Allegheny Institute Blog

The state broke new ground in 2003 when it granted Act 47 status to the City of Pittsburgh, the Commonwealth’s second largest city. Prior to that, Act 47 had been used in smaller communities and though the City of Scranton is currently in distressed status, it is about ¼ the size of Pittsburgh.

The decision rendered yesterday by the DCED Secretary is for the City to stay in Act 47 but for a revision of the recovery plan and Act 47 strategies to address the legacy costs (debt, pensions, and health benefits) that threaten the City’s long-term viability. DCED data shows that amending Act 47 plans is not unheard of as four other communities are currently operating under revised plans.

This amended recovery plan would “provide a blueprint for [the City] to exit Act 47” according to the Secretary.

The current Act 47 plan does address these issues, but the immediate need to change workforce practices and reform the tax structure shifted those needs to the background (although they are all intertwined in reality).

So what picture does the current recovery plan paint on these issues?

Debt—“Limitations imposed by…market conditions and by Federal tax law combine to virtually eliminate the opportunity to use debt refinancing or restructuring to make a positive impact on the budget situation”
Pensions—“Extremely weak funding status of the City’s pension funds threaten City stability”
Health Benefits—“Other PA communities facing difficult financial circumstances have reduced or contained post-retirement coverage”

In short, the road ahead is going to be long and painful. Thus far, the pensions have gotten the most discussion by City officials mostly in the hopes of a fold-in to the state system or favorable reimbursement policies from the state. Who knows how far either will go? Talks of City-County merger are predicated on the high legacy costs staying in the City proper, whatever it will look like. And the Controller’s report finally put a number on the unfunded health care liabilities, and they are a staggering $300 million or so.

Now Pittsburgh will have another three years with two oversight agencies steering it toward some resolution. Without reauthorization, the ICA expires in 2011 and Act 47 has no time frame, and it is unlikely the City will be petitioning the state again before then. Let’s hope two sets of heads start to come up with some sensible, cost-effective solutions to these issues.

As predicted in this blog in April when the state Department of Community and Economic Development convened a hearing in Pittsburgh to determine whether Pittsburgh had made sufficient progress and could leave Act 47 distressed status, the state has ruled that the City will remain under the watch of the recovery team.

The Secretary of the Department characterized the City’s desire to get out of Act 47 as premature and noted that the recovery plan could be amended to deal with the non-operational issues of debt, pensions, and health care liabilities that have a significant impact upon the City and its ability to eventually emerge from Act 47.

So the Pittsburgh slots parlor seems to be on track as new investors are providing equity for license holder Don Barden. The investors, Walton Street Capital Fund 6, have offered a $120 million equity stake and will now be the principal owners with 75 percent. While the new investors may help secure the remaining $600+ million in funding from banks—Key Bank has already pledged $150 million to the project—an important question needs to be asked: What happened to the now in-default $200 million bridge loan?

Don Barden had secured a $200 million bridge loan to begin construction of the casino. While he may have spent $50 million of it to pay for the license itself, did he burn through the remaining money on the first stages of construction? Contractors walked off the job after claiming they had not been paid for April and May. That bill amounted to $10 million for two months. Since its ground breaking in December, it seems unlikely that Mr. Barden spent the remaining $150 million in four months on construction and related fees. Did he use some of the money on the legal fees associated with the license appeal and objections from his North Shore neighbors?

While the casino is a private enterprise and an accounting of the funds may be a private matter, the people of Pennsylvania have a highly vested interest in these casinos. They deserve some answers. They have a Gaming Board who is supposed to be their watchdog. But to date the Gaming Board has not done a very good job of asking the right questions or providing adequate answers. It’s time to reverse that trend.

The Census Bureau has released its data on estimates for cities and towns (http://www.census.gov/popest/cities/cities.html) and the data for places over 100,000 shows Pittsburgh now stands at 311,218 down from last year and representing a cumulative loss of 23,000 people (7%) since the year 2000 count was taken.

In percentage terms, and excluding the hurricane ravaged New Orleans, Pittsburgh stands on the negative loss side with Dayton, Buffalo, Flint, and Cleveland as the most pronounced losers of City population.

Comparing those Census estimates of population year by year since 2000 with the City Controller’s data on actual general fund expenditures shows that the City’s actual per capita expenditures have risen from $1,071 in 2000 to $1,422 last year, a 32 percent increase. At the same time, the Consumer Price Index for the Pittsburgh area grew 20 percent. Adjusting for inflation and population decreases would put the per capita level of spending closer to $1,210, significantly lower than where things stand. At that level of spending the City’s budget would be around $376 million, far lower than where expenditures are sitting.

The license holder for Pittsburgh’s slots casino, Don Barden, has come up short in his quest to build his Majestic Star Casino. He was recently informed from his lender that his $200 million bridge loan was in default, putting the entire project in jeopardy. Casino construction has stopped as contractors haven’t been paid for work already completed. Because of his inability to secure any more debt to build the casino, he has had to step aside. But instead of abandoning the project altogether, he has sought investment partners who immediately put up $120 million in their own equity and secured another $120 million from a bank. In return Mr. Barden has agreed to give up majority owner status and instead will be a minority owner with only a 25 percent stake in the venture.

