Episode 91 – Michael Lamb, JD, Pittsburghs Controller, Speaks Out

Episode: 91
Originally Aired: August 26, 2014
Topic: Michael Lamb, JD, Pittsburghs Controller, Speaks Out

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Michael Lamb, Pittsburgh’s Controller, Speaks Out
James Lange, CPA/Attorney
Guest: Michael E. Lamb, JD
Episode 91

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TOPICS COVERED:

1. Introduction of Guest – Michael E. Lamb, JD
2. Avoiding Transfer Taxes
3. Problems With The New County Assessments
4. Keeping Up With The Pension Plan
5. Pittsburgh’s Infrastructural Problems

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1. Introduction of Guest – Michael E. Lamb, JD

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 studios with James Lange, CPA/Attorney and author of two best-selling books, “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.”  Today, we welcome Pittsburgh city controller Michael E. Lamb to the show.  He’s an attorney with a Master’s Degree in Public Policy from the Heinz School.  Controller Lamb in his five years has put a focus on making city 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’s also released Pittsburgh’s first popular annual financial report, a user-friendly document that provides a clear picture of the state of Pittsburgh’s finances, demographics and government.  The conversation tonight will focus on what 2013 holds in store for the city, but since the show is live, Jim and Controller Lamb are also available to respond to your questions and comments.  To join the conversation, call the KQV studios at (412) 333-9385.  Stay tuned for an interesting and informative hour, and with that, I’ll say hello, Jim, and welcome, Controller Lamb.

Jim Lange:  Welcome, Michael!

Michael Lamb:  Thank you.  Thanks for having me.

Jim:  Usually, I would go right into a bunch of questions for you, but we had such an important event, which is an agreement on the fiscal cliff, that I thought I would just take a few minutes before we get into our questions for you to tell the listeners what has happened, and this is going to be the short summary of it.  But basically, the tax side of the fiscal cliff has been averted.  There is legislation, originally passed in the Senate and then approved in the House, and it is now a bill that President Obama said he will sign that basically averts the cliff.  The tax rates are going to stay the same as they have been, that is, we are not going to see the Bush tax cut sunset, except for single payers making more than $400,000, your tax rate’s going to go up on that increment of more than $400,000 from 35% to 39.6%, and the same for married taxpayers making more than $450,000.  A couple of other things that were done that were very welcome: we have some permanent patches for the alternative minimum tax.  And it sounds like it’s one of those mundane areas, but for a lot of people, that is very important.  Some of the tax extenders that were due to expire, things like the research tax credit, the American opportunity tax credit, and a whole bunch of other tax credits have been extended, which is good news.  The other thing some of our wealthier clients and listeners will be very happy about is the estate tax exemption, which was $5.12 million for the year 2012, meaning if you died in the year 2012, you could exempt $5.12 million from your federal estate tax.  That has been extended and will actually go up with inflation, and in addition, your spouse (if you are married) has their own $5.12 million.  So, together, the two of you will have over $10.2 million, and we have something called ‘portability’ extended, which is beyond the scope of this short note.  The gift tax exemption, which we had feared was going to remain at a million, or was going to revert to a million, has also gone up to $5.12 million, each, that is for you and for your spouse, so you can give away likely much more money than you want without any federal or gift tax at all.  Now, the rates are going to 40% for the larger estates that go over that.  The other thing is, for taxpayers with income of more that $250,000, the capital gains rate goes from 15% to 20%.  There is no change on the surtax, no change meaning 2013 is the first year…this is the, let’s call it the Obamacare tax, which is levied on unearned income, like dividends and interest for people that have income of more than $250,000.  The other thing is, if you are a working taxpayer receiving a paycheck, you’ll find less because we did not raise or extend the 2012 payroll tax that was reduced from 6.2% to 4.2%.  So, that is going to take effect, or it’s going back to where it was, so basically, working people’s taxes will go up for…that’s assessed on the first $113,000 for 2013.  The other area is charitable giving.  There are two opportunities: one, if you had…actually three, but let’s call it the most important from the long-term, is if you remember, there was an opportunity to have money go directly from your IRA to a charity without having to pay a tax if you were over seventy for your minimum required distribution.  That has…and for a while, we weren’t allowed to do that, but now we are allowed to do that for 2013 and beyond.  But here’s what’s kind of interesting: you can direct a 2012 minimum required distribution taken in December 2012 if you donate that to a charity by January 31, 2013.  So, that is a nice opportunity.  And then, you can also treat that as a 2012 donation.  Anyway, thank you for your patience, Michael.  I now want to get back to the part where Michael is here.  First, a couple quick personal notes for my personal experience with Michael Lamb, and by the way, I guess the elephant in the room, although he has not announced, there are heavy rumors that he will run for mayor.  The first time I actually met him, I was an attorney taking continuing education classes, and frankly, it was an area that I didn’t really care about at all, but I needed the credits, and Michael happened to be teaching that class.  We didn’t even talk about this!  But he did such a good job in an area that I had no interest in.  I mean, he really cared.  He wanted people to get it, and I was really impressed.  I thought, “Wow, that’s good.”  Another time, I met him in a social situation.  I was just kind of talking with him, and I thought, “Man, this guy knows what he’s talking about!”  I shouldn’t say I’m surprised when a politician knows what they’re talking about, but I was really impressed.  I thought, “This guy is smart and he is with it.”  He did a great job on previous appearances on this radio show in the past, and I was, again, very impressed with that.  And the other thing that I should mention is that my daughter, who is now seventeen years old, when she was a little younger, she had a project that she was supposed to interview somebody in public office, and I said, “Well, how about interviewing Michael Lamb?”  And she said, “Well, Dad, he’s the controller of the city of Pittsburgh!”  And I said, “Well, you know, he is a public servant, and I think that he’ll talk with you,” and he did.  He granted Erica an interview.  And by the way, a quick follow-up to this, she did dutifully and respectfully write him a thank you note for Michael giving his time, and it was my wife who was supposed to mail the thank you note to Michael and she never did.  So, I cannot tell a lie.  It was my wife’s fault that you didn’t get a thank you note!

