Pittsburgh has lost again, although this time it was not a sports contest.  The City lost an arbitration award to the labor union representing Public Works employees.  The grievance was over the awarding of overtime during the G-20 Summit held in the City in September 2009. As a result, the City must pay a total of $50,000 to 62 laborers. 

That the City lost is not a surprise.  Pittsburgh's Public Works Director noted that he could not recall the last time the City won an arbitration case.  A union representative is sure that the City has won one, but was unable to name a specific case or how long ago it occurred. 

And that in a nut shell is the problem with the City of Pittsburgh:  it is being, and has been for many years, dominated by its unions.  Whether in arbitration disputes or at the negotiating table, the City cannot win in confrontations with unions.  The real problem is that the ultimate losers are the taxpayers who are forced to pay far more than they would absent this egregious imbalance of power between employer and employees. They are also forced to watch the City be embarrassed as workers are returned to jobs after serious dereliction of duties or conduct that should have resulted in conclusive termination.   

Ironically, one of the seeds of this problem was planted in 1974, when the City adopted its Home Rule Charter.  Article seven, section two of the Home Rule Charter states that "(a)n independent appeals board is established to hear employee appeals to the decisions of major administrative unit heads and other officers and officials." 

That's exactly what had occurred in this situation.  Members of the union accused assistant director of Public Works of disregarding seniority rules when selecting workers to work overtime during the G-20 Summit.  The arbitrator agreed with the union's accusation that the City was playing favorites and did not select union members according to the rules of an agreement the City had with workers to short-list those who wanted to work the overtime according to seniority.

To further underscore the fact that the City's union problems are self-inflicted is the notion that they agreed to these conditions in the first place.  Why would they agree to hand overtime to those workers who have seniority instead of to those who have the most skill or who are most readily available?  Undoubtedly, imbedded into every union contract with the City is a litany of work rules, job classifications, seniority, and other regulations that handcuff the City.  Any violation of these rules sends them to an arbitrator-where the City invariably loses. 

As we have written before, Pennsylvania's Act 111 of 1968, guarantees public safety (fire and police) workers binding arbitration in exchange for giving up the right to strike.  This law is heavily slanted toward the unions by failing to require arbitrators to take into account the financial condition of the City or its ability to pay the contract terms or any comparison of City employee compensation to that of same occupation employees from other cities.  Placing effective control over salaries, benefits and work rules, and grievance procedures into the hands of arbitrators operating under Pennsylvania's extraordinarily biased Act 111 provisions has proved to be disastrous for many Pennsylvania municipalities as costs have climbed across the state, including Pittsburgh.  Yet, as with the law allowing teacher strikes, there is little appetite in Harrisburg to reform Act 111 to bring it in line with other states' arbitration laws. What we have instead is Act 47 and distressed financial status to mitigate temporarily some of the damage done by Act 111. And as we have seen, distressed status has not been a great success in most municipalities that have been forced to apply for Act 47 help.

Combined, the Home Rule Charter and Act 111 have stripped the City of virtually any semblance of power to deal with problems arising from its unions.  If any more evidence was needed, the recent series of arbitration losses should be proof enough.  

While the most recent damage awards are not huge relative to the City's budget of about $440 million, the cumulative effect of the employees bargaining power has produced an upward spiral in the City's cost structure along with a work force on a per capita basis far above the typical U.S. city. Pittsburgh's government costs keep rising even under the protection of Act 47 and there is not much City leaders are willing to do about it. 

Rather than going to Harrisburg and lobbying for more taxes, perhaps the Mayor could find some folks to go with him to urge reform of Act 111. And maybe City Council would recommend a referendum question to revise the language concerning the appeal board to make sure taxpayers' interests as well as common sense are used in reviewing employee appeals.  Unfortunately, pigs will fly before either of these suggestions is implemented.  Union leaders will make sure of that. 

Pittsburgh City Council recently enacted a prevailing wage bill and is now considering a living wage bill.  Both measures will almost certainly increase City spending either directly, by raising the wage rates of its employees, or indirectly, as contractors push the costs back to the City through higher bids.  The question that cries out for an answer is; where are the Act 47 coordinator and the Intergovernmental Cooperation Authority (the oversight board)? Why are they silent about these legislative efforts?

