Originally Aired: July 20, 2015
Topic: Michael Lamb, Pittsburgh City Controller
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Michael Lamb, Controller, City of Pittsburgh
James Lange, CPA/Attorney
Guest: Michael Lamb, Controller, City of Pittsburgh
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- Guest Introduction: Michael Lamb, Controller, City of Pittsburgh
- Pittsburgh’s Financial Health
- The City and the County Working Together
- Proposed Tax Increases
- The Redevelopment of the former Civic Arena Site
- The Transfer Tax
- City Pension Liability
- Roads and Bridges
- Water and Sewage
1. Guest Introduction: Michael Lamb, Controller, City of Pittsburgh
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studio with James Lange, CPA/Attorney, and author of three bestselling books: Retire Secure!, The Roth Revolution, and most recently, Retire Secure! for Same-Sex Couples. With the new city administration in place, 2014 has already seen many changes, from property tax rates to new technologies. What impact will these and other changes have on Pittsburgh? What impact will they have on you? To help answer these questions, we welcome Pittsburgh City Controller Michael E. Lamb to today’s show. An attorney with a Master’s degree in public policy from the Heinz School at CMU, Controller Lamb has overseen Pittsburgh’s financial affairs for the last seven years. As the city’s fiscal watchdog, he protects tax dollars from waste, fraud and abuse by conducting audits of all city departments and authorities, including the URA, Parking Authority, Water and Sewer Authority and Housing Authority, making recommendations on how to make them more efficient and effective. To make government more transparent, he created OpenBookPittsburgh.com, a website that lets citizens search and view all city contracts, as well as campaign contributions and expenses for all candidates running for office in Pittsburgh. He also releases the Popular Annual Financial Report, which provides a clear picture of the state of Pittsburgh’s finances, demographics and government. Today’s conversation will focus on what’s in store for the city. Stay tuned for an interesting and informative hour, and with that, I’ll say hello, Jim and welcome, Controller Lamb.
Jim Lange: Welcome, Michael. So, before we get started, three quick anecdotes. When I was just out of law school, I needed some continuing education, and I took a class that Michael actually taught, and it was on how to use some of the city services for attorneys. Things like, how to look up things, and I thought, “Wow! This guy really cares! He’s taking a great effort!” And I was really impressed. Then, he’s done a great job on two previous radio shows, and when my daughter Erica was doing an assignment for her class, which was to interview a political figure and make a report out of it. Instead of brushing her off, Michael gave her a full time, and she got a great interview and just did very well. And then, the other thing is, I will tell you that I have spoken with him at various political events and just find him to be extremely knowledgeable, and it is a great feeling to have somebody who I think is so competent being the city’s Controller. So, anyway, Michael, one of the things that a lot of people want to know, and we’ve seen a lot of municipalities in enormous trouble, both short term and long term, how would you assess both, again, the short term and long term financial health of Pittsburgh?
2. Pittsburgh’s Financial Health
Michael Lamb: Well, first off, thanks, and thanks for having me and for the glowing introduction. I hope your daughter got an ‘A’ on that paper, but I will tell you that when you look at the city’s situation, I think it’s sort of a mixed bag, and I think when you think about where we were when I started there seven years ago to where we are today, it’s clearly a very positive picture. You know, we started…you know, when you look at it over the last seven years, how much we’ve reduced our long-term debt, which is almost by half, how well our pension fund has rebounded from what was a really terrible market back in 2007-2008 to where we are today, because of some very important decisions that the city made, you know, one of those I was very involved in, the whole pension parking solution, it really did do long-term good for our pension fund. And while we still have very significant challenges, both with respect to debt and pensions, we are in a significantly better place today than we were seven years ago. But the city of Pittsburgh’s finances are mostly reliant on one thing, and that’s population. You know, when you think about the city and the things that we do, it’s the people who live here, the people who own property here, that’s really our tax base. And when you think that since 1960, we’ve lost more than half of our population. You know, we had close to 750,000 people in the city in the late 50s, and we’re down to 300,000 now. That’s a big bite, and so, now, we are dealing with that loss, and that’s something that most cities across the country are dealing with, just that natural migration out to suburbs. And while we have certainly seen that loss slow and even stop, we’re hopeful that that’s going to reverse and we’re going to start to see growth again. We’re not quite there yet, but having more people creates more economic activity, but also just creates more tax base for the city. So, you know, we are…when you say, “What’s short-term, long-term,” over the last few years, we’ve done very well. We hope that that trend continues. We have a new administration now and they’re going through their first year, and hopefully, they will continue the course that we’re on. I’m a little concerned, frankly, about that, but hopefully, you know, they’ll get their feet and start to do some good things. And I think that when you think about us, you know, what are the things that need to happen? What are the pieces that are missing? We talk a lot in the city about the impact of our large non-profit organizations, and they’re great neighbors to the city and provide a lot of jobs here in the city, but one thing they don’t provide are many tax dollars. And so, one of the things that I know the new mayor is interested in is having them play a bigger role in city finances. That hasn’t happened yet, and that’s frustrating that it hasn’t happened yet, but when you look at a city where 40% of the property is exempt from taxation…
Jim Lange: Umm-hmm.
