Privatizing Garbage Deserves another Look

As city governments across the nation battle budget issues, the notion of privatizing some services is once again making its way to the fore.  Detroit, which is in bankruptcy, agreed earlier this year to contract with two private waste haulers for residential trash and recycling pickup services and is expected to save taxpayers $6 million annually.  Flint, Michigan, operating under an emergency manager, took the same path in 2013 with expected savings of around $1 million annually.  While Pittsburgh is not facing bankruptcy, it is still operating under financial distressed status, going on ten years now.  It’s time to give garbage privatization a look, or in the case of Pittsburgh, another look.

 

This is not the first time the subject of the City privatizing waste removal has been suggested.  The Allegheny Institute first wrote a full length report on the subject in 1996 (Report #96-18), and subsequently a Brief in 2007 (Policy Brief, Volume 7, Number 56), and a report in 2008 (Report #08-02).  Of course we are not the only ones to take up this mantle.  Two task forces also made the suggestion:  Competitive Pittsburgh in 1996 and Pittsburgh21 in 2002.  The Act 47 team, working with the City while in distressed status, issued a directive (PW-04) called “Managed Competition of Solid Waste Services” to have private service providers submit bids for the southern neighborhoods.

 

As we wrote 2007, “In stage one, only private haulers would be permitted to bid in order to allow for ‘an opportunity to evaluate contracted services’.  This would be followed by stage two, encompassing a larger service area, and ‘the City workforce shall be included among the bidders in competition with private contractors’.”  But the City did not let it play out that way as the City’s Department of Environmental Services (DES) won a combined bid—stage one was never launched and the public did not have a chance to see how much a private company would have charged for collection services and how it would have compared to DES.

 

In the City’s 2014 operating budget we find a breakdown of DES expenses[1]. The two largest expenses are salaries and wages, projected to be $7.88 million, and property services (disposal fees) at $3.5 million.  The remaining categories such as supplies, property, professional and technical services push the Department’s total to $11.7 million.  Keep in mind that two large expenses are not included in this total:  employee benefits and workers’ compensation costs.  We had mentioned in our 2008 report that benefit costs are roughly one-third the value of salaries.  Thirty percent of the above mentioned wages and salaries would be approximately $2.3 million.  Accounting for benefits runs the total up to $14 million.  But there is one more component to consider—to wit; workers’ compensation costs.

 

In a 2004 study performed on behalf of Pittsburgh’s other overseer, the Intergovernmental Cooperation Authority (ICA), the results found that while the DES comprised 5.8 percent of the City’s workforce, they were responsible for 52 percent of workers’ compensation claims.  Furthermore the report notes that over a third of those claims results in a change in work duty status for the claimant.  For fiscal year 2013, the amount of workers’ compensation claims for the City came in exceeding $19.3 million with claim payments of more than $22.7 million.  This amount has been fairly consistent for quite some time.  When we wrote the Brief in 2007 we noted that it was about $20 million and the 1996 report showed the amount at $18.9 million for 1995 and $20.3 million in 1994—not much has changed over the last twenty years.

 

Thus if we estimate workers’ compensation costs for DES at roughly half of the 2013 claims, we can add another $9 million to the Department’s expenditure estimate for a total of $23 million.  Broken down to a per-property served basis, for the 115,200 residential properties served (five dwelling units or less, the Housing Authority, the Borough of Wilkinsburg, and City government buildings) the per unit annual cost is just under $200.  Of course the City’s contract with the Borough of Wilkinsburg is expected to bring in $904,000, so even if that amount is removed from the gross of $23 million, it still leaves a net cost to City taxpayers of $22.1 million or a per residential property amount of $202 (removing the 6,000 residential properties in the Wilkinsburg contract).  Looking at it from a per City resident basis, with 305,700 residents the per capita amount is slightly more than $72.

 

So in a City that is looking to save every nickel it can, now is the time to give privatization a fair chance.  In addition to Detroit and Flint, Michigan, other cities are contracting with private firms to remove their refuse and recyclables.  Omaha, Nebraska, one of our four Benchmark cities, has privatized its waste collection. In Omaha, the contract with the private hauler, who services residential properties only, is worth $14 million.  Their department of public works does still engage in oversight of the program and pays landfill fees, so the total cost of waste removal is $17.5 million (conversation with Omaha finance official).  For a city with 421,500 residents this amounts to a per capita cost of roughly $41.50.

