the credit card?
4 STATE TREASURER REESE: You're maxing
5 out the credit card and you may need to get a fourth
6 job.
7 REPRESENTATIVE O'BRIEN: Thank you,
8 Mr. Secretary. I appreciate your time today.
9 MAJORITY CHAIRMAN ADOLPH: Thank you,
10 Representative.
11 Representative Sue Helm.
12 REPRESENTATIVE HELM: Thank you.
13 Treasurer Reese -- turn this on.
14 Treasurer Reese, a request was made that
15 all agencies provide the committee with information on
16 cost savings and efficiencies that could be implemented
17 to reduce spending or control spending increases. And
18 we did receive your document shortly before we came down
19 to this meeting --
20 STATE TREASURER REESE: Yes.
21 REPRESENTATIVE HELM: -- and I just
22 wondered since we haven't really had a chance to look
23 through it, if you would talk a little bit about it?
24 STATE TREASURER REESE: Sure. I'll give
25 it to you in the very broad brushstrokes very quickly. 41
1 There are six points here. The first is
2 the cost savings on modernizing our Bureau of Unclaimed
3 Properties publishing requirements. It's a $3 million
4 spend and we think that it relies on it -- it doesn't
5 take into account that we are now in the Internet Age
6 and most people get their information across from the
7 Internet, and that we can get probably even a bigger
8 bang for the buck if we were allowed to advertise in a
9 way that we think is -- allowed to cast the wider tent,
10 to make more people take advantage of going to the
11 Treasury site.
12 Number two, there was something around
13 the P-cards in the fiscal code that said that Treasury
14 would pay the bills and then do the monitoring of
15 payments post -- after the debt was insured on a credit
16 card. We think if there's a change in that, it will
17 allow us to possibly catch a little more savings by
18 allowing us to audit in front of that.
19 Thirdly, fiscal review, right now -- and
20 this gets into -- this third one -- is not necessarily
21 one that I'm saying that we need to own because there
22 are other departments that may want to own this; but
23 nonetheless, fiscal review examines tax returns that
24 have refunds because it's part of our experience, if
25 cash is being paid, we need to look for erroneous 42
1 payments. We think that the same level of due
2 diligence, if you will, could be spent on tax returns
3 that may not have a refund, but they may have some other
4 return basis that's not cash related. So maybe
5 prescreening to see if they have a credit or some other
6 function, maybe looking at that because there maybe some
7 erroneous math in that area as well.
8 Fourth, we think that there's a way to
9 consolidate contracts across one body across the
10 Commonwealth instead of it residing in a silo inside of
11 our department. We have the E-contracts library.
12 There's a cost associated with us managing that. We
13 think it could be better served perhaps under another
14 agency, maybe PennWATCH, where they consolidate and they
15 have the infrastructure. We don't think it's going to
16 cost them more, but again, that's for them to opine, but
17 that would go in and provide some cost savings.
18 Thirdly, it's something that we're asking
19 for in our budget -- excuse me, I said, thirdly. Fifth
20 is something that we've asked for in our budget which is
21 to allow us to modernize the Bureau of Unclaimed
22 Property technology platform. It's going to provide a
23 real value, a real cost savings if you allow us to do
24 that.
25 And sixth is something I've already 43
1 brought up which is the idea of consolidating, where the
2 administration is talking about preliminarily
3 consolidating the investment activities across into
4 maybe more centralized functions to lower cost.
5 So those are six points in that document.
6 REPRESENTATIVE HELM: Well, I appreciate
7 that, definitely will read this document thoroughly.
8 STATE TREASURER REESE: Yes.
9 REPRESENTATIVE HELM: I know you
10 mentioned unclaimed property twice and I know I'm
11 guilty, I've seen my name in the paper twice and I
12 haven't even applied for it. But you said in 2015, we
13 realized 550 million net benefit to the general fund, I
14 just wondered if you had any predictions for future
15 years, what you think we would annualize every year.
16 STATE TREASURER REESE: Yeah. I think
17 the Governor's budget calls for some 290 million or so
18 and another 270 million, which is back to normal. I
19 mean, we had this, as you know, this dormancy period
20 sort of collapse by two years from five to three and
21 that gave us a big bump. It's an artificial bump, don't
22 rely on that money, okay? It was an artificial bump,
23 550 million.
24 Now, I also will tell you as a CEO that
25 that money is actually a liability as much as an asset 44
1 because that 550 million in perpetuity is owed to
2 someone. So people can come back and claim on that
3 550 million. So in reality you should think of that as
4 a zero-sum basis in operations. We get to use it now,
5 but it really is zero sum because it's also a liability.
6
7 REPRESENTATIVE HELM: So for people like
8 me, anyone can claim it, that it's owed to forever?
9 STATE TREASURER REESE: There's no
10 statute of limitation.
11 REPRESENTATIVE HELM: Thank you.
12 And thank you, Mr. Chairman.
13 MAJORITY CHAIRMAN ADOLPH: Thank you,
14 Representative.
15 Representative Dean.
16 REPRESENTATIVE DEAN: Thank you, Mr.
17 Chairman.
18 Good morning and welcome. Thank for your
19 information today. We heard yesterday from both IFO and
20 from Revenue I think two takeaways, that the state is
21 enjoying some small growth in jobs and revenues; and
22 yet, we are facing -- we are in the middle of a
23 structural deficit somewhere in the tune of half a
24 billion dollars which we are forewarned will go to close
25 to $2 billion in the upcoming year and more in the out 45
1 years. And your department, Treasury, has such huge
2 financial, fiscal responsibility for deposits and
3 receipts and safekeeping and fiduciary safekeeping of
4 and investments of our moneys. I guess I'd like to pull
5 the lens back -- for the layman, for people out there,
6 ordinary people like me who don't understand all of
7 this -- and ask you in years past, recent years past
8 what has been Treasury's investment -- money management
9 strategy and maybe compare and contrast that in this
10 abnormal year where we are suffering the budget impasse.
11 What's our investment strategy and how has that changed
12 as a result of being in an eight-month impasse?
13 STATE TREASURER REESE: That is a big
14 question, you're right, and I will try to make it --
15 simplify it, bring it down to --
16 REPRESENTATIVE DEAN: That's what I
17 appreciate.
18 STATE TREASURER REESE: -- it's nothing
19 like talking about what happens at home, right? So
20 everyone can relate to that.
21 So first of all, it's not hard to
22 understand that the marketplace is turbulent, right? At
23 one point at the gas pump, we were paying almost -- we
24 were paying a little over $4 a gallon for gas. Today
25 we're paying below $3 a gallon, all right, somewhere 46
1 it's $1.60, $1.80, depends.
2 That had a net effect because while it's
3 good for the consumer -- that's a good thing, right?
4 Paying less for gas is good, but what it meant is people
5 who had invested in strategies around energy were
6 looking at gas that was over a hundred dollars a barrel,
7 and so they had made financial predictions on that.
8 Likewise over in China, China was buying a lot of things
9 in the world. Anything we made here, our manufacturing
10 in Pennsylvania shipping product to China. China
11 decided that they needed to go through fiscal austerity
12 and they stopped buying, that had another effect on the
13 market.
14 Thirdly, our federal government, our fed,
15 if you had money in the bank -- and this affected our
16 senior citizens, this affected our senior citizens. We
17 were in a zero-interest-rate policy, which meant that if
18 you were on fixed income, you retired, your money
19 sitting in the bank account wasn't making any money. So
20 if you were fortunate enough to have enough assets, to
21 have a banker, they probably were putting your money in
22 the equities market, okay? Well, now the feds started
23 raising the interest rate, that caused a ripple effect.
24 So those are three major events that
25 affected the globe. It affected everyone in America and 47
1 it affected the globe.
2 So when you look at Treasury, I'm a
3 custodian of $104 billion, that includes our two main
4 pension funds. Those are very mature funds, PSERS and
5 SERS, mature. Those are battleships. You cannot turn a
6 battleship on a drop of a dime. It's impossible.
7 Strategies, you just can't go at them -- we can do that
8 with your personal checking account. You can say I want
9 to take all the money out of that checking and put it in
10 savings, but saying that you're going to move
11 $53 billion or you're going to move $27 billion --
12 In Treasury, we manage 17 billion. Move
13 $17 billion overnight, it's not going to happen. It's
14 not even prudent. I would worry about the person who
15 does that.
16 What you need is someone who says, okay,
17 what is the marketplace? We -- you can't just
18 eliminate, we have to make sure and go back and validate
19 our strategies.
20 So what do we do? My CIO, Sandy and I,
21 we talk to our advisers, we talk to our managers, and we
22 check on their strategies. We see what they're doing,
23 we try and look at their money, and see if they're
24 making -- they're doing the appropriate things.
25 We have at TAP, our 529 program -- we 48
1 made money last year. We're one of the few, not many
2 people who made money last year. But I would not tell
3 you because prior to last year, every year we made
4 money, so we have one year where it was difficult.
5 Don't start throwing out the baby with the bathwater.
6 So let's go ahead and look at 2016 and we
7 will slowly make these incremental steps in turning the
8 battleship if required.