The prevailing wage bill, passed in March, requires all City contractors and subcontractors to pay its building service and food service workers a prevailing wage for those occupations as determined by the City Controller.  It also requires that "(b)uilding service, food service, hotel, and grocery employees shall be paid at least the prevailing wage according to their job classification for all work performed on or related to projects that receive a City subsidy..."  While firms feeding at the public trough get no sympathy from us, this law will have two unintended consequences.  First it will cause firms to ask for greater subsidies to compensate them for having to pay higher wages and secondly it will throw up one more signal to any firm looking to locate in the City that Council is willing to meddle in the private market and mandate wage rates.

Now a living wage ordinance is currently under consideration by City Council. An earlier    version was introduced and passed nearly a decade ago. It was to go into effect only after Allegheny County enacted a similar law, which at the time County Council was unable and unwilling to do. Apparently City Council is now willing to go it alone. The proposed new version of the law states that "...City employees, employees of City service contractors, subcontractors, and employees and contractors of City financial assistance earn an hourly wage that is sufficient to live with dignity and to achieve economic self-sufficiency." 

This law will directly increase the City's personnel costs.  When the bottom rung of the wage ladder is raised, higher wage earners will expect some increase as well.

Contractors forced to pay higher wages and benefits will ask for an upward adjustment in their contract payments to cover the mandated compensation increases. The City will have to shoulder some of that burden. If the City refuses, contractors could be forced to lay off workers and cut services. Then too, there is the effect on other wage earners below the "living wage" and their employers who are not covered by the by the living wage law. A two tier wage system will develop for comparable jobs and skills, one for jobs with a City government connection and another for comparable jobs with no City government connection. Eventually, the lower tier wage workers will press for wages beyond what employers can afford and unnecessary workplace tensions will develop-yet another City created worsening of the City's business climate.

Which brings us back to our original question:  where are the Act 47 team and the ICA in all of this?  Why haven't we heard their opinion on what these bills will do to the City's budget? 

In its 2009 Plan, the Act 47 team had this to say about Workforce and Collective Bargaining:  "With almost 74 percent of the annual budget allocated to employee-related expenses, workforce costs are a critical factor in the City's fiscal condition.  If workforce costs are not maintained at affordable levels, the results can not only erode the City's budget health, but can also have adverse impacts for municipal employees and City service levels."  So the Act 47 team has stated in writing the City needs to be mindful of its workforce spending, but is now strangely silent in the face of two bills that will almost certainly raise employment costs. 

Furthermore the 2009 Act 47 Plan states that "(g)oing forward, the City's primary workforce challenges are twofold:

• 1) Continuing to contain overall personnel cost growth at levels that can be sustained within the City's fiscal resources;
• 2) Actively addressing the longer term, $1 billion legacy cost crisis."

Have the City's fiscal resources improved while no one was looking?  It wasn't very long ago the Mayor was proposing a tax on post secondary tuition on students in the City-

evidence the City's fiscal situation has not improved, certainly not enough to shake free of financial oversight. 

The living wage legislation will almost certainly increase the City's personnel costs. And since pensions are based on worker pay, legacy costs will rise as well.  Yet not a peep from the state appointed overseers. 

In 2003 a duo of the City's elite chaired a task force known as the Hillman/Roderick Committee to study Pittsburgh's financial problems and to recommend solutions. Of course, this was before the City formally entered Act 47 distressed status or was under the watch of a state appointed oversight board.  The task force identified the usual fiscal maladies-stagnant revenues and too much spending.  They recommended substantial tax increases and spending cuts and the creation of a state-appointed review board.

Now nearly seven years later with the City still floundering the apologists for (and too often enablers of ) the City's self-inflicted fiscal wounds  are back with a Post-Gazette opinion column claiming the City has made the Committee's recommended $40 to $45 million in spending cuts but the revenues from the new taxes have been inadequate to fix the City's problems.  The Committee's leaders are asking for still more revenues on the grounds the City is the regional hub and the region's fortunes are inextricably tied to the City's well being. 

But what the authors fail to acknowledge is that having the region forever subsidize profligate and irresponsible financial and economic behavior is neither sustainable nor desirable for the future of the City or the region.  And it is also curious that they say not a word about the City's recent adoption of an economy stifling, government expenditure boosting prevailing wage bill or the looming living wage legislation.

Let's review what has happened regarding the City's financial situation since 2003 when the Committee convened.  In 2003, the City had $378.4 million in operating expenditures and revenues of $349.3 million.  Seven years later in 2010, Pittsburgh has budgeted expenditures of $446.5 million along with nearly equal projected revenues.  Even adjusting for the roughly $20 million increase due to an accounting entry change that started in 2005 for state pension funding, the City is still spending about $50 million more than in 2003.

