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. 

Shortly after the conclusion of the September G-20 Summit, the head of VisitPittsburgh claimed the event's economic benefits to the City and region reached $35 million.  As we pointed out in an earlier Policy Brief, that was a very dubious claim. Two months later data are available that call into serious question the notion the region enjoyed a $35 million boost in economic benefits.  We now have a reading on the RAD (regional asset district) tax revenue for September, which is a gauge of retail sales in Allegheny County, as well as figures for hotel occupancy tax revenue for September, which allow us to calculate the dollars spent on hotel rooms during the month.  By comparing the September 2009 data to September 2008 numbers and examining the pattern of year over year changes for 2009, it is possible to come to a reasonable conclusion about the G-20 meeting's direct impact on spending. 

Obviously, this is only a partial measure of benefits. But by the same token, it does not take into account any of the costs borne by the City, County, the Convention Center, the airport and Port Authority. Nor does it take into account for the loss of productivity of non-retail businesses in the City that were closed for the duration of the Summit and the expense endured by college students who were forced to evacuate their dorms. And it does not take into account the massive inconvenience to residents and motorists.

Whether the Summit will have measurable, identifiable near term or long term benefits in terms of helping recruit foreign firms to locate in the City or County remains to be seen. 

But as a reasonable approximation of the near term benefits the RAD tax and hotel tax will shed light on the value of hosting the meeting. First the RAD tax.  Collected by the state and forwarded to the Regional Asset District (RAD), the monthly posting for September 2009 shows this tax generated $6.8 million.  In September 2008 the revenue was $7 million.  Thus, the year to year decrease was around $200,000 or 2.9 percent.  Other year-to-year comparisons for the earlier months of 2009, show most were either down or flat from their 2008 levels.  The exceptions were February and August (each up about 1.5 percent). Because August 2009 was higher than August 2008, it appears that the sales impact of the recession had perhaps run its course.

A look back over several years at September reveals a fairly flat trend. In 2005 the RAD collections were $6.7 million and in 2006 they were $6.9 million. In short, the September RAD tax revenue at $6.8 million was not only lower than in 2008, but also weaker than 2006.  There is simply no evidence that retailers, restaurants, etc. in aggregate enjoyed an above normal September level of sales during September 2009.  To show otherwise will require those who still argue there was Summit boost to sales to demonstrate that other factors would have made September sales even worse without the G-20.  And since September was the month of the "cash for clunkers", that might prove difficult.

A second gauge of the Summit's benefits is the County's hotel tax revenue. Bear in mind that as a condition of hosting the Summit, local hotels had to offer their best (lowest) price for blocks of rooms rather than normal market price. In other words, a discounted price world leaders were willing to pay.  Hoteliers were pressured to come up with deep discounts that could adversely affect their bottom lines as well as that of the County's hotel tax.

According to the County's Treasury Department, September's hotel tax revenue was just over $2.8 million.  For September 2008 and 2007 collections were around $2.2 million.  It appears the County's coffers may have benefited by about $600,000 from the G-20 Summit meeting. With the County's seven percent tax, an increase of $600,000 implies that an additional $8.5 million was spent at County hotels than in the previous two Septembers.

The only other months in 2009 not showing declines in year over year revenue were February and August (February had an increase whereas August was flat). Again, as with the RAD tax, it appears the recession effect on year over year changes could have largely run its course by August. Be that as it may, the increase in September could have been attributed to the Summit, but there was some probably also a boost from the large number of reporters and football fans who were in town for the NFL's kickoff celebration at the beginning of the month.

Certainly some hotels benefited in terms of gross revenues, but did they actually make more profit in light of the increased costs from adding staff and paying overtime for accommodating the two or three days of extra guests?  If the hotel lost money, that loss has to be subtracted from the benefits of the extra pay received by full time and temporary workers. Certainly, at best, the $8.5 million additional hotel revenue is far short of the amount needed for VisitPittsburgh to make the claim of $35 million in economic benefits.

As is often the case with high-profile events such as the G-20 Summit, the benefits are touted before and during the event, but within weeks after they have come and gone there is little mention. How many times have the people of this region have been led to believe that hosting a playoff game, all-star game, or convention will lead to economic revival?  And yet we still await the promised return to meaningful growth. Thus, despite the hoopla surrounding the G-20 Summit, it is unlikely the meeting will be any different in producing lasting economic benefits.

