Monday, February 27, 2006

Memphis Doesn't Have To Be The Next Pittsburgh But It Requires Decisive Action Now

In December, the University of Pittsburgh Center for Social and Urban Research published a report called “The Roots of Pittsburgh’s Financial Crisis.”

It could just as easily be called “A Cautionary Tale for Memphis.”

The report is a post mortem on the city’s financial meltdown, which became so acute that the State of Pennsylvania stepped in to demand that Pittsburgh get its fiscal house in order. In that city, the verdict is still out on whether its strategies have worked, but in this city, the lessons from Pittsburgh should be instructive as city officials cope with Memphis’ financial problems.

Fundamentally, Pittsburgh failed to adjust its public services and employees despite falling population, rising budgets and a flawed tax structure. Without the benefit of strong annexation laws like those in Tennessee, the city saw its boundaries frozen and its population halved over 40 years. Despite the falling population, the per capita cost of providing public services was increasing and the workforce was not being reduced.

As for its population, Memphis has a sense of false security. Its population is artificially propped up by annexations that give the impression of population growth and stability. If Memphis were landlocked like most cities its size, it too would be in the midst of a population free fall. After all, from 1980 to 2000, the population of Whitehaven fell by 6,400; South Memphis fell by 9,200 people; North Memphis by 7,100; the Defense Depot district by 6,000; Midtown by 800; and downtown/Medical Center by 3,000.

It seems inevitable that there will be a point when Memphis doesn’t have the luxury of further annexations to bolster its population, and at that point, if past trends are any indication, its population will stall and to drop.

Like Pittsburgh, Memphis could then be a smaller city but with growing employment. It’s a curious phenomenon. Even now, with the exodus of people out of Memphis, 102,743 people flood back into the city to work each day. It’s a powerful reminder of the city’s place as the region’s employment hub.

This is particularly true in Pittsburgh. Memphis’ population swells 16 percent a day. In Pittsburgh, the daytime population grows 41 percent. Therein lies the problem, because Pittsburgh is also stuck with a tax system that is structurally unsound. Unable to tax commuters driving into the city to work and unwilling to abandon gratuitous political solutions, the cost of services fell to fewer and fewer property owners.

The shift in the tax burden was further complicated by the fact that a growing segment of the employment base was shifting to universities, hospitals and the public sector that do not pay any taxes.

Its most logical options: cut payroll and reduce services. Instead, it did nothing…for decades. And to compound things, it pretended that unfunded pension and health benefits obligations didn’t exist and made an agreement that dealt away its critically important assets – water and sewers.

As for payroll, Pittsburgh officials funded pay raises out of existing revenues, but never put enough revenues into reserve accounts to cover growing pension and health obligations. (That’s not a lesson lost on New York Mayor Michael Bloomberg, who is proposing that $2 billion of his city’s $3.3 billion surplus should be set aside to pay future health care costs for retirees.)

Rather than make the hard decisions, Pittsburgh went with the easy answers and political tricks. Pittsburgh issued $269 million in bonds to fund part of its pension liability, but the city bet on a loser - higher interests rates - and once the rates fell, the city was actually $450 million deeper in debt.

In another sleight of hand, the city concocted a complex reverse mortgage arrangement for its water and sewer in exchange for an infusion of quick money; however, in another show of political expedience, the system’s employees were made non-city employees, but they were allowed to stay in the pension system. In addition, the arrangement allowed the water and sewer authority to buy arguably the city’s most important assets at the end of 30 years.

And yet, the core problem wasn’t poor city finances. Rather, it was poor political courage.

“An important source of the city’s current difficulties was the unwillingness of past city administrations to address these structural deficits,” the report said. “…To keep the same workforce, despite expenditures growing faster than revenues, various city administrations resorted to a number of practices that shifted the financial burden of their current operations to future taxpayers.”

These days, the report says “the proverbial chickens are coming home to roost.” Now 20 percent of the city’s general fund revenues is earmarked for debt payments and financing the pension system.

The tone of the report is glum. Even with all the changes recommended by state government, the structural deficit is still $50-60 million a year. Pittsburgh may be too late to save itself.

“There is the fundamental maxim of tax analysis,” the report says. “Ultimately, whatever the legal basis upon which a tax is levied, the true burden of the tax is borne by those who cannot avoid it.” It is a cogent insight into tax policy, and it should be kept uppermost in mind as Memphis deals with its budgetary challenges. In the end, the answers must be compelling enough to convince those who can avoid city taxes to stay in the city and pay them.

People can move; property cannot. That’s why despite Mayor Herenton’s suggestion for his critics to go ahead and move out of Memphis, the overriding challenge for his financial experts is to craft financial solutions that entice people to stay. As the Pittsburgh experience proves, as many people as possible are needed to fight the decline of a city and its tax base. As the report says, it is property owners who will bear the burden of paying for the years that city government failed to get its house in order.

Perhaps that is the strongest signal that the Herenton Administration can send to the citizens of Memphis. Rather than invite people to leave, it can show that it is resolute and courageous in dealing with the crisis facing it. It can show that it has no interest in quick fixes and magic bullets. It can show that it has no interest in one of government’s most tempting tactics – shoving problems into the future for others to deal with.

As the Pittsburgh story proves, there is no time like the present.

9 comments:

mike said...

"...the overriding challenge for his financial experts is to craft financial solutions that entice people to stay." How does a payroll tax do this? The costs of accountancy, paperwork and compliance are non-trivial for most business. The actual tax will be borne by the workers in suppress pay increases and reduced benefits.

