Allegheny Institute Blog

In the recently released “Governor’s Report on State Performance: 2006-2007”, a little noticed section analyzes the travel industry in Pennsylvania. The report makes a big deal about a 2.3 percent increase in hotel room night rentals from fiscal 2005 to fiscal 2006. The problem is that that much of the increase represents a bounce back from a dip in the prior year. Since the Governor took office, room nights sold have climbed 6.3 percent. During the same period, national room nights sold rose by well over 10 percent, nearly twice as fast as the Pennsylvania rate.

Obviously, for hotel operators in the state, the growth that has occurred is a good thing. But the bigger issue is that outside any comparative context the Governor’s report puts far too much of a glow on the state picture.

Hotel use by non-residents reflects to a large extent the health of the national economy and international influences such as the value of the dollar. Given the national historic assets in Pennsylvania, the sate should have decent growth when the national economy is favorable. But so too do a many other states and clearly some are better at it than Pennsylvania in terms of stimulating growth.

Here’s some good governing news from the City: the Mayor has made it known that he would like the City to extend its contract for fleet management for another three years. The City is currently contracting with First Vehicle Services, which was awarded the contract after a Request for Proposals was put together by the City in 2004. The Act 47 Recovery Team did a review of First Vehicle’s work in other cities and at Allegheny County’s garage, where fleet management has been outsourced for some time.

City officials seem happy with the service, despite what had to be hard pressure from City employees and a report from the City Controller’s office on the costs of First Vehicle’s operations.

It may even become possible that the County and the City contract for First Vehicle’s services at the same time, since the proposed City contract renewal would expire at the same time as the County’s. Maybe this will be the catalyst for looking at the numerous services that the City could look to the private sector to provide.

But it is not as bad as Pittsburgh’s. That’s one of the interesting findings of the recent report by the Pew Charitable Trusts and the Economy League of Philadelphia.

The new report states that Philadelphia now has more claimants than workers and that “of comparison cities around the country, only Pittsburgh is in worse shape” on its percentage of liabilities that are unfunded.

We pointed this finding out in a 2007 report on local government pensions in the state and found that, taken together, Philadelphia and Pittsburgh’s unfunded liabilities accounted for 75 percent of the aggregate unfunded liability of the Commonwealth’s 3,000 local pension plans, which totaled close to $5 billion in recent years.

Both cities issued debt to shore up the deficit in funding, which did not help. Now the mayors of both cities are debating an “east-west” union that could address similar problems, one of them being pensions. “Strength is in numbers, as far as I'm concerned, specifically when you're dealing with the Legislature in Harrisburg, because many times our problems are similar…” were the words of Pittsburgh’s mayor.

The problem for municipal pensions and local officials is that the strongest numbers the state is looking at are the status of their own state employee retiree plan and the school employee retiree plan, both of which are projected to require steep increases to the employer share in the coming years. Those crises will likely be dealt with first. A comprehensive solution—one that moves to a defined contribution system, finds a pot of money, etc.—is likely far off.

Two weeks ago we wrote an entry noting the celebration that was about to erupt over the Port Authority’s South Hills garage reaching 50 percent capacity. The authority decided to close down and lease the land where they had offered 600 free parking spots and many of those commuters have opted to forgo driving into other park and ride lots and pay to park in the garage for a $2 per day fee or a $22 monthly rate.

We noted in that blog that many of these users were taking the path of least resistance and parking there for a fee. Albeit anecdotally, those sentiments were expressed in a newspaper article today by at least one driver, who noted that going to another lots is “too much trouble” because “They're all full by the time you get there.” Another noted that “Ninety percent of the people just had to bite the bullet and use the garage.”

Fair enough, but the assertion by the byline of the article that the garage is “finally making money” is just plain wrong. Let’s assume that the current average daily rate of 1,100 daily parkers holds: at $2 per day for 300 days per year, that translates into $660,000 in parking revenue. The authority may still be receiving $56,000 a year from a nearby Giant Eagle which leased a number of spots. They are also getting $131,000 for leasing the land where the free parking used to sit. That equals $847,000 in total revenue.

