Sunday, December 29, 2013
The PG has the first of a two part series looking at the state of city of Pittsburgh's finances. Use up your paywall quota reading: 10 years later, is Pittsburgh really climbing out ofthe red?
I'm just sorry... but no, that isn't the story. I feel for our media friends who must fit big long stories into column-inches that barely can tell the story of yesterday's baseball game. So in ten minutes, and my free marginal 'ink', here is my short short version of the financial history of the city of Pittsburgh that lead to the city's acceptance into Act 47 status by the Commonwealth of Pennsylvania.
When Tom Murphy was elected in 1993, he likely felt fully disillusioned over the state of city of Pittsburgh finances he was about to inherit beginning in 1994. What he thought he knew as a pretty bad situation was in fact far far worse once he had eyes on the actual budget from the inside. PG May 6, 1994: Murphy's Method
What was setting in for Pittsburgh was not only the combined effects of history, a city which had seen its population decline by over 45 percent over the previous 5 decades, but also a legacy of infrastructure that dated as the nearly the oldest in the nation with minimal reinvestment following the economic miasma of the 1980s.There just wasn't an option to stop spending money on core infrastructure across the board, infrastructure that was as expensive to maintain here as anywhere.
Then they opened the books and the Masloff Administration showed that the situation was actually far worse than even the pessimists thought. On top of the dire economic and demographic circumstances, city books were showing the stress of changes just a few years earlier that made the city's already dire fiscal situation far worse. As discussed here in the past, the Masloff Administration had proposed a tax swap entirely intended to keep young families residing in the city. A notional tax-neutral shift from a high earned income tax toward real estate taxes was put in place. As much as the proposal took immense political courage to even propose, the outclome likely could have been expected: the lower income tax was welcomed, but the corresponding real estate tax hike was protested. While it went through, the amount millage was raised by was insufficient to make up for the lost income tax and so was created a structural deficit in the city's budget going forward from 1989 on. Like all deficits, short term fixes could get you through couple years, but right as Murphy was taking over, the situation was dire and until then much unnoticed.
There really could only be one option, so bad was the situation. Bankruptcy was the almost inevitable outcome, as unprecedented as that option was at the time. In fact, the only thing that likely prevented it was the opinion of lawyers that it was not even legally feasible. Just a year earlier, the city of Bridgeport CT had attempted to file for Chapter 9 bankruptcy in federal court only to be told it was not allowed. Not because of any state law that proscribed the filing. Bridgeport, the judge ruled has sufficient fiscal capacity to get through its financial crisis. There were such few attempts at using federal chapter 9 bankruptcy code that the ruling was deemed as precedent at least outside legal circles.(my attorney friends tell precedent is actually not such an elephant in the ad-hoc world of bankruptcy filings... but what do I know?) The lawyers, who generally love precedents, I am positive told Murphy that the ruling meant bankruptcy was not an option in Pittsburgh as well. In retrospect I could make the case that the city of Pittsburgh's fiscal problems were so much worse than Bridgeport's at the time, and some legal research has said Bridgeport was only marginally above whatever legal Mendoza line was in the court's mind at the time. I really believe that a counterfactual Pittsburgh bankruptcy filing would not have been rejected and the logic that says Act 47 or any similar state laws prevent Pennsylvania municipalities from availing them of federal relief has been proven pretty false by Detroit's successful Chapter 9 bankruptcy filing despite
opposition by the state of
Thus Pittsburgh at the very beginning of the Murphy administration faced an almost Kafka-esque financial state that continued through his entire term of office, or at least until Act 47 came to be here. Unable to file bankruptcy it had to plow on. Revenue raising was not really an option as most all would agree Pittsburgh was past the max revenue points of what economists call revenue hills, and any greater taxes would only have pushed people out of the city faster. Thus the remaining option of cutting all services to draconian levels, which would have been the only real way to put the city's budget on a sound structural basis. Yet many believed the cuts required to make a dent in the budget deficit would only have made the city utterly unlivable and also further accelerate the decline. You really would have seen capital budgets cut to nothing and operating budgets slashed to levels never seen in the city.
So for good or bad the Murphy administration found other ways to carry on. Whether one agrees with the tactics or not the real error that Murphy fully admits to in public is that he was planning for growth in the city. If there was future population or income growth, the fiscal deficits could be overcome. But how to get to growth required investment. Since that growth did not come during his terms of office, the structural budget problems continued until there were no latent assets to tide the city over.
