For Release Sunday, December 5, 2010
The public finance crisis for local and state governments keeps rolling along, a bit like a slow-motion train wreck. Harrisburg, Pa., is on the brink of bankruptcy. In California, police departments say they must cut back on enforcement of certain crimes. Pensions and health care continue to wreak havoc on municipal budgets everywhere.
Meanwhile, the mood in the country is against new taxes, while several states have placed caps on property taxes. And as anyone who has balanced a home budget knows, it’s simply unsustainable to have expenditures going out outpace revenues coming in.
Against this backdrop comes heightened interest in collecting payments in lieu of taxes, or PILOTs, from charitable nonprofit organizations such as private colleges and universities, hospitals and medical centers, and cultural institutions that are exempt from paying property taxes in all 50 states and the District of Columbia. Currently, at least 117 municipalities across 18 states have PILOT programs in place; 82 of those cities and towns are in Massachusetts. Boston has one of the longest standing and most revenue-productive programs in the U.S., and Cambridge, home to MIT and Harvard, has the oldest, dating back to the 1920s. New Haven and Yale University have worked out another model program.
The basic idea is that while these nonprofits are by law — and in several states mandated by state constitutions — tax-exempt, they might reasonably be asked to make a voluntary contribution that is a fraction of what they would pay if they paid property taxes. The payments typically constitute a very small percentage of overall revenues collected by municipalities; Boston’s collection of $15.7 million in the 2009 fiscal year, for example, amounted to .66 percent of the total city budget that year.
Nevertheless, in recent years, other cities have been getting into the PILOTs business, primarily in the Northeast and Mid-Atlantic, but also in the Midwest, plus North Carolina, Georgia, Montana, and California. But the process has been uneven, ad-hoc and often contentious, according to Daphne Kenyon and Adam Langley, authors of a report, Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests, published by the Lincoln Institute of Land Policy.
Some cities and towns have been more aggressive than others as they seek revenue from nonprofits. Pittsburgh, Princeton, and Providence tried to establish a controversial “tuition tax,” and some state Legislatures have contemplated an “endowment tax” on higher education institutions as well. In New Hampshire, the town of Peterborough challenged the tax-exempt status of the MacDowell Colony, founded in 1907 to promote the arts and including an artists-in-residence program. Selectmen argued that all but one of the artists were from out of state, failing to meet the requirement that residents of New Hampshire be admitted to a charity’s benefits. Having gotten the institution’s attention, they proposed a PILOT program, which the MacDowell Colony refused. The New Hampshire Supreme Court ruled against the selectmen, leaving nothing but hard feelings all around.
Municipalities have also of course increasingly relied on charging user fees that can help pay for basic public services, from police and fire protection to streets and their maintenance or garbage collection. Legal challenges abound in this area as well.
The better approach, the report’s authors say, is to first decide if a PILOT program is appropriate, then collaborate with nonprofits to structure the program so it’s reasonable, predictable, and transparent — all as part of a town-gown partnership that is mutually beneficial. Cities can set a target based on the cost of public services directly benefitting nonprofits, and use the assessed value of tax-exempt property or square footage to calculate suggested contributions. Boston’s goal is that nonprofits contribute 25 percent of what they would pay if they were not tax exempt.
“PILOTs can provide crucial revenue for certain municipalities, and are one way to make nonprofits pay for the public services they consume,” Kenyon and Langley say. “However, PILOTs are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits. In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation.”
Even in Boston’s model program, there are wide disparities in what institutions contribute: Boston University leads the way with $4.8 million, followed by Harvard University with $1.9 million. Boston College contributes $293,251, and Northeastern University a mere $30,157. Boston Mayor Thomas M. Menino launched a PILOT Task Force to revamp the program and collect more revenue in a more even way from nonprofits. City Councilor Stephen Murphy says he hopes a phased-in expansion of the program will bring in $40 million per year in five years. The final recommendations of the task force are due out this month.
There are big themes at work here that go to the core of U.S. cities and their continued vitality. So-called “eds and meds” — higher education institutions and often related health care medical centers — are an economic engine for many cities, more resilient during recessions. They employ thousands of local residents and support and spin off all kinds of economic activity. But when they expand, more and more land goes off the tax rolls, while they continue to consume the services that cities provide.
Baltimore is an especially interesting case. The city recruited nonprofits to locate there as an economic development strategy — marketing the location as less expensive than Washington, D.C. but still close-by — but ended up being a victim of its own success, in terms of tax-exempt property. A PILOT program had to be established.
Luring businesses with tax breaks and incentives is a tried and true practice in the for-profit world. But tax-exempt status for nonprofits isn’t a loophole or a subsidy, says Richard Doherty, president of the Association of Independent Colleges and Universities of Massachusetts. It was established going back some 200 years because nonprofits provide essential services that government does not. Many institutions provide community benefits in many ways, in the public education system or by revitalizing parks and public space, which does not get calculated sufficiently in setting PILOTs contributions.
The role of nonprofits in cities should not be underestimated, says Doherty, who suggests that they are responsible for billions in economic activity. He’s against a one-size-fits-all, systematic or formula-based approach, and favors the Connecticut and Rhode Island systems, where the state reimburses cities and towns for some of the property tax revenue they don’t collect from nonprofits. Those reimbursements are partial, however, and in hard times are easily cut from state budgets — which brings us right back to the fundamental problem of state and local governments going broke.
It’s no surprise that public employee unions are beginning to take particular interest in PILOTs. And nonprofits of all kinds may have some reason to be worried. As cities assess the practice of collecting payments in lieu of taxes, some are starting to look at secondary schools as well as colleges and universities, museums, and even churches. It’s possible only soup kitchens, which are charitable nonprofit organizations like the rest, can feel comfortable that it’s with them that municipalities might draw the line.
Anthony Flint is a fellow and director of public affairs at the Lincoln Institute of Land Policy, a think tank in Cambridge, Mass.
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