Another pot-metal ‘solution’ in ForgingPGH?

Is it prudent planning or just another in a long line of central plans preordained to fail?

The City of Pittsburgh has announced “ForgingPGH,” characterized as a comprehensive 20-year land-planning effort.

As the Tribune-Review reports it:

“According to the mayor, city officials face a choice: They can continue to work with developers who have their own plans for what they want to do in the city and work to meet their needs. ‘Or we can change the way that we do urban planning in the City of Pittsburgh. We can play offense,’ (Mayor Bill) Peduto said.”

What exactly does this mean? It certainly sounds a lot like “The State” yet again attempting to command the marketplace, does it not?

The city says it will spend the next year seeking input from residents of each of the city’s 90 neighborhoods. That information will be incorporated into a land-use plan to help guide future development.

OK…

Additionally, the city will hire two consultants – each paid about $100,000 – to evaluate Pittsburgh’s housing needs and to work on an economic development plan.

But, gee, wasn’t it just in January that, as the Post-Gazette reported it, “Peduto introduced the city’s new development leaders … saying they are a team ‘comprised to be able to address the realities of Pittsburgh today and Pittsburgh of tomorrow’”?

Hmmmm…

The Trib also reports the plan will take into consideration issues of equity and systemic racism during the process.

“We can put into our urban plans a model that breaks away from generations of disinvestment in our black communities,” Peduto said.

“We can turn that model into a different model. One that looks through the lens of equity in assuring that everyone has a place at the table for the future of Pittsburgh.”

OK…

But Peduto’s overriding rationale is a lesson in dichotomous ignorance of history, at best:

The mayor says the “ForgingPGH” approach was used in the 1960s and 1920s but has not been employed since Pittsburgh dealt with the decline of the steel industry and the loss of its manufacturing base.

“During the 1980s, during the 1990s, the beginning of the 2000s, there wasn’t much investment happening in the City of Pittsburgh,” Peduto said. “We were playing defense. We were trying to save our city and keep our head above the water.”

Hold the phone!

Weren’t the 1960s that Peduto so fondly recounts the era of such central-planning failures as the destruction of the predominantly black Hill District to build the Civic Arena, replacement of a large tract of the central North Side with the Allegheny Center abomination and the bulldozing of East Liberty?

Uhm…

And weren’t predominantly taxpayer-subsidized professional baseball and football playgrounds and the rebuilt convention center of the late 1990s and early 2000s touted as wonderful “investments” that would pay endless returns, all proof-positive of Pittsburgh’s next great “renaissance”?

Never mind, too, that public officials ram-rodded those projects down the people’s throats after new stadiums were overwhelmingly rejected at the ballot box.

But, but but, we’re now told that Peduto’s plan will change all that. The people will be in charge. But, naturally, “The State” will direct that development on behalf of the people because, having listened to the people, it knows best.

After all, all we need is one more government intervention to end all government interventions, right?

So, what might this brave new world look like? For one thing, more publicly funded grocery stores in neighborhoods that likely can’t support them, right?

For another thing, it very well could be more faux “environmentally sound” development that likely has few real environmental benefits and is not sustainable economically, right?

And there can be little doubt in this “ForgingPGH” plan that developers will be forced to kowtow to even more “social justice” prescriptions – think of the already mandated paid sick-leave policy – that stand to defeat the very idea of “development” and strictly limit and even negate profit potential.

What might be next, attempting to force developers into projects at a loss?

Indeed, racism in public policy is abhorrent. But so, too, is “equity” not based on the kind of equal opportunity that free markets engender and for which sound public policy makers must strive.

Wrote Aldous Huxley in “Brave New World,” the 1932 novel of dystopian society:

“One believes things because one has been conditioned to believe them.”

Sadly and tragically, too many people long ago became conditioned to believe the “progressive” proposition that ever more government direction of the economy is needed to “level the playing field,” to “right capitalism’s wrongs” and to “make the downtrodden whole.”

Never mind that it too often has been those very government “solutions” that only exacerbate the very problems they are touted as “fixing.”

Whether “ForgingPGH” results in hardened steel or pot metal remains to be seen. But at first blush, it has all the makings of the latter.

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).

Dollars & nonsense at PIT

The Allegheny County Airport Authority says passenger traffic increased by 1.2 percent in 2019 at Pittsburgh International Airport (PIT). That’s versus the 7.5 percent jump it reported for 2018.

Authority CEO Christina Cassotis blames last year’s reduced growth on the grounding, starting in March, of those troubled 737 Max jets which affected Southwest and American airlines, PIT’s largest carriers.

Never mind that some other airports with those airlines and the same jet issue posted better gains.

And what, throwing $3 million over two years at British Airways for direct Boeing 787 Dreamliner flights between Pittsburgh and London – a deal so highly touted that one would have thought it was The Greatest Business Coup Ever Achieved – wasn’t the cat’s meow it was sold to be?

Speaking of which, isn’t the public about due for an accounting of how those flights – four times weekly and which began a year ago next month – are doing?

Inquiring minds want to know if the “pent-up demand” Cassotis said was there really existed.

Speaking of PIT, the Tribune-Review reports that “travelers this spring will start seeing the prep work for a three-year $1.1 billion construction project this summer that will build a new terminal at Pittsburgh International Airport.”

Of course, that oft-quoted price, Airport Authority officials were forced to admit, won’t be the final price. And we’re not talking about it being less.

Cassotis has yet to quantify how much more the “modernization” project will run. But there always seems to be that concomitant rationalization with such talk about how no local tax dollars will be used and that the airlines are footing the lion’s share of the bill.

But you can bet your bottom dollar that there will be taxpayer dollars in this project from federal and state sources. And, of course, there are gambling dollars in the deal.

The simple fact remains that the Airport Authority and PIT are public entities and the public that, yes indeedy, will be helping to pay for a very expensive project that some have dubbed as dubious have a right to know what this thing really is going to cost – now.

That the authority appears to not have a steady handle on the eventual cost of such a large project at this stage of the game – or it knows and is not revealing it publicly — is not acceptable.

Effectively saying “We’ll know what it costs when it’s done” defiles sound public policy.

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).

Gaming options expand in Pennsylvania

Summary: Gaming revenues grew in 2019.  But it was due more to the expansion of gaming options than growth to the existing system. Sports wagering, fantasy contests, internet gaming and, soon, mini-casinos should continue the trend.  But is the commonwealth’s reliance on tax revenues a sure thing? Will gaming boost the economy?

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At the conclusion of 2019, the state Gaming Control Board reported that total gaming revenues were up by 4.5 percent over 2018’s tally.  The revenue gain did not reflect an increase in the number of people playing slot machines, which debuted in 2006, or even table games (2010); it was primarily due to the expansion of gaming options.  In 2019 internet gaming and video gaming terminals debuted while retail and internet sports wagering and fantasy sports contests had their first full year.  With mini-casinos getting ready to open soon, and a full year of operation for last year’s newcomers, 2020 gaming revenue is likely to top 2019.

Slot machines

Statewide, the 12 casinos in operation realized $2.363 billion in gross terminal revenues (GTR) from slot machines in 2019—a slight dip of $6.8 million (-0.3 percent) from the previous year (all data is calendar year).  The high-water mark for GTR occurred in 2012 ($2.471 billion) from 11 casinos (the resort casino at Valley Forge opened in March 2012 while the one at Nemacolin opened in July 2013).   