 

While we can only speculate about how much a private hauler would bid to take over the City’s garbage collection, we can use the Omaha experience as a rough guide.  If a private company can do the job for $41.50 per resident—$30 lower than the DES is currently spending—the cost to the City would be $12.7 million.  The savings would be about $9.4 million or roughly the same amount the City is paying in workers’ compensation payments attributable to DES.  Keeping in mind that the savings wouldn’t follow immediately as claims already in the system will have to be satisfied, but there would be no new claims.  Thus, over time the enormous worker compensation savings will be realized and help the City enormously. Then too, the employees would no longer be on the City payrolls reducing the buildup of pension liabilities.  Cutting the City’s employee to resident ratio to a level closer to that of well managed US cities is a probably the best way to assure Pittsburgh’s long term financial stability.

 

The benefits of outsourcing are reduced costs to City taxpayers which of course includes the corresponding reduction to workers’ compensation claims/payments.  The City should revisit the Act 47 team’s directive, mentioned above, to solicit bids for the southern neighborhoods.  When the bids come in and are compared to the DES’s costs, all DES costs should be taken into account including employee benefits and workers’ compensation. While private companies try to keep costs down to earn profits to the benefit of owners/shareholders, public sector agencies should try to keep costs down to benefit their citizens/taxpayers.

 

With the City still under financial oversight and still struggling to keep expenditures in check, no opportunity to produce savings now and into the future should be off the table.



[1] City of Pittsburgh 2014 Operating Budget, page 262.  http://apps.pittsburghpa.gov/cbo/2014_Operating_Budget.pdf

Pittsburgh Area Jobs Data Still Weak

The Department of Labor and Industry has released the preliminary employment data for February 2014 and it does not look good for the region.  For the third consecutive month both total nonfarm and total private employment fell from their year earlier totals.  This comes on the heels of data revisions of 2013’s employer survey that severely reduced the original numbers turning what appeared to be strong monthly year-over-year gains into weak ones lowering both the annual average number of total nonfarm jobs (-13,400) and total private jobs (-14,400) significantly.

 

Most will cheer the fall in the unemployment rate from a seasonally adjusted 6.3 percent in December 2013 to 6.0 percent in January to 5.8 percent in February.  However, the reason for the decline has more to do with a drop in the labor force than it does people moving into the employed category.  For example, the number of unemployed in February fell 22,900 people from February 2013’s count.  However, the number claiming to be employed only increased 4,000—a negligible amount considering there are more than 1.17 million people employed in the area—while the number in the labor force declined by 18,900.  Thus, more than 80 percent of the reduction in the number unemployed is due to them dropping out of the labor force.  Not a ringing endorsement of the area’s economy.

 

This weakness is corroborated with the employer survey.  The preliminary count of total nonfarm jobs in February came behind that of a year earlier by more than 5,000 jobs.  Total private also fell short of last year’s total (-2,900).  This continues the trend from December, where the rebenchmarked data showed a decline in the year-over-year total nonfarm jobs (-2,900) and total private jobs (-1,500).  January’s final numbers likewise revealed a year-over-year loss of 3,900 total nonfarm jobs and 3,300 total private jobs.

 

The sectors posting job losses were spread throughout both the goods producing and service providing super sectors.  In the goods providing super sector the only area of growth is in mining and logging, posting year-over-year gains of a couple of hundred jobs for the last three months.  In fact it hasn’t experienced a year-over-year decline since midway through 2007.  Keep in mind that this sector, a beneficiary of the Marcellus Shale drilling boom, only accounts for a small percentage of the area’s job market—less than one percent of total nonfarm jobs.  Both the construction and manufacturing sectors have had slides over the last three months with manufacturing’s streak stretching back to August 2013.

 

Perhaps the biggest surprise happened in the private service providing super sector—specifically in the education and health sector.  Long an area of growth for the Pittsburgh region, the preliminary February data show no growth from the year earlier totals.  This sector has seen its year-over-year job numbers decline for the entirety of 2013 and into January 2014.  And if the final February data are revised downward—a distinct possibility—the losses will have extended to fourteen straight months.

 

For the first two months of 2014 the sector with the most growth has been leisure and hospitality with year-over-year increases of more than 1,000 in each month.  This growth extends back through all of 2013 as well.  Oddly enough the largest subsector, accommodation and food services, has not been the source of growth as they have been experiencing large year-over-year decreases.  This subsector accounts for about 80 percent of the leisure and hospitality sector with arts, recreation, and entertainment comprising the other 20 percent.  The latter must be the source of this growth, but with so little data at the regional level, it’s difficult to say where the jobs truly are.

