Allegheny Institute Blog

A researcher from the University of Pittsburgh, in conjunction with the new Pittsburgh Today Indicator Project, has released a study that found municipalities in Southwest Pennsylvania are plagued by budget deficits. To solve this problem, the major recommendation is for municipalities to raise taxes to pay for the rising cost of services. Haven’t these people been paying attention? The area’s high taxes have been pushing people out of the region for decades—further increasing the tax burden will only hasten the exodus.

Indeed, the report’s premise is wrong—budget deficits are not “plaguing” the region. If a municipality has a deficit, they often use surpluses or one time special revenues to cover—a tactic frequently used by the City of Pittsburgh before it sought state help. They are also allowed to borrow money to cover any shortfalls, as long as they are able to repay the loan within a year. According to newspaper accounts, the researcher even admitted that “some of those numbers might be skewed because his calculations disregarded the ‘other revenues’ and ‘other expenses’.”

If a municipality is having continued financial difficulty (three or more straight years) they are allowed to petition the Department of Community and Economic Development (DCED) for assistance, commonly known as Act 47, the Municipal Financial Recovery Act. To date 23 municipalities across the state have entered Act 47 status since its inception in 1987 and six have emerged—four of them in Allegheny County and one in Beaver County.

Regardless of the symptoms, the cure may be worse than the disease. Raising taxes on an already overtaxed populace is the wrong prescription for this region. This region has been hemorrhaging population for years. One example given is the affluent municipality of Mt. Lebanon. The researcher notes that Mt. Lebanon has run six deficits since 2000 (only two if “other revenues” are included). But what is not mentioned is that during this period, Mt. Lebanon, a high tax community with more in the offing, has seen its population fall by 6 percent—this despite having some of the best performing schools in the state. This is a community ripe for spending reductions to take into account the declining population.

Why not focus on cutting government costs as a way of avoiding budget deficits? Many of these municipalities are saddled with high personnel costs as a result of the state’s Act 111, binding arbitration for public safety workers, which does not allow the mediators to take into account the financial position of the municipality when awarding contracts. Why no recommendation to repeal the state’s prevailing wage laws that requires municipalities to pay higher union rates on public construction projects instead of allowing lower-cost non-union shops to do the work?

Taxing our way to prosperity has failed every time it has been implemented —whether on the local, state, or national level. The surest and best way to help the economy grow and boost tax receipts over time is to reduce tax rates—which means first cutting spending. Yet this lesson has not permeated the minds of most researchers and policy makers in the region or the state.

Still stinging from the surprise New Year’s Eve delivery of $22.5 million in gaming money from the state to the County that apparently only the Executive was aware of, Council has proposed legislation that will account for all gaming money delivered into Allegheny County.

Their motivation is understandable: $19.9 million that was to be used for airport debt (which the historical record indicates was the airport debt held by the Airport Authority) instead came to the County and was used to plug a 2007 budget hole. The County Executive claimed that the County itself had put $42 million into the construction of the airport and was owed the money, despite the fact that the Airport Authority’s books show no such debt. Council has also initiated legislation directing the Authority to get the balance to the County, which was the subject of a previous blog entry.

The ordinance sets out this course: if the Executive determines gaming money is coming in, he is to provide immediate written notice to the Council and the Treasurer. It has to show the amount, the fund from which it came, and what it is to be used for. The money will be treated as special revenue and can only be expended after Council action.

As things stand now, here is what the County government is to receive: the remaining $130.1 million for airport debt of which the County Executive plans to claim another $22 million, the remaining $27.5 million for retirement of obligations related to the County Economic Development Fund, and $80 million for an infrastructure fund. Those three streams are from Act 53 of 2007, the Tourism and Economic Development Fund, and were directed to the County because of a last minute legislative amendment. The County itself is also supposed to get 2% of gross terminal revenue of the Majestic Star once that is up and running under the provisions of Act 71.

There is considerable grey area: a total of $309 million for convention center and hockey arena construction are coming as a result of Act 53. Presumably, that money will go directly to the Sports and Exhibition Authority, a City-County authority that owns the convention center and the present Mellon Arena. But that has not been specifically spelled out yet and the State Budget Office won’t know who gets that money until the application for the funding is made (sometime this year). Could any or part of that installment end up in the County’s hands? It is too early to tell, but is open to speculation.

