An old tax idea is resurrected

Summary: Pittsburgh City Councilman Ricky Burgess recently introduced a bill that would levy a 1 percent tax on consumers of higher education and medical services within the City of Pittsburgh.  This is similar to a bill introduced in 2009 which only sought to tax higher education.  That bill never made it out of the council and resulted in some of the city’s nonprofit institutions negotiating a payment-in-lieu of taxes (PILOT) agreement.  At the time, the city was in Act 47 financial distress status and state oversight and was grasping for any revenue stream it could find. 

Thirteen years later, the excuse is infrastructure repairs in light of the bridge collapse over Fern Hollow.  It remains to be seen if this tax proposal makes its way to ratification or if the purpose is to once again extort money from the educational and medical institutions that call Pittsburgh home.  A resolution to move toward PILOT agreements was introduced to council one week later. 

Comparing the proposals

In 2009, then-Mayor Luke Ravenstahl proposed instituting a post-secondary education privilege tax of 1 percent on tuition.  As Policy Brief, Vol. 9, No. 69, noted at the time, “The Mayor’s plan derives from Act 511, the state law granting permission to municipalities the right to tax certain privileges.”  The city had a business privilege and occupational privilege tax and by 2009 those were replaced by the payroll preparation tax and the local services tax.    And since going to college in the city was also a “privilege,” it should be taxed as well.  But as was argued in that Brief, those privilege taxes were based on earnings and simply not one’s presence. 

The Burgess proposal also contains a “medical facilities user” privilege component. This would tax medical services rendered in the city at 1 percent—again taxing the presence of someone using a medical facility, not on any earnings. 

In both proposals, the city Treasurer’s Office would collect the tax and administer any fines and penalties.  The only difference is that, under the new proposal, city taxpayers subject to the tax would be eligible for credit against their wage taxes, so this would primarily fall on non-city residents—those who don’t vote for city officials.

State law authorization

As mentioned above, Act 511, known as the Local Tax Enabling Act (53 PS 6924), provides a list of certain items/activities municipalities are forbidden to tax.  There are 17 such prohibitions (Policy Brief, Vol. 9, No. 75).  However, taxing tuition and medical facilities usage are not among the restrictions.  After the 2009 proposal, there was an attempt to amend Act 511 to explicitly ban the ability to levy, assess or collect a tax on higher education tuition.  There was also an attempt to amend the Tax Reform Code of 1971 to do the same.  Neither attempt was successful, abandoned when the tuition tax failed to advance in City Council. 

Pittsburgh’s financial position

In 2009, the city was in Act 47 financial distress and under financial oversight and looking to increase revenues wherever possible.  But as we noted in a report and subsequent Briefs, the most recent, Vol. 19, No. 25, was released before the pandemic, comparing Pittsburgh’s spending with a composite benchmark city, Pittsburgh has been well out of line with areas such as personnel, spending and legacy costs.   

That Brief, looking at 2018 data, showed Pittsburgh had declining overall population and declining school enrollment.  Pittsburgh’s total city revenue per capita was 50 percent higher than the benchmark city ($2,111 vs. $1,406) with per capita total taxes almost 70 percent higher ($1,611 vs. $953).  But more importantly, per capita total expenditures were 51 percent higher ($2,238 vs. $1,478).  These gaps have persisted since the first benchmark study in 2004. 

Pittsburgh’s workforce has also been much higher than the benchmark city.  When looking at total employees per 1,000 residents, Pittsburgh came in at 11.0 while the benchmark city had just 7.5—a 47 percent difference.  Similar gaps exist for police (40 percent higher) and fire employees (38 percent higher). 

The implication is simple: work to lower costs for city operations and there should be enough money from existing sources to manage the infrastructure requirements of the city.

The pandemic was difficult on all aspects of life; government finances were no exception.  However, the federal government pumped stimulus money to state and local governmental entities to assist with any shortfalls.  In Policy Brief, Vol. 21, No. 36, the stimulus funds were analyzed. 

Pittsburgh, by its size, did not qualify for a direct CARES Act distribution but did receive $6.2 million from Allegheny County’s share.  In the American Rescue Plan, the city received a more generous distribution of $335.1 million.  A task force recommended how to allocate the money and decided to designate $59.9 million for the capital budget; infrastructure repairs from that money include $2 million for a pedestrian bridge in 2023.  The 2022 capital budget has $7.3 million for projects where “bridge” is mentioned. It is also worth noting that the U.S. Department of Transportation has pledged $25.3 million to the reconstruction of the Fern Hollow bridge, estimated to be more than enough to cover costs. 

New resolution

This proposal has met with resistance in the education and health care communities.  As mentioned above the 2009 proposal never made it out of the council but did result in a PILOT agreement that lasted for a few years.  Is this latest incarnation another attempt at coercing money out of the hospitals and universities? 

It must have been, given that one week later a separate resolution was presented to council that would not directly tax tuition or medical expenses but would instead direct the Director of the Finance Department and the City Solicitor to determine the fair market value of land and buildings owned by tax-exempt institutions and what those institutions would be paying in payroll preparation taxes if they were for-profit businesses and use that to determine the starting point for PILOT negotiations.

Based on the 2022 certified assessment roll the city has $31.8 billion in taxable and exempt value with the latter accounting for $11.6 billion (36 percent) of the total.  There are 142,642 parcels in the city. The resolution notes that an estimated 500 parcels with an assessed value of $3.7 billion are owned by colleges and hospitals.  If subject to property taxes, that amount would generate around $33 million for the city based on its millage rate and special levies for parks and libraries.

The findings are to be delivered within 60 days of the effective date of the resolution.  PILOT agreements are to be negotiated by the mayor (or a designee), the council president and the City Controller (or designees if the mayor approves) and be based on the value of 50 percent of the real estate holdings or 75 percent of the payroll preparation tax liability or “a combination of the two” of a tax-exempt institution.

In the 2022 operating budget approved prior to these proposals the city expects $151.4 million in property tax revenue, $66.1 million in payroll preparation tax revenue and $0.4 million in nonprofit contributions, which the budget notes does not include money from “the city’s large multi-billion dollar ‘Institutions of Purely Public Charity’.”

