Tag Archives: SEA

The Stadium Authority that Will Not Go Away

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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.

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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.

Pirates Threaten Legal Action

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Summary:  The Pittsburgh Pirates baseball club is threatening legal action over the Sports and Exhibition Authority’s reluctance to grant the team’s request for ballpark repairs and upgrades.  The dispute centers around a video scoreboard which the Authority claims is an improvement and falls outside the stipulations of the lease.  Given that the taxpayers have largely paid for the stadium from which the team earns millions, the team should fund desired “improvements”.

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While spring training is a ways off yet, the Pittsburgh Pirates baseball club is playing hardball with the City-County Sports and Exhibition Authority (SEA) over repairs at PNC Park.  The Pirates are asking the SEA to pay for capital upgrades to the ballpark which opened in 2001.  The requested upgrades include repairs to seats, new carpeting for suites, painting, and new field lighting.  In response, the SEA says it needs to explore whether or not it’s obligated to do so under its lease.  Legal action is being threatened by the team.

Presumably the lease details will determine what happens. PNC Park was built for $216 million and funded mostly with taxpayer money.  Required annual base rent paid by the Pirates for leasing the Park is set at $100,000 per year until 2030.  The team is also required to pay “excess gate” rent as well as “excess concession revenue”, each based on a percentage of benchmarks achieved by the team or its concessionaires.

The lease also stipulates that the team consents to adding a ticket surcharge to the price of admission.  Revenue from the ticket surcharge is divided such that the Pirates retain the first $1.5 million in each year with the next $375,000 going to the SEA (adjusted for cost of living).  This amount is to be deposited into a “capital reserve fund”.  The next $250,000 of the ticket surcharge revenue is to be paid to the SEA as additional rent and “… may be used by the Authority in such manner as it deems appropriate (page 15).”  Any remaining ticket surcharge revenue is retained by the team.

According to the SEA’s most recent audited financial statement (note 17); “In fiscal year 2015, the Authority recognized $100,000 in Base Rent, $750,969 in ticket surcharges, and $0 for Excess Gate and/or Concession Revenues.”  So for a rental payment of just over $850,000 per year, the team plays in a $200 million, mostly taxpayer financed stadium—an extraordinarily sweet deal.  But the deal is made even more generous by the fact that at least $375,000 of this money is placed into the capital reserve fund which is to be spent on the ballpark.  Thus the SEA actually only realizes about $450,000 in rent—certainly nowhere near the rent a $200 million facility would bring in a market transaction.

The capital reserve fund is the source of contention between the SEA and the team.

According to the lease (section 10.3.1) the SEA established a capital reserve fund and had to place an initial $3 million into the fund and then is responsible for placing $650,000 into the fund each year for the duration of the lease.  As of December 31, 2015, the fund held $5.8 million down from $9.1 million at end of December 2014. SEA claims there is currently only $3.3 million in the fund (end of December 2016).  The lease further specifies that if not enough money is in the fund for use, the SEA is required to find the funds for any work that must be done.

These funds are not to be used for ordinary repairs and maintenance, only for capital improvements and repairs.  Capital repairs are defined as extraordinary repairs and replacements that typically have an economic life of greater than seven years or that are needed to maintain the structural integrity of the park.  The lease lists quite a few repairs that are covered by the fund.

For example, the lease does allow for replacement of ballpark seats and “major repairs, replacement, or upgrades of components to the field lighting.”  It also stipulates that painting and carpeting of non-public areas is covered as long as it is done at a minimum every five and seven years respectively.

According to the news reports, the Pirates are seeking repairs to seats, new carpeting for suites, including their exclusive club area, painting, and new field lighting.  Furthermore they are asking to upgrade a secondary scoreboard (to show out-of-town scores) and other video boards.

The biggest disagreement seems to stem from the request over the scoreboard and video boards.  The lease notes that “upgrades to components of the scoreboard more frequently than seven years” does not constitute a capital repair. News reports state the SEA views the Pirates’ request to upgrade the scoreboard as an “improvement” and not a “repair” since it would involve using new technology and not a simple replacement of parts.  An improvement would not be covered by the lease.  The team disagrees.

