Allegheny Institute Blog

In its annual ranking of the best cities to do business, Inc.com does not show Pittsburgh in a favorable light. In compiling the list, the authors looked at four criteria, all based on employment growth. As readers of our publications know, the Pittsburgh region has fared poorly in terms of employment growth, failing to keep up with the national average let alone being able to keep up with faster growing metros.

Among the 66 largest metros, the Pittsburgh MSA ranked 53rd. Eight of the ten worst metros were from neighboring states New York, New Jersey, Ohio, and Michigan, and included Philadelphia as well. The good news is that Pittsburgh’s ranking did not fall from 2007—the bad news is that it did not rise.

The Pittsburgh MSA ranked a disappointing 260th out of a total of 335 metros across the country. Again the ranking remained the same from last year. In fact since Inc.com began this ranking in 2005, the Pittsburgh MSA has not fared well ranking 167th in 2005, 326th in 2006 and of course placing 260th in both 2007 and 2008. This miserable ranking seems to be a permanent thing. Much like the miserable tax and regulatory climate that pervades the area. But take heart, Pittsburgh is the most livable city.

Consider two teams having vastly different seasons. The Tampa Bay Rays have a 61 win, 44 loss record after 105 games. The Pirates are 49 and 57 at the 106 game mark.

The Pirates have scored a very respectable 523 runs, among the National League’s top four teams. Tampa Bay has scored only 468 runs. Here’s the difference, Pirates pitching have given up 558 earned runs and 591 total while Tampa Bay pitchers have yielded only 397 earned runs and 431 total. If you consistently score more runs than your opponents, you have a strong likelihood of winning more games than you lose. Tampa Bay is proving that this year.

The Pirates’ pitching roster as of July 30 has an earned run average of 5.25, the worst in the National League. Tampa Bay’s roster has an ERA of 3.81, one of the five best in the American League.

Pittsburgh’s roster of pitchers have an average salary of $520,000, with only one making over a million dollars a year at $1.135 million. The starting rotation average is just over $400,000. Tampa Bay’s pitchers earn an average of $1.5 million with seven making more than a million. The starting rotation salaries also average over a million dollars.

There is a lesson here. One the Pirates must have learned. If they want to become a winning team, they will have to get some quality, tested pitching. And that will require being willing to spend some money.

A news report just before the weekend described the City of Pittsburgh’s deal with the Borough of Wilkinsburg to pick up garbage for the 6,000 or so Borough households for an annual payment of $750,000 from 2007-2010. We’ve written about this deal a lot and recently released a report analyzing the financials of the arrangement. Our conclusion: the City is taking a loss on the deal based on how much it spends to collect garbage in the City (about $200 per household) vs. how much it is charging to collect garbage in Wilkinsburg (about $120 per household). As a result, City residents are subsidizing the venture.

The article also pointed out that the City has not yet executed any other garbage agreements with other municipalities. They are in discussions with a lot of municipalities for a lot of different services—or so the claim goes—but nothing has been worked out. On garbage collection, the City mapped Churchill Borough but did not submit a bid, and extending service to Baldwin Borough would have been too expensive up-front. That leaves the City’s one agreement with Wilkinsburg as the sole example of the City expanding services beyond its borders.

The Mayor has disputed the findings of our study. “The deal that we brokered with Wilkinsburg is one that is a break-even for the city of Pittsburgh…It's not city taxpayers subsidizing anything for the residents of Wilkinsburg. That's not the case with the agreement in Wilkinsburg, nor will it be the case if we enter into any future agreements with other municipalities, whether it's garbage collection or some of the other services we discussed.”

Now we’re not sure what the Mayor is and isn’t counting in those numbers—we were denied access to data. But we’re reasonably confident that there is no workers’ comp or fringe benefits allocated to the Bureau’s operation. To be break even, the City’s refuse operation and related costs would be around $13 million. Our estimate put it closer to $23 million.

The Mayor’s claim of the arrangement being mutually beneficial can easily be substantiated: release the data to the public showing what cost factors went into determining the bid for Wilkinsburg. It is really that simple.

Only in Pennsylvania can a seemingly straightforward process become so complicated. The ongoing saga of the Pittsburgh slots casino has taken yet another not so nice turn as one of the new investors has threatened the Gaming Board.

The problem with this transfer of ownership is found in the gaming law. The law clearly states that no owner shall control a majority of two casinos within the Commonwealth. Mr. Bluhm already owns a Philadelphia slots licenses and his company High Penn Gaming will be controlled almost entirely by either himself or members of his family or their trusts, which of course he controls. So, on the surface it seems Mr. Bluhm would be disqualified from owning more than a small share of Pittsburgh’s slots parlor, not the proposed 75 percent share. But is this really a violation of the law or is the use of trusts and family members keeping to the letter if not violating the intent? If you are connected, does it matter?

