For much of the past two decades, the political leadership of Pittsburgh has been running away from reality. Faced with dramatic losses in population and private sector jobs, elected leaders have consciously avoided making tough choices in bringing city spending into balance with city realities.
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| | | James B. Burnham (burnham@duq.edu) is the Murrin Professor of Global Competitiveness at Duquesne University's Donahue Graduate School of Business . He lives in the East End. His study "Pittsburgh's Pension Plan: The Black Hole that Won't Go Away" was published this month by the Allegheny Institute for Public Policy. | |
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We can thank clever financial engineers for helping the politicians evade their responsibilities. They pointed out that "spinning off" the city's water and sewer operations would help balance the budget for a couple years. Then, in 1996, the city raised $16 million from selling delinquent property tax liens to private investors.
To reduce payments into the municipal pension fund, the financial engineers (and bond underwriters) helped persuade the mayor and City Council to borrow nearly $300 million in pension bonds in the late 1990s. The proceeds were mostly put into the stock market -- and are currently costing taxpayers $18 million a year in interest payments. Now Pittsburgh is going through an expensive lesson in why borrowing for stock market investments is dangerous, particularly for a municipality that starts from a weakened financial position.
Maybe all these maneuvers were not as devious as what the whizzes at Enron were cooking up with help from their accountants, but the basic objective was the same: Avoid having to confront reality. Now, Enron has reached the end of the road, bankruptcy. And the mayor's task force on Pittsburgh's financial crisis apparently has included bankruptcy as an option for the city.
At first glance, the bankruptcy alternative (via state Act 47) may seem like a sensible, rational step to take. One need look no further than the ongoing restructuring of US Airways, now that it has entered into Chapter 11 bankruptcy, to see how bankruptcy can help managements make badly needed adjustments in contracts with labor unions and suppliers.
Bankruptcy could make it easier to implement long-overdue changes to city workforce staffing, pay, benefits and organization. It might make it feasible to restructure the bulk of the pension bonds outstanding, with considerable savings in interest.
However, such an outcome is highly undesirable. It would severely damage the reputation of the city -- and the region -- and increase the challenges of marketing Pittsburgh to investors, tourists and business people from around the world. It would probably substantially increase the cost of financing county and other nearby municipal governments, as investors shy away from securities associated with our region, adding to higher tax burdens for everyone. The citizens of Pittsburgh would find themselves ultimately ruled by Harrisburg bureaucrats and judges, rather than their freely elected officials.
A second alternative, in the minds of some wishful thinkers, is a sharp increase in funding for the city from Harrisburg. This is highly unlikely. There are a number of other communities in comparable difficulties that would demand comparable assistance, and the state has its own, rapidly growing budget problems.
A third alternative is to find new tax revenue. In the absence of any more financial rabbits, this is the politicians' preferred alternative, especially when taxes might be paid by nonvoters -- for example commuters into the city. The mayor complains that commuters pay no taxes to the city, overlooking the fact that a considerable chunk of the city's $32 million in parking taxes comes from them. But the central problem with focusing on additional tax revenue is that it diverts attention from the spending side of the budget, where the heart of the problem resides.
The final (and preferred) alternative is for the mayor and council to roll up their sleeves, show some political courage and take the tough managerial decisions that are needed to bring work force staffing, pay, benefits and organization into line with today's realities. Such an approach was called for in 1996 by another citizen task force, headed by Paul O'Neill, then of Alcoa. It was largely ignored.
The tough decisions that have to be made today are found in such areas as the fire and police bureaus, emergency medical services and 911 operations. Many of these services are still geared to a city with substantially greater population than the Pittsburgh of 2002. Tough decisions are also needed on controlling the skyrocketing cost of health benefits for retired employees, which at roughly $5,500 a person, cost the city over $7 million last year.
Nor should pension-related issues be ignored. The pension fund's unfunded liabilities, after dropping to 23 percent of total obligations at the beginning of 2000, are likely to rise to over 50 percent by the end of this year, thanks to a bear stock market and last year's municipal election year benefit increases worth $23 million. If we include the $272 million in pension bonds that will be outstanding at the end of this year, total city of Pittsburgh pension-related obligations are likely to exceed $690 million.
The basic approach for the pension fund should be to reduce the growth rate of liabilities and increase the annual contributions from both the city and its employees so that the unfunded liability can gradually be reduced to a manageable amount. Such an exercise should include conservative assumptions regarding both investment returns (currently programmed at an unrealistic 9 percent) and the amount of state aid. In view of the city's extremely weak financial position, it might be useful to start with a discussion of what constitutes "a realistic annual contribution" and to make adjustments in plan contributions and benefits around that anchor.
Making the right decisions gets harder the longer they are put off. It seems that some of our elected officials would prefer to let the city slide into bankruptcy so that they can blame a judge or a Harrisburg bureaucrat for making the unpleasant budget cuts and organizational changes. In other words, the political costs to most incumbents are seen as outweighing the long-run benefits of financial soundness.
An optimist might point to the potential represented by the mayor's "PGH 21" budget review panel. Its report is due shortly. Let's hope that it will stay away from one-shot fiscal "rabbits" and tax increases.
Instead, if it concentrates on spending and organizational issues, its recommendations could provide the basis for some of the tough decisions that the political leadership needs to make to help this region realize its potential, and avoid bankruptcy. But then the mayor and council would have to step up and carry the ball. That seems like a very tall order, given everyone's past record.
In short, Pittsburgh's looming financial crisis constitutes a challenge of the highest order for its elected officials and citizens.
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