A Pittsburgh authority will soon finance loans to private companies with taxable bonds, in hopes of stimulating the city's sagging economy and ending its recent history of large budget gaps.

On Tuesday, the Pittsburgh city council unanimously approved a plan by Mayor Thomas Murphy to create an economic development fund financed with bond proceeds. The city's Urban Redevelopment Authroity is scheduled in January to issue $60 million in bonds to launch the effort.

About $7.5 million of the city's share of annual revenue from a new county sales tax will back the securities, and the city says it will start loaning proceeds around the middle of February.

In addition to the bonds, members of the Allegheny Conference, a regional business organization, have committed to raising another $50 million to capitalize the fund.

The fund will loan money at below-market rates to businesses that have traditionally found it difficult to get private bank loans: start-up companies and companies that need "financing for speculative yet marketable residential, commercial and industrial development," according to a city outline of the fund.

Steve Leeper, the city's director of development policy, said the rates on the loans have not yet been determined, but borrowers would pay an interest rate "significantly below" market prices.

The strategy of issuing debt to stimulate economic development has never been universally praised, but Pittsburgh officials say their program has been carefully developed to fit the city's needs.

"I would say, 'Why do you think it won't work?'" Leeper said. "When you bring low-cost capital to the market ... I have to believe that will stimulate investment that would otherwise not occur."

The authority will issue taxable bonds to avoid federal restrictions on the use of tax-exempt bonds.

"There's just a much greater flexibility with taxables," Leeper said. City officials project that the income from the loans will maintain the fund without more bond issues.

The redevelopment authority selected PNC Securities Corp., a subsidiary of the Pittsburgh-based PNC Bank, to sell the $60 million issue. PNC will serve as bookrunner on all the authority's issues for the next three years.

City officials say the development fund will ultimately help strengthen the city's economy and stabilize its shaky finances.

Between the nationwide slump in manufacturing and a wage tax cut enacted in 1989, Pittsburgh's last few budgets have produced large deficits, prompting credit rating downgrades in June.

Budget deficits over the last four fiscal years have caused the city's current total negative fund balance to exceed $40 million. Officials say the city's $330 million fiscal 1995 budget, which begins Jan. 1 1995, is balanced, and cuts total expenditures by 4%.

In submitting his proposed budget for fiscal 1995 to the city council, Murphy said: "I am here to tell you that the fiscal health of the city is precarious. Revenues are down, expenses are increasing, and there is no quick fix to get us out of this financial situation."

At this point, Standard & Poor's Corp. has an underlying rating on the city's general obligation debt of Aminus; Moody's Investors Service rates it Baal. All of Pittsburgh's $500 million of outstanding GOs are insured.

City officials will not say how they plan to erase the accumulated deficit, but they say they have no plans to sell deficit bonds. "We will announce a series of steps to eliminate the deficit after the council enacts the 1995 budget," said city budget director Rowan Miranda. "Right now deficit funding bonds are not on the table."

Murphy's answer to the city's budget problems has been to reduce the size of the city's budget starting with a 12% cut in the municipal work force.

He is also negotiating a health care package with the city's unions that could reduce costs by $3 million.

But the budget cuts will not have a lasting effect unless the city economy grows, Murphy said. City officials say the development fund works toward that goal.

Meanwhile, rating agency officials say Murphy needs to clarify how the city plans to eliminate its deficit.

While Pittsburgh officials made a "pretty good case" that the 1995 budget is balanced, "we still need to see what the chances are that revenues and expenditures will match up," said Brad Gewehr, vice president at Moody's.

The city council is scheduled to vote on the budget tomorrow, and until a budget is enacted, bond raters say they must wait before issuing their definitive analysis of the city's finances or taking any rating actions.

Bond raters are also concerned with a city proposal to consolidate its Water Department with the Pittsburgh Water and Sewer Autthroity in order to produce budget balancing revenues. The action would remove the department from the city's operating budget, to create savings of $20.6 million.

Richard Larkin, a managing director at Standard & Poor's, said the agency is concerned about the merger, saying it is unclear if the consolidation plan would produce savings.

"We don't know what it means," Larkin said.

In addition, the proposed budget does not show how the city's finances will look at the end of fiscal 1994, raters said.

The city told rating agency officials in June that midyear cuts would reduce the 1994 deficit to $11 million. The city said it would then enact a balanced budget for fiscal 1995 and work to eliminate the entire negative fund balance by 1998.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.