Given a choice of choosing to move into the payroll tax zone or moving a few miles farther out, which do you think a business will choose? Businesses that can move will; businesses that can't will wilt under the competition disadvantage of paying the tax.

Moving good jobs into the city encourages folks to stay, and something like the biotech zone is a move in that direction. But having hung its hat on the distribution business (where margins are already small), the city is stuck. We can't move them closer to Midtown; they will want to move out of the payroll tax zone.

A City that doesn't give away PILOTs like candy, that doesn't earmark tax revenues to private developers and semi-public boards and commissions, that doesn't sell bonds for massive and questionable public projects, is what we need. We're a long way from it and there are no candidates to replace Herenton who sound anywhere near up to the task.

Smart City Consulting said...

Mike: It entices Memphians to stay here by lowering their taxes, and shifting regional costs to the regional tax base. Keep in mind that DeSoto County is the fastest growing county in Mississippi and the income tax doesn't seem to be a deterrent there. There is no competitive disadvantage that the tax creates for companies, and for those commuting from Mississippi, the payroll tax can be deducted from that state's income tax. And we agree with much that you say about biotech and distribution. The problem that we need to overcome is the feeling that we can't do anything about it, and sadly, no one seems willing to pick up this cause. SCC

Smart City Consulting said...

Mike: It entices Memphians to stay here by lowering their taxes, and shifting regional costs to the regional tax base. Keep in mind that DeSoto County is the fastest growing county in Mississippi and the income tax doesn't seem to be a deterrent there. There is no competitive disadvantage that the tax creates for companies, and for those commuting from Mississippi, the payroll tax can be deducted from that state's income tax. And we agree with much that you say about biotech and distribution. The problem that we need to overcome is the feeling that we can't do anything about it, and sadly, no one seems willing to pick up this cause. SCC

Larry said...

People move to DeSoto County simply because DESPITE Mississppi's income tax, it is cheaper to live in Mississippi.

It isn't cheaper to live in Mississippi because of the income tax ... no, it's cheaper because we have elected morons to run Memphis.

Morons who keep raising taxes and fees and wonder why people are leaving.

Morons who support turning the Promenade over to developers while other buildings stand empty across the street.

Morons who want to build a $400 million light rail system that adds to traffic congestion and is estimated to run $10+ million annual deficit.

Morons who want to lay off police and fire fighters to cover the budget to deficit but retain Janet Hooks in her political position.

The surrounding counties and municipalities will be glad to offer businesses a place to relocate. For smaller businesses that provide most of the jobs, it won't be much trouble to relocate.

Unfortunately, probably the only thing keeping many of the bigger businesses in town are the PILOTs.

A payroll/income tax will only serve to make Memphis more of ghost town.

Smart City Consulting said...

Larry: We'd try to respond, but it just seems that it's not the best use of our time, since you have anchored your opinion in concrete and no amount of facts (such as it's not cheaper to live in Mississippi, despite all propaganda to the contrary) and the name-calling just gets tiring. SCC

turnerarch said...

I'll pick it up...
Let me just say this Larry:
I cannot fathom why you think that any business will remain in this region if Memphis continues down the path you suggest. No doubt we will still be up to our noses in Walgreens, but a dying central city will offer little incentive for a company to relocate to say, Walls, Mississippi (no offense to the citizens of Walls). It would be both easier and in that companies best interest to leave the region completely if such were the case.
This attitude toward economic growth in this region seems to be the root of many of our problems and a source for a general lack of understanding. This region is not guaranteed a certain level of economic growth. We cannot assume that a certain number of jobs will be created annually in the region. The simple fact is that no company sees Mississippi as a land of plenty, just maybe the slightly lesser of two evils. One city might be slightly ahead of another municipality, but we are all still located in the same region, and no degree of municipal or state boundaries can change the condition within this area.

FedEx is not under contract to remain here indefinitely. Human Resource managers at FedEx mention on a regular basis how the poor quality of life not only in Memphis, but the entire region (including north Mississippi) has time and again hampered their ability to attract the best and the brightest. If at some future date their ability to command certain incentives and political clout no longer compensates for the areas shortfalls, trust me, the will pack up and leave. If the scenario you were to describe for Memphis rang true, no one outside of our small region will know, much less care, where Olive Branch, Hickory Withe, or Edmondson are located.
On the lighter side:
We could get an early jump on attracting talented and educated citizens to such areas. Postcards stating “Greetings from Southaven!” with a lovely shot of traffic chocked Goodman Rd. at sunset would surely do the trick.

Smart City Consulting said...

Brilliantly said.

mike said...

Memphis, like it or not, has a reputation for unresponsive, corrupt, inept, bloated, inertialess government; we also have a disturbing crime problem, the handling of which seems attached to the unresponsive, corrupt, inept, bloated and inertialess government.

Does Memphis' government do anything about that? Start meaningful reforms and re-adjust priorities? Dig in deep and push hard?

No. Instead, amid new reports of more problems, we are told that this is as good as it can get! The only problem is that we don't have enough money! Give us more.

No wonder so many aren't buying what this city is selling. They aren't convinced that more money will make anything better. It hasn't yet, despite several years of property tax increases and the highest tax rate in the State or region! Nashville and Knoxville seem to be going gangbusters with less.

I still think Memphis is a small town in a big city suit, trying to be made into something it's not by folks who are covetous of what others have. Too many at the top keep trying to make Memphis something most Memphians don't want it to be. If we were less concerned with being "world class" and more concerned with being a regional city, we'd do better.

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