Pittsburgh Shows Detroit Can Benefit From Education: Muni Credit
Pittsburgh, the former steel-industry capital that was close to insolvency a decade ago, is thriving again even as Detroit, largely abandoned by carmakers, becomes the biggest U.S. municipal bankruptcy.
As steel mills shut, the city at the confluence of the Ohio, Allegheny and Monongahela rivers focused on universities and hospitals to build its economy. Pittsburgh has also benefited from a natural-gas boom as drillers tap the Marcellus Shale formation in surrounding counties. About 1.2 million people work in the municipality, more than “when steel was at its ultimate peak,” Mayor Luke Ravenstahl, 33, said in a July 24 Bloomberg Television interview.
With Pittsburgh running a balanced budget for an eighth straight year, Ravenstahl wants to exit Pennsylvania’s Act 47 program for distressed municipalities, which it entered in 2003. Standard & Poor’s raised the city to A in June, its best grade yet from the company. The extra interest rate buyers demand on some debt has shrunk 17 percent since March.
“They’re really taking actions to address their long-term liabilities that we’d like to see more municipalities doing,” said Dennis Derby, a portfolio manager at Wells Capital Management in Menomonee Falls, Wisconsin. The company oversees $34 billion of local debt, including Pittsburgh.
Pennsylvania is among 19 states with programs that intervene in local finances, mostly in reaction to crises rather than trying to prevent them, according to the Pew Charitable Trusts, a research and public-policy group with offices in Philadelphia and Washington.
State overseers sometimes struggle to correct years of mismanagement outside of bankruptcy court. In Detroit, the state-appointed emergency manager, Kevyn Orr, filed for bankruptcy July 18. Central Falls, Rhode Island, exited court protection last year, after its receiver filed in 2011.
Pittsburgh’s coordinators under Act 47, Eckert Seamans Cherin & Mellott LLC and Public Financial Management, recommended that it leave the program while remaining under the oversight of a separate entity, the Intergovernmental Cooperation Authority.
In a sign of its diversifying economy, Pittsburgh’s biggest employer is the University of Pittsburgh Medical Center, with 14 percent of the workforce as of 2012, according to a city filing.
U.S. Steel Corp. (X), which occupies the city’s tallest building and has been based in Pittsburgh since 1937, no longer ranks among the top 10 employers. It was 10th-biggest in 2000. H.J. Heinz Co. and PNC Financial Services Group also have headquarters in the city.
Unlike Detroit, the city is reversing an exodus of residents. Pittsburgh’s population is 306,211, up 0.2 percent from 2010, Census data show. That’s still down from 604,332 in 1960.
Detroit’s population shrank 1.7 percent from 2010 to 2012, to about 700,000. In 1950, 1.85 million people lived in Detroit. Manufacturing jobs in the city fell to fewer than 27,000 in 2011, from about 296,000 in 1950 as auto plants left. Ford Motor Co. (F), based in neighboring Dearborn, hasn’t built cars in the city in more than a century.
For investors, Pittsburgh’s fiscal gains help make the decision on whether to graduate from Act 47 moot, Derby said.
“Even if they do exit Act 47, they still stay under a degree of state oversight,” he said. “There’s plenty of safeguards there.”
Pittsburgh bonds maturing in September 2026 and callable in 2022 traded last week at an average yield of 3.73 percent. That’s about 1.02 percentage point more than benchmark bonds, down from a gap of about 1.24 percentage points in March, data compiled by Bloomberg show.
In 2003, Pittsburgh cut about 13 percent of its workforce, mostly in one month with the firings of 446 employees, including almost 100 police officers. It was placed in Act 47 in December 2003. A few months later, the state legislature created the Intergovernmental Cooperation Authority to ensure the city would follow recommendations from consultants appointed under the program.
Pittsburgh “was on the brink of bankruptcy,” Dana Yealy, chairman of the authority, said in an interview.
The three-step increase from S&P matched the city’s score from Fitch Ratings. Moody’s Investors Service puts Pittsburgh at A1, one step higher.
Act 47 is a “good thing” for bond-holders, said Paul Brennan, a senior portfolio manager at Chicago-based Nuveen Asset Management, which oversees about $90 billion in munis including Pittsburgh securities. “You tend to see more difficult decisions that are being made because they’re not being made by elected officials.”
Pennsylvania hasn’t decided whether to release Pittsburgh, said Steven Kratz, a spokesman for the department of community and economic development, which administers the Act 47 program. Since 1987, only six communities have left it and 21 remain, 14 of which have been in for at least a decade. Pittsburgh would be the most-populous municipality to exit.
Bill Peduto, a councilman running to succeed Ravenstahl as mayor next year, says the city still needs the oversight. He said he’s lobbied Republican Governor Tom Corbett and his staff to keep the city in the program.
“If we go back to the same habits that caused us to nearly go into bankruptcy, then we’re not only going to fail but we’re going to be back in the same situation in six or seven years,” Peduto said by telephone. He is the Democratic nominee for the November election in a city where 72 percent of registered voters are Democrats.
Ravenstahl said in a statement that he is “hopeful that Pittsburgh will be one of the few cities that has ever emerged from the program. We have brought financial stability back to city government.”
The Democrat, who took office in 2006, ended a re-election campaign in March and said he would leave by year-end, citing job pressures and a federal review that led to the indictment of the police chief.
The investigation and the leadership change are just two of the challenges facing Pittsburgh, Yealy said.
The cost of the city pension system, which has 62 cents in assets for every dollar of liabilities, is “too high,” as is debt service, Yealy said. The city directs 19 percent of its budget toward bond payments. Andrew Teras, an analyst at S&P, said 15 percent of general funds going toward debt service is considered “elevated.”
Staying in Act 47 will help control spending because it mandates that labor contracts must reflect the city’s means to fund them, Peduto said. Police and fire agreements expire in 2015, he said.
“Our present ability of being in the black could turn to the red if just two contracts, the police and fire, exceed the city’s ability to pay,” he said.
In trading in the $3.7 trillion municipal market, benchmark 10-year yields are set to exceed interest rates on like-maturity Treasuries for a fourth straight week.
At 2.89 percent, the muni yield compares with about 2.7 percent on federal debt. The ratio of the interest rates, at 107 percent, compares with an average of 93 percent since 2001. The higher it is, the cheaper munis are relative to federal debt.
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