The SEA claims that there is currently not enough money in the capital reserve fund to pay for the scoreboard improvements, but plenty to cover the Authority’s responsibilities. There are references in news reports to a letter sent from the team president to the head of the SEA in which the team offers to put money into the capital reserve fund as long as the SEA matches those funds with money from a new revenue source.  The head of the SEA is quoted as saying “…our position has always been that the revenue should be generated by operation of the facility and not by the taxpayers generally.”

This is the fundamental point in the argument.  The SEA, as owner, has no source of funds to pay for “improvements” beyond what it can collect from the ballpark. And, the money they currently receive from the team is barely adequate to cover the normal owner expenses of repairs and maintenance, insurance, administration, etc. Where does the team president think the SEA will find more funding?  If they borrow the funds, where will the money come from to repay the loan?  They cannot levy taxes.  The ballpark itself would have to provide the dollars.

Or the SEA could ask the City, the County, or the Commonwealth for the funds.  How will that request be received?  Not very well in the current fiscal environment. That would mean still more tax dollars for the Pirates. There is a political limit, even in Pittsburgh, to the welfare that will be made available for rich owners and players. Finally, the SEA could turn to foundations and ask for grants.  But that seems less viable as a source of funding than the governments.

In short, what is wrong with the team asking luxury suite lessees, game attendees and concessionaires to put in a small percentage more than they are currently paying to fund “improvements” that will be enjoyed by the people at the game? What a novel concept. Tickets and suite leases are already heavily subsidized by taxpayers through the underwriting of the ballpark construction and the fact that there are no property taxes being paid by the facility. Those two factors produce many millions of dollars per year in direct subsidy to the team.

It is bad enough that taxpayers are on the hook for the construction of the ballpark. They should not be fleeced to provide the team with extras like secondary scoreboards.  If rents were close to a more normal market rate for a property of the ballpark’s value, the owner would be able to fund the repair budget and needed improvements easily.

The team makes many tens of millions from PNC Park through ticket sales, concessions, parking, naming rights, advertising,  radio and TV, etc.  If the team wants extras, they should pay for them and stop asking taxpayers for even more assistance.

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

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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.

Time to Shine a Legislative Light on the Sports and Exhibition Authority

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On November 5th the Court of Common Pleas of Allegheny County ruled that the Allegheny County Controller does not have the power to audit four Authorities related to Allegheny County:  the Allegheny County Airport Authority, the Allegheny County Sanitary Authority (ALCOSAN), The Sports and Exhibition Authority (SEA), and the Port Authority of Allegheny County (PAT).  The Court’s opinion is that these Authorities were created by state law and are therefore not subject to review by the Controller.

 

As we wrote earlier this year (Policy Brief Volume 15, Number 4), regarding the Controller’s request to audit the Sports and Exhibition Authority (SEA), “the law seems clear.  As long as the SEA annually delivers to the City and County an independent audit…then the Controller does not have standing to conduct an audit.”  The Court in its ruling also extended this assessment to the Allegheny County Airport Authority, ALCOSAN, and PAT.

 

The crux of the Controller’s argument was that the office has the right to perform an audit on any entity receiving public money (from the County) as granted to the Controller under the Second Class County Code.  The Court’s opinion noted that the Code grants the Controller “the general supervision and control of the fiscal affairs of the county and of the accounts of all officers or other persons, who shall collect, receive or distribute the public moneys of the county, or who shall be charged with the management or custody thereof. 16 P.S. § 4901.”  Of course the Controller wanted not only to perform a financial audit, but a performance audit as well and believed the Code also allows that.  As was outlined in the opinion, the Controller argued that the office “may at any time require from any of them, in writing, an account of all moneys or property which may have come under their control.”  She was particularly interested in how the SEA distributes tickets to events at its facilities.

 

Of course counsel for the Authorities disagreed, claiming that the Authorities were granted operating power through state legislation wherein no specific provision was made for permitting the County Controller to perform audits. The Airport Authority and ALCOSAN were created through the Municipal Authorities Act (1945) which gave governmental auditing power to the Attorney General.  The Attorney General was also granted auditing authority for the SEA which was created under Act 85 of 2000, “Second Class County Code—Omnibus Amendments”.  PAT was created under the Second Class Port Authority Act which provided the Auditor General auditing powers.  Of course, all Authorities must by law have financial audits carried out by the qualified firm of their choosing.

