	Study Pittsburgh's Path to Financial Crisis.... ....Is Houston Following a Similiar Road? by Joseph V. Smith January 1, 2006

__________________________________________________________________________________________________

I moved from Pittsburgh, PA to Houston, TX in 1978, 27 years ago, courtesy of a transfer by Gulf Oil Corporation. The articles below, published in 2003 and 2005 by the Pittsburgh Post Gazette, tell you about the financial crisis Pittsburgh is in. While the parallels are not exactly the same, the outcome in 10 to 30 years for Houston and Texas can be and will be the same if government spending is not restrained and if the tax burden is not distributed more fairly and evenly across all tax payers. My conclusion is that no solution has yet been reached to the fiscal crisis facing Pittsburgh which could easily include bankruptcy.

Houston and Texas must avoid ever reaching such a stage. Unfortunately, what I have seen in the last two to three years at the city and state levels is very troublesome. Spending is out of control. No one in government seems to care about anything except the next six to 12 months. No one in Austin is addressing the long term issues that will allow Texas to remain economically strong and competitive.

No one in Pittsburgh in the 1960’s or early 1970’s would have predicted the current situation the city is in. If economists in Pittsburgh had their suspicions about what could happen in 20 to 30 years as a result of the city’s tax forgiveness policies and excessive spending, no one would listen or care about something that far into the future. However, ordinary citizens, businesses and institutions acted in accordance with their own best interests. Citizens like my cousin, Richard, age 62, just moved to the suburbs of Pittsburgh from the city and cut his taxes by 60%. (Why he didn’t do it 25 years earlier is another matter.) Businesses have fled the city, county and the state to other locations with better economic conditions and fairer tax policies. The not for profits and government entities stayed and grew even though the city had declining revenues and increasing costs.

( "The Roots of Pittsburgh's Financial Crisis" is short and well worth reading, especially the part about the city of Pittsburgh's effort to float a bond offering to partially fund pension obligations. It backfired. )

I still remember my father, who worked for a steel company in Pittsburgh his whole career, telling me the steel industry in the United States started to die right after World War II as Japan and Germany invested in new (more cost effective) technology. They had to start from scratch after the World War II. US firms would not make the same investments for a host of reasons—resistance from labor unions, new plants were too costly, lack of government subsidies, no CEO gusty enough to push it through his board, etc, No one addressed the long term competitive issues, or they ignored them, as the post war economy was booming.

Businesses and industries cannot ignore the laws of markets and economics. Nor can cities, governments and school districts. Look at the city of Pittsburgh today-in a fiscal crisis and without all of those steel mills, jobs and the related economic infrastructure. The private sector adapted to changing economic conditions. Unfortunately, government supported sectors have not adapted to changing economic conditions as they should have. Allegheny County, in which Pittsburgh resides, today still has basically the same government structures it had when the area was larger and far more prosperous. Pittsburgh and other local governments have responded by creating new forms of taxes and raising existing taxes, making matters only worse. Combining governmental entities, cutting budgets, and implementing other required efficiencies have largely not been done.

I am very upset about the high property taxes I pay in Houston, TX. My Houston and Harris County property taxes have increased by 24% from 2000-2005. Property taxes in Pittsburgh are about 32% higher than they are here in Houston. (While Pittsburgh and Houston property tax rates might appear to be the same, Pennsylvania does not have the homestead exemption.) In addition, income, wage and occupation taxes are imposed to fund school districts and local governments as well as state government. Sales taxes in Pennsylvania are lower than those in large Texas cities. Ignoring state sales and state income taxes, a homeowner and wage earner working and living in Pittsburgh pays 1.91 times more in local taxes to local governments and school districts than what he pays in Houston. (I assumed a family income of $100,000 and a home appraised at $230,000.)

Tax incrementalism over the years has resulted in the 1.91 ratio. Increasing taxes has been the Band-Aid used to stem the bleeding from major structural wounds. Band-Aids do not work in these situations. What were needed were reductions in programs, spending cuts and a restructuring of local governments. Every Texan must guard against this practice that is practiced so well by every school board member and other public official. A little here and a little there adds up to a lot over time. Be forewarned, what has happened in Pittsburgh could happen in Texas and in any Texas city unless government spending is limited to only the most essential programs. Before anything “new” is added to the budget, something “old” must be dropped from the budget.