Thus came a decade of fully understood to be short term solutions. The first was the 'sale' of the city's water assets. To be clear the semantics of that are challenging since some today call for the privatization of the water authority. So what happened two decades ago? I call it the monetization of the water department actually. The city's municipal water department was spun off to an 'independent' water authority which in turn 'paid' the city for the assets and in doing go incurred a chunk of debt to be paid off in the future. In the fiscal machinations common on Wall Street it was no big deal, but convoluted nonetheless. So there was half of a privatization that provided the city a lump of cash that got it through the deficits of the first Murphy term, but not more. Those who are calling for a further 'privatization' of the water authority are talking about handing it over to an actual private sector company with equity ownership. There is no pot of gold in that potential transaction though. The high debt the water authority owes would take up any potential payment in the purchase... possibly the $$ on the table could not cover all of the debt, all which would be a real downer.
Then came the looming costs of pensions long since agreed to over previous decades coming due. Based entirely on recommendations a report chaired by no less than then-future Secretary of the Treasury Paul O'Neill, the Establishing a Culture of Excellence report (I really hate euphemisms) the city was told outright it needed to float a big Pension Bond to refund the soon to be depleted (and I mean absolute zero dollar balance projected to happen by 2000) pension fund. The city complied with the blue ribbon panel and did so by floating two big bonds that pushed up the nominal funding ratio of the city's pension system from under 20% to over 66% (sound familiar?) funded overnight, and thus push down the city's required cash contribution for many years, mostly getting through the second Murphy term.
The pension bond helped a lot, but by the third term it still was not enough and thus the third big trick commonly used elsewhere but not on such scale or impact as here. The sale and again I prefer the term monetization of the vast unpaid tax bills on city of Pittsburgh real estate. That is a monster story unto itself, but in brief a Wall Street firm called MBIA created a subsidiary with a mis-spelled if incredibly apt Spanish name for 'Black Hole' (I can't make this stuff up) to purchase at cents on the dollar the portfolio of tax liens the city nominally owned on unpaid real estate taxes. The firm obviously expected to collect on enough of those liens to make a profit. The city again received a chunk of change that continued to tide it through fiscal problems that had yet to structurally abate in any form. When that money ran out is when there was no other creative way to monetize anything else the city owned. Then and only then did the final phase come and the action by the state to come in and place the city in Act 47 status. Was there any reason the state could not have put the city in Act 47 a decade earlier? Absolutely not, but the state as happy as everyone else for the city to muddle through with short term fixes hoping for a long term future that somehow solved itself?
Yes, that was ten minutes stream of consciousness with the exception of finding a few of the old reference links (I may add more later). Maybe we will also make it two parts and cover the subsequent decade as well. I'll ponder that a bit longer.
Here is THE question historians will take up eventually. Was it worth it? Was there another option and would bankruptcy in the early 1990s have cleared the deck for future growth quicker? Or made things worse? If Murphy had made other choices and made the cuts some wanted him to make in the early 1990s would the city's financial history be different. One could argue that the cuts that would have been necessary would have made the city such an unpalatable place to live that the decline of the city's population would have accelerated. Am I arguing that? No.. I just don't know the aswer. I am pretty sure that Murphy would have been a one term mayor if he had come close to closing the budget's structural deficit with expenditure cuts alone. If that had come to pass, who knows what the counterfactual political history of the city would have looked like over the subsequent decade.Would it have been a Mayor Wagner 16 decades earlier? Mayor Cohen perhaps? Mayor O'Connor 8 years earlier? Mayor Ferlo possibly? The butterfly could have landed anywhere.
One thing is very clear, the fiscal state of the city in 1993, a place where population and incomes were declining rapidly, with a pension fund barely 17% funded (with optimistic assumptions no less), which was still dealing with the massive economic trauma of the decade before including the loss of many of the city's major employers located Downtown (Gulf anyone? just to begin), is just not a set of circumstances repeated going into the future. Those who think otherwise don't appreciate how bad the past was, despite a bit of gloss on the surface that kept the public from appreciating the worst of it at the time. Lots of folks straight line projections, and the city and region have already proven that to be a bad way to forecast most anything. There are few of the circumstances of today similar to where the city was beginning in the 1990s which was trying at best to stop sliding faster, let alone ever dream of growing again.