9 REPRESENTATIVE DEAN: I appreciate that.
10 And one thing I was thinking about when
11 you spoke about goodwill is the fact that we have failed
12 to pass a budget leaves so many people with
13 unpredictability. I've talked to nonprofit agencies who
14 I think courageously have said to this state as recently
15 as December -- and I think they might renew it -- don't
16 pass piecemeal budgeting, even though we are desperate
17 for funds, what we are more desperate for is
18 predictability. We can't do this year after year, month
19 after month.
20 So I wonder about the notion of both
21 goodwill and predictability and how that's affected. I
22 know you weren't here prior to the budget impasse, but
23 how that's affected your decision-making with cash
24 management and money management.
25 STATE TREASURER REESE: Yes. Well, 49
1 you're right, predictability as much as you can be
2 predictable, correct? Because there's no certainty with
3 predictability. There's only the predictability of what
4 you say you're going to do and those things are
5 happening and then I can make my adjustments or my risk
6 tolerance profiles based on that.
7 REPRESENTATIVE DEAN: Right.
8 STATE TREASURER REESE: Right. So that's
9 what we're talking. If I can a have a central nervous
10 system, which is the predictability, then everything
11 that happens out of that we can then adjust based on the
12 risk profile.
13 Treasury, for example, we have the
14 ability to say how much funding? If we know that we
15 have to, for example, provide a STIP loan to the general
16 fund, then that's going to determine what we're going to
17 do with our cash because we need to know that there's --
18 we know that the magnitude is, you know, 2 billion, so
19 that affects $2 billion worth of cash. That cash has to
20 go out and pay bills. It's not $2 billion we have to,
21 perhaps, put a portion of that in the 198 Fund that has
22 a little more aggressive investment profile.
23 So all these things have an effect and as
24 you get out to the communities and a broader audience,
25 similarly there's an effect. There is the effect of -- 50
1 you're right, if I know I have a check for $100, but I
2 really need $500, you know. I'd rather wait. In some
3 cases, you'd rather wait to know that you have a
4 predictability of $500 a you have for $100. But you do
5 take the $100, right? You do.
6 But I think what they're saying is we'll
7 all go in with you. I think there's a message, there's
8 a core message here that the citizens are saying, we'll
9 go in with you if you solve this. That's why they're --
10 that's me and my opinion. You know, so they have a
11 little -- there's still goodwill with them because
12 they're saying I'll wait, but what we don't want is a
13 half measure because then -- for me going in, I don't
14 get a reward. I don't get a benefit because they don't
15 have -- they might not have a voice, a big enough voice
16 in there, but I think that's what's occurring.
17 And so we have to make sure that we don't
18 get to a point where there's ranker and marches and all
19 that. We really want to be able to solve this before
20 that.
21 REPRESENTATIVE DEAN: I thank you for
22 your observations.
23 Thanks, Mr. Chairman.
24 MAJORITY CHAIRMAN ADOLPH: Thank you,
25 Representative. 51
1 Representative Karen Boback.
2 REPRESENTATIVE BOBACK: Thank you, Mr.
3 Chairman.
4 May I revert back to the unclaimed
5 property? So how do you acquire this property? Is it
6 dormant bank accounts or bank boxes? Like where do you
7 get this from and then acquire and take charge of it?
8 STATE TREASURER REESE: Right. So the
9 way the process to me works is we contact employers and
10 we deal with -- and let them know that if they have any
11 checks, banks, bank deposit box/boxes, things that have
12 been either abandoned or the ownership is not very
13 clear, those are, I think, our two primary ways that we
14 achieve the product.
15 It could be cash, it could be valuables.
16 You could have someone who has passed away, there would
17 be stuff in the house -- we have silverware, for
18 example. We have silverware that's collected, we have
19 jewels, we have coins, we have memorabilia. People can
20 turn that into the state.
21 There's a period where -- April 15th
22 all -- you have to report all sorts of products or
23 assets, if you will. And then our job is the ingesting
24 of that or taking that in and filing it because we have
25 to create a master record. Because -- 52
1 Go ahead.
2 REPRESENTATIVE BOBACK: I'm sorry, sir.
3 STATE TREASURER REESE: No, please.
4 REPRESENTATIVE BOBACK: So for our
5 viewers, when you said it could be left in a home, so
6 how would you get this estate? An unclaimed estate with
7 no beneficiaries?
8 STATE TREASURER REESE: Yes.
9 REPRESENTATIVE BOBACK: And then the
10 state comes in and does acquire this --
11 STATE TREASURER REESE: Yes.
12 REPRESENTATIVE BOBACK: -- and files it
13 and --
14 STATE TREASURER REESE: Yes.
15 REPRESENTATIVE BOBACK: -- waits for next
16 of kin or over the course of three years, if somebody
17 feels their valid and they can and ask for this back?
18 STATE TREASURER REESE: Right.
19 REPRESENTATIVE BOBACK: Which brings me
20 to number two, and this was a question raised in my
21 office. So what if it is jewelry or coins and after
22 three years finally a beneficiary comes forward, but the
23 state already dispersed of that? Because I would
24 imagine you sell it at fair market value?
25 STATE TREASURER REESE: Yes. 53
1 REPRESENTATIVE BOBACK: So they don't get
2 that back, but they would get the value that the state
3 received; is that correct?
4 STATE TREASURER REESE: Yes. So they'll
5 get the dollar value of the -- whatever was sold, so
6 they'll get that in cash back. They don't get an
7 appreciation of it. So if it's in there -- they're not
8 going to get interest on it, they'll get the dollar
9 value back.
10 REPRESENTATIVE BOBACK: Okay. Now, you
11 also mentioned trying to update your databank. And I
12 know that infers through technology, but a lot of my
13 constituents, who are seniors, they don't have access to
14 technology. So when you put it in the paper -- and then
15 many times through our senior expos, we'll have a
16 representative from Treasury there and they will
17 certainly do a search. So please keep that in mind --
18 STATE TREASURER REESE: Yes.
19 REPRESENTATIVE BOBACK: -- because I'm
20 sure many recipients don't have access to, perhaps,
21 technology.
22 STATE TREASURER REESE: Right.
23 REPRESENTATIVE BOBACK: It's -- I guess
24 when I think about it this too, it's somebody else's
25 property. So when you're selling particularly the 54
1 materialistic -- not the monetary, but you're selling
2 heirlooms, do you put it on maybe a site where there
3 would be an auction? Because I can't help but think --
4 I did watch a show on PCN that you were featured on at
5 the Treasury Department. And I thought, you know what,
6 for that particular piece of jewelry, if it went to
7 auction, you probably would get more than if you had
8 somebody come in and appraise it, so just a thought.
9 STATE TREASURER REESE: Yes. Okay.
10 REPRESENTATIVE BOBACK: Just a thought,
11 looking to make more money there.
12 But thank you for taking care of this.
13 And again, keep in mind the seniors --
14 STATE TREASURER REESE: Yes.
15 REPRESENTATIVE BOBACK: -- and every time
16 you publicize papers, you know, that comes to our
17 office -- oh, one last thing, sir.
18 I had a gentleman come to me and say that
19 he found in the paper -- when he called the Treasury
20 Department, it was a little over is a thousand dollars.
21 But he said -- and I was so excited for him -- he said,
22 but I had to jump through so many hoops, they could have
23 it. What kind of hoops? I mean, certainly they have to
24 acknowledge that they are the beneficiary, but what kind
25 of hoops was he referring to? 55
1 STATE TREASURER REESE: Well, it could
2 possibly just be the process to make sure that we are
3 giving the money back. I mean, remember this is, this
4 is a tremendous responsibility on Treasury because we
5 have to ensure the authenticity of the owner. And you
6 know, you can imagine how bad that would be if we were
7 giving the money to someone -- to the wrong recipient.
8 REPRESENTATIVE BOBACK: Sure.
9 STATE TREASURER REESE: And the right
10 recipient then comes in one day and says, oh, yeah, I'm
11 the owner of that and we realize the mistake, so we have
12 to make sure of that.
13 REPRESENTATIVE BOBACK: Death
14 certificates and someone --
15 STATE TREASURER REESE: But at the end of
16 the day, did he get his thousand dollars?
17 REPRESENTATIVE BOBACK: No, he said it
18 was too many hoops and I think it involved a death
19 certificate that he had to acquire. But to me, a
20 thousand dollars, wow, I'm surprised he didn't jump at
21 that opportunity, but -- thank you.
22 Thank you, Mr. Chairman.
23 MAJORITY CHAIRMAN ADOLPH: Thank you,
24 Representative.
25 Representative Schreiber. 56
1 REPRESENTATIVE SCHREIBER: Thank you, Mr.
2 Chairman.
3 And thank you, Treasurer Reese, and your
4 entire team.
5 Yesterday we received a brief snapshot of
6 an economic outlook report from the Independent Fiscal
7 Office and as a follow-up to what Representative Dean
8 had mentioned, there were certainly a lot of reasons to
9 be optimistic as Pennsylvanians. One of the areas that
10 the IFO highlighted was student debt and the growth rate
11 of student debt among graduates with debt has slowed a
12 bit in recent years. However, they did note that
13 Pennsylvania still ranks third nationally in debt per
14 capita among graduates with debt at about just over
15 $33,000.
16 Recognizing there is a whole spectrum of
17 contributing factors and solutions to that, but among
18 the Treasury we have the college savings plan. And I
19 was wondering if you could give a brief overview of
20 that, how it's doing, has it withstood the recession,
21 has it ebbed and flowed, are individuals investing in
22 that again?