Now look at the costs—in 2006 the authority was paying Parkway Parking $250,000 a year to operate the facility. Toss in the annual opportunity cost of the capital expense of the garage (it cost $21 million to build) at 7 percent which is $1.4 million and that comes to $1.650 in total costs. That leads to a loss of $803,000 for the garage. Sure, it is better than losing $1.3 million as it was nearly two years ago but the authority is certainly not making money on the garage.

We’ve dissected economic development deals for many years and can break the process down rather quickly. It goes like this: appear with a cardboard check and a lot of fanfare, remain conspicuously absent when the time to measure results arrives, and argue that without these investments companies would choose to locate in places other than Pennsylvania. Repeat year after year.

That’s why when two checks were cut in Pittsburgh last week that it would not be surprising to see the same. That was the fanfare part with two companies—TechAssist and CardWorks—getting a combined $907,200 to create 152 new jobs and retain 245 existing jobs. After examining “[the state’s] commitment to stimulate economic development” and making “it possible for companies to compete in the global marketplace”, the state sees its investment as justified completely.

But note that based on the new jobs expected to be created and the amount of the outlay we are talking about spending $6,000 per new job. Looking at each project separately shows that the CardWorks project edges the TechAssist project in egregiousness with the cost per new job for the former at $8,357 to $4,575 for the latter.

And those totals are based on whether the new jobs even come to pass, which we might never know. There probably won’t be any news story splash if we find out in three years that the job totals have not been met. And that is just too bad, especially in light of the recent audit of the Opportunity Grant program by the Auditor General’s office.

With all of the hoopla generated by the County landing $22 million in gaming funds on New Year’s Eve and the whole controversy surrounding where $19 million of that money was intended to go (for airport debt) and where it ended up going (to the County budget), there was a third disbursement made from the Governor’s Budget Office on the last day of 2007. This one was to the City for retirement of the bonds related to the Pittsburgh Development Fund. Under the gaming statute, the City is supposed to get $60 million to retire the obligations.

Talk about something that has slipped under the radar. The City did budget $5.1 million for debt retirement from the gaming money in 2008, but its receipt generated only one small mention in the press. But the City has apparently made no public acknowledgement of the money and there is no official press release from the City on the money. Perhaps they sat back and watched the bait-and-switch game that has gone on with the County and the mysterious announcement that there was a $42 million debt that the County incurred for the airport that they were going to use the money to wipe out.

Or maybe the city has similar designs of its own. But the Act 53 language is pretty specific in that it is for the retirement of URA debt with “the utilization of funds transferred to the Regional Asset District”.

Much like a shell game, the slots money for the City (and the County, which got $2 million for retiring its economic development fund) is taking the place of RAD sales tax money that the City committed to paying off the economic development funds. Gaming permits the RAD dollars to go back to the City for general operations.

There is going to be more money flowing in from gaming this year and the next. Applicants in line for disbursements from the same Economic Development and Tourism Fund include the Penguins’ arena (minimum $7.5 million annually), convention center debt and operating deficits (minimum $3.4 million annually), a County infrastructure fund (minimum $6.6 million annually), and for a convention center hotel (minimum $3.7 million annually).

After that, perhaps in 2009, money that is set aside for the City and County due to being the host location for the Majestic Star will begin, and that money goes for general government purposes.

As of now, it is not clear when the money will come, only that it will likely happen before the end of the state’s fiscal year on June 30th.

The Port Authority’s 2,200 space South Hills garage—the largest garage in the region—finally got a boost when a neighboring free surface lot was sold by the Authority for development. Whereas the garage had been about 20 to 25% utilized while the lot was routinely full, the closure of the lot has pushed up the capacity of the garage. One recent count even put the garage at 50% capacity. Break out the bubbly!

Of course, the official PAT line is that “they are not forcing people to use the garage”, but it is clear to anyone that is the case. While some commuters might go to other free park-and-ride lots nearby or closer on the line or try their chances parking in on-street spots, most of them have likely accepted the fee to park in the garage. Indeed, while PAT is “happy to see our customers choosing to use it”, those that have parked there probably view it as the path of least resistance.