Michael:  I do remember that!  I think she was a tougher interviewer than you!

Jim:  She might be!  Anyway, another quick thing about, I guess, the mayor’s office, and this is my own little editorial, and I try not to be political on this show at all, and I will just tell you that my view of the mayor’s office is a little bit different because what Michael feels about, you know, whether he’s pro-choice or pro-life, or whether he’s pro-gun and what he feels about the national deficit and what he feels about immigration, and a lot of the very important topics of the day are really not so interesting to me because that’s not really what he does, or could potentially do as the mayor of the city of Pittsburgh.  I kind of view the mayor of a city as kind of a CEO.  So, what I really want in a mayor is somebody who is really a competent businessperson who understands what’s going on, understands what is in the best long-term interests of the city, and has some of the courage and power to make some of these things happen.  So, what I want to talk about today are some of the issues and problems that the city has and hear Michael’s opinions on a variety of issues.  Michael, one of the things I’d like to talk about, and I’ve spent a career helping people legitimately reduce their taxes, mainly federal income tax and estate tax, but one thing I really don’t like is when there are blatant loopholes that only a few people can take advantage of where the rest of the city, country, etc. suffers.  Could you tell us a little bit about transfer taxes and the travesty that we have had with some of our major buildings being transferred and the city, nor the county, receiving any money in terms of transfer taxes?

2. Avoiding Transfer Taxes

Michael:  And I think you hit right on what the problem is.  I mean, the fact of the matter is, no one likes to pay taxes.  But when taxation is fair, people can at least buy into it, and with the transfer tax situation, you know, when you or I sell our home, we’re going to pay 4% of the sales price.  You know, it’s usually split half between the buyer and the seller.  You know, everyone pays that, but larger companies have found different ways of avoiding that tax and evading that tax, frankly.  This past year, working with Senator Ferlo up in Harrisburg, we were able to eliminate one of those loopholes which was called the 8911 loophole, and basically, what that was is you would buy 89% of a piece of property, therefore not being a full transfer, avoid the transfer tax, and then later come back and pick up the 11% was basically how those worked.

David:  How long did that have to…?