Conclusion

While the Burgess proposal may be moot, it was a cudgel used by a councilman to put pressure on nonprofits operating in the city.  One way to curtail such future proposals is to amend Act 511 to prohibit such taxation.  The Legislature needs to add to the list of prohibitions the inability to tax someone based on their presence.  They failed before; they must be more diligent this time.  If Pittsburgh does it, every small town with a college will seek to do the same.

Pennsylvania already has a reputation as a tax-unfriendly state and it is inhibiting economic growth, population and economic development.  Allowing municipalities the ability to tax someone for attending higher education or a health care visit would send a terrible message and slow progress even more. 

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.

Pittsburgh teams fight back: ineffectively

Summary: Pittsburgh’s major sports franchises banded together to pay for a study that purports to show how important the teams are to the economies of the city and region. Unfortunately, the study is not convincing—nor is the teams’ commentary offered in its support.

______________________________________________________________________

Results of the PricewaterhouseCoopers study were released in summary form to at least one newspaper –the Post-Gazette—that reported the findings. As best as can be determined that summary is all anyone outside the preparer of the study and the teams have seen.  The full report with statements defining methodology and data sources has not been made public—no doubt because team information would be revealed. Thus, the principal finding of direct and indirect employment of 10,100 annually and a five-year employee wage total of $3.2 billion must be taken with a hefty degree of skepticism. And the implied claim that the teams are major economic generators with $6 billion in direct and indirect spending over five years is unsubstantiated.

Simply stated, whether the real number is anywhere close to $6 billion is questionable since we are not allowed to see the numbers for direct spending by the teams and, just as importantly, what is included in those figures.  Multiplier effects for recreation spending are very low or non-existent. Moreover, set alongside a truly important economic driver in the city, the economic impact numbers claimed by the teams as reported in the study are not impressive.

For example, Carnegie Mellon University’s 2017 financial report shows an annual payroll of over $600 million and annual expenditures in excess of $1.1 billion.  So, in five years its direct payroll would be $3.6 billion and since a great share of revenue at the university is from outside the city and region, the multiplier effects on Pittsburgh would be far greater than the sports teams’ revenue that comes in large part from ticket sales and concessions.  The University of Pittsburgh, UPMC and Highmark all individually swamp the teams’ combined local economic impact.  No doubt many larger local companies with hefty exports from the region would as well.

One spokesperson took it upon himself to make somewhat disparaging remarks about other cities across the country in response to criticism that money spent on sports events is money not spent elsewhere in the region.  He was quoted in the Oct. 29 Post-Gazette article as saying, “Yeah, they’re dispersed in Tulsa and El Paso and Fresno, and they’re dispersed in other places that no one’s ever heard of that are twice as big as Pittsburgh.”

The teams, he asserted, give the Steel City a cachet that many other cities don’t have.

“I believe strongly having these three sports teams has significant economic impact that allows us to punch over our weight as a city in competition with other cities and brings intangible benefits that separate us from larger cities, similar cities this size, cities that have sports teams and, most definitely, cities that don’t have sports teams,” he said.

Well, this person might want to consider that since 1990 Tulsa’s private-sector jobs count has climbed 38 percent through September 2018 while Pittsburgh jobs are up only 16 percent during the period.  Or that El Paso’s jobs are 48 percent above the 1990 level.  Alternatively, he might want to think about Pittsburgh’s population loss since the stadiums were built. From 2000 to 2017 the city has dropped from 334,563 to 302,407 residents—a decline of almost 10 percent.  Allegheny County recorded a loss of nearly 60,000 residents over the period.   Meanwhile, Tulsa and El Paso have seen population growth with El Paso up a hefty 22 percent.

Many other cities with no major sports franchises have seen substantial population gains as well, including Austin. In 2000 Austin at 656,000 residents was twice as big as Pittsburgh. But in 2017 Austin’s population had swelled by 49 percent above the 2000 level to stand at 950,715. Austin is now three times the size of Pittsburgh. Consider too Greensboro, N.C., where population rose from 223,880 in 2000 to 291,223 (30 percent) in 2017 and is within 11,000 of Pittsburgh’s population.

So perhaps the teams’ spokespersons should find another approach to bragging about how important the teams are to the economy, especially with the looking down-the-nose disparagement of cities that do not have sports teams.  “No one’s ever heard of those towns,” he quipped. Yet amazingly somehow they continue to do very well.

Indeed, the city that best mirrors Pittsburgh in population change is St. Louis where population fell from 348,000 to 308,000, a drop of 11 percent. Until 2015, St. Louis had football, hockey and baseball franchises including the 11-time World Series champion Cardinals—who outdrew the Pirates by nearly two million attendees in the 2018 season.

Finally, the claim that 4 million people come to the city to attend sports events and concerts each year at the facilities is somewhat deceptive. The figure actually represents attendance at events, not individual persons. Large numbers of season-ticket holders and repeat visits by other people in the city, county and region account for much of the attendance at games. And some attendees no doubt go to football and baseball games as well as hockey games. Not counting city residents, the number of individuals making visits to the city for sports events and concerts is likely to be well under half-a-million and perhaps even a quarter-million.  Season tickets are expensive.

In short, comments by team spokespersons about the study are largely self-serving and overblown rhetoric and seemingly unaware of how well other cities are doing despite not having major league sports.  They might also want to look at Buffalo and Detroit as examples of what sports teams cannot do for a city. Clearly, there are many factors far more important for economic growth than sports.  Business climate, taxes, the regulatory environment and costs and burden of government come to mind.

The Stadium Authority that Will Not Go Away

Summary: The Stadium Authority, which should have gone out of business with the demolition of Three Rivers Stadium, continues to exist.  And now it plans to extend its life to 2049.  This Brief explains why that extension is very bad public policy.

________________________________________________________________________ 

Nearly two decades after Three Rivers Stadium was imploded and removed from the landscape, the authority created in 1964 to build and manage the stadium is still in business.  It is useful to recall the points made about the ongoing existence of the Stadium Authority that were made in our Policy Brief of November 15, 2001.