23 Are there things that the Treasury could
24 be doing to ensure greater access and awareness, and
25 particularly, access among our low-income families, 57
1 recognizing not a lot of those families have the
2 discretionary income to invest and put that aside in a
3 long-view approach. And then potentially, proactively,
4 are there things that the Treasury could be doing to
5 help our graduates that are entering the workforce and
6 better managing that debt, taking advantage of
7 refinancing or obtaining lower interest rates, things of
8 that nature?
9 STATE TREASURER REESE: Sure. Yeah, a
10 wholistic approach to it.
11 So first of all, the status of the 529
12 program. I mean that is a crown jewel of Pennsylvania,
13 our 529 program and it's recognized in other states by
14 other state treasurers -- because not only that, we
15 manage it, it's a program that's managed internally
16 by -- in our Treasury Department. And if you think
17 about that program, to achieve 111-percent-funded status
18 having only -- but I believe in 2006 or so, being not
19 fully funded, maybe 70-percent funded or so with a
20 $400 million actuarial deficit to now having
21 $174 million surplus if you will, and a 111 percent is
22 outstanding. And it has some core tenets of the
23 program, okay?
24 One of the things I would say is one of
25 the things that makes the program a success is that we 58
1 regularly look at all the state-related and colleges,
2 and universities that are part of Pennsylvania. And we
3 look at what we think are going to be their inflation
4 rates and we need to make sure that our actuarial
5 numbers are above their inflation rates in order to have
6 a viable program. We're also blessed with the fact that
7 we have roughly 200,000 or so members in the 529 program
8 that are contributing. I think we brought in
9 $400 million last year, okay?
10 So if you could look at that, right, we
11 have three legs -- there are three legs and three legs
12 are working because inflation hasn't been -- one of the
13 things that has helped is that the inflation rate among
14 colleges and universities have not been as high as in
15 the past. So that's allowed us to keep a cap on the
16 debt and probably allow for costs to be less burdensome.
17 The second part of your question around
18 getting people to become more aware and participate and
19 then, you know, the economics of it. Again, this is
20 what I was talking about in finance.
21 Finance is so personal. It's really hard
22 to determine what would motivate someone to do
23 something. We know that usually, you know, a positive
24 influence of saying, if you put this money away, you'll
25 have the money in the future. Sometimes it's not enough 59
1 of a trigger, unfortunately, for some people.
2 So we have to continue to highlight the
3 benefits of -- and I think, give more examples of
4 families giving their own testimony of what it meant to
5 have had this money available when they needed to pay
6 for college. Even if it was a tenth or a third or some
7 amount of what it was, that that would be -- there's no
8 more powerful testimonial than families sharing their
9 experiences about what that program meant and remove it
10 from -- because we all know the big numbers, but maybe
11 taking it down to ground zero, that may be an example.
12 And that should resonate, by the way, perhaps across
13 different economic strategic strata.
14 REPRESENTATIVE SCHREIBER: Thank you, Mr.
15 Chairman.
16 Thank you, Treasurer.
17 MAJORITY CHAIRMAN ADOLPH: Thank you,
18 Representative.
19 Representative Marguerite Quinn.
20 REPRESENTATIVE QUINN: Thanks, Mr.
21 Chairman.
22 And Treasurer, thank you very much for
23 being here and having your whole team here.
24 I have to commend you, you hit the ground
25 running and you've done a wonderful job serving the 60
1 Commonwealth. And I liked in the beginning of your
2 testimony that you started out saying, I made it clear,
3 I independently carry out the duties of the Treasury and
4 act in a manner that serves the Commonwealth and its
5 citizens.
6 It's my understanding that from July 1st
7 of 2015 to December 31st, approximately $40 million has
8 been expended through your office. And I understand
9 some of that criteria in making those payments, just to
10 use your words from your testimony, are people showing
11 up for work? If so, they should be paid. If it's
12 lawful and correct then they should be paid.
13 Yesterday, in front of the Senate,
14 Secretary Albright mentioned that as of this Thursday,
15 24th of February, $800 million in unit pay payments will
16 not be going out to school districts. Now, I understand
17 that many school districts will have operating funds
18 through March. There are still some that will not.
19 Where I'm trying -- what I'm trying to ascertain is in
20 school districts like counties, the human services.
21 So the political subdivisions, if they're
22 showing up for work, they should be paid. If it's
23 lawful and correct, it should be paid. So we see that
24 in one line of judgment or discretion for sending out
25 the money, then we see what -- a decision that was just 61
1 made with regard to corrections. Was it a mandate from
2 the feds that we have to pay it?
3 So my question is what is it -- what
4 would it take to get the moneys driven out to our
5 political subdivisions, in particular school districts
6 that, you know, already some of them have interest
7 payments that are, you know, collectively in the
8 millions? Would it -- can the school districts or the
9 political subdivisions send you a bill directly, that if
10 it passes the sniff test and if it passes the federal
11 mandate look that was given by the Governor's counsel
12 with regard to corrections, can you pay it or does it
13 have to come from the Governor's Office directly for the
14 bill?
15 STATE TREASURER REESE: Well, that's one
16 of those things, this is the unfortunate part. I mean,
17 I've been on the record on a couple of occasions from
18 our communications office that my heart goes out. I
19 have my -- I have a son in public school, in high
20 school, and -- but the Treasury Department works within
21 the state government and unfortunately, the public
22 school system is not part of the state government. And
23 so we cannot directly lend money to our school
24 districts. That's something a matter --
25 As you know, we were sued by PDE to not 62
1 make payments to charter schools, I mean so that is a
2 contentious issue, but it's an issue we clearly -- where
3 DOC, legislative, judicial, and other agencies are on
4 our side of our state operations, those are the ones we
5 pay the salary on because they are within our
6 jurisdiction. But the public school district is outside
7 of our jurisdiction.
8 REPRESENTATIVE QUINN: I've never met
9 with you and I apologize for not giving you the courtesy
10 of this, but during the summer, Mr. Craig and I worked
11 together closely on a bill that would actually amend the
12 fiscal code to provide the Treasury Department with the
13 authority to make lines of credit available to political
14 subdivisions under your investment authority. I'd like
15 you to look at that because, you know, the criteria for
16 picking winners and losers -- I think this is one way,
17 legislatively, we could go around it. It's the long
18 way, but it also seems to me that it would take a
19 lawsuit generated to say there are federal and there are
20 state constitutional issues that we are obligated to
21 keep these school districts runnings. And it, you know,
22 it's an embarrassment across the board, not just
23 negating our federal and state constitutional issues,
24 but our moral obligations to the students and to those
25 who are showing up for work and should be paid because 63
1 it's lawful and correct.
2 I respect the job you do. I just -- I'd
3 like to see some of these bills just come on your desk
4 and it seems to me given the independence and the
5 integrity that you've shown in this office, you would
6 have a very difficult decision in front of you. Thank
7 you.
8 MAJORITY CHAIRMAN ADOLPH: Thank you,
9 Representative.
10 Representative Acosta.
11 REPRESENTATIVE ACOSTA: Thank you,
12 Chairman.
13 And welcome and thank you for being here
14 today.
15 I have a quick question in regards to the
16 investments on state funds and disbursements. The
17 Treasury oversees those, you know, those assets and I
18 would like to know -- actually, I have four questions
19 based on that.
20 The first question is what is your
21 assessment of the investment strategy for the general
22 fund, how are these investments performing, and do we
23 have an appropriate risk profile for the operational
24 funds, and lastly, are there any changes you would like
25 to see during your tenure in office? 64
1 STATE TREASURER REESE: Thank you.
2 So the first part is on the general fund,
3 it has to be cash. There is not strategy we can be put
4 to it because this is your checking account that's got
5 to pay the bills. So we have to -- it's got to be
6 highly liquidatable. We cannot go to the marketplace,
7 sell securities, or be in some other long-term
8 investment strategy which could take weeks to unwind if
9 not months to unwind.
10 So on the general fund, we sit in a cash
11 basis. On the other pools, you know, we have the Pool
12 198. That net asset value is about $3.4 billion as of
13 2015, end of 2014. Our TAP net asset value for the GSP
14 portion of our program is about $1.75 billion. And then
15 we have OPEB which is a smaller account we manage. It's
16 200 -- a little over $200 million.
17 The way we have -- under our 198 Pool is
18 we have a target of doing fixed income, so 198 is the
19 one we can take a little more risk, but not too long a
20 risk. We look at a target of having somewhere --
21 anywhere from a 70 -- a little bit below. We can go
22 70-30 ratio of a fixed income and 30 percent in equities
23 or alternatives. That can drop as low -- that can go as
24 high -- 30 percent, go as high as 45 percent; 70 percent
25 can go down to 55. But right now we are roughly at 65
1 about a 70-30 ratio on that, okay?
2 On the TAP program, we roughly have about
3 a 39-percent fixed income and 61-percent equity in
4 alternative investment ratio. And OPEB is smaller and
5 it's sort of across the board, but those are the two big
6 ones. If you look at it from a fourth quarter basis,
7 the returns on the GSP strategy was 3 percent, a little
8 over 3 percent for the fourth quarter; for the full
9 year, 2.75 percent.
10 If you look at our 198, which is,
11 again -- it's got to be more liquidatable, we can do a
12 little more, but it can't be long. You know, we had .71
13 percent fourth quarter return and .64 percent for the
14 full year.
