Bonds. Municipal Bonds.

The post title puts the case as Sean Connery, the original celluloid Bond, might have put it. By coupling the latest news out of Birmingham, Alabama (the Pittsburgh of the South, as some would have it), with the New York Times' summary of Pittsburgh's natural population decline, Chris Briem finally has hooked me on the story of the public finance disaster that looms over Pittsburgh.

To recap, briefly:

The City of Pittsburgh owes roughly $1 billion in general obligation debt, i.e., municipal bonds.

The City of Pittsburgh also has roughly $500 million outstanding in unfunded pension liabilities.

On a per capita basis, the City of Pittsburgh owes more money than Jefferson County, Alabama, in which Birmingham is the largest city. "Jeffco" has roughly $3 billion in bonds outstanding. The county has been toying all Spring with the possibility of filing for federal bankruptcy protection. Just the other day, however, its bondholders and related creditors agreed to extend a forebearance agreement -- again staying the day of reckoning for the county and raising the possibility that Jefferson County may be too big to fail.

Is Pittsburgh any better off? There are no revenue windfalls in the offing, and if the per capita debt measure matters, then things are only going to get worse.

Municipal bankruptcies are not like "ordinary" corporate bankruptcies. Chapter 9 of the bankruptcy code, which would apply to both Jefferson County and Pittsburgh, includes certain special rules governing the classification of creditors; the bankruptcy trustee in a Chapter 9 case does not have the power to step in and run the municipality, as a Chapter 11 trustee might in a corporate proceeding. Among other things, that means, I think, that a bankruptcy court would have relatively few tools with which to manage the expected conflict in Pittsburgh between its bondholder and bond insurer (and reinsurer) creditors, on the one hand, and its pension obligee creditors, on the other hand. If and when forebearance agreements become topics of local discussion, there's no assurance that all of Pittsburgh's creditors can be made to get on the same page. Jefferson County may be too big to fail -- but is Pittsburgh?

Meanwhile, out in California, the Bay Area city of Vallejo filed its own Chapter 9 bankruptcy petition the other day. Residents quoted in The New York Times claimed to be excited by the prospect of municipal financial restructuring. I drove through Vallejo right after this happened and can safely report: uncertain though it may be, life goes on.

Out in California, municipal fiscal disasters are localized; poor towns subsidize the wealthy. All do not suffer jointly. Only sixty miles from Vallejo, in the Silicon Valley Eden called Menlo Park, the (re)building boom continues unabated, with teardowns and new McMansions to the left and teardowns and new McMansions to the right. Both before and after traversing Vallejo, in Menlo Park I saw the usual: Moms walking dogs. Nannies strolling babies. Men steering bicycles with one hand and cradling cell phones in the other. A Safeway store more palatial than the East Liberty Whole Foods and a Giant Eagle Market District combined. Latino day laborers with red baseball caps waiting idly at the side of the boulevard, waiting for a ride and a day's wage.

Pittsburgh's wealthier suburbs seem to care not about the city's public finance disaster because they imagine themselves to be more or less like Menlo Park, that is, essentially immune from what's happening on the other side of the bridge. But the Pittsburgh region is unlike the Bay Area in many, many ways, and this is one of them. If Pittsburgh goes completely in the financial tank, it seems likely to me that much of the region is so intertwined with the City economically that many of those suburbs will go with it.

Commuter tax, anyone?

Comments

9 Responses to "Bonds. Municipal Bonds."

Judge Rufus Peckham said... 5/19/2008 6:09 PM

Excellent post on the most pressing issue facing this region.

The fate of Western Pennsylvania indisputably is intertwined with the fate of the city of Pittsburgh. But some persons in Pittsburgh's wealthier suburbs do not care about the city's public finance disaster because they correctly understand that the city's fiscal problems are the product of chronic, indeed, reckless mismanagement. To put it bluntly, for many years, Pittsburgh politicians doled out benefits to powerful municipal unions that few, if any, private corporations could afford, much less a declining rust belt city, simply to secure their own reelections. To paraphrase Judge Posner, the city of Pittsburgh is the gratuitous author of its own fiscal disappointment.

