The following post from February 26, 2006, is the latest flash back in our series of blog posts from 10 years ago. Since this post, Pittsburgh has been reborn and just as we should have drawn lessons from the Steel City back then, we should draw new lessons about how thinking and acting boldly can produce a turnaround in less time that we might imagine.
Here’s the post:
In December, the University of Pittsburgh Center for Social and Urban Research published a report called “The Roots of Pittsburgh’s Financial Crisis.”
It could just as easily be called “A Cautionary Tale for Memphis.”
The report is a post mortem on the city’s financial meltdown, which became so acute that the State of Pennsylvania stepped in to demand that Pittsburgh get its fiscal house in order. In that city, the verdict is still out on whether its strategies have worked, but in this city, the lessons from Pittsburgh should be instructive as city officials cope with Memphis’ financial problems.
Fundamentally, Pittsburgh failed to adjust its public services and employees despite falling population, rising budgets and a flawed tax structure. Without the benefit of strong annexation laws like those in Tennessee, the city saw its boundaries frozen and its population halved over 40 years. Despite the falling population, the per capita cost of providing public services was increasing and the workforce was not being reduced.
As for its population, Memphis has a sense of false security. Its population is artificially propped up by annexations that give the impression of population growth and stability. If Memphis were landlocked like most cities its size, it too would be in the midst of a population free fall. After all, from 1980 to 2000, the population of Whitehaven fell by 6,400; South Memphis fell by 9,200 people; North Memphis by 7,100; the Defense Depot district by 6,000; Midtown by 800; and downtown/Medical Center by 3,000.
It seems inevitable that there will be a point when Memphis doesn’t have the luxury of further annexations to bolster its population, and at that point, if past trends are any indication, its population will stall and start to drop.
Like Pittsburgh, Memphis could then be a smaller city but with growing employment. It’s a curious phenomenon. Even now, with the exodus of people out of Memphis, 102,743 people flood back into the city to work each day. It’s a powerful reminder of the city’s place as the region’s employment hub.
This is particularly true in Pittsburgh. Memphis’ population swells 16 percent a day. In Pittsburgh, the daytime population grows 41 percent. Therein lies the problem, because Pittsburgh is also stuck with a tax system that is structurally unsound. Unable to tax commuters driving into the city to work and unwilling to abandon gratuitous political solutions, the cost of services fell to fewer and fewer property owners.
The shift in the tax burden was further complicated by the fact that a growing segment of the employment base was shifting to universities, hospitals and the public sector that do not pay any taxes.
Its most logical options: cut payroll and reduce services. Instead, it did nothing…for decades. And to compound things, it pretended that unfunded pension and health benefits obligations didn’t exist and made an agreement that dealt away its critically important assets – water and sewers.
As for payroll, Pittsburgh officials funded pay raises out of existing revenues, but never put enough revenues into reserve accounts to cover growing pension and health obligations. (That’s not a lesson lost on New York Mayor Michael Bloomberg, who is proposing that $2 billion of his city’s $3.3 billion surplus should be set aside to pay future health care costs for retirees.)
Rather than make the hard decisions, Pittsburgh went with the easy answers and political tricks. Pittsburgh issued $269 million in bonds to fund part of its pension liability, but the city bet on a loser – higher interests rates – and once the rates fell, the city was actually $450 million deeper in debt.
In another sleight of hand, the city concocted a complex reverse mortgage arrangement for its water and sewer in exchange for an infusion of quick money; however, in another show of political expedience, the system’s employees were made non-city employees, but they were allowed to stay in the pension system. In addition, the arrangement allowed the water and sewer authority to buy arguably the city’s most important assets at the end of 30 years.
And yet, the core problem wasn’t poor city finances. Rather, it was poor political courage.
“An important source of the city’s current difficulties was the unwillingness of past city administrations to address these structural deficits,” the report said. “…To keep the same workforce, despite expenditures growing faster than revenues, various city administrations resorted to a number of practices that shifted the financial burden of their current operations to future taxpayers.”
These days, the report says “the proverbial chickens are coming home to roost.” Now 20 percent of the city’s general fund revenues is earmarked for debt payments and financing the pension system.
The tone of the report is glum. Even with all the changes recommended by state government, the structural deficit is still $50-60 million a year. Pittsburgh may be too late to save itself.
“There is the fundamental maxim of tax analysis,” the report says. “Ultimately, whatever the legal basis upon which a tax is levied, the true burden of the tax is borne by those who cannot avoid it.” It is a cogent insight into tax policy, and it should be kept uppermost in mind as Memphis deals with its budgetary challenges. In the end, the answers must be compelling enough to convince those who can avoid city taxes to stay in the city and pay them.
People can move; property cannot. That’s why despite Mayor Herenton’s suggestion for his critics to go ahead and move out of Memphis, the overriding challenge for his financial experts is to craft financial solutions that entice people to stay. As the Pittsburgh experience proves, as many people as possible are needed to fight the decline of a city and its tax base. As the report says, it is property owners who will bear the burden of paying for the years that city government failed to get its house in order.
Perhaps that is the strongest signal that the Herenton Administration can send to the citizens of Memphis. Rather than invite people to leave, it can show that it is resolute and courageous in dealing with the crisis facing it. It can show that it has no interest in quick fixes and magic bullets. It can show that it has no interest in one of government’s most tempting tactics – shoving problems into the future for others to deal with.
As the Pittsburgh story proves, there is no time like the present.