Michael:  It usually took, like, a couple years for that to occur.  And so, really, it was just a way, it was an exemption that was set up.  The state, wisely, in my opinion, eliminated that loophole this year.  So, from now on, we won’t have that problem.  What we’re seeing now, and have seen in the past as well, is this idea of rather than buying a building, what you do is buy a company, and there’s a valid exemption in state law that when you buy a company, you don’t have to pay transfer taxes on all of the plants and the factory and the stores and everything.  When you buy the company, you buy the company.  You take the whole thing, and the company still owns that transfer.  So, there’s really not a transfer there.  But what we’ve found is what wise lawyers, what real estate lawyers are doing, are setting up companies whose sole purpose is to own a building, and therefore, they’ve created this situation where you can buy the company, which, in effect, is a transfer of one piece of real estate, and they’ve used that as a way to avoid the transfer tax, and again, it’s the kind of thing that you or I couldn’t do.  You know, we wouldn’t have the wherewithal to set this kind of thing up for our homes, but large companies can do this, and to me, it’s just an issue of tax fairness.  We had a conversation just earlier this week and even last week with Ira Weiss, who is the solicitor of the school district, and Senator Ferlo, who introduced the last bill, about, okay, let’s try to figure out a way that we can deal with some kind of language that would address this issue, and hopefully, we’ll get some hearing on that up in Harrisburg.

Jim:  And what about a 500-year lease, or something like that?

Michael:  Yeah, I mean, that’s the same kind of thing.  I mean, those kinds of situations we can usually pick up on, because if it’s a lease situation of that length of time, they have to record something, and when they record the document, the state can pick it up and add assessed transfer taxes to it.  So, those kinds of situations, we can usually get, you know, and we do get taxation.  We had one last year, or the year before last, that we fought.  It was actually the old Westinghouse building down on Stanwix Street, that we argued was they bought it as a deed in lieu of foreclosure, which is a valid exemption, but we argued that it really wasn’t done appropriately, and we ended up settling that and did get some payment out of it.  The challenge with these kinds of cases and these matters is that the enforcement of it is left to the state, so we don’t even get to enforce it.  All we can do is report to the state and have the State Department of Revenue take a look at it, which they will readily do.  So, we are pretty diligent about keeping an eye on the transfers and the various real estate transactions in the city just to make sure we’re getting our fair share.

David:  Do other cities in the state have to follow the same rules?

Michael:  Yeah.

David:  Does Philadelphia have the same problem?

Michael:  It’s actually the same everywhere except Philadelphia, as you find out so many things in Pennsylvania, everyone else except Philadelphia.  In Philadelphia, it’s a little bit different, and Philadelphia had a limited 8911 transaction years ago.  But right now, just about everything, the language is about the same for everyone, and for all of the other 67 counties and all the communities within those counties, the transfer tax collection is regulated and really watched after by the State Department of Revenue.

Jim:  All right.  Now, another exemption to the transfer tax, as I understand it, would be a non-profit organization.  So, let’s say one church decides to sell its building to another church, or maybe they no longer…they’re going to move, or something like that, and they’re legitimately, or at least I would think legitimately, isn’t a transfer tax.  But what about if you have an entity that in many ways resembles a for profit company, not to mention any specifics like UPMC, but what if you had a company like UPMC who’s buying up a lot of property, arguably acting, even though they have a non-profit charter, but arguably acting like a profit company in many areas.  Could you comment on that for both transfer tax purposes and perhaps more importantly in the long run, real estate tax?  Should these entities, and specifically UPMC, I guess, be assessed real estate taxes?

Michael:  I think really what the more important side of that question is the property tax itself.

Jim:  Well, sure.

Michael:  And UPMC, and again, not to pick on them because they do a lot of good in this community.  They provide a lot of jobs here, and of course, their core mission is to provide healthcare to people here in western Pennsylvania, and really around the world, at this point, but you look at it.  They are the number one property owner in the city of Pittsburgh.

Jim:  So that surpasses the University of Pittsburgh?

Michael:  Yes.

Jim:  Which used to be the biggest, right?

