Tag Archives: Oversight

A New Federal Urban Agenda?

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A Pittsburgh newspaper whose op-ed writers are hopelessly enamored of Federal government programs to solve any and all problems now think it would be just grand if the Federal government would launch a new urban agenda. One has to wonder where the writers have been.

Does anyone need a reminder of all the efforts the Federal government has launched over the decades to help cities? Public housing funding, block grants, all sorts of welfare programs, dollars for education programs, major financial assistance for mass transit infrastructure, and so on and so on.

Did all those programs stop Detroit or Philadelphia or Stockton, California and countless other cities from developing very serious or crisis proportion financial problems and massive loss of population? No. The cause of the problems can largely be laid at the feet of horrendously counterproductive policies by the local, state, and national governments. Public sector unions, a breakdown of law and order (in many cities), a collapse in public education quality as a result of educational folly masquerading as reforms (including a refusal to allow publicly funded voucher programs) and political correctness run amok.

The argument that people moved out of cities for greener pastures because they were induced to by Federal policies is getting stale. People left because living in the suburbs was more attractive than staying in the cities. Lower crime, better schools and all the reasons people want to be safe and comfortable.

Perhaps the original exodus was initiated by demographic and social phenomena, but there can be little doubt that the headlong rush toward public sector unionization, the attendant sharp rise in expenditures and tax burdens, runaway crime problems and rapidly decreasing academic performance in public schools encouraged more people to leave. Many cities became increasingly dominated by one party rule-the party being one of statist and government growth inclination and a party with practically no patience with free market capitalism. An almost guaranteed slow downward spiral began in many of the currently worse off cities. The worse they became the more Federal and state financial assistance was forthcoming in some form or other. Economic development, redevelopment, infrastructure, housing, education, social welfare payments, early childhood education, learning programs, jobs programs-the mind boggles.

And still, Detroit bankruptcy happened, Philadelphia is scrambling to open schools this fall because of a lack of money, Pittsburgh is under state oversight and is likely to remain so for a long time, Chicago is closing schools at a breakneck pace because students have abandoned city schools and it has gigantic pension problems looming.

These wounds have been self-inflicted by politicians and policies that can only be described as progressive, liberal, statist, and politically correct. Politically correct is a polite term for trying to force adherence to certain acceptable behaviors and thoughts through intimidation, ostracizing, or attempting to shame or embarrass anyone not subscribing to the latest fad in liberal dogma-dogma that gets more bizarre by the month. Little wonder thinking people want no part in it.

The worst part: calling for a new Urban Agenda is just a dreamed up politically correct scheme to avoid dealing with disasters created by earlier statist schemes.

Is There a Catch in Receiver Plan?

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The Duquesne School District is about to move into the next step of school district financial recovery under state law as the Secretary of Education has just asked the County Common Pleas Court to appoint the person who has been acting as chief recovery officer to become a receiver under Act 141 as the Duquesne School Board opted to reject the plan to send the remaining students of the District (all of elementary age) to neighboring districts. That request has been made on a voluntary basis (several have already said they won’t) so there is a possibility that a state mandate would come to pass.

The court does not have to take the person nominated by the Secretary to be the receiver; it can name its own or ask for an alternate. Whoever becomes the receiver essentially becomes the school board, except the receiver cannot levy or raise taxes. The receiver has the power to implement the recovery plan, communicate with the state on a quarterly basis, make sure employees of the district are following the plan, tell the school board to raise taxes, and go to court to get a directive to get employees to comply with the recovery plan.

The act says that receivership is to terminate three years after the receiver is appointed unless the state petitions the court for an extension. Even after receivership is terminated the district remains in oversight from the state for a five year period, most likely to ensure that the district does not slip back into distress.

Will the State Act on Allegheny County’s Mass Transit Situation?

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The wolf is sitting on the doorstep at the Port Authority of Allegheny County (PAT).  A little over six months from now the agency will be staring into the abyss of a $64 million budget shortfall for the fiscal year beginning July 1, 2012. 

 

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City Wants to be Free

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After presenting the 2012 budget to Council, the Mayor raised the idea that the City is ready to be released from state oversight. Now whether the Mayor meant Act 47, or the oversight board, or both is not clear from the newspaper article or the Mayor’s press release (which does not mention the request). The Mayor’s spokesperson had stated the City could function on its own in mid-October. Plenty of elected officials, both from the state and the City, weighed in on the Mayor’s statement.

Recall that the City formally petitioned DCED for removal from Act 47, a petition that was denied in July of 2008. There was a chance that the state was moving to eradicate the oversight board early in its tenure, but it is still in place and several new appointments have been made to the board.

