Allegheny Institute Blog

This May, voters in Pennsylvania will be asked to “pick their poison”: do they want to trade a higher school earned income tax or a personal income tax for school property tax relief? How the voter chooses depends on how the tax on income would hit them versus the amount of a property tax cut. Along with the tax shift question, schools would have to control spending from exceeding an annual index, but with plenty of exceptions built in for critical issues like health benefits for teachers, the power of referendum appears severely hamstrung.

In the rust belt state of Michigan, voters also got to have a say on public education recently. The results were dramatic and not well received by the educational establishment. Proposal 5 was defeated by a resounding margin of 62-38%. The proposal would have mandated annual funding increases for education.

Observers in Michigan have viewed the defeat as a statement on “the cost of education pensions”. There is talk now that the Michigan legislature might begin discussion of mandating newly-hired teachers be covered by a defined contribution pension plan instead of the standard, yet slowly disappearing, defined benefit plan.

How nice if the voters in this Commonwealth could have voted on a similar question or if they would have been given a say in the pension enhancements granted earlier in the decade. That bill will start coming due for school districts in five years. Instead, PA taxpayers have a tax shift to contemplate and no definitive control over education spending.

Ratings for the NHL all-star game, which was broadcast on the Versus channel last Wednesday, have indicated what media executives have known for quite some time—hockey may be worse off than ever on TV. According to Nielson Media the game garnered a 0.7 household rating, which translates to only 474,000 viewing homes across the country.

For the 2006-2007 season, games on the Versus network are averaging a 0.2 rating, while NBC’s first weekend of coverage earned a 1.1 rating. These dismal showings are lending credence to the notion that hockey just isn’t interesting to the vast majority of American TV viewers—at least in those areas without a hockey tradition. As a result, teams in the NHL need to maximize local revenues since there isn’t much national TV money to be had.

Even among cities with NHL franchises, the all-star game did not fare well. It did not place among the top 20 cable shows in markets such as New York, Los Angeles, Atlanta, Washington, and Miami. However it was the number one rated cable show in Pittsburgh, earning a 2.8 rating, behind only Buffalo’s 7.1 rating among NHL markets. While all-star game ratings for Kansas City are not available, the next closest NHL market, St. Louis posted a rating of 1.1 (sixth highest rated cable show), well behind the Pittsburgh rating. It seems unlikely that Kansas City would have been able to match St. Louis’rating.

Nielson Media rates the Pittsburgh television market ahead of the Kansas City market (22nd vs. 31st). Given the larger market and more dedicated fan base, the Penguins should be able to realize higher revenues in Pittsburgh. Yet this realization hasn’t dawned on team ownership as they continue to balk at the Governor’s more than generous offer for a new arena. Assuming the Penguins believe the arena deal in Kansas City is slightly better than what’s being offered in Pittsburgh, the difference can be made up through the greater local television market and loyal fan base.

Despite a streak of resiliency that withstood a major legal challenge, the loss of one lead developer after another, and criticism from the public, it took the decision of an anchor tenant to pull out of the proposed Deer Creek Crossing retail development to kill the project.

We noted as far back as 1999 when the Deer Creek proposal was first hatched that subsiding retail by awarding tax increment finance packages to areas that were not in any real sense blighted was not a sound development policy. But retail developments in Allegheny County continued on with TIF packages providing funding, and have now spread to Washington County with the development of Victory Center.

Deer Creek Crossing was seized upon because of a wetland issue. Soon after, the development of the nearby Pittsburgh Mills (also built with the help of a TIF) threw a wrench into Deer Creek’s plans. A 2004 study for Allegheny County noted that “[existing malls] provide competition and will affect Deer Creek Crossing’s ability to draw shoppers”. With $191 million in sales projected to be diverted from existing retailers, the study finally put into numbers what we know is already occurring given the region’s slow population growth. Showering selected retail projects with favorable tax treatment makes the situation that much worse.

Some development, much smaller and without a TIF, will be built at the site. Will the death of Deer Creek Crossing provide a lesson for the appropriate use of this development tool? Don’t count on it. Governments are hard to embarrass.

