Allegheny Institute Blog

To be certain, the looming decision County Council has to make over deciding whether to enact a drink tax and a car rental tax has led to impassioned debate in the community. By this time, with a decision to come Tuesday and a Council committee already voting to approve a budget with the levies in place, you either know if you are in favor or opposed to the new taxes.

But there may be one person who has a foot in two camps. He is the chairman of VisitPittsburgh, the organization charged with selling the region to outsiders for visits, conventions, and exhibits. Many of the folks who come to visit might rent a car while they are here and would be hit by the $2 daily fee. Later—much later—they might want to enjoy a libation while they are here, and would have to pay the 10% proposed pouring fee. Those would be detrimental to the visitation business, much like the extra 1% sales tax and the 7% hotel/motel tax are now.

But this person is also a member of the Port Authority Board of Directors, charged with operating said mass transit system that is hoping to be the recipient of the revenues from the new levies so it can continue to operate. The Port Authority has been told by the County Executive that if the levies are enacted they will not be remitted to mass transit until the union agrees to concessions on operating and legacy costs.

So which camp wins the day for this person? In a newspaper quote he stated that “if this drink tax doesn’t pass, that will be the end of public transit as we know it in Pittsburgh”. While we would certainly support an end to the status quo of monopoly control, lavish benefits, and high driver pay that have made public transit as we know it here, we doubt that was the gentleman’s sentiments. Unfortunately, passing the taxes will likely continue the sad state of transit for a long time.

In a 6-1 vote, City Council passed a resolution to petition the Secretary of the Department of Community and Economic Development (DCED) to review where they stand in Act 47 distressed status. Members of Council have stated that they aren’t asking to be removed from oversight by the coordinator, but it is clear that they are. Maybe Council wants some positive affirmation that they are going in the right direction, but is there anyone outside of City government who thinks things are good? Another explanation comes from the many public statements by public sector unions indicating they want to eliminate the power Act 47 has over contract negotiations. With several contracts set to be re-negotiated in 2009, this explanation seems very plausible.

Legally, Council is entitled to its action. Under Section 253(b) of the statute “a financially distressed municipality may petition the Secretary to make a determination that the conditions which led to the earlier determination of municipal financial distress are no longer present”.

Realistically, it is a different story. The same section points out four factors to consider, including feedback from the coordinator, the elimination of accrued deficits, obligations to finance the deficit have been retired, and the municipality has operated for a year with a positive fund balance. The law does not say that each factor has to be satisfied, just that they shall be considered. Since there is no fixed time limit in the statute and some municipalities have been in Act 47 for twenty years, it would be a monumental achievement that the City of Pittsburgh, with its hefty debt and pension obligations, would be ready to exit Act 47 in just four years time.

The Secretary is going to make a judgment call, but he does have some objectivity. There were over 200 initiatives made by the recovery coordinator—how many of them have been implemented? How many have been modified? We know for certain that the initiative to bid garbage collection was severely modified—how many others suffered the same fate?

At the very least, the City wants to see benchmarks set so the City knows what goals it has to meet to get out from under the special oversight. Here’s hoping that the state sets some stringent guidelines and direction, including a strong recommendation for the City to get its per-capita spending levels down to a level with better performing cities. After all the City’s own financial forecast shows spending will increase $50 million in the next five years. Beyond the operating side the large obligations loom. Until there is some drastic and significant move to correct the legacy costs, the talk about getting out of Act 47 ought to be shelved.

Allegheny County Chief Executive Dan Onorato signed an executive order on Monday that backs up his promise to withhold money from the Port Authority (PAT) unless the transit agency reduces costs. Since providing local money is necessary to unlock state funding, this Order may be the proof needed that the Executive will finally get tough with PAT and force the cost cuts needed. Or the Order may do nothing more than provide County Council members with enough cover so that they will approve the two new taxes he is seeking to plug the hole in his budget.

With Act 44, the state has increased its allocation to mass transit. But in order for a transit agency to receive the extra funds, the local government must provide matching funds of 15 percent. To receive $184.4 million in state money, Allegheny County must provide PAT with $27.5 million. Also through Act 44, the state gave Allegheny County permission to institute two new levies in order to meet this matching fund requirement—a 10 percent poured alcoholic drink tax and a $2 per day rental car levy.