 

All-in-all the February jobs report shows a continued softness in the Pittsburgh area labor market.  This is showing up in both the household data, despite the falling unemployment rate, and the employer survey with falling total nonfarm and private jobs numbers.  The Pittsburgh area may be a victim of a malaise in the national and state economies, but there are some things that leaders can do to help boost these numbers.   That entails making the business climate more inviting through lower tax rates and fewer regulations that tie the entrepreneurial spirit.

Shocking Revisions to Pittsburgh Employment Numbers

Jobs numbers released on March 18th that incorporated a data re-benchmarking by the Department of Labor and Industry and the Bureau of Labor Statistics paint a dramatically different picture of the Pittsburgh region’s employment situation than earlier data had portrayed. Establishment payroll employment was revised downward for late 2012 and all of 2013 with the downward revisions getting larger as the year progressed. For December 2013, the estimate of non-farm employment has been reduced by 20,700 jobs compared to the number originally reported just a month ago. The downward revisions wiped out all the gains that had been previously reported for 2013.

 

Bear in mind that through most of 2013, the employment reports for the Pittsburgh Metro area were showing the region as the statewide leader in job growth with widespread gains across several industry groupings.  With the new data, the Pittsburgh area is just an also ran with job growth below the state’s very anemic pace. Indeed, the revised December 2013 jobs count is 3,100 under the re-benchmarked figure posted for December 2012.  What’s more, all the strong 15,000 to 20,000 year-over-year increases registered in the summer and early fall of 2013 have completely disappeared in the revised data.

 

Months Measured in 2013

Total Non-Farm Jobs (Original Data)

Total Non-Farm Jobs

(Re-Benchmarked Data)

Difference

October

1,188,800

1,169,600

-19,200

November

1,190,800

1,171,500

-19,300

December

1,183,400

1,162,700

-20,700

Private sector employment (non-farm less government) took a major hit as well with the December 2013 number coming in 21,600 jobs below the figure reported a month ago.  Again the pattern was similar to the non-farm data with downward revisions moving higher throughout the year eliminating what was originally thought to be very good growth.

 

Revisions by industry groups were uneven with some taking big hits, some small hits, and a few showing upward changes. The goods producing sector was down, but only marginally, by a total of 2,400 jobs. Construction was taken down by 1,300, Manufacturing a statistically insignificant 200, and Mining by 900 jobs. The decrease in Mining, while small in absolute terms, does represent a nearly ten percent reduction in that industry sector.

 

Obviously, the big losses had to come from the service producing sectors.  Trade, Transportation and Utilities jobs numbers underwent downward revisions throughout the year that basically eliminated the initially reported employment gains. By December 2013, the lowered estimates had removed 4,000 employees from payrolls in the sector. Wholesale trade accounted for almost 2,500 of that reduction.

 

Finance jobs were lowered throughout the year but took their biggest hit in the summer months when original reports showed jumps of around 4,000 jobs in June, July and August. All those gains are now gone according to the newly revised figures.

 

Meanwhile, downward revisions in the estimates of employment in the Professional and Business services sector were relatively modest for most of 2013 but the reduction of 4,000 jobs in the December count essentially wiped out the originally reported gains for the twelve month period ending in December 2013.   Within this sector, the Professional and Technical grouping was relatively hard hit as half of the growth reported originally for 2013 was taken away in the revised estimates.  Administrative and Waste Services employment also experienced a pullback in its jobs count with the December 2013 number lowered by 3,400, leaving the employment total below the December 2012 estimate. However, the Management of Companies and Enterprises portion of this sector did have its job totals revised upward with each month now showing about 1,000 more jobs than initially reported.

 

In something of a surprise, the perennially strong Educational and Health sector suffered the largest setback with the amount of the reductions increasing throughout 2013 to over 9,000 for the last four months. The revisions took away all of the gains that had been originally reported during the year. Indeed, for December 2013, employment in the sector was actually down slightly from the figure posted in December 2012.

 

On the upside, sectors including Information, Leisure and Hospitality, and Government had their jobs totals revised upward. The biggest winner was Leisure and Hospitality with a pickup of 2,600 jobs in the newly re-benchmarked December 2013 number.  The other sectors’ increases were quite small. Obviously, the gains from upward revisions were not nearly enough to offset the large negative revisions in the rest of the industry groups.

 

Without question, if the re-benchmarked numbers are correct, and they usually stand up over time, they are giving a completely different and far less optimistic portrayal of the Pittsburgh region’s employment situation from the one depicted in 2013’s originally reported jobs numbers.  It should also be noted here that the two other Pennsylvania metro areas (Philadelphia and Harrisburg-Carlisle) for which re-benchmarked data are available showed modest upticks in employment over the earlier reports.

