Monthly Archives: March 2017

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*In 2013, the S&P 500 index, generally considered representative of the U.S. stock market as a whole, produced total returns of 32.39% — the highest return for the index since 1997. But the S&P 600, which represents the stocks of smaller companies, returned 41.31%.1–2

Consider a hypothetical investor named Jim, who looked at those returns at the end of 2013 and decided to sell his shares in an S&P 500 index fund and reinvest them in an S&P 600 fund, hoping to ride the hot stocks of smaller companies. Index mutual funds and exchange-traded funds (ETFs) attempt to track the performance of a benchmark index by holding the securities that comprise the index; individuals cannot invest directly in an unmanaged index.

The trade would have been a disappointment for Jim. Small-cap stocks slumped in 2014, with the S&P 600 returning just 5.76%. By contrast, the S&P 500 returned 13.69%. Jim would have missed out on the higher return because he tried to chase prior-year performance. If he continued to chase performance and switched his investments back to an S&P 500 index fund, he would have been slightly ahead in 2015, a down year for the market in general, and then lost out again in 2016 when small caps again outpaced large-cap stocks (see chart).

Spreading the Risk

This example clearly illustrates the danger of chasing performance, but it also demonstrates why owning stocks in companies of different sizes can be a helpful diversification strategy. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Companies are typically classified based on market capitalization, which is calculated by multiplying the number of outstanding shares by the price per share. There is no standard classification system, but Standard & Poor’s indexes offer a helpful comparison and are used as benchmarks for many funds.3

S&P 500 (market capitalization exceeding $5.3 billion). Stocks of larger companies, or large caps, are generally considered more stable than those of smaller companies. Large caps may provide solid long-term returns and possibly higher short-term returns in some years, as they did in 2013. But large caps typically have lower growth potential because they have already experienced substantial growth to reach their current size.

S&P MidCap 400 (market capitalization of $1.4 billion to $5.9 billion). Mid caps may have greater growth potential than large caps, and mid-sized companies can sometimes react more nimbly to changes in the business environment. Mid caps are associated with greater risk and volatility than large caps, but are considered less volatile and risky than small caps. Although they may not be the best performer in any given year, mid caps have produced the highest returns over the last 10-, 20-, and 30-year periods.4

S&P SmallCap 600 (market capitalization of $400 million to $1.8 billion). Small-cap stocks might offer the highest growth potential of the three classifications, because they have the furthest to grow and are more likely to react quickly to market opportunities. However, they are typically the most risky and volatile class of stocks, as illustrated by the performance swings of the last four years.

The performance of an unmanaged index is not indicative of the performance of any specific security. Past performance is not a guarantee of future results, and actual results will vary. The investment return and principal value of stocks, mutual funds, and ETFs fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1, 3) Dow Jones Indices, 2016
2, 4) Thomson Reuters, 2016

Happy Investing!

Scott C. Weaver

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

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By Neal Lesher

 

Running a small business isn’t easy. Being your own boss might sound appealing, but it means putting in lots of hard work to make it happen. Among the many things an owner has to think about are balancing the books, hiring and keeping employees, and pleasing customers. Increasingly, something else weighs on the minds of owners: regulations.

Small business owners frequently cite regulations as one of the largest obstacles in operating their company. Every four years, the National Federation of Independent Business asks small business owners to evaluate 75 potential business problems. In 2016, they told us that their second biggest problem was “unreasonable government regulations.”

A new NFIB survey delves deeper into the red tape problems faced by small businesses. We asked small employers across the country a variety of questions about how regulations affect their business.

First, about one in two small employers say that regulations are a “very serious” or “somewhat serious” problem for them. Also, half of small employers tell us that in the last three years they’ve experienced an increase in the number of regulations they must comply with. By contrast, only two percent of respondents say they had seen a decline in regulations.

So how do regulations make it difficult to run a business? Twenty-eight percent of small employers say that the cost of compliance is the biggest problem. For others, 18 percent, the largest problem is the difficulty understanding what they are supposed to do to be in compliance. Close behind that, 17 percent of small business owners find the extra paperwork to be the biggest hassle. Other issues for employers include the time delays caused by regulations and the difficulty discovering new regulations.

We asked small employers about what level of government gives them the most regulatory headaches. Only 15 percent said local government is the biggest problem. Double that number, 30 percent, said state rules had the biggest impact. A full 50 percent said it was the federal government that caused them the most stress when it comes to rules and regulations.

Big companies hire a legion of lawyers, accountants, and compliance specialists to make sure they are following all the rules. At a typical small business, the owner has to wear all these hats alone. According to our survey, 69 percent of small employers check out compliance requirements themselves. Only 15 percent rely on an expert for information.

