City found 'distressed'

Recommendation by state's experts could lead to help getting out of the red

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Financial investigators hired by the state have recommended that Pittsburgh be declared financially distressed, citing its dwindling tax base, huge debts, diminished services and overall poor financial condition.

Martha Rial, Post-Gazette
From left, Howard "Hoddy" Hanna III, CEO of Howard Hanna Real Estate; Mayor Tom Murphy and city Finance Director Ellen McLean listen to councilman Sala Udin testify at last night's hearing.
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The recommendation, which was issued last night at a crowded hearing on the South Side, means the city is a step closer to becoming distressed under Act 47, the Municipalities Financial Recovery Act.

A formal declaration of distress would allow for commuter taxes and spending cuts to help the city get back on its feet financially.

The final decision rests with state Department of Community and Economic Development Secretary Dennis Yablonsky, who presided at the hearing. He has 30 days to rule on the city's request.

More than 250 city government officials, union members and residents packed the ballroom of the International Brotherhood of Electrical Workers hall on the South Side for the hearing, a first step in the Act 47 process.

The act says there are up to 11 criteria that can be cited to be declared distressed, of which Mayor Tom Murphy, in requesting the formal declaration, claimed two: that the city's expenses outpaced revenues for three years running and the city was having trouble paying court-ordered damage awards.

Investigators from Public Financial Management of Philadelphia, who conducted the independent review under a contract with the state, looked at the claims and agreed the city is distressed and at "severe risk" of failing to provide services and pay its bills.

In a 38-page report, the investigators said the city ran deficits of $37.7 million in 2000, $48.6 million in 2001 and $53.8 million in 2002. The PFM team did not agree with the city's assertion that it could not pay the court-ordered judgments, but still said the city is distressed. The city even met a criterion it did not claim in its application, PFM said: that it had a 5 percent or greater deficit for two years running.

Overall, PFM based its judgment was based largely on factors that included the city's "dramatic decline in population" (a 44 percent drop since 1960); debt payments that eat 20 percent of the yearly budget; a heavier tax burden than surrounding suburbs that constrains the city's ability to raise existing taxes; an expected $100 million deficit by 2007; and a credit rating downgrade this fall to "junk bond" status, which branded Pittsburgh with the worst rating of any major American city.

"Absent corrective action, the city may not be able to provide for the health, safety and welfare of its citizens; pay principal and interest on [its] debt obligations when due; and meet financial obligations to [its] employees, vendors and suppliers," the report said. "Accordingly, we recommend that the city be declared distressed."

The PFM report was based on interviews with nearly 40 government and civic leaders, and reviews of official documents such as audits and annual financial reports.

Yablonsky would not say last night when he expects to issue a ruling. If he agrees the city is distressed, he will have another 30 days to appoint a coordinator who will then have 90 days to write a financial recovery plan for the city. The plan will go to city government for approval. The whole process can take five months.

Testimony to sway Yablonsky started with Mayor Tom Murphy. Murphy, who has been mayor since 1994, pleaded with Yablonsky to act with "all due haste" to approve the request, saying the city has "scrimped and scraped together" every way it could to balance its budgets in the past, but cannot do so anymore.

As he has for months, Murphy said the city suffers from businesses and non-profits exempted from paying taxes; that the city, which laid off 730 workers and cut services last year, cannot cut expenses any more; and that tax reform is needed from Harrisburg to save the city over the long term.

"Since we cannot be sure if and when Harrisburg will act, I am compelled by the responsibility of my office to utilize every tool available to our city under current state law to protect our citizens and stakeholders," Murphy testified.

From a dais on the IBEW stage, looking down at the lectern where Murphy stood, Yablonsky asked the mayor how the city's junk bond status would affect borrowing. Murphy answered that the city can no longer borrow.

The hearing lasted nearly four hours and ended shortly before midnight. More than 30 people took turns at the podium, most of them speaking in favor of the distressed status.

The PFM report said the city may "face a severe cash-flow crisis" early next year. One of the three other state officials sitting with Yablonsky, Fred Reddig, asked how the city will pay its bills, and Murphy answered that he is asking four local banks to each provide a $10 million line of credit (or $40 million total).

The $398.6 million budget Murphy proposed for 2004 contains a $42 million deficit, which Murphy hopes to eliminate with the help of Act 47. Besides commuter taxes, which have to be approved by Common Pleas Court, the act allows for spending controls, such as forcing future contract awards to weigh the city's financial status.


Tim McNulty can be reached at tmcnulty@post-gazette.com or 412-263-1542.


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