15 So if you look at over three years, the
16 numbers are better because as I've said, 2015 was a
17 difficult year, everything prior to that we had very
18 good gains. So in the most difficult time when those
19 three things I described, oil, China, and fed policy
20 kicked in and sort of destabilized investment strategies
21 across the globe, we were able to get a return on
22 investment.
23 REPRESENTATIVE ACOSTA: That's pretty
24 impressive.
25 STATE TREASURER REESE: Yeah. 66
1 REPRESENTATIVE ACOSTA: What changes
2 would you like to see during your tenure?
3 STATE TREASURER REESE: I am working
4 now -- so first thing I think, I don't have a long time,
5 okay? So to be honest, right, I know that. I'm living
6 my life in six-month increments, that's the strategy I
7 set out in this office because six months is about
8 enough time to determine if you can do something and it
9 makes sense.
10 So we're in my second of my six months,
11 where I'm focused is, one, continually reviewing our
12 investment strategy and structure, meeting with bankers
13 to hear about economic outlook. I like the debate on
14 economic outlook, I have my opinion on economic outlook,
15 so I drive with what is the economic outlook and I'm
16 very concerned about our economic outlook domestically.
17 Secondly is we are in a new -- my premise
18 is that we are in a new era because we came out of a
19 great depression, okay? Your thinking is going to be
20 different. Collectively, we are thinking differently as
21 individuals in America because we'll never forget where
22 we were and how close we were to the brink personally.
23 So now my strategy is looking at how do
24 we broaden our strategies and broaden our investment
25 appetites to make sure that we're looking at the full 67
1 cadre of investment professionals out there who's
2 actually made money in a time where maybe they were the
3 unicorn and now they may be less of a unicorn. That may
4 be the strategy going forward, so I'm looking at those
5 and looking for those now as well.
6 REPRESENTATIVE ACOSTA: Thank you. Thank
7 you for your testimony. Thanks.
8 MAJORITY CHAIRMAN ADOLPH: Thank you,
9 Representative.
10 Representative Keith Greiner.
11 REPRESENTATIVE GREINER: Thank you, Mr.
12 Chairman.
13 I have a quick question. Treasurer,
14 thank you for being here.
15 The Governor -- and I commend him for
16 this -- he had mentioned something concerning investment
17 management operations. Anytime we can possibly save
18 cost for the taxpayers with the structural deficit, I
19 think it's something that's prudent and worthwhile for
20 us to look at. And he had mentioned about the
21 consolidation of the investment management operations to
22 save dollars and to eliminate duplicative contracts with
23 private investment managers.
24 And I guess what I was wondering is -- I
25 mean, that's in his details, but there's no specifics. 68
1 Do you know what he's referring to? Are we going to
2 combine SERS and PSERS? Are we going to eliminate
3 managers to save costs? What's the -- maybe you could
4 provide more detail on that and maybe even provide your
5 thoughts on what you think we can do to save costs.
6 STATE TREASURER REESE: Sure. So what I
7 know is it's very preliminary, I mean, there's not any
8 hard core stuff. But if you look at all the things that
9 go into managing investments, you have back office, you
10 have folks who have to do the reporting of returns, we
11 have advisers that advise us on certain investment
12 strategies -- it could be equity, it could be in real
13 estate, it could be in energy. I mean you have such a
14 broad -- again, being mature funds, you have a broad
15 strategy. And so you have SERS and PSERS and you have
16 the Treasury Department and in some levels there may be
17 some commonality on what we do.
18 So for example, a lot of the cash
19 management, we do a lot of that already. So perhaps
20 because we're able to be effective at cash management,
21 which is one of the things we've shown to be fairly good
22 at, is perhaps that's a way that -- one of the things
23 that could be effectively managed inside of Treasury.
24 Again, this is just an example of that.
25 And you know, where we may not have as 69
1 much exposure, because like I said, a lot of our money
2 has to be available to pay the bills, there's other
3 folks that are doing more long-term strategies and
4 things of that nature around -- in other areas that we
5 may not participate. So it's a matter of that.
6 REPRESENTATIVE GREINER: So just to
7 follow up. It isn't necessarily a consolidation where
8 SERS and PSERS is using similar managers, you know, have
9 the similar strategies, it's probably nothing along
10 those lines or the elimination of certain managers or
11 anything like that. So that's really not the route, at
12 least at this point, that the Governor is looking at.
13 STATE TREASURER REESE: Well, you know,
14 and again I'm not speaking in this portion now, I'm not
15 speaking for the Governor because it's so preliminary,
16 but it is the idea of consolidating and reducing costs,
17 right, so it has to be effective, it needs to be
18 meaningful.
19 But where I'm pointing to,
20 Representative, is I'm pointing to the idea of fiduciary
21 responsibility because each PSERS and SERS has a board
22 and they have fiduciary -- so we just have to be very
23 careful to make sure that we don't interfere, if you
24 will, with that, where we're trying to save money on
25 maybe back-office type things because it could be front 70
1 office. But I just can't make a prediction around that.
2 REPRESENTATIVE GREINER: That's fine. I
3 appreciate the answer.
4 Like I said, I think it's something we as
5 a legislature is going to have to look at when we have
6 this structural deficit and certainly an area that I
7 think we need to focus on.
8 Thank you, Chairman.
9 MAJORITY CHAIRMAN ADOLPH: Thank you,
10 Representative.
11 Representative Daley.
12 REPRESENTATIVE DALEY: Thank you, Mr.
13 Chairman.
14 And thank you, Treasurer Reese.
15 It's been very interesting listening to
16 your explanations today. They've, I think, injected a
17 lot of clarity into a lot of complex issues.
18 I have -- there was a report in the
19 Inquirer today in the business section that budget
20 dispute delays redevelopment projects and it was really
21 talking about the fact that the capital budgets haven't
22 been approved yet, the RCAP money, you know, they're
23 kind of in limbo. And having just met with the
24 developer -- who we put in a RCAP grant for last week --
25 I know that they are delaying decisions. And I'm just 71
1 following up on the comment that you made that debt is
2 now financing operations. It's an inappropriate use of
3 debt, debt should be used for growth.
4 So I recognize that you don't have
5 anything to do with the actual movement of the RCAP
6 funds, but just in your short tenure as the Treasurer,
7 do you have an opinion on those as a vehicle for growth
8 in the Commonwealth?
9 STATE TREASURER REESE: I'm not very
10 familiar with RCAP to be honest. I mean, you're right,
11 my overarching theme around debt and use of debt and
12 this is around capital projects is the same. If you
13 want to be able to maximize the use of our dollars so
14 that there is a return on investment, I mean, I argue --
15 and I'm going a little bit away from your question and
16 I'll come back on it -- but I argue, like I say, that
17 going to work, people going to work is a return on
18 investment because they should be doing the good work
19 that's required for us to run as a government. So --
20 but I don't have anything specific.
21 Are you familiar, Keith, with RCAP?
22 DEPUTY STATE TREASURER WELKS: Chris
23 probably is --
24 MR. CRAIG: As the Treasurer said, excuse
25 me, we're not involved in the selection or promotion of 72
1 individual projects.
2 What Treasury is, under the fiscal code,
3 required to do is to sign off on new debt to pay for
4 ongoing projects. And at this point, you know,
5 internally we haven't been presented by that request to
6 issue new debt from the Governor, but there's a lot of
7 concern about the current environment in which we would
8 be issuing debt and the uncertainty as to our ability to
9 pay it without, you know, a consistent, regular budget.
10 So the concern that you have about
11 budgetary irregularities or impasses impacting those
12 kind of projects in the city of Philadelphia or
13 elsewhere will probably continue until there's some sort
14 of, I guess, complete resolution to the budgetary
15 concerns.
16 REPRESENTATIVE DALEY: And I'm not
17 suggesting that in any way that the Treasury should move
18 forward with anything, I recognize that completely. It
19 was just interesting to read this and I just linked it
20 up with your comment because the redevelopment funds, I
21 think, actually do promote growth in our areas.
22 STATE TREASURER REESE: Right.
23 REPRESENTATIVE DALEY: And it's just
24 another thing that's being held up.
25 So I do appreciate your comments today. 73
1 Thanks.
2 MAJORITY CHAIRMAN ADOLPH: Thank you,
3 Representative.
4 Representative Gary Day.
5 REPRESENTATIVE DAY: Thank you, Mr.
6 Chairman.
7 Thank you for being here and answering
8 all of our questions. I really appreciate it.
9 I'm very grateful to have talented people
10 like yourself working for the Commonwealth and sworn to
11 uphold our Constitution, you know, and I wish I could
12 talk to you about risk evaluation and all the components
13 of being Treasurer, wonderful things you're probably
14 doing for us. However, I -- we have a short amount of
15 time during these hearings and I have to ask the
16 questions that are most important to me and the people I
17 represent.
18 You know, the legislature is supposed to
19 authorize and then the Governor is supposed to spend
20 those authorized dollars, and that didn't happen, as you
21 know and you've talked about earlier. We, the
22 legislature, passed a budget the way our constitutional
23 authority has it set up to do and the Governor vetoed
24 away the money, turned back some dollars. He had also
25 proposed that he wanted to suspend more. So we had 74
1 dollars that were authorized that he wanted to spend
2 that he turned back, we also had dollars that he didn't
3 get authorization for that he wanted to spend. Then he
4 came to you and asked you for a loan.
