Tuesday, June 24, 2014

The Ferlo Dividend

I was thinking that the 166 page Act 47 plan has some similarities to an Umberto Eco novel.* So yes, I thought I would read the whole plan, I figure someone ought to. Some of the most unnoticed things are most interesting to me. Remember the recurring topic of how much the city of Pittsburgh loses out because of loopholes in Pennsylvania law. (old post: Forbes: Tax Shelter from Hell - U.S. Steel Tower in Pittsburgh)

Last year the law was changed and at least one big loophole called the 89-11 rule was closed, much due to the effort of retiring State Senator Ferlo. Did it help?

First, go back to the news earlier in the year from the Pittsburgh school district. A vastly improved fiscal situation this coming year, where a big deficit turned into a fairly historic surplus, came in part due to a big jump in Now the city of Pittsburgh has the exact same tax base (with the minor exception of the Borough known as Mount Oliver) as the school district. See PG: Pittsburgh school district ends '13 with $20.8 million surplus). Transfer taxes came in "$3.9 million over the budgeted amount. The transfer taxes, which totaled $10.9 million, were higher than they have ever been"

So how did the city of Pittsburgh fare with real estate transfer taxes?  Pretty good it turns out and in a budget sense better than the school district.. The city budgeted (expected) an amount of $15.9 million to come in from transfer taxes in 2013.  Turns out the amount was  $21.3 million, or over $5.4 million above what was budgeted for 2013.

So the unexpected windfall from transfer taxes offset much of  the lower regular real estate taxes said to be from a miscalculation from the reassessment.(2013 budgeted $130.5 million, actual $123.4 million). A $7.1 million shortfall, but if real estate and transfer taxes were added together, the shortfall from budgeted comes to $1.7 million, which is well within the range of volatility common over recent decades.

How much of the transfer tax windfall is due to the closing of the loophole? Not all of it for sure, and it would take a lot more data and work to calculate. Potentially Senatory Ferlo could be responsible for Pittsburgh city and school district having over $9 million more in their respective budgets last year. So the question then becomes what about the future. A $9+ million per year gain annually in to the future equates has a NPV of ?? a few hundred $million maybe depending on your assumptions. So if there is a balanced city budget now, or into the future, offer the good senator, and former city councilor, some kudos.

But maybe it was all a fluke or a variation that will not be repeated?   That certainly seems to be the belief of the Act 47 team that does not expect the 2013 take in transfer taxes will be repeated even the next year. Claiming the transfer tax being too volatile they expect transfer tax revenues to actually decline in 2014.  Nowhere in the new Act 47 plan is there any mention of the impact of closing the 89-11 loophole and even 5 years out the assumed transfer tax revenues remain below what was actually collected in 2013. Since these are THE tax experts, they are saying something in not saying anything about the change in tax law.  They must believe it is all de minimus?

Consider that if the loophole had been closed the year earlier, the Steel Tower sale by itself would have brought the city and school district together an addition $10 million (4% of $250 million reported price).  I bet even absent the change in the law, general trends in city real estate trends might be generating higher rates of real estate transactions, and thus more transfer taxes. Also, it looks like the loophole was further closed only in the middle of 2013, so the impact was only partially felt in the 2013 tax revenues. Yet still the trend is presumed to be down.  

* That is just a puzzle for @VannevarB to grok. Others probably just want to move on.


Blogger Vannevar said...

thank you so much! all the best, V.

Wednesday, June 25, 2014 4:04:00 AM  
Anonymous BrianTH said...

If you look back, though, the transfer tax really is very, very volatile even without any change in the legal scheme. So it is probably safest to make conservative assumptions about the future revenues from this tax, because under the present circumstances it would be better to be surprised with more revenue than with less.

Wednesday, June 25, 2014 7:31:00 AM  
Anonymous MH said...

I'm still much more interested in where the unexpected wage tax money is coming from.