What is ironic is that Pittsburgh and Allegheny County have yet to see a gaming establishment within their borders yet are reaping a gaming windfall while other counties and municipalities where gaming is up and running are getting nothing but their host fees.

The Port Authority has a backlog of cash? Apparently so as 26 barrels of cash and coins worth up to $1.5 million, about one month’s worth of fare collections, sits in a facility waiting to be processed. Normally the backlog is only two to four barrels.

Why the hold up? Port Authority management is claiming that in December the division responsible for counting and processing the cash had an unusually large number of missing days. The division’s 15 employees missed “769 hours for illness, vacation, or disability and family leave.” Of course the union representing these employees disputes this charge and instead points to personnel cutbacks as the culprit. Authority management notes that two positions were cut last year while the union says five to six positions were lost.

While the squabbling over the reason amounts to less than peanuts, it is a stark reminder that the mass transit system needs a major overhaul. This is a monopoly provider operating under heavy union influence. A rational person might ask why an employee from another division couldn’t be reassigned to help out. But as the authority’s spokesperson noted when asked that question: “We can’t reassign folks, with the work rules we have, we don’t have the ability to reassign people. We’re stuck.”

The spokesperson did reveal that the transit agency is considering outsourcing the counting operation saying “It’s something we’d be foolish not to look at.” But that would just be like skimming a snowball off an iceberg. What the Port Authority needs is to have its monopoly power revoked and to have parts of the system bid out to private and even other public transit operators. The process could be done gradually as was done in Denver to minimize disruptions, but a clear path to privatizing most if not all of this Authority is needed.

As you recall, last year taxpayers across the state voted on whether to increase local income taxes in order to pay for school property tax relief under Act 1 of 2006. The shift passed in just a few districts. However, the other pieces of Act 1, notably the rate at which school spending can increase before triggering a taxpayer referendum, is still in place.

Here’s basically how it works: the state designs a composite index that governs how high a school tax increase can be. The index ranges from 3 to 6 percent or so across the state. Given the index, districts can design a course of action:
• They can pass a resolution stating that for the coming school year they will not exceed the index (this does not prevent a tax increase less than the index).
• If the district does exceed the index and it shows no sign of abating, they can appeal to the state for an exception to the referendum requirement, or submit the increase to the district’s voters for an up or down decision in a ballot referendum.

Last year 10 of the 43 school districts in Allegheny County received referendum exceptions. Presumably that carries over to this year. We do know that each district has seen its adjusted index increase over the 2007-08 school year. Some districts are up 1.7 or 1.6 percentage points. Many are in the 1.2 to 1 percentage point range. The smallest increase is a 0.2 point bump in the Riverview School District.

Districts will have more leeway this year before they get to the requirement for a referendum or an exception. For instance, Pittsburgh has an 2008-09 index of 5.4% (up from 4.2% in 2007-08). At its current real estate millage of 13.9, Pittsburgh’s school taxes could increase up to 14.6 mills without seeking an exception or going to the voters. That’s the case with the other districts as well.

Follow up blog entries will cover referendum exceptions and the districts that have passed “no increase” resolutions as soon as that data becomes available.

We would be remiss not to mention that in the spirit of celebrating Pittsburgh’s 250th birthday that the Mayor and City Council opted to craft a pledge that will guide their efforts in the coming years. They plan to focus on five areas: the city’s long-term financial health, the performance of city services, equitable land-use and planning, environmental stewardship, and a redoubled commitment to the highest ethical standards of behavior.

To be sure, that’s a full plate, but it is not groundbreaking to say that the City’s elected leaders are going to focus on the most pressing issues. For whatever the reason, they decided to put forth the Proclamation of Pledges to Improve Governance in Pittsburgh. Of course long-term financial health is an issue, the primary issue—that’s why there is an Act 47 recovery team and a state oversight board in place. Under the action items, the City wants to finally look for operational efficiencies with the County and the school and in the authorities (Water, Redevelopment, Parking, etc.) and to improve its pension plans by trading off a lower debt service payment (moving to a system where capital needs are paid for with available money) and reallocating those savings to pension funding.