To understand better Pittsburgh's financial problems, in 2004, the Allegheny Institute created a benchmark city against which Pittsburgh's government finances and operation could be compared.  Four geographically dispersed cities were chosen for the benchmark, Charlotte, Columbus, Omaha and Salt Lake City.  The comparisons were very illuminating.  Pittsburgh government was spending almost $1,200 per resident compared to $803 for the benchmark city, a difference of nearly $400 or 48 percent. At the same time, Pittsburgh had 11 city employees per 1000 residents, while the benchmark city had only 8 per 1000 residents, a gap of 37 percent.

Moreover, in 2004, Pittsburgh's bond payments per capita were three times the amount paid by the benchmark city. And, the City's pension plans had already fallen to 50 percent funded compared to 89 percent for the benchmark city.

On the revenue side, Pittsburgh was collecting $898 per capita in taxes from all sources, far higher than the benchmark city's $551.  Non-tax revenues were fairly close at $287 per capita for Pittsburgh and $234 or the benchmark.

In short, Pittsburgh in 2003 and 2004 was spending and collecting taxes at levels far exceeding mid-sized cities across the country. 

Now fast forward to the Institute's benchmark update in 2007. Pittsburgh's tax collections rose significantly to $1,037 per resident in 2007 and benchmark taxes per resident climbed to $615, boosting the gap between Pittsburgh and the benchmark city sharply from $347 to $422.  Interestingly, Pittsburgh's tax collections in 2007 were $45 million above the 2004 level thanks to the new taxes and mandated changes in existing taxes required by the legislature's reform package-almost exactly the amount the Committee had wanted to see. Total revenue, including non-tax sources, climbed from $354.7 million in 2004 to an adjusted $428 million in 2007, a $73 million increase. The nearly $30 million jump in non-tax revenue was accounted for by money from gaming taxes, Commonwealth grants, the non-profit contribution and other miscellaneous line item increases.

Meanwhile, after adjustments to account for the transfer of debt service sinking funds into the PAYGO capital improvements and other one time transfers that were included in the operating budget, spending in 2007 still rose compared to 2004 rather than falling by $45 million the Hillman/Roderick Committee has claimed.  The point is that while Pittsburgh was enjoying a strong three year rise in revenues of over 20 percent, the inability to rein in spending meant the fiscal problems of the City did not go away.  Moreover, Pittsburgh's employee count per 1000 residents still stood 35 percent above the benchmark city. 

What's worse, the situation has not improved since 2007 despite the City's being under the financial oversight of an Act 47 coordinator and the ICA board. Although 2010 budgeted expenditures of $446.5 million compared to 2007's actual spending of $434.5 would appear to indicate a modest $12 million rise over three years, the elimination of the PAYGO transfers of previous years to the general fund budget resulted in $55.2 million fewer dollars in the non-departmental Citywide line item in 2010 than in 2007.  In other words, the other expenditure categories combined jumped by $67.2 million in just three years led by a $30 million (27 percent) hike in personnel benefits. But many other expenditure groups climbed by double digit percentage increases including; law, controller's office, city planning, police, fire, and public works. All told, 2010 budgeted spending stands $50 million above the 2004 level with further planned increases in coming years. 

So much for reining in Pittsburgh's expenditures. The last three years have seen a virtual abandonment of any pretense at checking the growth of expenditures. Combined with an overwhelming legacy cost problem and a huge debt load,  the inability to reduce other outlays on a continuing basis puts the City right back where it was seven years ago, except that it now has a panoply of new revenue sources, which we are being told yet again are not sufficient. It would seem fairly obvious that unless expenditures are curtailed by far more stringent efforts than we have seen to date, the City will never get its financial house in order.

These are the same folks who lobbied for the RAD tax, the regional renaissance tax, higher occupation tax, and the business payroll tax, among other revenue enhancements, again arguing that more taxes on non-residents are needed to solve the City's fiscal difficulties once and for all. Bear in mind it was the City's government officials who created this intractable financial mess with the tacit support of Pittsburgh voters. And it was the same civic leadership who now wants more taxes that perennially failed to bring pressure on the City to act responsibly.  It is no good for them to argue that binding arbitration prevented the City from holding the line on police and fire contracts. They could have gone to Harrisburg and lobbied for Act 111 reform. That did not happen either. Nor did they fight the enormous and losing bets the City placed on publicly funded developments that have added to the poor financial situation.