But there are some positive developments for small business owners on the regulations front. One of the first executive orders signed by President Donald Trump asked federal agencies to identify two regulations that can be rolled back for each new regulation proposed. To us, that sounds like a worthy idea, and we’ll be closely watching how that order is implemented. More recently, the president signed two executive orders putting the brakes on the EPA Waters of the U.S. rule and the EPA Power Plan rule. These massive regulations, which we are challenging in court, would cost the economy hundreds of millions of dollars and trigger a flood of lawsuits against small businesses.

Also, the President nominated Federal Judge Neil Gorsuch for the Supreme Court. In his previous opinions, Gorsuch has stated his distaste for court precedents that defer to regulators’ interpretations of the law. He could be a powerful voice defending small businesses from a continually creeping federal bureaucracy.

If legislators want to unleash small business growth, they must push forward regulatory reform. Most small businesses operate with thin margins. Every new requirement, every moment of their time spent on a new rule, means less time an owner can focus on their business. Reducing the time and expense of regulations and giving small business owners more freedom to innovate would pay off in solid economic growth and increased employment. Small businesses represent 99.7 percent of all employers. They employ 58 million Americans. In Pennsylvania, small businesses employ 46.9 percent of the workforce. The ball-and-chain of regulations restrains the biggest and most important part of the economy. President Trump has made significant progress already, but there is much more to be done.

Neal Lesher is the Legislative Director for the National Federation of Independent Business in Pennsylvania (NFIB) which represents more than 14,000 small businesses in the state.

 

 

 

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By Chris Comisac, Capitolwire

 

The General Assembly made several changes to the state’s liquor laws during the past year, but many of the promised fiscal benefits from those changes have yet to be realized by the Commonwealth.

 

During House and Senate budget hearings for the Pennsylvania Liquor Control Board, lawmaker were told by the PLCB that half-way through the current fiscal year, the state-run liquor monopoly’s expenses have exceeded sales. However, PLCB official said they don’t believe the through-December situation will exist when the fiscal year ends in about four months.

 

According to PLCB figures, the agency’s net ending financial position through the first six months of the current fiscal year was $5.3 million, or 7.3 percent, lower than through the same time period a year earlier.

 

Sen. Scott Martin, R-Lancaster, said to PLCB Board Member Mike Negra, “Obviously, there were supposed to be profit enhancement concepts that were implemented – you would think you would see the opposite occurring.”

 

Negra responded, “Sales were up 4.4 percent. Our cost of goods was up a little higher, and I think that’s a result of selling wine at a lower margin, so you’re seeing our cost of goods going up a little bit … we’re not getting the results of our flexible pricing negotiations yet because of the inventory issue … so our gross profit was up 3.1 percent through Dec. 31.”

 

“Are your operating costs outpacing sales growth?” asked Martin.

 

Negra responded, “Absolutely,” and explained pensions, benefits and payroll are the culprits, with pensions being the biggest cost driver – the agency’s net pension liability grew $17 million from FY2014-15 to FY2015-16.

 

He also noted that the agency expects some of the Act 39 and Act 166 changes to come into play by the end of the fiscal year, such as the $7.8 million they are awaiting from the first round of liquor license auctions.

 

Additionally, there have been costs incurred – for such things as computer systems, a new wholesale division and supply chain needs – during the ramp-up to some of the profit enhancements, said Negra, so costs have been “front-loaded.”

 

“I don’t expect that to show by June 30,” he said, but then cautioned, “However, it might take even longer to implement all the different facets of Act 39 so that it shows an overall improved profitability.”

 

Some of that is due to the agency having to work through its existing inventory before it can realize the benefits the PLCB says it and consumers will receive from what board member Michael Newsome described as “delicate negotiations with our suppliers,” as part of the flexible pricing – the ability to charge different markups on products – allowed by Act 39.

 

PLCB executive director Charles Mooney told legislators about 12 to 15 of the approximately 80-such meetings were difficult, but the board was able to work things out with those suppliers.

 

That prompted Newsome to tell House lawmakers savings from flexible pricing is “a moving target” dependent on the outcome of those negotiations.

 

Despite the uncertainty surrounding the savings, Negra assured the House Appropriations Committee Act 39’s removal of “the shackles” that had been on the PLCB with regard to product pricing would deliver better revenues for the Commonwealth and better product prices and availability for consumers.

 

Some lawmakers also expressed concern about the size of the transfer being made, as well as the source of a portion of the dollars, to the General Fund this year by the PLCB.