Michael Lamb: …and that’s our biggest source of taxation is property. You know, it’s troubling that they’re not contributing more.
Jim Lange: Well, certainly, you’re not talking about UPMC, which is a fine, upstanding citizen and purely a non-profit that only works in non-profit ways and methods of propagating itself!
Michael Lamb: You know, they are the big daddy, aren’t they? But, you know, the thing about UPMC, as I said, they are a great neighbor. I mean, they provide a lot of jobs here. They do phenomenal work and provide great healthcare to people who live here in the city. You know, they are right now in the middle of a big battle about how they pay their lower-level employees, and I’m one that has been in the middle of that fight, hoping that they will step up and pay living wages to the people who take care of us in their hospitals, you know, the people who are cleaning up the rooms and the people who are serving the food. You know, those people, they deserve to make a good family wage job, and I say that from the standpoint of being the city’s Controller because I know that when we see those wages going up, I also see our tax revenues going up. And so, you have an employer like UPMC with 50,000 employees, a small bump in salaries is a big deal for the city of Pittsburgh because many of that 50,000 live right here in the city of Pittsburgh and are taxpayers. So, you know, we have talked in terms of not only how much they’re paying their employees (which we’d like to see them pay them more), but also the fact that they are not contributing to the property tax base. I mean, they are the biggest property owner in the city, and the fact is that one property they have is more…if they paid taxes on one property, it’d be more than they’ve contributed to the Pittsburgh Promise, which is their big charity and their big contribution to the community.
Jim Lange: And I assume you’re talking about what used to be the U.S. Steel Building.
Michael Lamb: No, actually, I’m not.
Jim Lange: Oh!
David Bear: That’s still privately owned, yeah.
Michael Lamb: They don’t own the Steel Building.
David Bear: Yet!
Michael Lamb: And again, we’ll talk about good things that they do. One of the good things that they did was when they moved from Oakland to downtown, they moved into a building that they didn’t own, and a building that we do collect taxes on and significant taxes on. And I would say that when we talk about the downtown real estate market and how it has been so strong, one of the things that really kicked that off was UPMC taking up so much office space in downtown Pittsburgh. I mean, it has been a very positive thing. But the property that I’m talking about is the property that currently houses Children’s Hospital…
Jim Lange: Oh, okay.
Michael Lamb: …which is if you look at it through the county’s records, one of the most valuable pieces of property in the city and wholly owned by UPMC and exempt from taxation.
Jim Lange: All right. Well, earlier, you were saying we are losing population to the suburbs and the surrounding area. So now, we’re getting into Allegheny County in general, and it seems that there should be some correlation between our future (that is, city residents and city dwellers) with Allegheny County residents. There has always been…I even remember, you know, way back, back with Mayor Murphy and even before, talks of consolidation, or, at least, at a minimum, and I know there’s some going on, consolidation of services. And I know that, for example, that the County Executive Fitzgerald, Mayor Peduto was his guy, is there some progress in that area, and can the city be relieved of certain expenses that maybe the county will pick up?
3. The City and the County Working Together
Michael Lamb: Yeah, it’s an important thing, and I think let’s start with the fact that city residents are county residents, so we are county taxpayers as well, and so there is an incentive for us to work together with the county just for the financial well-being of people in the city, and also people in the suburbs. So, when you look at the city and the county, and I think the best way to look at that is what are those things that we both do? Because there are a lot of things that the county does that we don’t do, and a lot of things that we do that the county doesn’t do. The county doesn’t pick up garbage. It’s one of the biggest things that we do. The city doesn’t have a jail, or a court system. That’s one of the biggest things that the county does. So, it’s those areas where we do have similar work, and I think there are a lot of those areas, and in some of those, we really have made some strides in consolidating.