Currently the County provides PAT with $25 million from property tax revenues which the Executive would like to see returned to the County budget to plug an expected deficit. He uses the argument that other cities do not use property tax revenues to fund transit, but rely on other sources. In the Executive Order, he mentions ten such cities. While some of these cities use a dedicated sales tax, Allegheny County also has a sales tax, the Regional Asset District (RAD) tax, from which a portion of the County’s proceeds could be used for transit. But this swap of the property tax for the RAD tax would still leave a hole in the County’s budget and force the Executive to deal with it through either cuts, which he says is nearly impossible, or through the property tax, for which his base year assessment plan has frozen the revenue stream.

Thus he needs the new levies to bail him out. But the reception from County Council has not been too warm. To reassure them that the new money will not be wasted, he had pledged not to give any of the revenues to PAT until changes are made and costs are cut. With the Executive Order, he even put it into writing.

Unfortunately for the Chief Executive, the union is used to these types of tactics—tough talk of cutting costs and reducing service only to see money come pouring in to avert a shutdown. Also, he may have tipped his hand when he also said; “obviously, we’re not going to let Port Authority shut down.” The language of the Executive Order does say that the County will be “expressly prohibited from distributing funds derived from Act 44 of 2007” unless costs are “restructured” at the Port Authority. But could a shutdown be averted by using money from another source, or even by convincing the Governor to release the state’s contribution anyway? After all, Act 44 does have a hardship clause that waives the matching fund provision.

Hopefully the Chief Executive is serious about restructuring the costs of the Port Authority and reducing its crippling legacy costs. However, these actions can be done without the imposition of two new taxes on an already overtaxed population. If he is successful in getting these two costs reduced, then the need for extra revenue would be negated and he can begin the process of reducing taxes for the residents of Allegheny County, not imposing new ones.

Though it has never popped up on the political landscape before, it should not come as a complete surprise that Allegheny County Council is now looking into reviewing the tax-exempt status of non-profit owners as a way to possibly generate revenue. Our 2003 report on the City’s tax-exempt property found that the County as a whole had about $13 billion, or 18 percent of total value (taxable and exempt) held by tax-exempt entities. A newspaper report puts the value at $15 billion now.

Considering that the County has problems, such as its own budget deficit and its continuing financial support of the Port Authority causing a strain, it is basically taking a page from the City’s book and will review to make sure that all exempt property is being used for purposes that qualify it for exempt status.

It won’t be long before the Pittsburgh Public Schools, and other municipalities and school districts in the County begin to agitate for their own voluntary payments in lieu of taxes or something akin to the Pittsburgh Public Service Fund, which holds voluntary payments from non-profits for the City’s operations. That’s what a previous blog entry pointed out as a shortcoming with the plan to use the Johnstown flood tax revenue to compensate cities and towns for tax-exempt property—school districts and counties would not be able to participate in the program.

Of course, the County is not going to tax itself, other levels of government or authorities, and no one wants to go after churches or pure charities, so that basically pits the government against the university and hospital community, specifically UPMC. Both categories have their exemption granted by statute, so the General Assembly could remove their tax-exempt status, which seems doubtful.

This issue of hospitals and universities tax-exempt status needs a full debate. Abuse of tax-exempt status is not desirable, appropriate, and should not be allowed. Only where the public interest and welfare is best served by granting a tax-exemption should such exemption remain in place. Perhaps the time has come for a statewide examination of the tax-exempt status for some institutions.

There is a proposal in the General Assembly to redirect a tax on liquor that was created to help victims of a natural disaster—the Johnstown flood of 1936—to compensate local governments for the presence of tax exempt property. A lot of officials point to exempt properties as a disaster of the manmade kind since there are no property taxes paid by these entities. The proceeds from the tax currently fill the state’s coffers at a rate of $240 million per year.

The proposal would give money to municipalities as long as at least 17 percent of its property (not sure whether this is land area or total assessed value) is exempt, whether the properties are owned by public agencies or non-profits. The affected municipality could receive up to $24 million from the flood fund to offset its “burden” of exempt property. Pittsburgh, with 33 percent of its assessed value tied to tax-exempt property, would get the maximum amount, which is about one-fifth of what it gets from taxable real estate currently.