 

As we wrote in the aforementioned Brief, “the office of the Attorney General is the state’s top law enforcement officer, not an auditor. On its webpage the Attorney General’s office lists as its responsibilities and duties items such as defending the Commonwealth and its agencies in a court of law but, to no one’s surprise, auditing authorities is not one of them.”  Was the provision in the laws authorizing these three Authorities (excluding PAT which is periodically audited by the Auditor General) granting auditing power to the Attorney General rather than the Auditor General—which presumably should be able to audit any agency receiving state funds— done deliberately to limit governmental scrutiny or was it merely a typographical error?  Since it happened in two different Acts, the latter possibility seems very unlikely. Indeed, it would be interesting to learn whether the Attorney General’s office ever performed an audit of an authority.

 

The Court’s opinion is that the Legislature specified the Attorney General to have the primary auditing power and the best the Controller can do is review any fiscal audits that are performed for the Authorities.  Quoting the court ruling:  “That the legislature gave the controller only a back-up or provisional right to audit and gave the Attorney General the principal right to audit leads this court to the conclusion that the Controller cannot conduct an audit outside of the Municipalities Authority Act…”   That quote was in reference to the Airport Authority, but similar conclusions were made regarding ALCOSAN, PAT, and the SEA.  The ruling notes that “the general powers granted to the controller by the Second Class County Code cannot override the specific auditing structure the Legislature has created. 1Pa C.S.A.§ 1933.”

 

Of course that is the strict legal interpretation, which is of course correct. The Legislature created these Authorities and gave the oversight power to state level officials, the Attorney and Auditor Generals.  They did not include local oversight.  However there is an easy fix:  the Legislature can amend these Acts to give auditing power to the Auditor General, the county controller, or both, especially in the cases where the power is currently limited to the Attorney General, who would probably never become involved unless possible criminal activity was taking place. Indeed, involvement of the Attorney General would almost certainly be perceived to be an investigation.

 

First and foremost, transparency would be the main reason for allowing this move.  The crux of this lawsuit was the Controller’s desire to examine the awarding of tickets by the SEA.  Were the recipients politically connected and were they given as favors or rewarding past support? Was there any quid pro quo, whether explicit or not? The public has a right to know.

 

In the opinion, one judge stated in regard to the Acts, “the Legislature has created several layers of safeguards to assure the public that government funds and assets are being used wisely.”  But the ultimate “safeguard” was placed in the hands of the Attorney General, not exactly the greatest accounting and auditing expert. And as noted above, any audit by an Attorney General would likely be viewed as a signal that there were suspicions of questionable behavior.

 

In short, the current law regarding the creation of the SEA and the other Authorities needs to be amended to include granting auditing powers to the Auditor General and the local Controller.  Simple modifications in one sentence would be all that is required.  Why should there be any hesitation to offer the requisite amendment language and bring it to a vote?

Legislature Should Amend the Law to Allow County to Audit the SEA

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Once again the battle between Allegheny County Controller and the City-County owned Sports and Exhibition Authority (SEA) has bubbled to the surface.  She seeks the right to audit the Authority’s performance, particularly the practice of giving out free tickets to venues they own.  They say it isn’t under her jurisdiction.  She hasn’t been deterred and the SEA is asking an Allegheny County judge to stop an audit.

 

More than likely the SEA will succeed.  As we had written earlier this year (Policy Brief Volume 15, Number 4) the law authorizing the SEA (Act 85 of 2000), states that as long as the Authority has a certified public accountant examine its books, accounts, and records annually then they fulfill their public obligation.  If they fail to do so, “then the controller, auditors, or accountant designated by the county or city is hereby authorized and empowered from time to time to examine at the expense of the Authority, the accounts and books of the Authority, including its receipts, disbursements, contracts, leases, sinking funds, investments and any other matters relating to its finances, operations and affairs.  The Attorney General shall have the right to examine the books, accounts, and records of any Authority.”