Michael:  That’s right, that’s right, but UPMC, particularly now with Children’s Hospital, and the value because it’s such a brand new building and such a large building.  I mean, that building, you think, if you drive around Pittsburgh, you can see Children’s Hospital from just about anywhere.  I mean, I noticed it in Schenley Park the other day, and you can see Children’s Hospital over in Lawrenceville there.  But the fact of the matter is that it is such a large property owner, and the property tax is our biggest source of revenue.  It’s the biggest source of revenue we have, and when you’ve got 40% of the property in the city that is exempt from taxation, you know, you have a real problem there.  And so, there has to be some discussion about what does that mean to a city when we are, you know, we are a city of now all the way down to 305,000 people.  You know, at one time, we had 750,000 people in the city of Pittsburgh.  Now, we’re down to 305,000 people.  But we have just as many people come to town every day to work as we did at the height of the steel industry.  So, we’re still providing the services for a much larger city than we have residents, and so, when you have that situation, you have to find a way to be able to provide police, and fire, and EMS services, and all the other services that go along with that, and how do you do that when you have a shrinking tax base, you know, and you have this non-profit sector that continues to grow and continues to take properties off the tax role?  I mean, we mentioned UPMC as we were talking about the former U.S. Steel building, which is now occupied in a large part by UPMC.  What if they decide to buy that building and take it off the tax roles?  It would be devastating to us.

David:  What percentage of that is the city’s coffers, I mean, now?

Michael:  Yeah, well, you figure that building is worth between $250,000,000 and $300,000,000 dollars, and so the tax bill there is a pretty hefty tax bill.  I mean, it could be as much as, you know, 10% of our property tax collection.  So, you know, it’s a very significant issue for us.  And so, we’ve gotta find ways to get funding from our non-profit sector.  You know, right now, basically, what we do is we go hat in hand and beg them for money, and that’s really not a way for us to do it.  I don’t think it’s…while I think it would be great if we could find some formula that they would pay some portion of the property tax, given the legislature’s reluctance to do that in the past, you know, I don’t know that that’s a real opportunity.  What I would rather see, you know, in the city of Pittsburgh, employers pay what’s known as the payroll preparation tax, but non-profit entities were specifically exempted from that tax.  Not because they are charitable, it was just part of the language when the tax was created, and the fact of the matter is, it’s payroll tax, and they do pay payroll taxes.  So, we could have that tax assessed.  You know, obviously, we’d need the legislation’s approval to do it, but if we had the payroll prep tax, which is .05 mills on payroll, that would at least give us a significant chunk of funds, probably between $15,000,000 and $20,000,000 a year that we’d be able to pull from the non-profit sector.

Jim:  Well, I get it, but frankly, as a city employer myself, the idea of me paying more taxes on non-residents isn’t nearly as much fun as having the non-residents pay an income tax.  So, if I live in the suburbs of Philadelphia, or the suburbs of New York City, or the suburbs of many other major cities, depending on which city I live in, there’s a very good chance I’m going to have to pay an income tax to that city.  You just mentioned that we have just as many people working now, even though our population is, maybe, you know, well, a little bit more than half, but let’s say 4/7ths as much as it was in its heyday, and we’re providing the roads, we’re providing public transportation, and we’re providing police, we’re providing fire protection, etc., etc., but these guys and women who are working in our city, commuting on our roads, enjoying the protection of the police and the fire, aren’t paying anything except, what, a $50 occupation tax?

Michael:  Yeah, $52 they pay, and then, if they drive, they pay a parking tax.

Jim:  All right.

Michael:  But that’s right.  I mean, it’s…

Jim:  How about having THOSE guys pay some tax?  Now, all the people in the suburbs are quaking right now.  “Don’t give this guy any ideas!”

Michael:  I think it gets back to something that you and I have talked about before, and that is the relationship, probably the critical relationship you have to understand when you deal with municipal law, and that is, simply stated, that the city of Pittsburgh exists because the state says it can.  And the power in this rests in Harrisburg, and when you’ve got a situation, as you said, our city is now down to less than half of what it was.  It&rsquorsquo;s 305,000 people, and our legislature has been redistricted so that the city has far less influence than it used to have compared to the suburban communities, and so, it’s going to be a very tough vote for suburban legislators to approve a tax increase to their residents, frankly.

Jim:  So, basically, it’s not going to happen.

Michael:  It’s not going to happen.  It’s not realistic that it would happen.  Now, I do think there are opportunities to discuss the potential for increasing the $52 tax.  I mean, when the Act 47 plan came through, which is the plan that basically helped turn the city around, you know, well, arguably turned around.  The plan was that that tax would be $12 a month, or $144.  You know, it got into the legislature and we got a dollar a week, or $52.  So, I do think there’s some opportunity for us to talk about increasing that tax.

Jim:  Yeah, but that’s nickels and dimes compared to, let’s say, one percent of a $50,000 or $100,000 or $200,000 salary.