Based on the capital cost of $21 million, those 1,014 cars using the garage a recent Monday had a capital cost per car of over $20,000. But take heart that over 90 percent of the funding came from the Federal and state governments, money that probably would have gone somewhere else had the garage not been built. Sound eerily familiar to the rationale of the North Shore Connector?

Right before the holiday rush the Post-Gazette ran an article about a new Regional Indicators Initiative organized by a group called Pittsburgh Today. The purpose of the Initiative, according to its co-chairs—one, the former editor of the Post-Gazette and the other the former U.S. Treasury Secretary—is to get a clearer picture of the region by benchmarking it against 15 other regions. This is not too groundbreaking as benchmarking has been used by the Competitive Pittsburgh Task Force and we have written two reports that benchmark the City of Pittsburgh against four other hub cities.

“Until you know where you are, you can’t really be intelligent about it” were the words of one of the co-chairs.

But does the Pittsburgh Today Initiative bring confusion or clarity?

We’d argue that on first glance it is the former.

The problem is that there seems to be no agreed upon definition of what the Pittsburgh region is. The site points out that the Census defines the metro area as seven counties in Western PA; transportation dollars are targeted at a 10-county area; the Bureau of Economic Analysis takes a broader 19-county conglomeration that spreads throughout PA, Ohio, and West Virginia; and then the Pittsburgh Today group wants to add even more counties to the 19-county area and make it a 22-county region.

Rather than picking one definition, the Initiative uses the various groupings in various places: about half of the 36 current indicators use the 22-county area, 15 use the metro area. The group claims that when it is using one level of measurement for the Pittsburgh region, it is using the exact same level for the benchmark regions. In other words, when the general area of “Economy” is looked at on the indicator of “Job Growth” on the metro area (MSA) base, all of the other benchmark metro regions (MSA) are used as well.

There is a real problem when a group cannot arrive at agreement on a population base to gauge measurements upon. The region is either a 7 county area, then a 22 county area, then smaller, then bigger, and can even vary within general topic area. It would have been far more convincing to settle on one base and keep the comparisons consistent throughout. By not doing so, the picture is never clear and the project looks like an attempt to obfuscate some serious issues in the Pittsburgh region as most Pittsburghers know it.

Add to that there is little in the way of definitive supporting narrative and some of the data, like government finances, are from 2002.

So dear readers, rather than keep the confusion going, we instead make a simple request: go to the Pittsburgh Today website (www.pittsburghtoday.org) and make some comparisons. Is Pittsburgh’s government smaller than Cleveland or Charlotte? Are jobs growing faster here than in Boston or Philadelphia? Are we healthier than Kansas City?

Pennsylvania’s Secretary of Education is proposing to have all high school students pass exit exams before they can graduate. While the idea of improving the state’s education system is welcome, the devil’s always in the details—and with education in the Commonwealth that usually means more taxpayer money.

And what would state mandated graduation exams do that the state mandated PSSA exam, given annually to the students in the eleventh grade, doesn’t do? Can’t the state use the student’s performance on the PSSA to determine if they have qualified for graduation? The Secretary of Education notes Pennsylvania taxpayers spend $40 million to administer the PSSA to seven grades (third through eighth and then eleventh) and has not offered a guess as to new proposal’s cost. This may be another example of throwing money at a problem hoping it’ll get solved.

However, the premise of the proposal is markedly different from the PSSA, as it calls for students to take up to ten exams covering math (3 exams), English (2), social studies (3), and science (2), while those taking the PSSA are only tested on math and English at their grade level. This concept sounds good on the surface, but once teacher unions and school boards get their say it will no doubt get watered down and lose its original purpose—like many of the previous programs taxpayers keep paying for. What happens if they don’t pass the exams? If the test is hard enough to be meaningful many students will not pass. This may open the State up to lawsuits or causes the tests to be made so easy, the point of the exam will be lost.

But given the extravagant amount of money taxpayers spend on primary and secondary education, this type of testing should not be necessary. Students should be proving their abilities just by passing from one grade to the next. If we need to make sure students are meeting basic educational requirements by coming up with new tests, then this represents a stinging indictment of Pennsylvania’s current education system.