 

That is correct—the Attorney General has the right to do an audit as specified in the law creating the SEA.  Not the Auditor General, whose office has expertise in such matters.  The Attorney General is currently too embroiled in her own scandal to care about a ticket giveaway program at the SEA.   Furthermore as the State’s top law enforcement officer, she lacks the skills to do such an audit.  This was done deliberately by the authors of the law to limit governmental scrutiny of the SEA.

 

But the remedy is quite easy.  The Legislature can simply pass a one sentence amendment to Act 85 to enable the County Controller the right to audit.  They can change it to give the County controller the right to do the audit.  If the Authority is operating above board, they shouldn’t care who does the audit.  The awarding of tickets to events at SEA venues has the look of buying favors or rewarding past support.  The public has a right to know whether this entity is operating properly.  This is especially true since the public provided a large portion of the funds the SEA used to build its facilities.

Time to Rewrite Law Governing SEA Auditing

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Recently the Allegheny County Controller revealed that she wishes to perform an audit on the City/County owned Sports and Exhibition Authority (SEA).  As the County’s official fiscal watchdog she wants to review its practice of distributing tickets to sporting and entertainment events held at the Authority’s venues—shining a light on a practice that otherwise remains in the shadows.  However, the SEA rebuffed her attempt, noting that they are a state created agency falling outside the County and City Controllers’ purview.  If neither the County nor City Controller cannot perform the audit then who can?

 

The law creating the SEA is Act 85 of 2000, “Second Class County Code—Omnibus Amendments”, Article XXV-A “Sports and Exhibition Authority”.  Under section 2509-A, titled Moneys of the Authority, the process of overseeing the finances is spelled out:  Every Authority shall have at least an annual examination of its books, accounts and records by a certified public accountant. A copy of such audit shall be delivered to the county or city creating the Authority. A concise financial statement shall be published annually at least once in a newspaper of general circulation in the county or city where the principal office of the Authority is located. If such publication is not made by the Authority, the county or city shall publish such statement at the expense of the Authority. If the Authority fails to make such an audit, then the controller, auditors or accountant designated by the county or city is hereby authorized and empowered from time to time to examine, at the expense of the Authority, the accounts and books of the Authority, including its receipts, disbursements, contracts, leases, sinking funds, investments and any other matters relating to its finances, operation and affairs. The Attorney General shall have the right to examine the books, accounts and records of any Authority.

 

The law seems clear.  As long as the SEA annually delivers to the City and County an independent audit from a qualified certified public accountant, then the Controller does not have standing to conduct an audit.  Currently on its website the SEA has available audited financial statements from 2007 to 2013.  It is not quite apparent that the SEA is adhering to the law above by publishing these reports “annually at least once in a newspaper of general circulation”.  The website doesn’t even list press releases that would announce when an audit has been completed.  Moreover these statements cover just the finances (“the books, accounts, and records” mentioned above) of the SEA.  As noted in the Auditor’s report in the most recent statement, “Our responsibility is to express an opinion on these financial statements based on our audits…standards require that we plan and perform audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.”  They do not cover “operation and affairs” as perhaps desired by the Controller in her effort to look into the disbursements of tickets to events.

 

The SEA is a state authorized and created entity formed on behalf of the City and County and the   state has dictated who will perform audits and under what circumstances. But as mentioned above, the law gives the responsibility to the Authority first, and to the City and County Controllers if the Authority does not have an annual audit done by a certified accountant. The law permits the Attorney General to audit presumably any time he/she feels it is warranted. Interestingly, the Auditor General is not given legal power to conduct audits of the SEA as one would expect, that office being equipped and having the trained personnel to do the job properly.  The office of the Attorney General is the state’s top law enforcement officer, not an auditor. On its webpage the Attorney General’s office lists as its responsibilities and duties items such as defending the Commonwealth and its agencies in a court of law but, to no one’s surprise, auditing authorities is not one of them.  So was the provision in Act 85 that the Attorney General would have the power to audit the SEA rather than the Auditor General—which presumably should be able to audit any agency receiving state funds— done deliberately to limit governmental scrutiny of the SEA or was it merely a typographical error?