Michael:  You’re right.  Yeah, and it just gets to the point that really what the city needs to do is the city needs to grow, and the city needs population.  You know, we’ve got to find a way of turning this downward trend around, and you know, there are things that we can do to help that along, but we’re not doing enough right now.

Jim:  All right.  Well, everybody likes to talk about property tax rates, and I probably don’t even want to cover that all that much, and David’s waving his arms, going crazy, and apparently, he wants to take a break!

David:  Well, before we go there, let’s take a break, and when we return, we’ll continue the conversation.  If you have a question, give us at call at (412) 333-9385.

BREAK ONE

3. Problems With The New County Assessments

David:  Welcome back to The Lange Money Hour.  I’m David Bear, here in the studio with Jim Lange and Pittsburgh City Controller Michael Lamb.

Jim:  Michael, on the subject of property taxes, now I understand it is the county that assesses the valuation of the property and the city doesn’t have anything to do with that, but it’s the city that sets the assessment, and supposedly, after the new county assessments have come in…I’m sorry, the city assesses the percentage of tax, after the new assessments have come in, as I understand it, the city is supposed to adjust their rate so it’s revenue neutral.  So, presumably, the city’s not getting any more or any less, but let’s say some properties that were overvalued will now pay less and properties that are undervalued will now pay more and the city will end up with the same.  Do you think that’s really going to happen, or do you think that…I know a lot of people are saying, “Ah, that’s just what they’re saying.  They’re going to raise my taxes and it’s going to be misery.”

Michael:  Well, I’ll tell you, 2012 was an interesting year for us because…

Jim:  Interesting?

Michael:  Yeah, it was…you know, we had all the back and forth about the assessment.  The assessment, I think a lot of people would tell you that the assessment was not particularly well done by the vendor, and as I said, this was a court-ordered assessment and the county had to go through it, but the end product, as we started to see, there were a lot of problems with the valuations, particularly in the city.  We were lucky enough in our office to be able to help a lot of taxpayers through that process.  Councilman O’Connor actually introduced a bill that allowed my office to reach out to taxpayers, help them get cheap appraisals to fight their appeal, and then actually help them through the appeal.  We partnered with the Duquesne University law school, my alma mater, and were able to…

Jim:  And mine too.

Michael:  Yeah, and we were able to get some students who were in a clinical program up there to come down and actually help us talk to taxpayers about their case, and in many cases, go in and argue the case for them.  So, we represented close to 3,000 homeowners in the city of Pittsburgh this past year through that process, and on average, returned about a 40% reduction in their assessed valuation.  Now, a lot of that is because the way the assessment was done.  You know, we saw a lot of problems in neighborhoods…it seemed to me that the methodology that was used looked at real estate markets differently than local people would look at real estate markets.  As you know, the real estate market, while you live in the fourteenth ward of the city of Pittsburgh, you know, real estate in Squirrel Hill is different than real estate down in, say, Duck Hollow or…you know, it’s not all the same, and we saw that problem in a number of areas, particularly where there had been…when your neighborhood’s adjacent to neighborhoods where there was significant increase.  So, you know, around Children’s Hospital, values went up in those streets around Lawrenceville, but on the other side of Penn Avenue going towards Bloomfield, the market has yet to see that increase.  Well, those people, a lot of those homes got significantly increased in valuation as part of this.  So, we ended up representing a lot of those people in that neighborhood, and the same is true for the South Side and the South Side slopes, while the South Side flats we’ve seen a big increase in valuation.  That’s not so true for the South Side slopes, so, you know, we ended up representing a lot of people through that process and getting values lowered.  Now, back to your question, which is will they lower the rates?  They’re required by law.  There are several anti-windfall provisions that cover the city, the school district and the county, that they’re required to bring in no more money this year than they brought in last year.  So, the county, the city and the school district all will have to lower their millage to affect that.  Now, the math behind a lot of that is still up in the air because the values haven’t really been totally verified yet, but, you know, you are going to see lower millages in all three of those taxing bodies.

David:  What was the method that they used to determine values?  Did they just flyover?  They didn’t drive by.

Michael:  Well, flyovers were part of it.

David:  Yeah?

Michael:  Clearly, that was part of it.  There were some on-site, although most people did not have an assessor at their home.