Quoting that Brief: Remember that the Pittsburgh Stadium Authority was supposed to go out of existence once Three Rivers was demolished? In light of the fact that the Sports and Exhibition Authority (formerly the Auditorium Authority) had taken over the construction and ownership of the new stadiums, why would a Stadium Authority be needed? Yet here we are nine months after the disappearance of Three Rivers and the Stadium Authority is still very much with us. And, we also learn that the Authority continues to own land on the North Shore and is a principal player in any potential development of the property between the new stadiums.

 The obvious question is why this happened. It is hard to see any reason other than a desire to maintain some City control of the North Shore property.  Stadium Authority members are appointed exclusively by the City.

 As late as October 25 (2001), the City’s website carried the statement that “the Authority’s existence and function will conclude with the planned demolition of Three Rivers Stadium.” Obviously, that was written prior to February 2001(when Three Rivers was demolished—added for clarification of timing.)

 What happened to the plan to terminate the Authority in 2001? And here we are 16 years later asking the same question; why does the Stadium Authority still exist?

Today the Authority still owns parking facilities on the North Shore. It has no staff of its own opting instead to share personnel, including the director, with the joint City-County Sports and Exhibition Authority (SEA).  Purportedly, the Authority’s sole remaining function is to use revenues from its parking facilities to pay off bond debt associated with the facilities. Through an agreement with City Council in 2013, it was to go out of business in 2028 when the 15 years remaining to finish paying off the bonds for the garage on General Robinson Street would have been completed.

But wait. Owing to a plan to refinance the garage debt in a joint arrangement with SEA, the Stadium Authority board just voted to extend its life for an additional 21 years through April 5, 2049.  The relevant question here is: Which decision actually came first, to refinance or the decision to extend the life of the Authority—which required the extension vote they just took? Extending the Authority’s life beyond 2028 needed a plausible reason. How do they justify the vote to extend?  By refinancing the bonds, not only for lower rates but to get a longer maturity.

One would have thought the refinancing that extended pay off out 30 years should have been mentioned to the Mayor and City Council before any effort to refinance was undertaken or any deals made.  After all, in 2013 then Councilman Peduto, opposed a proposal by the Authority for a 35 to 50 year extension. The argument was that the Stadium Authority should cease to exist when the parking garage debt was retired in 2028. The then Councilman also recommended the Authority be folded into the Urban Redevelopment Authority. The Stadium Authority proceeded to vote for a 15 year extension through 2028 and no move to merge with the Redevelopment Authority has been forthcoming.

The director of the Stadium Authority and the SEA defends the extension on the grounds that it is part of a long term joint financing deal to get lower interest rates. How convenient. The argument that merging the Stadium Authority with another, such as the SEA, or even the Urban Redevelopment Authority, or even more appropriately the Parking Authority, would not be prudent does not hold water. The Stadium Authority could sell the parking garages to the Parking Authority (better still, why not sell to a private parking company?) and use the proceeds to pay off its debt.  Surely the outstanding debt is lower than the value of the parking facilities.  Now that would be a prudent step and it would get rid of an authority that was made obsolete by the destruction of Three Rivers and had announced 17 years ago it would terminate itself.

The Mayor’s Chief of Staff is quoted as saying “a reorganization or merger of the stadium authority with another public entity may require additional transactions costs without significant public benefit.”  How much would the legal fees be to do the paper work? Moreover, selling the garages and terminating the Stadium Authority would presumably free up any revenue from garage operations that is now being used to pay the SEA for its Stadium Authority work. That sounds very much like a benefit that would flow to the new owner of the parking facilities. Would it eliminate income of the SEA for the work done for the Stadium Authority? Now there is a question that needs to be answered.

So there you have it.  Even though the Authority has long outlived its original purpose, and should have gone away, it won’t go away. Furthermore, an extension through 2049 is for all practical purposes perpetuity. One can only imagine what the Stadium Authority might decide to get involved in over the next 30 years.

The reasons for another extension of the Authority’s life do not rise to the level of flimsy, especially in light of the far better alternative to sell its properties, pay off the debt and go out of business.  In short this is another illustration of governance Pittsburgh style.

Report on Tax Revenue from SEA and Stadium Authority Venues Needs Clarification

In mid-December of last year, the City Controller released results of a study showing that over a five-year period, 2009 through 2013 inclusive, properties (and entities using those properties) owned by the Sports and Exhibition Authority and the Stadium Authority had paid $107 million in taxes and fees to the City of Pittsburgh.  The study was done at the behest of a 2014 City Council resolution. The revenue figure is based on the Controller’s access to the individual tax reports of the various entities. Data was assembled for the amusement tax, earned income tax, business payroll expense tax, facility usage fee, local services tax, and parking tax on “…entities occupying the facilities and land owned by the Sports and Exhibition Authority and the Stadium Authority of the City of Pittsburgh” as specified in the resolution.

 

The study simply totaled up all the revenue in each category paid by all the entities involved for each of the five years and then added the five yearly six revenue sources to come up with the $107 million figure. The report also includes the statement that very few Pittsburgh tax dollars were used in the construction of the new sports venues, the convention center and the parking and other infrastructure associated with these facilities. And with that, the answer to Council’s request was complete. Or was it?

 

For several reasons these findings are misleading.  In the first place it is dismissive to brag that few local resources were needed for these projects. And it is somewhat insulting to say what a wonderful payoff these facilities have produced for Pittsburgh and have no concern about whether the folks who put up most of the money (PA and U.S. taxpayers) are receiving any benefits. After all, over a billion dollars were spent on Heinz Field, PNC Park, the new convention center and related infrastructure. Another $375 million was spent on the new Penguins arena.

 

Of that $1.45 billion, little was provided explicitly by the City, although local authorities did put up about $50 million while local foundations contributed $16 million.  Other private sources, mostly team contributions, added $330 million. All told, taxpayer backed bonds and grants from the Federal and state governments covered a billion dollars of the total outlays. One could also reasonably argue that the $517 million spent on the North Shore Connector would never have happened if the new stadiums had not been built.  Of that number 40 percent was state and local dollars and redirected Federal money away from needed highway projects.

