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A Project of The Annenberg Public Policy Center

Pennsylvania Pension Piffle

An ad in the Pennsylvania governor’s race takes some cheap, misleading shots at Democratic frontrunner Tom Wolf’s record on pensions. And these come from a fellow Democrat, Rob McCord.

  • McCord’s 30-second TV spot says Wolf’s company “terminated” a traditional defined-benefit pension plan. But it fails to note that Wolf wasn’t running the company at the time, when he held only an 11 percent interest in it.
  • The same ad says a “state pension investment fund” lost $19 million investing in Wolf’s company and that Pennsylvania was “the biggest loser.” In fact, Pennsylvania’s pension fund lost less than 5 percent of that total — on paper only. And the decline was even worse before Wolf returned to rescue the family company in 2009.

To start, it’s a stretch for the ad’s narrator to say “the press” is comparing Wolf to the state’s unpopular Republican Gov. Tom Corbett. That comparison is made in only a single article — shown on screen — by the online news service Capitolwire.com.

Pension Plan ‘Terminated’

More important, the comparison with Corbett’s pension policies rests on a misleading assertion. The ad highlights a portion of the May 5 Capitolwire article in which Wolf is quoted at a public forum as saying his company “terminated” a defined-benefit pension plan and switched to a 401(k) plan. What the story eventually made clear — but McCord’s ad does not — is that terminating the defined-benefit pension plan was not Wolf’s doing.

The issue is pertinent because Corbett last year proposed phasing in a 401(k)-type defined-contribution plan for new state employees. The Legislature rejected the idea. Such plans are often less expensive, but also less generous and less popular, than traditional defined-benefit plans that promise a specified level of benefits.

Wolf’s stated position is that he “absolutely” opposes any change in the state’s pension benefits. So if he actually had done what Corbett proposed, as the ad tries to suggest, it might convince the state’s Democratic voters to nominate McCord for governor instead of Wolf in the May 20 primary. But Wolf didn’t. “[T]he decision to close the defined benefit plan took place during the time frame after Wolf sold his company but before he came back to run it,” the Capitolwire story said.

Wolf and his cousins sold 47 percent of their family kitchen cabinet company in 2006 to a fund run by Boston-based Weston Presidio, a private equity firm. Wolf ceased day-to-day management and joined the administration of Democratic Gov. Ed Rendell as secretary of revenue in early 2007. He and his two cousins each retained 11 percent ownership, according to the Philadelphia Inquirer. But Wolf did not return to management until 2009, after the company fell on hard times during the 2007-2009 business downturn.

Nevertheless, a McCord campaign official insisted that the ad is fair. “If Tom Wolf believes that it is ‘critically important to protect defined benefit plans,’ [as Wolf has stated] then he could have re-instated the Wolf Organization’s defined benefit plan upon his return,” campaign spokesman Mark Nevins wrote in an email to us.

That’s a fair point, but not one made by the ad. Rather, the TV spot likens Wolf, whose website says he “absolutely opposes changes to current employees’ pension plans,” to a governor who proposed eliminating defined benefit plans for new employees and reducing future pension benefits for current employees.

 $19 Million Loss?

The ad further claims that “a state pension investment fund lost $19 million in Wolf’s company.” It goes on to say, “The biggest loser? Our state retirement fund.” In fact, the $19 million loss — on paper — was by Weston’s Fund V, not by the state of Pennsylvania’s pension fund.

According to the Philadelphia Inquirer story on which the McCord campaign bases its claim, Weston Presidio Fund V invested $41 million in the kitchen cabinet company, and the investment is currently worth $22 million. The McCord campaign calculated the difference — $19 million.

But the Pennsylvania pension system’s theoretical loss is only a small fraction of that sum. According to its regular reports to investors, the state’s pension fund owns only 5 percent of the $1 billion Fund V.

Furthermore, our own research leads us to think the total loss is somewhat less than the ad states. In its most recent report, Weston Presidio shows a “total valuation” of its Wolf investment at just over $22.7 million (counting previously realized gains of more than $3 million), which puts the total paper loss at a bit over $18 million. And again, Pennsylvania’s loss would be 5 percent of that figure.

The Inquirer said the Pennsylvania State Employees’ Retirement System was the “largest” of the investors in the Fund V, which logically would make Pennsylvania’s pension system the “biggest loser” as the ad states. But it’s barely true at best. Pennsylvania’s 5 percent stake is followed by a 4.5 percent stake held by a “Pension Reserves Investment Trust,” then by Harvard University’s 4 percent, and a 3.5 percent holding by the Los Angeles County Employees Retirement fund. Weston lists a total of well over 100 institutional investors and dozens of private individual investors as well.

More important, that paper loss in the Wolf Organization investment took place while Wolf himself was not running the company, and after the recession hit in late 2007. Indeed, the theoretical loss might have been worse if Wolf had not returned, re-investing personal funds and resuming management of the company in 2009.

The Inquirer story quoted Weston Presidio as “noting in reports to investors that the Wolf Organization, at that moment [before Wolf returned], had zero resale value.” Indeed, in its quarterly reports to investors, we find that Weston was showing no “fair value” at all for its Wolf Organization investment as recently as the end of 2011. The actual, realized loss — or gain — won’t be known until Weston Presidio liquidates its interest. But under Wolf’s management, the theoretical value has gone up to $19 million as of the end of last year. There’s no hint of that in McCord’s ad.

The McCord campaign denied any intent to deceive. In an email to us, campaign spokesman Nevins said the ad’s reference to a “state pension investment fund” is meant to refer to Weston Presidio, not to the Pennsylvania retirement system. He said, “a ‘state pension investment fund’ is, as the name makes clear, an investment fund that invests for state pensions.”

Really? In fact, the 100-plus institutional investors in Weston Presidio Fund V include fewer than a dozen state or municipal pension funds. Calling it a “state” fund on those grounds seems to us about as logical as calling Citibank a “widows and orphans bank” because some widows and orphans might be depositors. Weston Presidio refers to itself as a “private equity firm” whose investors include “leading financial institutions, major corporations, pension funds, endowments and individuals” — not just state pension funds.

Pennsylvania’s Pension Crisis

We’ll close by noting that misleading, cheap-shot political ads like this one do nothing to address what state officials are calling a “crisis” in funding for state pensions — and may make solving the problem even harder for whomever is elected governor in November. The state currently has to lay out about $1 of every $15 it spends to fund the state pension system — and, according to the most recent actuarial findings of the state’s own pension system, the unfunded liability of the system has grown steadily from less than $1 billion in 2007 to nearly $18 billion last year.

What’s to be done about that? Don’t look to attack ads to give you that information.

— Brooks Jackson