Livability rankings tell us very little

Summary: Livability rankings are very subjective.  The notion of livability will vary from person to person depending upon circumstances or individual tastes and preferences.  Yet they are big news in a city or region when the results are favorable.  This Brief examines two recent livability rankings to show just how different they can be.

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In late August, The Economist Intelligence Unit (EIU), and its sister company The Economist newspaper, released a ranking of the most livable cities on earth.  Pittsburgh media and officials were giddy to learn that the city landed as the 32nd most-livable city in the world and was the second-highest-ranked American city behind Honolulu.

Bear in mind, however, in the spring of 2018, U.S. News & World Report ranked the 125 most populous metro areas in the United States.  According to this ranking, the Pittsburgh area ranked 57th (Honolulu ranked 35th).  Not a lot of media attention, if any, was paid to this ranking of the Pittsburgh area.  So, can anything useful be gleaned from these rankings?  Or are they essentially meaningless exercises?

In the EIU’s methodology each city was evaluated based on qualitative (non-numeric) measures and quantitative (numeric) measures. The qualitative measures were based on the judgment of an in-house expert on that country and a field correspondent in each city.  For quantitative variables, the rating was based on the relative performance of a location using external data sources such as the World Bank or Transparency International.  Of the 30 categories listed, only four, (13 percent), were quantitative or data driven, meaning that the other 26 (87 percent) were based on the judgment of individuals.  Thus, the EIU ranking methodology is extraordinarily subjective rather than based on objective, verifiable facts.  Which is appropriate since the whole notion of livability is very subjective.

The EIU based its ranking on five main categories:  stability (25 percent of total); healthcare (20 percent); culture and environment (25 percent); education (10 percent) and infrastructure (20 percent).  The ratings were on a 100-point scale with anything in the 80-to-100 range meaning “there are few, if any, challenges to living standards.”

Pittsburgh’s best score was in the education category (100, or ideal).  There are three sub-categories to this measure:  availability of private education; quality of private education and public education indicators.  The first two were qualitative while the latter was adapted from World Bank data.  No mention as to what levels of education were evaluated—k-12, higher education, or both.

For livability the most important educational level is, or ought to be, k-12. And for that group our work has demonstrated many times that the Pittsburgh Public School District consistently underperforms academically and has seen drastic declines in enrollment despite spending well above $20,000 per student. Indeed, poorly performing public schools have long been a motivation for parents with school-age children to leave the city or put them in other schools. How could a reasonable, knowledgeable observer possibly give Pittsburgh a 100 percent rating on education?  Consider that just over a year and a half ago the district was excoriated by the Council of the Great City Schools (Policy Brief, Vol. 17, No. 4) for not improving student achievement since its previous report 10 years earlier.  Anyone following Pittsburgh schools should have known about that extremely critical study. In short, the EIU ranking on education is bogus.

Infrastructure was the city’s second next highest rated category (96.4). The sub-categories are: quality of road network; quality of public transportation; quality of international links; availability of good quality housing; quality of energy provision; quality of water provision and quality of telecommunications.  All are qualitative variables and interpreted subjectively.  The standout sub-category here is the quality of water provision.  As was documented in Policy Brief, Vol. 17, Nos. 14, 29 and 49, the Pittsburgh Water and Sewer Authority (PWSA) is beset by major problems with water main breaks in the 100-year old system and does not have the funds to do necessary repairs and replacements ($5 billion) to update the system.  It now is under the oversight of the state Public Utility Commission.

Obviously, the judgment of the EIU experts did not include “cost of provision” of public transportation. As was shown in Policy Brief, Vol. 18, No. 18, the cost of Port Authority bus operations is the second-highest in the country. Only New York City bus operations are more expensive.  Perhaps they were impressed by the tunnel under the river to the North Shore.  But that was built with a hefty half-billion dollar price tag (Policy Brief, Vol. 12, No.10) and offers free rides despite additional operating costs.

Nor did the judgment of the experts factor in the use of public subsidies to prop up the new international flights at Pittsburgh International Airport in the quality of international links.  Subsidies have been doled out to WOW, Condor, British Airways and Delta Airlines the only U.S. carrier. And Delta recently canceled its service to Paris. Without taxpayer handouts, the flights to Iceland, Germany and England would likely not have happened as the demand for unsubsidized travel from Pittsburgh to these destinations is just not adequate to justify the service.

Interestingly, the lowest scoring category was culture and environment (87.7).  There are nine sub-categories in this section of which only two are quantitative (humidity/temperature rating and level of corruption).  The others include discomfort of climate to travelers; sporting and cultural availability; food and drink; availability of consumer goods and services and social or religious restrictions.  Given the amount of money the taxpayers have ponied up for world-class sporting facilities, not to mention the Regional Asset District subsidies handed out to cultural amenities, city officials must undoubtedly believe they were short-changed on this category. And as for climate discomfort for travelers, how is that remotely connected to livability?

Given that the EIU relied mostly on qualitative, or observational, data to compile their scores the City of Pittsburgh obviously looks good to those on the outside.  But the façade belies the extraordinarily high cost of city government and the high tax burden placed on its residents, which is often the primary reason for the outflow of residents.  In a national comparison of city management, Pittsburgh ranked among the very highest in taxes and government cost per resident (Policy Brief, Vol. 16, No. 34).

Contrast the EIU ranking with that of U.S. News & World Report’s “Best Places to Live” ranking which looks at the seven-county metropolitan statistical area (MSA) and not the city proper.  The methodology relies more on quantitative, or numeric, data.  The five categories are:  job market index (20 percent of total); value index (25 percent); quality of life index (30 percent); desirability index (15 percent) and net migration (10 percent).  Pittsburgh’s MSA score was 6.5 (on a 0-10 scale), good for 57th place on the list.

The highest score was with the value index (7.8) which looks at the median annual household income for both homeowners and renters (blended together) and compares that to the annual cost of living in the MSA.  The annual cost includes an estimated cost for housing—mortgages, utilities and taxes for homeowners and utilities and rental prices for renters.

The lowest score came in net migration (5.6) which took data from the U.S. Census on those moving in and out of an area, adjusted for deaths and births.  The underlying premise is that migrants vote with their feet and will choose the best areas in which to live.  Top ranked Austin, Texas, scored a 9.4 on this measure.

The area’s job market index was the second-lowest score (6.1).  It measured the 12-month moving unemployment rate from the U.S. Bureau of Labor Statistics (BLS) with the purpose of seeing whether or not the area’s job market is growing, struggling or remaining stable.  The other part of the index looks at the average salary in the MSA (according to BLS data).  We have commented frequently on the area’s labor market (Policy Brief Vol. 18, No. 23) and have found  it to be stagnating at best with low growth in the goods-producing sector (mining, manufacturing and construction) while experiencing moderate growth in service-providing sectors (especially leisure and hospitality along with education and health).

The metro also did not fare well in the quality of life index scoring just 6.2 of 10. This index is comprised of five measures:  crime rates; quality and availability of health care; quality of education; well-being and commuter index.  What stands out here is the quality of education which is worth 25 percent of the score.  It uses data from the U.S. News Best High Schools rankings which calculated the average college readiness score for all schools in the metro area and compared it to those of all the other metro areas.  The Pittsburgh area scored 5.4 out of 10.  This low score happened despite some very good high schools in the area.

Clearly the two livability rankings offer a stark contrast in methodology and approach and produce widely varying results on the city and area.  The EIU ranking looks mostly at the city through a subjective and possibly very biased observer lens and determined Pittsburgh to be the second-most livable city in the U.S.  It doesn’t take into account any of the hard data on the cost of providing government services including education and transportation where Pittsburgh is woefully lacking when compared to other cities.

