While legislation to dissolve Pittsburgh’s Intergovernmental Cooperation Authority (ICA) has not been passed (it has been in a House committee since June), a bill related to Harrisburg’s distressed status has been amended to allow for the creation of a third ICA in Pennsylvania.
A blog last week examined proposed legislation that would allow the distressed City of Harrisburg to leave Act 47 status but still maintain tax rates that are only granted to municipalities during the time spent in Act 47. This week a major amendment was inserted into the bill that would create intergovernmental cooperation authorities for cities of the third class.
There are currently 53 cities in that class, but the amendment defines “city” so specifically on population range (48,000 to 55,000) and prior oversight (the third class city would had to have spent time in Act 47 and receivership) that Harrisburg would be the sole city covered by the statute.
The ICA board would be appointed in the same manner as in Philadelphia and Pittsburgh (by the governor and legislative leaders). It would possess the same political and corporate powers along with specific powers to examine consolidation, tax-exempt property, debt and sale of city property, among other efficiency and money-saving measures. It would have its books examined in the same manner.
Once an intergovernmental cooperation agreement is signed between the city and the ICA the distressed status under Act 47 would be rescinded. That’s instead of 2021, as would occur under the three-year exit plan option. The ICA itself would be terminated on Dec. 31 of the fourth full calendar year following the approval of the intergovernmental cooperation agreement. The special taxes would be levied until this termination date.
In the relatively short time that the City of Harrisburg has been under the watchful eye of the state, it has been under the guidance of, first, a receiver and, second, an Act 47 coordinator. The next step could be an ICA.
The 2019 revenue and expenditure plan for Allegheny County was presented Tuesday night at a meeting of County Council. In the county’s Home Rule Charter (VII,2,b) the chief executive is required to “appear before County Council to present the budget message and submit the comprehensive fiscal plan no later than 75 days before the end of each fiscal year.”
The operating budget as proposed is $932.4 million, up 2.9 percent over the $905 million for this year. With capital, grants and special accounts the total spending tops $2.2 billion. As our 2016 report on county finances showed, total expenditures grew 46 percent from 2000 to 2015, slightly higher than inflation in that same period.
Property taxes are budgeted at $376 million based on 4.73 mills and represent close to 80 percent of the total tax revenue generated. There is a ballot question to raise property taxes 0.25 mill but that proposal is not mentioned in the budget document. The county’s share of the Regional Asset District sales tax is budgeted at $50.2 million and the levies on alcoholic drinks and vehicle rentals are projected to raise $51.1 million. That is far more than enough to generate the match for mass transit and continues to point out the puzzling situation in which the Port Authority receives a piece of the asset share of the sales tax.
Of the expenditure categories public safety is projected to far outpace the overall 2.9 percent growth in the budget with an increase of 4.64 percent to grow from $247 million this year to $259 million in 2019. Public works and facilities and culture and recreation–expenditure categories that total $70 million–are also expected to grow faster than the overall percentage change for the budget. The spending categories of economic development and debt service are budgeted for a decrease of just over $200,000. On a departmental basis all departments will see an increase with the exception of Shuman Center (-0.22 percent) and County Council (-13.89 percent).
The county’s headcount is expected to increase by 36 full-time equivalents, with half of the increase accounted for by new hires at the jail. Based on the narrative section on the jail’s operations there is a 2019 initiative on minimizing overtime at the facility.
A bill introduced this week would allow the City of Harrisburg to keep in place its higher than typical local services tax (normally $52 but currently $156) and its higher than typical resident earned income tax (normally 0.5 percent but currently 1.5 percent), or possibly both, past the time when the city would leave Act 47 distressed status.
As we have written previously, amendments in 2014 addressed the length of time a municipality could remain in distressed status. Right now Harrisburg is in the three-year exit-plan option which means the city would leave in 2021. However, back and forth between city and state officials over the loss of $11 million in annual revenue from the higher than typical levies led to a discussion of options, from home rule to the legislation at hand.