The monthly average number of slot machines in operation has declined slightly over the years.  In 2012 there were 26,550 machines available on average per month across the state.  By 2019 that number had fallen to 24,722—a drop of 7 percent.  It is likely that space previously used for slot machines is now being used by table games or areas for sports betting—which is not a surprise given that slot machines are taxed at a higher rate than those options.   

Nonetheless, Pennsylvania has a lot riding on the performance of slot machines.  As noted in earlier Policy Briefs (most recently in Vol. 19, No. 15), slot machine GTR is taxed very heavily at 54 percent.  There is a 34 percent assessment for property tax relief;  a 2 percent assessment for the local share (with an additional 2 percent for the two smaller resort casinos); a 6 percent rate is added on for the economic development and tourism fund with the remainder allocated to the racehorse development fund. 

It is very interesting that $12.4 million per year of the economic and tourism fund is being allocated in perpetuity to Pittsburgh International Airport.  Reportedly the airport will use some of that money to help pay for the construction of a new terminal.   

Also, in his fiscal 2021 budget address, the governor is proposing to divert $204 million from the racehorse development fund to start a scholarship fund for students attending the 14 universities of Pennsylvania’s State System of Higher Education. The proposal is meeting predictable resistance from the racehorse industry.   

Table games

Tax revenue from slot machine GTR does not go into the state’s general fund budget.  But tax revenue from other gaming sources (table games, etc.) does.  The total tax rate on table games is 14 percent. A 12 percent rate is assigned to the state’s general fund and another 2 percent goes to fund the local share.  The only exception is for fully automated table games, which are taxed at 34 percent but there are far fewer of them. 

Table games were introduced in 2010 and the total revenues statewide have been on a fairly consistent growth path ever since (except a small dip from of 1.3 percent from 2017 to 2018).  In 2019 revenue from table games reached $903.6 million, $24.8 million (2.8 percent) higher than in 2018 and established a new high-water mark for the category.   

The average number of table games available per month statewide in 2019 was 1,275, up slightly from the 1,234 in 2018.   

Bear in mind that the increase in total table games revenue accounts for only 20 percent of the revenue increase from all gaming options ($24.8 million of $146.1 million) 

New forms of gaming

Two new forms of gaming were made available to the public in 2019 while two others had their first full years.   

Pennsylvania gamblers were able to play slots/table games on the internet beginning in July 2019.  Internet slot games are taxed at 54 percent, the same rate as traditional slots.  The allocation of the tax is a bit different:  34 percent to the state, 13 percent to the Commonwealth Financing Authority (county grants) and 7 percent for the local share.  The economic development and tourism fund and the racehorse development fund do not receive money from internet slots.  Funds from the state share of the tax are split between property tax relief (65 percent) and the state treasury.  Internet table games are taxed at the same rate as casino-based table games, 14 percent, with the same allocations.     

In just six months of 2019, internet gaming brought in $33.6 million in total revenues—$20.9 million from internet slots and $12.6 million from internet table games. 

Video gaming terminals opened at 20 truck stops across the commonwealth in August 2019.  A total of 100 machines collected $2.3 million in revenues over the last few months of 2019.  They are taxed at a rate of 52 percent—a 42 percent assessment going to the state’s general fund with a small portion of that going to a compulsive and problem gambling treatment fund and a 10 percent assessment to the local share.   

Fantasy gaming began in May 2018.  It is a process where a gamer selects players (typically football) to form a team that will compete (statistically) against other gamers’ teams.  This gaming avenue is taxed at a rate of 15 percent which goes to the state’s general fund.   

In just eight months fantasy gaming brought in $15.3 million in revenues in 2018.  For the full calendar year of 2019 fantasy gaming brought in $25.9 million, an increase of 69 percent over 2018.   

The final form of gaming, and the biggest of the new additions in Pennsylvania, is sports wagering.  Calendar 2019 represented the first full year of sports wagering in the commonwealth.  It is taxed at a rate of 36 percent—34 percent to the state’s general fund and 2 percent to the local share.   

Total sports wagering revenues in 2019 were $84.1 million (51.1 percent of that was wagered online, while the rest was wagered in person).  Sports wagering in 2018 consists of just November and December.  The total wagering revenues from these two months was $2.5 million.   

It is very likely that there will be substantial growth in Pennsylvania’s gaming industry in at least 2020.  First of all, the industry will grow with the addition of the new mini-casinos which should debut soon and some of these options such as video gaming terminals and internet based gaming have not yet had a full calendar year of operation.   

Gaming and the economy

But more importantly the national economic growth is putting more discretionary funds into people’s pockets and gaming is one form of recreation available in Pennsylvania. But is this a good thing?  Should the government be so dependent upon gaming as a source of tax revenue?   

Clearly, a dollar spent on one activity cannot be spent on another. Money spent on gaming comes at the cost of other options, most likely other leisure activities.     

According to Bureau of Labor Statistics’ (BLS) data, Pennsylvania’s “amusements, gambling and recreation” sector jobs stood at 58,500 in December 2019. In December 2018 that number was 62,200—a year-over-year loss of 3,700 jobs. The current job count stands 10 percent above 2009’s 52,400. In comparison, national employment in the “amusements, gambling and recreation” sector climbed 30 percent. Note that data for the gambling sector itself are not available at the state level. 

However, at the national level, jobs data are available for the gambling industries.  In December 2009 there were 126,600 jobs in the gambling industry. The count rose to 132,300 (4.5 percent) in 2013 before dropping 13 percent by December 2019.  Over the 10 years 2009 to 2019 the nation’s gambling jobs fell by 11,200 or 9 percent. Furthermore, nationally casino employment is down 5.7 percent over the last 10 years and by 14.5 percent since the peak of 2013.  Is this due to automation and the advent of alternative online gaming? Or could it be that the gambling industry has peaked and is in decline?  At this juncture, it seems unlikely that gaming will have much of an impact on Pennsylvania’s job count in the years to come.  

In 2009, employees in gambling industries accounted for 10 percent of the jobs in the “amusements, gambling and recreation” sector.  By 2019, the gambling share had fallen to 7 percent.  While Pennsylvania’s gambling share of “amusement, gambling and recreation” employment is not provided by the BLS, it seems reasonable to assume it is in the 7 to 10 percent range. And, if it is following the national trend, the share is declining.

As for the tax revenues that policy makers are more than happy to collect, what happens when the economy has a downturn and the discretionary spending ebbs?  How secure are these revenue streams?  Politicians may be running out of ways to expand gaming in the commonwealth.   

Gaming as a recreational outlet must be kept in perspective.  Pennsylvania should not look to the gaming industry to sustain its economy or keep its tax coffers full, not to mention the social ills and costs that can accompany gambling addiction or the impact on lottery sales.

State System problems get worse

Summary: Problems at Pennsylvania’s State System of Higher Education (PASSHE) continue to get worse. In May 2018, Policy Brief Vol. 18, No. 20, detailed enrollment losses through school year 2016-17 and discussed studies of the system’s problems and suggested solutions. Recently, several legislative proposals aimed at helping PASSHE deal with its severe problems have been presented.