5 Earlier you said a statement and I agree
6 with the statement so I want to say it again. All
7 employees that come to work -- it's really under federal
8 law that they must be paid. And it is something I
9 learned early in my career when Wage and Hour paid us a
10 visit because we had a mistake on time cards at the
11 company that I was the office manager for.
12 You know, my question comes down to this,
13 I think it's a constitutional problem and I wonder --
14 you know, you said -- and I follow you legally and I
15 think you're okay legally. I'm not going to ask you
16 your thoughts, but I wonder how you feel about being put
17 into this position. That's not my question.
18 My question is this, the Governor's
19 authority -- if he would double the number of workforce,
20 the state employees -- if he would go out there and just
21 say, let's hire. For every person we have, let's double
22 it. Would you consider that a risky loan to give him
23 the money to pay those people?
24 STATE TREASURER REESE: So the
25 hypothetical, if you increase the expenses -- but let 75
1 me, can I add just to make sure I understand? If you
2 increase the expenses during an impasse, you're saying,
3 do you think that is -- so there's two parts. One is, I
4 think, about can that really happen? I'm not sure if
5 that can really happen during an impasse. Would you go
6 out and add more employees to your payrolls during an
7 impasse because that would really be not prudent,
8 fiscally irresponsible.
9 So luckily we didn't have that, but I
10 think that would be irresponsible if someone did that.
11 What we had is a current set of
12 employees, you know, who are showing up and going to
13 work in all branches of the government. And you know,
14 we pay -- we look for lawful and correct in terms of the
15 payment. And again, as Keith says, we don't originate
16 the bills. I mean, our job -- we don't originate the
17 payment or invoices. We don't originate. We don't even
18 dictate the payment dates, those are given to us.
19 Now, we will -- in our responsibilities,
20 there could be a delay based on payment dates because if
21 we believe that, under fiscal review, we're taking the
22 appropriate measures to determine if these are erroneous
23 payments. And we said, we blocked about $4 million
24 worth of payments during the impasse. So we took it
25 very seriously, so I understand your question. 76
1 REPRESENTATIVE DAY: And I want to let
2 you off. I don't need to let you swing on that hook too
3 long. That's not fair to do, that's not the kind of
4 person I am.
5 But the point I'm trying to make is, when
6 the Governor made the decision to have authorized
7 dollars and vetoed that, he basically made a decision to
8 send those workers home. That's the constitutional
9 decision that he made.
10 Then he came to you and he asked you for
11 a loan, so I don't have to do it. Personally,
12 personally I'm glad that functionally it happened that
13 way and that you covered the Governor's horrendous
14 financial mistake. I mean, because I think that could
15 have injured the Commonwealth and all those employees
16 that you're concerned about, but I don't know that you
17 have the constitutional authority to make a decision
18 based on that. I think that's the Governor's choice, I
19 think that's our choice when we budget.
20 And I worry for you. I think you're an
21 outstanding individual. I really do want to talk to you
22 about the other great things that the Treasurer can do
23 for the Commonwealth, but in a five-minute question and
24 answer -- this is egregious. My hypothetical question,
25 I appreciate you attempting to answer that. I really 77
1 do. I wouldn't expect you to have to answer that
2 question, but I appreciate that you did because that's
3 what happens. When the Governor turned back that money,
4 that's the way I look at it.
5 I spend a lot of time being a State
6 Representative. I take my job very seriously as well as
7 all my colleagues on both sides of the aisle. And I
8 think it is a constitutional crisis what's happening
9 because, you know, I guess as we get older, we have a
10 lot of experiences and I've had a lot of experiences
11 that when little steps are made, larger ones follow
12 afterwards. And I don't know that the Governor -- if
13 you do this, I'm looking at what is -- my question is
14 what your responsibility is. Someone came to me and
15 asked me to lend money to them and you assess the risk.
16 So I'm asking you -- my next question
17 after that -- if you could answer that -- I would hope
18 you would say, no, that's too risky because I watch the
19 legislature and I don't believe that they want to double
20 the workforce, so I would go to the Governor and say
21 that's too much. I hope that was your answer, not that
22 I knew the answer, I like to ask the question. But I
23 hope that was the answer.
24 Then I was going to ask you, where is
25 that line then? When do you decide and is it your 78
1 constitutional authority to decide which workers should
2 be loaned -- you know, the Governor should loan -- you
3 should loan money to the Governor to give them money to
4 pay those workers.
5 Go ahead.
6 STATE TREASURER REESE: So I think
7 it's -- I think the line of reasoning, questioning -- I
8 understand where you're going, but I think it's slightly
9 different than what I'm saying.
10 So what I'm saying is I don't factor in
11 the budget, nor the legislation -- legislative
12 discussions with the Governor. I have not shown up to
13 one meeting around the budget. I have not asked one
14 opinion on the budget, nor is it my opinion to give.
15 And I think it's because in the Constitution, on
16 Treasury, why they separated the financial safeguarding
17 of moneys from the other bodies of government is because
18 they want someone who's blind to that process and says
19 on the face value of what I'm looking at, is this lawful
20 and correct? Not on the opinions, but on the face
21 value.
22 So I don't wake up and tell people to go
23 to work. They were at work. I mean, it's not like -- I
24 mean, if I were -- if the Governor -- if the Treasurer
25 was part of the process constitutionally and in the 79
1 room, then those are discussions you would have about
2 workers and things because that would naturally be what
3 the Treasury would be talking about, what I have to pay
4 the bills for, but that's not how it was.
5 REPRESENTATIVE DAY: So do you make a
6 loan decision? Is that what you do, you decide if the
7 person coming to you -- risk assessment of how much --
8 STATE TREASURER REESE: Yes.
9 REPRESENTATIVE DAY: -- is that correct?
10 STATE TREASURER REESE: You have to, you
11 know, there's two parts. There is a -- yes. You have
12 to assess the situation as it was.
13 So what it was is people are at work and
14 there was -- and by the way, you were in a budget
15 impasse. You weren't at a point where you stopped the
16 budget negotiations. You were actively working across
17 government trying to reach a decision, so you were
18 working.
19 REPRESENTATIVE DAY: So your decision --
20 when I think about the times when I was an applicant for
21 a loan or whether I was loaning out money, either side
22 of that equation, the person loaning the money looks at
23 what is the asset to back up -- to pay back the dollars,
24 right?
25 STATE TREASURER REESE: Okay. 80
1 REPRESENTATIVE DAY: So what is the asset
2 to pay back the dollars? How do you look at that?
3 STATE TREASURER REESE: The general fund
4 because we manage the money, so we see the money is
5 there.
6 REPRESENTATIVE DAY: So -- and let me
7 just reframe this. We have existing structural revenue,
8 taxes that are coming in, piling up in an account,
9 that's the general fund, right? That's what you're
10 talking about? And then we have a Constitution that
11 says that that money can be distributed by the
12 legislature line by line like this. Then within that
13 spreadsheet, those line items, within that the Governor
14 then has constitutional authority to spend within those
15 line items as he sees fit. That's the balance. The
16 balance is we can't say exactly what every dollar is
17 going to be, but our authority is we can say it's going
18 to be $10,000 or $100,000.
19 Is that right? Is that the way you
20 understand --
21 STATE TREASURER REESE: For the Treasury,
22 yeah. For your governments, for the legislative, and
23 the administration, yes. Okay.
24 REPRESENTATIVE DAY: So when the
25 administration comes to you for a loan, normally what 81
1 would happen is normally, the normal loan for you guys
2 is, the administration comes to you and says we've
3 collected moneys for this account, we don't have moneys
4 in another account, can we borrow from one because it
5 comes in earlier for one use; is that right? And then
6 you can loan between -- that happens during the year?
7 STATE TREASURER REESE: Well, I think the
8 overarching thing is not where the money comes from and
9 how it's compiled, it's the fact that people went to
10 work and we paid their salary. I mean, that's the only
11 thing that he did so --
12 REPRESENTATIVE DAY: Okay. All right.
13 And I appreciate it. This isn't easy and I apologize
14 and I appreciate your attempts to walk down this path
15 with me.
16 I'll ask you one more time if the
17 Governor would increase his workforce by a factor of one
18 to one, 100 percent, would you then think that that is a
19 good loan to loan him enough money to pay him the next
20 month of that double workforce?
21 STATE TREASURER REESE: I think in that
22 example, again, the way I process that question is that
23 it would have to go through a lot of other things to get
24 to that point because it would have to go through
25 legislative -- I mean, if you saw -- if we doubled our 82
1 workforce in a period where we have a structural
2 deficit, I mean, I, as a treasurer, before it even got
3 to Treasury's desk, I think there would be a lot of
4 other ranker before we even did that.
5 REPRESENTATIVE DAY: Thanks for your
6 answer. I appreciate it and I look forward to working
7 with you.
8 Thank you, Mr. Chairman.
9 STATE TREASURER REESE: Thank you.
10 MAJORITY CHAIRMAN ADOLPH: Thank you.
11 We have the Auditor General coming in at
12 11:30, we have four more questions.
13 You know, the Chair has given a little
14 latitude on the questions and the time. We like to keep
15 it within five minutes, if we keep it within five
16 minutes, we'll be on time. Thank you.
