A reversal of fortune means decline doesn’t always lead to fall

7 Mar 23

Pittsburgh has transformed itself from a city focused on heavy industry to a thriving metropolis. Its playbook offers some smart solutions to others

In 1758, General John Forbes established a fort at the confluence of the Allegheny and Monongahela rivers, named after William Pitt, 1st Earl of Chatham, or Pitt the Elder as he is better known. In 1794, the Commonwealth of Pennsylvania, in the now independent United States of America, established the town of Pittsburgh, and, in 1816, it became a city.

The steel city: “hell with the lid taken off”

As the need for a defensive site fell away, Pittsburgh was built upon heavy industry, particularly steel – the Pittsburgh Steelers are the most aptly named of all American football teams. The population grew from less than 100,000 in 1860 to over 700,000 in 1930 and its economy grew with it. Abundant supplies of iron ore and coal, coupled with ever-expanding rail links to deliver raw materials and to ship finished goods to market and customers made Pittsburgh and much of Pennsylvania an industrial powerhouse. Companies such as Heinz, founded by German immigrants, developed in Pittsburgh, as the city’s steel and zinc production allowed the company to can its products. Unemployment was rarely a problem.

However, the economic prosperity came with some cost. The abundant local coal was bituminous, producing sulphurous yellow and black smoke when burned. Atlantic Monthly, the US periodical, described looking down at Pittsburgh from the surrounding hills as “looking over into hell with the lid taken off”. Anthony Trollope described the city as “without exception the blackest place I ever saw”.

1940s to 2003: the rise and fall of an industrial powerhouse

The Second World War blew away any lasting effects of the Great Depression, as wartime demand spiralled and the US entered a long period of post-war economic growth. However, pollution in Pittsburgh was so bad in the 1940s and early 1950s that the smog could block out the midday sun, requiring people to carry lamps and torches in daytime. It became apparent that the pollution was killing residents.

This led to what some have described as Pittsburgh’s ‘first economic transformation’. Industry and local government, building on the strong civic pride shared between residents, business and political leaders, worked together to ban the burning of coal, to clean up the steel industry and to transform the provision of public services and the arts in the city centre. Business leaders’ philanthropy saw significant investments in healthcare and education. The city was booming, employment high and the investment in education and healthcare bearing fruit. Few could predict what was about to happen.

The 1970s oil crisis and soaring energy costs hit Pittsburgh extremely hard. Competition from foreign steelmakers, exhaustion of high-quality and cheap local iron ore, soaring energy costs and reduced domestic demand helped destroy the US steel industry. The rise of OPEC and declining local production saw the closure of the steel mills, and companies that benefited from proximity to the industry, such as Westinghouse, left. Between 1950 and 2000, the population of the city halved.

Mid-2003: a city in crisis

In 2003, the council’s credit rating was downgraded to ‘junk’ status and its resulting inability to borrow short-term funds, allied with dwindling cash balances, made it unlikely that the council could fund its payroll. Years of underfunding to help prop up the revenue budget and the dot.com crash saw the council’s pension fund deficit increase to nearly 65%. Interest costs comprised 25% of the revenue budget, and key unions, notably fire and police, secured average pay increases of 5% – more than double the rate of inflation. As taxes overlap with Allegheny County and the local school district, the ability of the council to increase tax revenue was, and remains, very limited. One-tenth of the workforce, some 446 employees, were laid off, and leisure centres and swimming pools closed, although public donations managed to re-open pools for the summer – despite everything, civic pride remained.

‘The crisis allowed the council to adopt a new approach to economic development, recognising that, without reversing economic decline, the city would lurch from crisis to crisis’

Faced with the council’s bankruptcy, the Commonwealth of Pennsylvania intervened to rescue the city. Outside specialists were hired to assist in the restructure of the council’s finances, and huge efforts were made to transform the built environment and renew the city’s infrastructure.

The second economic transformation

The seeds of Pittsburgh’s ability to recover from its economic problems began in the 1990s. Almost hidden from sight, the city’s business leaders, with some support from local government, had begun to try to leverage the city’s healthcare and higher-education sectors to help spur economic growth.

The crisis allowed the council to adopt a new approach to economic development, recognising that, without reversing economic decline and tackling urban blight, the city and council would lurch from crisis to crisis.

Key to the city’s progress was the decision to use data to drive economic development. Much of the data that identified various issues was well known, such as the loss of residents. However, data measuring which regeneration and economic development strategies and projects worked best, where they were needed and how various initiatives would interact was less well known. The city contained 1,400 condemned structures, 6,000 vacant buildings and 14,000 vacant brownfield sites. It became obvious from surveys and other data that tackling urban blight was vital.

