Passing the Buck

During Mayor Tom Murphy's 12-year reign, the city's shifting budgetary outlook has shown him at the height of his power and the depth of his despair. On one occasion, when the city's finances were riding high, Murphy made his annual budget presentation to city council before a room packed with his appointees, who all stood up when he entered. You might have thought he was a judge, or the potentate of a third-world country. Which in some ways he turned out to be: By August of 2003, a teary-eyed Murphy was announcing the layoffs of 731 workers, necessary to stave off total financial collapse.

This year's budget presentation, Murphy's last before his departure as mayor, avoided such dramatic extremes. It was released without ceremony on a quiet Thursday afternoon, to the handful of reporters and officials who stopped by and picked up a copy.

So far, at least, the reception has been muted as well. As proposed, Murphy's budget avoids the punishing layoffs of 2003, a year when city residents were greeted with headlines like "Murphy decides in favor of Christmas tree." And so far, it has avoided the kind of explosive battle Murphy waged with Harrisburg last year, when he sought a financial bailout to help the city.

Even Murphy's Sept. 27 presentation to the Intergovernmental Cooperation Authority was oddly anticlimactic. Although the ICA, one of two state-appointed panels presiding over the city's finances, has been studying city operations for more than a year, its five board members watched patiently as Murphy gave a PowerPoint slideshow describing the scope of the city's operations. (Did you know that each time it snows, city snowplows travel a distance equal to the drive between Pittsburgh and Miami? Or that the city's streetlamps and street signals cost $3.5 million "for electricity alone"? Oh, it's true!)

And yet ... there was something eerily, disturbingly familiar about it all. Was it the way Murphy skipped over the fact that the city would shell out $93 million in debt payments next year, the way he skipped over such bad news in the past? Was it the fact that -- less than a year after a state bailout that Murphy himself heralded as "historic tax reform" -- he was still pleading for various forms of state assistance? (Cities are "so governed by the legislature," he told the panel; as a city official "you are so constrained in what you can do to solve a problem.")

In fact, for all the sturm und drang of last year, some of the city's biggest fiscal problems still haven't been solved. Murphy may avoid a final budget controversy on his way out the door, but his successor may inherit one anyway.

As ICA chair John E. Murray said after Murphy's presentation, while the mayor had put together a "credible" financial plan, his presentation "didn't talk about how much money we owe." Instead of pondering next year's eight-digit debt payment, Murray noted, city officials had spent weeks bickering over "a dispute about $30,000 for rodent control."

"The city is in better shape than it was in 2004," Murray concluded. "But that's not saying much."





At first blush, the city is far better off than it was just two years ago. Passed last November, Harrisburg's bailout package allowed Pittsburgh to scrap or reduce loophole-ridden taxes on business and replace them with a "payroll preparation" tax paid by all for-profit employers. It also replaced the $10-a-year occupational privilege tax with a $52-a-year levy. It even created a "facility usage fee," which taxes visiting athletes using the city's sports stadiums.

Still, Murphy's presumptive successor, Bob O'Connor, will face significant challenges almost from the day he arrives in office next January. There's the ongoing property-tax fiasco, for starters. And like everyone else, the city is contending with rising fuel costs: Murphy noted that the increase in gas prices had cost the city some $700,000 this year.

Perhaps more crucially, Murphy's budget anticipates a 17 percent cut in fire spending. The savings are based on hoped-for reductions in overtime and the replacement of older, better-paid firefighters with rookies, but others have been skeptical of this cut. The president of the firefighters union, for one, told the Pittsburgh Post-Gazette Murphy was "out of his mind."

And as Murphy noted in his ICA presentation, ever since the bailout the state has been finding ways to hamstring the city -- almost by accident. Over the summer, Harrisburg passed a law in which a single deleted line from a previous act could cost an estimated $12 million in revenue from the deed-transfer tax. "We expect a lawsuit any day" from a taxpayer looking to take advantage of the language, Murphy told the ICA. Similarly, technical wording in another bill may prevent the city from collecting up to $3 to $4 million in its $52-a-year emergency-services tax next year.

Some of these problems, like the rising fuel costs, are universal. Others may be addressed shortly: Legislators contacted by City Paper say that the deed-transfer tax change, at least, was an innocent mistake the legislature will correct this year.

But what's most worrisome, says City Controller Tom Flaherty, is that, "This was supposed to be the transitional year. We're supposed to be on our way back to recovery, but we're going off the cliff in 2007."

