There are a lot of "ifs" in the agreement that was crafted between the Port Authority management, the Amalgamated Transit Union, and the Commonwealth that held off service cuts and reductions that were scheduled to happen at the beginning of September.  If the RAD board agrees to fund PAT, if the County comes up with money from the drink and car rental taxes, if the state finds the money etc., etc.

The PAT website has a summary of the executed agreement between PAT and the ATU and it states that there are essentially three events that could trigger one of the parties to void the agreement and reverting back to the prior contract.  "In the event funding is insufficient" and either:

• 1. A bus garage is forced to close (there are five operating divisions in the County) or
• 2. More than 5% of the current bargaining unit workforce is laid off (as of June 30, 2012 there were 2,106 ATU employees according to the PAT budget) or
• 3. More than 5% of the 2,300 bargaining unit is laid off over the life of the four year contract

Note that the most recent "doomsday" projection for September 2012 would have shuttered the Collier garage and resulted in layoffs that would have hit the PAT workforce (not all were represented by the ATU) to the tune of 23%.  Based on the conditions above the range of headcount reductions would be 105 to 115 employees.  Seeing that the PAT board and management has historically been inclined to avoid any interruption of service it is unlikely that they would be the party that would void the contract if one of the above did indeed occur. 

In its recent proposed budget document for fiscal 2013 and the outlook through 2016, the Pittsburgh School District reveals rapidly expanding deficits over the next four years. Spending is projected to rise from $516.5 million in 2013 to $561.9 million in 2016, while revenue edges up a slim $6 million from $512 million to $518 million. 

Causes for the $35 million jump in spending are listed as; salary increases, swelling pension payments, and expanding health care costs. Much of the rising costs is locked in by labor contracts and long term obligations entered into years ago. Realistically, significant savings can be achieved only through more personnel cuts or a large turnover in staff in which senior, high paid employees are replaced by entry level and lower compensated workers. 

Layoffs of teachers can occur for only two reasons: one, declining enrollment and two, elimination of programs or some combination of the two.  Thus, it is difficult to project declining employee compensation through layoffs. Eliminating entire programs is possible, but at some point program cuts can reduce the quality of the educational experience and make the District even less attractive. The state law that imposes the idiotic set of requirements needs to be addressed. It is far better to add a couple of kids to each class rather than eliminate a science program or foreign language courses.

But be that as it may, Pittsburgh schools are looking at serious financial trouble. There is one path to lower spending still open although it is not a desirable one. Note that enrollment continues to slide, dropping below 25,000 in the last school year. The decline in student count has been falling at a rate of over 1,000 per year for many years. The latest census shows a significant drop in the population in the numbers of children who will be of school age in the next years. There was also a big decline in the numbers of adults in the child rearing age groups suggesting that the Pittsburgh Schools are a major factor in outmigration.

Ironically, the District can cut spending growth only by continuous downsizing its operations. The tragedy is that spending per student is holding above $21,000 and will rise even further as enrollment drops. Expenditure cuts cannot match enrollment reductions because of the pension and health care commitments and the increases in costs they will entail.

The answer for education in Pittsburgh is-as it has always been-to adopt a voucher program and allow children and parents to attend schools of their choice. Maintaining the government monopoly schools to protect the teacher unions and the educrats who benefit from the state run monopoly that fails in its moral obligation to prepare students for life after school is disgraceful.  The never ending string of excuses will continue unless or until Pittsburgh parents and residents demand change. The state could help with a voucher law, but the state has shown itself to be content to live with the status quo. As a result thousands of Pennsylvania children are being denied the opportunity to participate fully in the American dream.

An annual growth rate of about 3% per year in expenditures; no increases to existing taxes and no real proposals for new types; still wrestling with legacy costs such as debt, pensions, post-employment healthcare, etc.

That basically sums up what came from the release of the City of Pittsburgh's 2013 budget and five year financial forecast submitted to the oversight board last week.  The City expects to finish 2012 with expenditures of $459 million, growing to $469 million next year.  Operating departments and debt service will be higher, but pension/health benefits/workers' comp will be down slightly. In 2013 and the years to come operating expenses represent about 50% of total expenditures, the other half going to the aforementioned non-operating costs of pensions/health/workers' comp and debt service.

The biggest adjustment for the City, like the County and the other municipalities, will be adjusting the property tax rate when new values are certified.  The City's rate held steady at 10.8 mills when it was adjusted following the 2001 reassessment (the City used to tax buildings at one rate and land at another) and was really the only tax untouched by the reforms of the Act 47 and oversight years in which new taxes were created, others eliminated, and some rates defined in state law.   