 

Negra said the agency will, when it’s all said and done, transfer $217.1 million to the General Fund this year, through several different payments. One such payment (actually two separate transfers in February), of $71.6 million, was received by the General Fund in February. Another $73 million was transferred in January, said Newsome.

 

The Wolf administration proposes transferring another $185 million next year, something Newsome said the PLCB is “comfortable” with doing both next year “and maybe the year after that,” although he noted “things can change over the next three to four years.”

 

This year’s $217.1 million transfer is a significant increase from the $100 million transferred to the General Fund during FY2015-16, and a significant portion of the FY2016-17 transfer appears as though it will come from the PLCB’s reserves.

 

Newsome said the PLCB for a few years had been building up its reserves, “So we were able to pay out of reserves – that’s what we’re doing this year [and] we’ll be doing it again next year.”

 

He indicated PLCB profits this year are expected to be approximately $90 million, while the agency’s cash flow is projected to be “slightly higher.” It’s from that “cash” that transfers are sent to the General Fund, along with money from the PLCB’s reserves, said Newsome.

 

But it’s not something the PLCB hopes it will have to do in the long-term.

 

“We’re hoping that as we move forward, we continue to build profits and we’ll not continue to reduce our reserves,” continued Newsome. “We have our staff telling us what they think the minimum reserve number should be – they’re telling us it’s about $150 million – we think it should be closer to $200 million.”

 

He said at the end of FY2015-16, the PLCB had a cash balance of $295 million, and the agency projects that will drop to $183 million.

 

“As we continue to pay down our reserves, we’ll have to keep an eye on that,” Newsome told one lawmaker.

 

Newsome later added, “The bottom line number is the one we’re most concerned about: where will we be after we’ve made those transfers.”

 

“And hopefully we won’t get to a point where the cash gets so low that it affects operations. And if that happens, well then we’ll have a conversation with you all and the Governor’s Budget Office. But it’s certainly something that we keep a close eye on,” said Negra.

 

“If your cash is dropping, you’ve got to make adjustments,” Negra later added.

 

While some on the House Appropriations Committee said they didn’t understand why former Gov. Tom Corbett’s administration chose to transfer only $80 million annually during his gubernatorial tenure, it’s clear from PLCB financial reports the agency’s reserves and its net asset position were of concern: the PLCB’s cash balance had dropped below $100 million (well below at one point), and it had negative net assets during FY2009-10, FY2010-11 and FY2011-12 – it wasn’t until FY2012-13 that PLCB net assets were greater than zero.

 

House Appropriations Committee Majority Chairman Stan Saylor, R-York, cautioned new cash flow problems could be caused by continued use of PLCB reserves to pump up General Fund transfers from the agency.

 

“I am concerned that we’re trying to put expectations [on the PLCB] … to kinda make things look good that aren’t necessarily as good as they may appear, simply because of transfers,” said Saylor.

 

“I think it’s important for us to be honest with ourselves,” he continued. “It’s like anything else – if you pass a budget that’s not real, you end up in big trouble, so I hope we can work with you to make sure that we don’t expect more from you than is reasonable.”

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The day of the initial quintet of hearings held by the Appropriations committees of the state House of Representatives and state Senate featured plenty of testimony regarding Gov. Tom Wolf’s severance tax proposal, with that testimony coming during hearings for the Independent Fiscal Office (in both the House and Senate) and the Department of Revenue.

Much that was imparted by the IFO to House and Senate lawmakers was the same information the agency supplied during its mid-November annual economic and budget outlook for Pennsylvania, with the same conclusion: without “permanent” changes regarding spending and/or revenues, Pennsylvania’s structural deficit won’t improve.

The agency was queried heavily about one of the governor’s revenue proposals – to impose an additional tax, beyond the current impact fee, on natural gas producers. However IFO Executive Director Matt Knittel indicated he didn’t have much to offer as the IFO is currently working on producing, by the end of March, an analysis of Wolf’s revenue package, including the governor’s 6.5-percent severance tax proposal.

During the IFO’s Senate hearing, Sen. Scott Martin, R-Lancaster, expressed concern  the Gov. Wolf’s tax proposal won’t deliver the revenue he estimates.

“Obviously there’s been a lot of discussion about where that revenue number could potentially be – and I personally have concerns what that would do to our competitiveness with other states, or energy prices, or whatever it might be – but in terms of our budget, and looking at revenues, this is looked to be just shy of $300 million coming in from that – are the various factors currently lined up to support those type of revenues coming in?” Martin asked Knittel.