Here’s where this proposal becomes predictably sticky: first, only municipal governments will get funds, even though school districts and counties can’t get real estate taxes from the entities either; second, a small town with a 15 or 16 percent exempt amount could quickly undertake a public works project or town hall expansion that would put them over the limit; third, there are a ton of places that would qualify, meaning the money would be spread around and the impact would likely be diluted.

This would benefit places like Gettysburg, which draw huge amounts of tourist dollars and spinoff activity as a result of its 80 percent threshold of tax-exempt property. Closer to home, Findlay Township would be able to benefit from this program due to it being the location of the tax-exempt Pittsburgh International Airport, though it does not really possess the type of burdens one would associate with an older city or town.

As we have pointed out before, having universities and hospitals, though they don’t pay property taxes, often leads to boosts in other revenues collected by municipalities. The state is also likely reluctant to give up on this revenue source, one that should have been phased out long ago. If they redirect the tax, how does that revenue get replaced? And if the state is running a massive surplus, making the reimbursement program a possibility, then why isn’t the Legislature moving to end taxes like the flood tax and other nuisance taxes? There could not be a better time. Extending it as a reimbursement program would only ensure it is in place for an even longer time.

A newspaper columnist took issue with our Benchmark City comparison in a column this weekend stating that Pittsburgh’s problem is that it is just not big enough to solve its problems. Cities like Charlotte, Omaha, Columbus, and Salt Lake can get bigger by annexation and thus right-size their costs, according to the columnist. “That's the key to survival in a commuter age: A city must capture where citizens make money and spend money for a stable tax base”.

Well, if Pittsburgh got bigger and essentially became Allegheny County, the population drain would not be solved since the County is still losing population and it would be likely that even more residents would flee the new borders to escape the larger metropolitan City.

It can’t just be size: the Benchmark City performs better because it has fewer sources of local taxation, does not spend nearly as much on general services, does not have the level of authority employment, and, on a key component, its schools are not taxing and spending at the level Pittsburgh does. None of the cities has a local option 1 percent sales tax that was intended to relieve the City of the costs of cultural assets and provide tax relief.

Taking in more taxpayers by annexation is not likely to happen, as the columnist later points out. The columnist also notes that moving to a countywide police force or solving the pension crisis is just not “on the radar now” and “won’t be easy to figure out”. The City and its overseers could be moving to a 401K plan for all new employees and could be combining services with the County—we’ve been recommending those moves for years, but to no avail. The City is looking for a bailout, and luckily, there does not seem to be any movement in that direction.

Various parties—City officials, public sector unions, state legislators representing the City—are beginning to increase their calls for an end to either the Act 47 recovery team, the Intergovernmental Cooperation Authority (oversight board), or both. The elected officials seem to want it as a sign that the City has turned the financial corner, the unions want it to end what they see as draconian control of their wages and benefits.

So can the City get out? Under Act 47, Section 253, the termination of distressed status can come about from a determination by the Secretary of DCED that the factors causing distress are no longer there. The Secretary can either initiate this process himself or by a petition of the municipality. The factors used to consider the termination of the status include the elimination of deficits, the retirement of obligations, and that the municipality has operated with a positive fund balance for at least a year.

Under Act 11, which created the oversight board, Section 204 states that the board shall be in existence for at least seven years, which would extend out to 2011. If the board has approved the three previous budgets and five-year forecasts, then the Secretary of DCED can certify that the authority is no longer needed. The board submits a final report and goes out of existence.

So, is there a track record in the state that could predict whether Pittsburgh—declared distressed in December of 2003 and having the oversight board created in November of 2004—could throw off what it perceives as shackles of state control? There are 17 municipalities, including Pittsburgh, currently in Act 47 status. Some have been in since 1987. Six communities have had their status terminated after being in Act 47, with some in for as little as three years and others in for ten.

There is an oversight board similar to the ICA that operates in Philadelphia and has been in place since 1991. It shows no sign of going anywhere anytime soon, having just received the Mayor of Philadelphia’s 2008 budget and five-year forecast.

It is very premature for the City of Pittsburgh to be out from under state oversight, either from the Act 47 team or the ICA. Showing some real movement toward reducing per capita operating expenses and dealing with long-term obligations would be a step toward the resolution some parties desire.