As you know, the city did used to have a court system. We consolidated that with the county. The city used to be responsible for 911 emergency calls in the city, and now that has been merged with all of the other municipalities in the county, or at least most of them, into a centralized 911. So, those kinds of consolidations have occurred. What I like to think about is sort of the back office-type functions that you would have. So, you know, things like computer processing and sending out checks and sending out tax bills. You know, we’re both doing all those things, and it saves a lot of money if we could do that together. So, we have really focused on building a new financial management system in the city. It’s probably one of the biggest things that I’ve been involved with since I’ve been in office, and something that I pushed for was a joint financial management system with the county. The county was pretty much ahead of us on that front. We knew that we needed a new system. In fact, we were under some pretty strong pressure to create a new system. It was going to cost us $10 million or $15 million. We found a way to join with the county and we’re up and running for less than $4 million on that system right now. And so, we want to continue to grow that system so that it’s more comprehensive of the things we do and using it as a management tool here in the city. I mean, I think there are a number of things that we’re doing. That kind of consolidation leads to a whole new host of other opportunities that we can be working on together. And right now, this system is housed over in the county, and we continue to work together on it.
Jim Lange: All right. Well, why don’t we talk about something that I think is on the minds of a lot of people, and I even believe that there was a KQV poll that was not terribly favorable towards the mayor’s proposed tax increases, and I know that you have some opinions on that. Can you talk about, let’s say, what your assessment of the proposed tax increases are? And I’m not talking about real estate taxes, and I’m not talking about, let’s say, something that is already decided, but is, let’s say, proposed.
Michael Lamb: Yeah. Right now, obviously, the mayor has proposed an increase in property taxes. It’s an increase to the millage rate.
Jim Lange: What would it be in terms of percentages? Or is that too tough?
Michael Lamb: Well, that’s a good question because the budget document that has been prepared doesn’t tell you what the millage is! But they do anticipate more revenue. What I’ve heard the mayor say is that it is basically a 5% increase. You know, I’m opposed to it. I don’t think we should be raising taxes right now. As I said, our biggest challenge is attracting more people to the city, and when you’re sending the message out that when a problem arises that your first action is, “Well, let’s raise taxes,” you know, when we really haven’t examined the budget as a whole, it isn’t ideal. I mean, this budget has grown dramatically this year and what’s proposed for next year. If you look at what we spent in 2013, which was the last year prior to the new administration, and compare it to what they anticipate spending next year, it’s a $50 million difference. That’s a lot of growth in spending. And so, I think there are things that we should be looking at. The city has a pretty simple mission, and it’s hard to accomplish but it’s stated pretty simply, and that is to keep people safe and keep neighborhoods clean, and if we focus on those two things, a lot of other things take care of themselves. There’s a lot being paid for in this budget right now that has nothing to do with that core mission, and I think we really need to examine that before we start asking people to raise taxes.
David Bear: All right, well, let’s take this moment now and take a quick break, and when we return, Jim and Controller Lamb will continue the conversation.
David Bear: And welcome back to The Lange Money Hour. I’m David Bear, here with Jim Lange and Pittsburgh City Controller Michael Lamb.
5. The Redevelopment of the former Civic Arena Site
Jim Lange: Michael, can you tell our listeners what is happening with the redevelopment of the former Civic Arena site? I know there was just an article in the paper talking about cutting parking, and there were, I think, 274 comments. So, this is a lot on people’s minds, and also, as I understand it, any revenue is not going into the general fund. It’s going to be, in effect, partitioned. Could you talk about that in general, please?
Michael Lamb: Yeah. So, it’s an interesting development, and I think, obviously, key to the future of the city. I mean, 28 acres right at that location, right in the middle of the city, you know, for a long time, housing the Civic Arena, which between the Civic Arena and the Crosstown Expressway, I think really acted in many ways as a barrier between downtown and the Hill District, and probably did serve to really hurt the Hill District in a lot of ways because there wasn’t that connectivity. And so now, there’s an opportunity to sort of reconnect the lower hill with downtown in a more visual and a more significant way. And the Arena, of course, is now gone. The Penguins, as part of their deal to build the new arena and stay in Pittsburgh, they’ve been given the rights to develop the 28 acres, which, at this point, has basically been the home to a lot of parking. And so, parking’s probably not the highest or best use for that property, so we’d certainly want to see it developed. But it does raise some real financial questions because one of the tools that’s being used to help develop the site is called ‘tax increment financing.’ Tax increment financing, basically, if you take a piece of property and what it’s worth today, as you develop it, it will increase in value, and what they’re basically asking is, the taxes that come out of that increment, that new piece of revenue, that new increment, that new increase, that that be rolled back into the development to help build infrastructure, typically is the way it works. What’s being suggested here is that not only will it be used to help the infrastructure on the site, but that it would be used…a fund would basically be created to help do other development throughout the Hill District, which, I think, is a bit controversial. When we’ve tried to do that in the past, we tried a very similar proposal like this in the Strip District, and some members of council referred to that as a ‘development slush fund.’ So, it does get very controversial when you do these things because people want to know, “If we are foregoing all of that revenue, what’s it going for? We want to know now. If we’re going to vote on this today, we need a better idea of what is that going to.” So, I think there’s a lot of work that needs to be done in developing this proposal and in explaining it to who will be the decision makers. In this case, it’s not just city council, because it’s a tax increment. So, it goes to all of the taxing body. It’s council, it’s the school district and it’s county council who are going to have to say, “Yeah, we’re going to forego those taxes so that this fund can be created to do this development.” That’s the one problem. The second problem is that, as I said, right now, they’re parking a lot of cars there. That creates a lot of parking tax revenue for the city, and if there aren’t cars parked there anymore, we lose that revenue.