If the legislation is approved and the city elects to continue to levy the taxes, the money is to be dedicated in a complex way toward the city’s trust fund for its retiree health-care liability. The city would be required to file an annual report detailing the amount of revenue and its use. That report would have to be submitted to legislative leadership and specific committees. It is quite likely the reports would be followed up on the same way the required audits of Pittsburgh’s oversight board were.
Finally, the bill would prohibit a non-resident earned income tax (commuter tax) from being levied by Harrisburg (language that applied to Harrisburg when it was in fiscal emergency status would continue).
Making a special exception to keep higher taxes for a municipality no longer in financial distress is not good public policy and would likely open the door for requests from current or future distressed municipalities.
When Pittsburgh’s pension board met in September it was told the aggregate funding ratio (assets divided by liabilities) of the city’s three pension plans was 57.5 percent , based on a January 2017 plan valuation.
That’s down slightly from what was a recent highpoint of 62.2 percent reported in December (that ratio was based on a January 2015 valuation). Assets, which are comprised of the invested portfolio and the parking asset, lost $3 million in value (the majority of the decline was accounted for by the parking asset, which fell $2.4 million) while liabilities increased $94 million, which led to the lower funding ratio.
Interestingly the active member count between the two valuations increased by 156 employees, raising the headcount to over 3,300. Adding more employees to the city’s payroll translates into pension payouts when their service is concluded. As we have pointed out before, Pittsburgh has more employees on a per 1,000 people basis than the Benchmark City. When the city exited Act 47 earlier this year we noted that, when adjusted for population, the city’s headcount had decreased only 7 percent from the time it was declared distressed.
Since entering into the parking asset transaction the city has been at the moderately distressed level of pension scoring under Act 44 of 2009. Upon Pittsburgh’s release from distressed status, coordinators stated the city should be putting enough money in “so the funding ratio does not crash back to the levels of a few years ago.” In addition Pittsburgh City Council passed an ordinance prohibiting pension enhancements for its employees.
Whether new municipal hires statewide would come under an arrangement similar to new state and public school employees (who will select from three separate plans, all with a defined contribution aspect) as will begin next year is unclear. It will take a long time to see improvements in pension health from that change. Under current projections the funding ratios of those two state plans will reach the 90 percent range in 2040, which is about the same time that the city’s parking tax pledge to bolster the pensions will come to an end. The city made suggestions for municipal pension reform to be undertaken by the end of this legislative session, which, with the number of days left, will likely not occur. Will the city advocate for those same changes again in the upcoming year?
In the Hempfield Area School District in Westmoreland County there is a dispute between the district and Hempfield Township, one of the six municipalities served by it, over property tax appeals initiated by the school district. There has been pushback from residents at public meetings. The township is now prepared to have its municipal solicitor defend residents who are unhappy the district appealed their property values.
Until last week, Hempfield Area was targeting properties with a difference of $100,000 between the fair market value (assessed value multiplied by the common level ratio) and purchase price. No doubt in reaction to complaints, the board voted to raise the difference to $250,000 for appeals in 2019. In other words, if a home had a fair market value of $100,000, under the previous criteria a sale price of $200,000 would cause an appeal by the district. Under the new criteria, it would take a sale price of $350,000 to trigger one. Where recent sales are often the focus, the practice has been referred to as the “newcomer’s tax.” There is always an arbitrary nature to the cutoff points to where properties fall relative to the appeals criteria.
Taxing bodies in Pennsylvania have the same standing as owners to appeal values. If the value is raised, the taxing bodies that the properties pay taxes to (the county, municipality and school district) would collect more revenue from the property at their existing millage rates. Typically school districts take the lead in the appeal process since they collect the bulk of the property tax bill. The other taxing bodies usually don’t openly protest, which makes the present situation between Hempfield Township and the school district rather unique. Like the change in the appeal standard by Hempfield Area, in recent years the Allegheny County municipalities of Pittsburgh and Mt. Lebanon changed their appeal standards (but the respective school districts did not).
