SHARE

A Fair Fare Affair

February 10, 2012

Given the state of the economy, most university administrators are worrying about their institutions’ budgets. But Brown University’s president has two budgets on her mind: Brown’s and the one crafted by the City of Providence.

The municipal government -- facing a budget shortfall after several years of state cuts and stopgap measures -- is asking Brown to increase its voluntary payments to the city, payments made because the university, like many nonprofit institutions, is exempt from paying property taxes.

But the negotiations have not gone smoothly. And the city, which the mayor says is facing bankruptcy, is now considering asking the state to revoke the university’s tax-exempt status -- an unprecedented move that could cost the university tens of million of dollars – unless Brown agrees to strike a deal that pleases city officials before June, when the mayor says the city will run out of money.

But getting to an acceptable agreement, especially within a short time frame, is tough. Agreements to make "payments in lieu of taxes," or PILOTs, as they are known, come in many forms, are based on varying criteria, and can vary wildly in amount, so applying a single standard to evaluate whether any of the offers Brown or Providence put on the table as “fair” is not easy.

Because city officials can point to other universities that have agreed to make regular large payments, it is hard for Brown administrators to win over city officials and the public by saying they do “enough” to help Providence. But because there are also many colleges and universities, not to mention hospitals and other nonprofits – even some with comparable size and wealth – that make smaller payments or none at all, there really is no baseline for what a “fair” payment should be.

“Both sides approach these talks with white hats on,” said Evelyn Brody, a tax law professor at the Illinois Institute of Technology who has studied such agreements. “Charities say, 'We’re serving needy people,' and towns say, 'We’re serving needy people,' and nobody has enough money. The question of fairness is an interesting debate.”

In the last few years, universities in several cities, including Boston, Baltimore, Pittsburgh, and Worcester, Mass., have faced political pressure to make or increase payment agreements with city hall. With each agreement, there is more pressure on other institutions to strike deals to increase voluntary contributions, and the question of what constitutes a "fair" payment becomes more pressing.

Sharing the Sacrifice

For three years, Providence has faced state funding shortfalls and has been relying on non-recurring revenues to help balance its budget. This year the city is facing a $100 million shortfall, Mayor Angel Taveras has said.

Taveras’s administration has placed much of the blame on his predecessor, David Cicilline, who left office in 2011 to serve in Congress. “The Administration did not present a corrective action plan that could have minimized the pending financial melt-down that the City has experienced,” stated a report prepared for the city council by the city’s internal auditor in April 2011. “Furthermore, the City’s financial challenges have been made more difficult to address because of a dysfunctional financial management system.”

While Taveras said the city has made cuts to city services and salaries totaling about $70 million of the $100 million hole, he said in news conferences that the city could run out of money by June and will have to declare bankruptcy if it cannot find the remaining $30 million. He said the city has already made sufficient cuts, and wants the remainder to come from two sources: the city's retirees, who the city wants to prevent from receiving an annual increase of 5 or 6 percent to their pension payments, and the tax-exempt institutions. "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe," the mayor said. "However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget." (The $7.1 million figure is what will be left of the budget gap if the city limits pension payouts.)

In 2003, the city’s four private universities struck a deal with the city, in which they agreed to pay $50 million over $20 years. Last year, the universities paid the city about $2 million, about half of which came from Brown, the largest and wealthiest. The state government also has a policy of reimbursing municipalities for the property taxes they lose by hosting nonprofit organizations. Providence received $23.1 million from the state in August, but the governor says that is not enough.

This year the city asked nonprofits to up their total contributions by $7.1 million.

City figures state that tax-exempt institutions in Providence sit on 41 percent of the city’s assessed value, but Brown officials said land held by nonprofit colleges and universities in Providence accounts for only about 8 percent of the city’s assessed property value. The $5 million the city is seeking from the university would constitute more than 70 percent of the overall nonprofit increase. Brown President Ruth Simmons told Bloomberg Businessweek that $5 million would be crippling to the university and is “completely out of line with what universities do.”

Last month, Taveras said that if a deal could not be reached with Brown, he would seek state legislative authority to require payments in lieu of taxes. Last week the city council considered a resolution asking the state to revoke Brown’s tax-exempt status. In the past week, the state’s governor and the university’s faculty asked the Brown administration and mayor to re-enter negotiations, suggesting he likely won't support a legislative change.

Marisa Quinn, vice president for public affairs at Brown, said the university is interested in working toward an equitable solution with the city. "We are committed to the health and success of the city, and we recognize that our fates are intertwined," she said. "We have a stake in the continued success of Providence. We have a record of commitment, and we have offered to do more."

A Public Benefit

Nonprofit private universities are classified as 501(c)(3) organizations, a tax status granted to religious, educational, charitable and scientific institutions, as well as to a handful of other types of organizations that provide some social service. Such institutions are exempt from paying many forms of taxes, including property taxes.

This doesn't pose much of a problem for national and state governments, who make enough from other revenue streams that the lack of income from tax-exempt institutions does not significantly affect their bottom lines. States and Congress have occasionally sought ways to get more money out of nonprofit colleges and hospitals and have threatened the tax-exempt status of some parts of their operations, such as college sports. But at the municipal level, particularly in cities and towns with a large number of tax-exempt institutions, the exemption can undermine a major source of revenue -- property tax. In the past few decades, mostly in cities in the Northeast, nonprofit institutions have struck agreements to make payments in lieu of taxes, recognizing that the institutions require significant municipal resources, such as emergency response services.

“Boston University’s president once said that the university can only be better if the city thrives,” said Daphne Kenyon, an economist at the Lincoln Institute of Land Policy, in Cambridge, Mass. “That should be on bumper stickers.”