 

Moreover, the Household Survey of employment and unemployment corroborates the weakness in jobs growth in the region. The report for January 2014 shows the number of people reporting themselves as working fell slightly from a year earlier and on a seasonally adjusted basis was also down by over 2,000 from December 2013. Meanwhile, the number of people in the labor force dropped sharply, falling a seasonally adjusted 22,400 over the last twelve months. Thus, with the unemployment count falling by a similar number, the unemployment rate tumbled from 7.6 percent to 6.0 percent—a quite remarkable decline in the unemployment rate but for the wrong reason.

 

Throughout 2013 the difference in signals about employment gains between the Household survey and the Establishment survey were suggesting that one or the other or perhaps both sets of employment estimates might have to be revised. The unusually large gains in the Professional and Technical category were also problematic, as we pointed out, because so much of the growth was concentrated in sub-sectors too small to be reported separately and thus there was no way of knowing or verifying what was propelling the Professional and Technical sector growth.

 

What does all this mean? It means our understanding of the regional economy and forecasts of future growth will have to be re-examined.  The spate of stories about how well the Pittsburgh region has fared in terms of employment compared to other regions will certainly have to be looked at again. Perhaps other metro areas in other states will find their jobs numbers were not as good as first thought—or maybe some, like Philadelphia, will see better jobs numbers.

 

To conclude, it is important to note that Pittsburgh’s recovery from the recession through 2012 was very strong as private sector employment climbed to an all-time high following a dramatic surge in job formation beginning in mid-2010.  The re-benchmarking did not push the 2013 employment total below the 2012 total but did effectively eliminate the gains we thought had occurred in 2013.

Parking Garage Economics

Leasing or selling public parking garages to shore up finances. Readers of the Institute’s work will recall days of yore around 2009 and 2010 when the City of Pittsburgh had a plan to lease the garages and meters to put the proceeds into the pension system. That did not happen, but the details of the plan are touched upon here, here, and here.

The idea did keep traction in the capital city of Harrisburg: we wrote in June 2011 that the Act 47 recovery plan for Harrisburg mentioned the possibility. Instead of paying off pensions, the 2012 final recovery plan noted "if the parking assets are included in the debt solution, the proceeds from the parking assets transaction will first need to be applied to repay the existing debt of the Harrisburg Parking Authority. The remaining proceeds…could potentially be used to pay a portion of the incinerator debt and to contribute over time to address a portion of the City’s structural deficit".

Such deals can be quite complex and raise a lot of questions. One that was raised in a news article is whether the Harrisburg arrangement is a lease or a sale. When the arrangement involves not leasing the garages to a private interest but a state-level economic development authority who will also involve another local non-profit economic development agency and then two private interests will have a role in managing property and parking operations, things can get a bit complex.

Why the involvement of the other authority and the non-profit? Because locals were worried "…that parking rates could increase out-of-control to boost profits while the assets themselves could languish and degrade in the hands of a company with no long-term interest in the welfare of the city." Similar thoughts arose many times during the debate in Pittsburgh. Of course, it is safe to assume that policymakers in both cities did not contemplate that a private operator would have to pay property taxes (unlike a municipal or authority owner), collect parking taxes, pay expenses, and still make a profit while recognizing that simply imposing higher rates would eventually result in a drop in parking customers.

Comparing Pittsburgh Metro Job Gains with National Performance

In June, the seven county Pittsburgh metro area (MSA) unemployment rate stood at 6.8 percent. In the same month, the national rate was 7.6 percent. So, does that mean the Pittsburgh area jobs market was significantly better than the national? 

 

The unemployment rate is derived from information obtained in a survey of households wherein each month a sample of people are asked to self-report their employment and labor force participation.  As a result, this survey does not tell us a great deal about what industries are adding or cutting jobs. Moreover, the survey tells us little about the quality or wages associated with jobs.

 

Fortunately, there is also a survey of establishments that hire and pay employees from which we learn a lot more about where the jobs are, the hours worked and the pay rates.  All of which are vital in assessing the state of the economy in terms of income and output growth.

 

Returning to the question of how the region is faring compared to the nation, this analysis looks at the regional and national payroll employment changes by important sectors over the last twelve months (June 2012 to June 2013) to ascertain whether there are significant differences in the jobs performance. The analysis focuses on the private sector on the premise that all real prosperity in the U.S. is measured by private sector activity; after all, unless there are producers and taxpayers, the government sector will have no real resources to spend.