The U.S. News rankings do take into account more hard data from the U.S. Census and BLS to draw its far from glowing ranking of the metro area. The economy of the metro and the city (as we have demonstrated in Policy Brief Vol.16, No.42), as measured by jobs, have been weak to stagnant from quite some time.  Meanwhile, Census data show net migration to be another area of weakness for both the city and MSA.  Weak job gains and little or no net in migration are undoubtedly related.

The city and the MSA’s poor business and regulatory climate are key elements in the comparatively weak economic performance. And unfortunately are likely to continue to be a drag on the economy.

Tax Foundation critiques PA local taxes

Summary: A recent report from the Tax Foundation entitled “Pennsylvania: A 21st Century Tax Code for the Commonwealth” examined the state’s tax system, with particular attention to local taxes.

“No review of Pennsylvania’s tax code is complete without diving into the complexities of local taxation.” That is the opening sentence to the local section of the Tax Foundation’s report on tax reform.

In Pennsylvania counties, municipalities and school districts can levy a variety of taxes as permitted by state law with limits on the rates each tax can be imposed. There are taxes levied on residents and paid to the governmental entity where the resident lives. These include taxes on property, earned income, deed transfers, per capita and occupations. Businesses, which are subject to property and earned income taxes, may also have to pay gross receipts taxes like the business privilege tax and the mercantile tax where the business is located. Patrons of places of entertainment or recreation are subject to the amusement/admissions tax. Workers pay the local services tax where they work.

Not all taxing bodies levy all taxes available to them. When a municipality and a school district both levy a tax (other than the property tax) they must split the overall rate. Home Rule municipalities can levy rates that exceed tax rates the state has set for the same classes of counties and municipalities that have not adopted a Home Rule charter. Tax rates can also be set above regular statutory limits in Act 47 distressed municipalities if the courts approve the distressed community’s request. Property tax levies for general purposes can come up against a limit (25 mills for counties of the third through eighth class, for example) but numerous special purpose levies have no limit.

Then too, tax rates can be changed by tax-shifting provisions that require voter approval. Special state permission may grant authority to impose a tax for just one local government class. Only counties are permitted to tax hotel stays. Taxes on sales, alcohol and vehicle rentals are levied only by Philadelphia and Allegheny County and Pittsburgh is the only municipality with a payroll preparation tax.

Earned income tax payments by non-residents are subject to crediting requirements if the resident’s home municipality also levies the tax. There is statutory language governing the payment of the local services tax in cases where a worker has multiple jobs in one municipality or has jobs in more than one municipality. Exemptions and exclusions to all of the foregoing local taxes also exist.

In all, according to the state’s Taxation Manual, in 2013 Pennsylvania’s local governments collected $24.8 billion in taxes; $16.9 billion came from property taxes and $7.9 billion from all other taxes. Of the latter group, earned income taxes accounted for $4.4 billion. Collections by school districts accounted for 69 percent of all property taxes while collections by municipalities accounted for 63 percent of all other taxes.

What changes did the Tax Foundation recommend for local taxes? First a general streamlining of tax codes and statutes was suggested. Second, rather than having separate tax collectors for county, municipal and school property taxes, the foundation recommended consolidation of collections at the county level. That proposal likely stems from a good government efficiency perspective but also takes into account the near-decade-long experience with centralized county collection of the earned income tax and distribution back to the municipalities and school districts under Act 32 of 2008.

More importantly, the report suggested that the state mandate reassessments at regular intervals in order to address the inequities of the property tax system. We have addressed the multitude of problems created by outdated assessments many times over the years and concur completely. A state mandate to reassess regularly would lead to major improvement in transparency and equity in the imposition of the most burdensome tax authorized for local taxing bodies in Pennsylvania. Property taxes as a percentage of owner-occupied housing value was 1.48 percent in 2016—lower than New Jersey and Ohio but higher than West Virginia and Maryland. A property tax ranking for businesses placed Pennsylvania 33rd out of the 50 states—better than New Jersey and Maryland but lower than Ohio and West Virginia.

Due to widely varying reassessment years and pre-determined ratios, the lack of reassessment cycle and three separate tax bills, there is widespread lack of understanding of how the property tax system works and the frustration with property taxes is very high. All of that led the foundation to conclude “this is no way to operate a major system of taxation.” Harsh words for the tax that is the lifeblood of local government but there is much resistance to adopting mandated reassessments.

On the earned income tax the foundation suggested that the tax base at the local level be switched to the state’s personal income tax base which is broader and would tax unearned income (interest, dividends, capital gains, etc.). By making such a change, the foundation projected that any additional revenue could be utilized to eliminate “nuisance” taxes like the per capita, occupation and gross receipts taxes.

Surely if there were to be a significant change—such as converting the earned income tax to a personal income tax for municipalities and school districts—there would be pushback from taxpayers who are not paying taxes on unearned sources of income currently at the local level. No doubt an income threshold exemption and reductions in existing municipal and school district taxes would be part of the discussion. This proposed tax could produce very difficult enforcement and collection problems.

To be sure, a tax system that emphasizes efficiency and transparency would be a welcome change indeed. At this point, what that looks like and when it will be put in place remains to be seen.

Is Pennsylvania’s economy picking up steam?

Summary: When fiscal year 2018 came to a close June 30th and the general fund revenues were finally tallied, the commonwealth’s total tax revenues collected exceeded the previous fiscal year by 4 percent. Given the struggles in recent fiscal years with stagnating revenues (see Policy Brief Vol. 17, No. 37) does this point to a strengthening in the state’s economy?
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According to the Pennsylvania Department of Revenue, total general fund tax revenue for fiscal 2018 topped $32 billion, 4 percent higher than fiscal 2017’s $30.75 billion. This is the second largest percentage increase to the total tax revenues in the last five years (fiscal 2015 was 4.96 percent greater than fiscal 2014). The other growth rates were quite anemic: 0.11 percent, 1.63 percent and 2.60 percent. While the increase in general fund tax revenue was a plus for the state, the commonwealth had estimated that collections would reach $32.13 billion, leaving actual collections about one-half of a percent below the projected level.

The corporate net income tax collections, the largest of the “corporation taxes” category, reached $2.88 billion, 4.6 percent better than the previous fiscal year’s $2.75 billion. This was the second largest yearly gain over the last five years (fiscal ‘15’s collections were 12.4 percent higher than fiscal ‘14). In fact, fiscal ‘17’s level of $2.75 billion was down 3.2 percent from fiscal ‘16 ($2.84 billion). In what had to be a surprise, this category fell 7.7 percent short of the $3.12 billion forecast. This may be a sign that businesses in Pennsylvania are not fully benefitting from a faster paced national economy. Or, it could be they are struggling under Pennsylvania’s tax and regulatory environment.

The sales and use tax, the largest of the “consumption taxes”, hit $10.38 billion in fiscal 2018, up 3.8 percent over fiscal 2017’s $10 billion. Over the last five fiscal years, the growth in sales and use tax revenue has been fairly stable, ranging from a gain of 2.14 percent (fiscal ‘17 vs. fiscal ‘16) to a high of 3.98 (fiscal ‘15 vs. fiscal ‘14). Projected sales and use tax revenue for fiscal 2018 was close to the actuals ($10.34 billion vs. $10.38 billion).

Personal income tax, the largest revenue generator, produced $13.4 billion in fiscal 2018 and accounted for 42 percent of all general fund tax revenue. This is a rise of 5.8 percent over the $12.66 billion collected in fiscal 2017 and was close to the fiscal 2015 collections gain of 5.86 percent over fiscal 2014. Forecast personal income tax collections for fiscal 2018 ($13.30 billion) were very close to the actual revenue for fiscal 2018.

By comparison, U.S. Treasury Department data indicate that thus far through the federal fiscal year (October 2017 through July 2018) personal income tax collections are up by 7.8 percent over the previous fiscal year, in spite of the tax cuts that took effect in January 2018.

