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Bankruptcy for Pittsburgh must be avoided

| Friday, Nov. 22, 2002

The state of Pittsburgh's finances has been a concern for as long as the city's population has been declining. As Pittsburgh's 21st Century Future panel (PGH21) presents its recommendations, the goal is clearly to keep the city's fiscal base solvent. The stakes are rising, however, on how to shape a sustainable city budget for coming decades. The specter of a future bankruptcy would seem to be the underlying fear of both public officials and private pundits.

Is bankruptcy on the horizon for Pittsburgh• What does bankruptcy mean for a large American city• Can bankruptcy be avoided and what will prevent it?

Pittsburgh would not be the first city to declare bankruptcy. Chapter 9 bankruptcy was created during the Great Depression just to deal with municipal bankruptcies. For a city or town to run out of money is a very different event from the much more common individual or corporate bankruptcies we hear about daily. Some of the consequences will last for many years to come. The immediate impact a municipal default would likely be a cutoff of future borrowing and bond issuance in the near term.

Heightened political turmoil within the region would only be a sideshow to what would be a national story and an indelible mark on Pittsburgh's image across the nation. If there is a slim silver lining, Chapter 9 is not like other types of bankruptcies in that the bankruptcy court will not have the option of liquidating city assets to pay outstanding bills. In other words, neither the City-County Building nor the mayor's office furniture will be auctioned off for cash.

Since 1937, when Chapter 9 was created, more than 500 municipalities have gone bankrupt and have restructured their debt under federal bankruptcy laws. Most have been smaller rural cities and towns that have suffered, much like Pittsburgh has, though decades of out-migration and population decline. It will always be the case that paying for public services and capital intensive infrastructure is difficult when the population base that pays the taxes moves out. Pittsburgh's relative decline has been significant and immense. In many ways it is remarkable that the city has staved off the bankruptcy that would have been predicted for a city that has lost 50 percent of its population since 1950.

SYSTEMIC PROBLEM

Clearly the city has been unable to pay for just its annual operating costs from concurrent tax revenues for most of the last decade. Many believe that the city's structural deficit can be traced to the 1 1 / 4 percentage point decrease in the city's wage tax in 1988. Supporters and opponents of that tax cut debate whether it was prudent given the fiscal realities of the city at the time. Both sides forget the intended purpose of that tax cut.

Going back to the Caliguiri administration, if not much farther, there was a clear concern with the out-migration of city residents to other parts of the country and suburbs within the metropolitan region. The future of the city seemed to be tied directly to a decrease in the wage tax and the retention of younger workers that are most affected by it.

The proposal put forth by the Masloff administration never was intended as a unilateral lowering of the wage tax but a more comprehensive tax-neutral program that included a complementary increase in property taxes. It was only at the last minute that the wage tax reduction was approved but follow-up legislation to increase the property tax was defeated. A fundamental error was not the tax reduction itself but the selective implementation of the mayor's original proposal.

It is ironic that what was thought of as a key policy to keep people from leaving the city — shifting taxes from wages to property values — is now the opposite of most tax reform proposals. The lack of a clear answer about what version of tax reform is best highlights the difficulty of sustainable urban public finances for Pittsburgh and other cities.

What may be surprising is that local police and fire department expenses per capita for Pittsburgh are not terribly out of line with other similar cities around the country. But the revenue to pay for those and other services is clearly lacking. And for Pittsburgh a key dilemma is how to deal with a legacy of debt incurred from a population that, for the most part, has retired or left for elsewhere in the state or farther.

TIME FOR CONSOLIDATION?

Additionally, the hyper-fragmented nature of Allegheny County municipalities means that Pittsburgh is not alone in terms of difficult public finances now and in the future. Many of the communities in the Mon Valley have experienced long-term population decline that is not likely to have ended. That fiscal crisis is a part of the structural decline in these communities is self-evident to anyone living there. One criticism of Mayor Murphy's PGH 21 task force could be that the issue needs a more comprehensive solution for all municipalities in the region. That is more a criticism of the void left by county and state leaders who have left municipalities to fend for themselves.

The governor, the state Legislature, the city and county, and all local municipalities have a stake in the future of Pittsburgh as a healthy entity. Is the long-term future one like that of Indianapolis, where city and county governments combined• It's hard to imagine that most outside of Pittsburgh would like to see Allegheny County absorb the city government and all its structural costs they would then have to pay for.

But what public officials should bear in mind is that there will be no winners if the city is forced into bankruptcy for whatever reason.

Bankruptcy in itself will solve little, exacerbate the existing strains on the city budget and leave whatever underlying problems in place in search of a solution. The damage will not be limited to the city and its residents. Years of image-building will be lost as the rest of the country will not distinguish a crisis in the city and the greater region that bears its name. Bankruptcy will either force the city out of the municipal bond market for many years or make such borrowing far more costly than necessary. Core city services will have to continue and will have to be paid for in almost any conceivable future. Whatever the final solution looks like — and there eventually will be a solution — it will unlikely be able to make all stakeholders happy. Compromise and courage will shape that future.

Christopher Briem is a regional economist at the University of Pittsburgh's Center for Social and Urban Research.

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