10 years later, is Pittsburgh really climbing out of the red?

A look at the forces that led to state financial oversight: The first of two parts

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Ten years and four months ago, then-Mayor Tom Murphy stood before a cadre of media to deliver grim news.

By the time he stepped up to speak, eyes moistened with tears, Pittsburgh city government had been sputtering along like an airplane held together by duct tape, according to a former finance director. But now the plane was about to take a nose dive -- with the possibility of bankruptcy hovering.

"I hate doing this," Mr. Murphy told the reporters.

He announced plans to lay off 731 city workers -- including police officers -- and leave hundreds more positions unfilled. All but six city pools would be drained and closed early -- along with 19 recreation centers that were, in many places, critical gathering spots for sports and community events. Later that year, the city's credit rating would be downgraded, making it the only major American city whose debt was rated "junk." A fifth of the city's budget went to pay off old debt.

By the end of that year of anguish, the city would pass a budget that portended a gloomy year. It would leave all of the pools dry and recreation centers closed. The city's workforce would remain significantly reduced.

But in the year when the city hit financial rock bottom -- though Mr. Murphy contends it was far from there -- he made a move that some have credited for turning the city into a poster child for municipal recovery -- one that would make 2003 seem like a distant memory.

Almost exactly 10 years ago, on Dec. 30, 2003, the city was officially declared "financially distressed" under Act 47. The state would appoint two coordinators who would help the city craft a recovery plan that included cuts and "right-sizing," and the creation of a new tax structure that raised money from those who worked in the city -- even if they lived outside of its borders. It also gave the city leverage in its negotiations with public safety unions, allowing it to cut jobs and benefits and reap savings, for better or for worse.

Nine years and two mayors later, in 2012, the city had significantly reduced its debt load, reined in spending and come up with a plan to fund its long-term pension costs. The city's two Act 47 coordinators testified that the city should graduate from the program. That decision now lies with the state Department of Community and Economic Development.

But a full decade out, and on the verge of a mayoral transition, incoming Mayor Bill Peduto is painting a very different financial picture, arguing that, despite the fact the city has been held up as a model of financial recovery, Pittsburgh still needs Act 47. He worries that the Ravenstahl administration has portrayed the financial situation as rosier than it actually is -- hiding shortfalls and deficits by not filling positions, for example.

Mayor Luke Ravenstahl and his finance team did not respond to multiple requests for interviews.

To the bafflement of some of his colleagues on council, Mr. Peduto wants to remain in the program, even though it means continuing to answer to state overseers. The incoming mayor believes the city is still in a precarious financial position.

"It's not a question," he said. "We must stay under Act 47."

He worries, especially, about the coming year, when the city will begin negotiations with police and firefighter unions. Act 47 can limit the power of unions at the negotiating table with economic caps, for example.

So how did Pittsburgh get to that place in 2003? And how far has it come back?

A long road to Act 47

It's the story of a lot of post-industrial American cities. There was population decline, accelerated by the closure of the steel mills in the early 1980s. In Pittsburgh, though, it was more dramatic, the population halved over the course of 40 years between 1960 and 2000, leaving a tax base of around 300,000 residents living in a city for a population twice that size. They could not support it.

By the time Tom Murphy took office in 1994, the situation was dire, he said. Ellen McLean, who served as his finance director in the last years of his time in office, said the city had almost no cash on hand that year. And before he was even sworn in, Mr. Murphy learned the Pittsburgh Pirates were threatening to leave unless they got a new stadium.

Mr. Murphy acknowledged that he postponed sounding the alarm on the city's financial problems. Instead, he pursued ambitious capital projects: PNC Park, Heinz Field and the David L. Lawrence Convention Center. Though they were built with no funding from the city itself, he said it would have been impossible to get the deals done had he portrayed the city as broke. He was told he should raise taxes, but he refused.

"My interest was making the city competitive again," he said. "So we figured out how to make it work. ... How do I talk about the city being broke and talk about spending $1.2 billion on these facilities and have people believe me?"

So he managed the city's finances with "blue smoke and mirrors," he said. The state requires municipalities to have balanced budgets, so to keep pace with the city's expenditures, he found short-term sources of money to make ends meet. The city created a water and sewer authority, generating a $100 million windfall. It sold tax liens. There were also some workforce reductions, but they only scratched the surface.

David Miller, one of Mr. Murphy's finance directors who's now a professor at the University of Pittsburgh, compared it to balancing a household budget by selling off heirlooms, meaning they were running what finance directors call a structural deficit. As the city's financial problems became more apparent, blue-ribbon panels were commissioned.

But the problem, Mr. Murphy believes, was on the revenue side. There was no amount of slicing and dicing and studying the local government could do that would address what he believed to be the heart of the quandary: a city whose shrunken population still supported infrastructure for twice as many residents and also hundreds of thousands of commuters who streamed into the city every workday but paid only a $10 annual tax. A business privilege tax brought in some revenues, but there were numerous exemptions, including for manufacturers. Around 40 percent of the city's property was untaxable because it was owned by nonprofits.