David:  Right.

Michael:  There was computer modeling that looked at just trends within neighborhoods, and, you know, it’s hard to know what percentage they got right because the only ones we know for sure they got wrong were the people who appealed.  And you know the people who were under-assessed didn’t appeal.  So, there are a lot of people out there who still are probably not appropriately assessed, and, you know, one of the problems that you have is doing assessments isn’t particularly popular, and so it’s hard for governments to go in and do that even though it is a core function of what they need to do, and I had a friend of mine who used to tell me, “Assessments are like a train moving down a track that you never quite catch, but you gotta keep running after them,” because once you stop…we had an assessment freeze here in the 90s, and we’ve, in many ways, have yet to recover from that.  And so, it’s a very serious problem.  It’s a problem that we were beginning to address in the early part of the 2000s, and then we kind of got away from again, and it’s something that has to be an ongoing project and ongoing function of county government.

4. Client Profile For Guaranteed Universal Life

Jim:  Well, speaking of ongoing problems with city and county government, I’d like to talk about the pension fund for a little bit, and by the way, I’ll just put in a publicity note: I actually got a little short letter in the Wall Street Journal on this topic, and the entity that was talking about in the Wall Street Journal was the Illinois state retirement system.  So, the Illinois state retirement system that has to pay teachers and other public employees a pension when they retire has a certain amount of money, and they have to put in a certain amount of money to keep the thing going, and implicit in how much money they have to put in and how much money they owe is the interest rate that they’re going to assume the future investments are going to yield, and Chicago, for example, or Illinois, the rate that they used actually just came down from 8.5% to 8%, and when John Bogle was on the show…I just thought I’d drop that name, “John Bogle, founder of Vanguard”…when HE was on our show, what he said was over the next ten years, you figure fixed income’s lower than it has been in the past, maybe figure 2%.  If you’re thinking in terms of stocks, maybe 7%.  Since you have an annual payout, not like an investor who, let’s say, is saving for retirement and doesn’t have to pay anything out, isn’t in distribution mode, but since a pension fund has an annual distribution, he figured maybe 50/50 allocation, maybe go a little bit more in terms of stocks, but if it’s 50/50, you’re at 4 1/2%.  If you figure another half percent for cost, you’re at 4%.  And again, Illinois was using 8%.  So, in my opinion, you have this massively understated liability, which I don’t know if those people will ever get paid.  Do we have a similar problem in the city of Pittsburgh?

Michael:  Yeah, we do, and just to put it in perspective a couple of different ways, first off, when I started, I, as the city controller, am on the pension fund.  I’m a member of the trust of the pension, and when I first started, our rate of return that we were assuming was 8.75%.  We lowered it that first year that I was on the board to 8%, and we are at 8% right now.  Last year, I tried to have them lower it again, and let’s at least talk about 7 ½% or maybe even 7% because of the issue that you just raised is that everyone you talk to in this industry will tell you that 8% is just not a realistic return to expect moving into the future over the course of that fund, because as you know, we have a diverse mix of investments.  We’re in fixed income, we’re in equities, and so, you want to assume a rate of return that is at least realistic, and many would tell you that 8% is not.  Now, in 2012, we actually had a return…you know, I don’t know what the final return ended up on the pension fund, but it looks like we had a double-digit return on a pension fund, which is great.  But you can’t expect that every year, you know, and if you look back in the prior years, we had significant losses, obviously in 2007, 2008.  You know, we came back in 2009.  So, over the course of the 20 or 30-year amortization of that fund, you want to assume a return that is realistic, and I think you’re right, that we need to take a look at that.  Now, just to make the math simple for people, it’s pretty simply stated: our pension fund, when you think of the benefit we pay out and the cost of the fund itself, those costs on an annual basis are about $87,000,000 a year.  This is a promise that we’ve made to our retirees, to our current employees, for their financial future that they’re relying on, and it’s a promise that we’re going to keep.  But, you’re paying $87,000,000 out.  The city is required under its amortization schedule, under its actuarial rate of return, they’re required to pay in something around $35,000,000 a year.  And you can see how that math doesn’t work.  So, we really push the city to do more.  So, a couple years ago, we dedicated a portion of the parking tax to the pension fund.  That’s about $13,000,000.  The city last year put an additional amount in because they got some additional money from the state last year, and they were able to put some more money in.  So, when it was all told, the city probably put in about $60,000,000, and then the employees put in another, about $11,000,000 or $12,000,000.  It’s their contribution.  And so, that gets you up to around $72,000,000, and you hope that you get some market return, and this year, we actually…it looks like, at least, this year, we actually will finish the year in the black on the pension fund.  That’s not a normal year for us.  And so, I’ve always been pushing this on two fronts: one is that they city’s got to keep its obligation up and continue to pay in, but we also gotta look at the cost side of this pension, and there are some reforms that we need and that we should have.  You know, right now, firefighters and police in the city of Pittsburgh can retire at the age of 50.  If you retire at the age of 50, you’re probably going to live well into your 80s, and so, you can work 20 years and get a pension for more than 30, so you can see how that creates a problem.  And with firefighters, in particular, because their pension is not based on base salary, it’s based on their total salary, and what happens is they can use overtime in the final years of their working career and really pump up that number.  So, while most city employees walk out of the door with a pension that’s roughly half of their largest salary, for firefighters, a lot of times, it’s 75 or 80 or even more, and again, retiring at 50 and living probably into their 80s.