Given that Pennsylvania’s fiscal ‘18 tax revenues were greater than those collected in the previous fiscal year, is the state’s economy picking up steam?

Household survey data (seasonally adjusted) for August 2018 suggest that a significant strengthening is not occurring. Compared to August 2017, the civilian labor force has fallen by 38,000 persons. That decline, combined with a gain of only 7,000 employed persons, pushed down the number of unemployed by 45,000. These data suggest that a large number of the population have stopped looking for work. Could be retirements are up or it could be discouraged workers and that would not be a healthy sign for the state’s economy.

Contrast that with the national household survey data (seasonally adjusted) which shows the civilian labor force increasing by 1.18 million over the 12 months ended in August. The number claiming to be unemployed fell by 893,000 while those reporting themselves to be employed rose by 2.07 million. Thus, strong employment opportunities have been more than ample to absorb large numbers of the previously out of work as well as newcomers.

From the August 2018 employer payroll survey (seasonally adjusted), the number of total nonfarm jobs in Pennsylvania had moved up by 65,500 (1.1 percent) from a year earlier. This continues a trend in which total nonfarm employer payrolls have struggled to break out. Particularly concerning was the drop of 4,900 from July posted in the August report.

By contrast the national nonfarm jobs rose 1.6 percent from August 2017 to August 2018. Pennsylvania has not been able to keep up with the nation in nonfarm job gains. In fact Pennsylvania has not bested the national growth rate in nonfarm jobs since coming out of the last recession in 2011.

Industry employment data are broken down into two major categories: goods-producing and service-providing. The former consists of mining and logging, construction and manufacturing while the latter consists of services such as health and education, leisure and hospitality and professional and business services. Goods-producing industries are prized for the multiplier effects on an economy with higher wages and supporting other industries, particularly the service sector industries.

Pennsylvania’s goods-producing industries have struggled to grow with the August 2018 job count up only 0.72 percent over the last 12 months. Nationally, the August year-over-year growth in the goods-producing sector rate was 3 percent. The goods-producing sector nationally has been gaining steam, while in Pennsylvania it has been weakening since March of this year.

The state’s manufacturing job count was up 0.73 percent over the past 12 months. Only June of this year posted a yearly rise of more than one percent. Nationally, the annual gain in August was a robust 2.04 percent.

Pennsylvania has kept pace with the nation as a whole in service-providing industries. The seasonally adjusted growth rate of the service-providing industries in August was 1.16 percent for the commonwealth and only 1.36 percent nationally.

One service-providing sector where Pennsylvania’s job growth tops that of the nation is in education and health services. Pennsylvania recorded a 2.62 percent 12-month rise in August while nationally that sector’s employment was up 1.93 percent during the period.
Again, while growth in service-providing sectors is welcome, these sectors do not have the wages, productivity or multiplier effects as the goods-producing sectors.

The 4 percent increase in general fund tax revenues for fiscal 2018 over 2017 should not be construed to mean the state is performing well compared to fast growing states or to the national economy. Rather, the below-national gains in nonfarm jobs in Pennsylvania point to persistent and longstanding problems with its business climate. The high corporate taxes, a smothering regulatory climate and fealty to unions all play a part in holding the state’s economy at subpar levels.

Proposal would erase school property taxes for homesteads

Summary: Pursuant to voter approval of last November’s ballot question to amend the Constitution to permit homestead exclusions of 100 percent for property taxes, the Legislature recently held a hearing on legislation that would raise the state personal income tax to provide money to eliminate school property taxes on homesteads.

How does this tradeoff sound? In exchange for a 1.72 percentage point hike in the state’s personal income tax, taking the rate from 3.07 percent to 4.79 percent (a 56 percent increase), school property taxes on homesteads would be eliminated. That’s the legislative proposal the Pennsylvania House Finance Committee recently discussed at a public hearing.

Last November voters approved a ballot question (54 to 46 percent) to amend the state Constitution that would permit local taxing bodies (counties, municipalities and school districts) to expand homestead exclusions. Among the state’s 67 counties, Monroe County, the location of the public hearing, had the highest approval rate for the measure at 83 percent.

Prior to the amendment flat dollar reductions of up to 50 percent of the median value of homesteads in all taxing jurisdictions were permitted. The new language in the Constitution allows for exclusions of up to 100 percent of assessed value of each individual property. Moreover, under current law local taxing jurisdictions cannot raise millage rates to replace funds lost due to a partial homestead exclusion. The proposed legislation addresses school taxes only—typically the largest piece of most homeowners’ tax bill—and includes complete elimination.

The committee heard testimony from two local government associations and one Realtor. The association representing counties did not directly take a position on the proposal since it deals with school taxes, but it was hopeful the discussion would eventually expand to alternative sources of revenue for counties. The association representing school boards looked at the issues facing school districts and the Realtor was in favor of the proposal.

According to an estimate by the state’s Independent Fiscal Office, in fiscal year 2016-17 homesteads accounted for $7.048 billion, or 54 percent, of all current and interim property taxes collected by Pennsylvania school districts with non-homestead properties paying the other 46 percent. Each percentage point of the state’s personal income tax raised $4.1 billion that same fiscal year, meaning the additional 1.72 percentage point would have brought in $7.095 billion more— assuming changes in behavior of income earners caused by the higher tax rate would have no negative effect on taxable personal income.
The legislation calls for the creation of an account that would hold the receipts from the 1.72 percentage point portion of the personal income tax (35.9 percent of total collections). In order to opt in to the program, school districts will be required to enact a 100 percent homestead exclusion resolution. Going forward districts would annually certify the amount of property taxes that would have been generated from homesteads and then receive that amount from the fund.

If a school district is reluctant to participate pressure to do so would almost certainly come from homeowners who would be paying the higher personal income tax rate but not enjoying an elimination of their school taxes. Prior to the constitutional amendment voters in only a handful of districts approved adopting the provisions in Act 1 of 2006 that allow districts to shift property tax burden to local earned income or personal income tax at the district level. The possibility of complete elimination of homestead property taxes will almost certainly produce a different result. After a number of eager districts opt in, it will be virtually impossible for other districts not to participate.

Of course, shifting such a large tax burden to another tax source can lead to opposition from those who will see their tax payments increase. For the most part, homestead owners also pay the personal income tax, thus there will be a net savings or a net increase tax cost depending on a household’s personal income payment and the amount of school property taxes paid. Thus homeowners living in high-value homes with low taxable income (possibly retirees with income primarily from pensions and Social Security) would benefit greatly. High-income earners who have bought or remained in homes that are valued well below what they can afford could well be losers.

One group is a certain loser. Residential renters, whose rent payments cover all or part of taxes paid on the property they occupy, would pay the increased personal income tax rate but would receive no offset from the homestead exclusion. Businesses, including rental properties, will still be liable for school taxes. It is very likely the homestead exclusion will be an incentive for many of those living in the 1.56 million renter occupied properties (31 percent of total) in Pennsylvania to own a home.

Then too, all future property tax hikes by the district would fall upon non-homestead property while taxes other than property taxes levied by school districts, such as the earned-income tax, would stay in place with tax rates that are limited by existing law unless or until those laws are changed. Reassessments, when they occur, could increase the amount a district can draw from the fund if the value of homestead property in the district rises significantly and/or millage rates are raised. And if values fall, the district might see a reduction in the income tax funding.

Districts that have much higher-than-average-value homesteads and higher school property tax payments on a per student basis will receive more—in some cases far more—per student from the fund than districts with lower property taxes per student. Even within districts a higher-value home is going to get a bigger reduction than a lower-value home on a dollar basis since the new language would eliminate the school tax bill for all homesteads completely.

It is also possible that the state’s recently adopted student weighted funding formula could be impacted inasmuch as the local property tax effort component of the formula will have been replaced by the personal income taxes paid statewide. And the formula for determining how much gaming money is sent back to each district for current school homestead relief may need to be re-examined.