 

That taxpayers, most of whom do not live in the City, have paid for the facilities is an important point of criticism but there is a deeper problem with the study. It should be obvious that the revenue produced by each of the taxes examined in the report must be placed in context if one wants to get an idea of how much the new facilities have actually enhanced revenue.  Bear in mind that amusement taxes, earned income taxes, parking taxes, and an earlier version of the local services tax were being collected at the sports venues, parking lots and previous convention center before the current facilities were built. There was no business payroll tax but there were mercantile and business privilege taxes that the payroll tax replaced. There was no facility usage fee until 2005, well after the new venues were built.

 

A better, more appropriate question than the one the Controller was asked by Council to investigate is; “how much did the new facilities add to the revenues of the various taxes compared to what was being collected before? And more pointedly, “what kind of return on all that investment are taxpayers getting?”

 

So, what happens if we look at estimates of taxes that were being paid prior to the new stadiums and compare them to the recent figures?   We will use the 2013 figures since they give the new facilities the highest numbers and the 2000 figures as the last year before the opening of the new stadiums, and well before the new convention center and the new hockey arena. The new sports complexes, the convention center and SEA and Stadium Authority parking facilities produced total revenue from the taxes listed above in the amount of $24,740,000 in 2013.

 

The largest component of the $24.7 million was amusement tax receipts at $10,967,000, 80 percent of the entire amusement tax collected by the City that year.  Amusement tax revenue is almost half the total tax revenue coming from the SEA and Stadium Authority venues. Meanwhile, in 2000, the amusement tax generated $8,256,000 (the tax rate of 5 percent of admission price has not changed over the period). If we assume 80 percent of that came from SEA and the Stadium Authority owned entities that would put amusement tax revenue in 2000 at $6,604,000 from those facilities. Now we know there was inflation over the period, so adjusting for the 30 percent increase in the CPI between 2000 and 2013 makes the 2000 revenue worth $8,585,000 in 2013 dollars. Thus for 2013 compared to 2000, the real net effect of the new facilities on amusement taxes stands at $2,382,000, a far cry from the nearly $11,000,000 touted in the study.

 

The next highest tax revenue in 2013 comes from the parking tax with $7,117,000 attributed to the SEA and Stadium Authority owned parking facilities, 14 percent of the City’s $52,000,000 total parking tax revenue.  The study says this is the revenue collected from the 23 garages and lots owned by the two authorities. There is no indication in the report that the revenue is solely collected during sporting events, i.e., it includes all parking taxes collected at those facilities.

 

In 2000, the total parking tax collected was $30,960,000. Since the parking tax rate was 37.5 percent in 2013 and only 31 percent in 2000, the 2000 revenue when adjusted to reflect the higher tax rate would have been $37,452,000. Assuming 12 percent of this was from SEA and Stadium lots, their 2000 share of total would have been $4,484,000, and then adjusted for a conservatively estimated parking price rise of 20 percent between 2000 and 2013, the 2000 collection would be $5,392,000 in 2013 dollars. Thus, the real net increase in parking tax collections from these facilities over what they would have been in the pre-new stadium construction period is actually only $1,725,000.

 

Granted the assumptions of 12 percent for the share of total parking taxes paid by SEA and Stadium Authority facilities and 20 percent increase to the pretax parking price might be off a little from the actuals, either high or low, but the point is made. The net impact of the Regional Renaissance plan construction on parking taxes, just as it was on amusement taxes, is much smaller than the numbers included in the study.

 

Because the amounts received from the earned income tax and the local service tax are so small, $509,000 and $171,000 respectively, the differences with the adjusted 2000 numbers reduce their net impact compared to the pre-construction numbers to less than $120,000 each.

 

The business payroll expense tax presents a problem for comparison purposes because it did not exist in 2000. The tax was phased in after 2004 to replace the mercantile tax and business privilege tax.  In 2013, the tax brought in $54,511,000 of which only $1,844,000 is attributable to the sports facilities, convention center and SEA and Stadium Authority parking. This implies taxable payroll expense of $354 million, and for the City, total payrolls of about $10.5 billion.

 

In 2000, total mercantile and business privilege taxes stood at $51,053,000. When the two taxes were completely phased out in 2011, the business payroll tax had reached $50,641,000. There were a few years between 2006 and 2010 when the combined payroll tax and privilege tax produced about $55,000,000. However, there is no way to estimate what the properties owned by the SEA and Stadium Authority were paying in the two nuisance taxes without a large number of assumptions that would make a specific result questionable. Nevertheless, it is undoubtedly the case that if the payroll tax had been in place in the pre-construction era, the net impact of the $1.4 billion building spree on payroll tax revenue would be less than the $1,844,000 figure in the Controller’s report.

 

Likewise, the facility usage fee came into existence well after the new construction and in 2013 produced $4.2 million.  Thus, there can be no direct or indirect comparisons with the preconstruction period. So, we have to give the report the $4 million since it would be unfeasible to estimate what the usage fee revenue would have been if it had been in place in 2000.

 

All told then rather than the $24.7 million impact on revenues in 2013, the net impact compared to the 2000 tax revenues is more on the order of $10 million and almost half of that is attributable to a fee that did not exist prior to 2005.

 

And then there are the costs not accounted for by the study. For one, $55 million worth of property was taken off the tax rolls in the late 1990s to build the North Shore projects. Assuming the value of that real estate would have increased along with the average value of commercial property in the City, these properties would now be assessed at $123 million. That means the City and school district are giving up over $2 million combined in real estate taxes annually.  The lost real estate tax effect for the properties acquired for the Penguins arena was not calculated but it is likely to be significant as well.

 

All this is by way of pointing out that it is not sound policy to focus exclusively on revenue being received from these facilities without taking into account the revenue that existed before and any additional costs incurred in the form of foregone tax revenue.  That is if one wants to know what the actual tax revenue impact of the construction has been.

Mayor Orders Wage Hikes

Recently Pittsburgh’s Mayor issued an Executive Order to raise the minimum wage paid to all City workers to $15 per hour.  According to the Mayor’s news release, it will cover 300 employees currently paid less than $15 and will be phased in over five years, beginning in 2017, to comply with Act 47 oversight.  Furthermore, the Mayor is calling for City Council to pass legislation “early next year” to require all City contractors to follow suit, or “face penalties.”