"What we came to realize is that we could never reduce our budget enough to make up all of the lost revenue from a tax structure that was on a narrow [tax] base," Mr. Murphy said.

So he took his fight to the state Legislature, which would have to approve any new taxes the city wanted. But it became evident by August 2003 that lawmakers were not so interested in helping the city, particularly those who represented residents in the suburbs that ringed Pittsburgh, so he made the tough call to begin cutting, announcing the layoffs and closure of city pools.

But he had one last move -- Act 47. The way he tells it, entering the state's program for financially distressed municipalities wasn't an act of desperation, but part of a strategy, one that he knew would make him wildly unpopular. If the state was declared financially distressed, it would be given leverage to create new taxes.

From his view, the city was not reaching the end of its line financially. He could have kept up the "blue smoke and mirrors" act, perhaps privatizing the water authority to raise funds or he could have raised taxes on residents he already believed were overburdened. Instead, he chose Act 47, making Pittsburgh the largest city in the state to ever enter the program.

"I wasn't going to ever run again for office and I just decided we were going to fix it the right way," he said.

Tough choices, new taxes

At the start of 2004, the task of putting the city back together again was assigned to two men whose firms specialized in helping cities get back on their feet -- Jim Roberts, an attorney with Eckert Seamans, and Dean Kaplan, a consultant with Public Financial Management. The state Legislature also created another oversight board, the Intergovernmental Cooperation Authority, which was tasked with approving the city's budget and five-year financial plan from year-to-year.

Mr. Roberts, who works at his firm's Downtown offices, lived in Highland Park and had watched the city unravel. He admitted that the assignment was daunting.

"Wow, are we going to take on Pittsburgh?" he recalls thinking to himself. "The situation was really dire."

Their first task was to assess the situation and then craft a recovery plan, a sort of blueprint to guide the city to financial stability. The plan would have to be approved by city council.

"The City of Pittsburgh, already in distress, now stands on the precipice of a full-blown crisis," the plan's executive summary read. The plan forecast an annual deficit that would balloon to $115 million for 2009 alone if drastic measures weren't taken. "Given the challenges at hand, regaining sustained fiscal health for the City of Pittsburgh will be neither simple nor painless."

And painless it wasn't. On June 29, 2004, opponents of the plan packed city council chambers as the body prepared to take a final vote on the measure. Union leaders called council members names and threatened to never forget. The meeting went on to a chorus of shouts and boos. Despite the opposition, the plan, which called for more painful cuts, passed with a bare majority and the support of Councilman Bill Peduto. Then-Councilman Luke Ravenstahl was among those who opposed it, saying he believed union leaders should be given more time to propose cuts of their own.

But while the ax fell, the alarm was raised in Harrisburg. The Act 47 plan strongly recommended raising the local services tax, charged on those who worked in the city but lived elsewhere, and creating a payroll preparation tax, which charged businesses a small percentage of their payroll. Those proposals passed in November of that year, raising the tax on commuters from $10 to $52 a year and imposing a 0.55 percent payroll preparation tax that still exempted nonprofits.

Gene Ricciardi, who was then council president, said the new tax revenue was the real game-changer, bringing in enough money for the city to come within $700,000 of running a balanced budget that year.

The plan's impact was far-reaching, touching nearly every department. The cable bureau, which broadcasts meetings and produces television shows for the city-run channel, was stripped to bare bones, making parts of its studio on the top floor of the City-County Building a sort of ghost town. It imposed a two-year wage freeze on some city employees, compelled employees to contribute more to health care and lopped 15 percent off the top of office budgets of the mayor, city council, city clerk and city controller.

Later came cuts to the fire bureau, which sustained no layoffs but led to the shuttering of about a half-dozen fire stations and the loss of manpower through attrition. The bureau also lost its retiree health care, a cost the coordinators said the city could no longer sustain, meaning that hires made after 2005 would not get the benefit.

The bureau lost about a third of its workforce, shrinking from around 900 to a little more than 600 today. The police bureau also saw more cuts even after the layoffs in 2003, with about 100 fewer officers in the city's current budget as there were in 2004. Public works director Rob Kaczorowski said the bureau lost about a third of its laborers and was forced to combine with two other city departments -- general services and engineering -- turning it into a "super-department" with more responsibilities but fewer resources. The city planning department was slashed.

If there was any silver lining, it was with CitiParks, which runs the city's parks, pools and recreation centers. The plan called for opening many -- but not all -- of the city's pools, using data to determine which were best situated and best used, an effort financed in part by private foundations. Duane Ashley, then the CitiParks director, got to call back many of the recreation leaders he had laid off less than a year prior.

Moriah Balingit: mbalingit@post-gazette.com, 412-263-2533 or on Twitter @MoriahBee.

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