Moreover, it is likely that most school districts will continue to face rising costs from pensions, salaries and benefits that keep growing because of union contracts—some that were settled by the threat of a strike or an actual strike—along with other financial pressures. This could create a situation wherein school districts have to ask the General Assembly to boost the personal income tax rate in order to raise adequate revenue to replace homestead property taxes that can no longer increase. To be sure, if a further increase in the personal tax rate is enacted, all those income taxpayers who are already heavily subsidizing the elimination of school property taxes on homesteads will get hit even harder.

In light of all the problems this legislative plan creates, the homestead exclusion as currently proposed should undergo serious alterations in order to avoid creating greater inequities in tax burdens.

Steelers want to dip into taxpayer pockets—again

Summary: The Sports & Exhibition Authority will be requesting money from the Regional Asset District board to set up a fund to pay for anticipated capital repairs to the sports facilities and the convention center it owns. This is a very bad idea, especially when considering how the teams have generously benefitted from their leases.

In late August it became public that the city/county-controlled Sports & Exhibition Authority (SEA) intends to ask the Regional Asset District (RAD) board to allocate $1.16 million in 2019 for capital repairs and improvements at four SEA-owned facilities—Heinz Field, PNC Park, PPG Paints Arena and the David L. Lawrence Convention Center.

Keep in mind that the RAD board, with money from the additional one percent sales tax Allegheny County collects on all taxable items, already gives the SEA $13.4 million annually for the bond payments used to pay for the construction of the two stadiums. The $1.16 million would be another dip into taxpayer pockets by the area’s sports teams.

The head of the SEA wants to create a new fund to help with capital repairs and improvements expected to arise as these facilities age. PNC Park and Heinz Field were opened in 2001, the convention center in 2003 and the hockey arena in 2010. Each venue has its own capital reserve fund that has been used for some upkeep but this would be a multi-facility fund designed as a supplement to the individual reserve funds. Thus, the initial $1.16 million request is likely to be followed by another and then another and so on.

The Steelers quickly supported the plan. Representatives from the other teams have been mum as of this writing.

A representative of the Steelers was quoted as saying “The SEA, like any landlord, has lease obligations for capital repairs. This request will help ensure that these buildings continue to host and promote events, concerts, conventions, and games.” While this person is correct in that a typical landlord is obligated for the capital upkeep their property, the fact is that the SEA is not a typical landlord, nor is the lease between the team and the SEA a typical lease.

Typically a landlord builds into the rental payments enough money to pay for capital improvements and repairs. But again this is not a typical lease. Its duration is for 29.5 years and conveys all but ownership to the team. Consider that the lessee in this case realizes nearly all of the revenues generated at the facility, with minimal lease payments. It does have a schedule of lease payments—three $25 million installments each due every 10 years covering the period of the lease. The total comes to $75 million paid over 30 years or $2.5 million per year on average. That would be on a stadium built for $261 million (not including interest payments on funds borrowed to build the facility).

But that is not the end of the story on lease payments. The lease provides for credits the team can earn to offset the rental payments. To quote the lease: “The credits available for the first ten-year period of occupancy shall be amounts of eligible taxes paid to the Commonwealth in respect to that ten-year period which exceed the product of the Base Line Tax Amount multiplied by 7.5.”

The Base Line Tax Amount comes from the Capital Facilities Debt Enabling Act of 1999 (Section 501) in which the base line is the average of taxes paid by the organization for the three-year period of 1996-1998. It consists of payments for “all corporate net income tax, capital stock and franchise tax and personal income tax related to the ownership and operation of the professional sports organization.” It also consists of all personal income tax withheld from its employees, the employees of any provider of events, those of the performers or other participants, including those of the opposing teams, all sales and use taxes related to the operation of the professional sports organization and the facility and enterprises developed as part of the facility complex. It also includes all taxes paid on the sale of alcoholic beverages at the facility or complex in addition to any tax imposed by the commonwealth after passage of the Act in 1999.

A request made to the SEA asking how much rent was paid after the first 10 years has not yet been returned. A look at the audited financial statements (2010-2012) provides no indication that a payment was made.

These deductions had the potential to offset a substantial portion, if not all, of the $25 million rent due after the first 10 years. Any credits exceeding $25 million can be carried over to the next rent payment. Moreover, for the second (due in a couple of years) and third payments, these deductions are multiplied by a factor of 10 to calculate the credit against the rent. Again it’s not a typical lease.

Moreover, the lease gives the team almost all of the revenues generated at the facility. From the lease: “The Lessee … will retain 100% of the revenue from all Sporting Events and other activities, and 85% of the Event specific Net Revenues from Non-Sporting Events.” “Net Revenues” are defined as “ticket or gate receipts (including tickets for suites) (net of taxes) less any deductions for direct Event specific expenses…” Furthermore the team keeps 100 percent of all concession revenues earned at events held at the stadium (other than community events) as well as 100 percent of the revenues from novelties and programs, in-stadium advertising, naming rights and all other revenues generated at the facility. The team also gets to keep 100 percent of the parking revenues from event days (after paying the SEA an annual fee for those spaces of $44,800).

The SEA does get to keep some revenues in addition to the 15 percent of the “Net Revenues” from non-sporting events. For example, there is a $3 ticket surcharge on NFL events that goes to the SEA. Any money in excess of $1.4 million in each lease year from this surcharge is to be deposited into the capital reserve fund. A surcharge of $2.25 is added to each ticket for non-NFL events (originally $2 for the first 10 years and will go up to $2.50 after the 20th year.)

The lease also grants the teams (Steelers and Pirates) with development rights for the land between the two stadiums. From section 7.7.7(b) (Future Development and Parking Revenues) the Steelers were guaranteed three things: first they get to approve all developments that take place between the stadiums; secondly, they are guaranteed a certain level of parking availability; and finally they are guaranteed “that the Authority will share with the Lessee the revenue derived from the sale or lease of property in the Option Area for the purpose of offsetting the Lessee’s funding of the annual operating and maintenance costs of the Stadium and the loss of parking and development revenues… .” In short, both teams realize some revenues from the lease of the land between the two stadiums. And that doesn’t count the $2.5 million taxpayer subsidy the Steelers received to build the concert venue near the stadium—which they own and keep those revenues as well.

The stadium and the generous lease have been so lucrative they have helped boost the value of the team tremendously. In Forbes magazine’s 2018 ranking of valuable teams, the Steelers were valued at $2.45 billion. To illustrate how much money is in the NFL, they rank as the 16th most valuable franchise in the league.

The lease between the football team and the SEA was designed for the team to retain the overwhelming majority of the revenues generated at the facility, leaving the authority that owns the building with very little in the way of facility-generated revenues. Of course the stadiums were going to need repairs as they age. But the SEA isn’t in much of a position to pay for them since it doesn’t receive much from the operations of the facilities it owns. The convention center has yet to live up to its promise to run in the black.

The request to the RAD board for $1.16 million to supplement capital expenditures should be rejected. That money could be better used elsewhere such as the county parks or even the Pittsburgh Water and Sewer Authority to help with its crumbling infrastructure. After all, the RAD board provides funding to the Port Authority so the precedent has been established.

The teams that have already benefited enormously from taxpayer money should shoulder the responsibility for any repairs or capital improvements. These costs ought to have been factored into the lease agreements. It’s a travesty for an organization with average pay in the millions that has been a huge beneficiary of taxpayer generosity to be asking for more tax dollars.

Pennsylvania Still Not Ready or Willing to Adopt Regular Reassessments

Summary: A task force working on “common sense modifications to address significant flaws and promote fairness and accuracy in the property assessment system” in Pennsylvania has finished its work. The task force acknowledged the problems arising from not carrying out reassessments on a regular basis while also recognizing that base year assessments will likely remain a feature of Pennsylvania’s property tax system for the foreseeable future.