The continued single-party stranglehold on the city doesn't lend comfort to suburbanites who might otherwise be sympathetic to the notion that the city and the region are intertwined (note I am avoiding the words "bail out"). Only when the present dysfunctional form of government is discarded will most suburbanites trust Pittsburgh to be a responsible steward of its limited fiscal resources.

In any event, Mayor Ravenstahl is to be commended to backing the idea of a city-county consolidation. The billion dollar debt, of course, will need to be dealt with before the suburbanites or the legislature go for it.

Bram Reichbaum said... 5/19/2008 10:05 PM

Commuter tax? Taxing nonprofits? A merger than actually merges public debt?

The problem with this issue, if one is a political blog, is that no politician nor political aspirant seems to be offering any workable solutions, except ritualistically and sporadically. When DeSantis was a going concern in the city, the issue got a little play, but since then it's been all crickets and tumbleweeds.

Mike Madison said... 5/19/2008 10:20 PM

Bram, that's a real problem with this issue whether or not one is a political blog! ;-)

Anonymous said... 5/20/2008 9:37 AM

I'm sure the city is partly at fault for its own financial problems. But I am 100% sure that it is not solely responsible. Cities all over this state are having financial problems. It's a Pennsylvania problem.

Furthermore, the suburbs are very much intertwined with the city, as has already been stated. Pittsburgh has one of the nation's largest daytime influxes of population. Quite a lot of people live in the suburbs and work in the city. The city carries a big burden. It is the center of a region with 2 million people, but only about 300,000 live within its limits. This has been a problem for many years and will continue to be a problem. Until we work out a sensible tax structure for this county, the city will have financial problems. It's time the suburbs stepped up.

Schultz said... 5/20/2008 10:09 AM

"In any event, Mayor Ravenstahl is to be commended to backing the idea of a city-county consolidation. The billion dollar debt, of course, will need to be dealt with before the suburbanites or the legislature go for it."

I can't commended Ravenstahl for anything that A) He rejected when his opponent, DeSantis, recommended the city-county merger and B) He was strong armed into endorsing by "The Boss," Dan Onarato, who needs a big win like a successful merger before he announces his run for Governor in 2010, since the drink tax has done a lot of damage to his reputation.

With regards to the merger, I do think it makes sense for some of the Allegheny County municipalities (inner ring suburbs) to merge with the city of Pittsburgh, but a full city county merger won't happen, and even if it did what is the benefit besides seeing Pittsburgh higher in the rankings for most populated US cities?

Now, in terms of getting out of the hole, it is clear that the answer is to grow the tax base, but to accomplish that fundamental changes need to be made in terms of how the city and county need obtain their revenues. In a city and county that already have high taxes and an unfriendly business climate, that are both in a state that has one of the highest corporate tax rates, does it make sense to keep adding taxes? Is taxing our way to growth the answer, Dan Onarato?

When I hear about growth and expansion, it is usually the non-profits acquiring more land and moving to new buildings, like Point Park in downtown, or Carnegie Mellon's ambitions to a (hostile) takeover of Craig Street. If you want to see real growth from the private sector in this region you have to drive up to Cranberry, which, if it keeps doubling in size like it did over these past 10 years, could eventually be one of the top 5 most populated cities in PA.

Why can't the city have some of that growth? Why can't the city attract those folks who are moving up to Cranberry? How about former city residents, like myself and my neighbors in Mt Lebanon? Patrick Dowd thinks the Pittsburgh Promise is the answer, but IMO that is only an answer for retaining existing residents. In order to attract more residents from beyond it's borders we need some big changes with regards to city taxes. I am in favor of lowering the city of Pittsburgh wage taxes to make them more competitive with the suburbs. The way to make up that reduction in taxes is to implement a nominal commuter tax, say 1.5%, with suburbanites only paying the difference between their local and the city commuter tax, so on average about .5% per commuter.

Right now people who live in city neighborhoods like Brookline, Banksville or Beechview ponder "Why live here when we can hop skip and jump over the border to Dormont, which has a wage tax that is about 2% less? Oh, and our streets will get plowed once in a while too! What a deal!"