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Enrollment

There is little doubt that for several of the universities in the 14-university system dramatic changes are needed. Since peaking in 2010 at 119,513, system enrollment has declined continuously to reach 95,494 in the fall of 2019. This loss of 24,019 students amounts to a 20 percent drop.  But that figure does not capture the whole story. There are very large differences in the enrollment losses among the universities. Note that West Chester, which now has the biggest student count at 17,691, has added 3,210 since 2010. Slippery Rock has seen enrollment remain essentially flat over the period.

All other schools have lost at least 10 percent.  Three schools—Millersville (10), Bloomsburg (14), and East Stroudsburg (16)—had the smallest percentage losses.  Three schools had losses in the 20 to 30 percent range (California and Shippensburg at 27; Kutztown at 23).  Two schools suffered losses of 30 to 40 percent—Indiana, 32 percent (the system’s biggest student number drop at 4,778) and Clarion, 36 percent.  Meanwhile, enrollment at two universities fell 40 to 50 percent—Edinboro, 46 percent (3,996 students) and Lock Haven, 42 percent. Finally, two universities lost over 50 percent of their enrollment—Mansfield, 51 percent and Cheyney, 61 percent.

Taken together, the schools with over 20 percent enrollment losses account for 23,687 or 87 percent of the actual decline in enrollment of 27,200 at the schools with declining enrollment. West Chester’s gain holds the system’s net loss to 24,019. 

Obviously, schools with 20 percent or more in student count losses face enormous difficulties. Schools with declines of 35 percent or more face extraordinary difficulties. How do they maintain economically justifiable class sizes or degree programs? How do they cope with all the surplus infrastructure—classrooms, dorm rooms, etc.? How do they handle layoffs of redundant faculty? How many doctoral or masters programs are at risk? Indeed, how can university status be maintained for schools that have lost 40 percent or more of students and are still shrinking?

Beyond the enormous problems many of the schools have with massive losses of students, PASSHE as a whole has developed major financial difficulties resulting not only from the enrollment issue but also from overly generous compensation packages for employees.  Then, too, a tightening of Governmental Accounting Standards Board (GASB) reporting requirements now shows the true level of financial difficulties PASSHE faces.

Assets and liabilities

The most definitive and succinct indicator of what has happened financially is the statement of net position—the difference between total assets and total liabilities. Note that all PASSHE financial data in this report are taken from audited financial statements for fiscal years ending on June 30 of each year cited (available online). Between 2010 and 2019, the aggregated system’s net position dropped precipitously from around zero to a negative $1.6 billion. In 2010 the reported net position was positive.  But it did not include the pension liability of around $700 million as required by GASB beginning in 2015. When the pension liability was not accounted for in 2010 there was a positive net position of $687 million.  

Liabilities climbed from $2.072 billion in 2010 (in which pension liability was not counted) to $5.460 billion in 2019. Every category of liabilities rose over the period including workers’ compensation and compensated absences.  The massive $3.3 billion jump was due in large part to the required inclusion of pension liabilities that had risen from about $700 million (based on reported net assets) in 2010 to $1.108 billion in 2019, a jump of nearly 60 percent.

Meanwhile, other post-retirement benefits (OPEB) liabilities rocketed from $723 million to $1.977 billion, a spectacular near tripling of that liability. Bond debt increased 40 percent from $825 million to $1.155 billion during the nine-year period.  The “other” liabilities more than doubled from $404 million to $1.070 billion.   

Obviously, given the decline in enrollment, on a per-student basis, the increases in liabilities are even worse than the percentages shown above. Note, too, that assets grew substantially from $2.760 billion to $3.850 billion from 2010 to 2019, a $1.09 billion (or 39 percent) gain, leaving a negative gap of $1.6 billion compared to liabilities. The nine-year period reflects an increase in assets, other than capital assets, of $600 million to reach $1.308 billion and an increase in capital assets, net of depreciation, of $655 million to stand at $2.016 billion in 2019.

The depreciated value of buildings and improvements jumped from $1.051 billion to $1.654 billion (a 60 percent rise) to account for most of the rise in capital assets.  The large rise in the value of buildings helps the balance sheet.  But with enrollment down 20 percent overall and much more at half the schools, all the new building is a financial disaster.   

Revenue and spending

System revenue was fairly flat from 2010 to 2019, rising from $1.903 billion to $2.104 billion, an increase of 10 percent in nine years. Operating revenue over the nine years rose from $1.301 to $1.386 billion, a rise of just 6.5 percent.  The largest component of operating revenue in 2019 was student tuition and fees (61 percent) with grants and auxiliary enterprises making up most of the rest. The bulk of non-operating revenue is derived from state appropriations (68 percent) with gifts and other sources making up 25 percent.

Total expenses grew from $1.859 billion in 2010 to $2.125 billion in 2019, a rise of 14.3 percent. Employee expenses (salaries and benefit payments) climbed from $1.248 billion to $1.388 billion during the nine years, an increase of 11 percent. This, while enrollment was falling 20 percent. Non-personnel outlays climbed from $611 million to $737 million, reflecting increases in interest payment and losses, depreciation and auxiliary enterprises. On a mildly positive note, expenses hit their high point in 2017 at $2.196 billion and fell slightly in 2018 and 2019.  

In short, PASSHE as a whole has severe financial issues related to declining enrollment that affects the ability to grow revenue through student charges and state appropriations for operations because student counts have fallen, substantially and dramatically, at some schools. Raising tuition becomes self-defeating when demand is falling.  The university system’s overall financial picture has worsened substantially because of accounting requirements and growth in employee benefits especially retirement benefits and continued pay increases. 

Employment

Aggregate employment—full time and part time—at the 14 schools has fallen 12.0 percent from 2010 through the 2018-19 school year. Faculty—full and part time—fell 12.6 percent over the nine years with full time down only 9.5 percent. Bear in mind that enrollment is down 20 percent while salaries and benefit payments are up 11 percent and liabilities for pensions and OPEB are up 53 percent and 174 percent, respectively.  Note that layoffs are strictly based on seniority. Newer faculty members with lower salaries are let go first regardless of ability to teach, part-time faculty has been reduced by 20 percent and annual pay increases continue based on union contracts.  All this combines to push costs higher despite the payroll count reductions.

What to do?

Legislation has been proposed to deal with the system’s severe problems while it endeavors to come up with ways under existing legislation to deal with shrinking enrollment. The most promising proposal, if passed, would give the PASSHE board the ability to close or combine schools.  Most of the other actions being developed or approved will do little to deal with the problems created by faculty unions whose powers cripple management prerogatives and, with the threat of strikes, push contractual compensation costs upward continuously in the face of the system enrollment declines and very large declines at half the schools. 

The Legislature must recognize the surplus of state-supported university capacity. With Penn State’s enrollment of over 74,000—not including professional schools or online students—Temple at nearly 40,000 and Pitt and its affiliated campuses at 34,000 students, these three state-related schools have more enrollment than all the PASSHE schools combined. And all push hard to sustain enrollment in an environment that is increasingly competitive because of falling high school graduate counts.

Moreover, there are many private schools, large and small, competing for many of the same students, not to mention schools in other states. The Legislature also must recognize the importance of union-free faculties.  Unions are inimical to containing costs, education excellence and management prerogatives such as hiring decisions and layoffs.    

