Episode 19 – An Overview of Pittsburgh’s Financial Climate with guest Michael Lamb, JD

Episode: 19
Originally Aired: November 18, 2009
Topic: An Overview of Pittsburgh’s Financial Climate with guest Michael Lamb, JD

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James Lange, CPA/Attorney
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An Overview of Pittsburgh’s Financial Climate
James Lange, CPA/Attorney & Daphne Lapoint Special Guest: Michael Lamb, JD, Controller of City of Pittsburgh
Episode 19

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TOPICS COVERED:

1. Introduction of Special Guest:  Michael Lamb, JD
2. The Effects of Being an Act 47 Distress City
3. The City’s Underfunded Pension Fund
4. CONNECT – Bringing Communities Together
5. The Critical Issue of Property Taxes
6. Open Book Pittsburgh – Transparency of City Contracts
7. What’s Ahead for the City of Pittsburgh?

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1. Introduction of Special Guest: Michael Lamb

Daphne: Thank you for joining us this evening. We’re talking smart money. I’m Daphne La Point along with Jim Lange. Jim is a nationally known IRA, 401(k) and Roth IRA conversion expert. He’s a CPA, an attorney, and a registered Investment Advisor. Jim is also the author of the best selling Retire Secure! with testimonials from Larry King, Charles Schwab, Jane Bryant Quinn, Ed Slot, and 60 other financial professionals. We have a very interesting show this evening featuring our esteemed guest Michael Lamb, Controller of the City of Pittsburgh. Michael Lamb was elected Controller of the City of Pittsburgh in November of 2007 and took office on January 7, 2008. Prior to being elected City Controller, Michael was the Prothonotary of Allegheny County, the chief record Keeper of the Court of Common Please. During his years in the Prothonotary’s office, Michael helped transform the office from a manual record keeping office to the most technically advanced court recording office in the Commonwealth. As Prothonotary, Michael returned millions of dollars in surpluses to Allegheny County taxpayers and reduced the budget of the Prothonotay’s office. Michael’s an attorney. He received his Juris Doctorate from Duquesne University, his Masters Degree from CMU’s John Hinds School of Public Policy and his bachelor’s Degree from Penn State. A lifelong resident of Allegheny County, Michael and his wife Jill reside in Mount Washington. Jim…

Jim: I just wanted to mention that I met Michael when he was running for Mayor, and before I met him I was actually not supporting him. Then I met with him, and we spoke just privately, just he and I, for about five or six minutes, and I thought this guy is bright, he’s getting my support. And then the next time I really ran into him–I have Continuing Education requirements as an attorney, and I unfortunately let it go to the last minute and had to get some credits quickly. I did something that really wasn’t relevant because I really do retirement and estate planning and trust and estates, and the only one thing that I could find in time was actually courtroom education  and  how to use the Recorder of Deeds and the Prothonotary etc.–and it so happened that Michael was teaching that, he did a fabulous job. So, in addition to his abilities as controller, I will just tell you that I’ve had nothing but good experiences with him. Michael, right now the big issue literally on the front page of the last couple days’ headlines is what’s going on with the budgets and the potential tax on students. I thought I would just throw it to you and say, hey, what’s going on here and what should taxpayers be thinking about and what should we do?

2. The Effects of Being an Act 47 Distress City

Michael: Well, thank you and thanks for having me. It’s a great opportunity just to talk about what’s going on in the city and the city’s financial situation. You know, we are in an interesting time in the City of Pittsburgh because as you know, this city has gone through some very difficult fiscal situations over the last ten years or so. We are now considered an Act 47 Distress City. It’s basically a bankrupt situation. And based on that designation, we were able to get some new revenues, we had to make some significant cuts, and we’re really beginning to come out of that difficult financial time in a way that is really moving the city forward. We’ve seen surpluses, budgetary surpluses for each of the last five years. We are bringing in more money than we’re costing each year, but we still have very significant long term legacy costs, pension, and long term debt that we need to deal with. And we have a situation in this city as in most cities across Pennsylvania where, because the city is the core of the region, we have an inordinate amount of non-profit or tax-exempt property within the city. The property tax is our biggest source of revenue, and when you have close to 40% of your property which is tax exempt it, does create a significant problem for the city. So we’ve been trying to find creative ways to have the non-profit sector within the city contribute to the city in a more meaningful way. The Mayor’s suggestion has been  a tax basically on the tuition charged at local universities, post secondary educations, post secondary schools. It’s a 1% tax on tuition, and it would have raised about $16 million to help fill a budget gap that we have. I have some significant issues with the tax both from a legal perspective and from a policy perspective that we can talk about. But basically what happened yesterday was that our oversight board rejected that tax as enforceable and collectable next year, and as a result now we’re sort of back to the drawing board with the budget as to what we should do. Council met today and will continue to meet through the end of the year to try to craft a budget and cobble together a budget that is balanced and serves the needs of the people of the City of Pittsburgh.

