Allegheny Institute Blog

The chairman of the Pittsburgh Urban Redevelopment Authority’s board, Yarone Zober recently offered this lesson about retail development: “At the end of the day, it (is) a matter of market. You really have to test market conditions before you make investments, especially in retail.” But will he keep this lesson in mind as the Urban Redevelopment Authority (URA) deliberates on two grocery store proposals for the City’s Hill District?

Interestingly enough, his comments were in reference to a failed grocery store in another of the City’s neighborhoods—the Spring Garden Shop-N-Save—in which he served as treasurer of the community group who operated the store. The Spring Garden Shop-N-Save opened in 2004 with the help of subsidies from a variety of groups including the URA which pitched in $150,000. After starting out with high expectations and praise for serving an under-served neighborhood, the store fell on hard times with revenue levels falling to the point where the store had to file for bankruptcy. Subsidies could not overcome the prevailing market conditions and the store closed.

Now Mr. Zober sits on the board of the URA which must decide on two grocery store proposals for another of the City’s low-income neighborhoods: a large popular development or a more modest grocer (for details, please see Policy Brief Vol. 8 No. 62). The URA must decide which grocer not only serves the community best, but will succeed in the market. Will they learn from the Spring Garden experience or will Mr. Zober’s lesson go unlearned?

The questions on the legality over the County’s drink tax continue today, one month before voters are supposed to have their say. To recap, a petition drive collected the requisite number of signatures to place a question on the ballot asking voters if they wanted to reduce the amount of the drink tax from 10% to 0.5%. The Elections Board and the County Common Pleas Court denied the question’s place on the ballot, citing language in the state Home Rule Law that says the electorate cannot determine rates of taxation and can’t impose limitations on the governing body. That decision was appealed to the Supreme Court, but that Court opted not to hear the case and sent it to Commonwealth Court instead. If upheld, it is a certainty that the case will then go to the Supreme Court upon appeal.

We’ve already pointed out in a Policy Brief that the state’s Home Rule language being cited is incompatible with the fact that there are tax limitations in the County’s Home Rule Charter, a Charter debated and approved by the voters.

So what happens if the courts drag this on? The attorney for the drink tax opponents said “Obviously, the [Supreme] court believes we will have enough time to present the case before election deadlines”. But what if that does not happen? Maybe it would be better to let the issue on the ballot with the caveat that the courts may strike down the legality of the question. That would prevent irreparable harm to the petition drive and the people who spent time collecting signatures and the expense of putting the campaign together.

Developers of Mt. Lebanon’s high end Washington Park condo project have asked for, and received, an extension on their project. Municipal Commissioners voted unanimously to extend the tax increment financing (TIF) designation on the project by one more year. The developer blames the national housing crisis and “the decline in consumer confidence” as reasons that not enough units have been pre-sold so that construction could begin. But this project was given the green light more than two years ago (April 2006) before any drop in consumer confidence or any issues arose with financial markets. What were the excuses then?

As we noted in a recent Policy Brief (Vol. 8 No. 58), this is the second developer to take a crack at the project. The first bowed out due to a lack of demand. The second developer revamped the project by adding more units and building in two phases. However they are unable to secure the private funding necessary until a certain number of units, 25 percent (18), are pre-sold. Once the private funding has been secured, the TIF will be released.

The continued lack of demand is being blamed on a weak economy. But these are not low-income houses. The majority of condos are priced at $400,000. While a slumping economy can be blamed for some lack of demand, the project struggled from the start. The Commissioners who have supported this fiasco are on the hook and have no choice but to draw this out and hope it turns around. This project didn’t make sense two years ago and will not make sense years from now. The private market and consumers could not be clearer.

In the meantime if Mt. Lebanon had auctioned it off and let the private market determine its best use, it would have been collecting the full amount of taxes and been someone else’s concern.

“In the 1990s, cities including Pittsburgh scrambled to build or expand their centers, which were seen as a vital component in drawing tourists with fat wallets to town. Now there are too many sites chasing the same events.” Pittsburgh Post-Gazette editorial, September 30, 2008

“Why are convention centers, particularly new ones, seeing such weak bookings? The answer could well be a massive oversupply of convention space that is developing in the face of declining growth in demand.” Allegheny Institute editorial in the Post-Gazette, March 13, 2002

Now that the glitzy convention center has been built and is in no danger of being ripped down physically, the PG has joined the chorus of chipping away at the rhetorical foundations upon which the center was built. It is hard not to: the Center’s owners are begging the RAD board for sales tax money to close an operating deficit, the market is telling the community that a 300 room hotel (with a public subsidy) is all that can be built, and now the owners and convention boosters are saying “ignore the actual attendance and number of events, just look at the economic impact”. Even the center manager said “Volume is not the answer. Quality of the group is the answer”. That statement is in direct contradiction with the drumbeat of visitor officials who have been insisting on the 500 adjacent rooms as a way to land the really big shows.

Too bad the PG was not on board when our work was published nearly six years ago. They have come a way since proclaiming “an enlarged convention center, will complete the blueprint for a resurgent Downtown. Not since the construction of the new airport terminal has the region embarked on such a major economic undertaking.”

We documented the trend in over-supply against weak demand then and stated that Pittsburgh would have a hard time attracting business. We looked at how demands for a bigger, better center sucked up more of the available hotel tax for debt service, leaving little to help run the day-to-day operations of the center. And we have brought up the grandiose promises of how many hotels the center would spur on, all without public subsidy. That obviously did not come to pass. Now we will be subjected to shifting sand definitions of what success at the center is to be judged by.