Pennsylvania’s State System of Higher Education should be moving to combine the smaller failing schools, including Cheyney, with other schools. It should also contemplate letting West Chester go its own way and any other school that feels it can make it as a free-standing university. As of now, the high acceptance rates and dropout rates and low graduation rates after six years at several schools are simply not what taxpayers should be supporting.

It is time for the Legislature and the governor to address these problems head-on.

The state of Pa.’s business climate

Summary: Business optimism in Pennsylvania continued in late 2019 and only slightly diminished from a year-earlier reading, according to the findings of the Fall 2019 Keystone Business Climate Survey by the Lincoln Institute of Public Opinion Research. 

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Survey respondents indicated the most significant problem facing their businesses was a lack of qualified workers with 38 percent highlighting this problem. The tight labor market poses serious difficulties as 75 percent of respondents noted they were having trouble hiring qualified employees.

This situation mirrors the latest National Federation of Independent Businesses (NFIB) survey results. “Finding qualified workers remained the top issue for owners in December, with 23 percent reporting it as their No.1 problem,” the NFIB data said. “Fifty-three percent reported hiring or trying to hire, but 94 percent of those owners reported few or no qualified applicants for the positions they were trying to fill.” 

In short, the very low unemployment rate nationwide is creating difficulties for businesses.

So, why are businesses struggling to hire qualified employees? Pennsylvania survey respondents listed three crucial factors with 58 percent indicating a lack of essential skills, 31 percent noted a lack of applicants and 17 percent pointed to the failure of applicants to pass drug tests. 

Lincoln Institute survey respondents also pointed to other problems affecting their business.  Eighteen percent indicated excessive regulations and 13 percent mentioned high taxes as obstacles to their businesses. These findings strongly suggest a need for the state to act on tax reform and improving the regulatory environment.  

On a more positive note, sales in Pennsylvania are relatively strong: Thirty-eight percent of respondents reported their sales had increased during the previous six months, 41 percent indicated sales held steady while only 15 percent claimed sales decreased during the prior six months. It’s another sign of strength in Pennsylvania’s economy.

While the fall 2019 survey conveyed continued business optimism, there was a drop off from the fall 2018 results. In the 2019 survey, 23 percent of respondents said business conditions were better than six months earlier, 52 percent reported they were the same and 22 percent believed they were worse. In the fall 2018 survey, the response was 39 percent better than six months earlier, 51 percent the same and only 7 percent worse.

Last year’s Policy Brief (Vol. 19, No. 1) detailed the Lincoln Institute’s fall 2018 Keystone Business Climate Survey in which business leaders attributed their business confidence to federal policies such as the 2017 tax cuts and regulatory reforms. The influence these tax cuts have on bolstering the economy are seen when survey results from fall 2019 and fall 2015 are compared. Both years represent the year leading up to the presidential election.  But the difference between responses from 2019 and 2015 further underscore the positive effects tax cuts and decreased regulation have on business conditions.

When asked the question about how they foresee business conditions over the next six months, 19 percent of respondents in the fall 2019 survey thought it would be better, 50 percent the same and 26 percent worse.  (The remainder had no opinion.) In the fall 2015 survey, business leaders, responding to the same question, indicated only 6 percent thought it would better, 42 percent the same and 49 percent worse.

Phrased another way, business leaders had little optimism in the fall 2015 survey with nearly half indicating business conditions would be worse in the coming six months.

Outlook for employment also contrasted sharply between the fall 2019 and fall 2015 survey. Of the respondents in the fall 2019 survey, 25 percent look to increase jobs over the next six months while 64 percent will hold at current levels.  A mere 6 percent expect to make cuts.

By contrast in the fall 2015 only 14 percent of survey respondents planned to increase employment, 67 percent would hold steady and 16 percent would reduce jobs. 

Thus, in 2019, 10 percent more firms expected to add employees in the next six months compared to the 2015 survey. And in 2019, 10 percent fewer firms planned to make cuts than the 2015 survey found.

While there is always uncertainty regarding upcoming elections, business leaders now are still displaying significant confidence, largely due to a more pro-business climate resulting from federal economic policies.

The majority of business leaders—60 percent—replied the current federal administration has the national economy on the right track. Pennsylvania’s business leaders note approval of the federal administration because, as discussed in a previous Policy Brief (Vol. 19 No. 1), they attributed their optimism to the federal tax cuts and regulatory reform measures in 2017.

Meanwhile respondents to the fall 2019 survey expressed disapproval with the state Senate (27 percent approved while 42 percent disapproved) and the state House (21 percent positive and 49 percent negative). The governor also was viewed negatively, 55 percent to 32 percent—further illustrating disappointment with state government on economic matters.

While the continued confident responses from business leaders in the fall 2019 survey are encouraging, the state’s business optimism is largely a response to federal tax cuts and regulatory reform. Tax cuts and regulatory reform at the state level along the lines of the federal policies would be of enormous help to the commonwealth’s economy.  One need only look around the country at fast-growing states to see the benefits of more pro-business and pro free-market policies.

Allegheny County’s household employment lagging

Summary: As 2020 began, Allegheny County Executive Rich Fitzgerald touted the economic performance of the county since 2000.  As noted in late 2019, an Institute Policy Brief (Vol. 19, No. 44) reported that the seven-county Pittsburgh Metropolitan Statistical Area’s employment growth has fared quite poorly recently compared to similar-sized metros. Allegheny County makes up about half the population of the seven-county region.

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The Policy Brief findings were based on surveys of employer payrolls. These surveys cover only metro areas and do not report data by county. However, U.S. Bureau of Labor Statistics does collect household employment and labor force data at the county level through phone surveys.   

In the earlier Brief, the Pittsburgh metro area was compared with the Charlotte, Cincinnati, Cleveland, Indianapolis and San Antonio metro areas. This Brief looks at household employment data for the counties that host the cities for which the metro areas are named. They are Mecklenburg, N.C. (Charlotte), Hamilton and Cuyahoga, Ohio (Cincinnati and Cleveland), Marion, Ind. (Indianapolis) and Bexar, Texas (San Antonio).  Additionally, this study will include the performance of the nation and state. 

Household employment for Allegheny County in 2000 stood at 612,461 people (all figures are the 12-month average for the year cited).  In 2019 employment had increased to 625,287—a rise of 2.1 percent. In the sample of counties, it ranks as fourth best ahead of Cuyahoga (-11.4 percent) and Hamilton (-1.4 percent), but well behind Mecklenburg (57.5 percent), Bexar (45.7 percent) and Marion (7.8 percent).  Nationally household employment rose 15 percent and Pennsylvania’s count moved up 6.5 percent. 

The first decade of the new millennium ended just as the deep recession was drawing to a close with four counties having lower household employment in 2010 than 10 years earlier (Allegheny, Cuyahoga, Hamilton and Marion).  Pennsylvania also saw a drop while nationally household employment posted a very small 1.6 percent gain.  Meanwhile, Mecklenburg and Bexar (16.4 and 18.4 percent, respectively) recorded solid growth. 

