A few years ago, 2009 to be exact, the County’s tangled web of relations between itself and UPMC, the County’s role as the body that assesses property value and certifies that parcels exempt from real estate taxation really should be, the County’s role as promoter of economic development and leaning heavily on "eds and meds", and the County’s role as viewing itself as needing to intervene in matters such as UPMC’s decision to shutter the hospital in Braddock all intersected at one Council meeting, one that we wrote about then. That’s because on the same night that County Council decided it wanted to explore what UPMC owned and whether everything was deserving to be exempt (presumably as a tactic to scare UPMC into changing its mind) it had to decide whether the County-acting through its related Hospital Development Authority-would issue $1 billion in bonds on behalf of UPMC.
The issue of the Authority acting as a debt issuing vehicle rose again in 2011 when the UPMC-Highmark battle was at its apex. Again, we wrote about that debate and the $330 million borrowing request that, in case the County wanted to exert influence by not issuing the debt, another state level authority stood ready. The County did not issue the bonds.
So why bring these instances up? Because at the end of 2012 County Council held a hearing on UPMC which it promised would be the first of many on finding out if property owners classified as charitable and exempt really deserved all their exemptions. As an article today pointed out, the classification system the County has on exempt property is a mess, but tomorrow night the Council will take up business deciding whether its Higher Education Building Authority should issue over $80 million in debt for two private universities in the City of Pittsburgh and, after that, whether the Authority needs a new lease on "municipal" life, which amounts to fifty years additional. The County does not pledge its revenues or the state’s by issuing the bonds but it has the opportunity to make plenty in fees and payments. That’s the decision point it has to deal with when deciding if it wants its instrumentalities to help the institutions it is trying to get to act a certain way.
Call it "the week that was" in news items related to projects on the drawing board, soon to get off of the ground, or those that failed to live up to promises. The common thread is that all of them somehow involve tax increment financing (TIF) as a funding tool. TIF allows development on a specified parcel (or parcels) of property to move forward by an authority issuing bonds for certain aspects of the project and then allowing, with the agreement of the taxing bodies where the development is located, that a good portion of anticipated taxes on the new more valuable development to be funneled to repaying the bonds instead of fully to the taxing bodies’ accounts.
We read of a failed development in North Versailles for townhomes and how the Mall at Robinson may not be throwing off enough money or produced enough corollary development (more retail?) to pay off debt; that the long-talked-about apartment village in Castle Shannon will go before Castle Shannon Borough and the Keystone Oaks School Board this month with one school official noting that the revenue split (75% for the bonds, 25% for the district) won’t bring a lot of dollars to the District, but they will get a lot of earned income tax dollars from people who will occupy the apartments (unless, of course, those prospective residents are already ling in the District and will simply move to the new location); the empty lot in uptown Mt. Lebanon, where the first swing and miss at development with a TIF came about a decade ago and is now in the hands of a second developer; a multi-use development in Sewickley; and, not to be left out, the Market Square development in Downtown Pittsburgh. We wrote an editorial in June about the resurgence of TIF in the area.
With these new developments, and a lot of ones already done over the years, are taxpayers getting significant benefits through the elimination of blight, the creation of new job opportunities, and increased tax value? If those questions are to be answered, don’t look to the Commonwealth: as we pointed out this year, the state hasn’t produced an evaluation on TIF even though it was a requirement in the 1990 law that permitted its use.
A couple of weeks ago Moody’s Investor Services assigned an A1 rating to Allegheny County bonds. Much glee was expressed by the County Executive at the rating agency’s good opinion.
There is no gainsaying the fact that a high bond rating is a very good thing for the County in terms of its ability to borrow money at the best interest rates. But before County residents get too comfortable they should know the details of the rating that might be somewhat less reassuring.
First of all, the rating comes with a negative outlook based on Moody’s concerns about the challenges facing the County; namely, the very low reserve balance, the low pension funding levels and lack of financial flexibility. Moody’s does credit the stable economic base that is heavily structured toward higher education, health care and government employment. A point the Institute has made for quite some time.
Second, it is instructive to examine Moody’s rationale for the A1 rating. Quote; "The bonds are secured by the county’s general obligation, unlimited property tax pledge." (Bold and italics added by the Allegheny Institute.) Moody’s is saying that because the County can raise property taxes as much as necessary to make bond service payments the agency will give the County a high credit score. Thus, the low reserve balance, the budget balancing by one time funding sources-such as grabbing gaming money headed to the airport, the sale of tax liens, etc.-and the low pension levels and ongoing structural imbalances that might otherwise have caused a rethinking of the bond rating are overridden by the fact the County can raise taxes as much as necessary to make bond payments.