It is worth mentioning, as it has been in news articles and a district document explaining its actions, that Westmoreland County has not conducted a countywide reassessment since 1973. If Pennsylvania had a mandated cycle for reassessments, there would be far less incentive for taxing body appeals since there would be regular updates that would minimize the gap between assessed and market values. Folks who feel they have been singled out in the appeals process might still see their value rise. Then millage rates would have to be adjusted to a revenue neutral level and that would determine if taxes would increase or decrease on the property.
This past Friday the mayor of Pittsburgh submitted the 2019 operating budget to the oversight board (yes, the board is still around). Budgeted revenues are $579 million and budgeted expenditures are $568 million resulting in a operating surplus of $11.6 million.
This coming year will be the first since Pittsburgh was released from Act 47 distressed status. A municipality has to satisfy four conditions to be released, including a projection of revenues to ensure they “are sufficient to fund ongoing necessary expenditures including pension and debt obligations and the continuation or negotiation of collective bargaining agreements and provision of municipal services.” That includes a projection of five years of revenues–including any increases to taxes and fees.
When the rescission report for the city was written last November the city’s increase to the deed transfer tax had not yet gone into effect. That has changed where the city estimates finishing this year on revenues ($569 million from the budget vs. $560 million from the report) and in 2019 ($579 million from the budget vs $571 million from the report). The planned second step of the increase is to go into effect in 2020.
The budget sets expenditures at $568.1 million, with increases in operating departments (7 percent), pension and other post-employment benefits (9 percent) and health benefits (12 percent) and decreases in workers’ compensation (3 percent) and debt service (32 percent). If the most recent city population estimate is on target, the per capita expenditure will be $1,881 next year. When we last examined Pittsburgh in comparison with the Benchmark City its per capita expenditure was 31 percent higher.
This budget is the first component to determining if the city sticks to the steps taken to improve financially and avoid slipping back into distressed status.
Local officials have resubmitted the application for a proposed Bus Rapid Transit (BRT) project between Downtown and Oakland to the Federal Transit Administration (FTA) with some changes in the frequency of vehicles and the project’s connection to the existing busway.
When the project was given a rating last November, the total capital cost was $195.5 million, with $97.7 million (50 percent) coming from the Section 5309 Small Starts program (the federal government was to provide an additional $28.3 million above that). State and local sources ($69 million combined) made up the remainder.
The Allegheny County chief executive noted, as he had previously, that the BRT would “move ahead” even if the federal money does not materialize. It is not clear why that point has been raised. Is there a suspicion that the federal government is going to deny the funding request? That there could be a holdup in the money arriving even if there is an approval? If the federal money is not critical, why even bother with the process of submitting and resubmitting the proposal, conducting site visits from federal officials and undergoing feasibility studies and waiting for the FTA to make a decision?
What would fill the void if the $126 million in federal money did not materialize has not been made known. If it fell 50/50 on state and local sources it would require both levels of government coming up with an additional $63 million each on top of what is already committed, assuming either level would be willing to put in more (the amounts committed may just be the usual formula matches on transportation projects).
Would the project be viewed in the same light if there was not the prospect of the federal government funding a big portion of it, like the North Shore Connector?
The Tax Foundation recently released a study on reforming Pennsylvania’s tax code for the 21st century. Besides covering state level taxes, the study spent a good deal of time on the state’s system of local taxation which involves “multiple layers of local tax authority and extends different degrees of taxing power to local governments based on population and other factors.” Counties, municipalities and school districts tax and/or share taxes on property, earned income, local services, deed transfers, gross receipts and others.
