Tag Archives: Legacy Costs

Benchmarking Pittsburgh

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City of Pittsburgh, know thyself. So goes the Socratic admonition.  Here’s some information to help in the self-knowledge. 

 

 

In order to see how the City performs on various measures of local government functions; how much it spends, taxes, how many people it employs, its legacy costs, and its authorities and schools, the Allegheny Institute in 2004 created the concept of the Benchmark City. The Benchmark City allows for an approximation of national norms of city governing by taking four regional hub cities from across the U.S. (Salt Lake, Omaha, Columbus, and Charlotte) and amalgamating them together to form a construct with which to gauge Pittsburgh’s performance.  After undertaking the initial analysis in 2004, we have updated the data in three year intervals and just recently released our 2013 report.

 

What did the 2013 analysis find?  An in-depth analysis can be found in the report, but here is a summary: on a per capita basis Pittsburgh spends more overall, collects more taxes and more non-tax revenue, and spends more on police and fire than the Benchmark City.  On the key measure of general fund spending, the gap between Pittsburgh and the Benchmark City was 46 percent ($1,539 to $1,051). When staffing levels are examined (on a per 1000 person basis), Pittsburgh is higher on total employees, total police, and total fire.  It has higher per capita debt obligations, a lower pension funded ratio, and pays out more in workers’ compensation.  City authorities employ many more people and have much more assets. Meanwhile, school spending and school taxes per person are considerably higher.  Overall, 2013 comparative results were not all that different from those found in the three previous Benchmark City reports as they took snapshots of budget and audited data at specific periods of time.

 

It is fair to say that positive change has occurred since 2004 when we first created the Benchmark City comparing Pittsburgh with cities of similar population size. Remember, that the City had just entered Act 47 recovery status and an oversight board like the one in Philadelphia was being discussed.  Gone are the business privilege and mercantile taxes, the $10 occupational privilege tax, and in their place are the payroll preparation tax and a $52 local services tax.  Act 47 status could be revoked based on the recommendations made by the recovery team in November of last year. 

 

With nearly ten years of benchmarking data on hand it is also possible to look back at 2004 and compare the relative standing of Pittsburgh to the Benchmark City now to see where the gap on certain variables has improved, stayed the same, or gotten worse.  There is good news. Pittsburgh has significantly improved its standing relative to the Benchmark City on pensions and debt.  In 2004, the funded ratio of Pittsburgh’s pensions was 43 percent lower than the Benchmark City.  By 2013, the gap had shrunk to 13 percent. Obviously the 2010 revenue plan crafted locally in response to the mandate by the state under Act 44 had a major impact. In 2004 the funded ratio in Pittsburgh was 51 percent and the Benchmark City 89 percent.  As Pittsburgh’s ratio climbed to 62 percent, the Benchmark City ratio fell to 72 percent, thus the combination of Pittsburgh’s improvement and the Benchmark’s poorer showing worked to close the gap. 

 

Then too, per capita debt, which was 233 percent higher than the Benchmark nearly ten years ago now stands at 64 percent higher.  Pittsburgh’s per capita debt fell by more than $800 while the Benchmark City debt rose by over $300 per person. If there is a strict adherence to reaching the debt to spending goal laid out by City Council (12% of spending taken up by debt by 2020) then improvement will continue in the future. 

 

Total staffing and fire staffing (per 1000 people) have also seen movement in a positive direction. Per capita school spending and per capita school taxes (which are not under the control of City officials in Pittsburgh or any of the cities that comprise the Benchmark, but are critically important) are still higher in Pittsburgh as of 2013, but again the relative standing between Pittsburgh and the Benchmark shrank since 2004.

 

That being said, the City’s per capita spending still remains close to 50 percent higher than the Benchmark,  now as it was did in 2004 and the gap between it and the Benchmark City on taxes is likewise the same (62% higher in 2004, 57% higher in 2013).  There is no noticeable difference in the staffing levels or asset holdings of related authorities which, again, are not directly part of any city’s government but perform services critical to taxpayers and have directors exclusively or partially appointed by city officials.

 

Did anything get worse since 2004?  The student population to city population (students per 1000 people) was 29 percent lower in 2013 compared to 20 percent lower in 2004.  Police staffing was 13 percent higher in Pittsburgh in 2004 and is now 24 percent higher. 

 

In sum, we conclude the Pittsburgh has made progress, but there is still much more work to do.  Whether there is one oversight group or two going forward, they will have to continue pressing the City for more restraint and downsizing of government.

Act 47 Team: Pittsburgh “Completed” 64% of Initiatives

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If an exam with 132 questions was administered at any of the schools in western Pennsylvania and the student correctly answered 85 of those questions, the resulting percentage would be a 64%. On most grading scales that would be a "D": if the student was previously and "F" student, then there is progress.