To be sure, the City does serve as a regional core. But why should the burden of propping up its government fall ever more heavily on those living outside the City while the City fails miserably and continually to act in a prudent manner financially or in terms of economic policies? Those who work in the City pay one the nation's highest parking taxes and the Local Services Tax (the former occupation privilege tax). Their employers pay the payroll preparation tax; their companies pay property taxes either directly or indirectly through rent.  County residents and visitors to the county pay RAD sales taxes that heavily support the City and its amenities-which by the way, is one of the main reasons Pittsburgh remains the sports cultural and entertainment center of the region.  Perhaps the Committee leaders have forgotten that. 

Folks venturing into Pittsburgh for a sporting or entertainment event pay an amusement tax on the tickets they purchase as well as the parking tax. Commuters and non-residents pour enormous revenues into the City's coffers that are well in excess of their use of services. Yet they are for some, always the scapegoats for Pittsburgh's problems. 

Those living outside the City did not agree to the egregious pension benefits and legacy costs that threaten to sink City finances.  They did not elect the officials that caved into union demands or placed stifling mandates on businesses. The City has done little to help itself as budgets and obligations continue to grow, even under financial oversight. 

Finally, why do the Committee leaders not call attention to the glaring fact that the City and County have made virtually no progress in the last five years to reach accords on consolidating services despite the recommendations of many task forces over the years?  So much time and effort was wasted pushing the full governmental merger of the City and County. A push doomed to failure from the outset.

Pittsburgh City Council's attempt to install a prevailing wage for employees at City-subsidized development projects has emboldened one Council member to take it a step further and revisit the idea of the living wage.  At a time when the nation is in recession,  the City and area are losing jobs, and governments at all levels are struggling to balance their budgets, resurrecting the living wage could not be more ill-conceived. Although hearings on the bill have been postponed for the moment, it will almost certainly be on Council's agenda soon.

To recall, City Council passed a living wage back in 2001 but shelved it when  Allegheny County failed to enact a similar living wage ordinance. Council then put in place a contingency that if and when Allegheny County enacted a living wage law, the City's version would be activated as well.  For nearly ten years, neither side expressed an interest in reviving the living wage requirement.  That is until now as Pittsburgh City Council will attempt to remove the contingency language from its bill. 

It is too bad this crippling piece of legislation is now a part of some Council members' agenda. Imposing a living wage is fraught with negative consequences for the City. At a time of grave fiscal problems the wage mandate would put tremendous additional strain on the City's finances.

The living wage law would require all employees of the City, the employees of all contractors doing business with the City, as well as workers at firms receiving City subsidies to be paid a minimum of $11.50 per hour plus health benefits. 

Consider first the consequence of boosting wages for City workers who are currently paid less than $11.50 per hour. Raising the lowest rung on the wage ladder will mean that City workers on rungs above the living wage will clamor for higher wages to reflect the need to take into account productivity and seniority value differences. Thus, the living wage bill would boost the City's personnel costs, probably significantly. Personnel costs are the biggest budget item.  

Besides elevating the City's expenditures on wages and benefits, legacy costs will also rise.   Pension payments are based on the wages paid to employees and years of service. Thus, a permanent and substantial rise in wages will have a ripple effect on pension payouts for years to come. This cannot be a welcome development for a city whose pension plans are woefully underfunded-a city that has been scrambling to find new tax revenues to fund pensions. 

And of course there is much more involved than the City's personnel expenditures.  Consider the City's payments to contractors subject to this law. In the first place, it is unlikely the City will be able to mandate higher than market wages for firms under the terms of an existing contract. Forcing firms to pay higher wages without adjusting   payments to contractors would lead to reduced profits or losses if the contractor could not cut employees and still deliver the services called for in the contract.  Undoubtedly this situation would lead to lawsuits.  So, it is likely that a living wage requirement would be a condition imposed in new contracts, allowing bidders to take the higher wages into account in their proposals.

Firms that have received subsidies would find themselves in a situation similar to the contractors only they might not be able to sue depending on the terms of their agreement with the City. But the higher wages would lower their profits or lead to losses.  Job cuts would be virtually inevitable.  In the future, firms contemplating taking a subsidy would have to seek even more money to compensate for paying above market wages. 

In short, whether the living wage raises City employee pay or the pay of contractor employees, the City will see its expenditures rise, forcing hard choices: raise taxes, find new sources of revenue or find ways to cut spending and most likely reduce workers employed in providing services to Pittsburgh. To date, neither the Mayor nor Council has shown any desire or willingness to make service cuts. Therefore, we should expect even more desperate attempts to find revenue.