"The challenge isn't in the 2006 budget," agrees City Councilor Doug Shields, who chairs council's budget committee. "It's in the 2007 budget."

Why? In part because what the state gave with one hand last year, it is taking back with another now. (See chart, page 24.)

Under the terms of the state bailout, the city will be required to phase out some of the taxes that have kept it afloat so far. The city's 50 percent parking tax, for example, begins a phased reduction in 2007. The city projects a $4 million loss in 2007 alone. The business privilege tax too will be cut nearly in half, reducing revenues from $14.5 million to $7.6 million. It will be phased out almost entirely by 2010.

Offsetting these cuts is the $17 million the city hopes to receive from slot machines by 2008. "But that's optimal projections, of course," Flaherty says. And such projections have proven false before: The city's financial overseers originally ordered Murphy to include $3.8 million from gambling revenue in this year's budget. But court battles over the state's gambling law have delayed slots development.

In fact, Flaherty says, the result of the city's tax restructuring is "a wash in terms of revenue. And the worst part is that they make it out like the legislature did us a big favor, so we shouldn't come back for another 25 years."

That may be an overstatement: Murphy's financial plan projects that in 2007, the new tax structure will generate a net gain of $12.5 million when compared to the taxes in 2004. That's nothing to sneeze at. Still, the city's debt and pension payments alone are projected to increase by twice that much during the same period.

And even independent observers say the city is only slightly better off now than it was a year ago. "If you look at the revenue projections, you could say the state has let us down," agrees Councilor Bill Peduto, who was an early supporter of financial oversight for the city.

The new revenue structure might be fairer than the old loophole-ridden mess the city had, and it has shored up the city's day-to-day operating expenses. But when it comes to the city's real financial problems, "The new tax scheme hasn't helped the city much," says Chris Briem, an economist at the University of Pittsburgh's Center for Social and Urban Research. In fact, he says, the city's long-term debts are still so huge that "Bankruptcy is a path that is more possible than people talk about."





It seems incredible to hear anyone mentioning bankruptcy so soon after 2004, and it's hard to say just how possible it really is. Some would argue that it's not even legal, and as Briem acknowledges, "It's a bad option for all kinds of reasons. Do you want to be on the front page of The New York Times as the city that went bankrupt?"

But possible or not, it is certainly tempting when you consider the problems Pittsburgh still faces.

For example, state Sen. Jim Ferlo (D-Highland Park) says bankruptcy might be the only way for the city to get out of a five-year contract Murphy signed with the firefighters earlier this year. While the contract can be reopened for further talks in 2007, it makes layoffs unlikely in the near term. Ferlo worries that "this contract, while signed by Mayor Murphy, will be an albatross around O'Connor's neck. ... I predict that this may cause the issue of bankruptcy to come up," Ferlo says, because that may be the only way to get out from under the contract.

An even larger problem is the city's pension liabilities -- the money it owes to retirees. State Rep. Dan Frankel (D-Squirrel Hill) says the pension obligation is an "enormous elephant sitting over the city's budget."

The conventional wisdom is that the city's pension fund has enough money on hand to pay out about 40 percent of what it owes to the retirees of today and tomorrow. While the city can cover expenses for now, that's perilously low: An ICA-commissioned study last year noted that, of 85 other public pensions surveyed, only seven had less than half the money they needed on-hand.

Even that 40 percent figure may be optimistic.

The estimate relies upon a whole range of assumptions that may or may not be correct: assumptions about how long retirees will live and draw on pensions, about how well the city's investments do until then, and so on. And, the city uses assumptions that tend to minimize the amount it expects the pension fund to require. For example, the city assumes that through skilled investment, its pension fund can earn a return of 8.75 percent on its own. That's an optimistic number, one based on returns from the stock market before the 2001 crash.

Of perhaps more concern to city workers, Pittsburgh's numbers also count on city employees dying sooner than the rest of us.

According to the national Centers for Disease Control, over the past two decades, the life expectancy for a 65-year-old has increased by about two years. If Pittsburgh's retirees followed that trend, it would mean that today's retiring workers would be drawing their pension for two years longer than workers back in the 1980s. But Pittsburgh's pension fund is counting on workers dying as early now as they did back then. As a 2004 review by the ICA notes, the fund uses a 1984-vintage life-expectancy table that is "out of date and has generally been replaced throughout the industry."