Unless dealing with bond ratings, letter grades are rarely handed out to cities and towns. As Pittsburgh waits to hear if the state will release it from Act 47 distressed status, the team charged with recovery (in place since 2004) published its rescission report that shows what Pittsburgh has accomplished: debt levels are down, there is labor peace, a trust fund has been established for retiree health care liabilities, there is a financial management system in place, and the City has pledged a revenue stream to deal with pensions. Just as those successes are heralded by the coordinators, they also express "continuing concerns" on most of those big ticket items: dealing with escalating benefit costs, funding capital needs, and executing collective bargaining agreements in the future. Unlike 2007, when the City petitioned to get out of Act 47, the recovery coordinators are now in favor of rescission.

The team shows 132 initiatives that have come from the recovery plans and funnels them into one of four categories:

  • Completed: Action has been achieved or achieved to date and may require a recurring action to remain complete. (85 or 64% of initiatives)
  • In progress: Demonstrable progress made to achieve completion, but the action is not complete or it may require a long term effort. (38 or 29% of initiatives)
  • Not applicable: Opportunity has passed or it is out of the City’s control. (9 or 7% of initiatives)
  • Incomplete: No demonstrable progress has been made. (0)

Obviously there is a lot of leeway in this typology, even realizing that if DCED would accept the status of each initiative as gospel only 64% of them are actually done to the point of completion (or how something that is "completed" would require "recurring action"). If DCED looks at the initiatives "completed" or "in progress" as "good" then the City has made positive strides on 93% of the work.

But there are some head scratchers for sure. The Act 47 team considers the City’s establishment of a debt policy "completed"; whether the City sticks to it is another matter altogether, hence the recurring or further action. Same holds for the three decades long promise of money to the pension fund. Does anyone believe that "[pursuit] of City-County consolidation of departments" is "in progress"? Or that the City is not "incomplete" on any of the initiatives?

In order to have distressed status removed, a municipality has to have a positive operating fund balance for at least one year, have eliminated accrued deficits, retired obligations that were taken on to eliminate the deficit, and get the recommendation of the coordinator. Pittsburgh has satisfied the first two, never had the third, and has the fourth. It also has the situation where even if Act 47 goes away the oversight board stays in place.

Could Pittsburgh Shed Act 47 Status?

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Close to five years ago the City of Pittsburgh asked the state to remove it from Act 47 distressed status. At that point the City had been in Act 47 for just under four years. If the request was denied, the City asked that a new recovery plan be written telling what should be done in order to emerge. That plan was written in 2009 and focused heavily on the City’s legacy cost issues.

With articles today reporting that the Act 47 coordinators wrote to the DCED secretary that Pittsburgh should have its distressed status removed (here and here) Pittsburgh would be the seventh municipality to leave the Act 47 fraternity. The most recent was the Allegheny County municipality of Homestead, which came out in 2007 after spending fourteen years under state watch. The three preceding Homestead were all Allegheny County towns: North Braddock (out in 2003 after close to eight years), East Pittsburgh (out in 1999 after seven years), and Wilkinsburg (out in 1998 after ten years).

The statute leaves the determination to the DCED secretary. A public hearing has to be held, and the law points out several factors shall be considered including the monthly coordinator reports, that accrued deficits have been eliminated, that obligations issued to finance the municipality’s deficit have been retired, and that the municipality has operated under a positive operating fund balance for at least one year. The 2009 amended recovery plan noted that it would give "…the City a clear strategy to address the remaining obstacles to full fiscal recovery [and] completing these steps will allow Pittsburgh to leave Act 47 oversight".

No Big Surprises in City Budget

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An annual growth rate of about 3% per year in expenditures; no increases to existing taxes and no real proposals for new types; still wrestling with legacy costs such as debt, pensions, post-employment healthcare, etc.

That basically sums up what came from the release of the City of Pittsburgh’s 2013 budget and five year financial forecast submitted to the oversight board last week. The City expects to finish 2012 with expenditures of $459 million, growing to $469 million next year. Operating departments and debt service will be higher, but pension/health benefits/workers’ comp will be down slightly. In 2013 and the years to come operating expenses represent about 50% of total expenditures, the other half going to the aforementioned non-operating costs of pensions/health/workers’ comp and debt service.

The biggest adjustment for the City, like the County and the other municipalities, will be adjusting the property tax rate when new values are certified. The City’s rate held steady at 10.8 mills when it was adjusted following the 2001 reassessment (the City used to tax buildings at one rate and land at another) and was really the only tax untouched by the reforms of the Act 47 and oversight years in which new taxes were created, others eliminated, and some rates defined in state law.

Golden State Municipality Hopes Chapter 9 Brightens Future

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Stockton, CA has a population of just over 291,000 people, making it slightly smaller than Pittsburgh. Located in the central part of the state, the city has just filed for Chapter 9 municipal bankruptcy. Unlike Pennsylvania, which has Act 47, oversight boards, and a receiver in the capital city of Harrisburg, California allows for bankruptcy filings without many conditions. California has a mediation process, and that is what just wrapped up for the City of Stockton.

Satisfying the various criteria to file (state has to explicitly authorize, filing must be done by a municipality, filing has to be voluntary, has to be insolvent, and has to have explored other options) Stockton has approved a "pendency plan" that describes how operations will continue during the filing. That plan states "…the city is insolvent. Now, only the difficult process of restructuring its long term financial obligations and personnel costs will enable the City Council to protect the community and make sure the City emerges from this financial crisis as a viable, sustainable institution".