My point with the commuter tax, after just b!tching about high taxes in this region, is that we need to distribute the tax burden around more evenly. Most of us living outside the city use the city roads, services, and attractions, so we have a vested interest in seeing the city succeed and therefore should be okay with a small commuter tax.

Unfortunately, I don't know of any state legislators outside of the city of Pittsburgh - Democrat or Republican, who would be in favor of a new tax on their constituents. I also know of too many suburbanites, who have never lived in the city nor want to ever move there, who would never support a commuter tax.

The second thing the city needs to change the standard it sets for the upkeep of residential properties. This means people have to have their lawns mowed regularly, so that 4 foot high weeds are not growing in them, and there needs to be more citations given out for those who leave trash in their front yards, on the sidewalks, or on their front porch. Having visited pretty much every neighborhood in this city, I can say with confidence that these problems exist in every city neighborhood - even neighborhoods like Point Breeze or Squirrel Hill. People don't want to live across from a house with broken windows and trash strewn throughout their front yards. If the city starts cracking down on these neglected properties and lowers the tax burden on residents, I could see more people taking a look into moving there instead of places like Mt Lebanon or the North Hills.

Burgher Jon said... 5/20/2008 12:04 PM

I’m glad to see so many blogs tackling this debt issue, I think blogs particularly ones penned by people who are authorities on what they discuss (for example say, lawyers (Peckman), Law Professors (Madison), Professors of Social and Urban Research (Briem) or even recognized amateur local political experts (Bram). I believe that it provides a forum for forcing this conversation with or without the policy makers. I further believe that if this conversation is forced, policy makers will have no choice but to join.

I think from this post and the several others scattered around the Burghosphere that this discussion is well under way. However, I find it lacks several key facets that will be necessary to force this issue with the public and the policy makers:

1. What is the danger? When we say “financial ruin” what do we mean? In cities that have gone bankrupt how have the citizens felt it? I would hypothesize and hope to confirm with research when I find the time (or if one of you do) that there are documented cases of cities not very different then our own that had to cut off funding for parks, street cleaning, commuting (though you could argue that is happening to us already) and other key services for both residents AND commuters. Even if such cases do not exist educated guesses from those of us with related degrees/expertise would be valued. With public policy the public has away of assuming that concerned citizens are claiming the sky is falling unless provided with concrete evidence otherwise.

2. An effort to define the scope of the problem. Yes we can sight the size of the public debt… but some debt is a good thing (or at least not a bad thing) for a municipality. Roughly how much of our debt is in the “too much” category?

3. What can be done short term and long term to curb the debt? Along with exploring the horrors we can avoid (point 1) and understanding the amount of debt that needs to be trimmed (point 2) how much sacrifice do we need to make now to avoid “financial ruin”? For example, if we live with a commuter tax, does that make this problem go away? Is it insufficient? Is it overkill?

The problem with debt is not unique to Pittsburgh, and it is also not independent of the financial problems of the country as a whole. However, this does not mean we can or should throw up our arms and give up. In business the company that weathers the recession with solid (if not glowing) financials rebounds quicker and stronger then companies that resigned to blaming the cyclical nature of business. When the country and the economy again find value in the rust belt cities, Pittsburgh can be the one that has the foundation to support it. If city officials are disinclined to engage this problem, I think it is important that bloggers (and anyone else with a public forum) constructively bring it to the general attention.

Bram Reichbaum said... 5/20/2008 9:27 PM

"... or even recognized amateur local political experts (Bram)."

Whoa, I just fainted.

Mike said... 5/23/2008 12:04 PM

I've had experience in trading distressed and defaulted municipal bonds. I have not seen so many cities skirting these areas, since Detroit, Philly, and New York City in the 1980's. The problem this time is pension obligations. Talking of California, San Diego is another city facing this problem. You mention the insuror, their bonds are trading on the underlying credit, not the insurance.

orange county bail said... 9/18/2008 3:08 PM

this is such a great and informative post. This region is facing a problem and its so generous of you to share your knowledge.

Cheers,
Robyn

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

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