 

Total private employment nationally rose by 2.1 percent from June 2012 to June 2013. Meanwhile, private jobs in the Pittsburgh MSA climbed by 1.6 percent. And, over the last three years the national job growth was 6.2 percent and the region’s gain was 5.8 percent.  Interestingly, while the national gains for both the three year period and the one year period are slightly above the Pittsburgh area increases, the national employment total remains 1.5 million below the peak level reached in 2007. On the other hand, Pittsburgh metro area jobs, while growing slightly slower, have climbed well above (31,000) the pre-recession peak set in 2008.

 

Bear in mind that from 2003 to 2007, the nation added 7.2 million private jobs, a rise of 6.6 percent.  Employment in the Pittsburgh MSA-during the same four years-expanded by only 2 percent.  For the decade, employment gains for the country and region were virtually the same in percentage terms.  The explanation? The nation suffered an enormous 7.1 percent employment drop during the recession while Southwest Pennsylvania experienced a much smaller 2.5 percent decline thanks to the absence of a housing and construction boom and a very favorable mix of recession resistant sectors.

 

Focusing on industry growth over the last year, a few similarities and differences stand out. Manufacturing, for example, has managed small gains of less than a percent nationally and locally. Likewise, the leisure and hospitality sector, a major source of job strength in both the region and the country, had almost identical employment gains of around 3.3 percent.  Health care gains were reasonably close at 2.9 percent in the region and 2 percent nationally.

 

Sectors exhibiting very different growth rates include professional and technical services, construction, retail trade, finance, mining, and private education.

 

The U.S. jobs gain in construction was much stronger than the region, rising 3 percent while the Pittsburgh area had a small decline. This undoubtedly reflects to some extent a rebound from the almost 30 percent loss in construction employment the nation felt in the recession. The Pittsburgh loss was far lower at 13 percent.

 

A similar pattern was seen in retail trade. Nationally, jobs managed a pickup of 2.1 percent over the past year, in sharp contrast to the region’s slide of nearly 2 percent.  Indeed, the area’s retail jobs in June 2013 remained almost 9 percent lower than ten years earlier. In contrast, U.S. retail jobs are above the ten year ago level although still not completely recovered from the recession induced losses.

 

Private education jobs nationally increased by just under one percent in the last year. Pittsburgh area employment tumbled by 4 percent after a smaller but significant drop the year before.

 

Obviously, since the region’s private job growth was in the ballpark with the national gain, not all local sectors could have had slower rises than the country as a whole. Most prominent among the sectors rising fastest in the region is the industry called professional and technical services, a sector encompassing engineering, accounting, management consulting, scientific research, architecture, public relations, computer systems design, marketing and legal services. Unfortunately, for the Pittsburgh MSA, data is collected for only a few of the sub-sectors in this category so that we cannot say with certainty what is driving the gains.

 

The good news is that over the last year the MSA has seen a major jump of 8.2 percent (6,100 jobs) in the professional and technical category. That means this fairly small sector-it represents only 7 percent of all employment-has generated a third of all net gains. And interestingly, this sector has added more jobs than health care over the last year even though it’s only one third its size in terms of employees on the payrolls. This is a category that bears watching in the future and more research into what is driving it. A reasonable speculation would be that there is considerable outsourcing from other industries. Another would be that the Marcellus Shale gas drilling activity has produced significant demand for scientific and engineering assistance.

 

Financial services jobs have fared better in Pittsburgh as well, moving up 4.3 percent over the past year.  Nationally, the uptick was far more modest at only 1.4 percent.  And, countrywide, financial services employment remains well below the 2003 level and a half million under 2007. They were hit very hard by the financial crisis and are having trouble recovering. On the other hand, Pittsburgh MSA financials jobs have moved well above ten year ago levels and are contributing a significant fraction of the net job region’s gains.  

 

Finally, it is noteworthy that mining and logging jobs climbed 10 percent in the past year compared to just 2 percent nationally. This undoubtedly reflects the impact of Marcellus Shale on the area. While the MSA mining jobs growth rate is impressive, it must be remembered that the employment base is small so that 10 percent is only 1,000 jobs. Still the overall impact of Marcellus on the area’s employment and income are quite substantial and are a boon to the MSA’s economy. 