With a rebound from recession levels and ongoing strong gains in recent years, the national household employment count climbed 13.2 percent between 2010 and 2019 while Pennsylvania posted a 6.5 percent rise. Unfortunately, Allegheny County, at 6.4 percent, trailed well behind the national gain and managed to surpass only Cuyahoga’s 1.8 percent. Allegheny’s growth fell far behind Mecklenburg (35.3 percent), Bexar (23 percent), and Marion (17.7 percent). Hamilton County, at 8.9 percent growth, was marginally better than Allegheny County’s gain. 

Another measure of the economic vitality of an area is labor force growth. The labor force consists of those who are employed and those who are actively seeking employment.  It does not count members of the population under age 16, retired or in an institution such as a school or hospital. 

From 2000-19, labor force in Allegheny County ticked up from 638,137 to 650,557 or barely 2 percent.  Over the same period the national labor force rose 14.7 percent, while the commonwealth rose by 6.5 percent.  Among the counties reviewed, Mecklenburg County’s labor force jumped by 58.9 percent followed by Bexar County at 44.3 percent and Marion County at 8.4 percent.  Both Ohio counties, Hamilton and Cuyahoga, had losses of 1.5 and 10 percent, respectively. 

While better than two Ohio counties, Allegheny County’s very slow 19-year labor force gain does not signal strong economic vitality in comparison to the nation and many counties across the country.  

As mentioned above, labor force is dependent upon the population at large—generally speaking, a growing population allows for a growing labor force.  While the next decennial Census will be taken in 2020, recent county population comparisons can be made using annual population estimates, with the 2018 estimate being the most recently available from the U.S. Census Bureau.

In the 2000 Census Allegheny County’s population was recorded as 1,281,666. By 2010 the count had fallen by 4.6 percent to 1,223,348.  The losses slowed to just 0.4 percent between 2010 and the 2018 population estimate of 1,218,452.  Over the time frame 2000 to 2018, Allegheny County’s population fell by 4.9 percent. 

By contrast, Pennsylvania’s population count over the two decades increased by 4.3 percent.  The bulk of that increase happened in the first decade (3.4 percent) before cooling off to less than one percent between 2010 and 2018. 

From 2000 to 2018, Mecklenburg led the six-county sample with a jump of 57.3 percent to the population (695,454 to 1.1 million) and will likely surpass Allegheny County in the next Census count.  Bexar County’s population climbed 42.3 percent to 1.99 million people, up from 1.4 million in 2000.  Marion County grew 11 percent over the period. However, Hamilton County and Cuyahoga County each saw population losses. Hamilton’s drop of 3.4 percent was smaller than Allegheny County’s.  But Cuyahoga was very hard hit with a population loss of 10.8 percent. 

In short, Allegheny County’s economic performance, as measured by household employment and labor force gains in comparison with the nation and state and several counties, has not fared well over the last two decades.  Of course, part of that story is tied with the loss of population.  But it all comes down to the availability of jobs and the business climate.  Job availability draws people to a county and boosts labor force and employment levels.

As many earlier Policy Briefs have noted, the business climate in Allegheny County has been less than ideal for job growth.  It is not free market-oriented or business friendly. A large part of that is the stifling regulatory climate coming not only from the state level but also from the county’s core, the City of Pittsburgh.   

It also has a lot to do with burdensome taxes, such as the additional one percent Regional Asset District sales tax, the drink and rental car tax and the very high level of school real estate taxes within the county.  Until the county reverses course and becomes more welcoming to businesses—without using public subsidies to draw them here—the slow growth that characterized the first two decades of this millennium will continue.

Pittsburgh: Financial and economic changes 2013 to 2018

Summary: In several respects the financial situation in Pittsburgh made significant and important positive strides over the period 2013-2018. However, there are still substantial concerns about the city’s economic and financial structure. Debt outstanding is down but retirement benefit problems remain. Revenue gains and spending increases have outpaced employment gains. However, spending and revenues per resident are far higher than comparable cities and getting worse.

Audited numbers for 2019 will not be available for several months. An update of this report through 2019 will be forthcoming when the audited data are made available.

The Comprehensive Annual Financial Report (CAFR) for 2018 provides detailed statistics for spending and revenues and the balance sheet entries from 2009 to 2018 as well as estimates of the number of workers (resident and non-resident) on payrolls in the city. The Bureau of Labor Statistics (BLS) provides city labor force and number of residents employed figures back to 1990.

Employment and Labor Force

First, a look at labor force and employment data. Note that the average monthly labor force in 2000 was 156,650 and in 2018 stood at 156,476, virtually the same level after 18 years. In 2012, the labor force reached 160,000 but has since retreated, falling to 158,861 in 2013 and sliding further through 2018.  The non-existent growth in labor force is consistent with a flat, to slightly lower, population. Nationally, the labor force climbed 4.3 percent over the 2013-2018 period.

The number of employed city residents stood at 149,662 in 2000, the highest level of the 2000s until 2018. After 2000, employment of residents was quite weak in the 11 years before 2012 when a recovery period began and by 2013 the count had risen to 148,111. Over the following five years, resident employment crept slowly upward until 2018 when it rose to 149,994 (up 1.3 percent over the five years) and surpassed the 2000 level in 2018 for the first time during the 18-year period.

Nationally, household employment climbed 8.2 percent between 2013 and 2018, over six times faster than Pittsburgh. Better news for the city is that the improving trend continued in 2019. The city’s unemployment rate fell to 4.2 percent in 2018, its lowest level since 1990, and through October 2019 had fallen further to 4.0 percent.

Payroll employment data that count all the jobs in the city whether held by residents or non-residents is, and has been, much larger than the number of residents working. Indeed, there are twice as many payroll jobs in the city than city residents with jobs.  According to Pittsburgh CAFRs covering the 2000s, there were 325,318 jobs in the city in 2000. That count fell for a number of years and in 2004 had dipped to 301,671. Jobs began to grow slowly and reached 307,678 in 2013 and rose further to 311,881 (a 4,100-job increase, or 1.4 percent).  

It must be noted here that unlike the BLS household survey data for employed city residents there are no BLS payroll data for the city.  The job counts reported in the CAFRs are based on figures constructed by the city controller’s office.  That methodology is not explained in the CAFR. If the CAFR numbers are reasonably accurate, the city’s job total remains well below the 2000 level, unlike the residents-working count that in 2018 surpassed the 2000 number. Moreover, the CAFR measure is quite volatile year-to-year. Nonetheless, by either measure, there was some modest employment progress from 2013 to 2018.

Finally, it is important to bear in mind the city’s population fell by almost 30,000 between 2000 and 2010 to stand at 305,000.  This after 60 years of nearly continuous losses since 1950 when the population peaked at 676,806. With a 2010 Census population of around 305,000 the city has 16,000 fewer residents than the 321,000 in 1900—simply stunning.

Finances

As far city finances are concerned, they have improved somewhat between 2013 and 2018 with revenue gains outpacing spending growth by a five-year cumulative total of $239 million—measured on an accrual accounting basis in the table showing Changes in Net Position. From 2013 to 2018 revenue from taxes—measured on an accrual basis—grew from $399 million to $489.2 million, a 22.6 percent increase. All tax categories were up, with greater than 15 percent gains in all except the local services (11.8 percent) and Miscellaneous (6.7 percent). Still, the local service tax revenue, paid by those working within the city, rose much faster than the jobs reported in the CAFR grew (1.4 percent). Better collections perhaps or underestimation of employment?   In any event, tax revenues per resident climbed from $1,299 in 2013 to $1,624 in 2018, a jump of 25 percent as population fell by 4,000 to just over 301,000, according to the Census Bureau inter census estimate.  