Renovation work on Point State Park has been disrupted by demonstrations from local unions. These picketers hurled profanities at workers and even attempted to set up a human blockade to prevent deliveries before they were arrested. As the union leader was being led away in handcuffs, he said “Pittsburgh is a union town, and it will continue to be a union town.”

That’s what’s wrong with Pittsburgh—the union mentality that still prevails undermines economic growth and development. Public sector unions in the City and with the Port Authority have driven their employers to the brink of financial ruin and are asking taxpayers to bail them out. Union work rules and prevailing wages inflate the cost of public development projects, again requiring more money from the taxpayers.

However, the trend across the country shows that unionism is on the decline. A report from the U.S. Labor Department notes that in 2006, U.S. labor unions lost 326,000 members, dropping the number of employed workers belonging to unions to 12 percent. This has been a decade’s long trend across the nation and even in Pennsylvania, where less than 14 percent of employees are union members.

Yet unions have fostered such an anti-business climate that manufacturing jobs continue to slip away. Heavily unionized states such as Pennsylvania and Michigan continue to languish in job creation and growth while Right-to-Work states such as North Carolina and Virginia prosper.

The negative correlation between unionism and economic growth continues to elude most area policy makers. Only when business-friendly policies, such as Right-to-Work, are enacted and the union mentality is soundly rejected as a way of life, will the economic tide turn. Until then, this “union town” will continue to bleed population. Hopefully, union work rules will allow the last person to turn out the light.

Wow, after a few years of bickering and stalling it looks like the City and the County will finally begin joint purchasing of goods. The next time one of the region’s officials or study groups propose an entire City-County merger, remember this chapter as an illustration of how difficult it is to get government functions merged.

With this pact in place, the City expects to save $1 million annually from the $10 million it spends on goods and services. Not an earth-shattering amount, to be certain, but a step nonetheless.

Recall that what held up the merger in 2005 was that the City was basically concerned about losing control and, in all reality, the jobs for people employed in purchasing. Well, those folks will still keep their jobs and the City and the County will “really” explore doing something bigger in 2008. It defies logic as to why the City needs to continue buying goods in house. There can be no other reason but to protect a few jobs.

That makes us wonder why this is really being labeled a merger at all.

Penguins’ ownership is “very disappointed” at the progress of arena talks. The latest proposal from the Governor is very generous—more so than any other stadium deal offered to a professional sports team in the Commonwealth. And possibly the best deal for a new arena offered any NHL team in recent years.

Since the team is balking at the Governor’s proposal, which calls for $14.5 million per year in slots-based revenues, here’s another idea:

The Governor can give the $14.5 million to the Sports and Exhibition Authority (SEA) and have them construct a new facility without the Penguins. To cover the remaining money needed, the SEA could issue bonds than can be paid off from anticipated revenue streams from seat licenses, luxury boxes, naming rights, etc. Build a new arena and bring in another NHL team. Every year there are a couple of NHL franchises that come up for sale. Finding an owner willing to bring a team here to take advantage of a “sweetheart deal” and a built-in hockey fan base should not be hard to do. With a new arena in place and ready to go it would be a strong drawing card to attract a hockey franchise.
In short instead of being jerked around by Penguins’ ownership with their threats to move the team, the Governor and Chief Executive ought to turn the tables and remind the team that the City and State have options as well. If the team wants to leave—good luck.

Over the past weekend, a local transportation reporter wondered how silly local opponents of the North Shore Connector can be for being willing to walk away from $420 million in federal and state money. This is the same reporter who has recently begun reporting on the terrible state of Port Authority finances after years of excusing their spendthrift ways and calling on Harrisburg to come up with dedicated funding.

Well let’s set the record straight on the $420 million we are said to be turning our backs on. First of all, 25 percent ($47 million) of the federal funding is flexible funds that were to be diverted from other regional projects. The state funds ($72 million) are committed to the project but could be shifted to other projects if the Connector is not built. And, the County would save the $14.7 million it is being counted on to contribute. That’s a total of $174 million. So, let’s be clear. The County would not be giving up $420 million; it would be keeping over $170 million for worthwhile projects.