 

“Pennsylvania is one of only six to eight states without a statutorily specified reappraisal cycle.”

“Most states mandate reassessments annually or on a fixed cycle of no more than six years.”

“A countywide reassessment is almost generational for most counties and property owners.”

The three quotes above come respectively from a study on the Blair County reassessment, a study on the Indiana County reassessment and meeting minutes of the Property Assessment Reform Task Force (task force), a project of the state’s Local Government Commission. Before recent reassessments in Blair and Indiana were completed the counties had last done one in 1958 and 1968, respectively. Sometimes entire generations are skipped without assessment updates.

Pennsylvania does not have a legislatively mandated reassessment cycle. In 1982 the assessment laws were amended to permit counties to use a base year for values but there are counties with base years going back many years before 1982, meaning some had stopped updating values long before the law change. As long as all property is valued in the same base year and at the same ratio of assessed to market value set by the county government (the pre-determined ratio) then there is supposedly no problem.

Of course, market values change over time, properties are appealed, economic forces come into play and the base year values become less and less reflective of actual current market values and certainly relative market values of properties. Clearly, departures from market values would be minimized with a more frequent reassessment cycle. But as has been demonstrated over and over, property reassessments in Pennsylvania are viewed with dread by under-assessed property owners and elected officials who claim everybody’s taxes will increase.

One of the task force’s nine objectives to accomplish during the legislative session was to develop a “self-evaluation tool for counties to determine their need for a countywide reassessment.” The development of the tool was discussed at several of the task force’s meetings and was finalized as a guide in June. At that meeting the task force members working on the guide said it was not going to provide an answer as to whether a reassessment was appropriate for any county but would provide the tools for county officials to determine if the time is right.

In explaining the role of the county government in the reassessment process the guide notes that Pennsylvania does not have a state assessment oversight agency with a direct supervisory role of counties. Instead, counties decide on the frequency of reassessments, whether to use base year or current market value and the pre-determined ratio to be used. The guide goes into depth on the various ratio study methodologies that can be utilized to analyze whether uniformity is being threatened. That’s much of the same information that has been found in previous studies, including the Allegheny Institute’s 2007 report on property assessment practices.

Counties can decide on their own to carry out a countywide reassessment, and that is where the guide is supposedly designed to assist in the coming years. Since 2013, Blair, Indiana, Erie, Lehigh, and Lancaster counties all passed ordinances or resolutions to conduct a reassessment. Monroe will be the next county to carry out a reassessment based on a government decision. The reassessment will move values from a 1989 base year with taxpayers assessed at 25 percent of their market value to a 2020 base year and a 100 percent pre-determined ratio. Reassessment literature posted on Monroe County’s website states “property value fluctuations within areas of the county and the thousands of assessment appeal hearings…[produced] widely varying assessed values resulting in inconsistent taxes.”

Even with the primacy of the county in the assessment process, if and when the constitutional requirement of uniformity of taxation is being seriously violated, then lawsuits and court actions become likely. According to the guide the courts’ involvement in uniformity goes back over a century and in a 2006 case the Supreme Court noted that “a taxpayer is entitled to relief under the Uniformity Clause where his property is assessed at a higher percentage of fair market value than other properties throughout the taxing district.”

Since 2013, court-ordered reassessments have been completed in Allegheny, Lebanon and Washington counties. Delaware County is in the process of conducting a reassessment ordered by the Court of Common Pleas that will go into effect in 2021. The county is already using a pre-determined ratio of 100 percent, so the reassessment will only be updating the values from 2000.

For Delaware and Monroe that is a 20- and 30-year gap between revaluations. The guide rightly notes that when there is significant time between reassessments, inequitable tax burdens can result. Moreover, failure to update assessed values can add significantly to costs of reassessments if the property data require reconstruction and can also greatly complicate the development of a mass-appraisal model.

Clearly, there can be no more serious obligation of lawmakers than to ensure fair and equitable treatment of taxpayers as required by the Pennsylvania Constitution, especially in a state that relies heavily on property taxes to fund education. Taxpayers should not have to engage in expensive lawsuits and long delays in the court system to receive fair treatment. The arguments against regular updates of property assessments are tired and shopworn and reflect the worst in political favoritism by elected officials.

The recent Washington County experience demonstrates the flawed and often unscrupulous political opposition to reassessments. Despite all the dire warnings, the process was carried out in an open manner with property owners fully informed and with the windfall provisions in place there was little outcry at the results. Ditto other recent county revaluations.

It is time for the Legislature and the governor to fix this glaring problem. It is a detriment to the state to be so far out of step with sound and fair taxation policies practiced in almost all other states. Every year of delay exacerbates the difficulties in a reassessment process for counties that are decades out of date.

A Woeful Tale of an Airport Subsidy

Summary: The Allegheny County Airport Authority transferred a lot of money to OneJet Inc. to have them move their “focus” airport to Pittsburgh from Indianapolis. Promises of services to 10 destinations were made in exchange for the $3 million of loans and investments. It has not worked out well.

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OneJet Inc. began its existence by incorporating in Larkspur, California. Its headquarters is in Massachusetts. Its hub (focus) of operations—if two destinations can be called a hub—is in Pittsburgh. After beginning serious operations in Indianapolis in 2015 with great fanfare about service to cities throughout the Midwest and Pittsburgh, the airline dumped Indianapolis as its base in 2016 and entered into a heavily subsidized agreement to move its operations base to Pittsburgh. OneJet promised flights to 10 destination cities from Pittsburgh International Airport (PIT) in exchange for a $3 million “investment”.

In October 2017, the airline received an unknown “investment” in Milwaukee to set up a secondary operations base. As of August 17, 2018, the airline operates to only five destinations—Hartford, Indianapolis, Pittsburgh, Albany and Buffalo. The Albany and Buffalo flights are only between those two New York cities. Two destinations remain for Pittsburgh—Hartford and Indianapolis. And flights from Hartford and Indianapolis are still in effect to each other and Pittsburgh.

Note that, according to USA Today, Milwaukee business leaders made a significant investment in the airline last October. However, currently, Milwaukee is not a second focus airport and is not even a OneJet destination. Nor are Memphis, Nashville, Omaha, Kansas City, Cincinnati, Columbus, Richmond, Palm Beach, Louisville, Providence or Raleigh. All were cities where OneJet started service or promised to start.

Now the Allegheny County Airport Authority, which provided a $1 million loan as part of the $3 million used to get the airline to move its focus of operations to PIT with its promise of 10 destinations, has filed suit against the carrier to recoup $763,000 for failure to make good on its promises.

What is the real problem here? Can failure to do due diligence be at fault? And the glaring conflict of interest of having a non-voting OneJet board member also sit on the board of the authority is extremely problematic if not a gross violation of ethics or the law.

As a non-voting board member of the airline, the authority board member—and by extension the entire authority board—should have had access to the financial situation of the airline, including importantly, current and projected revenue and costs per seat mile flown as well as expenditures for ground operations, flight control, scheduling, booking systems, planning, marketing and general management. Were the authority board and county officials made aware of the key figures? If so, were they deemed credible?  Was there a business plan showing prospective revenues and profitability associated with the promise to greatly expand service?  If all was in order, why has the airline failed so miserably? How many other creditors and investors other than in Pittsburgh are suffering losses as well?  None of this is known because the privately held corporation does not make the information public.

More importantly, now that the authority is suing OneJet, it would seem likely that other creditors will be looking to jump in before any other adverse financial news hits the carrier.

Then too, the authority would have done well to read the large number of predominantly negative passenger reviews that excoriated the airline for cancellations and delays.

