Days before launching his re-election campaign this month, Mayor Ed Gainey and a top aide declared that Pittsburgh's finances were on solid ground and the administration would not be forced to cut vital services that have long bolstered the city's quality of life.
The mayor acknowledged that Pittsburgh was facing declining tax revenue and the end of federal COVID money, but he said any warnings of a potential fiscal crisis amounted to “misinformation” and “fear tactics.”
Reclined in wingback chairs in front of reporters and photographers, Mr. Gainey and Deputy Mayor Jake Pawlak then bumped fists in a gesture that ended what was described by city officials as a "fireside chat" held to put any alarming concerns to rest.
But behind the optimistic rhetoric, the city’s own numbers show critical declines in revenue that exceed even previous predictions, leaving some city services such as public safety stretched to limits not seen in years.
So far, the city's revenue this year is $15 million less than what officials had expected just months ago and in the years to come, the flow of revenue dollars is expected to shrink even more — $125 million less than what was expected by the mayor's office.
What the administration predicted would be a healthy surplus at the end of this year — $28 million — has now been downgraded to $3.8 million, and even that figure is subject to change before year's end.
Consider the plight of public safety: If the city moved forward to hire enough police officers to be fully staffed — 87 positions in all — it could cost $7.6 million in salaries and benefits, far more than Pittsburgh has to spare, a Post-Gazette analysis shows.
Emergency Medical Services is down 29 paramedics and EMT positions — vacancies that save the city more than $2 million in payroll and other expenses, but are now costing millions of dollars in overtime to cover empty shifts, according to the mayor’s mid-year report.
As the administration prepares to release its next proposed budget by the end of the month, the revenue crisis that financial experts had warned about has been confirmed by the mayor’s own updated figures.
The administration continues to predict near-record levels of investment income, between $14 million and $15 million each year through 2028, according to its updated budget figures.
But the city controller has for months warned the administration that those earnings are based on a pool of cash that’s about to vanish. Federal COVID aid — about $335 million — has driven the record earnings in the city’s investment accounts, but federal law requires all of that money to be spent by the end of 2026.
"With the drying up of COVID money, these problems are going to increase exponentially,” said Andrew Stoltmann, a Chicago attorney and nationally recognized expert in securities law.
Fiscal crunch
It’s a problem that cities nationwide are confronting as the federal deadline nears. At the same time, a steady drop in property tax revenue — a trend impacting urban areas across the nation — continues to be driven by high vacancy rates in Downtown office towers that have slashed their values as companies shifted to remote work schedules.
The decline in value has led owners to appeal their 2023 property assessments in moves that could cut more than $3 million in city tax revenue, plus millions more in refunds for years of overcollections.
Just last week, the BNY Mellon Center — the city’s second-largest skyscraper — won a $90 million reduction in its valuation, a move that’s expected to cost the city more than $725,000 in revenue.
Overall, the Gainey administration now expects to collect $57 million less in property taxes over the next five years than it initially counted on in its budget. That’s about double the entire Parks and Recreation Department budget during that period.
“The mayor is dealing with these macroeconomic trends that are impacting wide swaths of the country,” said David Chase, a securities lawyer who led a federal investigation in the 1990s into shell games that the city of Miami used to cover up its budget woes.
For years, experts have warned about the looming threats to local government finances. In other cities, including Cleveland and Boston, officials launched robust programs to encourage developers to convert office towers into residential buildings — including tax incentive offerings and one-stop-shop permitting — to shore up their finances in the face of years of declining revenue and support from Washington.
But a Post-Gazette investigation found that Pittsburgh has lagged behind. Development efforts citywide have faltered in recent years, undercutting future property tax revenue. To date, three Downtown areas have been targeted for revitalization, but no firm plans have been unveiled.
In Oakland, Mr. Gainey put a month-long hold on a sprawling residential development just days after he took office. The plan was later dramatically scaled back. In another, a $500 million expansion of the Bakery Square complex only recently got the city’s go-ahead after two years in limbo.
On the expense side of the city ledger, Mr. Gainey has added hundreds of new positions in some departments since taking office in 2022 — from Public Works to the Mayor’s Office — that added more than $10 million to the payroll.
Now, the steep drop in revenue is raising questions about how the city will cover those new salaries, pay for crucial infrastructure repairs, and ramp up hiring in understaffed departments such as Public Safety.
Just two weeks ago, the head of the police union sent a scathing letter to Chief Larry Scirotto, warning that the bureau was badly understaffed and in “shambles.”
A department with 850 positions had dwindled to just 763. Take away the officers on military or sick leave, along with those assigned to command staff, and the number of people available to patrol the streets is closer to 670 — a “dangerously low” number, FOP President Bob Swartzwelder warned.
“You have to staff all six zones 24 hours a day, seven days a week, 365 days a year. And then you want to have all these events,” he said. “It's more work, it's greater stress. It puts strain on families and relationships because the officers are working a lot.
“The nature of the profession itself, with the stress and so on, we already have a high alcoholism rate. We already have a high burnout rate. We have a high divorce rate, and now the workload is just going to add more to that.”
This year alone, 25 officers resigned and 40 retired, Mr. Scirotto said in late August.
Plugging holes
An oversized city payroll was a key driver of the financial crisis that drove Pittsburgh into state oversight 20 years ago, said Ann Dugan, a member of the Intergovernmental Cooperation Authority, which was created then to oversee the city’s budget.