Earlier this year we issued a report on Allegheny County's retirement system.  Measured by the ratio of current employees to those receiving a pension, the County is in the opposite position of places like Pittsburgh or the Port Authority: there are more actives than retirees in the County system.

The report detailed the funding progress of the plan back to the mid-1980s.  The funded ratio, which takes the plans actuarial assets divided by the actuarial liabilities, is a strong indicator of how healthy the pension plan is.  The County's most recent audit covers 2011 and 2010 and shows that the funded ratio was 58.7% in 2011.  Note that in 2005 it was 84.9%.  Last year's ratio was low, but it still beats 2009 and 2010 and the lowest ratio in our available data, 53.3% in 1986.

Two important considerations to keep in mind.  First, the County has increased the percentage of pay employees have to put in to the pension system the last two years.  At the end of 2011, effective for January 1, 2012, the level was 8%.  The Retirement Board will make a determination at the end of this year whether the contribution rate increases by a vote at a public meeting.  Under the law that created the pension system, the County has to match what the employees put in.  So when the Board tells the employee it is 8%, the County has to come up with money that equals the aggregate employee contributions.  In 2011, the audit shows $23 million coming from both.

Second, though the employees and the County have been putting in a sizable amount of money, the County is not coming close to what it should be putting in under its Annual Required Contribution, or ARC, which makes the "R" looks more like "recommended" than "required".  In 2005 the ARC was $22.5 million and the County put in 73%; last year it was $59.4 million and the audit shows the County put in 39% (the aforementioned $23 million).

"Turnpike Head Says There is No Immediate Crisis".

Responding to a rising chorus of concerns about the Turnpike Commission's annual borrowing of $450 million to meet its Act 44 obligation to PennDOT, the Commission head and the PennDOT Secretary say in effect, "move along there is nothing to see here." They contend there is no immediate crisis looming for the Turnpike. Their story is the Turnpike is cutting expenditures and raising toll rates adequately to meet debt service requirements. That means every year it must squeeze at least enough out of Turnpike users to cover the latest borrowing and of course that is accomplished through continuous rate hikes.

Moreover, the $450 million per year new debt is not all the Turnpike's borrowing needs.  In order to upgrade and maintain the old system, it has an extensive capital program underway that also necessitates additional borrowing. According to Moody's summary, the Turnpike is scheduled to borrow $5.3 billion over the next 10 years for the capital projects. This in addition to the Act 44 borrowing.  Of course, unless the Turnpike is kept in fairly good condition user levels will fall, something that would be disastrous for the Commission's finances.

The other claim by the Commission head and the PennDOT Secretary is the Turnpike's bond ratings are still high.  That is true but Moody's rating of March 2012 contains a negative outlook and lays out a number of challenges facing the Turnpike's finances.  Then too, as it does with municipal bonds, Moody's gives great weight to the ability of the Turnpike to raise revenue through increased tolls. Indeed, it compliments the Commission for its independence and willingness to raise tolls.  But as Moody's points out raising tolls is only useful as long as demand for the Turnpike remains very inelastic.  That simply means cars and trucks do not have viable alternatives between many travel points in the southern portion of the state and will bear high toll rates, at least at levels seen so far.

But as first year economic students learn, unless a product has no substitutes and is an absolute necessity, there is a price beyond which further increases will reduce revenue. That is, demand becomes elastic. How far away we are from that is hard to say. With a strong growing economy, the inelasticity can extend to higher prices. With a deep recession, raising prices will become extremely problematic.  The Turnpike is in effect betting on virtually non-stop growth.

Beyond these considerations, one must be alarmed at the willingness to pile up debt in massive quantitites so the government is not forced to find other sources of revenue for PennDOT. That is the essential point here. The Turnpike is being used as a substitute taxing body and its users are contributing to roads and bridges throughout the state.  It is a great asset that is being milked; perhaps to the point of catastrophic damage.

No crisis yet. That is the assertion. But looking around the state and country we see so many other cities, authorities and even states who are staring into a financial abyss. California, Illinois, San Bernardino, Birmingham, the Port Authority of Allegheny County, Pittsburgh pensions, the city of  Harrisburg. And the biggest of all, the US government, accompanied by gigantic problems in Europe.   Greece and Spain kept believing the crisis was not here yet. Now look. Warning signs are everywhere and each threatened player keeps saying "we're still ok".  Just like 2007 and 2008 when anyone with eyes to see knew the housing bubble was about to collapse. But what soothing words officials kept repeating that we should not be alarmed, all is well. And the problem is as long as the rating agencies bury their heads in the sand and pretend not to see the dangerous buildup of debt, the larger the amassing of debt.  When the correction comes, it is much worse than if the rating agencies had looked at macro forces and downgraded some borrowers to discourage reckless borrowing.