 

In sum, the local and national economies are performing somewhat similarly overall in terms of private employment gains. But in light of the depth of the national recession and the expectation of some rebound, the job growth for the country over the past three years and last year must be considered extraordinarily slow. And it is a great disappoint in light of the employment increase over the years leading up to the recession. Pittsburgh MSA employment expansion since the recession has been strong relative to its pre-recession pattern and in all likelihood reflects some structural industry shift. Whether that shift will continue to add impetus as we have seen in the last three years remains to be seen. 

Could Pittsburgh Be Following Detroit to Bankruptcy?

While Pittsburgh has some similarities with the problems in Detroit (albeit nowhere near the same magnitude) and there is cause for concern about Pittsburgh’s financial wellbeing, there is little chance that on its present course the City will face bankruptcy. That is not to say that it can be allowed to return to the spendthrift, reckless behavior that had the City headed toward financial collapse and brought it to the point of being placed under two state financial overseeing groups-the ICA board and the Act 47 financial coordinator team-a decade ago.

 

 

There was period in 2009 when the legacy cost issue reared its head and prompted renewed speculation of a possible bankruptcy. See our Policy Brief Vol.9 no. 51 for a full discussion of that period and an explanation of some of the technicalities involved in a Pennsylvania municipality seeking to file for bankruptcy.

 

Without question Pittsburgh has made significant progress under state oversight and under legislative edict to lower spending, reduce debt levels, cut employment and address the City’s massively underfunded pensions.  Still, there is no denying that fairly large problems remain and there must be no backsliding that would aggravate them. Based on the Allegheny Institute’s work in constructing a benchmark city to compare Pittsburgh’s financial performance indicators, it is clear that the City government continues to spend more per capita, taxes more per capita, and has more employees per 1,000 residents than a composite of similarly sized and situated cities from across the country.

 

Moreover, Pittsburgh’s debt per resident remains very high compared to the typical, well run city despite having dropped significantly from the 2004-05 level when it exceeded $2,000 per citizen.  Then too, even though the pension funding level has been raised above 50 percent, as required by the state to avoid having the state takeover management of the pension plans, it is still far below the 80 percent level where it needs to be and its rate of return calculation assumption for the investment portfolio is by all accounts too generous. By pledging parking tax revenues for decades to shore up the pensions, the City averted a takeover and a period of dangerously low funding of the pensions.  

 

Finally, it must be noted that Pittsburgh’s public schools are, by and large, a major obstacle to population growth in the City. This is especially true for the 30 to 50 age group, the age group having families and raising school age children.  The last census showed continued decline in that group while the college and the 20 to 25 age groups expanded. The desire to be attractive to young people has paid off but the City cannot thrive when parents in high percentages abandon the City because of poor schools.

 

In certain respects Pittsburgh appears to have some of the problems Detroit faces. However, Pittsburgh has a number of factors going for it that Detroit does not have.  First, the City of Pittsburgh has a much smaller population than Detroit and has far less deep seated and widespread social problems including markedly lower crime rates. Pittsburgh has a large, strong, and recession resistant employment base in medicine, post-secondary education, government and the financial sector.  Pittsburgh weathered the 2008-10 recession well because of its favorable industry structure and the fact that the absence of a construction boom in the years prior to the recession reduced the need for a major correction.

 

Pittsburgh is also very fortunate in having a disproportionately large charitable foundation community that supports education, welfare, and cultural activities in the City. And for a city its size it has an unsurpassed aggregation of top quality museums, performing arts, music, cultural amenities and major league sports.

 

The City’s small population compared to its home County and the metropolitan region means it derives enormous benefits from its hub status in terms of commuters, visitors, attendees at cultural and sports events.  An excellent symbiotic relationship exists between the City and the region.   

 

In short, with continued oversight from the ICA board and Act 47, and a commitment by the City’s government to avoid the fiscal and management mistakes of the past, the City will be able to stay far away from the need to file bankruptcy.  Quite unlike the situation in Detroit which was allowed by the state to descend into a hopeless morass.

 

Nonetheless, there are danger signs posted in the City that it cannot afford to ignore-and the oversight teams should not permit it to ignore. A growing, dynamic Pittsburgh will require a major overhaul of the k-12 education system.  The current failed system is depriving far too many young people of a decent chance at a good, productive and satisfying life.  And until that system is substantially reformed, parents of child rearing age and children will become increasingly hard to find in Pittsburgh. In the long term, that is probably the biggest negative in the outlook and cannot be left unaddressed much longer.

 

The other cautionary warning is that the Pittsburgh government must move away from the heavily statist mentality with regard to business and the economy that has for so long dominated its decision and policy making processes. And it must begin to reduce the number of employees per 1,000 residents and bring itself into alignment with other well managed and prospering cities in this key measure of management and financial efficiency.