Jim: Can I go back for a minute and ask something I’ve always wanted to ask. What is the impact on the individual living in the city that we are bankrupt or an Act 47 city?

Michael: Well, it starts with dealing with the quality of life issues that you deal with in the City of Pittsburgh. You know since we went into the status you look at the change that we’ve made. Neighborhood swimming pools– a lot fewer than there used to be. Neighborhood fire houses–we’ve closed a significant number of fire houses across the city–a number of swimming pools and rec centers and those things that so many neighborhoods really rely on to add the quality of life in their neighborhood. We’ve had to close a lot of those kind of facilities to save the money necessary to make our budget every year. The other thing though on the good side from the citiy’s perspective is the status allowed us to enact some new taxes and eliminate some nuisance kind of taxes.

Jim: Like the Business Privilege Tax?

Michael: Exactly, which is probably the biggest example.

Jim: And that’s a huge nuisance to tax preparers.

Michael: Absolutely. I mean the Business Privilege Tax along with the Mercantile Tax were taxes on gross revenues. So even in years where you didn’t make money, you still paid the tax.

Jim: And that’s still around for one more year right?

Michael: It was actually eliminated this year.

Jim: Oh, it was eliminated this year, that’s new.

Michael:  It was at 6 mills and then it was at 4 mills. It’s eliminated now, the Mercantile Tax has been eliminated for the last few years. And in place what we have is a Payroll Preparation Tax which is .55 mills on your payroll.

Jim: But that’s been around for a while hasn’t it?

Michael: It’s been around since the Act 47 recommendation in 2004. The advantage to that tax is that it was applied to a much broader category of employers. It didn’t include the non-profit employers, but it did include the banks and the financial services companies and others who didn’t pay in many cases the Business Privilege Tax.

Jim: Well, let me ask you this, UPMC is theoretically a non-profit organization and they, as I understand it, are not paying any real estate taxes.

Michael: They pay property taxes if they have buildings that within those buildings there’s profit making activity. So, for example, when you go to Children’s Hospital, the restaurant or the gift store there that does actually generate profit, there is an assessment of tax for those kinds of activities within those buildings. But for the most part, and we’re talking probably 90-95% of the property that UPMC owns is tax exempt within the City of Pittsburgh.

Jim: Alright, and as I understand at least what was proposed is to let those guys alone and go after the students.

Michael: And that is one of the problems I had with the proposal because if our goal is to extract greater  assistance from the large non-profits–and in my mind that’s the universities, the hospitals and the insurers, Himark and UPMC insurers–this really let them off the hook. And in many ways, it let the universities off the hook as well because this tax was just going to be directly tied to the students, so it would have been the students paying this tax.  Even the Mayor said it’s a tax on students. While it’s called the Fair Share Tax, I think it’s one of the most unfair taxes I’ve ever heard of. First off, depending on what school you go to determines how much you would pay. Now taxation–you think about the local services tax in the City of Pittsburgh which applies to all commuters in Pittsburgh, $52 a year. Everyone who works in the city pays that to the City of Pittsburgh whether you live here or not. The student tax would have been based on the amount of tuition you pay, so that a student who is at the Community College would have paid around $27, whereas a student at Carnegie Mellon would have paid around $400, yet their impact on the city is identical. So to me, it’s a very unfair tax. You add to that the double taxation that occurs because so many of our students in our post secondary schools in Pittsburgh have jobs, and so they’re already paying in some cases a wage taxation and in all cases the Local Services Tax depending on their income. So it just seems to me to be not particularly a good policy, but the reason for the rejection yesterday wasn’t about policy, it was about the legal arguments about the tax and whether or not it can be collected. It seems to be–at least it’s speculative–whether we can collect it next year.

Jim: Alright, so whether we like it or not it’s just not going to be a possibility?

Michael: Well, the Mayor’s going to push on ,  the Mayor’s  going to try. He probably has the support on Council to pass it.  It will be met with a legal challenge, and that will work its way through the court system, but even still I don’t see a situation in which we would collect it next year because that will be a protracted legal fight over whether or not that is a valid tax.

Jim: Let me ask you this.  Sometimes city residents are saying we’re paying 3% of our income and that’s pretty high, whereas somebody who lives just outside the city who might be making more than we are is paying $52, hey what’s this? Is there a Pennsylvania constitutional issue about taxing non-residents because I know they do in New York City and do they in Philadelphia?