The different degrees of taxing powers and the other factors are playing out currently in the state capital of Harrisburg. But this involves the actual city, which is currently in distressed status. As a result of distressed status, Harrisburg is able to have a higher than normally permitted local services tax, which falls on residents and non-residents who work in a municipality and is normally levied at $52 annually but, when in distressed status, can be levied at $156 a year. It also levies a earned income tax of 1.5 percent (2 percent total with the school district portion); if not in distressed status, the maximum would be 0.5 percent.
Due to time limitations on how long a municipality can stay in distressed status Harrisburg is currently slated to exit in September 2021. But there is a strong push by city officials to maintain the distressed status taxes even after exiting. So in addition to lobbying state officials, city officials will take a strong look at adopting a home rule charter as a way to have a higher than normal earned income tax (likely a 2 percent total rate). To that end an ordinance calling for a ballot question on creating a government study commission was introduced last week.
As noted by the Foundation study, “The most far-reaching exception is for home rule localities, which are exempt from the cap [on the earned income tax].” Voters in Harrisburg will have to consider that if they are asked to vote for a home rule charter.
Last week the House Finance Committee held a public hearing on legislation that would eliminate school property taxes on homestead property by raising the state’s personal income tax.
Homestead exclusions were approved by Pennsylvania voters in 1997 and permitted local taxing bodies (counties, municipalities and school districts) to enact exclusions that did not exceed 50 percent of the median assessed value of a homestead in the taxing jurisdiction. That language was amended by another ballot question last fall and now exclusions of up to 100 percent of the assessed value of the homestead are permitted.
Here’s how the proposal would work: the income tax rate would increase from 3.07 percent to 4.79 percent (generating around $7.1 billion based on recent collections). The money from the increase would be held in an account and school districts would have to opt in to receive a proportional share of the funds to replace the property taxes that would be generated from homestead property. Combined with the existing revenue from slot machine gaming that is used for homestead exclusions, proponents say there will be enough money for a complete elimination of property taxes on homesteads.
Income earners who are also homeowners would see a net savings or loss depending on their income and their school property tax bill. Income earners who are not homeowners would see a tax increase as a result of the shift. School property taxes on non-homestead property would stay in place, as would non-property taxes levied by school districts.
There are questions to be raised: is the state going to adjust the portion of the personal income tax to account for faster growing property values? What about the continued presence of school strikes that drive up the need for more money locally? And what does the business community, especially those that can’t deduct their property taxes against their tax liability, think of the proposal and what effects it might have on the overall business climate?
At tomorrow’s meeting of Allegheny County Council the first reading of a final resolution on the Smallman Street Tax Increment Financing (TIF) deal will take place. The deal involves a project to redevelop the produce terminal into a mixed use (retail and office) development. In July of 2017 County Council voted 14-0 with one member absent to authorize its participation.
The total estimated project costs for redevelopment of the produce terminal and another building on Smallman Street (281k square feet combined) along with infrastructure improvements is $121 million. The TIF is expected to provide $3.5 million of the $22 million related to infrastructure (the state, City, and PWSA will provide the remainder).
In a TIF all three taxing bodies (county, municipality, school district) agree to participate and dedicate all or some of future property tax revenue (the increment) to retire the bond. There are two parcels in the district with a total assessed value of $3.5 million (the produce terminal is still listed as being owned by the Urban Redevelopment Authority and tax exempt but according to a newspaper article the developer will pay property taxes as part of the agreement). After the improvements the assessed value is projected to be close to $31 million.
At its current millage rate (4.73) Allegheny County collects $16,224. After the improvements, and at the same millage rate, the County would collect $143,697. Of that amount, the County will retain its base tax collection, which then leaves $127,473 from the tax increment. Under the agreement, all of the taxing bodies will retain 25%–for the County that is $31,868. That leaves $95,605 pledged to the TIF bond from the County for a 20 year term.
Even though the project is promising to “attract additional people to the neighborhood” and create 645 full-time jobs the County should deliberate on whether this is net new activity and not a shift of activity within the County.