Here is a recap of state and local tax burden if you own property and live and work in the city of Pittsburgh compared to Houston, TX. Let’s make sure these tax burdens are never imposed on Texans.

City of Pittsburgh Resident Taxes:

Income Taxes

State Income tax—2.8%, on income, interest, dividends, etc

City of Pittsburgh Earned Income tax—1%

City of Pittsburgh School District Earned Income Tax—2%

Property Tax Rates, on Assessed Values

City of Pittsburgh—1.08

City of Pittsburgh School District—1.396

Allegheny County—.469

Total—2.945

Sales Taxes

State—6%

City of Pittsburgh—1%

County Realty Transfer Tax—1%

Here are comparables for Houston Texas:

Income Taxes—none

Property Taxes on Assessed Values, less Homestead exemption

City of Houston—.6475

Houston ISD—1.62

Harris County, et al—.64627

Total—2.91377

Sales Taxes

State—6.25%

City, et al—2.0%

Joseph V. Smith

Houston, TX

Here is the full text from the 2003 article:

Paper: Pittsburgh Post-Gazette (PA)

Title: SOLVING PITTSBURGH’S FISCAL CRISIS: - IT’S NOW OR NEVER

Author: ELSIE HILLMAN AND DAVID RODERICK

Date: October 26, 2003

Section: EDITORIAL

Page: E-1

By January 2004 the city of Pittsburgh will be out of cash. The presumption of this possibility has already led to a reduction of our bond rating to junk status and our future is uncertain.

In an effort to focus the attention of the citizens of Pittsburgh and the surrounding area to this financial crisis, we find it necessary to present the facts as we have found them. The Pittsburgh Financial Leadership Committee is an outgrowth of a request from state Sen. Jane Orie, R-McCandless, that a group of business leaders/taxpayers convene together and accomplish three things; to provide clarity on the severity of the financial crisis, to assure accuracy in cost figures and projections provided by the city and to present a unified plan to help solve the problem from the business community. We feel that we have accomplished that mission. We have determined that the city will run out of money by mid-January, the deficit for 2004 will be $80 million and approximately $85 million in 2005. We hope that Sen. Orie and other elected officials will accept our findings and act on them accordingly.

The financial crisis of Pittsburgh is the culmination of many years of taxing and spending beyond the term of the present mayor. Four committees previous to this one have reviewed this situation (Competitive Pittsburgh, PGH 21, Governor’s Task Force, The Allegheny Conference/Economy League). Problems were identified, suggestions for cuts and efficiencies were presented, many of which were adopted by the mayor and City Council. Many others are now being implemented and more are being planned for the future.

Let us review some important facts: The Pittsburgh resident population has dropped from 600,000 people in the late 1960s to a present number of 330,000. Of this number, 100,000 are employed in the city. They are joined by another 200,000 commuters who come in to their workplace every day. Those 300,000 people employed in the city pay a $10 annual fee for this privilege, which is called the Occupational Privilege Tax. This was levied in 1965 when our resident tax base was twice the number it is today, and has never been adjusted to inflation in 40 years.

We must consider also that 30 to 40 percent of the value of property in this city of approximately 55 square miles is tax-exempt. The tax-exempt institutions include all schools - public, private and parochial (except trade schools) - museums, hospitals, colleges and universities, non-profit agencies, parks and recreational facilities, all city, county, state and federal government facilities.

Please note that we do not suggest re-evaluating their tax-exempt status; we merely point out that the city tax revenue base has shrunk dramatically in 40 years. Our expenses have grown just at the rate of inflation; our revenues have not.

To repeat: We face a cash flow stream that will run dry by mid-January, a projected deficit in 2004 of $80 million, $85 million in 2005 and we have an inequitable tax structure that threatens the quality of life and the quality of service that the city should provide. Couple this with the “B” word - our bond rating has already been reduced.

Therefore, our goal has been to avoid bankruptcy, to provide a balanced recommendation to stabilize the Pittsburgh financial situation present and future, and to assure the economic growth of Pittsburgh.

We suggest - as others have presented, in each legislative package - that an oversight board be appointed to help assure financial stability for the city, approve and recommend budget preparation and execution. There are differences in our recommendations as to the formation of this board and we recommend, similar to other cities’ successful models, the authorization of revenue enhancements only after cost reductions are first put into place. The mayor and City Council have no problem accepting this oversight board.