All that said, what we have here is another useful object lesson—a lesson that seems never to be learned.  Subsidy of airlines beyond providing the place to land and takeoff, the parking for passengers and other infrastructure is a gamble at best and poor economics at worst.

Have so called experts been of any help in the OneJet fiasco? Consider these quotes in a May 30, 2017, Trib article.

“Airline industry experts say that although giving public money to startup airlines can be a gamble, the OneJet deal is the type of creative investment [PIT] needs to make to rebuild after losing its hub status and more than 70 percent of its departing flights.”

One aviation consultant was quoted as saying, “It would appear to me this should work very well.  It’s not the same thing as getting British Airways into town, but it’s part of the mix. A strong, business-focused market like Pittsburgh is somewhere where this makes sense.” Another said, “In a matter of two or three years, I think the money will be going back to the coffers of the government.”

The first consultant mentioned above, when asked about the authority’s lawsuit, replied flippantly in an August 14 Post-Gazette news story saying that “God gave us the court system” to settle such disputes.  And a couple of days later, he told the paper “It was a risk, an option, and it hasn’t worked. That’s the name of the game.”  Easy to say when it is not your money at risk.

And the story does not end there. At PIT, there has been a rash of subsidization of airlines over the past three or four years to induce them to provide service to various U.S. and overseas destinations.  So far, there has been no data released regarding the number of passengers that are using those flights.  Some reporting on the passenger counts at WOW Air, Condor and China Eastern would be useful. Qatar Airways cargo and recently British Airways have received or will be receiving subsidies.

Where is all the money coming from? Apparently, a lot comes or will come from the state. Bear in mind that for the last 10 years or so the airport has received well over $100 million in gaming revenue to retire debt. And now, thanks to some Legislative maneuvering, it will continue to receive $12 million each year in gaming money. Some of the money for subsidies likely comes from the Department of Community and Economic Development’s other development funds.

Which raises the main issue: Are airports primarily economic generators or infrastructure that accommodates and helps facilitate economic activity and growth? If airports are hubs, they are clearly jobs producers and economic generators.  Without a hub, the airport is primarily a facilitator of economic activity that involves air travel and transport. Obviously, being able to accommodate the demand for travel by inbound and outbound passengers that is organically produced by the local economy and population travel needs is important. Indeed, that is why municipal governments or authorities underwrite or help underwrite the construction costs of airports and related structures.

However, that means demand for air transportation at a non-hub airport will depend on the area’s population, income, employment and businesses and/or amenities that attract out of towners to the area served by the non-hub airport.  Real demand for travel will bring in carriers to provide service. For some destinations, travel demand that is insufficient to make the routes profitable for airlines will go unmet, forcing passengers to use flights with one or more stops or find other modes of travel.

Subsidizing airlines so they can lower the fare prices to fill a plane to desired levels or so they can make a flight profitable with lower than desired loads cannot be justified.  It could well be taking business from existing carriers who could get the passengers to their destination with one stop. Then, too, it represents, in part, an indirect transfer of tax dollars to the passengers using the subsidized flight.

Why should local or state taxpayers underwrite the flights of people so they can avoid using existing options? Or in the case of overseas travel, why should taxpayers subsidize people who are traveling to other countries and spending lots of money overseas?

Money spent on ill-advised subsidies is money that could be used for other justifiable purposes on behalf of taxpayers. Or the tax dollars could have been left in taxpayer pockets in the first place in the form of lower tax rates.

Unfortunately, as has happened at PIT, subsidies beget subsidies. Give it to one carrier and others are bound to show up with their hands out. As the analyst quoted above said, it is a gamble with risks. Airport officials should not be in the business of making unnecessary gambles with taxpayer money. And at the very least, they need to show real and permanent positive outcomes resulting from the subsidies if and when some happen.

Considering the total amount of taxpayer dollars that have already gone into PIT over the years, further use of tax dollars to subsidize carriers and passengers is outrageous.

The Airport’s Misguided $3 Million Subsidy to British Airways

Summary: On July 25, Pittsburgh International Airport (PIT) officials announced that British Airways would begin nonstop flights from Pittsburgh to London’s Heathrow airport. $3 million in subsidy is being provided to the airline to offer service at PIT.  This Policy Brief describes the deep flaws in the subsidy of British Airways.

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British Airways is set to begin flights in April 2019 with one flight per day on Tuesdays, Wednesdays, Fridays and Saturdays. Flights will arrive at 8:15 p.m. and depart at 9:50 p.m. PIT will become the 27th U.S. destination for the carrier and is by far the smallest airport in terms of enplaned passengers (ranked 47th in the U.S. in 2017).

To get the airline to resume operations at PIT after a long hiatus the Airport Authority will pay British Airways $1.5 million each year for two years. This after handing WOW Air $800,000 to fly to Iceland and on to Europe and $500,000 to Condor for seasonal flights to Germany. Note, too, that American Airlines offers one-stop service to London through Philadelphia and Charlotte with several flights to choose from each day. Those airports are American Airlines hubs and can gather travelers from many cities to fill planes flying to Heathrow. Then, too, American is already posting fares at PIT to match the British Airways fares for next April.

The obvious question—will the British Airways service create new passengers at the airport or take them away from existing flights, some of which are receiving airport subsidies? According to the British Airways spokesperson, there is pent-up demand for travel to Europe. If that’s the case, why are subsidies necessary and why haven’t U.S. airlines jumped at the chance to offer nonstop flights to serve the pent-up demand?  Something does not add up here.

Indeed, the only possible justifiable reason to subsidize any carrier is to create demand by foreigners to fly to PIT. Subsidizing passengers to fly out of the country on a foreign carrier to spend money as tourists abroad is folly.

And that leads to the worst part of the airport’s presentation announcing the subsidy arrangement with British Airways. Airport executives said the authority estimates there will be a $57 million economic impact resulting from the British Airways presence.  To be clear, the economic impact estimates were provided in a study prepared by the EDR Group of Boston.

Apparently, most of the estimated impacts in the EDR study are based on assumptions about non-U.S. passengers using the flights. The study does not provide figures for spending on baggage handling, gate services, or purchases of fuel, food and beverages. EDR assumes 40,562 arriving and departing passengers annually on 234 roundtrips (81 percent occupancy).  Presumably those figures are from British Airways. Of those, 29 percent (11,763) are assumed to be from the United Kingdom or other Europeans whose destination is PIT and are not connecting to another city. How the 29 percent figure was determined is not explained.

Spending by the UK/European visitors in the Pittsburgh region seems to account for the bulk of the economic impact of the carrier’s flights. All told, the study predicts the 234 yearly roundtrips will lead to 564 added jobs in the 10-county Southwestern Pennsylvania region with average worker income of $37,776 and a total labor income boost of $21,306,000. This will be accompanied by a value-added increase of $33,879,000 according to the study. The $57 million economic impact figure quoted by airport executives is for gross sales and not net value produced.

Before evaluating the study estimates in more detail, it is important to note three large potential differences in economic impact depending on passenger count assumptions. Obviously, the total of 40,562 passengers matters because it will determine the amount of services needed at the airport. The assumption of 29 percent (11,763) non-U.S. passengers is critical because that drives the bulk of the local economic impact. And third, the British Airways passenger count assumptions do not factor in the percentage of travelers that would have flown other airlines to and from England or Europe.

Note that most of the projected new jobs in the study will be at restaurants and hotels as a result of the increase in foreign visitors to the region. Bear in mind, however, that 11,763 visitors to the region over 365 days is an average of only 33 per day.  Even if they stay seven days on average that represents only 82,000 hotel or other accommodation room nights. The city alone has around 2.6 million room nights available per year and the rest of the region likely has at least half that many. Thus, UK/European visitor stays would make up only two percent or so of the region’s available room nights.