Those revenue estimates were also on the mind of Rep. Garth Everett, R-Lycoming, earlier in the day. He said he was having difficulty “reconciling the numbers on the revenues to be generated – gross revenues – to be offset by the impact fee, how much the estimates of the impact fee are, whether post-production costs are going to be deducted before the severance tax is calculated, and whether landowner royalties are going to be deducted before the tax is calculated.”

Knittel told Martin it’s his agency’s understanding the governor’s severance tax revenue projection assumes $3 per MCF (thousand cubic feet of natural gas). He noted the current rate is closer to $2.25 per MCF based on an average of prices at the Dominion South Point hub, located just northeast of Pittsburgh, and the Transco-Leidy hub in Potter County. Earlier in the day, Knittel told House lawmakers the projections he’s seen for natural gas prices during the next five years range from $2.50 per MCF to $3 per MCF.

He also told the Senate that while natural gas production was up 10 percent in 2016 compared to 2015, “we expect that would drop off slightly going forward, down to something more like 5 or 6 percent.”

Knittel explained to Sen. Lisa Baker, R-Luzerne, that his agency, absent evidence to alter the IFO’s normal practices, would assume a higher tax will result in reduced production. As an example, he said if the price of gas would increase by 6 percent, the IFO expects output would decline by 6 percent.

Additionally, Knittel clarified to Everett the proposal would not allow the deduction of post-production costs, which he said, with everything else being equal, would increase the effective tax rate on gas producers. However, the proposal also allows for a credit for companies that pay the impact fee, which would “push down” the effective rate, said Knittel. During the IFO’s afternoon Senate hearing, Baker questioned the lack of a deduction for post-production costs, and was informed by Knittel that his agency could find no other state that doesn’t deduct such costs before the tax is calculated.

Martin referenced a recent IFO report that indicated as of April 2016 the existing impact fee had an effective tax rate of 6.9 percent, with the IFO projecting an effective rate of 5 percent for April 2017.

Knittel said that at a natural gas price of $2.75 per MCF, imposing the proposed 6.5-percent severance tax would result in “a slight increase in the effective tax rate – instead of 6.5 [percent], it would be 6.8 or 6.9 [percent].”

He also acknowledged that “compared to surrounding states, we would be somewhat higher,” with Knittel indicating West Virginia’s current effective rate is 5 percent (although an additional local tax pushes it closer to 6.5 percent), Ohio’s volume tax (2.5 cents per MCF) is a “fairly low effective tax rate,” while Texas’ effective rate is closer to 4.8 percent; Knittel said Pennsylvania is often compared to Texas.

Democrats were keen to argue that if a severance tax had been implemented several years ago, the state would be in far better fiscal shape than they are now.

Knittel wasn’t prepared to agree with that assessment, as voiced by both Rep. Madeleine Dean, D-Montgomery, and Rep. Kevin Boyle, D-Philadelphia. However, later in the day, the Wolf administration’s Revenue Secretary, Eileen McNulty, was, after Boyle repeated his question from earlier in the day.

“I can definitely say that we would have less of a problem than we have now,” said McNulty, although she said she couldn’t put a specific number on that.

When asked by Boyle “if it would be fair to say that we would have generated hundreds and hundreds of millions of dollars since 2011,” McNulty responded, “Yes.”

McNulty’s assertions were later challenged by Rep. Jason Ortitay, R-Allegheny.

“Do you think the state would have had the same level of gas production had we put a severance tax in place 3 or 5 years ago – would it have gone up, would it have gone down?” Ortitay asked, who also queried if Wolf administration production projections in future years factor in gas price impact on production.

While she didn’t address the first question, McNulty said, “We are anticipating production to increase,” although she clarified the administration anticipates a slight output drop in 2017 but a production increase in 2018, beyond 2016 figures.

“We’re still waiting for some additional pipeline capacity to come online,” she later added, when asked about the reason for the immediate output drop followed by a projected increase.

At about the same time McNulty was answering that question, Sen. Randy Vulakovich, R-Allegheny, was eliciting a response from Knittel regarding the impact on natural gas prices by the cost of those pipelines, and getting natural gas to market.

“We don’t know the exact infrastructure number – the spending on equipment – but we do know, and what’s reported by the companies usually in their annual reports, is the cost per MCF,” said Knittel. “If the price of gas right now is $2.30 [per MCF], the companies are reporting 87 cents of that is due to what we would call post-production costs, which is moving gas from the wellhead to the hub, and cleaned and processed so that it could be traded.”

Delaware County Democratic Rep. Leanne Krueger-Braneky said one of those pipelines will be going through her legislative district and will likely be carrying much of its natural gas to be exported from Pennsylvania.