 

There are many problems with this diktat.  First is whether the Mayor has the authority to issue an Executive Order to raise wages.  According to Pittsburgh’s Home Rule Charter, the duties of the Mayor are enumerated in Article 2, Section 204.  There are eight basic powers given to the Mayor including; “to inform council at least once a year concerning the finances and general conditions of the City; to provide council with information concerning the administration and conditions of the City as requested by council;” and to “submit proposed legislation to any member of council for introduction.”  Other powers revolve around a supervisory role, promoting intergovernmental relations and to defend and uphold the Charter itself.  This Executive Order, if not challenged, could establish a bad precedent.

 

The Mayor could have asked a member of City Council (many share his views on the subject) to introduce legislation imposing a wage mandate for City employees.  Keep in mind imposing a living wage has been tried twice before (2001 and 2010).  In 2001, a living wage passed City Council, but when Allegheny County Council failed to follow suit, the Mayor at the time shelved the idea.  In 2010 another try at a living wage expired in City Council.  At that time the City was grappling with the effects of the nationwide recession and subsequent sluggish recovery and, of course, the City was under the financial oversight of the Act 47 team and the Intergovernmental Cooperation Authority (ICA). Importantly, the City remains under their oversight.

 

The press release does not provide any detailed financial consequences the City will incur as a result of the higher wages—which will be of great interest to both financial overseers.  For example, assuming 300 workers are now at, say, $10 per hour, the increase to $15 per hour will cost the City an additional $3.12 million in wages per year and additional hundreds of thousands of dollars in higher benefits attendant to the higher wages.

 

And there are several other interesting questions.  With City employees being covered by a multitude of unions, how did these 300 slip through the cracks?  Or are these 300 part-time employees, not eligible for full-time pay and benefits?  If they are in a union, why is the Mayor demanding they be paid more than their collective bargaining unit is willing to accept?

 

And of course if these 300 employees in question receive wage boosts, this will undoubtedly have a “trickle-up effect” on the rest of pay rates within City government.  Employees and their unions will not be willing to see their substantially higher pay levels and the gap with the lower wage employees that reflect experience, productivity and bargaining gains over the years be greatly diminished without demanding major pay increases to maintain workplace wage hierarchy.  Otherwise there will be a great leveling of pay scales.

 

How much this will cost taxpayers cannot be known for sure until the process plays out, but it will be a lot of money.  If this Executive Order is successful, and not challenged and overturned by one or both of the oversight boards, the Mayor may well be creating a feel good policy that will come back to haunt the City in a big way in two or three years as the need for more revenue rises sharply.  In the meantime it’s a great vote buying gambit as far as City employees are concerned as they foresee getting higher pay with no additional work effort or union negotiations.

 

The second part of this Order, to seek legislation to impose the $15 minimum on City contractors or have them “face penalties”, is fraught with unintended problems.  The Mayor expects this to be taken up early in 2016.  In the first place, it is unlikely the City will be able to mandate higher than market driven wages paid by firms under existing contracts as forcing them to pay higher wages without being able to adjust to the new conditions, e.g., obtain a boost in the price of the contract or reduce the necessary amount of labor and possibly the amount work product to cover the higher costs, will likely be met with breach of contract lawsuits.

 

Thus, it will likely only apply to new contracts written after the mandate goes into effect.   This will allow bidders time to take the higher wages into account and make the necessary adjustments—either passing the increased cost to City taxpayers, reducing the number of workers or taking on a smaller amount of work per dollar of the contract. Contractors might choose to reduce non-wage compensation unless the ordinance precludes that as well.

 

It is a virtual certainty that cost of contracted services will rise. This amount cannot be known without having information on contracts, the number of workers employed by contractors and their wage rates. It can be assumed the Mayor believes some contractors are paying less than $15, otherwise why ask for the legislation?  In that case, costs for contract services will rise.

 

The bottom line is that this policy and Executive Order cannot be put into place without costing the City a lot more money.  Pittsburgh is still operating under financial oversight from Act 47 and the ICA.  Pledging to spend more money than approved in the five year plan might be another argument for keeping the City under such oversight.  For sure, it is unlikely the Mayor will offer other offsetting cost reductions for these inevitable spending increases.  Perhaps one of the oversight groups will challenge the Mayor’s authority to issue the wage edict in the first place—or maybe a concerned taxpayer organization will do so.

 

This Executive Order is arbitrary income redistribution by government edict. Does anyone believe that unearned pay increases will make the City’s work force more productive?

US Steel Skates away from Lower Hill Redevelopment

Amid declining steel sales and a bleak outlook for the company’s immediate future, US Steel announced that it was skating away from the commitment to relocate its headquarters in the new Lower Hill redevelopment area.  The 28-acre site was once the home of the Civic Arena and is now vacant.  In a sweetheart deal for the Pittsburgh Penguins hockey club, they were given the rights to develop the site and their anchor tenant was to be US Steel.  So what are the ramifications of this announcement?

 

The first, and most obvious, is that the Pittsburgh Penguins have to find a new anchor tenant.  US Steel’s proposed headquarters was to be five stories tall and occupy 285,000 square feet on 2.23 acres.  This is a big hole to fill in the development.  There are very few companies of US Steel’s size who could replace this anchor.  The team may make a pitch to Kennemetal, the tool-making company leaving the Latrobe area to relocate downtown, but this company is also having financial difficulty and may not be willing to use up that much space without a very heavy subsidy.

 

Also the entire project, as envisioned by City officials, was going to be used to throw off money to help the rest of the Hill District through a Tax Increment Finance (TIF) program.  An Urban Redevelopment Authority press release from 2014 noted that the 20-year TIF may generate $22 million in proceeds that could be used in other areas of the Hill.  US Steel was to receive tax credits (New Markets Tax Credits) and abatements (Local Economic Revitalization Tax Assistance) for their headquarters over ten years (approximately $7.5 million) of which they were going to use about half and put about $3 million into a development fund to assist other projects in the Hill District.  TIF money from other retail development would fill the remainder of this fund.  The mixed-use development is to also include a residential component.  Keep in mind that residential developments do not qualify for a TIF under state law (Policy Brief Volume 14, Number 48) so they can’t backfill the project with more residences.  The loss of US Steel puts a potential hole in the redevelopment fund that was going to pay for other improvements in that area.