And in that regard, it is highly improbable that a two percent uptick in room nights would create a commensurate number of new hospitality jobs. Indeed, stats from “The Economic Impact of Travel and Tourism in Pennsylvania 2016”, prepared by Tourism Economics a division of the Oxford Economics Company, show that for Allegheny County in 2016, on average, $143,297 was spent by tourists/travelers for each job in the tourism related industries. If that figure is still anywhere close to the present ratio, the 11,763 visitors would have to spend over $80 million, or $7,000, each to produce 564 new jobs.

What’s more, most newly created jobs resulting from these foreign travelers would likely be low-paid hotel room attendants and restaurant wait staff for which pay levels are about $23,000, a far cry from the $37,776 pay level used in the EDR report. The figure EDR used for average worker pay would include salaries of managers, sales reps, engineers, security, repairmen, etc. It seems extremely unlikely that additional staff in these higher paid categories would be needed to handle an average of 224 people per night—assuming seven-day stays per visitor—at all the hotels in the 10-county region or even if they are concentrated in Allegheny County hotels.

And it gets worse. There is no estimate of how many of the 28,800 local passengers will be additional travelers to the UK/Europe or will be passengers that would have traveled on other airlines such as the already subsidized and very inexpensive WOW Air or from folks who would have flown one stop on American through Philadelphia or Charlotte—or United through Newark or Dulles. But it is almost certain that a large percentage will be passengers that would have taken other carriers. Likewise, it is not known how many Europeans will use British Airways instead of American or some other airline to come to Pittsburgh. If as few as half of Pennsylvania travelers to Heathrow are net new passengers and half of UK visitors are net new travelers that would mean the net effect of British Airways flights would be 15,000 more locals headed to London with 5,900 additional UK or other Europeans coming to the Pittsburgh area. Other assumptions about the ratio of new additional to total passengers could be made but this one will serve to illustrate the point.

If 5,900 is a better measure of the net additional UK/Europeans visiting Southwestern Pennsylvania, then the impact on the economy will be far lower than even a realistic estimate of the impact of 11,763 visitors, which the EDR estimate clearly was not.   Consider, too—assuming foreign visitors to Southwestern Pennsylvania spend about the same as local travelers spend abroad—that the outflow of dollars from the region to foreign-owned enterprises caused by 28,800 local travelers flying to London and perhaps visiting other European destinations will be far greater than the inflow of money associated with 11,763 foreign visitors to the region.  Using the EDR estimate of 29 percent of the passengers to be UK/Europe residents—which seems high—then U.S. residents make up 71 percent, a ratio of almost 2.5 to one. Thus, spending by Pennsylvania travelers would be 2.5 times greater than foreign British Airways travelers to the Pittsburgh region. That is not a win for the region. Indeed, it is just the opposite. Moreover, if the percentage of UK/European travelers turns out to be only 20 percent of total, the ratio of U.S. spending abroad to foreign spending in the region rises to four to one. And so forth if the percentage of foreign passengers is even lower.

Then too, the money spent by local residents to fly on British Airways will end up in that airline’s bank account.  And for that matter so will all the fares purchased by UK/European passengers. Using British Airways’ estimate of 28,800 Southwestern Pennsylvanians (and maybe some from out of the area) who will pay a low-side estimate of $1,000 or more for the trip means British Airways will collect $28,800,000 in fare revenue from area residents. And those dollars are leaving the region even before the travelers land in England. Note that British Airways’ basic economy fares at $716 will be available but these fares are accompanied by fees for luggage. And, the passengers cannot select their seats and must board last. Prices are significantly higher for other seat classes. The $1,000 figure is used for demonstration purposes as an estimate of average fares but the actual average is likely to be significantly higher and the regional outflow of dollars higher as well.

Even if half the passengers would have flown other airlines absent the arrival of British Airways, the British carrier would still collect $28,800,000 in fare revenue. And if average fares for the other carriers are close to British Airways, they would lose almost $15 million in revenue. Obviously, any reductions in U.S. airline revenue will lower the economic benefits of the arrival of British Airways.

The fact that PIT is not a major hub and that the area is not world famous as a tourist destination—certainly not a on a scale such as Orlando, Miami, Las Vegas, Tampa, Phoenix or even New Orleans—makes it harder to induce UK/Europeans to fly to PIT as tourists.

All these factors make the airport’s $3 million misguided taxpayer investment unlikely to ever pay for itself unless British companies with significant investment and potential employment that otherwise would not have located facilities in the region decide to place operations in Southwestern Pennsylvania.  And in the meantime, with the most probable effects of the subsidy being to damage competitors while increasing the net outflow of resources from the region, it is hard to see any upside to handing over tax dollars to the airline.

Will Interest in Land Banks Continue to Grow?

Summary: A new law amends the statutory language of the land bank law to allow redevelopment authorities to carry out the functions of a land bank, which is a public entity that is empowered “to facilitate the return of vacant, abandoned and tax-delinquent properties to productive use.”

When we first wrote about land banks in 2014 there were four in existence in Pennsylvania. Today there are 22. The ones that have been operating for a few years have been quite active—last year’s annual report for the Westmoreland County Land Bank (created in December 2013) shows that 91 properties had been acquired and 55 sold since 2014; in 2017 the land bank in Schuylkill County (created in September 2015) earned $46,000 from property sales according to its audit; and as of last year the Philadelphia Land Bank (created in December 2013) had over 2,000 properties worth $25 million held for sale.

Operating expenses ranged from a low of $27,000 in Lackawanna County (created in June 2015) to over $2.6 million in Philadelphia. A review of audits shows that the majority of expenses are related to administrative, accounting, advertising, insurance and legal functions. The source of operating and non-operating revenues are quite varied with membership contributions, foundation and government grants, property sales, and shares of property tax revenues on properties that have been sold and are now producing property tax revenue are present in the statements of revenues, expenditures and changes in net position in the land banks. Land banks submitting audits that did not engage in any activity and did not collect any revenue or expend any funds noted that fact.

Despite the sharp increase in the number of land banks it still takes time and expense to establish one. Initially a local government has to pass an ordinance, the Department of State has to issue a certificate of incorporation and by-laws have to be drafted before the land bank gets involved in thinking about property transactions.

Four years ago we wondered why the task would not be assigned to a redevelopment authority instead of creating another quasi-governmental body. Based on a search of Department of State entities, there are over 100 redevelopment authorities in existence and all of them are dedicated to stemming the growth of blight.

Recently approved legislation now known as Act 33 of 2018 fulfills that by allowing land bank jurisdictions in all counties except for Philadelphia and Allegheny (where there are three land banks total) to designate a redevelopment authority to do the job a separate land bank would perform.

If a redevelopment authority was designated as such, it would have to follow several key provisions of the land bank law, finances would have to be accounted for in a separate fund and in exercising the land bank’s powers, a redevelopment authority could not use eminent domain to acquire property. That would still have to come through donation, purchase and by tax sale—and only within the boundaries of the land bank jurisdiction. Real property and income of a land bank are exempt from state and local taxes. It can then dispose of property it holds in a manner determined by the land bank. A redevelopment authority acting as a land bank could be dissolved in the same manner as a land bank currently inasmuch as it applied to the redevelopment authority’s land bank designation, not its entire corporate and politic existence.

In many of the operating land banks there is such an interwoven arrangement between the land bank and the redevelopment authority in regards to board membership and staffing that the act in some sense is legitimizing present practices. In the Southwestern Pennsylvania counties of Westmoreland and Washington, for instance, land bank board seats (five of seven in Westmoreland and five of five in Washington) are reserved for the appointees serving on the redevelopment authority board. Both land banks are staffed by employees of the redevelopment authority.

In places where there is no land bank currently, the option of designating a redevelopment authority to do the job could be utilized under the new law. Only 11 counties do not have a redevelopment authority (there may be a municipal redevelopment authority in these counties, however) and in 10 of those there is no land bank. Venango County has a land bank but no redevelopment authority. Its ordinance states that staffing can be provided by contract or memorandum of understanding with a municipality if it does not have its own employees.