Michael: The Local Tax Enabling Act, which is the act that controls these issues in Pennsylvania, does not permit a city that is second class like Pittsburgh to collect a commuter tax so to speak. So the one tax that we have the ability to collect is the Local Services Tax which is capped at $1 a week, so $52 we can collect. Now, we also have a Parking Tax which is paid a lot by commuters but also by city residents. So we do have some of those taxes, but you’re right.  I mean we do not have a commuter tax like they have in New York, like they have in Philadelphia. The only way that’s going to change would be for the support of our legislators in Harrisburg which are heavily weighted toward our suburban areas so less likely that that’s going to really happen.

Jim: Alight.  Well speaking of our suburban areas, I know that there has been a little bit of a push to consolidate some of the city and county services and as I understand it, both the Mayor and Don Onarato are supportive of this type of activity. Can you give me some updates and your opinion on consolidating and potentially merging, but I don’t know if merging is ever going to happen.

Michael: It’s really a hard proposition. Clearly, we live in a county that has 130 municipalities including the city and all of its suburban communities, and we have a county government as well. So there clearly is need for some effort to coordinate activities to share services because we have this very fractious system of government in Allegheny County. The city-county issues– mean I’ve always believed that when the city and county are doing the same thing they ought to try and do them together. So things where there are synergies, we really ought to be working together. Tax collection is one area, we both do that, we both have a Treasurer who does that. And we made some progress on that just this year because the city and county have consolidated its delinquent tax collection just this year. It will actually start in January of 2010 consolidating the city, the school district, the county and the Pittsburgh water and sewer authority into one collection module that will allow us to collect lien and tax delinquencies from delinquent taxpayers without cost to the city or the county putting all that cost on the delinquent taxpayer. That will save the city some money, and we think generate significant new revenue for the city.

Jim: Well, that makes sense for me, but you don’t ever think that there’s going to be one wholesale merger, is that right?

Michael: I don’t see how you get there from where we are right now. I mean, I think the way that will happen, and I think there’s a chance that it could happen at some point in the future, but what needs to happen first are the kind of functional consolidations.

Jim: Things like police and fire and 911?

Michael: Yeah you have to remember we’ve done a consolidated 911 in Pittsburgh. The thing you need to remember about the city and county is that they don’t do a lot of the same things. The city doesn’t have a court system, the city doesn’t have a jail or a hospital for the elderly, and the county has those things. So you have to focus on those areas that the city and the county are doing the same thing, things like parks and public works and administrative functions like tax collection. If we can move down that road, then I think there’s a better likelihood of a bigger consolidation down the road.

Jim: Aright.  Well, that’s good. I mean I think we all don’t want to see money wasted.

Michael: Well, there’s clearly money to be saved through consolidation. That being said there are hurdles to that and significant hurdles. I mean there are a number of city employees that realize a lot of benefits that county employees don’t, and so we have to take that into account as we are working together. We take into account the effect that will have on employees and whether they be basic health care related benefits or other benefits that employees have city and county, we just need to make sure that we’re doing right by our employees as well.

Jim: Okay, by the way, we forgot to tell people that we are open for calls.  Daphne, could you tell listeners how they could call in?

Daphne: Absolutely,  any callers out there, please if you have any questions for Jim or for Michael dial 412-333-9385.

Jim: What was that number again please?

Daphne: 412-333-9385.

3. The City’s Underfunded Pension Fund

Jim: Okay great. Another big issue that I suspect is very troubling–it’s a national issue, I know that California is grappling with it right now–is the pension fund. As I understand it, we are grossly overfunded, underfunded rather, which is probably very, very typical of many private companies but supposedly isn’t supposed to happen in the city. You know the deal is, if you work for the city maybe you don’t get paid as much but at least you’re going to get a pension when you retire, and now I understand that that is threatened. Could you fill us in a little bit on that?

Michael: The city, as I said, while we have been performing well on a year to year basis on a cash flow basis, we have significant legacy problems and pension being the biggest hurdle ahead of us. We have a situation where our pension is among the most underfunded in the country of any municipality. It’s about a $1 billion pension, and we’ve probably got about a third of what we need to pay down those liabilities. So we’ve got a significant problem there, and we want to be able to assure our employees that there will be a pension for them when they retire. So we’ve worked to do a number of things including contributing more to the pension funds, and the Mayor has a plan to deal with the parking garages, either selling those garages and taking the proceeds and putting them into the pension fund or maybe even a direct grant of the garages into the pension fund. That’s one way to pump up that pension fund and then have a new revenue source for it moving forward. It’s the biggest financial hurdle that the city has ahead of it.

Jim: Isn’t that really just taking money from the right pocket and putting it into the left pocket and just juggling around as opposed to new sources of revenue? Even presumably if you sell the parking lots, you’re giving up or even you sell the water sewage facilities, you’re giving up a future stream of income.