There’s more: the City wants to begin “the publication of performance measures and standards established initially for the departments of Public Works, Police, Bureau of Building Inspection, City Information Services, Finance, Parks and Recreation, and Personnel; establish regular quarterly meetings at which Directors report departmental performance to the Mayor, the City Council, and the citizens of Pittsburgh”.

We guess that hindsight is 20/20, but wouldn’t these good governing principles been useful decades ago before the City began its slide? Many other cities across the nation have already achieved efficiencies and benchmarking departmental performance. Pittsburgh is late to the party.

A state representative from Delaware County is concerned that the opening of seven slots parlors across the state has cut into lottery revenues. He cites lottery revenues from the last two years—$1.41billion in 2005-06, $1.35 billion in 2006-07, and a projection of less than $1.3 billion this year—as proof that this is happening and is worried about the Lottery Fund’s balance which is used to pay for senior citizen programs. The Lottery Fund is expected to fall from $476 million in 2007 to $35 million in 2009. Is the lottery a victim of the slots casinos or are these decreases just circumstance?

Of course lottery revenues were going to fall once slots casinos were up and running. Gamblers have a fixed pot of money that they will gamble with. For every dollar spent at the casinos is a dollar that cannot be spent on the lottery. People who were regular lottery players are more likely to be frequent guests at casinos. The casual lottery player, who played the Powerball once in a while, will still do so, but they were not the driving force behind lottery sales. While it may be too early to tell if slots will completely cannibalize lottery revenues, it will surely eat into lottery profits. Just think, there are more slots parlors yet to open, and the state will likely raise the issue of table games at some point. Thinking that casinos was not going to affect the lottery was just gambling on stupidity.

The Governor of Pennsylvania has announced a new way to fund public schools. The new plan will use the so-called “costing out” study results to determine how much school districts receive. We have previously commented on the unscientific nature of the study, pointing out methodological flaws and internal inconsistencies. An upcoming Policy Brief will take an even more detailed look at the study.

Meantime, we learn that under the Governor’s new plan the Pittsburgh School District is slated to get an increase of 4.3 percent, about $3 million more than it was expecting. The problem? According to the costing out study, Pittsburgh is already spending several thousand dollars more pupil than the study finds they should be spending to achieve the goal of 100 percent proficiency by students on the state’s PSSA exams. The state should be reducing its allocation to Pittsburgh.

How preposterous can this government be? It decides to use the results of a flawed study to allocate school funding and then ignores the parts for the study it doesn’t like.

Can we just dispense with the pretense? This is government by caprice and whim.

When the City decided to grant a financial incentive package to build a downtown Lazarus department store in 1998, the public was told that this would spur development in the deteriorating corridor of Fifth and Forbes Avenues. It cost $78 million to build the store and parking garage, with public sources providing $48 million of it through the Pittsburgh Development Fund, Parking Tax and Revenue bonds, City funding, and a TIF package.

We all know how that scheme turned out. Virtually all money gambled on that vision is lost. Now the corridor, and most of Downtown, is banking on the growth of condominium development for revitalization.

Currently, Millcraft Industries is in the process of converting the department store into a mixed use development including condominiums that will range in price from $320,000 to $1 million. Of course, the development is viewed by elected and civic leaders as a success and a rebirth for Downtown housing.

Millcraft bought the building from Federated for $8.5 million in 2005. Here’s the record of public involvement since that time:

• In December of 2005, the state granted $3.7 million for the conversion of the store into its new mixed use status
• In December of 2007, the URA debated modifying a $2 million mortgage so that the developer could take advantage of a program called the New Market tax credit
• In February of 2008, the URA agreed to purchase 43 parking spaces and enter into a lease agreement with Millcraft for the spaces instead of Millcraft purchasing them from the Pittsburgh Parking Authority because “adding the cost of the spots to the price of the condos could make the units too expensive”

What is wrong with this picture? People who can afford very expensive housing have to be shielded from the cost of parking? If Downtown Pittsburgh wants to be like New York City, the shortage of parking has to be reflected in the price of the housing, which, thanks to ten years of generosity to the site when it was a store and now being converted, is likely well below where it should be anyway.

According to the URA’s general counsel the intervention of the URA to enter into the lease agreement on the parking spaces is “…an assistance to the redevelopment of the building.” The burning question is “when does all of the public assistance end?”