David Bear: And where do people park?
Michael Lamb: Well, where do people park, and then how is that revenue replaced, as well? So, there’s a challenging financial issue there that the mayor and his team really need to go through. I mean, I think it is something that can work, but I think there’s a lot of work that needs to be done in explaining to people what this is about, and that doesn’t even go into the issues with respect to people in the lower Hill District, who feel potentially displaced. You have people who have lived in that community for fifty years and more who want to stay there. It’s their home. They want to be there. They want to be involved, and as we’re developing this, there’s been a push for more reasonably priced housing for people up there, and if you lived in that neighborhood and you put your time in, I think you also would feel that you were owed the opportunity to take advantage of this development. So, there’s opportunities for more minority hiring and really having the community involved in the development. I think the Penguins (at least from what I’ve read) are really trying to work with the community to try to get more people involved in this and create more jobs for people who actually live in the Hill District. So, those efforts are all good if they’re honest and being really pushed genuinely. So, it’s a development that…I was very supportive of taking the Arena down. There were a lot of people who wanted save the Arena.
Jim Lange: I was too, but that’s not true of everybody in this room!
Michael Lamb: Yeah, well, I was supportive of it. I’ll tell ya, it’s interesting. I grew up in a neighborhood not far from downtown. I grew up in Beechview on what would be the northern end of Beechview, the closest to the Fort Pitt tunnels, and that neighborhood, there was a church that was built there in 1960, St. Pamphilus church, which was basically a church to replace St. Peter’s church, which was torn down at the Civic Arena. So, the Franciscan friars were at St. Peter’s, and now, they came up to St. Pamphilus in my neighborhood, and a lot of the people who lived around St. Peter’s in the Hill District came too. And so, I grew up with the families of a lot of people who were displaced from the building of the Civic Arena and felt so wronged by that whole thing. And now, to have the chance to go back and maybe correct history a little bit, reestablish the street grid there, and create a neighborhood there, to me, it was justice in many ways.
David Bear: What happens if that area is taken over by some non-profits? I mean, how’s that going to work?
Michael Lamb: As they develop that, obviously it’s going to be a mixed use development.
David Bear: Umm-hmm.
Michael Lamb: So, there’s going to be some residential. There’s going to be some commercial. There’ll be some offices and some entertainment-type development there. And so, yeah, I mean, sure, there’s a potential that a non-profit could move in there, and in this city, non-profits continue to grow. So, that’s not the worst thing in the world. I mean, obviously, you don’t want them owning too much because of the tax consequences, but if they’re creating jobs in that neighborhood, there’s a positive in that…
David Bear: Right.
Michael Lamb: …and we ought to encourage it.
Jim Lange: But let’s be clear: the initial taxes that come as the property becomes more valuable go to pay for more infrastructure for that same property. So, the city, outside the fact that they’re getting money and putting money into the infrastructure, isn’t getting any money, and then when they finally do get some money after the infrastructure is done, that money is allocated towards a particular area, not the general budget. Is that the big picture?
Michael Lamb: That’s right, yeah, that’s right.
Jim Lange: So, let’s just understand that.