Stockton has made significant reductions in headcount, with public safety employment falling 25% and non-public safety positions down 43%, bringing total general fund employment to 930, down from 1,350 in the 2008-09 fiscal year. In comparison, from the first Act 47 plan in 2004 to the revised plan in 2009, Pittsburgh’s headcount fell 10% (there were over 400 layoffs in 2003, prior to the Act 47 declaration).

A Funding Proposal to Alleviate PAT’s Financial Woes

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By now it should be common knowledge that the source of the Port Authority’s (PAT) financial problems stem from decades of labor contracts containing excessively generous pay and benefits-especially retirement related benefits.  Legacy costs are crippling the transit agency. Indeed, unfunded liabilities for non-pension retiree benefits surpassed $800 million in 2011. In FY 2012, PAT budgeted $33 million for pensions and $34.3 million for retiree health benefits, almost 20 percent of total spending.  Ironically, the recent and pending bus service and employee cuts simply raise the legacy costs as a share of total spending.

 

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Solving PAT’s Financial Woes: State Problem or Local Issue?

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The ongoing saga of the financial morass at the Port Authority (PAT) has developed an interesting twist.  Governor Corbett, through a spokesperson, has responded to PAT’s entreaties for a hefty boost in money from the Commonwealth to cover an impending $64 million deficit by telling PAT that, “they should look to their own resources to come up with a solution.” 

 

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PAT Retiree and Employee Concessions Are Critical

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Right on cue, the Port Authority has rolled out the latest doomsday scenario of service cuts and layoffs. No doubt the huge projected budget shortfall, if unaddressed, will require enormous cutbacks. But as sure as robins returning in the spring, there is no talk of addressing the underlying causes of the financial disaster that PAT has become.

Whipping up rider and business sentiment in an effort to persuade Harrisburg to increase its subsidy-despite the looming $700 million state revenue shortfall for the current budget year-is the overused and cynical modus operandi. Where are the brave elected leader voices demanding that retirees with their enormous legacy costs and current employees with their $25 per hourjobs with Cadillac benefits and efficiency killing work rules make some sacrifice to save jobs and bus service?

That’s not how the game is played in Pennsylvania. Rather, it’s lobby for more money to feed the voracious maw of employees, past and present. And when Governors and County Execs manage to get more money from the state as happened so many times in the past, especially under the previous Governor, what is the lesson learned by employees and retirees? Hold out, make no concessions, more money will be coming from the state or Feds. If the state blinks in the current round, the unions will have their convictions reinforced and the game of chicken will be repeated next year.

The state should set an amount of subsidy per rider, adjusted for inflation of no more than the 2011 level and keep it there permanently.

On the other hand, the state shares a lot of responsibility for PAT’s financial condition by caving in to union demands in the past, by refusing to eliminate the right to strike and being far too deferential to requests for funding for money pits such as the North Shore Connector and by permitting the monopoly status of PAT to continue when competition was sorely needed. It can begin to take some responsibility for its failure to prevent the problems that have being brewing for years. Change the law so the Port Authority can declare bankruptcy-the only way it can deal with its massive and growing legacy costs. Appoint an independent board including several non-Allegheny County members to oversee the organization. Remove the monopoly to allow other carriers access to the County and eliminate the transit workers right to strike.

In the meantime, concessions must be forthcoming and permanent. Some additional monetary help might be granted on a temporary basis if the retirees and employees make a strong, good faith effort. But the additional help must be accompanied by other legislative actions including those recommended above. The Commonwealth needs to take bold steps to deal with PAT and not kick this can down the road again.

Some ABC’s of the School Budget

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On the heels of a Citywide referendum that approved a tax hike for libraries (1/4 of a mill) and the 1 mill increase by County Council Tuesday night, residents of the Pittsburgh Public School District (City of Pittsburgh and Borough of Mt. Oliver) can be relieved that the 2012 budget contains no tax increase. But they should be concerned that the trends that have plagued the District show no signs of abating.

Enrollment continues to fall; it stands at 25,031 for the 2011-12 school year but the District is planning for additional school closings, realignment, and possible additional layoffs in 2012. And the same legacy cost issues that have impacted other local governments in the region are present in the District. The superintendent’s budget message points out that "despite [headcount] reductions…benefits and pension costs will rise by $31 million over the next four years. From 2004 through 2012, our pension cost per employee increased by 82 percent.." Health care costs fared no better, and both outpaced inflation.

The budget has $508 million in revenues and $529 million in expenditures, requiring the District to dip into the fund balance. It is interesting to note two facts on the revenue side of the equation: first, the local-to-state split in funding is 53% to 46% and second, based on the assessed value of real estate characteristics outlined in the budget (taken from the state equalization board) residential value accounts for 57% of total assessed value. Of the 43 districts in Allegheny County, nine others besides Pittsburgh have less than 60% of their total assessed value represented by residential property.