 

Furthermore, not only will they have to fill the space vacated by US Steel, they also lose about 800 US Steel employees who would have likely been patrons to any retailers occupying the project.  Will this dissuade any retailers or restauranteurs who were in discussion with the team about locating near the anchor tenant?  How wide ranging of an affect will this announcement have?

 

Thus while the team and civic officials are shrugging this announcement off, it puts a serious hole in their plans for the Lower Hill Redevelopment project.  How they fill it, and how much taxpayer money they have to throw at potential replacements, will be worth watching.

Is a “Family Wage” in Pittsburgh’s Future?

Pittsburgh has seen its fair share of mandated wage proposals over the years from the minimum wage to the prevailing wage and even the living wage.  Then too, the City recently enacted a mandated sick leave law that is a form of coerced compensation. To date there has been no “family wage” proposed, but perhaps that could be coming soon.

 

It’s an idea that will be voted on in Spokane, Washington in a referendum this November. The basic premise is that employees should earn enough money to support their family’s “basic needs and a limited ability to deal with future emergencies without the need of public assistance.”  Of course like all mandated wage proposals, this has all the trappings of feel good rhetoric without a hint of economic understanding.

 

The definition of family wage from the petition is as follows:  “Family wage means a wage that provides for basic needs and a limited ability to deal with future emergencies without the need for public assistance.  The City of Spokane shall calculate the family wage to include, but not limited to, basic necessities such as food, housing, utilities, transportation, health care, childcare, clothing, and other personal items, emergency savings, and taxes.  The City shall calculate the family wage rate based on a household size of two with one person employed and the family wage rate shall not be less than the Self-Sufficiency Standard for Washington State 2014, as adjusted for inflation…..  If the City of Spokane does not calculate a family wage, then eligible employers must provide, at minimum, a wage equal to the higher of either (1) three times the federal poverty guidelines for a family of two, or (2) any family wage rate previously calculated by the City of Spokane.

 

There are a couple of points about the Spokane petition worth mentioning.  First, the provisions of the petition require any employer with more than 150 employees to pay the “family wage”.  This would essentially put into law that corporate and employer rights are subordinate to employee rights.

 

Secondly, the City is being forced by the courts to place it before the voters via referendum after 2,600 people signed a petition.  It is not known, nor has been tested in court, as to whether the provisions of the petition conform to either the Washington State Constitution or its laws.  Furthermore, the petition contains language that presumes to take away the right of affected businesses to challenge any part of the new law in court.  Nor could employers assert any state or Federal laws that would overturn the restriction on their rights.  It is outrageous that any legislation would contain a provision barring it from being challenged in a court of law.  That alone should be enough for a dismissal.

 

Since there has not been a calculation of “family wage” by the City of Spokane, let’s look at the Federal poverty level for a family of two in 2015—$15,930.  Multiplying this by three, as required in the language above, sets the “family wage” at $47,790.  The Self-Sufficiency Standard for Washington State (2014) for a family of two, one employed, is $44,806—adjusting for inflation raises that amount to at least $46,600.  Note that the average of all workers in the Spokane metro area was only $43,000 in 2013.  In fact many jobs at large organizations in Spokane are low paying with annual wages well below this level in the range of $25,000 to $35,000.  Health occupations below registered nurse, many factory jobs, general office assistants, the hospitality industry, and low level management typically earn significantly less than $47,000.

 

Of course the intent is to force employers to pay enough so families would no longer need to collect public assistance.  But how can a company afford to pay a low skilled worker, currently worth only $28,000 to them, $47,000 a year?  Economic principles in a competitive market place will compel employers to pay wages commensurate with the value of the workers’ productivity.  When a company is forced to pay more than an employee is worth in terms of their production value, they must either pass on the higher costs in their prices, try to improve productivity, severely reduce all other benefits,  or cut back on the amount of labor used—possibly all three.  With the amount of increase the “family wage” law would entail, there is a little chance that productivity or prices can be raised enough or benefits cut enough to offset the higher wage costs, making reduction in the number of workers the only viable option.

 

Then the question arises: What will be the reaction of those skilled workers with experience and high productivity already earning at or above the family wage?  Certainly they will push hard for a substantial raise to maintain workplace salaries that recognize differences in worker value. There might well be cuts to their benefits or hours to help pay for the big increase for the workers that were well below the family wage.  And the workplace would become far less amiable. Many would undoubtedly leave absent some sizable pay raise.

 

All of this will conspire to raise labor costs at these firms.  If they cannot pass those costs onto their customers through price increases, they may be forced to lay off enough people to keep those costs down, or in the extreme, close their doors.  Either way there will be layoffs of mostly unskilled workers and a larger burden on public assistance.

 

The arbitrary cutoff of 150 employees will create its own problems.  How do we know that a company with 180 employees, many of them low skilled, such as hotel or social service agencies, large department stores, etc. is better able to pay $47,000 for a low skill worker than a company with 140 workers?  At market rates, the smaller company might be paying only $30,000 for the same job.  It will give the smaller firms a competitive advantage in the market place and motivate larger firms to reduce their employee count to less than 150 through layoffs—again putting more people on social assistance rolls.  Who is being served in this case?

 

It is not clear what governments that are affected by the law but who cannot dramatically reduce services, will do to cover the additional costs of the wage mandate.  Higher taxes are almost a certainty.  Will the citizens of Spokane consider the prospect of higher taxes as they are tempted to vote for this anti-business, feel good petition?  What will hospitals do?  They will have to raise prices substantially or see red ink flow in torrents.  As a last resort they could slash services and lay off workers.  Are voters willing to put up with lower quality and less available health care?  Do Spokane residents believe state or Federal taxpayers will stand ready to bail them out of the mess they are about to make?  That might be a poor bet.

 

This proposal is preposterous on its face.  Forcing firms to pay the “family wage” will cause more problems than the backers realize.  Presumably, the prospect of socking it to evil employers is reward enough for them. Consequences are apparently of secondary importance. As is the case with virtually every statist, anti-free market effort to replace market forces with government dictates, the results will be awful for workers and taxpayers.  It will cause layoffs for those who can  least afford it and cut off the bottom rung of the economic ladder for the low skilled, inexperienced  people looking to enter the workforce.