Michael Lamb: For a period of years. So, let’s understand what happens. So, as the development goes on, basically what happens is you commit that revenue to pay off bonds. So, the Penguins, or the developers, will go out and borrow $50 million, and the increment financing then is used to satisfy those bonds. So, for that twenty years of the life of that bond, you’re right. You don’t have access to that new revenue, but what we’ve seen in the city, in a lot of cases, that the tax increment outperforms what was expected. So, in many cases, you satisfy the bonds early, or you have more room and you’re able to draw down some of those funds earlier than you think. So, tax increment financing, for the most part, has worked in Pittsburgh if you look at the projects, but first off, we’ve never seen a tax increment district created as big as this one, and we really haven’t seen the idea that, okay, we’re creating a tax increment, and rather than tell you exactly what we’re doing with it, we’re just going to have it set aside for a fund to do things later on that we’ll talk about. So, I think that’s the biggest challenge. I think that’s the problem that some council members will have with it because they want to know. “If we’re voting for this, we want to know where the money’s going.”
Jim Lange: Well, there seems to be a consistent theme for you of fiscal responsibility, and we’ll get to the spending side, or, at least, hopefully we will, but why don’t we keep talking about the revenue side, because when you were on our show in January 2013, one of the big issues was companies avoiding real estate taxes when they bought a building. So, they had this kind of re-steal, and it wasn’t really considered a purchase of a building, and the city didn’t get any transfer taxes, and that was a big issue, and I think that that was the 8911 rule. So, what’s happening there and what’s happening on the, let’s say, revenue side?
Michael Lamb: We actually have good news there from the city’s perspective. We worked with Senator Ferlo over that period of time, and in 2013…actually, the early part of 2013 (it might even been 2012), a bill was passed in Harrisburg banning that kind of a transaction. So, that is no longer an acceptable exemption from the transfer tax. So, for those kinds of deals, it can’t work.
Jim Lange: Oh, you killed the loophole then?
Michael Lamb: We killed that loophole. The problem is, there’s still another loophole out there that’s actually, in many ways, more troublesome, and that is, what I would call, the ‘partnership’ loophole. And so, while the 8911 was basically a lease-to-own deal that helped you avoid the tax, this is one that’s even more troublesome because it’s not a transfer at all. Let’s say you own the building that we’re in right now here at KQV, but you don’t own it. The Jim Lange Partnership owns it. Well, I want to buy the building, but I’m not going to buy the building. I’m going to buy the Jim Lange Partnership.
Jim Lange: I see.
Michael Lamb: So, I pay you for the Jim Lange Partnership. The deed is still owned by the Jim Lange Partnership. I just own the partnership now. So, since I’m not recording a new deed, there’s no transfer, and therefore, no transfer taxes. And so, that’s happening here…
Jim Lange: Would that be the same with corporations also?
Michael Lamb: Exactly, yeah. Well, what we’ve seen is that there is an exemption, and it’s a valid exemption in Pennsylvania, and it is basically set up that if I buy a company and that company owns fourteen locations, I shouldn’t have to pay transfer tax on every one of those locations. If I decide to buy the Eat’n Park franchise (it’s 53 restaurants or whatever it is in Pittsburgh), I’m buying that business, and part of that business is those restaurants, I shouldn’t have to pay. I own the Eat’n Parks. I don’t have to transfer all those deeds. And that’s how the exemption was set up. But what we’ve seen, you know, lawyers get kind of smart on this, they create these companies or partnerships that their only purpose is to own a building. And you see it all over Pittsburgh that buildings are owned by limited partnerships. We had a transfer just recently in the Strip District. The Strip District has now become a very hot real estate market. The Cork Factory, which was one of the first real apartment buildings down there, just recently sold along with two of its other ancillary properties, and we don’t know for sure what sold because it hasn’t been made public, but what we understand is that it sold for more than $100 million, those three properties. They were assessed at around $10 million. So now, we know they’re worth a lot more than what they were paying taxes on, but in addition to that, because they were all owned by three different limited partnerships, the buyer just bought the three limited partnerships. No deed changes hands. And so, we miss out on the real value of the transfer. What they end up filing is a notice allowing the county to know that this happened, and as a result of that, we do get some transfer tax based on the assessed valuation. But we know that the real value is significantly more than the assessed valuation.
Jim Lange: All right. Maybe we’ll ask you about that in a couple years.
Michael Lamb: Yeah, that’s a tougher one to get to, but we’re going to try.
Jim Lange: All right. Well, speaking of tough ones to get to, you had alluded that the city pension liability is significantly less that what it was, or, at least, we are in better shape. Can you talk to us about the city pension liability?