Despite all our vaunted nonprofit hospitals, Herbert Loomis, who audits the city's pension fund, says Pittsburgh workers are still dying like it's 1984. "Every four years we perform a study of mortality [for those] under the Pittsburgh plans," Loomis says. "And the data to date shows the older table is still pretty good."

Skeptics suspect, however, that the city is using Enron-style accounting tricks to make the fund look healthier than it is. In a public letter last year, state Rep. Mike Turzai (R-McCandless) charged that the Murphy administration had "modif[ied] the actuarial assumptions used to calculate the funding requirements." Doing so, he contended, reduced its contribution by $3.7 million a year.

Loomis says revising the city's assumptions is "something that we're looking at," but would not speculate on when the new numbers might be forthcoming.

When they're compiled, the funding shortfall could be much larger than 40 percent, and the city would be on the hook for a lot more. This, Briem says, is the kind of crisis that could haunt Bob O'Connor -- just as it haunted Murphy. "Murphy was set up with these problems when he came in, and that's where O'Connor is now. These pension obligations were incurred by people in the past, who are dead and gone." But the rest of us still live with the cost: Next year, pension and health benefits total $123 million -- more than a quarter of the city's budget. Depending on Loomis' re-evaluation -- and depending how many city workers retire in the near future -- that cost could escalate dramatically.

The state does provide pension aid to municipalities. But as Murphy pointed out during his ICA presentation, the aid is tied not to the number of retirees but to active workers. The city workforce has shrunk by 1,000 workers over the past decade, and as a result, state pension assistance dropped from more than $25 million to $18 million. "We're getting penalized by the state for being efficient and reducing costs," Murphy contended.

Ferlo and others have proposed a variety of fixes. The city could, for example, merge its pension plan with that of the state. It could do the same with its health insurance, so that government workers across Pennsylvania are paying into the same insurance pool.

But prospects for such reforms are poor. Turzai's letter also charged that "City leaders seek additional revenues" for things like pension payments "to cover the debt they foisted on future generations. ... City officials wish to continue without making the tough decisions."

It may be hard to take Harrisburg's allegations of reckless spending seriously, what with the 16 percent pay hike recently taken by Turzai's colleagues. But "I don't see [pension reforms] rising to the top of Harrisburg's list," says Jake Haulk of the conservative Allegheny Institute for Public Policy, a long-time critic of city spending. Pooling the city's pension fund with that of the state might look good to Pittsburgh, Haulk says, but "The fund is so far underwater that you'd be shifting the costs for the city's extravagance to the state taxpayers."

Harrisburg is more likely to embrace the kind of suggestion the Allegheny Institute is proposing. The Institute says the city should sell off city-owned land and privatize more services. Frankel contends that "no one who's looked at the budget could take those solutions seriously," but Haulk says legislators "have got to do things to benefit taxpayers around the state, not just Pittsburgh."





Murphy's appearance at the Sept. 27 ICA meeting was part of a final effort to convince state officials to see things differently. He credited the ICA with being "very helpful" in putting together last year's bailout, and urged it to plead the city's case in Harrisburg.

Flaherty, for one, doesn't see the point. The financial overseers "can't deliver on anything. All they can do is cut."

In fact, as Republicans like Turzai point out, the city's 2005 budget is nearly $40 million larger than it was before the 2004 bailout. But since then, overseers have proven better equipped at nickel-and-diming city expenditures than at addressing the big-dollar items like pensions.

For example, when city council found itself running over budget in September, it chose to avoid layoffs by using money intended to renovate council chambers. It's the kind of transfer that irks the city's critics, and the ICA wrote an Oct. 10 letter thundering that council was using "imaginary funds that are not actually available." The letter reminded Council President Gene Ricciardi that "we made recommendations to the [state] that were instrumental in securing additional revenues for the City. Those recommendations, however, were predicated upon a cooperative effort ... to achieve an efficiency culture." Council, the letter argued, wasn't holding up its end of the deal.

To which City Councilor Doug Shields says the state never followed the ICA's recommendations in the first place. Because of that, "I don't want to see the state hold our feet to the fire over expenditures."

Last year, after all, the ICA recommended that the occupational privilege tax be increased to $144 a year. The state, however, only raised the tax to $52 a year -- a discount that cost the city an estimated $17 million.

And while financial overseers fault council for relying on "imaginary funds," they've done the same thing themselves. When the city compiled its 2004 budget, the ICA insisted that it include $6 million in volunteer payments from the city's nonprofits for each year in the city's five-year plan. It did so even though it had no reason to think that money would ever arrive.