With all the talk that has been surrounding the City’s 2008 budget and the parking tax and the County’s 2008 budget and the drink and car rental taxes, the Pittsburgh Public Schools have decided to join in the party and submit their preliminary 2008 budget. The good news, if there is any, is that the schools aren’t proposing a tax increase, asking for new tax authority (like the County), or forestalling the reduction of any taxes (like the City was).

The schools actually have proposed reducing spending (by 0.5%) to $525 million. The schools’ budget dwarfs the City’s by about $100 million, and, like the City, is suffering from the population loss and the movement away from the City in its enrollment. This year’s enrollment is pegged at 28,265, which is down significantly from a decade ago. More importantly, the proposed budget and enrollment translates into per-student spending of $18,767.

So how is it possible for the schools to avoid new taxes and even make a small budget reduction? A lot of it is due to the state’s funding formula.

The superintendent notes the state isn’t punishing the school district for its poor performance. He mentions that state aid isn’t tied to enrollment, because, in his words, “that would be almost an Armageddon point for us”. But his comment points out the tragedy in state education funding. According to the complex Basic Education Funding formula, each district is entitled to the same amount it received in the prior year and then gets increases based on supplemental information such as poverty, growth, property values, and others. Thus even though the District’s enrollment continues to fall, their state appropriation continues to rise.

There is no incentive from the state to look to reduce the costs that come from a reduction in students. It is conceivable, if not probable, a district can encourage declining enrollment to pocket more state money than they need. Thus the current system actually rewards districts for losing students. This is something that needs to be rectified by the Legislature and quickly.

The proposed drink and car rental taxes received another public hearing last evening, which once again provided an opportunity to see how utterly nonsensical the plan is.

What we have repeatedly heard is that if the County Council approves the optional taxes the money will be withheld until the Port Authority makes the necessary changes to its structure that will then justify releasing the money to them. This line of reasoning was convincing enough to pick up the support of the Allegheny Conference and the Greater Pittsburgh Chamber of Commerce, who endorsed the plan at the hearing.

Under Act 44, the County needs to come up with $28 million as a match for state funding. Up until now, the County has written a $25 million check to the Port Authority from property tax revenues. The Executive says the County can no longer continue that course, so instead of finding an additional $3 million in savings from existing programs, the Executive and supporters on Council have attempted to sell the new taxes as dedicated funding for transit.

Instead, the new taxes will allow for County to stop sending property taxes to PAT and instead use those dollars to plug a hole in the County budget. It is a tax grab scheme perpetuated by the Executive’s ill-advised base year reassessment plan.

And what is the outcome if the new taxes are approved and held essentially in trust? There is no benefit to the County or the taxpayers, that’s for certain. If the taxes are enacted and then withheld, there is a good chance that the matching state subsidy is held back and the system shuts down. Think the County Executive is going to go down this road? Not likely. And what about the transit union? They’ve seen threats come their way before only to have an elected official come through for them. So what incentive do they have to give concessions if the tax money is sitting there waiting to be released only if they decide to play nice? No much at all.

The silliness of this plan is once again laid bare.

When the weak arguments underpinning the North Shore Connector grew more wobbly, supporters were always quick to say that getting the trolley to the North Shore was the clearest way to extend the system to the airport. Though making such a link would require the system to once again cross rivers and double back to the South Shore to get to the airport. But that argument continued despite its shortcomings, and might have prodded Federal officials to keep the connector going.

Now comes the County’s Transportation Action Plan, which is a blueprint for future transportation links between Downtown, the Oakland university community, and the airport. Here’s some of the findings from the plan’s recommendations to “Implement Rapid Transit from Downtown to Airport”. In order to provide the “fastest and most direct route to the airport”, the plan recommends two stages:

“Stage I would complete the LRT from Downtown to the “Western Station” intermodal hub; and Stage II would continue the LRT on to the Airport Station hub”.

Note that the plan does not say “continue light rail transit from its terminus on the North Shore to the airport”. In fact, one of the recommendations of the plan is that the connection to the airport “provides a link connecting to the Downtown subway, North shore and South Hills LRT”.

Maybe the connection to the airport will take on a much different look than what is outlined in the Action Plan. If not, the Connector’s legacy as a sham will be even further solidified.