Michael Lamb: Yeah, I mean, this is probably the biggest financial hurdle that we have in the city, and continues to be. I mean, we have made strides, but it’s still a big problem. When I got on the board back in 2008, one of the things that I was really pushing for was that we have to get more realistic in how much money we’re putting into the pension fund. So, we pushed for a reduction in the anticipated rate of return, and we’ve now lowered that twice. When I got there, it was 8 ¾, which obviously is just not reasonable. We lowered it to 8, and then just last year, lowered it to 7 ½, which at least gets you closer to a more realistic number. A lot of people would argue that you’d even be lower, and I thought it should’ve gone to 7, actually. But understanding that when you lower that rate, the one thing it does is that increases the amount of money that you’ve got to put in. So, you have to balance that with the city’s other needs, because we do have other needs other than just pension. So, we did lower the rate of return. The result of that was to increase the floor level of what we’re putting in. Fortunately, the new mayor agrees with the idea that we should be doing more than the floor, and so he’s putting more in. He’s proposing next year putting more in than he did this year, and my understanding is that his plan is to continue to increase the amount that’s going in so that we get to a system where we’re actually putting in as much as we’re paying out.
David Bear: And that’s part of the budget increase that you’re talking about?
Michael Lamb: That’s part of the budget increase, yeah, for this year. And I support that. I think we really do need to be more responsible with our pension fund. But the end result of that, like I said, we’ve been doing more than we’re required to do, and we’ve benefitted from a pretty good market over the last four years anyhow. And so, we took a fund that was 28% funded, I think, when I got there, you know, at the low point, into a fund that is now 60% funded. The big thing that we did, as a lot of people know, we dedicated revenue to the fund so there’s a dedicated stream of revenue that goes to the pension fund every year. We take a portion of the parking tax and pay that into the fund every year, and so that has created an ownership of revenue that really has improved our situation. When we proposed this back in 2010, a lot of people said, “Well, that’s just an accounting trick. You’re just saying you’re doing it.” But the fact is, it’s really had a very positive effect on the fund. And so, it enabled us to avoid a state takeover, which would’ve been really costly for the city, and I think would’ve just hurt the city in a very big way. But we’ve been able to right the ship a little bit. Unfortunately, we’re still dependent on positive returns in the market to continue to make it. So, we want to get to the point where we are funding this outlay every year and letting the fund itself grow and as the market and then bonds and then equities grow, then we continue moving forward.
Jim Lange: Yeah. Now, by the way, I want our listeners to understand. So, when Michael was talking about the different rates of returns, so if they have a certain amount coming in and a certain amount going out, the amount that they have right now to invest, they have to choose some investment rate. And if you have a, let’s say, 50% bond or 50% stock, or even 60% equities and 40% bond, you have to come up with some type of rate that you could assume. Jack Bogle, for example, argues that after costs, 7% is reasonable going forward for the equity section. Maybe 2%, maybe 3%, is reasonable for the fixed income, and if it’s 50/50, he would argue for maybe a 4 ½ or 5%. And I actually had a letter that the Wall Street Journal kind of said that. So, right now, I know you’re happy that it’s lower than it was and that you were instrumental in getting there, but for whatever it’s worth, from a guy like me who’s kind of conservative, and my goal as a professional is to make sure that people have enough money to live for the rest of their lives, I would not be happy if we’re using too high of an assumption of what the markets and the interest rates will return, and we’re only 60% funded even with that unrealistically high number. So, with all due respect, I think that we have some challenges in that area, notwithstanding the fact that it’s great that it was the progress that you’ve made.
Michael Lamb: Yeah, well, it’s one of these things where you’re really balancing a lot of issues. So, while we are assuming…and I would agree with you that maybe we are assuming a rate that is not where we would like it to be. But if we’re assuming that we’re going to make 7 ½% on our investments, is basically what we’re saying, that requires us to put a certain amount of money in. We’ve actually been putting more than that in. So, even though we’re assuming a 7 ½% rate, we’re actually putting more in than is required by that rate. So, we’re probably contributing more like as if we were at a 7%. So, again, it’s not perfect, but if we were to reduce that rate of return to 4 ½% or 5%, that would require us to increase, if what we’re now putting in is $50 million or $60 million, we’d be putting in close to $100 million. And the fact is, our budget just could not withstand that kind of a contribution rate.
Jim Lange: And that’s the realistic reason.
Michael Lamb: Yeah, yeah.
Jim Lange: So speaking of long-term issues and long-term problems, we’re always reading about the problems with the bridges, in particular, the roads. It seems like there’s construction all the time, but there’s enormous deficits in that area where, in effect, they’re kind of like unstated liabilities. What can we do, or what is being done about, particularly, the bridges because we have so many of them, and presumably if the roads are bad, even if they’re bad, we can at least drive over them, where the bridges…like in Greenfield, it’s just going to go away! So, what are the people going to do?