Michael: I guess with the parking lots, if you were to sell the parking lots, or as discussed, lease the parking lots you’d still realize the revenue of the tax–which is significant, I mean the tax right now is 37.5%. Under this scenario it would actually go to 40%–and the likelihood is that tax rates would go up so you would realize a bigger bump moving forward from the tax. The other thing that you’d have, though, is you’d have likely something north of $200 million that you could pump into the pension fund and get you back to a more solid footing. Then the plan would kick in that you would pay beyond just your minimum obligation to the pension fund, you’d pay an additional $5-10 million each year that you’d be able to do particularly in the out years, and you could bring the fund to its full solvency.

Jim: Alright, I guess the issue there is do you think that we would be giving up an excellent long term revenue source for way less than it might be worth, and can we trust the people in charge to negotiate a fair deal?

Michael: Yeah, and that’s really the issue. That’s exactly the issue because we’ve got this proposal that’s out there right now, and we shouldn’t just walk away from the idea of not selling the asset and just using the revenue from the asset to pour into the pension fund. I mean that would work as well. So we need to keep that in mind and as the proposals come in the one thing that’s good appears that there’s significant interest in this proposal, so we have a lot of interest that should keep us honest  and hopefully a lot of funding behind that interest. But we should never lose sight of the fact that one solution to this is to not sell them at all and to use the revenue and to pump it into the system.

Jim: Okay, and I guess the conflict there is do we trust the government to get a fair price, and then presumably if we did then if you do believe in the free market system, you believe that the small business owner is going to be more efficient than government then presumably he can make some money, and you can tax that.

Michael: That’s right, and the way you trust the government in this situation is you have a competitive bid. We’ve got a competitive bid situation where our RFPs are out there, and when they come back we look at the best deal. Right now, I know there are at least ten different organizations who have expressed interest in bidding on this proposal, so hopefully we can get a good price for the city. As I said, if not, the other option is just hold onto the asset and direct the revenues from the asset right into the pension fund. So we have options, and we just need to commit to do them.

Jim: And who’s really the decision maker? I know you’re the Controller and then you have Luke , who’s the Mayor, and then there’s council and I would imagine there’s a bunch of committees.

Michael: It is. It’s a pretty good mix of people on this proposal because first and foremost, the decision maker on most of the stuff is the Mayor. He’s the Chief Executive of the city and he has the power to appoint the members of the parking authority who will be critical to this decision. He controls a number of the votes on the pension fund.  As well, I serve as a member of the Comprehensive Pension Fund along with the Mayor and the President of the Council and representatives of the various unions. So all those have a role but clearly the biggest vote in the room is the Mayor.

Jim:  I guess I mean frankly from my perspective, you have both a legal background, a financial background, where the Mayor frankly does not.

Michael: You know the mayor…

Jim: Maybe he’s learning quickly on the job.

Michael: Well, he has now been in office for the last two years but was on council for a couple years before that. He’s been a pretty quick study particularly on the pension issue. This summer when there was a bill introduced in Harrisburg to basically take over, have a state takeover and seize pension funds, I sat with him on a number of those meetings. We put forth a plan to keep that from happening, because frankly the plan that the state had recommended would have required significant contribution from the city and significant additional cost to the city. And the Mayor crafted a plan to delay that takeover, give us a chance to try and get this thing back on the right footing, and he did a pretty good job. I have to say, he had a very good understanding of what we were doing and made some very good decisions.

Jim: Alright, that is somewhat reassuring to hear. The other thing that I know that you have been involved with is something that I think that you call Connect, that is part of your openness.

4. CONNECT – Bringing Communities Together

Michael: Yeah, Connect is an interesting organization. We talked about the need for greater coordination of all the various levels of government in Allegheny County. Connect is an acronym for the Congress Of Neighboring Communities and it’s basically made up of the city of Pittsburgh and all of those communities that share a common border with the city of Pittsburgh. It’s 36 communities in whole, and it takes in places like Scott Township, and Ross Township, and Mc Keyes Rocks, and all those neighborhoods, those municipalities outside the city that share a common border. The goal of Connect is to focus on issues of mutual interest to the city and really bring the core communities of the region together, because they represent a big chunk of the population of this region but also a large number of the jobs in this region. We do share a lot of common interests, so it’s a forum for us to really work together.

Daphne: Okay, so we’re going to take a quick break. Thank you, this has been very interesting.

Daphne: We’re back with Jim Lange and our special guest, Michael Lamb, Controller of the City of Pittsburgh. Callers, we welcome any of your questions, please call 412-333-9385.

Jim: Okay Michael, you said that you had a few more things to talk about with Connect, and I want to finish that up, and then I’m going to ask you a tax question.