“I don’t know if most is the case, but it’s definitely the case that some is being exported,” reacted McNulty, who later added, “I know that some of the pipelines are expressly being extended for purposes of export.”

Krueger-Braneky then questioned who would ultimately be paying the tax, particularly if at least some of the gas is leaving Pennsylvania.

“Generally speaking, you can be sure that although the business is the one that remits it to the state, they have to recover that cost in selling their product, and it would go to the people who are purchasing the product who are both in-state and out-of-state,” said McNulty. “Other states export their severance tax here when we purchase energy that’s drilled or refined in another state, and the same thing happens when our energy goes elsewhere.”

Wolf has now proposed a severance tax in all three of his budgets, with the first two attempts, which involved various iterations of such a tax, failing to get a vote in the General Assembly.

 

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Research from the George Washington University paints a clear picture as lawmakers consider legislation to modernize Pennsylvania’s outdated nurse practitioner law. Two new studies found that outdated nurse practitioner licensure laws do nothing to improve the quality of patient care, and that nurse practitioners deliver health care that is on par with physicians.

The first study compared nurse practitioner (NP) care quality in states where NPs have full practice authority versus sates like Pennsylvania with outdated laws.

If restrictions like Pennsylvania’s current law were beneficial to patients, researchers reasoned, NPs in states like PA would have better health care outcomes. But, “Findings from this study did not conform to this pattern. In fact, state independence had no statistically significant effect on any of the three quality indicators studied.”

Senate Bill 25 would modernize PA law by removing a mandate for NPs to secure business contracts, called collaborative agreements, with two physicians in order to practice.

The study found these contracts are not necessary to ensure that NPs collaborate with physicians. To the contrary, researchers found: “NP visits in states with practice independence had a higher odds of receiving physician referrals than those in restricted states.”

SB25 has been endorsed by AARP Pennsylvania, the Hospital and Healthsystems Association of PA, the PA Rural Health Association, and numerous other stakeholders.

The second study reiterated the quality of nurse practitioner-delivered health care in community health centers. “The researchers found that visits to nurse practitioners and physician assistants received similar quality, services and referrals as those made to physicians.”

“Findings from our study should be reassuring to patients who rely on community health centers for their care,” said Ellen Kurtzman, associate professor in the GW School of Nursing and lead author of the paper, in a press release. “We found that care is likely to be comparable regardless of whether patients are seen by a nurse practitioner, physician assistant or physician.”

The results mirror hundreds of other studies over the past decades. In fact, numerous researchers have documented improved patient health outcomes as a result of modern NP laws. The National Academy of Medicine and the Federal Trade Commission reviewed all available evidence and concluded that patients would benefit from modern NP laws.

“These studies make it clear: modernizing Pennsylvania’s nurse practitioner law would increase access to health care without giving up one iota of quality,” said Lorraine Bock, President of the Pennsylvania Coalition of Nurse Practitioners.

“Pennsylvania should stop leaving patients behind and join the 22 states that already give nurse practitioners full practice authority.”

About Full Practice Authority for Nurse Practitioners

Nurse practitioners (NPs), also called Certified Registered Nurse Practitioners (CRNPs) or Advanced Registered Nurse Practitioners (ARNPs), have graduate, advanced education, with master’s degrees or doctorates and are nationally certified in their specialty areas. Among their many services NPs order, perform and interpret diagnostic tests; diagnose and treat acute and chronic conditions such as diabetes, high blood pressure, infections and injuries; prescribe medications and other treatments; and manage a patient’s care. Over 100 studies have proven that NPs provide safe, high-quality health care.

Currently, in order to practice, a nurse practitioner must secure business contracts called collaborative agreements with two physicians. Researchers – including physicians and nurse practitioners alike – have proven that this mandate offers no patient health benefits. To the contrary, research shows that the mandate restricts access to care and correlates with worse patient health outcomes.

Currently, 22 states and the District of Columbia are already using full practice authority to expand access to care, especially for underserved rural areas and patients with Medicaid insurance.

 

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Auditor General Eugene DePasquale believes Pennsylvania should strongly consider regulating and taxing marijuana to benefit from a booming industry expected to be worth $20 billion and employ more than 280,000 in the next decade.

“The regulation and taxation of the marijuana train has rumbled out of the station, and it is time to add a stop in the Commonwealth of Pennsylvania,” DePasquale said during a March 6 news conference

“I make this recommendation because it is a more sane policy to deal with a critical issue facing the state. Other states are already taking advantage of the opportunity for massive job creation and savings from reduced arrests and criminal prosecutions. In addition, it would generate hundreds of millions of dollars each year that could help tackle Pennsylvania’s budget problems.”