In denying the Act 47 request, the DCED Secretary at the time noted the City had several issues to address:

  • Debt service requirements that exceed 20 percent of the City’s operating budget and will not decline until 2018
  • Unfunded pension liability currently at $467 million
  • OPEB liability that ranges from $220 million to $320 million
  • Workers’ compensation liabilities have remained high and are projected to reach $24.7 million by 2012

So what do things look like now, more than three years later? We know that debt service is still around 20% of the budget ($87 million for 2012); as a result of the pension bailout and asset infusion unfunded pension liabilities stand at $381 million; OPEB liabilities are now $488 million; and workers’ comp costs are down slightly, at $21 million for 2012.

Harrisburg Council to Act 47 Plan: Get Lost

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Harrisburg’s City Council has refused to approve a state oversight plan to deal with Harrisburg’s financial distress threatening the loss of any state aid and enormous repercussions from bond holders. Council members voting against the plan did not want to sell assets and were upset that the state’s plan did not include a commuter tax or local option one percent sales tax-which it was claimed would raise $37 million a year. In a city of 49,000 that is highly unlikely. Allegheny County, which is 25 times larger in terms of population, collects about $160 million per year with its one percent local tax. Obviously, the Council members who were positing the $37 million figure were contemplating a countywide tax-something the plan did not propose or would not have proposed.

As we have seen in other communities that dig themselves into financial holes, it is as predictable as night following day that local officials will look to the state or their neighboring communities to bail them out.

Legislators in the state capital have shown little patience with Harrisburg’s imprudent behavior and lack of resolve in dealing with its problem. Nor does the county seem eager to help. The question is: since this the city where the seat of state government resides, will the state appoint a city oversight group with total power to manage and direct city finances? Is there any alternative given the recalcitrance and lack of seriousness of the Council?

Act 47 Prescribes Remedies for Reading

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Though separated by a distance of over 200 miles and a population difference of more than 200k people, Pittsburgh and Reading now share the distinction of both being Act 47 financially distressed communities. Late last week Reading’s Act 47 plan was published on DCED’s website.

Reading has been operating at a deficit since 2007, and the recovery team recommends a variety of solutions related to workforce (a three year pay freeze, employees pay more for health benefits), turning services over the Berks County, and exploring various revenue raising options.

A brief snapshot of three indicators in Pittsburgh-which has been in Act 47 since 2004-and new entrant Reading shows that Reading has fewer employees (on a per 1000 person basis), its ratio of fringe benefits to salaries and wages is lower, and so too is its per capita debt level.

Indicator

Pittsburgh

Reading

Headcount (FTE per 1000 people)

10.6

8.2

Ratio of Fringe Benefits to Salaries

$0.54

$0.30

Debt (per capita)

$2200

$1802

While Reading might find encouragement that its situation might not be as bad as Pittsburgh’s (which raises questions of its own since Pittsburgh has been in for six years and has a separate oversight board to boot) it should be known that only six municipalities have emerged from Act 47 since its inception. For every one community that has exited there are three still in fiscal distress.

Another Entrant into Act 47

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Does this sound familiar? A city with "year end structural deficits that were addressed by one-time solutions; debt burden in excess of 10% of its general fund revenues; and a stagnant tax base that raises serious concern about the ability of the City…to generate the revenue necessary to support core municipal services".

It could be Pittsburgh, or one of any number of towns in the Mon Valley, but it turns out that the description is of Reading in Berks County, the Commonwealth’s fifth largest city (population of 80k according to the most recent Census estimate). Reading was just granted entrance into Act 47, a classification of municipal distress that holds 18 other cities currently and from which only 6 have emerged.

Four of the state’s ten largest cities are in some type of financial oversight, either Act 47 (Scranton and Reading), an oversight board (Philadelphia), or both (Pittsburgh). The Department of Community and Economic Development (DCED) has completed its initial assessment of the City and found that its per capita and median household income was lower than other similarly-sized cities as well as lower than Berks County and the Commonwealth.

How long the City will remain in Act 47 is anyone’s guess. Some have been in since 1987 and are operating under second, third, or even fourth revised plans. Reading is just beginning its quest for financial solvency.

Act 47 Report Errs Badly with Tax Recommendations

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City County BuildingPittsburgh’s Recovery Team unveiled its amended Recovery Plan last week, the latest step in the City’s tenure under Act 47 distressed status that began in December of 2003.  The amended Plan came about after the state denied the City’s request to exit Act 47 in 2008.  This Plan, with its five year financial projections and recommendations, basically means that the City can count on being under state watch until 2014 at the earliest. 

 And while the Plan does a fairly good and thorough job of reviewing the City’s financial situation and problems, it makes a very serious mistake toward the end of the narrative by mentioning the possibility of increasing the Local Services Tax (LST) from $52 to $145 and forestalling the state mandated drop in the parking tax.  Just mentioning these as possibilities has allowed City officials to latch onto them as desirable alternatives to be explored. Now enormous amounts of time and energy will be wasted trying to persuade the Legislature to make the necessary statutory changes to permit the City to adopt the tax changes.  