It is important to bear in mind how Pittsburgh compares to other cities. To that end, the Allegheny Institute has constructed a benchmark city – a composite of Omaha, Charlotte, Salt Lake City and Columbus—to contrast Pittsburgh’s performance with others. For 2018, Pittsburgh’s per resident tax revenues were 70 percent higher than the benchmark city average (see Policy Brief, Vol. 19, No. 25).  In 2013, taxes per resident were 57 percent higher than the benchmark. 

The two largest sources of tax revenue, real estate and earned income, accounted for over 40 percent of the $90 million rise in tax revenue. The biggest percentage increase occurred in the deed transfer tax that climbed $16 million, an increase of 78.5 percent. An increase in the tax rate in 2018 played a significant role.  Payroll preparation and parking taxes accounted for another $21 million pickup in revenue. The RAD tax and amusement tax posted a 20 percent plus gain over the five years.

Note that the 20 percent increases in earned income tax and the payroll preparation tax are much greater than the 1.4 percent estimated rise in the number of workers in the city.  This gap points to significant gains in wages and salaries and proprietor incomes.

Meantime, revenues from government programs—fees, charges, licenses, etc.—were essentially unchanged over the five years, rising from $140 million to $143 million. Adding these revenues to the tax collections puts the total revenues at $539 million in 2013 and $632 million in 2018, still a $90 million plus increase but in percentage terms only a 17 percent rise compared to 22.6 percent for tax revenues.

Meanwhile, expenditures (accrual basis) during the 2013-2018 period climbed from $535.7 million to $580.5 million, a rise of $44.8 million (8.3 percent), a considerably smaller increase than revenues.  General government outlays were up $23 million, public safety was up $20.9 million and highways and street spending rose $17.2 million while sanitation outlays were up by $4.8 million. Two categories saw large expenditure cuts: economic development was cut by $9.9 million and interest payments were down by $9.7 million. Culture and recreation spending was down $1.5 million bringing total spending cuts to $21 million. These reductions provided a significant offset to the $65.9 million increase in the categories where spending climbed very rapidly.

Unfortunately, even with expenditure growth rising more slowly than revenues over the five years, an estimated drop of 6,000 residents combined with the expenditure pickup lifted the spending per resident to $1,925, a 10 percent increase compared to 2013’s per resident outlay of $1,751. The total 2018 spending per resident in Pittsburgh was 57 percent higher than the benchmark city average.

As for the city’s balance sheet, some notable changes occurred during the five years.  The CAFR for 2018 shows that as of December the city had a net negative position of $1.458 billion dollars.  In 2013, the reported net position was a negative $423 million and in 2014 negative $421 million. However, the government accounting rules were changed to require other liabilities including pensions that resulted in a restatement of the 2014 figure to $1.324 billion (as posted in the 2015 CAFR). In 2015 the net position as reported in the 2018 CAFR was a negative $1.291 billion. The restated 2013 figure is not available.  Thus, from 2014 to 2018, the net position worsened by $134 million and from 2015 is worse by $167 million.

The good news is that the city’s debt outstanding fell sharply from $575 million in 2013 to $406 million at year end 2018—a decline of $169 million or 29 percent. Unfortunately, net pension liabilities rose by $128 million and other post-employment benefits (OPEB) liabilities rose significantly as well to stand at $408 million up by over $300 million compared to the figure reported in the 2013 CAFR. Then, too, the accrued workers’ compensation liabilities in 2018 stood at $118 million.

The 2018 ratio of funds in the pension trust to liabilities was only 31.8 percent ($428 million to $1.347 billion), down from 32.6 percent in 2014. However, because the city has pledged $26 million in parking tax revenue through 2041 and is allocating $10 million in gaming tax revenue, the present value of those revenues is sufficient to put the actuarially determined asset to liabilities funding ratio above the 50 percent the state requires to avoid a takeover of management of the pension funds. Meanwhile, city employee payroll count has remained fairly flat at just over 3,300 and the covered payroll has been quite level at just over $200 million per year.  Including state pension aid of $21 million, Pittsburgh spent $116.8 million (does not count $12 million paid by employees) on pension and OPEB in 2018. However, the $116 million in taxpayer funds expended on retiree benefits amounts to 56 percent of the covered payroll.  The pension problem is not over and with no defined contribution plan in the offing; the city could eventually face another pension crisis and be forced to find additional funds for the pension plans.

The Parks Tax & Peduto’s games

The Pittsburgh Parks Conservancy has spent about $714,000 in promotion of a Nov. 5 ballot referendum that would raise property taxes to fund the parks system.

While some have questioned the prudence of a group that’s been begging for money turning around and spending no small chunk of change to obtain tax dollars, there’s another, larger, question in play.

Here’s what will appear on Tuesday’s ballot:

    “Shall the Pittsburgh Home Rule Charter be amended to establish a dedicated Parks Trust Fund beginning in 2020 to improve, maintain, create and operate public parks; improve park safety; equitably fund parks in underserved neighborhoods throughout Pittsburgh; be funded with an additional 0.5 mill levy ($50 on each $100,000 of assessed real estate value); secure matching funds and services from a charitable city parks conservancy; and assure citizen participation and full public disclosure of spending?”

Of course, the question leaves some vital things up in the air, as usually is the case. Topping the list, as some opponents have noted, is how the money’s overlords, the city and the conservancy, formally would divvy up the proceeds.

Another issue is that catch-all but typically hard-to-define clause (on purpose?) “equitably fund parks in underserved neighborhoods throughout Pittsburgh.”

What, pray tell, does that really mean? Who defines “equitably”? Who defines “underserved”? And how? What metrics are to be gauged?

It long has been the practice du jour,  in most government jurisdictions, to write enabling legislation that enacts an adopted ballot referendum.

But, that said, the process leaves the door open for voters getting the kind of pig in a poke that they never intended. What kind of pigs will City of Pittsburgh voters find in their pokes post-Tuesday should the Parks Tax be approved?

An Allegheny County Common Pleas Court has struck three Pittsburgh gun-control ordinances for the simple reason that they are in contravention of state law.

Of course, the Peduto administration has developed something of a cottage industry of passing legislation either prohibited by state law and/or the city’s home rule charter.

That has led to a number of lawsuits, defeats, appeals, defeats and then finding (or hoping to find) a sympathetic “progressive” majority on the Pennsylvania Supreme Court to, and in circuitous (if not tortuous) fashion, rule that we should pay no attention to the rule of law behind that curtain.

And in true fashion, Peduto & Co. say they’ll appeal the latest court rebuke. The mayor has vowed to take the issue to the U.S. Supreme Court if necessary. As the fictional cartoon dog Astro might say, “Rots o ruck rif rat run!”

Peduto acolytes like to remind that, in this case, taxpayers are not on the hook for the legal challenge; some legal eagles are doing the work gratis. But there’s still a steep cost.

The scheming still clogs the courts with debate on an ordinance that relied on the dishonesty of parsed phraseology, one that blows raspberries at a prohibition that clearly says what it means and means what it says.

