Articles

(April 2004) How did Pittsburgh get into the current fiscal crisis? What will it take to get out? The state already is playing a role in the City's future and likely will have a role in any long-term solution. There may be lessons here for other Pennsylvania municipalities on the brink of their own financial crises.

Pittsburgh's fiscal crisis didn't happen overnight.

It's the result of decades of population decline, outdated state policies, and a series of mayors and councils trying to balance a budget of escalating costs linked to a shrinking tax base. Throw in a regional economy with a base that's shifted from industry to service - especially services such as education and healthcare delivered from tax-exempt properties. Add pressure to retain existing jobs and attract new and expanding businesses, which has led to more tax exemptions, abatements and other incentives.

The outcome? A city in crisis.

Pittsburgh's growing gap between revenues and expenses isn't new. The city has had a structural deficit since at least 1993. Despite a series of one-time fixes to address the deficit - including making institutions like the Pittsburgh Zoo non-profits, selling tax liens, and refinancing existing debt - by 2003 the deficit had grown to exceed $50 million in a $386 million budget. The 2004 budget of $389 million is expected to have a deficit of about $40 million.

To address its worsening financial situation, in 2003 the city reduced service levels, laid off over 600 workers and closed its swimming pools and recreation centers. Last November, Pittsburgh's bond rating was downgraded by all three Wall Street agencies to "junk" status. According to Public Financial Management, Pittsburgh now is "the only major U.S. city to be rated below investment grade," which severely constrains its ability to borrow money.

What else led to the crisis?

Over the past decade, most of the city's expenditures increased no more than inflation. Revenue growth, however, fell short of inflation by $60 million. Two-thirds of the city's revenues come from taxes - specifically property and earned income taxes, a variety of business taxes, the parking tax and the occupational privilege tax. According to Public Financial Management, growth in these revenue sources is expected to be modest through 2007 and won't exceed the projected annual rate of inflation.

To raise revenue, the city could increase the rates of the taxes it levies, especially the property and earned income tax. But the burden on city residents and property owners - when combined with Pittsburgh school district's levy - already is among the highest in Allegheny County and larger cities in Pennsylvania. (See an analysis by city for more detail.) Under the current city tax structure, increased business taxes would fall largely on smaller businesses, which may be least able to pay. In the short term, the city could raise its taxes, but increased taxes are counter-productive to long-term growth.

Pittsburgh's ability to raise more revenue through increased taxes is critical to the question of whether it can declare bankruptcy. If the city were to declare federal bankruptcy - which requires state approval - the courts likely would deny its petition because Pittsburgh can generate further revenue by raising taxes.

What does Pittsburgh spend money on?

With the exception of public safety, most services people receive from the city represent only a small part of the budget. Pension payments, benefits for city employees, debt service payments and public safety costs dominate expenditures. In the 2004 budget, these four categories make up over 80% of costs.

Most of Pittsburgh's debt and pension costs are legacies of construction projects and employees from decades ago. Like many communities in Pennsylvania, Pittsburgh has had a significant unfunded liability in its pension program for decades. The largest single factor in its rising debt service payments has been the city's bonding of unfunded pension liability. Annual expenditures for pension costs, benefits and debt service are expected to have increased $119 million between 1993 to 2005.

Pittsburgh, like many employers, has been hit hard by increased healthcare costs. Fringe benefit costs are projected to rise - due to increasing health insurance costs - from $55 million in 1993 to $88 million in 2005, despite significant cost-cutting measures the city's taken.

The cost of most city services actually has declined in the past decade. There's been a $25 million reduction in real (inflation-adjusted) non-public safety expenditures from 1993 to 2002. Although there have been increases in police and fire costs, direct operating costs for city services are projected to have increased only 10% - much less than inflation - from 1993 to 2005.

Fire service costs are over 40% of all public safety costs in the 2004 budget. The city has made significant reductions in police costs over the past year to help balance the budget, but it can't make reductions in fire service costs until the current fire union contract expires. State requirements for arbitration of public safety union contracts restrict Pittsburgh's ability to negotiate these cost reductions.

Solutions?

They'll likely come from a range of short-term and long-term actions, including increased revenues, decreased expenditures and new ways of providing municipal services. Increased revenues could mean revisiting taxes and fees as well as subsidies and exemptions. Decreased expenditures could mean curtailing or privatizing various services, or delivering them differently. And recent public discussions have shifted to serious consideration of city/county service consolidation or, ultimately, merger.