The council’s Urban Redevelopment Authority began to drive economic development and regeneration. The URA pursued a two-pronged strategy – expand parks and green infrastructure, and redevelop publicly owned properties. The URA began redeveloping the vacant buildings and brownfield sites. Where it made no economic sense to redevelop a site, it was converted to a park, both ‘greening’ the city and removing urban blight. In turn, as areas were improved and became more attractive, freeholders were able to secure finance to redevelop and refurbish their own buildings and brownfield sites, creating a virtuous circle and ensuring that adequate housing was being supplied to minimise the risks of a real-estate bubble. Redeveloping the waterfront was also a key to reinvigorating the city’s downtown area.

By the time of the financial crisis in 2009, Pittsburgh was able to withstand the economic impact and continue to grow. Robotics, healthcare, education, natural gas, nuclear engineering, biotechnology, finance and the technology sectors are thriving. Research at the University of Pittsburgh and Carnegie Mellon University has increased tenfold.

The need for fiscal discipline and other lessons

If there is one key lesson from US local government crises for UK councils – increasingly a lesson that can be learned from councils that have issued Section 114 notices – it is the need for fiscal discipline. At least three of the councils that have issued Section 114 notices in the past 22 years appear to have been driven to this point not by any one dramatic economic event but by a lack of financial discipline among their senior management teams, allowing service deficits to spiral and essential budget savings to remain undelivered. It is imperative in a time of high inflation, spending pressures and constrained funding that this important lesson of maintaining fiscal discipline and taking difficult decisions is learned.

Although each situation is different, the experiences of Pittsburgh and other authorities previously in financial distress, such the cities of Baltimore, New Orleans and Philadelphia, demonstrate seven specific lessons concerning financial crises in local authorities:

Be realistic about the problem and how long it will take to fix

Financial crises do not develop overnight. Tempting though it is to seek a quick fix and to hope for the best, this hardly ever works and never for long. Pittsburgh’s problems stemmed from economic decline and the long-term failure of the council to deal with and adapt to the effects of that decline.

Work with other public and voluntary sector partners

Services and attendant problems are usually interlinked. Other public and voluntary sector entities are often key to managing interlinked services, such as housing, health and social care. Problems in services such as social care cannot be tackled without help from the NHS, and poor housing cannot be tackled by a council acting alone.

‘Financial crises do not develop overnight. Tempting though it is to seek a quick fix and to hope for the best, this hardly ever works and never for long’

Focus on core services and do not rule anything out

Essential services matter more than ‘nice to haves’, and outcomes more than initiatives. If a city needs its streets cleaned, the outcome must be that they are cleaned; a slogan or a politically-inspired inefficient programme is not an outcome.

Make tough choices, but share the burden and be inclusive

Hiring freezes, pay cuts, etc, may seem politically simple because they can help delay some more difficult decisions and can be presented by councillors as ‘tackling waste’, but they rarely solve a budget crisis on their own and will further damage the morale of staff. Conversely, shutting services that residents value – libraries, for example – without tackling ‘waste’ are unlikely to go down well. The burden needs to be shared across staff, services, fees and charges, and council tax. Residents are rarely asked to opine on a trade-off between taxes and adult social care, libraries, highways and all the other essential and highly desirable services councils provide – make sure they are.

Match long-term problems with long-term solutions

Long-term problems such as highways maintenance backlogs, housing dilapidation and pension deficits are long-term problems that need long-term funding to address them. They cannot be ignored – and, left unsolved, can cause significant financial crises and problems of their own. But they cannot be addressed immediately if the council is struggling to keep the lights on.

Preserve and upgrade capacity

Cuts, hiring freezes and early retirements to help tackle a budget crisis often mean that a council loses experienced staff and is left with gaps in capability and capacity. It is vital that capacity is not only preserved but enhanced. If a council is in difficulty because managers have lacked the means or skills to manage their budgets, reducing that capacity and not addressing that skill shortage makes it likely that a crisis will be prolonged or recur.

Monitor and report

All councils already undertake budget monitoring, but the frequency and quality of that reporting and analysis varies. Being able to identify, quantify, understand and address spending pressures is vital to restoring financial stability, targeting resources on the right outcomes and to getting help from partners. Significant ongoing virements or budget transfers, particularly if hidden within large departments, make it impossible to tackle problems unless those budgets are reset for the long term.

Pittsburgh’s success

From having one of the few US councils that had a sub-investment-grade rating and was effectively bankrupt, and from competing with Detroit to be the poster child for post-industrial decline, Pittsburgh is now thriving. The Economist ranked Pittsburgh as the most or second-most livable city in the US in 2009, 2011, 2012, 2014 and 2018; in 2015, it became the 11th most livable city in the world. The council is expanding its capital programme and is now a beacon of effective financial management.

At a time when many of the UK’s former industrial areas remain in need of regeneration and more effective economic development, and some councils find themselves in great financial difficulty, Pittsburgh demonstrates what can be done to arrest decline and financial difficulty. Across the US, Pittsburgh is held up as an exemplar; it should be here in the UK, too.

June Matte is managing director of PFM

Image credit | Paddy-Mills

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