Michael Lamb: Yeah. Well, I’ll tell you, that’s going to be an incredible project, and Greenfield in particular, the Greenfield bridge project, which is going to happen in the next couple of years, it’s really going to cause havoc when they take that bridge down.
David Bear: Right.
Michael Lamb: There’s no doubt about it.
Jim Lange: Is anything going up, or is that…?
Michael Lamb: They’re replacing the bridge.
David Bear: Yeah, they’re going to blow it up, yeah.
Michael Lamb: But the process of bringing it down is going to require us to close the Parkway for…
David Bear: Parkway for a week.
Michael Lamb: At least. My understanding of the plan is that they are going to bring in truckloads of dirt, cover over the Parkway and create a big mound to drop the bridge on to, and it seems to me, it’ll take more than a week just to create the mound.
David Bear: Right.
Michael Lamb: So, I have a feeling that that is going to be a very challenging time.
David Bear: But that’s a PennDOT project, right?
Michael Lamb: Well, the bridge itself is a city project.
David Bear: Oh, okay.
Michael Lamb: Yeah, the bridge itself is a city project. It’s obviously funded, for the most part, through PennDOT, as most of our transportation projects are. But it’s a city capital budget project, and we’ve been planning and engineering that project for a long time now and it’s finally going to happen, and I just don’t think it’s going to be pretty for the people who live out in the East End and in the eastern suburbs. It’s going to be a real challenge getting into Pittsburgh over that period of time.
David Bear: How are they going to do it?
Michael Lamb: I don’t know the plan. I don’t know what the traffic plan is.
Jim Lange: And that’s only one bridge.
Michael Lamb: And that’s one bridge. So, it’s going to be a challenge. But let me just get back to the issue of infrastructure in the city because when I first took office, people would ask me about what’s the biggest financial challenge we have, and I’d always talk about pension. Today, when people ask me that, I say, “You know, pension’s a big problem and it continues to be, but we have a deficit that we don’t talk about a lot. It’s the deficit of infrastructure in the city.” We have a lot of projects that need to be done, and you’re right. If you drive around the city right now, you see it. You just see crumbling staircases and roadways and sewers.
David Bear: Well, sewers are a big issue.
Michael Lamb: Yeah, and all that is so important, and we have to find a way to fund it. Over the last few years, while we’ve made such great strides, as I said earlier, on reducing our debt, part of the cost of that is that we haven’t had the money to improve our infrastructure.
David Bear: Even maintain it, really.
Michael Lamb: Yeah, and so we need to find a way to get more money, and I know that the mayor has suggested that one of his salvos to the non-profits is that that was what he’d like to see them do. If they’re going to contribute to the city, contribute so that we can do more infrastructure projects. Even if they’re in the neighborhoods of those non-profits, it would help relieve some of the burden on the city, and it’s the kind of thing that I would support. When you look at a city like ours, it’s so hilly. Even those little staircases and retaining walls, they’re really important in our neighborhoods, and so when we have them crumbling the way they are, it’s just really not serving our residents all that well.
David Bear: All right. Well, we need to take one more break. Let’s do it right now.
David Bear: And welcome back to The Lange Money Hour. We’re here with Jim Lange and Pittsburgh City Controller Michael Lamb.
Jim Lange: Michael, my wife just went to an event. I think it was called ‘Sustainable Pittsburgh,’ or something like that, and I asked her how it was and she said, “Oh man, we are in trouble! There’s going to be so many problems with the sewage system, and they’re just building more and more concrete, and there just isn’t the infrastructure to handle all this water and sewage, and we have some big problems.” I thought maybe you could comment on ALCOSAN and, let’s say, unfunded liabilities or problems that we might be having with water and sewage.
Michael Lamb: Yeah, well, she’s right. I mean, we have an enormous problem here in the region, and if you think of the 83 communities that are served by ALCOSAN, including the city of Pittsburgh, it’s a problem that is billions and billions of dollars in repair, and the problem is a problem of infrastructure and wet weather. When it rains, the way our sewer system works (or doesn’t work) is that storm water infiltrates our sewer system, and our sewer infrastructure can’t handle all that water, and as a result, there are various release valves throughout our system that allow whatever’s in those sewers to be released into our fresh water. And so, when you have a rainstorm, even a rainstorm as little as a tenth of an inch, you result in sewage being dumped into our rivers and streams, and the Federal EPA has stepped in and said that can’t happen anymore. The Clean Water Act requires municipalities to deal with this issue and find ways to reduce the amount of these kinds of events that happen in a given year so that the water can remain clean. I think everyone agrees that that’s an admirable goal and something that we need to do. The question is, how do you do it? And it really comes down to an issue of source reduction: reducing the amount of that water that gets into the sewers.