Jim:  Let me ask you this: right now, in terms of the investment choices that the city makes, you have both active and passive managers, is that correct?

Michael:  That’s right.

Jim:  And, in general, how would you say the active managers did, and how would you say the passive managers did?

Michael:  Well, it’s really interesting because we did, over the last few years, move more into index-type funds, and they’ve done…

Jim:  Yeah, I’m sorry, passive investing is like the Vanguard S&P 500.  That is, a passively managed fund.  So, we’re talking about passive index funds.

Michael:  Right, so we’re invested in an index that’s tied to the Russell index, or, you know, one of the other indices, and we have found that we’ve done very well with those funds, particularly given the fact that they are so less expensive.  And so, we’re paying less for the fund, but we’re also realizing great returns, and this past year, at least in 2012, it looks like the index funds actually outperformed the managed funds.

Jim:  Yeah, and by the way, without meaning to do a plug (although I guess it is), that is the focus of much of my business, which is helping people invest using low-cost index funds and getting the strategies that I use, like Roth IRA conversions, estate planning, how much money they can spend, etc.

David:  Well, why don’t we stop here and take one more break.  When we come back, the conversation will continue.

BREAK TWO

David:  And welcome back to The Lange Money Hour.  Let’s continue with the conversation.

5. Pittsburgh’s Infrastructural Problems

Jim:  So, Michael, one of the things that always bothers me is I’m kind of an infrastructure guy, meaning I like good roads, and I like infrastructure that I can’t even see, like good sewers and good pipes and good electricity, things that a lot of people don’t even think about, and as you said, we’re an aging city and a lot of these things are pretty old.  Is this going to be a major problem, and what, if anything, can be done about some of the infrastructural problems?  Now, of course, you know, we notice when a bridge is closed, but I don’t think that we notice when there’s a problem with the sewage or pipes.

Michael:  And it’s a major problem for the city, and really for this region.  We are under a number of consent decrees with the federal EPA because, what’s happened over time, is that the city and part of the infrastructure has deteriorated.  In other parts, it doesn’t have the capacity that we need, and when we have wet weather events, whether it be rain or a snowmelt, we are regularly releasing raw sewage into our streams and rivers.  And so, the Clean Water Act requires us to do a number of things to correct that problem, and so, we’re dealing now…obviously, if you live in the city of Pittsburgh or in any of the 83 communities around the city of Pittsburgh, you’re dealing with ALCOSAN.  And ALCOSAN is our sanitary company that’s basically our utility that treats sewage.  And so, ALCOSAN needs to upgrade it’s facilities and it’s lines, and the city needs to do the same because the city basically delivers it’s sewage to those collectors of ALCOSAN, and what we’re seeing in the city of Pittsburgh is that we have significant outflows and overflows of sewage into rivers, even when we have rain events as little as 1/10th of an inch, we are having that problem.

Jim:  And then, sometimes, some of that comes back up in our basements, too.

Michael:  Exactly.

Jim:  And if the pipes were cleared, or the capacity was enlarged, we wouldn’t have that problem.  Is that right?