Governor Rendell has stirred considerable controversy as a result of comments wherein he essentially accused certain segments of Pennsylvania’s voters of being unwilling to vote for a black candidate. He is quoted as saying that Lynn Swann could have gotten as much as a five percent higher vote count if not for the voters who cannot bring themselves to vote for a black candidate.

Well what does the evidence from voter patterns in that election actually tell us? Mr. Rendell might want to look at the CNN voter exit survey taken during the 2006 gubernatorial election. Undoubtedly, two findings would give him pause. First, Mr. Swann, the African-American candidate, received only 13 percent of the African-American vote. Swann received 46 percent of the white male vote, one of his highest totals among major categories of voters. Swann received 79 percent of Republican votes and 73 percent of conservative votes. Meanwhile, Swann received only 13 percent of self-described liberal votes.

Swann received 68 percent of the votes of people who are dedicated church goers. Rendell got 77 percent of votes of those who said they never go to church. Half of the Protestant vote went to Swann. The Jewish, other non-Christian and no religion group went overwhelmingly for Rendell giving him a better than 80 percent of their votes. And it gets more interesting. Of the supposed more tolerant and more progressive voters with post graduate education, 72 percent voted for Rendell.

Similarly, union members gave Rendell 70 percent of their vote.

Finally, it is key to note that among those who approved of Bush’s job performance, Swann received 88 percent of the vote while Rendell got 92 percent of the votes for the group who strongly disapproved of Bush’s job performance.

The inescapable conclusion to be reached from these findings: the motivation for people to vote for Swann or Rendell was traceable primarily to ideological reasons. Race hardly entered into the equation. In fact, one might reasonably argue that Swann received some votes from white voters principally because they wanted to help an African-American candidate.

Moreover, one could easily argue that Swann could have increased his Republican and conservative vote totals if he had a run a campaign based more solidly on conservative principles instead of the bland, watered down campaign version that was actually presented.

We would be remiss if we did not mention that the City has decided to approve a contract with First Vehicle Services to continue maintenance on the vehicle fleet through 2010. The contract expires at the same time as the County’s which also contracts with First Vehicle. This opens up the possibility of a joint bid two years from now on a combined City-County vehicle maintenance bid.

The City did add some conditions, such as the right to cancel the contract with a six months notice, and audits on the operation by the City Controller’s office. But overall a good step in the right direction of moving non-safety services to a competitive process.

“We would certainly support any kind of development along any of our transit lines, whether bus or rail, that would improve ridership and add another place for our riders to go in the immediate vicinity of a shop or station”. This statement came from a Port authority official and was in reference to a Pittsburgh Business Times article on plans to spur residential, retail, and commercial development near or on PAT property, sometimes with creative financing methods.

Specifically in the South Hills, where the trolley line runs through the suburbs and into Downtown Pittsburgh, there have already been planning meetings and wish lists created for the sites where the trolley stops. High density condominiums with integral parking have been mentioned for several communities, neither of which have upscale development as it is presently envisioned. Another community spoke of “a New York City-style neighborhood with condos, a bank, grocery store and theater with the T running right alongside”.

The state has even created a special financing district option, a Transit Revitalization Investment District, or TRID, which will allow the taxes from the special development to be captured and used to retire debt. It is exactly like a TIF, except targeted at transit areas.

While it all sounds nice, it represents another feeble attempt by PAT to grow its mission beyond running a transit line and making that transit line as cost-effective as possible. Now the state has permitted it to act as developer and try to attract activity closer to the rail line and bus stops in the hope that someone might part with some of their money on a condo. If people were attracted to the possibility of light rail, the South Hills communities would be booming with development and the private sector would be begging to be build on PAT property. Instead, we have yet another top-down development scheme aimed at propping up PAT ridership.

Mass transit is supposed to provide transportation. It is not supposed to be in the real estate development business.

Here’s the story on passenger traffic at Pittsburgh International Airport: overall, it is down 19 percent from 2006 through the end of 2007. There are airlines that posted gains in traffic, most notably Southwest and AirTran, but the decrease in operations of US Airways continues to be felt.

It sounds like the Airport Authority has accepted PIT’s transition to a regional airport with good competition from where it once stood as a US Airways hub. The Authority’s director noted that that the airport wants to attract customers “by offering more airline choices and lower, competitive fares”.