To spend $260 million of new federal money that requires $174 million of money that could be better used is not a bargain--especially, in view of the extremely low level of benefits the Connector will provide and its extraordinarily high per mile cost.

Moreover, when the cost overruns start, as they are certain to do, the local and state funding could rise by tens or hundreds of millions. At that point, not forgoing the feds’ $260 million will look like the biggest mistake anyone ever made in Allegheny County.

Giving up the federal money on its face might seem foolhardy. But in light of other factors diehard advocates refuse to consider, telling the feds to keep the $260 million would be very smart.

Though it has only existed for three short years, the Emergency and Municipal Services Tax (EMS) has caused enough heartburn to last a few decades. Recall that the state gave municipalities permission to increase the former $10 Occupational Privilege Tax to a maximum of $52 a year and to take it out in one lump sum at the beginning of the year. They could set a minimum income threshold of $12,000 per year, but were not required to do so.

Since this tax is mostly collected in a lump sum one time payment, low-wage workers were especially hard hit in their first paycheck and those who work in multiple jurisdictions had to jump through hoops in order to get a refund (the state’s clear intent was that no taxpayer was to pay more than the rate set by their primary place of employment). Moreover, in Pittsburgh, people making less than $12,000 can apply for a refund of $42 in the following year by producing their tax returns to prove they made less than $12,000. Of course, most will not and do not, allowing the City to be keeping as much as million or more dollars per year it isn’t morally entitled to.

There was a glimmer of hope last legislative session when the General Assembly passed a bill that would have softened the blow of the EMS tax by making the collection of the tax quarterly instead of a lump sum once a year. Ironically enough, the bill exempted the City of Pittsburgh from changing its collection scheme until 2010, essentially acknowledging that the City’s need for revenue outweighed the obligation of the City to treat its lowest paid citizens in an ethical manner.

But the Governor vetoed that bill, noting that municipalities were not prepared for the change. Funny how they were able to get ready so quickly to impose the new tax after the state granted the authority to do so in late 2004.

Now interest groups are staging protests against the tax outside of the City-County building (though nothing would have changed in Pittsburgh anyway if the bill would have passed) and asking for the state to implement a $1 a week deduction and a mandatory $12,000 exemption. The recent minimum wage hike will push most full-time workers above this limit, so the exemption would likely benefit only seasonal and part-time workers.

The protestors ought to ask the Governor how he can lay claim to be looking out for the “little guy” when he permits the unnecessary, hardship-producing collection of this tax to go on indefinitely.

The state is about to enter into contracts with three of its major labor unions that will require workers and retirees to contribute to health care coverage while partaking of wage increases of 3 percent in 2008 and 2009 and a final 4 percent in the final year of the contract. Bear in mind that though the Governor characterizes the pact as good since “our workers had sacrificed to get us out of the deficit situation we faced”, they only had a one year wage freeze and did get 3 percent and 3.5 percent raises in the past two years.

So while this is sold as a “win-win” for the employees and the taxpayers, don’t feel too bad for the employees having to make health care contributions and don’t feel too good that your pocketbook is safe. The state’s pension funds for school employees and state employees are on a trajectory to be enhanced nicely, long after the officials who negotiated this contract are gone from office.

Thanks to benefit enhancements negotiated by previous administrations and legislators, the “the cost of subsidizing pensions for state workers and school employees is expected to jump from less than $1 billion to more than $3 billion a year”, according to an AP series. A June 2006 projection from the school employees’ retiree system shows that the total employer (school district) contribution rate for pensions will jump from 4.7 percent in 2012 to 18.7 percent in 2013. An actuarial report from the state employees’ system projects that the employer share of contributions (as a percent of pay) will jump from 3.5 percent in 2011 to 13.3 percent in 2012. That money has to come from somewhere, and taxpayers are going to get the bill.

Pension enhancements, looming tax increases for transportation needs, new spending plans from the Governor, and no remedies for controlling the growth in state spending: sounds like a lot of aggravation is on the way.

The most recent results for the statewide academic assessment tests show that students in the Pittsburgh Public Schools still have a long way to go. The percent of eleventh graders who scored proficient in reading remained stagnant from the previous year at 51 percent while in math the number of students scoring proficient increased from 38.4 to 40.2 percent. However, both sets of scores rank City students near the bottom of the state’s 501 districts.