Michael:  Yeah.  And so, it’s very expensive.  I mean, it’s very expensive to do that, and you get into this discussion about gray infrastructure versus green infrastructure.  Really, what it comes down to for the city of Pittsburgh is source reduction.  Reducing the amount of money that gets into the sewer system to begin with…

David:  Water.

Michael:  Exactly, water.  And when it rains, you want to be able to slow that water down, and if you can, eliminate it from the sewer system altogether.  And so, when you do simple things like disconnect your downspout at your house and have a rain barrel there.  Those little things add up and reduce the amount of water that gets into our sewer system.  You know, the city of Pittsburgh, we’re an older city.  We have a combined sewer system.  So, the water that’s coming off of your roof ends up in the same place that the water that you flush your commode with.  So, if we can pull some of that water out of the sewer system and let it naturally dissipate, whether it’s at your home or whether it’s through the green solutions that we talk about, planting more trees and directing water from roadways into, sort of, holding-type areas.  Any of those kinds of solutions really will help us hold down the cost of what will be…the need for some gray infrastructure.  I mean, there is going to be a need for us to do a lot of work on our sewer system, but we’ve gotta find a way to do it in the most cost-effective way, and we have to deal with these problems.  I mean, you know, we had a tragic event because of wet weather just a couple of years ago.

Jim:  On Washington Boulevard.

Michael:  On Washington Boulevard, and we had four lives lost.  A microburst, so to speak, and that water just came down into that valley and really wreaked havoc, and you talked about this need for the city to do things, and I agree with you.  I get excited about infrastructure.  This city is a city that used to do big things.  And so, a situation like that at Washington Boulevard, you know, to me, the solutions is let’s deal with the problem, and part of the solution there is to maybe open up that natural streambed there and deal with that water that comes down from Negley Run and down into the river.  There are a number of techniques that could be used to resolve that, and the city’s answer so far has been “Let’s put up a gate that closes the road during rain events.”  I mean, to me, that’s not a Pittsburgh solution.  A Pittsburgh solution is “Let’s get in there and deal with the problem and fix it.”  Obviously, infrastructure is costly, but it’s necessary, and not just is it necessary for us and our safety and our health, but it also creates jobs, and we should be investing a lot more in that kind of infrastructure.

Jim:  Well, speaking of infrastructure, let’s go to the roads, and maybe this isn’t the city jurisdiction, but there’s certainly a lot of places that seems to me could use some roadwork, and then there’s other places that felt like they were doing just fine, and then the city…or, not the city, and then somebody, I guess PennDOT, said, “No.  We need to redo it.”  I’m not thinking of the Squirrel Hill tunnels, of course, where there’s enormous delays and what are we going to get out of it?  Slightly better lighting and, you know, so now some of the bigger trucks can go through.  Can you tell us a little bit about what the city’s role is in road infrastructure?

Michael:  Well, yeah.  I can tell you, obviously, the city has its own capital program where we try to get as much of the streets paved as we can every year.  We’ve got 800 miles of roads that we’re responsible for, so it is a fairly vigorous program.  It takes a fairly vigorous program to keep those roads up.  For a number of years, we haven’t been doing very well.  Over the last two years, we’ve really tried to put more money into paving and getting roads paved.  But the Parkway East problem is an interesting one.  I was really glad to see PennDOT decide not to do what it was planning on doing, which was basically shutting down some of the ramps onto the Parkway at various times of the day.  Particularly, they were talking about the ramp at Swissvale and Edgewood coming into the city.  I mean, that really would’ve just closed off those communities.  And we work a lot with those communities.  I mean, obviously, there are neighboring communities of the city.  When I first got into office, I sat down with some people at GSPIA at Pitt, and we created an organization called Connect.  It’s the congress of neighboring communities.  And it’s Pittsburgh and all those communities that touch Pittsburgh.  And for the first time, now, we are talking regularly about issues that affect us all, and that’s one of the issues that really was going to have a negative impact on Wilkinsburg, Edgewood, Swissvale, and so the city, you know, we’re really reaching out to them and trying to help them through that discussion.  Fortunately, I think the complaints were being heard because PennDOT did decide not to put that plan into place, because had they done it there, they probably would’ve done it in Greentree and some other areas as well.  So, you know, it was just one of those instances where the city could actually reach out and talk to our neighbors and really get a sense of what was going on, and that one, at least, bared some positive fruit.

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