17 Representative Bradford.
18 REPRESENTATIVE BRADFORD: Thank you,
19 Chairman Adolph.
20 And thank you, Treasurer, for trying to
21 bring some clarity to the issue. One of the issues that
22 seems to keep being bandied around is the idea of why
23 did your office fund prisons and why did you make those
24 payments? Can you just succinctly explain why or what
25 would happen if you didn't pay to fund our prisons? 83
1 STATE TREASURER REESE: Well, let's
2 just -- there is two parts to that question on
3 Department of Corrections.
4 The first part is in the Governor's
5 budget there was a line-item veto that was reduced.
6 There was money to pay the back bills of the Department
7 of Corrections. So there -- they got money just like
8 the money was let to PDE and then the school districts
9 to catch up, that was money. Now going forward, the
10 Department of Corrections have a situation where their
11 employees are continually showing up for work --
12 REPRESENTATIVE BRADFORD: Right. So
13 Treasury --
14 STATE TREASURER REESE: -- and so that's
15 different. Those payments are different.
16 REPRESENTATIVE BRADFORD: Right. So it
17 would be fair to say, Treasurer, that we paid people who
18 continue to go to work because there's a court ruling
19 that now says if you come to work, you must get paid.
20 And because there was payments that weren't made in the
21 past up to the point of 10A coming to pass, that there
22 were debts owed to Department of Corrections that were
23 made whole.
24 If we didn't pay, our prisons would shut
25 down. I guess what we continue to find hard to believe 84
1 because there is this hue and cry that keeps going on
2 and on is the legislature and the Governor have
3 completely failed and abdicated its role to pass an
4 on-time budget. We have not done that. It is a
5 disgrace, it is embarrassing, and the idea that we're
6 trying to put the Treasurer's Office in the position of
7 making balls and strikes calls --
8 This is of the creation of a legislature
9 that's leadership has failed to come to terms with its
10 constitutional job. We have an obligation. We have not
11 been able to come to an agreement with the Governor, we
12 can fight that fight, we can have commercials, we can
13 have a political fight, we can call each other names and
14 such, but at the end of the day, if we don't pass a
15 budget and we don't pay the bills, you, unfortunately,
16 will be left to pick up the mess. Is that a fair
17 assessment of what's going on right now?
18 STATE TREASURER REESE: I think that's
19 what we have characterized it, that we didn't make this
20 decision, it was left to us. And making these decisions
21 the best we can.
22 REPRESENTATIVE BRADFORD: We appreciate
23 you trying to do your constitutional obligation. There
24 are some of us who recognize that we have a financial
25 problem that we need to deal with and we need to get 85
1 responsible.
2 I've never seen a time where we spend
3 such an inordinate amount of time trying to figure out
4 what the ramifications of dealing with our own failure
5 to do our constitutional responsibility. We're talking
6 about what should we do about default budgets if a
7 budget isn't passed on time. My suggestion might be
8 maybe we should spend a little more time not going
9 through all of the what ifs and how ifs, but what about
10 us getting back to December 23rd, when there was a
11 chance to pass a budget that the Governor would sign,
12 which would fully fund the operations of the
13 Commonwealth.
14 I think it's absurd that we continue to
15 have this theater that serves no purpose to fund our
16 government. But it is an absurdity and there seems to
17 be a complete unwillingness to take ownership of the
18 mess that the leadership of the legislature has created
19 because it won't deal in good faith with the Governor or
20 vice versa. They can argue that all day long, but
21 putting the Treasurer's Office in this position is
22 just -- it's an absurdity.
23 So I apologize that you're put in this
24 position. I thank you for doing the best you can under
25 a very difficult situation. So thank you for the job 86
1 you're doing, Treasurer.
2 STATE TREASURER REESE: Thank you.
3 MAJORITY CHAIRMAN ADOLPH: Representative
4 Seth Grove.
5 REPRESENTATIVE GROVE: Thank you, Mr.
6 Chairman.
7 Treasurer Reese, thank you for coming
8 before us. And I applaud your staff, they've been great
9 to work with, answering questions through a very, very
10 tough time, so I appreciated Christopher and Keith and
11 all their work and openness and help along the way.
12 First, Federal Labor Standards Acts,
13 there's some exceptions to that act. Can you just give
14 us what those exceptions are to the Federal Labor
15 Standards Act?
16 STATE TREASURER REESE: I think it's best
17 for my counsel.
18 REPRESENTATIVE GROVE: Go ahead, yeah.
19 STATE TREASURER REESE: So, Christopher?
20 MR. CRAIG: As the statute provides,
21 exceptions involve individuals that are elected to
22 offices, individuals that are the personal staff of
23 electors, and legislative librarians were carved out --
24 I mean, are covered, but everybody else in the
25 legislature is not, and people that give legal advice to 87
1 elected officials. That's a summary.
2 REPRESENTATIVE GROVE: That's it for the
3 exceptions?
4 MR. CRAIG: I'm not telling you that's
5 definitive, but those are the big exceptions.
6 REPRESENTATIVE GROVE: When the
7 administration sent you payments during the impasse, did
8 they use a broad definition of employees or did they
9 also cover what those exceptions would be to Federal
10 Labor Standards Act? What did --
11 MR. CRAIG: When we met with staff of the
12 administration, we came to the conclusion that while
13 there were employees that would not be covered by Fair
14 Labor Standards Act, there was other legal authority
15 upon which to pay those noncovered employees.
16 REPRESENTATIVE GROVE: Okay. At some
17 point can you provide the committee those standards that
18 were set up during that time frame so we know?
19 MR. CRAIG: I can. What we have is a
20 legal memorandum delineating those legal authorities
21 that was written within the context of paying the
22 general assembly, staff, and members.
23 REPRESENTATIVE GROVE: Okay.
24 MR. CRAIG: I can, if I have not
25 otherwise done so, I will provide that copy. 88
1 REPRESENTATIVE GROVE: Okay. I wasn't
2 sure if it was -- I was looking more broad-based with
3 the overall administration, not just what transpired
4 between the general assembly and the Treasury.
5 MR. CRAIG: It would be applicable to the
6 executive and the judicial branches.
7 REPRESENTATIVE GROVE: Okay. Under the
8 gasoline taxes and motor licensing fund restricted
9 account in the Constitution, there is a provision that
10 allows borrowing from that fund and that limitation is
11 one year -- and I want to make sure I read it right --
12 no loan shall be made within the period of one year from
13 any proceeding loan.
14 There is a large amount of impasse
15 spending that was pulled from the motor licensing fund.
16 If an impasse happens again, are those same loans
17 available from the motor licensing fund based on that
18 provision or are there going to be another pool of money
19 that the administration will have to look for, the
20 Budget Secretary will have to request from the
21 Treasurer's Office to find where that money goes?
22 STATE TREASURER REESE: I think you're
23 talking -- it's up to -- Representative, it's up to
24 the -- where we draw the funds to be able to pay in to
25 make those loans. 89
1 I can get more brief to how we -- the
2 process that we take to identify the sources and how we
3 provide the money for those loans.
4 REPRESENTATIVE GROVE: I know there was a
5 memorandum from the Budget Secretary to the Treasury
6 outlining where they wanted everything paid. I wasn't
7 sure if at what point does that provision kick in, was
8 it from the initiating date of the loan, when it was
9 fully executed, what time frame? You probably don't
10 have an answer now, so please feel free to get back to
11 me on that one.
12 With corrections, the general counsel
13 sent a memo outlining the constitutional arguments to
14 pay corrections during an impasse and they are rooted in
15 the Supremacy Clause of the United States Constitution
16 ensuring that prisoners meet health and safety
17 requirements. Obviously, they need to have maintenance
18 moving forward.
19 Now, since the Governor is declaring that
20 the correction budget is constitutionally protected, is
21 it possible to even veto that line item any further?
22 Can the Governor do a full veto or a partial veto of a
23 constitutionally protected line item that the
24 administration is making?
25 STATE TREASURER REESE: That's a legal 90
1 question and constitutional question.
2 MR. CRAIG: In theory, he could
3 completely eliminate the Department of Corrections so
4 long as there was an alternative way of feeding,
5 housing, sheltering, and caring for inmates and
6 protecting the general population from those that have
7 been deemed dangerous.
8 The current veto as it takes effect now
9 puts Treasury in the position of ensuring that those
10 operating expenses that we may pay for are strictly
11 related to those services that are critically necessary
12 and that would not otherwise cover services or costs
13 that were deferrable or otherwise discretionary.
14 REPRESENTATIVE GROVE: I get that and I
15 understand that. But wouldn't that make the Governor's
16 veto null and void? I mean, it almost seems like he
17 overrode his veto by having it paid for and I get the
18 reasons why he was paying for it, but if you know it's
19 constitutionally protected, why go through the process
20 of making that veto to begin with? And it provides that
21 in the Constitution, like who can override that veto?
22 It seems like he literally overrode his own veto.
23 MR. CRAIG: I understand that concern. I
24 would just suggest that it's not Treasury's role to
25 determine the wisdom of the veto, we just deal with the 91
1 aftermath.
2 REPRESENTATIVE GROVE: Let's say the
3 administration would ask you to make a payment to school
4 districts. We just saw that Steelton tried to -- is
5 looking at trying to get bondings to get through it.
