Pittsburgh adds an exclamation mark to its recovery with state oversight exit

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While Pittsburgh had already emerged as a national model for urban rejuvenation, its emergence from 14 years of state oversight puts an exclamation mark on the city’s comeback.

“Pittsburgh is back,” Mayor Bill Peduto said after Pennsylvania Gov. Tom Wolf declared that the city is no longer distressed. Pittsburgh became the second city and 14th municipality to exit the state-sponsored workout program commonly known as Act 47.

“We are now a city that is financially solvent. We’ve changed our habits and we have safeguards in place to assure we won’t fall into our previous bad habits," said Peduto.

Pittsburgh in 2003 was on the brink of bankruptcy, the only major U.S. city whose bonds were junk. It laid off nearly 500 employees, including 100 police officers. It closed recreation centers and swimming pools, and eliminated services from mounted police patrols to salt boxes.

“We came to realize that there were no quick fixes and we had run out of borrowing room,” Peduto said in an interview.

Pittsburgh has since received 11 rating-agency upgrades.

“For us, being in Act 47 for 14 years meant making difficult decisions to become financially solvent. It definitely had its costs,” the mayor added. “Our workforce took it on the chin, going without pay raises, and our infrastructure suffered without our ability to borrow.”

The city had also operated under a second overseer, the Intergovernmental Cooperation Authority, which the state legislature created in 2004 to work jointly with the Act 47 team. Legislation pending in Harrisburg would disband ICA. State lawmakers eliminated the ICA’s budget last year and the authority has since operated on a city grant that enabled bill payment and other housekeeping.

Working with two overseers posed occasional difficulties. In January 2012, ICA officials scolded then-Mayor Luke Ravenstahl and other city officials after they went to New York and pitched the city’s attributes to the major bond rating agencies. Shortly thereafter, Moody’s Investors Service and S&P Global Ratings adjusted their outlooks to stable.

Exiting oversight took longer than expected.

After Peduto succeeded Ravenstahl as mayor in 2014 following 12 years on the City Council, he petitioned the state’s Department of Community and Economic Development to remain in the Act 47 program, reversing the city's position.

“We were still in the throes of pension liability,” said Peduto.

Also in 2014, the state legislature amended the Act 47 law to limit a municipality’s stay in the program to five years from the adoption of a recovery plan or its amendment. The change, in response to arguments that some municipalities have labored too long in Act 47, “slightly changed the factors DCED was to consider in making a rescission determination,” said think tank Allegheny Institute for Public Policy.

Aliquippa, in nearby Beaver County, has been under Act 47 for 30 years and is on its sixth recovery program. Other notable long-timers include Scranton and Chester, which joined in 1992 and 1995, respectively.

“The program was successful for Pittsburgh, especially if I compare it to cities such as Chester,” said David Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township,

East Pittsburgh's stay was much shorter, seven years. About 30% of the communities in as Act 47 have been from the Allegheny area, according to Fiorenza.

Pittsburgh’s 2014 amended recovery plan, prepared by Public Financial Management and Eckert Seamans Cherin & Mellott LLC, called for eliminating the operating deficits in the baseline multi-year financial projection while preserving basic services, avoiding the need for cash-flow borrowings; and buffering against unanticipated revenue shortfalls or expenditure increases.

It also set out to gradually reduce the city’s debt to provide more resources to support daily operations; direct more funding to the city’s capital budget, with priority to roads, bridges, police and fire stations and other core infrastructure; and gradually increase pension fund contributions to actuarially recommended levels.

As of the end of 2016, the city’s unassigned fund balance was 17.7% of its operating expenditures, higher than the 16.7% level the Government Finance Officers Association recommends.

Pittsburgh two years ago refined its revenue forecasting methods and began subscribing to an external data analytics firm, through which the city receives city- and county-level economic indicators including non-farm wages, gross county product, retail sales, and city employment throughout the year.

Moody’s rates the city’s general obligation bonds A1. Fitch Ratings and S&P rate them AA-minus and A-plus, respectively. All three have stable outlooks.

“Pittsburgh has a favorable credit position, given strong financial results through fiscal 2016,” said Moody’s, while noting that A1 is slightly under the median of Aa3 for cities nationwide.

Moody’s called Pittsburgh’s financial position satisfactory, given strong operating surpluses in the last two fiscal years. The fund balance as a percent of operating revenues (18.4%) falls short of the U.S. median for the rating category (32%), said Moody’s, though fund balance improved considerably since 2012.

Pittsburgh’s debt and pension liabilities, said Moody’s, are “somewhat elevated,” and are slightly weaker than Moody’s A1 peer group.

Pittsburgh’s emergence from oversight prompted an immediate call from the city’s police union to renegotiate its current agreement, retroactive to 2015. Robert Swartzwelder, president of Fraternal Order of Police Fort Pitt Lodge No. 1, cited a contract provision that enables renegotiations after the Act 47 oversight.

“We expect that to happen with all the unions,” said Peduto.

Infrastructure presents another challenge. Pittsburgh, which sits where the Allegheny and Monongahela rivers form the Ohio, must maintain about 450 bridges. While the city expects to bond more for projects, it intends to stay within debt limits, according to Peduto.

Hovering above Pittsburgh and many other cities is the specter of cuts in the funding formula from President Trump’s infrastructure proposal. “I’m concerned,” the mayor said of the plan that would swap an 80% match with one at 20%.

Pittsburgh’s debt policy requires contracting with an independent financial advisor when issuing debt; issuing debt only for capital projects included in the capital program; limits usage of tax revenue anticipation notes; limits its tax-supported debt service to 17% of general fund revenues; and establishes a 10-year goal of reducing this ratio to 12%.

An ordinance prohibits the city from issuing debt with derivatives. “Overall the debt policy is another tool for ensuring long-term financial stability, if it is followed,” said the recovery plan.

Peduto’s fiscal 2018 budget and five-year plan assumes the city would issue $60 million a year in new debt beginning in 2019 to fund capital projects. If it follows that proposal through 2022, its debt service that year would fall below the 12% target in the debt policy and represent about $24 million less than the city budgeted this year.

Another debt cliff in 2027 looms when debt payments drop below $30 million, “but presumably there would also be additional debt associated with issuing bonds after 2022,” said the plan.

Pittsburgh is a far cry from its days of yesteryear, when soot from the coal mines and factories darkened the city in the early afternoon. Its population has dropped from 700,000 in 1960 to about 304,000 today.

The city has rebranded itself around education and healthcare – “eds and meds” – plus technology and culture.

Ten universities sit within the city limits, while the University of Pittsburgh Medical Center and Highmark anchor a thriving healthcare industry. Amazon, Google and Uber, among other companies, have added jobs in the region while Pittsburgh -- along with Pennsylvania counterweight Philadelphia – is in the running for Amazon’s second world headquarters.

Pittsburgh has placed emphasis on arts and culture with a 14-block district that encompasses restaurants, retail shops, art galleries, public parks with art installations and many theaters.

“The challenges that lie ahead for the city is keeping the braintrust of the recent college graduates from all the universities from leaving and going to cities like New York and Philadelphia to work,” Fiorenza said.

Allegheny Institute warned current and future Pittsburgh leaders to remember the city’s dark past so as not to repeat it, and suggested state officials engage in aftercare.

“[The commonwealth] added an early intervention component to Act 47 to monitor municipalities and work to ensure stability before they get to the point of distress,” it said. “That probably should be paired with some special attention to the municipalities that have exited distressed status.”

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Budgets Bond ratings Infrastructure Healthcare industry Bill Peduto Tom Wolf City of Pittsburgh, PA Commonwealth of Pennsylvania Pennsylvania