“The base year system…fails to reflect changes in property values, suppresses growth, and leads to inaccurate assessments and disproportionate taxation…”

Who made this accusation against Allegheny County’s base year plan? Certainly it had to have been legal counsel in the case pending against the base year (as it is applied statewide) in front of the state Supreme Court. And it is likely that such sentiments have been echoed there.

Or it could have been the man on the street, particularly one who is living in a community where values have fallen but are locked into the 2002 value. Again, it has likely been stated as such, maybe not the exact same words, but the frustration has been there.

No, the source of the statement is actually the Mayor of the City of Pittsburgh, made through the City’s 2009 budget document. Next year the revenue from real estate taxes—the City’s largest source of tax revenue—is projected to grow minimally to $126.9 million, up from about $125.5 million this year if the budget amount is achieved.

Since 2000, when the County undertook a reassessment and City real estate tax revenue stood at $114.5 million, the average annual growth in property tax revenue has been about 1.2%. The City has not raised its millage rate (though it did switch from a two-tier rate to a single rate) and it offers exemptions to senior citizens and most of its large development projects are tied up in tax increment finance deals where incremental taxes go to the development debt instead of to the City coffers. The only real year-over-year substantial growth in City real estate revenue came in 2000-2001 when, thanks to the reassessment, revenue grew 5.4%.

So count the Mayor as another party frustrated at the County’s base year plan and waiting to see what the Supreme Court decides.

If it makes it through the County’s budget deliberations in the next couple of months, the unpopular 10% drink tax will be cut to 7%. Like many bar and restaurant owners were saying at the time of passage and during its implementation, the tax is on pace to bring in more than budgeted (it has brought in $22 million so far compared to the 2008 budgeted $28 million). It could bring in about $8 to $10 million over according to the Executive.

So what does that mean for the rest of this year and the use of the drink tax as the local match for mass transit? Politically, the Chief Executive may be viewed as generous for cutting the tax back even though he is cutting it to a level that produces what is needed for the local match. Nice, but also necessary.

Unfortunately the Executive has indicated that he will use the excess from the remainder from collections from this year for infrastructure development and debt service. How is that allowable? Recall earlier this year that a member of Council tried to argue that the drink tax would be used for “transit systems” that include the busways, bridges, and maybe the North Shore Connector. No sale on that one. There is no definition what is meant by “transit systems” in Act 44—some Council members seem to think that it includes every surface a bus would travel over. The law does say that the money is to be deposited into a restricted account.

But if the reduction of the tax does whittle the drink tax down closer to the exact match needed for the Port Authority, it does force the union to realize that there is no extra money coming beyond what is needed for the match. That means no extra help, no drink tax deposited into a health care trust fund, and it removes any possible claim by the union for the excess because there won’t be any. That’s a much better bargaining position to be in for next year. And besides it prevents any further subsidy of the North Shore Connector by County taxpayers.

A Post-Gazette editorial on proposed legislation aimed at ending the Port Authority’s hammerlock on mass transit in Allegheny County has labeled it “two cents' worth of distraction” that is unnecessary in the event the Port Authority “gets its house in order”.

Talk about hoping against hope. The editorial fails to realize that PAT is a monopoly provider and the Amalgamated Transit Union is the monopoly provider of labor to the monopoly system. Its union has been granted the right to strike and bring the system to a halt. That’s why when the paper says that the union hierarchy hasn’t “grasped the idea that the public's patience with overindulgent benefits is wearing thin when many other workers are struggling” they miss the point: the Authority has nowhere else to go because it cannot hire replacement workers and the union’s allies in the state will likely come to the rescue. The union does not have to grasp the idea at all.

By encouraging competition—whether it comes from regional providers, who drive through Allegheny County but cannot pick up passengers within the County due to the monopoly status, or new business models that spring up to take over routes—the Authority and its workers cannot just continue to operate an inefficient system and enjoy the lavish benefits that come along with it.

The PG does not want to give up on the Port Authority “until they’re over”. Even the County Executive has said this will be sooner rather than later. Then what? Would the PG just want to create a new authority from scratch and watch the situation develop into what it is now? The PG would likely advocate going back to the regional providers who they don’t see as capable of getting the job done now and mandate they become part of a regional authority.

It is not easy enough to fall back into the old answer of “well, we had private bus service 40 years ago and they all went bankrupt”. The world has changed in the last four decades, and there are examples of mass transit service that has become better due to competition, with improved ridership and efficiency to prove it. It is zero hour for PAT now and nothing should be off of the table.

For the tidy sum of $800,000, a consultant has told PAT board and management that “there's plenty of room for productivity gains and operating efficiencies” on its routes.

Really? We had no idea. After all, PAT’s operations have been intensely studied by the Allegheny Institute, the County Controller, the Auditor General, the Governor’s Task Force, and others in just the past few years. Ridership has fallen since earlier decades and the operating cost per passenger trip is the highest among other U.S. systems and has grown over 40 percent since 2001 as measured by the National Transit Database.

Of course the system is inefficient. In case the consultant did not hear, there is about to be a showdown over the agency’s labor contract; the state legislature is going to deliberate ending PAT’s monopoly on mass transit in the County; the County Executive just reiterated his position of withholding the local subsidy and stated that the system will be broke in a year.

It is unbelievable that PAT would be commissioning an outside confirmation of what it knows, and the public knows, needs to be done. Just another example of the “day late, dollar short” mentality.