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City reality: Financial hole getting deeper

Sunday, July 13, 2003

By Timothy McNulty, Post-Gazette Staff Writer

Refinancing debt. Striking deals with the firefighters union. Selling off delinquent taxes to a collection company.

The Murphy administration is out of tricks like those to patch the deficits it has faced almost every year in the leaky city budget. A fiscal task force the mayor appointed last year had a subcommittee whose sole purpose was to discover more of the one-time budget fixes, but couldn't find any -- the city had used them all up over the years.

"What about naming rights? What about renaming Grant Street? What would people pay for that?" recalled Paul Renne, who co-chaired the PGH 21 task force.

"It is a dumb idea, I admit, but what can we do? What's there [in the city] that people might pay for?" the retired H.J. Heinz Co. chief financial officer asked.

Renne's group ultimately proposed fixing the budget by restructuring the city tax base, and this week Mayor Tom Murphy is counting on the state Legislature to permit just that.

Without the reform -- which includes increasing the yearly worker tax to $52 and charging companies a 0.45 percent payroll tax -- Murphy says he will lay off some 400 city employees, cut services and amenities such as the Great Race, and consider municipal bankruptcy.

Chronic structural deficits, such as the $60 million hole the city faces this year, are nothing new. Pittsburgh is long accustomed to its expenses growing faster than its revenues and patching up that difference with maneuvers that just put off the problem again until next year.

But with the gap expected to widen to $81 million next year and almost $95 million in 2005, according to a commission named by Gov. Ed Rendell, the maneuvers can no longer keep pace.

According to interviews with several former city budget experts, the story of how that happened -- and why the city is in the fix it's in today -- is a constellation of problems marked by a dwindling city population, an old infrastructure, mounting debt and public safety costs, and a city that is still struggling with its old image.

A shrinking tax base

Pittsburgh's peak population in 1950 was 676,806, and it shrunk to less than half that by 2002, when it was 327,898, according to an estimate by the U.S. Census Bureau last week. The citizens who remain are left holding the bag to pay for city services that do not go away, such as police protection, fixing roads and picking up trash.

"It has the same number of roads, the same acres of parks and a growing acreage of tax-exempt properties," such as hospitals and universities, said, Joseph Sabino Mistick, a Duquesne University law professor and former executive secretary for Mayor Sophie Masloff. "That is a recipe for failure."

Population drops and business losses were consistent through the 1960s and 1970s, but prior to Mayor Richard S. Caliguiri's administration, which ran from 1977 to 1988, "People didn't stress there were problems in the city," said Caliguiri's former treasurer and executive secretary David Donahoe, now executive director of the Allegheny Regional Asset District.

Donahoe and others said the problems were clouded by Caliguiri's predecessor, Pete Flaherty, who had a reputation for keeping a tight rein on costs.

"He was able to control budgets and masked the problems developing in the '70s, of the tax base not keeping pace with expenditures," Donahoe said. "By the time Dick became mayor, he was faced with really significant revenue problems."

Then as now, gaps between tax revenues and spending were exacerbated by the city's debt. Some of that debt exists simply because of the city's age -- some of the city's roads, bridges and other infrastructure predate not only the 1950s, but also the 20th century.

Pittsburgh has iron piping in its sewer system that is more than 150 years old. Other sewers are made from hand-crafted brick. The crumbling staircases that slither along city hillsides date to when people walked down to work at long-gone factories and mills on the riversides.

It takes big money, usually raised through long-term borrowing, to keep that infrastructure together. That alone would be expensive, but the city's debt is even bigger because of the growing pains created by its economic development policies.

An old infrastructure

At the same time the city is fixing its old infrastructure, it is trying to compete for new business, and a new image, by supporting new city neighborhoods and projects. To do that, it has to build new roads, sewers and sidewalks for projects such as the football and baseball stadiums, David L. Lawrence Convention Center, Nine Mile Run and the former LTV works on the South Side.

"That's a double whammy. A young western city just builds new infrastructure. We're trying to do both, and it's got to be expensive," said David Miller, an associate dean and professor at the University of Pittsburgh Graduate School of Public and International Affairs, and a former Murphy budget director.

"If you're only maintaining what is existing, you don't grow. If you're only building new, you're just fooling yourself. [The city] has never answered the question of which way to go."

While it struggles with that question, the debt keeps going up. Its long-term debt at the end of 2002 was more than $968 million, or $2,891 for every man, woman and child in the city, according to City Controller Tom Flaherty.

Debt has long been a problem. Debt service accounted for 22 percent of city expenses last year. Ten years earlier it was roughly 20 percent, and in 1980 debt was 19 percent of total city expenses, according to Flaherty's office.

Murphy has tried a "debt diet" of going into no more debt than the city retired the previous year, but that keeps the spending at the status quo. He added $250 million to the city's debt to bail out its ailing pension system in 1998, and he has refinanced debt three times since 1999, which provides short-term relief by stretching out payments.

Public safety costs

The city's other main albatross is public safety spending, mostly on police and firefighter salaries and benefits. In 2001, public safety ate 41 percent of city expenditures; in 1991, 40 percent; and in 1980, 27 percent.

Some place blame for those costs on a state law passed in 1968 that gives three-member arbitration panels the final say on police and firefighter contracts. In exchange for those binding arbitration rights, the public safety workers are prohibited from striking.

"The fact that uniformed services were granted the right to adjust their salary and benefits by a third party has quietly and consistently expanded the city's expenses past its revenues," said Aldo Colautti, executive secretary to Mayor Joseph Barr, the city's mayor from 1959 to 1970.

But state government hardly abandoned the city. In 1989, it started issuing the city $28 million in pension aid, based on a 2 percent tax assessed on out-of-state insurance premiums. That aid eased Masloff's decision that election year to cut the city's wage tax to 1 percent, which has not been raised since. (The Pittsburgh Public Schools wage tax is 2 percent.)

Murphy complains that the state funding has dipped to $16 million, but that is partially due to his own cost-cutting efforts: the state calculates pension aid based on the number of city employees, so when the city payroll drops, so does its pension aid.

The state also approved the 1 percent extra Allegheny County Regional Asset District tax in 1994, which pumped $19.6 million into the city budget last year, and $145 million total since 1994. The RAD also took over funding for amenities the city used to be partially responsible for, including Three Rivers Stadium, the Pittsburgh Zoo, the National Aviary and Carnegie Library.

With Murphy's urging, City Council agreed to divert from $6 million to $7.5 million in those RAD revenues every year through 2014 to create an economic development generator called the Pittsburgh Development Fund.

If the city can get the state's help again, the next question is whether it will be used to really fix the budget holes that have plagued it for a generation.

"I'd like to think I'd be remembered as a guy who changed Pittsburgh," Murphy said, answering a question Friday on the city's beat-up image.

"We have a tax structure clearly that's based on a city that doesn't exist anymore. It's based on a city of when my father was working at Jones & Laughlin steel mill on the South Side, and he walked to work from a couple blocks [away] where he lived. We need to change."


Tim McNulty can be reached at tmcnulty@post-gazette.com or 412-263-1542.

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