To add some context to this picture, bear in mind that the City was unable to manage its finances in the past and as a result has been under financial oversight by an Act 47 administrator and the ICA (oversight) board since 2004. Several obvious questions arise.  How will the increased personnel costs resulting from the living wage legislation be greeted by the Act 47 administrator in terms of the impact on the state approved recovery plan?  Indeed, where are the Act 47 team and the ICA board on this issue?  Not one word has been forthcoming from the leaders or the members of either team. They cannot be happy with this proposal and should be voicing serious concerns about it. 

The Act 47 team and the oversight board must approve all budgets and rule on the advisability of costs and viability of revenue sources.  For instance, the oversight board ruled in December that the projected revenue from a still unpassed tuition tax could not be used in the budget and it would not approve the budget. Given the potentially large impacts on spending, the living wage bill could lead to a loggerheads situation with Act 47 and the oversight board.  Budgets might not get approved and the oversight board could withhold gaming funds from the City.

Pittsburgh's City Council is holding debates over proposed prevailing wage legislation.  The legislation requires that any tenant of a subsidized development "would have to pay hotel, cafeteria, grocery, and building service workers prevailing wages, based on the averages paid to their peers in the city".  This language is accompanied by feel good rhetoric and, not surprisingly, is heavily supported by the local labor unions. The proposed ordinance is sponsored by seven of the nine council members.  This latest market interfering bill is opposed by the mayor and developers who argue strenuously that development in the City will come to a virtual standstill if the mandate is enacted. 

Why does the Council feel compelled to push this legislation?  Quite simply the City government's long held disdain for the private sector, free markets, property rights and profit seeking behavior in favor of government directed and controlled development has reached the inevitable stage of a dilemma wherein bad policy begets bad policy.

Over the past several decades, the City and City voters have become increasingly comfortable with changing government from an institution with limited core functions to a redistributive body, replete with regulations that hamper businesses, along with an environment generally unfriendly to free market capitalism. The high taxes faced by businesses and the issues created by labor-owner tensions have caused jobs and people to abandon Pittsburgh.

As businesses and jobs departed, taking tax base with them, City government embarked on a number of schemes to attract companies and development into the City. Because the cost of operating a business and the risks of locating in Pittsburgh were so daunting, it became necessary to offer subsidies to attract firms and jobs into the City. These came in the form of tax credits, heavily subsidized loans, grants from a myriad of programs, Tax Increment Financing, and so on.

Now the companies who were lured by the subsidies to invest in the City are threatened with a "prevailing wage" requirement.

Council members who have no sense of history about the role of excessive and heavy handed government in driving jobs away are easily led to the view that if the City is providing financial assistance to firms who will make a profit-or attempt to earn a profit-then the City has a right to dictate terms relating to employee compensation and benefits.  For them, this is entirely logical. It conforms neatly with their understanding of the role of government.

 Rather than understanding that the subsidies they have given reflect the need to offset costs and aggravations of operating in the City, Council will plow ahead with this proposal.  Because businesses already have to pay what the market requires to hire workers and because their hiring of workers helps supports wage rates above levels that would exist in the absence of that employment, this ordinance is not only unnecessary it will result in fewer jobs and less willingness of firms to come into the City.

If the prevailing wage legislation passes in its current form, the City will have, in effect, painted a big sign across the Fort Pitt Bridge entrance into town with the words,

"Businesses who like government interference and control are welcome here." 

Making it even harder for business to operate successfully in Pittsburgh will lead to ever more generous subsidy offers as the clamor to promote jobs increases. And then the spiral will worsen. Heavy, costly-to-taxpayer subsidies become less and less likely to produce the desired payoff.  Indeed, development subsidies ladled out by the state, County and local governments in recent years have failed miserably to produce the predicted economic impact. And as the subsidies become ever more generous, the probability of their success diminishes proportionately. 

The cycle of bad policies begetting worse policies must stop. The time has come for a recognition and acknowledgement of the proper role of government as it relates to business and the economy.  Unfortunately, that will not happen as long as the powerful special interests in the City who have created the legacy cost nightmare and the still excessive spending levels continue to hold sway with regards to public policy.

When a City plans to tax tuition of college students simply because it can and makes noises about grabbing some of the County's drink tax revenue, we have more than ample evidence that powerful special interests are still very much in charge.