The tragedy in these scores is the amount state and local taxpayers pay for such sub-par performance. At more than $18,000 per student, there should be a higher return on investment. The trend is slowly creeping upward, as reading scores were below 50 percent and math scores were below 40 percent from 2001 to 2004. Still, not enough progress is being made for the outrageous sums being spent.

While the superintendent has made some changes designed to increase scores, closing some schools and shuffling students will not improve academic results enough to justify such enormous expenditures by taxpayers. Real changes need to be made and made quickly.

The best remedy for public schools in Pittsburgh is competition. Short of offering vouchers to parents, the district can create its own charter school system that demands performance from its students and accountability from its faculty. These schools can take a “No Excuses” approach to learning fosters the idea that all students can and will learn the material and make continuous improvement. “No Excuses” is an academic program that is clearly defined and constantly evaluated through a rigorous program of testing and feedback. But most importantly it rests the decision making responsibility to school principals who have complete latitude over hiring and firing decisions for teachers and staff as well as full authority to make curriculum choices.

Students and taxpayers deserve the best education possible for the money spent. Since it is clear that the current system is not achieving that goal, a new approach needs to be tried.

Data from the Pennsylvania Department of Labor and Industry shows that the November private payrolls in the Pittsburgh metro stood at 1,028,000, an increase of 5,200 (0.5%) over November 2005. However, it is useful to note that private employment is still 3,500 below the previous high November private job count of 1,031,600 from 2000.

It is no surprise that the service-producing sector accounted for the upswing in jobs, growing 8,000 from November 2005 to November 2006. That growth was offset by a loss of 2,800 in the goods-producing sector including a 3,600 decrease in manufacturing.

We have documented on previous occasions that much of the metro—and state—job growth is coming from the categories of education and health services (up 4,800 or 2.1%) and leisure and hospitality (up 2,700 or 2.5%). Those two categories accounted for 94 percent of the net growth in service-producing jobs, thus showing that the trend continues to hold.

Bear in mind that significant government money is providing major support for the education and health services category, providing further evidence of the overall weakness of private sector growth.

In a plaintive letter to the Post Gazette, a reader argues that Allegheny County owes its ranking as the nation’s 28th largest county in large measure to its overly generous provision of mass transit services. And, the letter writer goes on to predict that if the Port Authority makes the cuts it has announced, Allegheny County will drop in ranking.

This letter represents an appalling level of ignorance about what has happened in recent decades as the Port Authority has been in a greatly expansive mode to offer more and more service that has in turn led to a situation of grave financial crisis as revenues simply cannot keep up with spending.

Here’s the reality: in 1960 Allegheny County, with a population of 1.63 million, was among the top twelve counties in the country in terms of population. By 2004, Allegheny County’s population had fallen to 1.25 million dropping the county to the 29th ranked most populous. A total of 19 counties that were smaller in 1960—many much smaller—now have a bigger population count than Allegheny County. And the trend is not good with many counties that are currently ranked below Allegheny showing strong decade to decade gains. Only the very largest counties from 1960, such as Cook County, Los Angeles County and the borough counties of New York City have maintained a higher ranking than Allegheny County.

Lamenting the needed cuts at the Port Authority has it exactly backward. Allegheny County has been losing people for decades because of high taxes, out of control government spending, empire building by authorities and intrusion into the private sector’s ability to generate market driven growth in the economy. The underutilized Wabash tunnel, the underused South Hills parking garage, the underused West Busway, and the many, many examples of buses running around the County with next to no riders all point to an overly expensive, poorly run system that is symptomatic of the County’s and City’s approach to providing public services. People have moved to get away from the taxes and anti-business climate, weak growth economy.

Many of the counties that have experienced enormous population gains offered relatively little in the way of mass transit during their strong growth phase. Allegheny County, Cuyahoga County, Ohio, Wayne County, Michigan and Philadelphia County have long offered substantial transit systems, yet all have experienced huge population losses. Obviously, there is much more to economic and population gains than mass transit. Unfortunately, too many people are so narrowly focused they make silly comments and draw wildly erroneous conclusions about public policy issues.