In a previous Policy Brief (Volume 9, Number 51) we raised the question of whether Pittsburgh's legacy costs could force the City to seek relief under Chapter 9 of the U.S. Bankruptcy Code. Under Chapter 9 a judge would oversee a readjustment of debts.  Pennsylvania's Act 47 permits a municipality in financial distress to pursue a Chapter 9 filing if one of the following conditions is present:

• The Act 47 coordinator recommends filing
• There is imminent action by a creditor that would threaten the ability of the municipality to provide services
• A creditor has rejected the Act 47 plan and the rejection cannot be resolved
• A condition causing financial distress could be solved by filing
• The governing body has failed to adopt an Act 47 plan or carry out the recommendations of the coordinator

If a majority of a qualifying governing body votes to file for Chapter 9, then the municipality would be subject to a debt readjustment proceeding (Pittsburgh has the additional requirement of petitioning the Governor under legislation that created the oversight board, which supersedes the Act 47 requirements). Bear in mind that debt readjustment for municipalities is qualitatively different from a Chapter 11 bankruptcy by a private entity. Because the municipality cannot "go out of business" there is no prospect of all assets being liquidated with the proceeds apportioned among creditors.

After a Chapter 9 filing has been made, what then? Various parties would be asking this question-City officials, City residents, unions, creditors, the media, etc.-so it is worth looking at a recent Chapter 9 case in Vallejo, California to get an idea of how the question might be answered.  

A March 13, 2009 memorandum of the Eastern District of California's Bankruptcy Court addressed the issue of "whether Chapter 9 of the Bankruptcy Code permits a municipality to reject collective bargaining agreements with its public employee unions".  The City of Vallejo filed a motion for approval of rejection of its collective bargaining agreements with its police, fire, blue- and white collar employees.  The police and white-collar unions made supplemental agreements with the City and the motions against them were voluntarily dismissed by the time of the memorandum.

The memorandum noted that the U.S. Constitution gives Congress the power to establish uniform bankruptcy laws, and reserves powers not delegated to the Federal government to the states and the people.  States are free to permit or forbid their municipalities from filing for Chapter 9, and those that do permit a filing can attach as many pre-conditions as they wish.  But once in Chapter 9, the state law and, presumably, state constitutional provisions, would yield to the Federal law.  "When a state authorizes its municipalities to file a Chapter 9 petition it declares that the benefits of Chapter 9 are more important than state control over its municipalities". 

The memorandum pointed out that "by authorizing the use of Chapter 9 by its municipalities, California must accept Chapter 9 in its totality; it cannot cherry pick what it likes while disregarding the rest".  Going into Chapter 9 means a municipality is "entitled to fully utilize [the Bankruptcy Code] to accept or reject its executory contracts".

So what did the judge do in the Vallejo case?  At the time of the memorandum, the City was still trying to renegotiate contracts with the firefighters and the blue-collar workers as it had with police and white-collar unions, so the court agreed to give the negotiations more time.  In addition, the court wanted to see a clear accounting of the City's finances since the unions had argued that the City's more than 100 special and enterprise funds could be used to solve the City's financial problems.  (According to the City's Public Relations Officer, negotiations have begun with the firefighters and blue-collar employees, and the court was satisfied with the City's explanation of the special funds). 

What implications would this have for the City of Pittsburgh?  On the chance that the City found itself in front of a bankruptcy judge there might be some nudging to renegotiate existing union contracts. That would be quite different from the procedures under Act 47: that law mandates that collective bargaining agreements negotiated while in Act 47 cannot violate the terms of the Recovery Plan. On the other hand, contracts in existence at the time Act 47 status is granted must remain in effect until the term of the contract expires. However, in Chapter 9, a municipality would be able to void an existing contract and renegotiate more favorable terms if the judge so ordered.

And it could involve an alteration of pension benefits. The Pennsylvania Constitution (Article I, Section 17) prohibits laws that impair contracts, and the Department of Community and Economic Development's "Municipal Pension Handbook" notes "the Pennsylvania Supreme Court has applied [this provision to mean]...pension benefits cannot be taken away unilaterally, by statute, ordinance, or similar action".  But a judge in a Chapter 9 proceeding would not be making law: he would be adjusting the municipality's debts (analogous to what happens in Chapter 11 proceedings and as provided for by the U.S. Constitution). This type of adjustment could well include pensions if the judge deemed it necessary to solve the City's problems.   

Draconian? Perhaps, but that is why Chapter 9 contains so many hoops for a municipality to jump through before getting to a debt adjustment proceeding.  It is supposed to be the last resort.  And it is also why there are so few such filings nationwide. Whether Pittsburgh or any of the other 16 municipalities currently in Act 47 ever end up in Chapter 9 remains a very big question.  In view of the fact that Act 47 coordinators would have to approve (undoubtedly requiring the Governor to agree) along with the enormous heavy political pressure and resistance labor unions would bring to bear in opposition to Chapter 9, the City will probably be have to be insolvent, unable to meet payroll, unable to pay bills, and facing legal action by creditors to ever vote for Chapter 9. 

At that point, Chapter 9 could be more desirable than having a judge issue an order to pay even if it means the City would have to raise taxes to make the ordered payments.