Our specific legislation will recommend that when cost reductions of approximately $40 million to $45 million have been made, the oversight board levy an increase in the employee occupational privilege tax from $10 per year to $5 a month ($60 annually) as adjusted over a 40-year period for inflation. The employer would pay approximately $99 per year per employee also. This would be an entirely new contribution for the for-profit businesses in Pittsburgh.

Pittsburgh, by previous legislation, may levy an increase on the following taxes: real estate property tax, which now is 23.76 mills (10.8 mills to the city and 13.96 to the city schools); the earned income tax paid by those who work in the city, which now is 3 percent of a person’s salary (1 percent to the city and 2 percent to the city schools); and a 31 percent parking tax that goes to the city. Other revenues allowed to the city must come from user fees on the residents.

The consensus of the Pittsburgh Financial Leadership Committee is to recommend to the City Council and elected representatives in Harrisburg and to the governor the following plan.

We will lobby for it intensively, though we realize that there will be heated debate and modifications. Every citizen of southwestern Pennsylvania must know that we are “tied together at the hip” and how Pittsburgh goes, so goes the region.

We therefore propose:

That the city reduce costs by $40 million in 2004 and $45 million in 2005.

That a powerful financial review board with oversight and taxing authority be created.

That the General Assembly and the governor provide the authority to Pittsburgh to increase the Occupational Privilege Tax from $10 a year to $5 a month for any employee in the city earning over $10,000 per year; workers below that level would continue paying the $10 fee. The state should also authorize a $99 tax per year, per employee paid by employers. The other tax recommendations the city is already empowered to carry out on its own. (See the box above.)

It is important to note, however, that we propose no levy or payment of those new taxes until such time as the $40 million cost reduction is in place.

We need now to have the broader community willing to share the burden of updating our costs and revenues. United, we can - and we will - save the city from bankruptcy which would have a terrible ripple effect on all of our region. The city of Pittsburgh, the spoke in the southwestern Pennsylvania wheel, would lose its strength and resilience. Its ability to attract opportunities for economic growth and new jobs would be extinguished. As the city and county bid for new airline access, we wonder who would want to invest in a bankrupt city and who would want to come here.

We will continue to tell this story. We urge those of like mind to contact their representatives and Sen. Jane Orie who has, at her request, been assigned this project by our Senate leadership. The future of Pittsburgh seems to lie in their hands. We will either fall into our Three Rivers or continue to be the light at the end of our tunnels.

Author: ELSIE HILLMAN AND DAVID RODERICK

Section: EDITORIAL

Page: E-1

Copyright © 2003 Pittsburgh Post-Gazette

Here is the text from the Sept 2005 article:

Paper: Pittsburgh Post-Gazette (PA)

Title: NONPROFIT PAYMENTS TO THE CITY IN SPOTLIGHT - MEASURE BEFORE

COUNCIL CALLS FOR CONTRIBUTIONS OF UNSPECIFIED AMOUNTS

Author: RICH LORD, PITTSBURGH POST-GAZETTE

Date: September 5, 2005

Section: LOCAL

Page: B-1

If pleas for charity from charities echo through Pittsburgh city hall Wednesday, it won’t be the first time.

If the response from city nonprofit groups is wary, that, too, will be a repeat performance. That’s because the current spat over how much money nonprofit organizations should contribute to the cost of running the city, and for how long, is part of a two-decade-long debate for which there’s no end in sight.

City Council expects Wednesday to debate and tentatively vote on a proposal under which universities, hospitals, foundations and nonprofit insurers would contribute an unspecified amount to the city’s coffers for three years.

The issue first emerged in the 1980s, when the city and Allegheny County both saw their property tax bases erode as expanding nonprofit institutions took land off the tax rolls.

Currently, $7.2 billion worth of city property -- 35 percent of the total—is tax-exempt, according to the county treasurer’s office. In the entire county, $14.6 billion worth of property is tax-exempt, comprising 19 percent of the value of land and buildings.

In the late 1980s, the city and county tried what was then a novel approach. They went before the county’s Board of Property Assessment Appeals and Review to challenge the tax-exempt status of big nonprofit organizations including large hospitals, the Downtown YMCA and the Central Blood Bank.

