Articles

(April 2004) In many ways, Pittsburgh's struggle with decline is similar to that of Pennsylvania's other urban centers. However, Pittsburgh does have unique disadvantages and advantages. How does it compare? IssuesPA sought answers.

Pittsburgh, the state's second largest city, has experienced a drop in population greater than that of other large cities in the state. In the 2000 census, Pittsburgh had 334,563 residents, down nearly 10% from 1990 and 45% since 1960, when it had 604,332 residents.

What's the taxpayer burden?

Compared to other municipalities in Allegheny County, Pittsburgh's local tax burden on residents is among the highest. An analysis of the total local burden on residents in Pennsylvania's major metropolitan centers shows that Pittsburgh consistently ranks among the top three, along with Philadelphia and Wilkes-Barre.

These total tax burdens include school district taxes. The Pittsburgh school district imposes a higher millage rate than the city and double its earned income tax - 2% versus 1%. Unlike Philadelphia, Pittsburgh city government has no control over the school board.

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In contrast to many urbanized areas, Pittsburgh has a strong urban core with a large number of jobs inside the city limits. However, the city must provide services and infrastructure for people commuting into the city, as well as for its residents. A high "workday" population means increased costs for city services and infrastructure, with the greatest percentage of those costs borne by city residents.

Over time, employment levels in the city have remained relatively stable while population has declined. Nearly 325,000 people work in Pittsburgh. Almost two-thirds of them live outside the city. Pittsburgh imposes a 1% earned income tax on non-resident commuters, but very few commuters actually pay this tax because it's offset by the earned income tax in their home municipalities.

Pittsburgh's main commuter tax is a flat tax - the $10 occupational privilege tax. Compared with other major cities its size, Pittsburgh's is among the lowest of "commuter" taxes. Other cities such as Philadelphia, Cincinnati, Cleveland, St. Louis, and Louisville-Jefferson County have commuter taxes based on income.

How about the tax burden on employers?

For-profit businesses that own property pay the property tax, while non-profit organizations largely don't. Some for-profit businesses pay the business privilege tax, but others - such as manufacturers, banks, utilities, and securities brokers - are exempt under state law. Wholesalers and retailers pay the mercantile tax. Entertainment businesses pay the amusement tax.

About one-third of Pittsburgh's assessed value (about $6.2 billion) is tax-exempt because it's owned by government or non-profit entities. In 2002, Pittsburgh estimated that it "lost" $64.9 million in property taxes annually not paid by tax-exempt entities. The government, charitable non-profit, utility and other tax-exempt entities are major employers, employing 40% of those working in the city.

Cities often are host to a concentration of tax-exempt properties, from courthouses and parks to hospitals and universities. For instance, in cities like Cincinnati, Philadelphia, Boston, Erie and Columbus over 20% of the tax base is exempt. In Johnstown and Harrisburg, over 40% of the tax base is exempt.

What about Pittsburgh's debt burden?

Pittsburgh's debt service represented 16.3% of total 2002 operating expenditures and is projected to exceed 23% in 2004. Standard and Poor's, which issues benchmark measures on debt, considers a ratio of debt service to operating expenditures in excess of 15% to be high.

The city regularly borrowed and retired debt for capital projects. However, until the last few years, the city borrowed more than it retired to maintain infrastructure in an aging city.

The rate at which the city pays off debt is also important. "Best practice" communities pay off 65% or more of existing debt within 10 years. Pittsburgh currently is scheduled to pay off its debt less rapidly -- 55.8% in 10 years. To manage this rate of repayment, the city's debt service levels will continue to increase through 2006 and will remain high until 2012, even if the city takes on no additional debt.

Further, Pittsburgh has long had significant unfunded pension liability. Years of operating retirement systems on a pay-as-you-go basis left the city with accumulated unfunded liabilities totaling $515 million in 1995. The city issued $326 million in pension obligation bonds in 1996 and 1998 to bring down that unfunded liability.

Still, by 2002 only 51% of the Pittsburgh's pension plan obligation was funded, down from 67% in 2000, due to worsening market performance, decreasing state aid, and increasing pension benefits. According to Fitch, a bond rating service, a funding ratio that drops below 60% raises concerns "about an issuer's fiscal future."

The schedule of the city's pension plan contributions is dramatically increasing as the city follows a formula designed to amortize the unfunded liability. In 2000, the city contributed $7 million; for 2004, the City has budgeted a payment of $17.2 million, the city's minimum municipal obligation of $30.6 million less anticipated state pension aid. The minimum obligation could rise to over $45 million, less any state pension assistance, after 2004.

What does all this mean for the future of Pittsburgh? The impact of many years of structural deficits, depending on one-time sources of revenue, refinancing to buy time to repay debt and pension liabilities, and state policies and mandates contribute to the city's high unfunded liability, indebtedness and tax burden on its residents. Add to that a counterproductive tax structure and growing pressure for reform. Pittsburgh has a long road to recovery.