Judge Joseph M. James called out the city for that very machination; Peduto claims James is tone-deaf to nuance. Please.

Were Peduto & Co. sincere in their efforts, instead of the politically expedient grandstanding in which they’ve been engaged, they’d be lobbying the Legislature to consider amending what’s known as the commonwealth’s “pre-emption” law.

But knowing that won’t happen, they continue to play children’s games.

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).

PA’s overtime over-reach

Summary: Governor Tom Wolf is proposing to raise the amount salaried workers can earn and still qualify for overtime pay from the current federal base of $23,660 to $45,500.  This new regulation just adds to the burden Pennsylvania businesses already face and could have a detrimental effect on the state’s economy. ____________________________________________________________________

In early October, Kiplinger’s magazine rated Pennsylvania as one of the least-tax-friendly states in the country, ranking as seventh worst.  While Kiplinger’s methodology can be debated, those of us living in Penns Wood are all too familiar with a high tax climate that continues to stymie job creation. 

But what rarely gets mentioned in the media is the burden businesses face due to high-cost regulations coming out of Harrisburg.  Governor Wolf recently rolled out another one, seeking to change the overtime rules which businesses must follow regarding salaried employees.

In a Pennsylvania Department of Labor and Industry news release, the governor’s plan will “expand eligibility for overtime to 143,000 people and strengthen overtime protections for 251,000 more.  In total, 394,000 workers may benefit from the updated overtime rules.” 

The issue is to define the maximum salary level for which a worker qualifies for overtime pay, which is typically time-and-a-half.  The current level, set by the federal government, is $23,660 per year, meaning that any salaried worker earning up to $23,660 per year is eligible for overtime pay.  The federal government is set to increase that threshold by 50 percent on Jan. 1, 2020, to $35,568 and, of course, the commonwealth will follow suit. 

The governor is proposing to raise that threshold even further to $45,500 by 2022—92 percent over the current level. 

According to a Pittsburgh Post-Gazette (PG) report, the new state regulation will not apply to “public employees, including those at state-affiliated entities, counties, municipalities and public-school systems”—just private employers. 

As mentioned above, by going beyond the new federal mandate, the state estimates that 143,000 people will now be eligible for time-and-a half and more clearly defined rules will be in place for 251,000 more workers—apparently, as the news report clarifies, there are those who may qualify for overtime but weren’t aware they could.  So, the new regulation is estimated to immediately affect 394,000 workers. 

Over the last decade (2009-19) the commonwealth’s job growth has failed to keep pace, not only nationally, but with neighboring states as well.  In September 2009, the beginning of the recession, total non-farm jobs in the state were 5.6 million and by September 2019 (the most recent non-seasonally adjusted data available) had climbed to 6.07 million—a rise of 8.4 percent.  The national non-farm growth came in at nearly double Pennsylvania’s increase (16.4 percent). 

Bear in mind that Pennsylvania’s economy was not hit as hard by the recession as some of the fast-growing states because the over building of construction and sub-prime mortgage debacle had less of an impact in the commonwealth.  So its weak performance since 2008 is even more telling. Neighboring states Delaware (13.2 percent), Maryland (10.0 percent), New Jersey (8.5 percent), New York (15.4 percent) and Ohio (11.1 percent) all out-grew Pennsylvania over the last decade.  However, West Virginia lagged well behind (3.3 percent). 

Interestingly, in the Kiplinger’s ranking of tax-friendly states both New York as third worst and New Jersey as fifth worse had higher tax burdens than Pennsylvania (7th). Meanwhile, Ohio was slightly better at eighth worse. Yet all three states had better non-farm job growth than Pennsylvania over the last 10 years. 

According to the PG report if the governor’s proposal is put into effect, the $45,500 threshold would put the state “on par with the highest thresholds, including California, New York and Alaska.”  Each has significantly higher average wages compared to Pennsylvania.  This would put Pennsylvania at a further economic disadvantage with the majority of its neighbors and other business-friendly states in its efforts to convince new businesses to locate in the commonwealth. That could incentivize some to leave.  

While the political rhetoric of helping “the working people” of Pennsylvania makes for a nice sound bite, there are unintended consequences of such a mandate.

As mentioned above, this will only apply to private firms, not public employees, including those at state-related entities, counties, municipalities and public-school systems.  Does the phrase “state-related entities” cover the public colleges in the Pennsylvania State System of Higher Education and the larger state and state-related universities such as Penn State and Pitt? 

This mandate would lead to a lot of screaming from some private schools, especially small, financially shaky ones.  This clarification was likely done to let voters know that taxes will not go up to cover the anticipated labor cost increases had government been covered under the mandate.  For affected firms, costs—direct costs of paying overtime to the expanded employee base as well as indirect compliance costs—will increase. 

How will private firms react?

Some firms will be able to pass along the higher costs to their customers through price hikes.  Others who are forced to internalize those costs will resort to cuts, either to hours worked, jobs or other benefits currently enjoyed by employees.  They may forego hiring new employees and instead rely more on those they have chosen to keep and pay.  These are the seen consequences. 

One of the unseen consequences could be a lack of advancement for an employee.  Employees who jump from hourly to salaried are often on a management track which could lead them to greater salaries down the road, either with the current firm or another.  This mandate could take that opportunity away from workers or push it further down the road, perhaps suppressing wage growth.   

Imposing yet another costly mandate on Pennsylvania businesses will further hamper job growth.  Considering how anemic growth has been over the last decade when compared to the national pace and neighboring states, Pennsylvania can ill afford to go down this path.  If nothing else, it sends a message to any firm thinking of moving to Pennsylvania that the government is happy to help run their business.  And that could be enough to keep them away, further hindering the state’s economy.

Regional Greenhouse Gas Initiative is wrong for Pa.

Summary:  Gov. Tom Wolf has announced plans to have Pennsylvania join the Regional Greenhouse Gas Initiative (RGGI). He wants to use the proceeds from its cap-and-trade program to fund his $4.5 billion “Restore Pennsylvania Infrastructure” initiative. But Wolf ‘s desire to join RGGI seems to be more about imposing a carbon tax and little to do with actual environmental concerns. A closer look at RGGI reveals that the cooperative is more of a taxing entity and less of the environmental proponent it claims to be.

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The RGGI is the first mandatory “market-based” program in the United States to implement a cap-and-trade regimen aimed at decreasing greenhouse gas emissions. Initially 10 states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, Vermont and New Jersey—joined in January 2009. New Jersey left the cooperative in 2011 but will rejoin in 2020. The RGGI sets the emissions cap for all states within the cooperative.

RGGI rules require fossil-fueled electric power generators with a capacity of 25 megawatts (MW) or greater to buy allowances equal to their carbon dioxide emission caps. RGGI Inc., the group responsible for overseeing the program, determines the cap and each plant must purchase allowances to equal its carbon dioxide emissions over a three-year compliance period. Each state sells the emissions allowances via auctions and is supposed to invest the proceeds in energy efficiency, renewable energy and other consumer-benefit programs. Currently, 165 facilities are governed by RGGI emissions allowance rules.

RGGI has several key features: three-year compliance periods, emission allowances, emissions auctions and cost-containment procedures. Each state is responsible for ensuring compliance.  RGGI Inc. has no enforcement powers.