According to news reports, both Mr. Bluhm and fellow investor Ira Lubert are connected to Governor Rendell as they both have generously donated directly to the Governor’s campaign while Mr. Bluhm has also been generous to the Democratic National Committee, to which Governor Rendell was once the chair. Rendell’s spokesman denies Governor would be influenced by these contributions. But recently the Governor held a conference call with the new investors, Mr. Barden, members of the Gaming Board, and the chairman of the House Appropriations Committee to discuss the deal—conversations which are a clear violation the Board’s code of conduct prohibiting private discussions on issues that will come before the board for a vote.

This also caught the attention of several lawmakers who are calling for the Gaming Board to remove Mr. Barden’s license and start the process from scratch. The State Senate called a hearing on the matter where they questioned Mr. Bluhm who threatened to scuttle the deal if the Gaming Board does not approve his ownership group by July 30th. This is a deadline that had not been mentioned previously despite months of negotiations.

This is obviously designed to put pressure on lawmakers who are skeptical of the new ownership deal. But will anyone cave to the threat of withholding gaming money from cash starved recipients? This threat should be disregarded. The Gaming Board must be diligent in its duties. The ownership structure as submitted by Mr. Bluhm and his investors is very complex and will need some time to be sorted through.

Even if the ownership structure can be settled in less than one week, that only covers part of the picture. What about the financing? Mr. Bluhm and his investors have still not offered details on where they are obtaining the money or if that financing has been secured. The public was told that new investors were critical in helping to secure the remaining financing. That has not happened. With the exception of the equity put up by Messrs Bluhm and Lubert, which doesn’t even cover Mr. Barden’s defaulted bridge loan, no other funding has been finalized.

Even if the new ownership group is finalized by the deadline, there is no guarantee they will be any more successful than Mr. Barden. Recently Standard and Poor’s gave the project a “B” rating—slightly better than the rating given to the project under Mr. Barden—but still junk bond status. This surely cannot help in securing the bonds necessary at an interest rate that would enable the casino to pay all of its obligations and still turn a profit. There are too many details left unturned for this process to be rushed.

Mr. Bluhm’s threat is not one the Gaming Board, nor the Legislature, should not bow to. The Gaming Board should take as much time as needed to do the thorough job that they failed to do the first time around.

The next step in the contract impasse between the Port Authority and Local 85 of the Amalgamated Transit Union is a 45 day fact finding process conducted by a neutral party that will accept testimony and documents and make a recommendation based on that information.

This process, outlined in the statute that created the Authority, played out three years ago when the Authority and the union could not settle the 2005 contract. A neutral fact finder was positioned between the Authority, which wanted a wage freeze, and the union, whose original demand was for a $5 an hour raise over the life of the contract. The fact finder sided with the union, writing at the time “employees within this bargaining unit cannot be sheltered from the economic realities of Western Pennsylvania. Notwithstanding this fact, the employer cannot expect its employees to simply give up their hard-earned benefits on a wholesale basis. There must be a modest increase in wages and some of the other benefits over the life of the agreement.”

Talk about being labor friendly. And if that quote sounds eerily familiar to the current position the union has staked on legacy costs—that they are not going to give up their benefits that they won at the negotiating table—it should.

But would a similar conclusion from the fact finder this time around—after service cuts, fare hikes, a statewide task force concluding that PAT driver wages were the highest in the nation, the creation of two new taxes to fund transit, and intense public scrutiny and awareness of the type of benefits PAT employees receive—carry any weight?

It may end up being a moot point. Both parties have to agree to the fact finder’s report to use it as the basis for a contract. If the fact finding process does not conclude that the legacy costs are out of line and threaten the viability of the Authority, then it is basically a wasted 45 days. If either party rejects the fact finding it leads to either a strike or binding arbitration (both sides have to agree to go to arbitration). That’s how things developed in 2005 before intervention by the Governor and County Executive prevented a labor stoppage.

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.

May’s private sector job numbers indicate a dramatic year over year slowing from the stronger growth pace that began in the second half of 2006.

After climbing at a near one percent rate—on a year over year basis—during the first four months of 2008, the May gain was a paltry 0.3 percent. Goods producing employment fell. Even construction jobs fell, a sector that had enjoyed steady gains. Retail trade, finance, information, and transportation joined the parade of industries with declining employment.

Health care, administrative and support services continue to drive the region’s employment gains. Food services restaurant jobs continue to post very respectable two percent year over year increases. This despite high gasoline prices which many analysts have suggested would reduce eating out.

Bottom line: Notwithstanding the modest job gains over the past 20 months or so, private sector employment in the region has yet to reach the level posted seven years before in 2001.