 

The only people who know for sure are the Legislators who wrote and/or sponsored the language and they have not stepped forward to offer an explanation.  But there is a simple fix.  All it would take is for someone on the appropriate committee to offer an amendment to change the Act 85 wording to read “Auditor General” instead of “Attorney General”.  To really repair the language the amendment should go further and give the County Controller and/or the City Controller, since this is a joint authority, the power to audit the SEA every three years or on an as needed basis. Surely this is not the type of change that would counter much resistance if the SEA has nothing to hide.  At least one attempt to expand the powers of the City Controller had been attempted in the 2003-04 session of the Legislature when a bill was introduced (HB2007) to give the City Controller the ability to audit the SEA.  The Governor at the time vetoed the bill.

 

In the event this proves to be too difficult, perhaps the Attorney General ought to designate someone with auditing experience, such as the Auditor General’s office or even the County Controller, to perform the audit on behalf of the Attorney General’s office.  Not the best solution, but a possibility.

 

This is a matter that clearly cries out for remedial action. The SEA, as a public authority, ought to be subjected occasionally to the bright light of the Controller’s office. The awarding of tickets to sporting and entertainment events to those who are politically connected can be seen as buying favors or rewarding past support.  The public has a right to know whether this entity is operating completely above board.  It will be interesting to see who opposes amending the Act 85 language as recommended above.

Steelers to Pay for Stadium Expansion

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After threatening the SEA with a law suit in an attempt to force the authority to pay the cost of adding seats to Heinz Field, the Steelers have settled for having the SEA borrow the needed funds to be repaid by the team.  This settlement with the SEA has to be the result of the likelihood of losing in court and the public relations beating the team was suffering on the issue. The Steelers will add a ticket surcharge to cover the bond debt service.

 

As we noted when the lawsuit was first talked about, the Steelers have benefitted enormously from the tax dollars expended to build the stadium.  Given the profitability of Heinz Field and strong demand for tickets it only made sense for the Steelers to incur the cost of building the additional seating.  It was the height of arrogance to ask the taxpayers through the SEA to bear the expense.

 

If the Steelers believed the seats would not pay for themselves in a reasonable time period, then why would it be in the interest of taxpayers to underwrite their cost?  This should have never been an issue. Obviously, the Steelers believe the seats will be a profitable investment. The fact that the Steelers made their demands of the SEA is a reflection of the assumption by the City’s sports teams that they are owed public subsidy, and lots of it. And given the past behavior of politicians who bend to their wishes they are probably justified in that belief.

 

Good for the SEA for holding firm in this case. Perhaps it is a portent of things to come in these matters.

Pittsburgh Taxpayers’ Debt Load Getting Lighter

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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. 

 

Is a Sweet Steelers Deal About to Become Ridiculously Generous?

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With all three Pittsburgh professional sports teams playing in fancy new digs, taxpayers could be forgiven for thinking they are through having to subsidize the teams. But they could be wrong.  There is high probability they will be asked to pony up even more money for Heinz Field as the team eyes adding 3,000 more seats at the southern end of the stadium. 

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SEA, TIF, and OPM

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The Sports and Exhibition Authority (SEA) has announced it is seeking $3.1 million from the Commonwealth to pay for design work necessary to begin the redevelopment of the 28 acre Civic Arena site. And we all thought the Penguins would have the redevelopment rights. But that obviously does not mean they will be expected to pay all the costs of the redevelopment-no matter how much money they stand to earn from the site’s redevelopment.

Then, after the design work is completed, the SEA will want tax increment financing (TIF) to help fund the new construction on the site. Did it ever occur to these folks that the site is a very valuable piece of real estate and maybe should be sold to a developer who will fund the new construction itself? But having assigned the redevelopment rights to the Penguins, the SEA obviously feels compelled to find the money to help them redevelop the site. Call it the urban renewal project that never ends.

Now what all of this actually reveals is the unfortunate mindset of public officials and coddled sports team owners who hold the view that they have an inherent right to use other people’s money (OPM) to subsidize their pet projects. Nice deal if you can get it but it fosters a cynical and ultimately destructive view of government. Favoritism creates calls for more favoritism and it engenders a sense of entitlement in private sector players who are constantly looking for taxpayer money in the form of economic assistance. It weakens the very fabric of the free market entrepreneurial system. It makes for cronyism and mutual backscratching between business and politicians, the exact opposite of what should be happening.