DePasquale said Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington have all regulated and taxed marijuana in recent years. Washington, D.C. has legalized marijuana, but does not yet have retail sales. Other states are considering regulating and taxing marijuana, including Delaware, New Jersey and Maryland.

In 2012, Colorado voters approved legalizing, regulating and taxing marijuana. Last year, Colorado – which has less than half the population of Pennsylvania – brought in $129 million in tax revenue on $1 billion in marijuana sales from the new industry that had already created an estimated 18,000 jobs.

“The revenue that could be generated would help address Pennsylvania’s revenue and spending issue. But there is more to this than simply tax dollars and jobs,” DePasquale said. “There is also social impact, specifically related to arrests, and the personal, emotional, and financial devastation that may result from such arrests.”

In Colorado’s experience, after regulation and taxation of marijuana, the total number of marijuana arrests decreased by nearly half between 2012 and 2014, from nearly 13,000 arrests to 7,000 arrests. Marijuana possession arrests, which make up the majority of all marijuana arrests, were nearly cut in half, down 47 percent, and marijuana sales arrests decreased by 24 percent.

“All told, this decrease in arrest numbers represent thousands of people who would otherwise have blemished records that could prevent them from obtaining future employment or even housing,” DePasquale said. “Decriminalization also generates millions in savings from fewer arrests and prosecutions.”

DePasquale said Pennsylvania has already benefited by some cities decriminalizing marijuana.

In Philadelphia, marijuana arrests went from 2,843 in 2014 to 969 in 2016. Based on a recent study, the RAND Corporation estimated the cost for each marijuana arrest and prosecution is approximately $2,200. Using those figures, that’s a savings of more than $4.1 million in one Pennsylvania city.

Last year, York, Dauphin, Chester, Delaware, Bucks and Montgomery counties each had more arrests for small amounts of marijuana than Philadelphia. Those counties had between 800 and 1,400 arrests in 2015.

“Obviously, regulation and taxation of marijuana is not something that should be entered into lightly,” DePasquale said. “Should Pennsylvania join the growing number of states benefiting financially and socially from the taxation and regulation of marijuana; there are many things to consider, including details about age limits, regulatory oversight, licensing, grow policies, sale and use locations, and possession limitations.

“As I said earlier, the train has indeed left the station on the regulation and taxation of marijuana,” DePasquale said. “It is time for this commonwealth to seriously consider this opportunity to generate hundreds of millions of dollars in new revenue.”

 

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    During the Feb. 22  budget hearing for the state’s public pension systems, there were plenty of questions – but not a lot of answers – regarding Gov. Tom Wolf’s early retirement proposal for state employees.

     

    “The proposed budget assumes an early retirement incentive program,” according to a section on Page A1-14 of the governor’s massive 990-page FY2017-18 Executive Budget document. However that’s the only reference or mentioning of it in the entire document.

     

    When asked about the proposal, David Durbin, executive director of the State Employees’ Retirement System (SERS), said his agency has requested more details about the proposal, but has yet to receive anything from the Wolf administration.

     

    “All the details that you don’t have, we don’t have,” Rep. Daryl Metcalfe, R-Butler, said to Durbin during the hearing.

     

    “It sounds like the administration hasn’t spoken with the retirement systems related to that proposal, and the company they contracted with did not come to you, is that correct?” asked Metcalfe.

     

    “That’s correct,” said Durbin. PSERS executive director Glen Grell said it was his understanding school employees would not be part of the early retirement option.

     

    When asked for comment and any available details regarding the early retirement option, Wolf spokesman J.J. Abbott responded by email: “In the governor’s proposed budget, savings are assumed for a ‘30 and out’ retirement incentive program. As several classes of employees, such as state police, have different retirement age and years of service requirements, they would not be captured in the savings calculation. However, we intend to work with the legislature and SERS to further address these nuances and provide a retirement incentive as part of the final budget resolution to realize these savings and minimize employee impacts.”

     

    Abbott ended his email stating, “I do not have projections as these details need to be worked out.”

     

    The study – done for the Wolf administration by consultant McKinsey & Co. – suggests that as part of the Wolf administration’s efforts to manage the size of the state employee complement across agencies, “The Commonwealth could also consider managing supervisory span of control and offering an early retirement program to reduce the workforce complement.”

     

    McKinsey estimates the state could realize $15.2 million in savings during FY2017-18, with recurring annual savings of approximately $15.8 million thereafter.