A big part of competition and cost at the airport is the fees that airlines have to pay to operate at the facility. There are terminal fees, ramp fees, landing fees and others that generate revenue that cover the airport’s costs. In early 2008, these fees were boosted as US Airways downsized. Now the Authority has taken steps to refinance debt and, as a result of saving $10 million on the refinancing, will pass the savings onto airlines in the way of fee reductions.

Even with the cuts, the terminal fee and the landing fee will still be higher than they were before the increase. The low-cost airlines expressed thanks but continue to hope that they will go lower.

And even though the Authority seems exuberant that they were able to sharpen their pencils and refinance debt, they should have been more forceful over getting the $19.9 million from gaming money that was supposed to go for airport debt but ended up in the County’s hands, despite claims to the contrary that the plan all along was for the County to get first call on the money for airport debt it had. We have detailed the whole story in a previous Policy Brief (Volume 8, Number 4) and now the first installment for the Authority will be in 2010, presumably since the County is going to take another chunk in 2009. Hopefully competition and choice at the airport can hang in there while the County gets its act together.

If you thought the stadium building boom in Pennsylvania in the late 1990s stretched the limits of economic rationale, we ask you to now turn your attention to the state’s involvement in attracting a Major League Soccer franchise to the Philadelphia area, specifically the Chester waterfront. In all, the state is committing $47 million to a multi-use project called “Rivertown” which will have the requisite amenities of retail, offices, condos, etc.

Of that total $25 million will go toward an 18,500 seat soccer stadium, based upon the hopes that the region would get the 16th MLS franchise. Never heard of the MLS? Don’t be surprised. It has teams in DC, LA, and Boston, but Chester finds itself in competition with Connellsville, Missouri, whose own elected officials are ready to battle with incentives of their own.

The league has been around since 1993 and has gone through the growing pains of establishing franchises, expanding their numbers, going through relocations and contraction. While the league started out playing games in NFL or college stadiums, the league has seen the construction of six soccer specific stadiums. The capacity of these six facilities ranges from 18,000 to 27,000 seats, and league figures on 2007 average attendance at the facilities ranged from 50% attendance to 100% attendance. On average, the soccer stadiums are about 75% filled for games.

Given these numbers, it is obvious that by putting money into the project the state is either hoping that a larger development will funnel people into the stadium on gamedays, or that people drawn to the development but not the stadium will give the appearance of vibrancy. Time will only tell, but we give the state a red penalty card for getting involved in this project.

An alarming report in today’s newspaper: nearly half of the region’s performance-art going patrons are 55 and older. Higher than the national average, higher than the average in other “rust belt” cities with cultural attractions, such as St. Louis and Baltimore.

One academic pointed out that the problem with attracting younger attendees is that “the arts are "just another leisure choice…To get somebody to say, 'Yeah I'll go to the exhibit rather than go to [a restaurant] you have to help them understand why that's a better choice.”

The article goes to great lengths to detail the strategies that cultural outlets like the Cultural District, the Symphony, and the City Theater are going to employ to attract younger patrons. Here are the two big omissions, however: first, the attendance is simply a by-product of the age distribution in Allegheny County. The County has experienced more deaths than births and the age cohort of people 18 to 29 has fallen significantly from where it stood in 1980. Simply put, there are just fewer young people for the amenities to court.

Second, Pittsburgh and Allegheny County have had a 1 percent sales tax (the Regional Asset tax) in place since 1994 which was sold as necessary to make such cultural amenities attractive, especially to the young demographic. People here of all ages have much more skin in the game than in other regions by virtue of their tax dollars being invested in cultural and arts institutions.

Since 1995, the arts and cultural organizations have received a cumulative total of $90 million, or about 10% of all the money the District has dispensed of since its inception. An official of one cultural venue stated that “We can't just keep maintaining the same loyal fans, as extraordinary and important as they are…We need to keep reaching out to build a younger core, and get them in the door at a younger age, and then they will be our core in later years.”

But what he fails to realize is that the 1 percent tax crafted to shore up venues like his, when combined with other burdensome levies, including the new one on poured drinks, are driving the younger core out of the region, the exact opposite effect all the boosters of the tax and other development plans claimed we would see. Instead of using a 1 percent tax to invest in infrastructure to grow the local economy which would produce the disposable income needed to spur cultural amenities, the regional brain-trust eschewed the strategy.