But in recent years, with municipal budgets increasingly strained by diminished state appropriations, rising pension costs and struggling real estate markets, municipalities have tried to renegotiate agreements or impose new ones to try to balance their budgets. Cornell University, in Ithaca, N.Y., has also been asked recently to increase its contributions.

In general, universities have argued that they provide significant economic benefit to municipalities, including drawing students and employees, who add to tax rolls by owning property, supporting local businesses, and increasing the value of nearby property. The presence of good universities also attracts businesses. Many nonprofits – particularly charity and educational organizations – also argue that they provide services that the city or state would otherwise have to provide.

‘So Many Variables’

One of the major problems with crafting an acceptable benchmark against which to measure Brown and Providence’s positions is that there is little standardization across existing PILOT arrangements with regard to what an agreement should be based on and how it should reflect an institution's wealth.

According to a 2011 analysis by the Lincoln Institute, of the Ivy League institutions that made payments to their host cities, Brown’s payments were the smallest, at $1,147,481. Cornell University was second, paying the town of Ithaca $1,643,000. Two universities, the University of Pennsylvania, in Philadelphia, and New York's Columbia University -- both of which have larger endowments than Brown -- did not pay anything.

But the structure of agreements varies widely and are rarely comparable, so it is next to impossible to distill one standard for all universities, researchers said. Some agreements are based on the number of students. Others are based on what the university would be taxed. Still others are set at the value of city services that the university uses, such as compensating the city for the number of times a fire truck is called. Other universities have agreed to simply buy a fire truck or pay to keep local libraries open.

Boston, which has had payment agreements with nonprofit institutions for decades, struck a new agreement with the tax-exempt institutions in 2010. The agreement, which was created by a committee that met for two years, asks universities with property in Boston to pay roughly 25 percent of what they would pay if they were taxed. The program is voluntary and allowed institutions to deduct up to 50 percent of their obligation if they could demonstrate that they were giving back to the city in other ways. Richard Doherty, president of the Association of Independent Colleges and Universities of Massachusetts, said about half the colleges and universities asked to contribute ended up paying in the first round, and almost all qualified for the full 50 percent deduction.

Taveras estimated that Brown owns $1 billion in property, which, if taxed, would generate $38 million in additional revenue. If the city were to apply the Boston standard and ask the university to pay 25 percent of its taxable value, the university would pay about $9.5 million. Half that would be about $4.75 million, less than what the city is asking.

Yale makes a large annual payment to New Haven based on the number of full-time university employees working in the city and the number of full-time students living in nontaxable university facilities. For the 2012 fiscal year, the university paid about $8.1 million to New Haven.

Multiple administrators who have looked at payment agreements said it would be difficult to apply a single standard. Steven Bloom, director of government relations for the American Council on Education, said the council has no general recommendations for colleges and universities entering into talks about PILOT agreements, noting that the situation for each institution is different. “They’re on the ground and have the relationship with the community,” he said. “They are, in fact, best situated to determine how to work out an agreement that meets the needs of the city and the institution.”

Tom Conroy, a spokesman for Yale, also said it would be wrong to impose a single standard or say that what one university has done would be applicable in a different municipality. “There are so many variables in comparing School A and its host city and School B and its host city -- size of the school relative to the size of its city, the many different types of positive economic impacts that vary based on the uniqueness of each school, and on and on -- that we would not presume to suggest what would be appropriate elsewhere,” he said.

Even in Boston, which many hold up as a "gold standard" of payment agreements, the program works only because it is completely voluntary, and the institutions that object to it don't have to follow it. "A single formulaic approach does not take into account the significant diversity of resources, purpose, and size of the institutions under consideration," Doherty said.

Other Policy Solutions

Given the contentious nature of payment debates like the one in Providence, and the potential for them to damage town-gown relations, policy researchers have sought alternative means of striking or codifying deals that avoid contentious negotiations.

Some have argued that the laws that exempt educational institutions from tax payments were crafted well before large universities existed, and simply shouldn’t be applicable in modern times. “These policies evolved in an organic way that goes back to the beginning of the property tax, back to the time Massachusetts was a colony in the 1600s,” said Kenyon of the Lincoln Institute. “Nonprofits were very different at the time.” Modern universities have facilities that aren't used for purely educational purposes, such as residence halls, fitness centers, stores and restaurants, which some politicians have argued should be taxed.

Others argue that states should change the law to require nonprofits of a certain size, wealth or property value to make payments of some value. But because state government don’t bear the brunt of the costs to giving institutions tax exemptions, there is little incentive for state lawmakers to do so. And those ideas have received pushback from nonprofits who say the philosophical and practical reasons for granting such institutions tax-exempt status are still meaningful today. Doherty said institutions are still providing a public good. The tax exemption also prevents undue governmental influence.

Like Rhode Island, a handful of other states, including Connecticut and Massachusetts, compensate municipalities for the revenue they lose by hosting nonprofits such as universities and hospitals. But those programs do not guarantee a certain level of state payments to the municipalities, and when state budgets are tight, payments can decrease.

“The states are the ones making the exemption, so why don’t the states compensate the town?” said Brody, of Illinois Institute of Technology.

In their current iteration, payment agreements aren't even a reliable form of revenue, Kenyon said, because the law still grants nonprofits tax-exempt status, meaning they don't have to make payments. “I try to emphasize that cities should not put too much hope in the revenue-generating ability of PILOTs, because you can’t count on institutions, and not everyone’s going to contribute,” Kenyon said. “So much of it is played out in the court of public opinion -- that’s what really provides the nudging.”

 

Most:

  • Viewed
  • Commented
  • Past:
  • Day
  • Week
  • Month
  • Year
Loading results...
Back to Top