     

    The McKinsey report describes the Early Retirement Incentive Program (ERIP) to generate that amount of savings as follows: “The program would provide full annuity at 30 eligibility points regardless of age. The Administration has assumed a 50 percent participation rate, 80 percent backfill rate, 16 weeks on average to backfill, and backfilling positions at 75 percent of the retirees’ rate, to estimate approximately $24.5 million in total FY17-18 General Fund savings, and approximately $25.1 million in recurring annual General Fund savings across all agencies. As the program is rolled out, the Administration could consider adjusting backfill targets, both in terms of number of positions and pay grade at which to backfill, to reflect operational needs agency by agency.

     

    “Other initiatives estimated in this report could use ERIP as a mechanism to reduce complement; as such, the ERIP savings estimate presented here has been reduced to avoid double-counting savings, resulting in approximately $15.2 million in FY17-18 General Fund savings, and approximately $15.8 million in recurring annual General Fund savings.”

     

    Having only limited details restricted the questioning and answering about the proposal Wednesday, but Metcalfe tried anyway.

     

    “If we went with the governor’s program allowing an early retirement and, based on the study they’re expecting to backfill 80 percent of those positions, out of the 50 percent they expect are going to take the early retirement – from my perspective that’s just going to increase pension costs,” said Metcalfe. “You’ve got new employees coming into the system that are going to get into the pension system, and then you have the other employees that are pulling lump sums out and retiring and pulling cash flow out, and not contributing the system anymore.”

     

    “Is that the case? If we’re just going to add more employees, even though we let people retire – we’re just swelling the amount of people you have to pay?” Metcalfe asked.

     

    Durbin answered: “From this perspective, this is where the details really matter, and we haven’t seen those details. But we know in the past the pension system has had an increase in the liability they have had to pay as a result of early retirement incentive programs.”

     

    According to Durbin, SERS’ unfunded liability is currently $19.5 billion. In its budget hearing documents, SERS states the Commonwealth’s contribution to the system is expected to be 31.8 percent of payroll in FY2017-18, which represents approximately $2 billion of which 43 percent originates from the General Fund from employers under the governor’s jurisdiction.

     

     

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    Though the bulk of state government hearings are usually intended to focus on the proposed finances of state departments for Fiscal Year 2017-18, it appeared that lawmakers in the state House of Representatives’ and Senate’s Appropriations committees had election integrity and security on their minds when questioning officials from the Pennsylvania Department of State.

    “The president has alleged that there has been massive voter fraud in the last election. Was there any fraud that you know of in Pennsylvania?” asked Rep. Michael O’Brien, D-Philadelphia, in the House committee hearing on Feb. 22.

    “To the best of my knowledge – this is not wishful thinking, this is talking with the counties, media reports, the federal entities that looked at our elections – and the answer is no,” stated Cortes.

    Other lawmakers posed questions regarding voters casting more than one ballot and non-citizens voting in elections, forcing Cortes to defend his agency’s oversight of the elections throughout both of his appearances, first in the House on Tuesday afternoon, and then in the Senate on Wednesday morning.

    “I’m not sitting here to unequivocally say ‘There’s no type of issues or problems or fraud in Pennsylvania;’ It’s a massive state but certainly nothing happened,” Cortes continued.

    The secretary also testified to the success of online voter registration, which was implemented in Pennsylvania in 2016 to save money and make registration more efficient, and the state’s participation in the Electronic Registration Information Center collaboration, a database of voter information shared between 22 states that helps clean up voter rolls.

    More than 900,000 Pennsylvania residents utilized the online voter registration system leading up to the 2016 General Election, which saw the largest voter turnout in Pennsylvania history: 6.5 million of 8.5 million registered voters cast a ballot.

    Lawmakers also discussed different proposals to update the delivery of elections to Pennsylvania voters, including moving towards no-excuse absentee ballots and early voting, and doing more to clean up voter registration rolls.

    Any changes to election processes would need to be made to the state Election Code, which would require legislative approval. Lawmakers plan take a closer look at the proposals in a Senate hearing later this spring, they said.

    With regard to finances, Gov. Tom Wolf’s budget proposal asks for less money for the Department of State in the coming fiscal year compared to the current year.

    Wolf is requesting $88,022,000 from the General Fund for FY2017-18, down from $88,977,000 in FY2016-17, with proposed minor cuts to the department’s general operations and decreased costs for the publication of information related to constitutional amendments, among others.

    Certain programs and duties of the department will require small increases, though, like the Statewide Uniform Registry of Electors, which needs more money to modernize operations.

    In the interest of further reducing appropriations, lawmakers also questioned Cortes about the costs associated with special elections and campaign finance reports.