Michael: Alright, well let me just say that the Congress of Neighboring Communities, a couple of the issues that they’re focused on, that really apply to any of these communities within the core of our region, are the significant water and sewer issues that we face and mass transit issues that we face. You know, all these communities are members of the ALCOSAN sanitation system. We did an audit earlier this year with the County Controller Mark Flaherty looking at ALCOSAN and the cost associated with the consent decree that they are now under with respect to wet weather improvements. You know, over the next 20 years, it’s about a $20 billion price tag. There’s a lot of need for new infrastructure within our water and sewer system, and that’s just at ALCOSAN , that’s not counting the various municipal needs that our water systems have. So, we’ve got some significant issues ahead of us, and we’re trying to work together to get through them.

Jim: This sounds a little like the federal government. I don’t know if they can increase the taxes of Pittsburgh anymore. By the way, that’s one of the reasons why I’m such a big Roth IRA conversion expert, because I think taxes are going up, and I’m very interested in helping people hold their taxes and getting tax-free growth in the future. I have a tax question. We are still a CPA firm, we’re also a Law Firm and a Registered Investment Advisory Firm, but one of the things that has always bothered me is that I like people that get extensions because it kind of spreads out our workload a little bit. For a federal extension, there’s an appropriate form and you estimate how much you think you’re going to pay, and you pay it, and the same with Pennsylvania. Pittsburgh doesn’t have an extension, so I think what we’re doing right now is we’re just filing a return not even putting in a lot of details and then later on, we file an amended return that has the real numbers. That doesn’t feel very comfortable to me and a lot of clients say, wait you’re just guessing at what the profit is, and this is a real return, this isn’t an extension. Can you help me out if there’s going to be any change, if there’s something that we should be doing differently or how you would handle a situation where somebody is getting an extension. Now sometimes Pittsburgh taxation is relatively simple–you’re taxing wages, you’re taxing profit from businesses, but you’re not taxing interest, you’re not taxing dividends, you’re not taxing IRA distributions–which by the way, thank you for that, Michael, because Pittsburgh is actually a good town to retire in because your IRA distributions and your pension is not taxable for this city–let’s keep it that way if you would.

Michael: Well, I agree with that and the city of Pittsburgh, it’s an Earned Income Tax so it is on earned income.  You know, the question of extensions has come up for me before, and I’m not the Tax Collector, I’m not the Treasurer, but it’s an interesting issue. I think one of the reasons that it really hasn’t been addressed is just what you said, it’s a relatively simple calculation and form.  I mean it’s a 3% tax.–it’s 1.5% to the city, 1.5% to the school district, so it’s a relatively simple tax for most taxpayers. But you’re right.

Jim:  Unless you have a business.

Michael: Well, that’s right and when you have your own business–

Jim: Like me.

Michael: It gets more complicated. But it’s a good point. It’s something that we need to discuss obviously with the City Treasurer to see what we can do. When we do it with respect to property taxes, which as I said is the biggest revenue source for the City of Pittsburgh, we do have a number of payment plans, hardship plans, to deal with that. But on the earned income side, we really haven’t addressed it yet.