After reviewing a host of sources-statutes, judicial decisions, internal documents of the organization-an attorney retained by the Regional Asset District (RAD) board has determined "there is no legal impediment to the District providing funding to the Port Authority (PAT).  That answers the "is it" or "isn't it" part of the question of the plan to devote $3 million in asset funding to PAT as a local subsidy. 

The opinion does not address the "should it" question (the attorney notes "...we are not opining that the District is compelled or that it is advisable to fund [PAT]) but says that the law does spell out what RAD can't give money to and if transportation was not the Legislature's intent it would have put it on the list of prohibited beneficiaries. It also noted that the RAD request will not be a one time deal ("it is further anticipated that this will not be a one time request but will be continuing for at least the next several years").

The Institute raised these questions in a recent Brief and the attorney's opinion will provide the input the RAD board needs on the decision.   

An opinion piece celebrates the start of RADical days, when the assets funded by the 1 percent sales tax created under the Regional Asset District offers free admission as a "thank you" to taxpayers to show them what the money has paid for.  The op-ed closes by noting "RADical Days are the most entertaining way to watch your tax dollars at work."

Much more entertaining that going down to see what happens at the County Courthouse or the City-County building, that is for sure.  If the Port Authority gets deemed a regional asset as is envisioned by the recent bailout plan perhaps there will be a day in the future when "free" bus or trolley rides will get patrons to RADical days. 

The piece correctly points out that one half of the proceeds from the sales tax goes to fund the assets.  The other half is split into two pieces, 25 percent to Allegheny County, the other 25 percent to the municipalities in the County.  The legislation creating RAD mandated that upon accepting the money the County and the City had to eliminate their personal property taxes, and the City had to reduce its amusement tax from 10 percent to 5 percent.  The City and the County had to create senior citizen tax relief programs and municipalities other than the City and the County were to use the money to reduce local taxes and dedicate a portion to inter-municipal organizations like councils of government. 

Do taxpayers know what their local governments are doing with the money?  For the County's 2012 budget the revenue side shows $41.5 million from the sales tax, which amounts to its 25 percent share under the formula.  Then, under "other and miscellaneous" there is $17.8 million reported from the Regional Asset District.  The latter allocation in its entirety goes to Parks, which has a $22 million budget this year.  The $41.5 million goes entirely to non-departmental revenues, a $408 million pot of money. The City budgeted $12.2 million this year as its share and notes that the money "replaces funds lost with the elimination of the personal property tax, the reduction of the amusement tax...and the expansion of the City's real estate senior relief program".

The RAD website notes that "as a result of new sales tax revenue, 115 municipal governments reduced local millage, 10 eliminated the per capita tax, and three reduced/eliminated the wage tax."  It is a strong bet that many of those millage rates have crept back up, and we know that the County and the City have been granted and are often asking for new sources of tax revenue. 

In a recent op-ed piece a business owner made an incredible statement. "My business would be hurt far more by allowing the tax cut for America's most fortunate to continue and instead slashing budgets for things like public education, research and infrastructure to pay for them."

Nice rhetoric but completely wrong on every point.  Federal income taxes are not even close to the most important component of education spending. Public education is funded primarily by state and local taxes.  Infrastructure, especially roads and bridges, are funded mostly by special taxes designed to collect money from people and businesses that use them. And the notion that Federal budgets have been slashed totally ignores the fact that Federal spending is up a trillion dollars since 2007. Which budgets have been slashed?  Federal spending as a percent of GDP is at its highest level in history save for WWII.  The claim that programs are being starved is nothing if not hilarious.   

The writer is obviously concerned about Federal tax revenue not keeping up with the nation's spending binge. But the primary reason for depressed tax revenue is the weak economy that has not responded to the bulge in Federal spending as we were promised it would by the President and his people.  Moreover, the policies of regulation and the threats of higher taxes coming out of DC are depressing private sector investment and growth. It is important to remember that the USA has one of, if not the, highest corporate tax rates on the planet. And the magnitude of the final real costs of Obamacare is still unknown both in terms of direct expense for employees for health care costs and for compliance.

The notion held in some quarters that allowing the tax cuts to be eliminated for those making over $250,000 is going to solve the nation's fiscal crisis is irrational. That will not raise nearly enough money in a depressed economy and will have a chilling effect on business growth. The tax raisers are forever and always disappointed when higher rates fail to produce more revenue. But they never learn.  

