How your Pa. insurance fees finance public-worker pensions

Half a billion dollars: That's what Pennsylvanians paid last year in state insurance surcharges on their auto, business, health, homeowners, life, and other policies, and on traffic tickets. 

Insurance taxes are Pennsylvania's fastest-growing source of income, according to the state's official budget. 

The 2 percent premium tax raised $465 million for the state's General Fund last year. That's supposed to rise, with higher premiums, to $664 million by fiscal 2020, a 43 percent increase over six years, bigger than the expected change in corporate or personal income tax, or sales tax. Pennsylvania also collects about $30 million a year from its insurance surcharge on traffic violations.  

Where do these taxes go? Not to regulating insurers, which in Pennsylvania have a history of occasionally exploding in spectacular financial ruin. Not for checking out consumer complaints, either.

More than half the premium tax is set aside to help finance Pennsylvania's 3,000 municipal pension plans, each with its own lawyer, accountant, consultant, and money managers. 

While a majority of the plans are solvent, hundreds are underfunded, according to state data. Despite annual pension contributions that consume 18 percent of the city budget, Philadelphia, for example, has just 42 cents in pension assets for every $1 it will need to pay retired police, firefighters, and other public workers. The gap is a big reason the city has the second-worst credit rating among 15 major U.S. cities, boosting its borrowing costs, a report last week by Standard & Poor's said. 

The state took $264 million in Pennsylvania insurance premium taxes and gave it to local public-worker pension plans last year, $277 million this year, and projects that it will take $282 million next year. 

"That's where your premium tax goes. Hundreds of millions of dollars a year," said Sam Marshall, veteran president of the Insurance Federation of Pennsylvania, one of the state's most effective industry lobbies.

The rest goes into the general fund, alongside income and sales taxes, for state police and prisons, medical and college subsidies, and other programs.

The Pennsylvania Insurance Department makes do with half the licensing fees it collects each year, plus company penalties and settlements, for a budget of $25 million this year.

That's less than the Insurance Department budget in the mid-2000s, though it's up from just $18 million a year during the Corbett administration, according to data collected by the Pennsylvania Association of Mutual Insurance Companies. The department's staff of about 250 is down from a high of more than 400 in the 1990s. Some Pennsylvania insurance company exams are now conducted by private contractors — at higher costs, the association says. 

Before 2013, the Insurance Department had no guaranteed funding and had to bargain with legislators for cash each year. In 2013, a new law allowed the department to keep some of its fees, notes Seth Mendelsohn, who as executive deputy commissioner runs day-to-day operations. He called its resources "adequate."

Even with dedicated funding, Pennsylvania's Insurance Department has fewer employees, given the size of the business it oversees, than almost any other state's, according to data from the National Association of Insurance Commissioners,  as my colleagues Mark Fazlollah and Erin Arvedlund reported last week.

Pennsylvania also gets more complaints about the industry, per staffer, than any other state, according to NAIC.  The department said it fielded 12,000 consumer complaints last year. Total "consumer interactions" are expected to rise to 320,000  in 2021, from 199,000 this year. 

How do insurers and policyholders feel about their policy taxes paying municipal pensions? Marshall is philosophical: "That's life," he told me. As long as Pennsylvania's overall premium taxes aren't higher than neighboring states, companies look on the state's share as a cost of doing business.

But if the local burden gets out of line, watch out: Insurance lobbyists crushed Gov. Wolf's proposal to boost insurance taxes to 2.5 percent of premiums. Erie Insurance Group complained that it would cost that company alone $25 million, with more than half going to compensate insurers in other states for paying higher taxes here, under the industry's unusual cost-sharing arrangements. Erie profits last year totaled $210 million, on revenues of $1.6 billion.

I asked Marshall whether the state should treat insurance investment and annuity salespeople like other licensed brokers, and whether it really has the resources to patrol that end of the business.

Marshall said it's fair to compare. But he has no desire to see any other agency — the federal Securities and Exchange Commission or the state Department of Banking and Securities enforcement office, which has had a tough time filling positions — take powers away from the Insurance Department. "Overall, we do a decent job," Marshall said of Pennsylvania insurance regulation.

The message to small investors, policyholders and anyone else who buys financial products in Pennsylvania is clear:  Buyer beware. 

For more about Pennsylvania insurance investments and regulation, see: www.philly.com/annuities and http://www.philly.com/philly/business/How_Annuities_Can_Drain_Seniors_Savings.html