 Already the Mayor has made comments about approaching Harrisburg to give the City authority to raise the LST and hold the parking tax at 37.5 percent rather cut it to 35 percent as required by law.  The arguments are sterile and will fall mostly on deaf ears. Five years ago the Legislature gave Pittsburgh substantial new taxing power with the higher LST and the payroll preparation tax.  In addition, the City was allowed to keep $4 million in RAD money that was being transferred to the School District and now receives 0.25 percent more in earned income tax the 2004 legislation shifted from the schools to the City.  Pittsburgh also receives gaming dollars and will get more when the casino opens.

 Then too, in 1994, the General Assembly created the Regional Asset Tax for Allegheny County (one percent local add-on sales tax). Pittsburgh is a major beneficiary of that tax, receiving direct support to be used for tax relief and through the tax’s support of regional assets previously dependent on hefty City payments such as the zoo, the aviary, museums, libraries, professional sports stadiums and so on. 

 The City collects an amusement tax and the nation’s highest parking tax from commuters and visitors. Moreover, nonresidential and commercial properties in the City pay a large share of real estate tax revenues collected by Pittsburgh and the School District-this in addition to the payroll preparation tax businesses pay. Thus, the notion that Pittsburgh is entitled to grab a bigger share of its revenue from nonresidents and the business community is wrongheaded to say the least. 

 With all the traditional taxes as well as the legislatively created new tax sources and greater revenue one thing has remained constant: the City has not been able to bring spending down on a consistent basis to a level matching its revenues.  Debt and legacy costs have been allowed to grow out of control through excessive generosity in union contracts and an unwillingness to clamp down effectively on spending growth in general.

In the Act 47 Plan, the coordinator lays out the extent of the ongoing problems. Pittsburgh must deal with its unfunded pension liability ($523 million before the market downturn) and general obligation debt ($723 million) along with unfunded liabilities associated with other retiree healthcare benefits ($320 million) and the unfunded long-term cost of workers’ compensation ($128 million).  Combined those four items total $1.7 billion, roughly what the City would spend in its general fund budget over a four year period.

 To combat the legacy costs the Act 47 Plan recommends putting more money aside annually ($10 to $14 million above the $48 million currently set aside), starting a trust fund for retiree health care, avoiding additional borrowing, and monitoring workers’ compensation claims and treatment for those on compensation.  While there is no shortage of ideas on how to reform the local government pension system in Pennsylvania and how reform might benefit Pittsburgh’s predicament, the Recovery Plan tries to keep its solutions “under current statutory constraints” without relying on a statewide overhaul of employee benefits.

 Other major points in the Act 47 Plan:

 

  • City employment has fallen 10 percent since 2004: In 2004 the original Recovery Plan noted that “reductions in the size of the Pittsburgh workforce can be an important contributor to fiscal recovery, so long as this goal can be achieved without severe, adverse service impacts”.  It makes sense: an employee reduction saves on wages, stops the accumulation of fringe benefits like pensions, and eliminates the chance of a workplace injury that adds to workers’ compensation.  As the Allegheny Institute studies have shown, Pittsburgh has had and continues to have significantly more employees per 1,000 people than comparably sized U.S. cities. So there is room for further reductions.
  • City workers still enjoy good benefits: “City workers receive health, retirement, and paid leave benefits superior to private sector norms and competitive with public employer standards”.  It is important to note that while City workers are receiving defined benefit plans the private sector and other state and local governments (including the state of Pennsylvania) have greater access to defined contribution plans.  Baseline budget projections show that fringe benefits are expected to grow 27.5 percent from 2009 to 2013. 
  • To that end, the City will pay $93 million in FY2009 just for retiree benefits:  Counting pension fund contributions, debt service on pension bonds, retiree health care (eliminated for those hired after December 31, 2004), Medicare, and Social Security, the City will pay about one-fifth of its budgeted expenditures toward retiree benefits. 

 In sum, despite the tax overhaul in 2005 which netted the City additional revenues and even though the Recovery Plan notes that “from 2005-2008 the City’s general fund revenues outpaced the general rate of inflation” there still is not enough money to meet the City’s spending needs. 

 According to the Act 47 plan 74 percent of the City’s general fund outlays are tied to employee-related expenses. The Plan also shows that the reduction in workforce has not resulted in a “severe or adverse” impact on services and that City employees are richly rewarded: especially on benefits that are superior to those enjoyed by other workers.  And now, by mentioning the possibility of tax increases on nonresidents (despite the fact that the Plan earlier said that it would work within existing statutory constraints) City officials, residents, and employees will focus on how the state can once again step in to alleviate their revenue problem. 

 A far better approach to solving Pittsburgh’s problems would be to embrace the Allegheny Institute’s recommendation for general fund spending: adopt, by home rule charter amendment, a strict spending cap that holds per-capita inflation adjusted spending constant, or even better, holds total spending flat for at least five years.  That would radically alter the five year expenditure trajectory and could deliver a nice surplus to be set aside for legacy costs and possibly allow for tax reductions.

 In short, Pittsburgh simply must address the profligacy of its past spending head on. The City cannot expect the state, with all its own problems, to keep riding to the rescue.