5. The Critical Issue of Property Taxes

Jim: Well, you mentioned another big issue, property taxes, and I personally think, at least in terms of income taxes, is whatever income tax laws are going to be out there that they should be enforced, and people should pay the taxes according to what the law is, and that the enforcement should be good. My gut instinct is the same with the city that presumably we should have a fair taxation system, and if we are going to have a property tax, and some people might not agree with that idea, that it should be based on a good assessment of the property.
Michael: I couldn’t agree with you more. It’s a critical issue in the City of Pittsburgh, and it is probably the biggest issue on which Dan Onnerato and I disagree, because if we are going to have a system that taxes real property, you have to have a system that fairly values that property. It just doesn’t work without that. And what’s happened in the county is for all intents and purposes a freeze, we basically have frozen values in place. This is a very diverse county, it’s a very diverse city, and so we have many neighborhoods where property values go up at a very high rate, we have neighborhoods that stay pretty stable, we have neighborhoods that are actually on decline. And so what ends up happening is you have neighborhoods that are assessed at 100% or more than their value, and you have neighborhoods that homes were assessed at a quarter of their value. It’s just not a fair system of taxation, and we need to have regular assessments. I look at property assessments like a train rolling down the tracks–you never quite get to perfect market value but you can’t stop running, you’ve got to keep moving and trying to get to fair assessments. We’re not doing it right now in Allegheny County, and that’s why we’ve had a lawsuit that has challenged the fairness of that tax, and that’s why Judge Wedicka has ordered a new reassessment across  Allegheny County.
Jim: Well, doesn’t he keep doing this every couple years and not a whole lot happens?
Michael: Well what happened was that he required it back in the late 90s, so we did do an assessment. We did one in the early part of 2000, we did another one a couple years later and there was a lot of outrage about it and people complaining about the values that they saw, but that’s why we have an appeal process. What Judge Wedicka has recommended now, which I think is fair, let’s assess a quarter of the county every year and then every four years your area would be assessed. And by doing that, you could assess properties and then you can have an appeal process and we would always be improving. We’d never again be perfect but at least we would be taking into account the fluctuations that you see from neighborhood to neighborhood in the real estate market.
Jim: Well, I guess what Dan is worried about is significant tax increases for people whose property goes up. Maybe if you legislate certain limitations, that might be a way to do it.
Michael: And that is the way to do it. And what you’ve seen in a lot of communities and in a lot of school districts are anti windfall provisions so that when a community has a reassessment and that assessment results in new revenues of more than say 3% or 5%, then that governing body, whether it be a school district or a council, would then be required to reduce millage to offset that increase. Now you’re never going to be able to do it for individual properties, but you could do it for communities, and it has worked.
Jim: Well, that seems more fair, because I think what happens if people perceive that what is going on isn’t fair, they will do everything they can to avoid, or I don’t want to use the word evade.
Michael: And we’ve talked about that in a number of instances tonight. We need people to pay their fair share, and whether that is the non-profit community, whether that is as the Mayor has called the Fair Share Tax or now property tax, you’re right, I think if people can understand and respect that–you know, no one likes to pay taxes I don’t like to pay them and no one does, but when I know that that tax is fairly assessed, I certainly feel better about paying it.
Jim: I come from a slightly different background and orientation. My goal, frankly, is to take the tax laws as they are, and I’m really speaking more about federal tax laws, and help people organize their finances in a way as to reduce taxes and let the other poor schmoes pay the tax. My clients, people taking my advice, so for example people with the Roth IRA conversion having tax-free income for the next 50-70 years, but I guess that’s not your problem.
Michael: Well,  you know my father was a longtime estate lawyer, and the little bit of law practice that I continue is in the estate field, and you’re right, the goal is to limit your client’s exposure to taxes, and there are a lot of techniques to do that and people need to be made aware of them.
Jim: Right Judge Ordanhan said it is not a duty to pay the most taxes. In fact, it’s not even patriotic. You have every right to arrange your affairs to pay the least possible taxes.  That’s my hero in the area of tax philosophy.
Michael: Well, except for the city, you should pay whatever you can to the city. But you know our tax situation has improved dramatically over the last few years I think just with elimination of some of the nuisance taxes.  I really think, as you said, the City of Pittsburgh is a phenomenal place to retire because we do have an Earned Income Tax, but it’s also a great place to start a business. You know we’ve eliminated a lot of those nuisance business taxes, and it really has become a much better place to do business then it was even five or six years ago.
Jim: Right, but even a business–let’s say I live in Monroeville, and I start a business in Pittsburgh and I make a lot of money–Pittsburgh still isn’t getting a chunk of that.
Michael: That’s right because you’re paying your wage tax to your home municipality. What the city is realizing is  any of the business taxes that you generate from the Payroll Preparation Tax, and then of course the $52. It’s interesting in this whole discussion about the tax on tuition, Councilman Pedodo made a statement yesterday that is really true,. It’s hard to believe that under this tax scenario the president of any of the universities will be paying less tax then the students who are attending the schools. So that really tells you something about the fairness, or lack thereof, of this tax.
Jim: Well , yeah I like the idea of taxing some non-residents and probably some of the people from the outlying counties are screaming and yelling and saying this guy Lange, what’s up with this guy, and I’m not going to ask you to go that far out. Let me ask you this–the new mantra these days is full disclosure, openness, transparency, and Pittsburgh is doing something and specifically your office is doing something about that.

6. Open Book Pittsburgh – Transparency of City Contracts

Michael: You know, there was something that we wanted to do when I first got into office, and we finally have it up and running. It’s the beginning of what we think can be something very special in Pittsburgh.  It’s called Open Book Pittsburgh. It’s a website that’s been set up through our office which basically has taken the database of every city contract. So every city contract is online right now. You can go on and see what companies are getting contracts, what the contract is for. In the long run you’ll be able to actually go on read the contract itself but we still need to get some space on the city’s main frame to do that. But we are prepared to do that, we also have on there all of the political contributions because there’s always a lot of question about who’s getting contracts and are they getting contracts because they’ve contributed to candidates. So this kind of opens up that process so that you can go online right now at Open Book Pittsburgh and see every contributor who’s given to any candidate in the city and the individual candidates you can look at everyone of their contributors. So you can see that, and you can match  that up with the various contracts and really find out for yourself if you trust what’s going on.

Jim: How does the city assess bids if price isn’t the only issue? So let’s say you need a repair of a road, and you have the ABC Shyster company that doesn’t have a great reputation and the roads have to be redone every couple years that comes in with a lower bid than Mr. Reputable Road Repair.