 

We hope this ludicrous idea will go down in flames in the November vote in Spokane. If it does not the concept will undoubtedly spread and Pittsburgh will likely be targeted by the same groups pushing the Spokane referendum. Just recently, we were treated to a report from a left leaning group telling us that a Pittsburgh family of four needs $67,200 per year to maintain a modest life style. What the authors forgot to mention was that the median family income in Pittsburgh is only $53,800. That means a huge number of families would need a whopping raise if $67,000 was set by law as the minimum.  Even the more modest $47,000 “family wage” in the Spokane scheme would be disastrous.

 

The country has enough problems without more self- inflicted economic wounds created by more laws dictating the wage levels.

Pittsburgh’s Population Drop in 2014: What Does It Mean?

From July 2013 to July 2014, the date of the latest estimate, the City of Pittsburgh’s population fell by 1,314 people. This decline followed two years of gains that lifted the count to 1,000 higher than the April, 2010 Census figure of 305,704. On a net basis, the City now has 300 fewer people than four years earlier. Essentially, the population is probably flat within the margin of statistical error. All data are taken from the Census Bureau’s American Fact Finder report on the Community Survey.

 

This four year flatness in the City’s population is interesting considering that although the County population fell by 1,700 between 2013 and 2014 to 1,231,255,  the 2014 figure was nearly 8,000 above the 2010 Census number, a rise of 0.65 percent.  That represents reasonably good growth for the County but it is still well below the 2.4 percent gain recorded by the national population over the same period. If the County had grown at the national rate, its population would have reached 1,252,708, a rise of 29,500. Likewise a growth of 2.4 percent would have placed the City population at 313,040, a pickup of 7,300.

 

The City’s population, while fairly steady since the 2010 Census, has now dropped to 62nd highest among U.S. cities, a far cry from the number 12 ranking in 1950 when there were 676,000 inhabitants. It is worth noting several cities have fared as badly or even worse. For example, Detroit’s decline from just under 1.9 million people in 1950 to less than 700,000 now provides some perspective on how bad things could be. Cleveland has also been very hard hit with a decrease of well over half of its population count during the period.

 

It is also interesting to note the comparison of the City’s recent population changes with those in the seven county Pittsburgh metro area. After tacking on about 4,500 people between 2010 and 2012, the region saw back to back declines in 2013 and 2014 that completely reversed the earlier gains, dropping the latest count about 300 below the 2010 reading. Over the period, Westmoreland, Fayette, Beaver and Armstrong were down measurably led by a significant drop in Westmoreland, while Butler and Allegheny posted gains and Washington was essentially unchanged from 2010 to 2014 after a small rise in 2011 and 2012. Indeed, according to the Census estimates, most western Pennsylvania counties have struggled to maintain their population levels during the last four years.

 

Among the U.S cities with 200,000 or more people in 2010, nine, including Pittsburgh, showed population declines over the four-year span from 2010, some were fairly dramatic when contrasted with Pittsburgh’s small 300 person drop. Detroit continued its long slide posting a four-year drop of 34,000. Other sizable falloffs were seen in Cleveland (-7,000), Toledo (-6,000) and Montgomery, Alabama (-5,500). Smaller but no doubt worrisome dips were recorded for Buffalo (-3,000), St. Louis (-2,000) and Akron (-1,200). Rochester and Baton Rouge had measurable but not overly frightening decreases of around 500. Note too, that New York City and Chicago managed to grow over the period despite weakness in the rest of New York and Illinois. The data indicate that in all likelihood, international migrants are heavily responsible for much of the net population gains in these cities.

 

Pittsburgh is not alone in its troubles of trying to grow population. And certainly the gain in Allegheny County takes away some of the sting of its failure to post gains.

 

One of the oft-repeated explanations for the City’s inability to grow rests on the claim that the City’s population is very old and has a high ratio of deaths to births because of the elderly population. But that argument does not hold any more.  In fact in 2013, the latest data for age distribution shown on the Census website, the City has a lower median age (33.4 years) than the nation as a whole (37.6 years). How can this be? It is true that the over 75 age group in Pittsburgh represents a slightly higher percentage of the population than in the nation, 7.3 to 6.2 percent. However, from 65 to 75 years, the national percentage was 8.0 compared to the City’s 6.7 percent.

 

The real, substantial gaps between the national age distribution and the City’s distribution occur in the younger age groups. From birth to 14 years of age, the share of population in the City was 13.6 percent and the national was 19.3. The Pittsburgh share of population was 20 to 30 percent lower in every five-year age group in the fifteen year span from 0 to 14. This suggests a much lower birth rate or a preferential out migration of young children from the City as compared to the national behavior.

 

But a dramatic shift happens when the 20 to 34 year age category shares are compared. This group accounts for 30.5 percent of the City’s population while the national percentage is only 20.9. That is an astounding gap and reflects, in all likelihood, the college and graduate school students as well as a substantial number of other in-migrants to the City in this age group—certainly well above the national norms.

 

Then something very interesting happens.  The age group from 35 to 65 accounts for a substantially higher portion of the national population than it does in Pittsburgh, 39.0 to 33.8 percent. This is the age group that by and large represents the highest income earners (those at the top end of this age range) and accounts for the lion’s share of those with middle and high school age students (in the middle portion of the range).

 

These statistics point to an almost indisputable fact. As people get married and start to settle down by their mid-thirties, their focus shifts to concerns about children, especially education. And for quite a long time Pittsburgh schools, with a few rare exceptions, are failing to deliver the quality of education responsible parents want and expect for their children.  There may be other factors affecting Pittsburgh’s favorability toward families as well: taxes, government services, and safety come to mind. In any event, there can be little doubt that parents who cannot afford high quality private schooling, while also paying high property and wage taxes in Pittsburgh, are voting with their feet.

 

Finally, it appears that the birth rate among Pittsburgh childbearing age groups could be running below the national average. It could be a lot of factors, delayed marriage, career concerns that prevent having babies, or simply life styles that delay or downplay having children.  Combine that with out-migration of families with school age or nearing school age children and the outlook for enrollment in City schools is far from rosy. This is occurring despite the enormous spending per student and the Promise Program that was supposed to fix this problem.