UPMC’s conditional pledge of $100 million over ten years to the Pittsburgh Schools to be used as scholarship funds raises many questions. Setting aside the issue of UPMC’s motivation—although developments have given rise to questions about motives—there are many administrative pitfalls, public relations issues and financial calculation concerns that will present themselves.

Two very large philosophical questions must be addressed. First, how is it that a school district that has operating expenditures of more than $18,000 per pupil has the temerity to ask a non-profit, tax-exempt organization that’s mission is to provide charitable service and is itself a seeker of tax deductible contributions for this $100 million pledge? If Pittsburgh schools were spending $13,000 per pupil—still well above the state and national average—the district would save between $140 and $150 million per year, 15 times more than the annual $10 million UPMC is willing to contribute.

There is something truly remarkable going on when a district spends—at current levels—an average of $234,000 per child to get them through 13 years of public education and then feels the need to get millions more to help fund their college education. If the district would find savings of around $400 per child each year and set that money aside as scholarship funding, Pittsburgh schools would easily generate the $10 million pledged by UPMC or make it $1000 in savings and produce over $25 million per year for college funds. There would be no ten year time limit and the fund could become very large over the years. Instead, the district will squeeze another $250 million out of the corporations and foundation community to help it stave off the ongoing and predicted massive shrinkage in enrollment that its already colossal spending per pupil is not able to do.

Second, how is that hospital organization—a tax-exempt charitable entity—can afford to be giving money away in this amount? To be sure, UPMC has plenty of money as its income statement and balance sheets show. It has over $600 million in surplus on revenues of around $6 billion—not too shabby even allowing for sizable investment earnings. The question surely must be, “Why is a medical organization that is tax-exempt for charitable purposes not returning its surplus to its customers in the form of lower prices or free services?” Setting aside some reserves is prudent. But any surplus should be plowed back into providing more or less expensive medical services, not becoming a funding organization for college scholarships.

But beyond the philosophical issues, several more practical questions arise. First, how can UPMC, which derives its revenue from operations and patients from around the region and not just in Pittsburgh, justify scholarship grants for only Pittsburgh students? Indeed, over half the work force is from outside the City. There will undoubtedly be requests from other school districts where they have major operations. How will they respond?

Secondly, how will access to the scholarship program be policed? For example, can a child from the suburbs move in with relatives for their senior year and qualify for funding? Then too, will the academic requirements utilize national testing standards? If requirements are based solely on district measures such as grade point average, there is a high probability of even further grade inflation, which would have a perverse effect on the plans to improve academic quality. A look at the SAT scores in many of the high schools shows how poorly the students are performing compared to state and national averages. Adopting even a very modest combined SAT score of 900 (100 points below the national average) to qualify for funds would make the bulk of students at several schools ineligible. Using scores on the state’s PSSA tests would lead to the same problem.

The political and public relations nightmare created by setting reasonable standards will assuredly consume the scholarship administrators’ time and attention.

One of the stated requirements will be 90 percent attendance. But with attendance running at 80 percent or so in some schools that means a huge fraction of current juniors and seniors will not be able to qualify. Will the requirement be waived for those about to graduate?

Which raises a greater question: Why would we expect that kids who do not see the value of getting a high school education all of sudden respond with markedly improved performance given the prospect of getting help to go to college?

And finally, there is the financial math question. Currently, there are about 2,000 seniors. If half qualify for help at an average of $5,000, half the first year’s grant of $10 million will be used up. And assuming that another 1,000 comes along next year, $10 million will be spent, in the third year scholarships would total $15 million and in the fourth $20 million where it would level off, assuming no growth in graduates or average amount of funding per recipient. So even if the matching $15 million per year is raised, the total available funds—discounting any investment earnings—would be only $65 million and far from the amount needed to sustain the “Promise” funding out of endowment earnings.

The only way out of this dilemma would be to raise far more funds than the projected $250 million, limit the average per recipient funding to well below $5,000 or to keep the number of new recipients well below 1,000 each year. All of these might be accomplished but doing so will certainly take away from the luster of the program.

In sum, the “Promise” idea is a poor substitute for providing students with a high quality education in the K-12 experience. Well prepared and accomplished students can get funding for college. Where they can go and benefit fully from the experience and not have to be remediated and placed in watered down courses and majors.