Michael: Well the city follows the state law and guidelines on this, and what is required is that kind of a contract be awarded to your lowest responsible bidder. So we go out to bid on those kind of projects. We tend to deal with a lot of the same companies. There are a lot of local companies that do very good work on those kind of projects,  and we’ll go out to bid and receive the bids in and the bid is then offered to the lowest responsible bidder. Now that responsibility or the responsible part of that is we look to make sure they’re bonded, and we make sure their reputation is what they say it is. And the city has had pretty good success there. Where the city has more of a problem  are on those contracts where they’re not required to take the lowest responsible bidder, things like professional services, hiring lawyers, hiring architects, hiring consultants. So we’ve really tried to, when we’re doing that kind of work, enforce the same kind of policies as we do on the lowest responsible bidder.  Let’s have a very vigorous RFP process that we try to get the best information from all the various vendors who want to do whatever kind of work it is. Even with Open Book Pittsburgh, we created that with an outside vendor, a small tech company here in Pittsburgh was the successful bidder, but we sent our RFPs out to every company we could think of. We ended up getting about seven or eight responses back, and from that we whittled that down to a couple companies and interviewed them both and picked the company that we chose to do the system, and we’re very happy with it. But it’s really about having a process, and where the city gets into trouble, where the URA and some of the authorities get into trouble is when they stray from process. And we’ve seen that in some contracting in the city and in some of our authorities in the past. When they stick to a basic process that’s open and transparent and follows the guidelines that have been set out, we do pretty well.

Jim: Well, I see that for roads and then you say well there are some other legal services or things where there might be some intellectual activity. I know in my area and the area of retirement and estate planning, one piece of advice can save people thousands, sometimes hundreds of thousands and in the long run millions of dollars, and maybe the cost of that is pretty insignificant. I don’t know if it’s the same thing where the quality of the advice that the city might be getting where if you have a responsible attorney who’s okay and he’s $175 an hour, but then there’s this wiz bang guy for $475, and the advice is going to save millions and millions of dollars. I mean in  a private sector people kind of work that out themselves if they’re being responsible. What they’re doing is they’re reading articles and books and listening to programs and listening to even, for example, the archives of this program that has just tremendous intellectual property or intellectual content. Is there anyway that the city can assess that, in other words distinguish between responsible and wonderful?

Michael: Yeah, I think we try to invoke best practices in everything that the city’s doing. Part of my job as Controller is to go out into the various departments, observe their practices and make recommendations for improving their practices.  What are best practices in the various fields that they are operating in? We’ve done a couple of audits just looking at contract processes and what policies are in place to make sure that you’re getting the right expertise at the right price. The Government Finance Office Association of America has put out a number of best practices just for contracting, and so we try to follow those and try to encourage all the departments and all the authorities in the city to follow those as well.

im: Well I’ll tell you this, if I’m a listener and I’m hearing some pretty smart things coming from your mouth and saying he’s on top of some of the procedures and order, that this city is hiring services,  I would be feeling a lot better than I might have an hour ago.

Michael: Yeah, well like I said…

Jim: Except when you told us that we’re going broke. In fact, we are broke.

Michael: You know, the city is again in a very interesting situation because we’re doing very well year to year, but we’ve got these long term problems we need to deal with.

Daphne: We’ll be right back.Daphne: Welcome back. We’re delighted to have you with us this evening in The Lange Money Hour Where Smart Money Talks. Our special guest this evening has been Michael Lamb, Controller of the City of Pittsburgh. And listeners, if you have any questions, your time’s running out, please call as soon as you can, 412-333-9385. Jim…

7. What’s Ahead for the City of Pittsburgh?

Jim: Michael, let’s say you’re a city resident, and you’re hearing what is going on and sewage liabilities are in the billions, pension liability is in the billions.  Let’s say you’re working and paying taxes or even if you’re retired, what’s going to happen to Pittsburgh?

Michael: Well, you know it’s an interesting question because while we have significant hurdles ahead of us, I think we are charting the right course right now. A number of things are falling into place with some significant fiscal controls that we’ve had put in place by both our oversight board and the distressed status designation and  the Mayor and council sort of holding the line on a number of things. You know, we have a situation right now where we’ve got about a $450 million budget, about 20% of that budget goes to debt service ever year.  That’s going to continue at least until 2018 before we see a significant drop in that debt service payment. The good news is through that we’ve been able–because of the new taxes and holding the line on some expenditures–to generate surpluses each year that have enabled us to not borrow new money. So we haven’t gone to market for new money since 2006, and we continue to pay down our debt. When I first started in office, our debt was around $900 million. We’re down to closer to $600 million and paying that down significantly every year. So there is an opportunity for us if we can continue on the course that we’re on to get to say five years from now or six years from now and really begin to realize a benefit of having a much more stronger or more sound budget that is not paying so much toward debt service. You know, we’re doing something that maybe you as an accountant wouldn’t like and that is that we’re paying capital costs as you go. So when we’re building a bridge we’re paying for that bridge with today’s dollars rather then paying for that out over the 40 year lifespan of that bridge, and that’s not good accounting practice, but it is the situation that we’re in right now in the city, and we’ve been able to make it work at least for the last four or five years. If we can continue to do that, well it might not be the smartest fiscal advice that we could give, but it certainly is allowing us to get our debt under control.