Taxpayers might be more comfortable if the bond rating was due to careful financial management, keeping a strong reserve, not depending on last minute finding of money to close a budget gap and holding prudent debt levels. In other words, the good debt rating should not be used to go borrowing more money other than for refinancing. Taxpayers would also be more comfortable if the County’s budget problems were resolved by spending cuts through outsourcing and privatization. County employees might feel differently about that but it is the taxpayers who must be served. After all, they pay for the government.
The Moody’s unlimited taxing power rationale that underpins its high bond ratings can lead governments to get themselves into trouble by borrowing imprudently and not paying enough attention to controlling spending. High credit ratings have undoubtedly led municipalities to go too far into debt and created financial crises when the economy stumbled and tax revenues began to fall. Slashing core government functions has often been required to leave enough money to pay debts. Raising taxes in an already depressed economy can be counterproductive and actually drive tax base away. Moody’s might want to rethink how it weights the "unlimited" taxing power criterion.
Following the directive of CB01 of the 2009 recovery plan and section 508 of the City’s Home Rule Charter, a City Councilman today introduced legislation that would create a six year capital improvement program for the City. The program would create a committee to select and oversee capital projects, the sources and uses of capital revenues and expenditures, and generally how to manage the infrastructure needs that include 2.3 million square feet of facility space and 900 miles of roadway.
The critical question becomes how to pay for those needs. In order to avoid taking on additional long-term debt (the Act 47 plan notes that "Pittsburgh continues to face a debt crisis" and per person it amounts to more than $2,200 but current debt is to be retired in 2024) much of the City’s capital needs have been met on a pay as you go basis out of current revenues, other state and Federal funds (including stimulus money) for an annual capital expenditure of $59.6 million in FY09. Actual City contributions (not counting state and Federal) were low in comparison with other cities like Cincinnati and Toledo.
At the time the Act 47 team recommended that money from freezing the parking tax at 37.5% be set aside for capital, but that has been dedicated to pensions via Act 44. The time frame for the City to identify a method of funding capital needs is coming in the 2013 fiscal year when the plan expires.
When the new hockey arena’s financing deal was announced, politicians were pleased to declare that no direct taxpayer money would be used to fund the facility. They noted the financing would come from the new casino, a state fund supplied by casino taxes, and the team. However, through a lease and sub-lease arrangement, the bonds issued to fund the arena were Commonwealth Lease Revenue Bonds. However, bond underwriters were not confident in the Pittsburgh casino’s ability to pay, so to secure lower interest rates, the Commonwealth-i.e. the taxpayers -would be called upon to backstop the lease. This detail was not very well known until months later. Even when it came to light officials claimed that taxpayers having to ante up was a remote possibility. Well, remote possibility just became reality.
Taxpayers were sent a bill for $5 million to satisfy an unexpected increase in bond interest payments as a result of a rise in the variable interest rate secured on the debt for the new arena. The interest increase happened last fall and was made known to the Governor in December whereupon he inserted the payment into his 2009-10 budget proposal. Unfortunately, it went unnoticed until discovered by the Tribune Review even though the state is scrambling to fill a budget shortfall and still hasn’t agreed to a budget three months after it was due.
The money still has to be appropriated by the Legislature, but a Budget Office spokesman noted that failure to do so "could have long-term negative repercussions…" He also rationalized the lease-sub-lease deal as "a sound financial arrangement in 2007 that was caught up in the crash that affected businesses worldwide."
And that is exactly what is wrong with Pennsylvania policy and one reason it is such a slow growth state. Using taxpayer funds to support a largely private venture should not be considered sound finance. This is the first shift taxpayers will take in paying for the arena. And unless the Rivers Casino comes up with $7.5 million soon, taxpayers may take another big hit quite soon.
The question is; "will the General Assembly appropriate funds to cover bond payments made necessary by the Governor’s ill-advised agreement to put the state on the hook without consulting the legislature and will they demand spending reductions to offset the millions needed to fund the bond payments?"
With less than a month until the Rivers Casino opens in Pittsburgh the slots parlor is facing a $7.5 million payment due this October for its share of the hockey arena debt service. Predictably, casino owner Neil Bluhm is balking at making his first payment so quickly. Instead he insists that his first installment is not due until 2010 at the earliest and possibly not until 2012. Will this be settled amicably or through the courts?