 

The big question:  Can a population that is not growing and has an increasingly large share of its population concentrated in the late teens through early thirties age category be sustained at its current level unless birth rates for this age group increase and the City’s public schools improve sufficiently to stem the decline in the share of the population represented by 35 to 65 year olds? Attracting young people will not be enough if a high percentage leave when they get older.

Lower Hill Development No Longer Using a TIF: So What Now?

Redeveloping the Lower Hill District, where once stood the Civic Arena, or in its later years the renamed Mellon Arena, has taken an interesting new twist.  Instead of relying on the creation of a tax increment financing (TIF) district, the City has decided instead to create a tax abatement district.  The latter is made possible via the local economic revitalization tax assistance act of 1977 (Act 76), commonly known as a LERTA.  Why the change?

 

As we wrote in a Policy Brief last fall (Volume 14, Number 48), with a TIF, a bond (or bonds) would have been issued against the future property tax payments from the completed development.  Any subsequent increase in tax payments resulting from the project, compared to payments from the development area prior to the project, would have been used to pay off those bonds.  The downside is that if the development fails to generate enough of an increment in property taxes to satisfy the debt issue, taxpayers would then be on the hook for those bonds, or bond insurance would pay, possibly resulting in a downgrade of the issuing body’s credit rating that could affect the cost of future projects.

 

This happened to the City when the Lazarus department store TIF project failed.  To refresh a distant memory, the Lazarus development project used $56 million in public funds yet had a market value of only $21 million upon completion (see Policy Brief, Volume 1, Number 2).  Not only did this not generate enough property tax to satisfy the bond repayment, the store performed poorly, Lazarus’s parent company declared bankruptcy and closed the store just a few years after opening.

 

Nonetheless, TIF areas have been a popular way for governments to finance “infrastructure components” of economic development projects. So why did the City change its mind about using TIF?

 

The Mayor’s vision for the Lower Hill Development presented a problem. Bear in mind that the scheme was not only to develop the 28 acres comprising the former Civic Arena and parking lots, but also to use TIF revenue in a program to pump money into the rest of the Hill District (Middle and Upper) for programs such as job training and capital improvements. Inconveniently for the City, incremental property taxes realized after the development is completed must be used to pay off the bonds issued for the project’s costs, or if there is a surplus beyond the amount required for debt service it must be returned to the taxing bodies. The language of the Tax Increment Financing Act of 1990 (revised 1992), Section 7 part (c) states; “(t)o the extent that any moneys remain in the fund after all forgoing costs have been paid or satisfied, the remaining moneys shall be distributed on an equal basis to all municipalities and school districts which participated in the tax increment district.”  Clearly, a TIF would not accomplish the Mayor’s goal—so it was abandoned and replaced by a LERTA.

 

LERTA provides for property tax abatements for individual parcels within the development area.  The guidelines are laid out in Act 76.  A tax exemption can be granted by the local taxing authority; however, the length of the abatement shall not exceed ten years, applies just to that parcel and is transferable.  It is done to encourage development in an economically depressed community.

 

The local taxing authority has some leeway in setting its own guidelines. The City of Pittsburgh has put together a table outlining the real estate abatement programs available, including those under the LERTA program for both commercial and residential developers effective as of September 2014[1].  For a commercial LERTA, the abatement period is five years and the annual abatement limit is $50,000. This represents a tax credit as opposed to an assessment reduction.  For a residential LERTA, the abatement period is ten years for a $150,000 per year tax credit.

 

The Pittsburgh Public School District has also indicated it will participate in the residential abatement in the Lower Hill project for ten years at $250,000 per year.  However, according to the table, the School District’s abatement decreases over time.  Unchanged for the first two years it then declines by ten percent every two years afterward so that in the final two years the abatement is 60 percent of the original amount.

 

The current table does not list the County as a possible participant.  However, in a previous version of the table (effective 12/2012) the County was listed as participating in the residential LERTA, agreeing to abate $100,000 on the same schedule as the School District.  Of course for the kind of project the Mayor has in mind, he will need both the School District and County to participate.

 

According to news reports, the 28 acre project has a planned value of $440 million when completed. As mentioned above, local taxing authorities have leeway in setting the LERTA parameters.  The Urban Redevelopment Authority (URA), the agency that will be overseeing the development, was asked to approve an amended LERTA for the Lower Hill Development at a special board meeting on January 26th—it passed unanimously.  Under the new parameters the maximum abatement ceiling is now $750,000 per year. However, it is unclear if this is for residential, commercial, or both.  The overall LERTA is to last 25 years, even though each individual parcel can use the abatement for only ten years so the project will effectively have to roll out in sections.  As of this date, none of the three taxing bodies have officially approved the amended LERTA plan.

 

However, there is a major wrinkle in this LERTA plan. Interestingly, while property owners will not be required to make real estate tax payments to the taxing authorities, they will have to make annual payments equal to the abatement into two funds:  a reinvestment fund for other projects around the Hill District, and a development fund to help out with infrastructure improvements or to subsidize development.  The URA is estimating that each fund will accumulate about $20 million.  The only exception is for US Steel which has placed $3 million into the reinvestment fund, as opposed to half of the annual abatement, while the other half of their abatement will be used to subsidize their own project.  Will that same deal apply to other developers/owners?  Will it even be offered?  Will the owners demand it?

 

Assuming the US Steel arrangement is unique, what is the benefit of the LERTA for other developers/property owners?  The purpose of the LERTA abatement is to encourage development in economically depressed areas by giving property tax breaks as an incentive.  If the property owners are required to pay into special designated funds instead of receiving the tax abatement, where is the incentive from the LERTA for developers?  In effect, the taxing bodies will be using a complicated scheme to divert what ordinarily would be tax revenues into funds that could easily become a slush fund ripe for abuse.

 

But even if that concern is not to be heeded, why not just have the taxing bodies agree to put some tax revenues in the designated funds and avoid the whole LERTA complication? Finally, if the project succeeds in creating many good jobs and large increases in tax revenue for the three taxing bodies, why not let it help the taxing bodies with much needed revenue for municipal operations and education?

 

If the project is as successful as the promoters say it will be, it will breed more private development that will not require public money. What a novel approach that would be for Pittsburgh.

[1] http://apps.pittsburghpa.gov/finance/Current_Abatement_ProgramTable_effective_8-1-14.pdf