"All I can say is that no one consulted us when the figure was $6 million," says Rev. Ron Lengwin, a spokesperson for the Catholic Diocese and for the effort by nonprofits to find some money for the city. Days after Murphy presented his budget, the nonprofits announced that they could only come up with $4 million. And that they expect to pay it for only three years, not five. Told that city's fiscal plan anticipates revenue from funding in 2008, 2009 and 2010, Lengwin says, "There's no reason for them to do that. From the beginning, we've said this deal was from 2005 to 2007."

As a result of such shortfalls, Murphy's budget for 2006 has been scaled back. He deleted gambling and some nonprofit revenues that "were insisted upon by the ICA," he explained to the ICA board, because it is "not now realistic to assume that we will receive" the money.

If the ICA really wants to see a potentially dangerous financial swap, though, it should look to a portion of the state bailout that entails robbing Peter -- or at least his grade-school children -- to pay Paul. Under the plan, a portion of wage-tax money residents once paid to the schools is now being directed toward the city. By 2009, the Pittsburgh Public Schools could be losing as much as $11 million a year. "All you're doing is taking money from one end of town and giving it to the other," says school-board member Randall Taylor. "Whether it's the school district or the city, it's the same group of taxpayers."

The schools, in fact, are now facing a $47 million deficit of their own -- which means now they're looking for a state handout. "The schools are going to hope for some kind of relief from Harrisburg," Taylor says. "We're going to be lobbying to get [the tax revenue] back and a whole lot more, believe me."

Shields says city officials have been betrayed. Through the oversight boards, he says, "The state gave us a list of things we had to accomplish." For example, city workers were required to make a 15 percent contribution to their health plans, and have been on a four-year wage freeze And yet, Shields says, "After we do all that bad stuff [and] cut our political throats, what did the state give us? Half of what its own [oversight boards] said we needed.

"To suggest to the public that the light is at the end of the tunnel -- it's not."





Murphy, at least, warned from the outset that the light could prove to be a railroad train. Even when he trumpeted the city bailout last November, he acknowledged the plan "does not fully resolve our financial crisis. ... I had hoped that we could have reformed our badly distressed pension system ... and we will continue our efforts in the coming new year."

In fact, Murphy didn't continue his efforts. No one else did either. The pension issue was ignored throughout the mayoral primary, along with just about every issue in a campaign that was essentially a victory lap for Bob O'Connor. Barring a sudden catastrophe, the issue will go on being ignored, says state Rep. Dan Frankel, for at least another year. The gubernatorial election is next year, he notes: "Given the political environment, it's unlikely to get anything done until after November of '06."

Of course, given Murphy's stormy relationship with the state, keeping quiet might have been the best thing he could do. "I like Tom; I think he's a visionary," says Moe Coleman, the director emeritus of the University of Pittsburgh's Institute of Politics. "But Tom doesn't have a lot of respect for other politicians. Even our own delegation is not in coordination about the city plan."

As befits a politician who has yet to take power -- and who wants to stay popular until then -- O'Connor is keeping quiet. "We're looking at the budget like any other private citizen right now," says O'Connor spokesman Dick Skrinjar.

But many observers believe that the best thing Pittsburgh has going for it is the fact that starting next year, it will have a mayor who isn't widely despised in Harrisburg. Even Frankel, long a Murphy ally, says, "One thing that separates Bob O'Connor from Tom Murphy is that people like him." Murphy would "like to have fixed this before he left office, but that isn't going to be done. It's just going to have to wait for the next administration."

Coleman, though, says that what's held Pittsburgh back isn't entirely Murphy's arrogance; it's that unlike predecessors such as David Lawrence, Murphy never had the muscle to back his arrogance up. "I worked for [Mayor Joseph] Barr in the late 1960s," Coleman says. "Back then, we told city council what to do, the state legislature what to do, and the Congressmen what to do. Now, there's no Mellons, there's no strong unions. All the elements that made Lawrence Lawrence just aren't there any more."

Lacking such a base, O'Connor's own likeability will be put to the test. In the end, what may determine the city's future is not the mayoral election this year, but the election to come in 2006. Will Gov. Ed Rendell be re-elected? Will the Republicans maintain their grip on the legislature?

"It's a failure of the political process," says Dan Frankel of the city's ongoing travails. The bailout of 2004, he contends, "postpones the need, but there will be a day of reckoning. I'm not sure exactly when that will be. I don't know how sustainable the city's budget is, or for how long."