6 Let's say they're looking at closing down. They have
7 federal mandates they need to abide by. They have to
8 provide for school lunch, they have to provide for
9 special education, there are a lot of federal guidelines
10 that base school districts have to abide by.
11 If the administration sent a request for
12 payment for basic education funding for those school
13 districts, so they don't close down to meet those
14 federal guidelines, is that criteria to make payments
15 for school districts? And I -- listen, I get we're in a
16 tough spot, but these are legitimate concerns that may
17 or may not be coming up.
18 STATE TREASURER REESE: Right. Now, I
19 had brought -- I was thinking this. Thank you,
20 Christopher.
21 That's where the lawsuit is right now
22 regarding school district payments because we were sued
23 to not make any payments until the ruling.
24 REPRESENTATIVE GROVE: Okay. All right.
25 I appreciate that. And again, there's a lot of gray 92
1 area, you know.
2 There's a lot of questions of what is a
3 veto anymore. Is the Governor overriding his veto, when
4 obviously, there was no movement from the general
5 assembly to override a veto? And I understand you're in
6 a very, very tough predicament of making some tough
7 calls. And a lot of it, I think, has to come on from
8 what the administration is demanding the decisions that
9 you make, which I think is very unfair to you and your
10 staff moving forward.
11 Generally over the impasse, the
12 administration -- I think it was just reported in the
13 news recently, that the administration has spent roughly
14 about $50 billion -- now that's federal, state dollars,
15 all in -- for this half of the year. During that same
16 time frame or for the entire fiscal year that Governor
17 Corbett was in office, he spent about $99 billion all in
18 '14-'15.
19 Is there a risk based on that half a year
20 spending that we exceed Governor Corbett's spending,
21 even without certain line items not being funded? And
22 at what point does Treasury look at kind of drawing the
23 line on -- you're exceeding your appropriations' limits?
24 STATE TREASURER REESE: I think that's a
25 question that I would look at and say what portion of 93
1 our spend is related to salaries, benefits -- I mean,
2 that's a huge portion of our dollar spend. And that's
3 why you see such a high number -- is that when you pay
4 salaries, benefits, and other related items, it's not
5 uncommon for that to be 60, 70 percent of your payroll,
6 if you will and so that's a huge spend.
7 What would the total -- what would be the
8 final amount? I don't know. But as you have seen a
9 large amount of that 40 billion is -- 44 is really
10 federal and other related special, one-time payments
11 that had to be made.
12 REPRESENTATIVE GROVE: When -- who's in
13 charge of reconciling the impasse payments, the loans
14 from motor licensing fund, any kind of waiver money
15 coming out is that the Budget Office or is that the
16 Treasury who unwinds that money within each department's
17 appropriation?
18 STATE TREASURER REESE: I would believe
19 that would be a combination of both because the Budget
20 Office is the one that tells us what needs to be paid
21 and we review the payments.
22 REPRESENTATIVE GROVE: Has the Budget
23 Office asked you to reconcile those payments as of yet,
24 are you aware?
25 DEPUTY STATE TREASURER WELKS: As the 94
1 Treasurer said, it's a mix. We wouldn't do the
2 reconciling, that's not our job.
3 REPRESENTATIVE GROVE: Okay.
4 DEPUTY STATE TREASURER WELKS: The Office
5 of Budget proposes a variety of expenditure adjustments,
6 journal entries, and other general ledger kinds of
7 activities in order to reconcile back what are called
8 ledger five expenditures once the general appropriation
9 budget is passed. We review those when they're
10 proposed, but we do not originate the reconciliation
11 activity. That's part of the fiscal review lawful and
12 correct process.
13 REPRESENTATIVE GROVE: Correct.
14 And then with the purchase cards, that
15 law change was taken away and I think you hit that
16 earlier that you see the aftermath of the payments.
17 It's really up to the administration to kind of, at this
18 point, self-police.
19 And just for the general public, the
20 purchase card is a credit card each department has and
21 they're supposed to use it for toilet paper, pens,
22 pencils, those kind of issues. Is there any limitations
23 on the purchase cards for use at all?
24 DEPUTY STATE TREASURER WELKS: Yes.
25 Yeah, the purchase card is, in fact, regulated by a 95
1 policy that the office of administration establishes.
2 It is, in general, purchase cards are to be used for
3 certain kinds of purchases where it is more efficient to
4 pay through that mechanism than through a traditional
5 purchase order or field limit of request or things of
6 that sort. There are also, obviously, credit limits
7 that are associated with the purchase card.
8 REPRESENTATIVE GROVE: When the
9 administration sends over payment requests, do they send
10 over analysis of where they are at on within those
11 appropriations? Let's say the administration or we
12 appropriated within a budget a million dollars for a
13 line item. Does the administration come back and say
14 we've spent $900,000, this is what we spent it on, we
15 still have a hundred thousand dollars left, and here's
16 the payment; do they supply where they're at on the
17 appropriations for that?
18 DEPUTY STATE TREASURER WELKS: We're
19 tracking that on our own.
20 REPRESENTATIVE GROVE: Okay.
21 DEPUTY STATE TREASURER WELKS: We think
22 of ourselves as the book of records for those kinds of
23 things. So we're maintaining a status of appropriations
24 on an instantaneous basis. In fact, at this point the
25 Treasury website, I believe, has daily postings of the 96
1 status of appropriations, so anyone can confirm how much
2 money has been charged back against an appropriation at
3 any point.
4 REPRESENTATIVE GROVE: If the department
5 sends in an overage, what happens? Is that denied? Do
6 they run it for as a deficit for next budget year? How
7 is that reconciled?
8 DEPUTY STATE TREASURER WELKS: If they
9 propose debiting against an appropriation whose funds
10 have been completely exhausted, the payment is blocked.
11 REPRESENTATIVE GROVE: Okay. So they
12 can't make those payments.
13 If it's for personnel, it would fall
14 under salaries and benefits, Federal Labor Standards
15 Act. So if the Governor would enter into a contract
16 with state employees and that contract exceeded the
17 amount that's appropriated by the general assembly, it
18 would literally add to the structure deficit because
19 money wouldn't be available, we would still have to pay
20 that money out.
21 DEPUTY STATE TREASURER WELKS: I'm not
22 sure that I agree that that constitutes a structural
23 deficit, that constitutes an expenditure that exceeds
24 the appropriation for that particular line, but it is,
25 in fact -- if it's a Fair Labor Standards Act situation 97
1 or other federally mandated payment, it is a payment
2 that we would nonetheless make. That's correct.
3 REPRESENTATIVE GROVE: Okay.
4 DEPUTY STATE TREASURER WELKS: I mean,
5 again, just to go back to what the Treasurer said
6 multiple times, we need a demonstration that the payment
7 appears to be lawful and correct. There certainly are
8 some that are recurring and we understand what the legal
9 rationale is. When we encounter something that we have
10 not seen before, we ask for both legal and other
11 practical supporting justifications.
12 REPRESENTATIVE GROVE: Okay. Thank you,
13 Mr. Chairman.
14 Again, thank you for being that
15 independent voice. Thank you.
16 MAJORITY CHAIRMAN ADOLPH: Thank you.
17 Representative Warren Kampf.
18 REPRESENTATIVE KAMPF: Good afternoon, I
19 think -- maybe it's good morning, still.
20 Good morning, Mr. Treasurer.
21 DEPUTY STATE TREASURER WELKS: Seems like
22 that.
23 REPRESENTATIVE KAMPF: You made some
24 statements about the cash flow situation dictating
25 intergovernmental loans, essentially loaning money to 98
1 the Governor or the government out of the Treasury and
2 actually going out into the markets. And I'm curious
3 whether you've gone back and looked at the
4 Commonwealth's history of cash flow borrowing, you know,
5 over the -- say the last couple of decades.
6 STATE TREASURER REESE: Yes. As I recite
7 here, I can -- I won't go through too much of the
8 detail, but I'll just give you numerical values.
9 And so, if you go back, I started in
10 December 13, 2013, at 600,000. If you go back to
11 October 12, 2010, it was a million -- a million dollars.
12 REPRESENTATIVE KAMPF: No, a billion.
13 STATE TREASURER REESE: A billion
14 dollars, excuse me, and then there was --
15 REPRESENTATIVE KAMPF: So what year
16 that --
17 STATE TREASURER REESE: Back in '09, it
18 was --
19 REPRESENTATIVE KAMPF: What year was
20 that? I'm sorry.
21 STATE TREASURER REESE: -- 800,000.
22 REPRESENTATIVE KAMPF: What year was that
23 billion dollars borrowed?
24 STATE TREASURER REESE: That was 2010.
25 REPRESENTATIVE KAMPF: 2010, okay. 99
1 STATE TREASURER REESE: Okay. And before
2 that it was 800 million and December --
3 REPRESENTATIVE KAMPF: That was 09?
4 STATE TREASURER REESE: '09.
5 REPRESENTATIVE KAMPF: Okay.
6 STATE TREASURER REESE: So you have the
7 same numbers. So as you can see, as you got out of the
8 fiscal -- the 2008 is where the loan, the magnitude of
9 the loan really became larger, after 08.
10 REPRESENTATIVE KAMPF: And, Treasurer, is
11 it not the case that sometimes the Commonwealth or other
12 large entities do cash flow borrowing? For example,
13 back in the 1990s, did the State of Pennsylvania do
14 substantial tax anticipation of borrowing?