Philadelphia, Too

Our Brief this week covered the efforts of consultants working with the Pittsburgh Public Schools who laid out per-pupil spending comparisons for Pittsburgh and a peer group of similar districts in Pennsylvania. We noted Allentown, Reading, Scranton, Erie, Hazelton, and Lancaster as being in that comparison group but failed to note that the state’s largest district, Philadelphia, was also in that group.

Based on the consultants’ data, Philadelphia spent about $6,000 less per-pupil than Pittsburgh before ($20,477 to $14,132) and after ($18,371 to $12,988) after they came up with an adjusted amount.

Imagine that: if Pittsburgh was to spend at the per-pupil level of Philadelphia, its budget would be more than $100 million less than at present. If Philadelphia-which is facing a $300 million shortfall and has plans for new taxes, higher taxes, and requests for state money-its budget would be more than $4 billion rather than the $2 billion it is today.

The Lung Association Coughs up More Drivel

If it is April, it must be time for the American Lung Association to slander Pittsburgh with the claim that it has filthy air. And yes, it is the same old story. Virtually the entire southwest region of Pennsylvania is labeled as having high particulate pollution based on two monitoring locations, both just downwind from factories with relatively high particle releases. But monitors in the rest of the region continue to show the air to be perfectly acceptable. Indeed, counties with no monitors are deemed polluted because they happen to fall in the EPA’s western Pennsylvania district that contains the two offending monitors.

For several years the fallacies in the American Lung Association’s annual report on Pittsburgh have been pointed out so vociferously that almost no one who has bothered to look at what they are doing assigns any credibility to their asininity.

As we noted in a Policy Brief dated May 1 last year, the mortality rates for every age group in polluted southern California are lower than the rates in Laramie, Wyoming which consistently ranks among the cleanest air cities in the nation. We asked the Lung Association to explain this and to determine to what extent air quality plays a role in determining age specific mortality rates and why the discrepancy in their implicit predictions of what will happen and what is actually happening with death rates is so large. We are still waiting for those answers.

Pittsburgh Takes the Prize: Can It Keep It?

Officials in Nashville are mad. They just saw the most recent ranking from moving company U-Haul that ranks "growth cities" which are "…determined by calculating the percentage of inbound moves vs. outbound moves for each area." The Music City has been dethroned by the Steel City, with the company noting Pittsburgh had a 9% rate in 2012.

Actually there has been no news out of Nashville (it finished 8th in 2012) because of a phenomenon noted in a 2007 Brief we did when Pittsburgh was named "America’s Most Livable City": when a city-to-city or metro-to-metro list or ranking of "most" or "best" is put together it is often dubious. The London Times stated "the publication of the Almanac sets off a round of preening from mayors of winning cities and huffing and puffing from the losers." One has to wonder if losers or runners up even bother to fume at all.

The company has produced the ranking at least as far back as 2008 and if patterns hold taking first place as a growth city is fairly volatile: only Santa Monica has repeated as a first place finisher (in 2009 and 2010); Nashville appeared in 9th place in 2008, disappeared from the top ten in 2009 and 2010, and then finished first last year; 2008‘s winner Wichita has not been in the top ten since that year. A handful of cities-Austin, New York City, San Francisco, and Oakland-have appeared more than once in the top ten. (The company also produces a destination city ranking based on a person making a move to a city of more than 50 miles away from the origination point and does not take into consideration the percentage of inbound and outbound moves like the growth city methodology, and Houston has finished first in 2009, 2010, 2011, and 2012).

We also pointed out in 2007 the best measure of the attractiveness of a place is whether people stay or leave. Recent numbers show that the metro area and Allegheny County are seeing a small uptick in population (0.2 in the metro, 0.5 in the County from April 2010 through July 2012). When the net domestic migration as a proportion of total population for the 25 largest metros was measured from July 2011 to July 2012 the region did better that Philadelphia, Chicago, Detroit and seven others but rose slower than fourteen other regions including Tampa, Seattle, and San Antonio.

Pittsburgh Taxpayers’ Debt Load Getting Lighter

In 2011, the debt per capita in Pittsburgh was $1,901, based on the Census count of 306,000 and $581.8 million in general obligation debt of the City.  A decade earlier the average resident carried a much heavier debt load of $2,651.  Both the debt and the City’s population were higher in 2001 but debt has fallen faster than population in the intervening years resulting in the per capita debt drop. 