But in spite of the new infusion of $240 million, there still is the matter of the rest of the financing which amounts to more than $500 million. When Mr. Barden approached the Gaming Board with these changes, there response was to come back when the rest of the financing was in place. According to Board member Jeffery Coy, “It’s time to put some finality to this” and that the project was “in need of some credibility”.

These comments are curious since the Gaming Board had a large hand in creating this mess. Blaming this failure on a poor credit market is not a good excuse. They awarded the license to a man whose existing casinos are hemorrhaging money and drowning in debt. They should have demanded his financing be secured before they awarded him the license. Their misjudgment has created more problems including who will now hold the Pittsburgh license? Will Mr. Barden continue to be the holder, even though he will only own 25 percent of the casino? If he is forced to relinquish the license, how will the transfer take place and will there be any financial repercussions?

This saga is far from over as there are too many questions left to be answered. The Gaming Board has a lot of explaining to do.

Can the City, as the host municipality for the City-County sanitary authority (ALCOSAN), levy a “host fee” on the other 81 municipalities that are members of the authority? Should it?

That’s part of the discussion that arose over the fairly innocuous but complicated resolution that would require the City to approve a slight expansion of the service area for a conduit near the western part of the City where Robinson Township plans a new development that will increase sewage flow.

One member of City Council proffered that since ALCOSAN is “in our area, and just like garbage—we pay a fee [to dump trash] in Monroeville and Imperial—I want to look into whether it's something we should do”. Apparently the last examination of the issue was a 1998 audit by the City Controller’s office which, fortunately, was sitting in our archives.

That audit found a multitude of ordinances that specified City-suburban responsibilities for sewer construction and maintenance but those ordinances varied widely with what exactly the obligations were. The audit noted that the ordinances in and of themselves were not enforceable: only a signed agreement between the City and another municipality would be. As such, the audit found few instances where there was an actual payment or reimbursement on sewer work.

So what about a host fee for the City? ALCOSAN is within the City’s borders and a good number of municipalities send their sewage through City sewer lines to get to the treatment plant. Could the City make a case for levying a fee?

The audit dealt with this issue as well, but left it on murky and unresolved ground. There is language in the Municipal Authorities Act (the enabling legislation for ALCOSAN) that “expressly allow[s] for use/rental charges imposed by one municipality upon another”.

It also noted that “opponents…could make a credible argument that one legal effect of the formation of ALCOSAN is that all participating municipalities (including Pittsburgh) surrendered their right to charge each other fees related to the use by one municipality of another municipality’s sewer lines”. The audit concluded that finding out where the legal truth is “lies beyond the scope of this performance audit”.

So the issue could be revisited, and, depending on how eager Council is to pursue it, could end up in court. If that happens, it will open up a can of worms that will affect a lot of municipal services that are interconnected in Allegheny County.

Thanks to a gift from a foundation, the County will soon come into possession of 78 acres in the western suburbs that will be turned into a sports and athletic complex with amenities and fields that will cost $10 to $15 million to develop. No estimate of operating or maintenance costs was given.

In terms of size, this does not appreciably increase the total acreage the County currently has in park land (12,000 acres now in nine parks) but it raises the question: what will the development of this park do to the efforts underway at the others?

Recall in a Policy Brief we wrote earlier this year that the County is trying to find private ownership and/or partnership for physical assets and programs that are years behind on maintenance. In the same part of the County Settlers’ Cabin Park and its 1,600 acres were the subject of six recommendations by an Oglebay Foundation study that recommended the private sector take over the wave pool, operate and maintain a Log House and Nature Center, as well as the golf course and tennis courts.

Maybe with all the growth we are told is happening in the western corridor around the airport (though a lot of that is relocations from other parts of the County and have received state and local subsidies) there will be enough private sector support to go around.

On the same day the County announced that it is turning an idle piece of land into a hotel it was announced that the convention center hotel is on hold because no one wants to develop a 400 room hotel near the center. Market conditions might get a 300 room structure, but elected officials and tourism boosters want at least 400 rooms in order to get to 1,000 adjacent rooms (they would work in conjunction with the Westin’s 600).

If the plans wait another year, not only is the convention center in danger of being bypassed by more shows, the region may be in danger of hearing more bewildering statements that are a 180 degree reversal of what was said before.

Two examples: nearly a year ago this time the newspapers announced the approval of $44 million in state gaming money for the project. The head of the Convention and Visitors Bureau stated that the money “should be enough to build a 400- to 500-room hotel”. Obviously that is not the case as costs to build have gone up enough to shelve the project for the time being.

Also at that time the director of the SEA stated “no more money will come from the city or the county to finance the hotel.” Interestingly enough, at the meeting announcing the Downtown hotel the County Executive stated that “The county will not provide any public subsidy for a convention hotel that would not provide at least 400 new rooms”.

What are we to believe? The state supposedly set aside enough money to get to the magic number of 1,000 rooms without a local sweetener. Now neither is true. How far we have come since the days when we were told a new convention center would spur hotel development.