Jim: When you say debt, you’re talking about money that we owe right now?

Michael: Right.

Jim: Alright. Now, see what I’m worried about is things like the future pension liability and the future sewage liability, so when you say we’re paying some of our debt down, I’m thinking that’s great, we’re going one step forward, but we’re really taking twenty steps back because of the sewage and pension and other issues. The other thing is issues that we haven’t even faced, any kind of catastrophe, fire, flood, terrorist event, anything that we haven’t even faced, so we’re in hot water it sounds like even without any of that stuff.

Michael: We really are, but I think what you need to remember is that while the pension issue–and it’s the biggest issue that we face, there’s no question about it, it’s a billion dollar problem, and we’ve got about $300 million to handle it. So we’ve got at least a $700 million liability there. But it’s the kind of thing that not coming due today, and we are taking steps to deal with it. If we’re successful in doing any of the projected proposals with respect to parking, and we can get that, that could bring us up to being around $500 million. The market has significantly turned around since March, as you know, and we’ve realized a significant benefit from that. So we are, we’re getting there. We’re never going to invest our way out of this problem. It’s going to require a couple things. First, it’s going to require us to put more into it, but it’s also going us to hold our employees to fewer benefits in the out years. I mean, we’ve got a number of employees, in particular our Public Safety Personnel, who are getting lifetime health care and that’s expensive. We’ve got to at some point cap that number and seek increased contributions from them as we move forward. Certainly, we can’t extend benefits and that’s if we can keep from extending additional benefits and keep the state from extending benefits for us, which happens sometimes as well. We can dig out from under this, but it’s going to take a long time.
Jim: Well, I salute you for your optimism. I hope it is well founded, and frankly, I’m glad you’re on the job. You know we’ve mentioned sewage, obviously the school districts are a major cost. Can you tell us what we’re getting in terms of fire, sewage, police? Where do our city tax dollars go?

Michael: Well, you know it’s interesting.  You mention the school district, because I am the only elected official that represents both the city and the school district. I’m the Controller for the school district as well.

Jim: You’re talking about the Pittsburgh school district, not the outlying?

Michael: Right, the Pittsburgh school district. And in the Pittsburgh school district, we’ve got a relatively new superintendent who has really made significant changes to that district, held the line on costs and has really shown that you can have dramatic improvement in student achievement in an urban school district. He’s really to be commended for what’s going on in the Pittsburgh schools. You know, it’s not always been easy. We’ve had school closings, we are a shrinking district, but the Pittsburgh public schools have been able to really right the ship with respect to student achievement and really begun to close the racial achievement gap in the Pittsburgh public schools. So when you say what are we getting for that while you’re paying a 3% wage tax, half of that is going to the school district along with a significant property tax, but you’re seeing that the school district is producing citizens who are ready to compete in the global economy as they come out of high school which says a lot about what can be done in an urban district like Pittsburgh.

Jim: Yeah, and I think the Pittsburgh promise is probably helping  that.

Michael: I think it is. It’s going to be interesting to see if the Pittsburgh promise actually holds the promise that has been expected, and we start to see a reversal of the population trends in Pittsburgh because that’s really what it comes down to. When it comes down to the tax burden in the City of Pittsburgh, it’s mainly on the people who live in the city, and the people who own property here. So if we can’t reverse that population decline, we’re going to have problems dealing with our fiscal future.

Jim: Well, has the city not already lost a lot of people?

Michael: We’ve lost more than half our population since 1960.

Jim: Alright, is that within the same geographical boundaries?

Michael: Yes, the City of Pittsburgh has not changed its geographic boundaries since it merged with, I think Karak, in the 1930s.  We’re still a 58 square mile city, and when you look around the country and see cities that have grown, most of them have grown because they have annexed neighboring communities, and we in Pennsylvania have been unable to do that.

Jim: But on the other hand… okay, I think we’re going to have to wrap up soon.

Daphne: Okay, alright. Well, this has been really wonderful. This is The Lange Money Hour Where Smart Money Talks. Jim and I would like to thank our special guest, the uber- impressive–you like that–Michael Lamb, Controller of the City of Pittsburgh. Michael, it truly has been a pleasure.

Michael: Well, thank you. It’s been great for me to be here.

Jim: I think you did a great job. Thank you, Michael.

Daphne: Oh yes, and we wish you the best and success with all these very important initiatives. And tune in again on Wednesday December 2 at 7 PM here on KQB for our next show featuring Jane Bryant Quinn.

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