 

 

It is no small feat what the City has accomplished with regards to its debt.  Over that time frame it resisted issuing new obligations and set a target for bringing down the ratio of debt outlays to general spending (which has been running around 20 percent) over the coming decade.  When the Act 47 team examined debt service as a percentage of operating expense in 2009, Pittsburgh’s 21 percent was well above Newark (4.6%), Buffalo (7.6%), St. Louis (7.9%), and Cleveland (11%). The City wants to get the level down close to 12 percent.

 

Beyond the obligations of the City government, Pittsburgh taxpayers are liable for various other debts issued by related governments that perform functions such as owning sports stadiums, land, parking facilities, and schools.  City financial data shows that City taxpayers are responsible for all the debt or a portion of debt for some of the other borrowers. A look at the decade from 2001 to 2011 shows that some shares have increased, some debts have disappeared, and some have increased.

 

2001

 

 

2011

 

 

Debt

(Direct and Overlapping)

Percent

Obligation of City Taxpayers

$ Amount (millions)

Debt

(Direct and Overlapping)

Percent

Obligation of

City Taxpayers

 

$ Amount (millions)

Pittsburgh General Obligation

100

885.7

Pittsburgh General Obligation

100

581.8

Stadium Authority

100

22.7

Stadium Authority

0

0

Auditorium Authority

50

13.5

Auditorium Authority

50

1.4

Urban Redevelopment Authority

29

64

Urban Redevelopment Authority

61

40.2

Parking Authority

100

83.9

Parking Authority

100

93.4

Pittsburgh Schools

100

399.4

Pittsburgh Schools

100

451.7

Allegheny County

25

176.3

Allegheny County

25

192.9

Total

 

1,645.5

 

 

1,361.4

 

While the City government’s debt was falling, so too was the debt of the authorities related to stadia and the URA.  The percentage of URA debt attributable to the City rose while the amount of URA debt fell. It is reasonable to assume the City has agreed to back more of that agency’s debt and, should it incur more obligations, the City would be on the hook for a larger share than in the past. By way of explanation, note that if the City were still responsible for only 29 percent of URA debt in 2011, the dollar amount of the obligation would have been $19 million rather than the actual $40 million it now actually has.

 

Going in the opposite direction by taking on more debt from 2001-2011 was the Parking Authority ($9.5 million), Allegheny County ($16.6 million), and perhaps most surprisingly, the Pittsburgh Public Schools ($52 million).  The School District has been losing enrollment and is currently being advised on what to do with twenty school buildings no longer in use. Some are in the process of being sold.  The District is expected to be “insolvent” by 2015 by some observers, so it’s puzzling as to why the debt was issued and why the District has not put itself on a self-imposed “debt diet”. 

 

In total, all the debt obligations City taxpayers are responsible for amounted to $4,926 per capita in 2001, falling by about 10 percent to $4,449 in 2011.  Note that much of the property tax in the City is paid by commercial and industrial properties, many of which are owned by non-residents who pay a large share of taxes collected in and by the City.

 

How does Pittsburgh compare to other cities?  As we noted in our recent Benchmark City report, the per capita debt in Pittsburgh was 64 percent higher than the Benchmark City just on general obligation debt, and that the gap between Pittsburgh and the Benchmark shrank since we did our first Benchmark report in 2004 (it was 233% higher then).  But how about Pittsburgh compared on the total direct and overlapping debt to another city that is very similar on population and square mileage?  The City is Stockton, located in the San Joaquin Valley of central California.

 

The City has a lot of debt applicable to it in varying shares: school district, community facilities, and its own general fund and pension obligations, and the total comes in at $1.065 billion, just about $300 million less than Pittsburgh’s direct and overlapping total, and with a population of 296,000, the typical Stockton resident’s share of the debt is about $850 less than Pittsburgh’s ($3,601 to $4,449).

 

It is worth noting that Stockton’s pensions are in better shape than Pittsburgh’s (88% funded combined for police, fire, and non-uniformed employees compared to 62% combined for Pittsburgh) and it has slightly less accumulated in unfunded liabilities for other post-employment benefits like life insurance and retiree health care ($416 million in Stockton vs. $488 million in Pittsburgh).  Despite all the foregoing, the City of Stockton has been walloped by the effects of the recession and the housing bubble and it was successful in its Chapter 9 bankruptcy filing with a favorable ruling from a Federal judge in March. 

 

But the Stockton case does point to the absolute necessity of restraining municipal spending and being very prudent in agreeing to overly generous compensation and pension packages.  A lesson that Pittsburgh must keep in mind as it works its way out of distressed status and seeks to have the state appointed financial oversight board removed.