    Special elections in 2016 cost taxpayers almost $1 million in addition to normal election costs, and only two months into 2017, nearly $400,000 has been expended on the elections for unintended vacancies, Cortes said.

    These costs, which are paid by the counties up-front and reimbursed by the state, could be avoided by waiting until the next general or primary election to fill any vacancies, Cortes said.

    Encouraging or requiring candidates and political action committees to file campaign finance reports electronically could also save money, as well as publishing information related to constitutional amendments on online sites rather than in print newspapers, Cortes said.

    The department currently utilizes a third party to scan submitted reports and make them search-accessible, costing the state thousands of dollars each year, while publishing information about constitutional amendments cost $2.7 million in FY2016-17 and is estimated to cost $1.5 million for next fiscal year.

    Those costs could be driven down by advertising on online sites, though citizens’ access to the Internet must first be considered, Cortes said.

    As for future costs, lawmakers will need to take a look at upgrading outdated voting machines across the Commonwealth, Cortes said.

    Aside from election-related issues, lawmakers also questioned Cortes about a few concerns and ideas related to the department’s oversight of professional licensure programs, including lengthy wait times for professional licensure complaints to be investigated and closed.

    It is estimated that in FY2017-18, it will take on average 410 days to investigate and close a complaint, up from 282 days in FY2015-16. If trends continue, the department expects that timeframe to increase to 450 days by FY2021-22 due to an increase in the number of complaints received by the department.

    One of the department’s main objectives next fiscal year is to reduce the wait time and increase the efficiency in prosecutions through the use of new technology. It also hopes to reduce the processing time of professional licensure applications from 16 days to 10 days, according to the proposed state budget.

    Rep. Jamie Santora, R-Delaware, also posed the cost-saving idea of renewing professional licenses every four years rather than every two.

     

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    Gov. Tom Wolf  is accusing IBM of racking up tens-of-millions in cost overruns while failing to deliver under a $110 million contract to create a new integrated computer system for handling the state’s unemployment compensation program.

    A fraud suit filed by the Wolf’s administration said a sweeping computer upgrade the state contracted IBM to complete back in June 2006 fell three years behind schedule, went $60 million over budget, and ultimately never came to fruition.

    Following the advice of an independent project assessment, the Corbett administration in 2013 , cancelled the contract with nothing to show for all the time, effort and money.
    “All told, Pennsylvania taxpayers paid IBM nearly $170 million for what was supposed to be a comprehensive, integrated, and modern system that it never got,” Gov. Tom Wolf said in a statement.

    “Instead, the Department of Labor & Industry has been forced to continue to support many of its UC program activities through a collection of aging, costly legacy systems, incurring tens of millions of dollars in server, support and maintenance costs.”

    Said Senate Republican spokeswoman Jenn Kocher of the lawsuit: “This lawsuit validates our position that taking a step back, asking more questions and holding the administration accountable for spending was the right thing to do. Our insistence on finding a remedy has finally brought us to the point of action by the administration.”
    According to a complaint in the Dauphin County Court of Common Pleas, the upgrade was meant to integrate disparate computer systems that the department relied on to process data regarding tax payments submitted by employers and benefit claims submitted by unemployed workers.

    After a three-year bidding process, the complaint said that the state chose IBM for the project based on its representations that it was the only vendor with the type of proprietary databases capable of providing a totally integrated computer system.

    But the state said that IBM never came through on its promises.

    “Despite being paid nearly $170 million, IBM never delivered the modern, integrated computer system it commit to build, instead delivering failed promises and a failed project,” the complaint said.

    While analysts spent time working with the department to understand the functions that would need to be built into the system, the complaint said that IBM ultimately removed the workers from the project when the time came to begin actually designing and coding the system.

    “Frequent IBM personnel churn came to be a defining feature of the … project,” the complaint said.

    The complaint also accused IBM of making repeated misrepresentations about the prospects for completing the project.

    The contract was ultimately allowed to expire in September 2013 without the system ever coming online.

    The suit levels claims including breach of contract, fraudulent inducement and negligent misrepresentation, and seeks unspecified damages.

    “IBM will vigorously defend itself against the unfounded claims by the commonwealth,” the company said in a statement. “The claims are without merit ….”

    The commonwealth is represented by David Wolfsohn, Sandra Jeskie and Aleksander Goranin of Duane Morris LLP.

    Counsel information for IBM was not immediately available.

    The case is Commonwealth of Pennsylvania v. International Business Machines Corp., case number 2017-cv-1740, before the Court of Common Pleas of Dauphin County, Pennsylvania.

     

     

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