As city workers’ pay and benefits rose, leaders dipped into the city’s reserve account in ever increasing numbers, and relied on one-time fixes like selling off city properties to plug holes in each year’s budget. Eventually, they ran out of options and barely avoided having to lay off hundreds of workers.
Mr. Gainey, through a spokeswoman, declined an interview request and did not respond to a list of questions.
At the mayor’s fireside chat in August, Mr. Pawlak said city finances were in a fundamentally different place than they were when Pittsburgh began its nearly 15 years of state oversight.
During those arduous years, elected leaders and state-appointed supervisors made politically difficult choices to combine departments, cut services and pare down the workforce in an effort to remake a financial structure that had been built during the city’s industrial heyday.
“When you have constraints on your budget, you're looking at where the value is, what are the services we should be providing — and then where do we cut and where do we build?” Ms. Dugan said.
Now that revenues are plunging, some experts worry those hard choices could once again be just around the corner.
The city’s budget already predicts steep cuts in some core services in coming years. Next year, for instance, the current budget calls for a nearly 70% cut in street repaving. If that doesn’t change in Mr. Gainey’s next budget, it would be the lowest amount the city has spent in that area in decades.
If Mr. Gainey does propose an increase in the paving budget, it’s unclear where the money would come from.
One critical source of revenue — a tax on the income of athletes and performers who play in Pittsburgh — could be lost to the city in a legal fight now being waged before the state’s highest court.
The so-called “jock tax” has been declared unconstitutional twice, and if Supreme Court justices agree, it would wipe out millions of dollars that Mr. Gainey’s future budgets rely on.
City Controller Rachael Heisler urged the mayor not to count on that money in coming years. But Mr. Gainey’s revised revenue projections actually increased the amount of money the city expects to collect.
“Unfortunately, governments have a tendency to have rosy revenue projections and very conservative spending projections,” said Sheila Weinberg, founder and CEO of Truth in Accounting, a nonprofit that advocates for stricter financial practices in cities and states across the country. “Then, when they get into trouble, they have to use these one-time budgeting gimmicks to make everything work out.”
In other cities that have faced budget crises, leaders have papered over their problems with accounting maneuvers that masked the true scope of the trouble.
Shell games
In Miami in the 1990s, city leaders turned to a shell game with city finances — inflating revenue projections, selling property and, in some cases, raiding restricted funds to cover up a dire financial picture.
Eventually, that false picture made it into the financial disclosures that the city used to publicly issue more bonds.
“At the end of the day, when the city is certifying its financials for purposes of raising capital, the financial statements — which typically include budgets — need to be true and accurate. If the finances of a city are not sustainable and are presented sustainable, they are going to have a potential problem with the [Securities and Exchange Commission],” said Mr. Chase, a Florida lawyer who led the agency’s investigation.
Typically, the SEC focuses on corporations to ensure they’re being honest with investors about the risks of buying their shares. From their public filings to their executives’ public statements, companies are required to give accurate information about how much they expect to make — and any threats to those potential earnings.
Those same rules apply to governments, from statehouses to school districts, that rely on investors to buy public bonds on the open market to fund major projects.
“I'm actually surprised the Securities and Exchange Commission is not stepping in and charging more governments with securities fraud for saying they're balancing their budget, for saying they had surpluses” when they don’t, Ms. Weinberg said.
It happened in Illinois, where her organization is based, in 2013. The federal agency charged the state with failing to disclose to bondholders that it had drastically underfunded its pension system for years. Investors poured billions into the state without knowing about the massive financial risk looming in the future if the state suddenly found itself unable to pay retirees the money they’d earned.
The state settled with the SEC, agreeing to key changes in its funding practices and transparency with the public.
Ripping off the Band-Aid
“Municipal investors are no less entitled to truthful risk disclosures than other investors,” George S. Canellos, then the acting director of the SEC’s Division of Enforcement, said at the time.
For governments, that extends to the public comments from elected leaders and the budgets they release, Ms. Weinberg said. A bond offering isn’t the only way to mislead people, she said.
“Any public statement, any public documents, any press releases, any press conferences — the anti-fraud provision of the Securities and Exchange Commission, the Securities and Exchange laws, apply to those types of statements,” said Ms. Weinberg, a certified public accountant.
That includes budgets, where financial sleight-of-hand sometimes includes the use of trust funds — specialized accounts where the money is supposed to be dedicated for a specific purpose — to offload costs.
Millions in salaries or expensive equipment purchases that should be paid through the general budget are shifted into trust funds, draining resources that were intended for something else, Ms. Weinberg said.
“They switch money from one pocket to the other in these trust funds,” she said. “It allows them to pretend they're balancing the budget when, in reality, they're not,” she said.
The accounting maneuvers might not make it into bond offerings, but the effect is the same: a public that’s unaware of the reality of the financial peril they’re in. And eventually, if the law doesn’t catch up, reality will, Mr. Chase said.
“It’s not uncommon to move money around — sometimes more egregious than others,” Mr. Chase said. “Ultimately, it’s going to get to a point that you can't rob Peter to pay Paul. You have to show fiscal stewardship. ... The answer is, you have to rip the Band-Aid off.”
Deputy Managing Editor for Investigations Michael D. Sallah contributed to this report.
First Published: September 15, 2024, 9:30 a.m.
Updated: September 16, 2024, 2:58 p.m.