“That forced some of them to come in and justify that they were purely public charities,” said Ron Pferdehirt, an associate city solicitor who was involved in those efforts.

At the time, state law put the burden on nonprofit entities to prove that they advanced charitable purposes, had no private profit motive, provided free services, helped people in need and relieved the government of some of its burdens.

Rather than roll the dice before the assessment board, nonprofit groups settled with the city, signing on to multiyear contracts to make payments in lieu of taxes, or PILOTs, to the city.

PILOT payments peaked at $4.6 million in 1993, and remained near or above the $2 million-a-year mark through 2001. By that time, though, the PILOTs faced turbulence.

In 1997, the state passed the Purely Public Charities Act. It shifted the burden of proof, creating a presumption that certain organizations were tax-exempt.

That undermined city leverage in negotiating PILOT agreements, said Pferdehirt. The city can, and occasionally does, challenge the tax exemptions of specific parcels of property, he said. But it no longer challenges the nonprofit status of entire institutions, nor vigorously pursues PILOT agreements.

As a result, payments by nonprofit organizations dwindled to $688,000 last year, and $88,000 in the first half of this year.

In December 2003, the city was declared distressed under state Act 47. Its recovery plan, approved by council in June 2004, calls on nonprofit organizations to pay the city $6.7 million annually through 2009.

The nonprofit groups had no role in setting that figure, said the Rev. Ron Lengwin, spokesman for the Catholic Diocese of Pittsburgh and the Pittsburgh Public Service Fund. That fund was created to represent nonprofit organizations in talks with the city.

The fund negotiated an agreement with Mayor Tom Murphy in which it pledges to contribute to the city through 2007. During its three-year term, the agreement would bar the city from pursuing any new taxes or fees on charitable organizations that make contributions, or from unduly slowing their applications for permits and licenses.

Murphy has estimated that nonprofit groups will contribute $5.7 million this year.

On Aug. 24, Lengwin sent letters soliciting pledges from 972 organizations. He expects responses to trickle in this month and next, as the boards of organizations meet to consider what, if anything, they can give.

City Council, though, must approve the agreement. Its members have been harshly critical, saying that the agreement should pledge the nonprofit groups to a specific dollar figure, and run longer than three years—perhaps even in perpetuity.

That kind of talk has irked some nonprofit leaders.

“I’m troubled by the city’s response,” said Gregg Behr, president of the Forbes Fund, which helps other local charities with management. “I don’t think we as a community are being mindful enough about the roles nonprofits play in our lives. ... Imagine a day when the Cultural District was closed, when most hospitals were closed, when most day cares were closed.”

The agreement has also divided the current mayor from his likely successor.

Murphy spokesman Craig Kwiecinski said in a statement Thursday that the city would finish the year with a surplus “as long as council does not cost the city $5 million by rejecting the nonprofit contribution.”

Democratic mayoral nominee Bob O’Connor, meanwhile, believes the agreement “is a good beginning, but we need some more dialogue to ensure that we’re doing the best for the city of Pittsburgh,” said his spokesman, Dick Skrinjar. “That dialogue will ensure that everybody’s doing their fair share.”

In the 1980s, other cities asked Pittsburgh about its approach to collecting from nonprofit groups, said Pferdehirt.

Pittsburgh’s latest wrangling with nonprofit organizations could also have broad resonance, said Fred Lane, a professor of public affairs at Baruch College of the City University of New York, who has studied the nonprofit sector for 30 years. “You would think that other [distressed]cities would pick up on the precedent,” he said.

That could be a bad precedent, Lane said, if it reduces the ability of nonprofit organizations to serve the needy, or gives donors pause “because they don’t want to see their money going to taxes.”

Author: RICH LORD, PITTSBURGH POST-GAZETTE

Section: LOCAL

Page: B-1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Joseph V. Smith is retired from active business and now serves as President and board chair of St. John Vianney Federal Credit Union and Treasurer and Director of Houston Social Venture Partners. He is a member of the board of the St. John Vianney Social Services Ministry and a member of the parish Finance Council. He recently completed a three year term as a director of Genesys ITS, a non-profit technology education and training program that targets economically disadvantaged youth. Mr. Smith holds a M.B.A. in Finance from The University of Chicago and a B.A. in Economics from Georgetown University.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Home