Land banks might be a useful tool in helping turn around blighted, run down properties. But in light of the powers they have been given, they must be held to account. The law requires an annual audit and activity report, but what’s to ensure that the parties that receive these documents are reading them? Monitoring tax increment financing, the ICA in Pittsburgh and the initial years of the Commonwealth Financing Authority should serve as reminders of the need for follow up.

As part of the reporting requirements there should be metrics that evaluate the success of the land banks. For example, what percentage (or number) of long time tax delinquent run down properties are being returned to the tax rolls? Is the land bank operating efficiently in terms of costs relative to value being produced? Are the land banks financially sound in terms of liquidity and their net asset and cash flow situations? Finally, are the activities of the land bank successful in improving the neighborhoods where they have acquired property?

The Allegheny Institute will continue to look at and analyze land banks in the future to chronicle successes and note any shortcomings.

Shale Gas Impact Fees Jumped in 2017

Summary: Impact fees from drilling in Pennsylvania’s shale formations jumped in 2017 by 21 percent over 2016.  The impact fees, authorized by Act 13 of 2012, are distributed not only to select state agencies and to municipalities and counties hosting such wells, but to all counties across the commonwealth.  Thus far more than $1.43 billion has been collected.

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In late June the Pennsylvania Public Utility Commission (PUC) reported that $209,557,300 in impact fee revenues was collected from owners of unconventional natural gas wells in 2017.  The 2017 figure represents a jump of 21 percent over 2016’s collections.  It reverses a three-year trend of declining revenues from the 2013 peak of $225.75 million. The 2016 tally of $173.26 million represents the lowest point in the seven-year history of the impact fee.  To date more than $1.43 billion in impact fees have been paid.

Act 13 of 2012 authorized an impact fee to be assessed on all unconventional wells (those drilled in the shale formations using the hydraulic fracturing method) drilled in the state (retroactively covering 2011 as the first year).  The fee follows a schedule based on two factors:  the trading price of natural gas on the New York Mercantile Exchange (the spot price representing dollars per million Btu) and the age of the well.  Older wells will presumably produce less gas over time as the pool of gas is expended so the fee schedule lowers the amount they pay as they age.

One of the reasons impact fee revenues slid from 2014 through 2016 was a glut of natural gas due to a rise in production from Marcellus and Utica shale formations. The resulting over supply contributed to the drop in the market price that fell from an average yearly price of $4.13 in 2014 to $2.62 in 2016, a drop of 37 percent.  This plunge in gas price led to a decline in the number of new wells being drilled.  In 2014 there were 1,371 wells started, the second highest behind 2011 (1,956).  In 2016 only 504 wells were started—a decline of 63 percent since 2014.  Thus the number of aging wells outweighed newer wells, which would presumably pay a higher impact fee, as the pace of drilling had fallen off.

However, 2017 saw the gas price move up to an average yearly price of $3.02, 15 percent over 2016’s average. The rise in gas price encouraged a major rise in new wells with 810 drilled in 2017, a 61 percent surge compared to 2016. In total, there were 8,518 unconventional wells representing an increase of 4.9 percent over the total reported for 2016.

It is too early to tell if this uptick in prices, drilling activity, and the subsequent jump in the impact fee collection, is the start of a new trend, but it is certainly welcome news to those who benefit from this revenue stream.

Act 13 specifies how the impact fee will be distributed.  State agencies get the first $10.5 million off the top.  These agencies include the PUC; Department of Environmental Protection; the Fish and Boat Commission; the Emergency Management Agency; Office of the State Fire Commissioner and the Department of Transportation.  Also another $7.75 million is given to the State Conservation Commission for county conservation districts.  For the 2017 distribution, that leaves $114.78 million for counties and municipalities with the remaining $76.52 million for the Marcellus shale legacy fund (section 2315.a1 of Act 13).

From the legacy fund, $15.3 million is allocated to the Commonwealth Financing Authority (CFA), an agency whose purpose and impacts we questioned in Policy Brief Vol. 14, No. 8.  Since 2012, the CFA has reaped $87.7 million in impact fee money.  Other components of the legacy fund go to county rehabilitation of greenways ($11.48 million); highway bridge improvements ($19.13 million); water and sewer projects ($19.13 million); a hazardous sites cleanup fund ($3.2 million) and an environmental stewardship fund ($7.65 million).  Since inception, the Marcellus shale legacy fund has collected more than $515 million to be distributed among these causes.

All counties across the commonwealth receive money from the Marcellus shale legacy fund, whether or not they host any unconventional wells, from the county rehabilitation of greenways fund (section 2315.a1.5).  The amount received is based on the county’s share of statewide population.  For example, Philadelphia County has a population of 1.57 million or 12.26 percent of the state’s population and thus receives the largest share of greenways monies ($1.39 million).  In fact, since the implementation of Act 13, Philadelphia County has received over $9.3 million.

However, a minimum amount of $25,000 is given to counties with small populations (for example, Fulton, Juniata and Montour Counties).  None of these counties sit atop the Marcellus shale formation and thus do no host a well yet benefit from the legacy fund, and by extension, the impact fee, having received $175,000 each over the time period.  As mentioned above, all 67 counties split $11.48 million in 2017 and since the beginning have shared $65.8 million.

The focal point of the impact fee is to tax the drilling industry and then return the money to those communities that are most impacted by the activity.  Thus those counties and municipalities impacted the most split the largest share of the money ($114.78 million) as outlined by Act 13 (section 2314.d).  Of this amount, more than $39.52 million in 2017 was allocated to counties hosting unconventional wells, with the rest dedicated to municipalities hosting, or being in proximity to, such wells.

For those counties hosting an unconventional well, their allocation is determined by the number of wells they host.  For example, the county with the most unconventional wells in 2017 was Washington County (1,528) and as a result collected the largest amount of money ($7.09 million) from this section of Act 13.  The runner-up is Susquehanna County (1,274 wells), earning $5.91 million.  As two of the top counties with wells, Washington has collected more than $38.85 million over the years while Susquehanna has collected more than $35.53 million.  Allegheny County, with only 125 eligible wells, a fraction of the total, has received $2.15 million over time.  As largely rural counties, Washington’s population is 207,981 and Susquehanna’s is just 40,862.  These totals are quite significant and most likely larger than if the state would switch to a severance tax instead and the money was allocated from Harrisburg at the whim of those viewing the shale industry as a cash cow for their own pet projects.

And of course that was the intent of Act 13—to place a fee (tax) on those drilling in the Marcellus and Utica shale formations using the technique of hydraulic fracturing (unconventional wells).  The money would then bypass the political machinations of Harrisburg and send the money directly to those counties and communities most impacted by the activity surrounding the drilling and to those state agencies that would also be impacted from the activity.  The money distributed even has strings attached as to how it can be spent such as on public infrastructure construction, storm water/sewer systems, emergency preparedness/public safety and environmental programs, among others.

Yet the clamoring for a severance tax continues.  But what those favoring a severance tax fail to consider is that not only do drillers pay the impact fee, they also pay the assorted business taxes levied by the commonwealth and pay royalties to leaseholders.  According to the Marcellus Shale Coalition president in a recent op-ed, that has amounted to $4.5 billion to date on top of the impact fees total of $1.43 billion.  The latest proposal from Harrisburg will leave in place the impact fee and couple it with a severance tax amounting to double taxation on the industry.

A severance tax has the potential to curtail production causing a reduction in these payments as drilling will likely be reduced or shifted to neighboring states that are also above the Marcellus and Utica shale formations.  The impact fee has struck a balance between holding drillers accountable for their activities and generating much needed revenues to those counties and municipalities most affected.