It’s amazing what happens when a professional sports team threatens to leave. Politicians trip over themselves to give away money they really don’t have. The Pittsburgh Penguins have threatened to pack up their sticks and move to Kansas City if they don’t get a new “free” arena. And by “free” they mean at no cost to themselves.

The Governor, County Executive, and Mayor have heard the team’s warning and have put together a very generous proposal, at least for the team, called Plan B. This plan relies on money from the slots parlor that will soon open its doors in Pittsburgh ($7.5 million per year), as well as money from the state’s share of gaming proceeds ($7 million). The team will be responsible for an upfront payment of $8.5 million, an annual payment of $2.9 million, as well as foregoing $1.1 million in naming rights revenues. In return, the team will reap revenues from non-hockey arena events, including rentals, concessions, parking, and others along with all hockey produced revenues—a pretty sweet deal for the team considering that these revenues could top $20 million per year.

But one City Councilman (and mayoral hopeful) wants to take it one step further by promising the team a share of profits from a promised redevelopment of the lower Hill District—a $350 million development project being promised by Pittsburgh’s slots license winner. The Councilman suggests that the Penguins should be offered a chance to partner in the redevelopment. If the team does not want to redevelop its own arena, how interested will they be in redeveloping the area around them?

He says the deal is similar to what the Steelers and Pirates received, as both teams will receive revenues from the development between their two stadiums. However, these teams do not receive money from this development other than parking, they only have a say in what development takes place. The Steelers have talked about building an amphitheater on this land, with help from taxpayers, but would not have shared profits with the Pirates.

Finally, since the team’s 30 day clock has already been running for several days, its seems extremely optimistic to believe that all the relevant parties can reach a timely agreement on an arrangement infinitely more complex than Plan B.

Could Pittsburgh be the latest city to use advertisements and selling naming rights to raise revenue? The process has been put into motion with the selection of a firm that will begin an eight month process to identify assets and facilities that could be seen by corporations as money makers. Other cities have done it and it was recommended by the Act 47 coordinator as “market based revenue opportunities”.

The coordinator’s plan identified “general outdoor advertising, street furniture, indoor advertising, and secondary use of public real estate” as possible avenues of revenue generation. It was labeled as a priority and arrangements were to have been in place by January 1, 2005 so that the City could realize revenues of $500,000 that year and would be getting $1 million this year.

No such luck. For whatever reason, the Act 47 plan’s recommendations were once again modified or outright ignored. In true Pittsburgh fashion, the City has already said that “the names of parks and the City-County Building are probably off limits to corporate marketing [and] there won't be billboards all over town.” Another example where the consulted party has already cut off the consultant’s input.

In addition, the city isn't allowed to sell ads on its cable channel, because that would compete with private broadcasters. Why not sell off the cable channel? What if a company offered $1 million to advertise in Frick Park? That’s $1 million that does not have to come through taxes or fees. Too tacky? Unfortunately, Pittsburgh wants to be entrepreneurial, but only on its overly rigid terms.

Fare increases, service cuts, and layoffs. It is nothing we have not heard before from the Port Authority; in fact, it has become almost an annual occurrence. But with a new Executive at the helm and the recommendations from the Governor’s Transportation Commission in, it appears that the long overdue changes at PAT might go into effect.

The details on which routes will go and what fares will look like will be determined as the process moves forward with public hearings likely to be very animated. This much we know: weekday routes will fall by half and the layoffs, to number around 400, will fall on labor and management.

That’s quite a change from the attitude that all was well when elected officials intervened to thwart the Port Authority’s plan to outsource 20 percent of operations to the private sector through competitive contracting like the system in Denver has done. Indeed for years management and employees have denied they were inefficient and not cost-effective and proceeded to expand service even when ridership was flat or falling. For too long, PAT was able to continue to receive funds that covered up the massive problems that were developing.

At last there is recognition that the system is simply too expensive for the region and that changes, regardless of what funding reform comes from Harrisburg, will happen. Too bad this attitude did not prevail when the authority engaged in expensive boondoggle after expensive boondoggle and inertia kept the North Shore Connector going through its groundbreaking.