15 STATE TREASURER REESE: I'm not familiar
16 with the TANS that were done, but yes. You did do
17 borrowing, but it all seemed -- stayed in the same
18 range.
19 REPRESENTATIVE KAMPF: So TANS, for --
20 TANS are tax anticipation notes, so that's a cash flow
21 concept, right?
22 STATE TREASURER REESE: Right.
23 REPRESENTATIVE KAMPF: You borrow in
24 order to make it to the point where the taxes come in.
25 STATE TREASURER REESE: Right. 100
1 REPRESENTATIVE KAMPF: So just as an
2 example -- I mean, I have the records interestingly
3 going back to the 1960s. And apparently something like
4 60 times the Commonwealth has gone out and done tax
5 anticipation notes. And in 1990, 1991, '92, '93, '94,
6 '95, '96, '97, the Commonwealth in tax anticipations
7 notes borrowed 405 million, 495 million, 475 million,
8 430 million, 1 billion, 450 million, 600 million,
9 375 million, 400 million, 600 million, 500 million, 550
10 million, and 225 million.
11 STATE TREASURER REESE: Right.
12 REPRESENTATIVE KAMPF: Based on that
13 record, would you agree with me that in the past there
14 have been times when the Commonwealth has done cash flow
15 borrowing?
16 STATE TREASURER REESE: Yes. As noted,
17 there is the time when it is done. My example was a
18 little different.
19 In the ones I talked about after '08
20 which is that your velocity of your loans and your
21 magnitude of your loans are increasing. The numbers you
22 gave were within the same or similar range that said
23 that it was sort of short-term borrowing because you had
24 the revenues. These now show that even your revenues,
25 somewhere the magnitude of your loan amounts are 101
1 different than your revenue amounts because the size of
2 the amount of loans are increasing.
3 REPRESENTATIVE KAMPF: So for example,
4 the period I read in 1990, where January of '90,
5 405 million was borrowed; and then again in August,
6 495 million was borrowed; and then again in November,
7 475 million was borrowed; and then again in December of
8 1990, 430 million was borrowed. Isn't that a pretty
9 significant velocity of borrowing?
10 STATE TREASURER REESE: But the numerical
11 value -- I gave you two factors, velocity and the
12 magnitude. And the magnitude of your numbers is -- you
13 see, it's almost roughly the same. It's off by
14 80 million or so on one example, one is maybe 10 million
15 or so. So you see a fairly sustainable hole which it's
16 telling you that you are consistently -- the
17 predictability of that amount was there.
18 REPRESENTATIVE KAMPF: Mr. Treasurer,
19 before I ask a question on benefits and then I'll sit
20 down, just for your note, in 1991, which would have been
21 nine months after that last period, there was a
22 borrowing of 1.4 billion, which is a factor of three or
23 four larger than the borrowing of 430 million in
24 December.
25 We asked you for benefit factors for your 102
1 employees, and I'm looking at page 7 of your submission
2 to us. And I just saw a discrepancy here and I just
3 wanted to point it out to you. We asked for benefits as
4 a percentage of salary and most of the departments for
5 the Commonwealth have presented us with numbers for the
6 benefit factor of 70 percent, 80 percent, which means if
7 you pay a dollar of salary, you pay about 70 cents or
8 80 cents for benefits today.
9 Your numbers are actually quite a bit
10 lower, 33 percent in 2013, but then in 2016-17,
11 40 percent. I think what you did is you gave us a
12 percentage of benefits for the total compensation
13 package. In other words, if you paid a dollar of salary
14 and benefits, how much of that was the benefit portion?
15 And if you would, could you go back and change that? I
16 mean I get the point, but if you would, that would be
17 great.
18 And then lastly, I'm very curious since
19 you sit on SERS and PSERS and you have experience out in
20 the private sector, do you have an opinion on whether
21 the Commonwealth for future hires should go to a defined
22 contribution plan?
23 STATE TREASURER REESE: That -- you
24 know, I have stayed on the sideline on whether it's a
25 defined or hydrid or defined benefit plan. And in 103
1 Treasury, we authored a document that we submitted, an
2 electronic document around this particular issue showing
3 the numerical values because I really want to look at --
4 my point is, whatever you decide, whatever comes out as
5 the final passage around that, our job is to be in a
6 position to be able to manage it.
7 And so whether it's a defined benefit
8 plan or a defined contribution plan or hybrid, I just,
9 you know, I would want -- whatever you guys think makes
10 sense is the one that I'm going to manage. But I think
11 more importantly, you know, we really need to find a way
12 to deal with this. My big thing is to deal with the
13 unfunded liability.
14 REPRESENTATIVE KAMPF: Thank you.
15 STATE TREASURER REESE: Thank you.
16 MAJORITY CHAIRMAN ADOLPH: Thank you,
17 Representative.
18 Representative Fred Keller.
19 REPRESENTATIVE KELLER: Thank you, Mr.
20 Chairman.
21 And thank you, Treasurer, and the folks
22 that have come today.
23 I just have a question. I want to go
24 back to a couple things that were talked about earlier,
25 and the one is on part of the structural deficit. 104
1 According to the Independent Fiscal
2 Office -- is about $125 million from nonpension
3 personnel costs. So that would be for negotiations for
4 contracts and so forth that the executive branch would
5 do with some of the agencies representing Commonwealth
6 employees, also probably affected was some employees in
7 the Treasury.
8 If the department or any department that
9 is subject to these agreements exceeds the money
10 appropriated under the GA bill or the appropriation
11 established by the GA bill, would those payments then be
12 made by the Treasury? I mean, is that something -- we
13 have a fixed thing for costs in our budget, but if our
14 expenses exceed that for employees -- now as identified
15 by the IFO, $125 million have been put in there. If we
16 exceed what has been budgeted for these expenses, do we
17 just pay those bills?
18 STATE TREASURER REESE: Keith, do we --
19 I'm not sure I understand the question.
20 DEPUTY STATE TREASURER WELKS: I'm not
21 familiar with the $125 -- $125, that would be wonderful,
22 we'll solve that tomorrow -- the $125 million structural
23 deficit. I would like an opportunity to review that and
24 get back to you.
25 REPRESENTATIVE KELLER: That would be 105
1 fine. Okay.
2 I just think it's important that we
3 understand how all these things happen and so on.
4 And I wanted to go back to my colleague,
5 Representative Kampf. We were talking about the tax
6 anticipation things and we talked about previous years.
7 I think it's an important point to note that our general
8 fund budget was much lower when they were lower numbers
9 in the '90s. So the fact that we have a higher amount
10 that we do now may be a function of the fact that our
11 spending has increased dramatically over the same period
12 of time. Would that be an accurate -- would that play
13 into it?
14 DEPUTY STATE TREASURER WELKS: Well I --
15 STATE TREASURER REESE: So if you can
16 imagine, I talk about this in internally our department
17 because I want to make sure I understand.
18 I understand as a business operator that
19 debt is used to function as a business. There's
20 appropriate levels of debt. But what I understand is
21 that the prior -- a decade ago, that there were enough
22 assets in the general fund to fund those gaps, but
23 today, those -- the magnitude and the amount is really
24 coming out of other areas of cash management where -- I
25 don't want to say robbing Peter to pay Paul, but you're 106
1 basically trying --
2 REPRESENTATIVE KELLER: I would say that
3 we probably did that in '08-'09, '09-'10 when we used
4 federal money to fund reoccurring expenses that created
5 some of the problems we're seeing now.
6 So I guess, I just -- there's a couple
7 things that create the issue --
8 STATE TREASURER REESE: Right.
9 REPRESENTATIVE KELLER: -- which, you
10 know, part of it is spending and the other part is
11 revenue. I mean, there's a lot of things that go into
12 this. We keep hearing, you know, things have been
13 caused because we didn't increase our taxes, but a lot
14 of things have been caused because we spend too much
15 money. That creates your structural deficit also.
16 STATE TREASURER REESE: Absolutely. I
17 think on the face value, it's revenues versus expenses.
18 REPRESENTATIVE KELLER: Okay. Thanks.
19 MAJORITY CHAIRMAN ADOLPH: Thank you,
20 Representative.
21 Treasurer, I want to thank you for your
22 willingness to take on all questions. We're kind of in
23 unchartered water right now, so there's a lot of new
24 questions that come up and we're just trying to cover
25 all bases, okay? 107
1 And look forward to working with you over
2 your next six months, okay? We'll take it six months at
3 a time, that's what you had suggested, but I also
4 appreciate the job that you and your staff has done and
5 keep up the good work.
6 STATE TREASURER REESE: Thank you,
7 Chairman.
8 MAJORITY CHAIRMAN ADOLPH: Thank you.
9 The Auditor General should be here any
10 minute. We are going to break for five minutes and get
11 right into the Auditor General's budget hearing. Thank
12 you.
13 (The hearing concluded at 11:38 A.M.)
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25 108
1 C E R T I F I C A T I O N
2 I hereby certify that I was present upon the
3 hearing of the above-entitled matter and there reported
4 stenographically the proceedings had and the testimony
5 produced; and I further certify that this copy is a
6 correct transcript of the same.
7
8 Dated in Lebanon, Pennsylvania this 22nd day
9 of March 2016.
10
11 ______12 Summer A. Miller, Court Reporter Notary Public 13
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