I've not read the Act 47 plan, but I did read Foucault's Pendulum. It wasn't bad but it was enough for me to say I had read enough Eco for a lifetime.

Wednesday, June 25, 2014 9:15:00 AM  
Anonymous BrianTH said...

So some numbers. I didn't look at the Act 47 plan, but I did look at a few of the archived City budgets through the present. First, here is actual transfer tax revenue over time:

2007 $17.1M
2008 $17.6M
2009 $11.6M
2010 $14.3M
2011 $18.3M
2012 $14.8M
2013 $21.3M

Also interesting was how the projected revenues for 2014 have changed over time (so this is the projection for 2014 as of the year listed):

2014 projection as of . . .
2011 $15.1M
2012 $16.2M
2013 $16.3M
2014 $17.8M

So it does appear to me the City has internalized some sort of expected increase in 2014 as a result of the legal change and actual results in 2013. It also appears to me the City's practice is to have a baseline projection that simply increases by a small percentage in each future year, such that by increasing the expectation for 2014, they also increased the expectation for future years. These are versions of the prior chart:

2015 projection as of . . .
2011 $15.4M
2012 $16.6M
2013 $16.6M
2014 $18.1M

Same with 2016 and so on:

2016 projection as of . . .
2012 $16.9M
2013 $16.9M
2014 $18.4M

In short, it looks like the new projection is roughly $1.5M per year higher as a result of recent events. That may be a bit conservative, but it is not nothing either.

Wednesday, June 25, 2014 11:00:00 AM  
Anonymous BrianTH said...

"I'm still much more interested in where the unexpected wage tax money is coming from."

More fun with numbers. Actual EIT revenues (in millions of dollars):

2007 56.7
2008 65.3
2009 67.3
2010 69.9
2011 71.9
2012 70.4
2013 82.1

I'm going to try this next one as a matrix. Across the top is the year the project was made, and along the side is the year about which the projection was made


So it looks to me like they have internalized a permanent increase in the expected future EIT revenues, with a growing gap in fact.

Wednesday, June 25, 2014 11:17:00 AM  
Anonymous MH said...

I'm not interested in the increase in EIT revenues as a matter of Pittsburgh revenue. Since neither jobs or population increased that fast, I'm trying to figure how who is paying higher wages.

Wednesday, June 25, 2014 11:20:00 AM  
Anonymous BrianTH said...


Supposedly part of it was an increase in the collection rate as a result of the new withholding rules, although I am not sure the timing of that makes sense of the data (wouldn't it have started showing up in 2012?):


But I would also note that overall population numbers for the City are not necessarily determinative of what we should expect to be happening with the City's EIT revenues. Instead, what you would specifically be interested in is the population of working age people in the City, and indeed specifically the population of working age people in the City combined with any other personal attributes that correlate with earned income (like educational attainment).

In other words, this is an old issue around here: the overall population dynamic in the City hides a much more dramatic change in the composition of that population. And to the extent younger, better-educated adults are replacing older, worse-educated adults (or, for that matter, children), that is going to cause a more rapid change in the EIT base than the overall population count would have suggested.

Wednesday, June 25, 2014 11:36:00 AM  
Anonymous Anonymous said...

Speaking as a real estate, not economics person, it would be all but impossible to quantify the impact of the change to the 89/11 rules and, even more unlikely that anyone could predict that the change would generate any sustainable new income stream for the city/school district. I would be willing to bet that before the regulations were changed, there were likely fewer than a half-dozen, meaningful, 89/11 transactions each year in the city. Keep in mind that the premise of the 89/11 transaction was that the seller, "remained in the deal." That often created so many non-tax issues that the parties opted to pay the tax. Obviously on USX Tower type transactions, the amount of the tax might drive a different conclusion - but - how often does Pittsburgh see transactions of that magnitude? The Act 147 report was wise to be conservative on this point.

Wednesday, June 25, 2014 12:41:00 PM  

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