The specific carbon dioxide cap is in place for a three-year period. The goal is to offset price fluctuations caused by short-term market volatility. RGGI distributes 80 percent of allowances at quarterly auctions. Each state is responsible for implementing these auctions.

RGGI mandates a price floor for the emissions allowances. It determines the lowest price that an allowance can be sold for (i.e. in 2008 the price floor was $1.86 per allowance; in 2019 the price floor was $2.26 per allowance). RGGI permits emission allowance banking, allowing facilities to save allowances for future use in order to prevent potential allowance price volatility.  Facilities are also able to sell their unused allowances on secondary markets.

However, in 2014 a cost-containment program was established so that reserve allowances can only be sold if the prices exceed the predefined price levels. In effect, the facilities are only able to sell if emission reduction costs are higher than projected. Each year the cost-containment reserve price will increase by 2.5 percent through 2020.  

This is anti-market at best.

In 2017, seven RGGI states (Maine and New Hampshire declined to participate) added an emissions containment reserve (ECR) program. Beginning in 2021 the RGGI will use a trigger price of $6/ton (to rise 7 percent per year after) as a mechanism to manipulate the secondary market.  It will force states to withhold emission allowances to keep them from being resold, unless the secondary market price is greater than the trigger price, thus, effectively lowering the cap.

RGGI maintains that its cap-and-trade program is market-based.  But the mechanisms it uses—such as setting a minimum price called the “reserve price” and other market interventions like “cost containment reserve” and “emissions containment reserve” —are not characteristic of free-market mechanisms. Given the complexities of the program, one wonders—why not tax electricity use to deter consumption rather than going through the elaborate auction and cap-setting process?   

RGGI’s success and effectiveness are questionable. A very conspicuous failure of the program occurred in 2009 when RGGI’s cap exceeded actual emissions.  In 2009 actual emissions were 44 percent below cap emissions.  Which meant RGGI effectively did nothing to decrease emissions, only taxing them. The first emissions cap from 2009 to 2014 used assumptions based on 2005 emissions levels under the erroneous assumption that emissions would rise from that level and, as a result, set the cap far above actual emissions.

During the 2009 to 2014 period, carbon dioxide emissions decreased in large part due to a move to less-carbon-intensive fuels (i.e. natural gas replacing coal) and the economic downturn.  In 2012 the program was amended; a revised lower cap was established in order to be more effective following the “failure” of the first cap. The new cap—which went into effect in 2014—was 45 percent lower than the original level in order to match actual emissions.

The second review in 2017 required the 2012 cap to be reduced by 2.5 percent per year through 2030. Note that from 2009 to 2016 (the most recent data available) emissions in the RGGI states stay below the emission cap. During 2009, RGGI’s first year of implementation, emissions were 44 percent below the cap. In 2012 the cap was lowered but emissions were still 44 percent below the cap. In 2014 after the cap was decreased by more than 50 percent from the original level, emissions were still 5 percent below the cap. In 2016, the most current data available on emissions, emissions in the RGGI states were 8 percent below the 2016 cap.  

Only by setting an artificial price floor could the system work in a situation where supply exceeds demand.  Moreover, the scheme is little more than a tax-revenue generator as emissions have fallen below the cap-constrained market.  So much for having an impact on the environment.

In a news release this year announcing New Jersey has rejoined the program, RGGI Inc. also touted the public health benefits of the program.  It claims avoided asthma attacks and lives saved.  But according to the Center for Disease Control and Prevention (CDC), Pennsylvania’s percentage of adults with asthma (10.1 percent) is lower than all the current RGGI states except New York (9.2 percent).  Pennsylvania’s death rate of 8.7 deaths per million persons from asthma is lower than the four RGGI states with data reported on these deaths (New York, Maryland, Connecticut and Massachusetts).   

That same news release also noted that “net benefits to the RGGI states’ economies (are) on the order of $4 billion.”  The nine states currently in the program had a combined GDP of $3,250 billion ($3.25 trillion) in 2018 (quarterly average).  Thus $4 billion represents a mere 0.12 percent of that total—hardly a statistically reliable benefit.

To date there have been 43 state auctions totaling $3.2 billion in proceeds. From 2008 to 2016 states used auction revenues for the following purposes:  50 percent to energy efficiency; 19 percent to energy bill-assistance; 7 percent to greenhouse gas abatement; 4 percent to renewable energy projects; 6 percent to state budget reduction; 4 percent to state administration costs; and one percent to RGGI Inc. for program implementation.

However, there is no explanation for the remaining 9 percent (of the $3.2 billion). Where does that 9 percent go?

The 19 percent allocated to bill-assistance reflects the need to provide “rebates” for the increased cost of electricity due to the requirement of electricity generators to buy emission allowances. Proponents of RGGI argue bill-assistance programs are needed to offset increased costs.  But even if it is distributed to customers, it is only for those with incomes low enough to qualify.  The rest of the customer base is left with increased energy bills, including businesses.

While RGGI maintains that auction proceeds should be used to promote energy efficiency, bill-assistance and renewable energy projects, the reality is very different. Both New York and New Jersey used RGGI proceeds to help pay down state deficits. This underscores the point that environmental concerns can be, and are being, used as pretext to garner support for taxation and government revenue.

By levying an additional cost on electric power generation, the price of electricity is artificially driven up and passed on to consumers, especially businesses. Consumers face increased utility costs and additional costs due to secondary effects of higher energy prices.

Business growth, especially in the manufacturing sector, which relies on large amounts of energy, will be hampered by increased energy prices resulting in job losses. In “A Review of RGGI” by David T. Stevenson, of the CATO Institute, concluded that RGGI state electric rates created a 35 percent reduction in energy-intensive industries (primary metals, food processing, paper products, petroleum refining and chemicals) and a 13 percent decrease in the overall goods-production sector. For comparison, Stevenson looked at five non-RGGI states (Illinois, Ohio, Oregon, Pennsylvania and Texas) and found that they had only a 4 percent decrease in energy-intensive industries and a 15 percent increase in goods production.

The CATO report also found increased electric rates in RGGI states. Using the weighted average nominal electricity revenue for multi-state groups, Stevenson found that from 2007 to 2015 electricity prices in RGGI states increased by 64 percent more than in the non-RGGI sample states. The review also found RGGI’s mandated allowances added $11 million a year to Delaware’s electric bills and $28.5 million for indirect costs due to RGGI rules.

Pennsylvania has experienced an impressive reduction in carbon dioxide emissions in recent years without joining RGGI. Natural gas, which emits less carbon dioxide than coal, has largely replaced coal as the leading fuel for electricity generation in the state. The EPA’s data for Carbon Dioxide Emissions in Pennsylvania showcases the extraordinary results: carbon dioxide emissions in the state from 2000 to 2016 fell by 26 percent.

Keep in mind the emissions data includes all emissions from fossil fuel combustion statewide and not just the electric power generators that RGGI would affect.  Pennsylvania has reduced carbon dioxide emissions through market solutions and without the tax burden that RGGI would levy.

The increased energy prices for taxpayers, loss of jobs due to mounting energy costs and second-order effects resulting from higher electricity costs are strong arguments against joining RGGI. Joining RGGI would be an ill-advised decision that would undermine much of the economic and environmental success the state has enjoyed in the last decade thanks to natural gas production in the electricity market.