Getting more people on private sector payrolls is the only sensible answer to our fiscal woes, Federal or local. Current and prospective policies in DC are pushing in exactly the opposite direction.  It is too bad and very sad that some folks can be successful in the private free enterprise system and still have so little understanding of what makes the system great or have so little respect for keeping free enterprise free and as unfettered as possible. A look at France, Greece  or Spain might help them but the writer of the op-ed in question is too busy linking things together fallaciously to take a look elsewhere to see what happens in the world he thinks would be better than ours.

Finally, the typical ignorant comment about the need to spend ever more money on public education in the country fails abominably to see what is happening in public education in Chicago, Philadelphia and Pittsburgh and other cities. Seven percent of Westinghouse 11th graders are proficient in math. The majority of Chicago students are unable to function at grade level. Lack of spending? Over $20,000 per pupil in Pittsburgh and the nation's second highest paid teachers in Chicago. How many more tax dollars must be thrown at these failed school systems to satisfy the business man who thinks we are under taxed?

Acquiring some actual knowledge about the world and how it works could go a long way to correcting the thinking of the business owner. 

Reaction is coming in to the County Controller's audit of the contractor that performed the reassessment.  The audit deals with four main findings: the contract provisions were satisfied, but they were weak; the project was not completed in the timeframe; the County's Office of Property Assessments (OPA) did not adhere to its contract provisions; and various internal control deficiencies.

There's plenty of data as the Controller's office calculated median, mean, coefficient of dispersion, and price related differential for sales covering two time periods and displayed the results by municipality and school district.  There is a response to the audit from OPA, which basically concludes that the property tax system in the Commonwealth is flawed and needs reformed. 

What's very important to note is that in at least two instances the audit goes to great length to dispel the notion that a reassessment automatically causes a tax increase.  We noted earlier this year that the County's reassessment page published a quick and handy guide to this fact, and the Controller's audit notes that "it is important to understand that a taxpayer's tax liability will not necessarily increase when the assessed value of their property increases" and "one of the common misconceptions held by Allegheny County property owners about the reassessment is that the reassessment will automatically result in a higher property tax bill for the homeowner..." 

By detailing the anti-windfall provisions in Act 71 and Act 1 along with providing examples of homes the Controller's office has provided another voice to counteract the drumbeat of "reassessments mean higher taxes" that has been so prevalent in the near decade long tussle over revaluations. 

A couple of weeks ago Moody's Investor Services assigned an A1 rating to Allegheny County bonds.  Much glee was expressed by the County Executive at the rating agency's good opinion. 

There is no gainsaying the fact that a high bond rating is a very good thing for the County in terms of its ability to borrow money at the best interest rates. But before County residents get too comfortable they should know the details of the rating that might be somewhat less reassuring. 

First of all, the rating comes with a negative outlook based on Moody's concerns about the challenges facing the County; namely, the very low reserve balance, the low pension funding levels and lack of financial flexibility.  Moody's does credit the stable economic base that is heavily structured toward higher education, health care and government employment. A point the Institute has made for quite some time.

Second, it is instructive to examine Moody's rationale for the A1 rating. Quote; "The bonds are secured by the county's general obligation, unlimited property tax pledge." (Bold and italics added by the Allegheny Institute.)  Moody's is saying that because the County can raise property taxes as much as necessary to make bond service payments the agency will give the County a high credit score. Thus, the low reserve balance, the budget balancing by one time funding sources-such as grabbing gaming money headed to the airport, the sale of tax liens, etc.-and the low pension levels and ongoing structural imbalances that might otherwise have caused a rethinking of the bond rating are overridden by the fact the County can raise taxes as much as necessary to make bond payments.

Taxpayers might be more comfortable if the bond rating was due to careful financial management, keeping a strong reserve, not depending on last minute finding of money to close a budget gap and holding prudent debt levels. In other words, the good debt rating should not be used to go borrowing more money other than for refinancing. Taxpayers would also be more comfortable if the County's budget problems were resolved by spending cuts through outsourcing and privatization.  County employees might feel differently about that but it is the taxpayers who must be served. After all, they pay for the government.  

The Moody's unlimited taxing power rationale that underpins its high bond ratings can lead governments to get themselves into trouble by borrowing imprudently and not paying enough attention to controlling spending.  High credit ratings have undoubtedly led municipalities to go too far into debt and created financial crises when the economy stumbled and tax revenues began to fall. Slashing core government functions has often been required to leave enough money to pay debts.  Raising taxes in an already depressed economy can be counterproductive and actually drive tax base away.  Moody's might want to rethink how it weights the "unlimited" taxing power criterion.