David Bear: Storm water.
Michael Lamb: Storm water, yeah, and it gets into the sewers a number of ways. It gets into the sewers, in some cases, because the sewers are broken, and in those cases, we need to repair those sewers. But the bigger problem is that in a lot of our older communities, we have what’s known as a combination sewer system. So that, typically, if you live in the city of Pittsburgh, for instance, and it rains and water goes into your gutter, that water comes down into your downspout and that downspout goes into the sewer, and that creates this problem. So, there are a number of ways to deal with it. One is, of course, to build new, bigger sewers, which is very expensive. Another way is to try to deal with it with a more green solution, a more natural solution. And so, when you mentioned all this concrete that creates this water that has to go somewhere, having more porous surfaces is a way to…
David Bear: Parking lots.
Michael Lamb: Yeah, porous surface parking lots, swales within land and changing the landscape a little bit, planting more trees, taking downspouts out of the sewer system and having water gardens and just…
David Bear: Lawns and…
Michael Lamb: …yeah, saving that water, retaining that water, if we’re releasing later, slower release, you know, all these things help to pull that storm water out of the sewer system, and then reduce the need for bigger infrastructure. We know we’re going to have to have some gray infrastructure to make this project work, but we can reduce the amount of gray infrastructure by getting smart about the green infrastructure. I don’t know if you saw a story recently about Etna and what they’ve done along the Etna business district, where they have basically taken the sidewalks, and all the buildings along the main street in Etna, their storm water comes out of the sidewalks, and the sidewalks have sort of gullies dug into them that are covered over with metal grates, and that water ends up there, and it sort of feeds trees and…
David Bear: It doesn’t go into the sewers.
Michael Lamb: …so it doesn’t end in the sewer system. So, creative solutions like that can really help hold down the cost of this major project, but it’s still going to be a very expensive project. The project right now, as it’s envisioned, is basically digging tunnels alongside of the rivers up the length of the Allegheny and the Mon so that the communities can tap their systems into the ALCOSAN system, and that will involve also an expansion of the ALCOSAN plant itself. So, it’s a very big number. We did an audit there a few years ago in conjunction with the county controller at the time, Mark Flaherty, and Mark sort of looked at the costs of this, and we looked at making sure they had good contracting in place so that when all the engineers and construction came about that there would be good, solid policies for letting those contracts. So, we’re getting prepared for it, but, like I said, it’s a multi-billion dollar proposition and something that we’re going to be dealing with for the next twenty-five years.
Jim Lange: Well, speaking of long-term budgets, what do you think of…now, Mayor Peduto has submitted a proposed budget for 2015, and you might have some opinions on it because you did mention that the proposed budget, I think, is $50 million higher than the amount spent last year?
Michael Lamb: Yeah, compared to 2013 and what they anticipate spending next year, it’s a big number. $50 million more, and you wonder where that money is going, because one of the things he’s proposing is a wage freeze. Our biggest expense is always labor and salaries for people.
Jim Lange: Including yours, I assume?
Michael Lamb: Including mine, including all the elected officials, yeah. That’s only fair. But when you are holding down basically a freeze on wages, you wonder where that kind of an increase comes, and part of it does come from the increased pension payment. But like I said earlier, I look at the city’s function, and we are an Act 47 distressed community. We are at distressed status. Some people will argue whether we should be or not, but if you buy into the idea that we are a distressed community, then we should really be spending based on what are our real core functions, and as I said earlier, our core mission is to keep people safe and to keep neighborhoods clean, and there’s a lot in this budget that has nothing to do with that. And so, I think that the council has to take a very critical look at an organization that…you know, I believed under the past administration that the city administration was a very top heavy organization, and that’s an organization that, through this year, has only gotten top heavier. We have a lot of chiefs and not enough Indians in this city right now, because we’re not getting the day-to-day work done. When I look at projects that I think were going along pretty well, one that the mayor I know supports is LED lighting. We know that when we convert our street lights to LED, we save money on energy. We were going through a process where we were buying LED lights, our guys were installing them in their downtime, and so we were doing it very cost-effectively. Well, this year, that has stopped. We’re not doing that anymore. I think we need to get back to just doing the basics of what the city needs to do.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.