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A Pseudo-Taxing Debate

April 26, 2011

As cities and towns attempt to patch budget holes caused by shrinking state support and tax revenues, several municipalities have started a new round of campaigns targeting property-tax-exempt colleges and other nonprofits, demanding that these institutions pay their “fair share” for local services.

It is not a new idea for cities to try to seek “payment in lieu of taxes,” or PILOT, agreements with nonprofits to help shoulder local costs. But the frequency and fervor with which municipalities have been proposing such plans recently could indicate a looming town-gown debate at a time when budgets for both are being squeezed.

Several high-profile confrontations have occurred during the past few years in large, institution-rich cities such as Pittsburgh and Baltimore. A new round of discussions has started to emerge, with the city of Boston and others seeking to reevaluate or strike new agreements.

Observers such as Kim Griffo of the International Town-Gown Association, at Clemson University, say the next few years could see even more discussion about PILOT agreements as budget pressures grow. “All along I’ve been telling people, ‘2010 isn’t going to be easy,’ ” she said. “But 2011 is going to be worse.”

All 50 states have laws that exempt private colleges and other nonprofit organizations such as museums and hospitals from property taxes. The exemptions exist partly because these institutions provide services – such as health care and education -- that would traditionally fall to the state, or because they contribute to communities in other ways and are assumed not to have a profit motive.

In cities where nonprofit institutions like colleges take up a significant chunk of land, this can cause a real problem. Universities can put a strain on local services such as the fire and police departments and water and sewage systems without paying back into the system.

Because of this burden they impose, many colleges make voluntary payments to local municipalities to help compensate. The value and structure of such payments varies widely. Some colleges have arrangements to pay for water and sewage service. Some make annual “gifts,” while others have longstanding contractual agreements. Some agreements at smaller colleges hover around $50,000 a year, while Yale University pays the city of New Haven $7.5 million annually.

But the increased pressure on cities and towns to balance budgets is causing many to evaluate whether nonprofits are paying enough.

Daphne Kenyon, who co-wrote a report for the Lincoln Institute of Land Policy asserting that more PILOT discussions are on the horizon, said the coming uptick can be attributed to three converging factors. The first is the strain that has been put on municipal budgets by declines in tax revenue and withdrawn state government support.

The second is the changing nature of nonprofits, particularly universities and hospitals, which she says are now run with a greater concern for the bottom line and bring in large amounts of money. This has caused the general public to become more skeptical about how much these institutions should contribute to local government, she added.

The final change, Kenyon says, has been an increased anti-tax sentiment among the American public, which has forced politicians to come up with new ways of raising revenue.

A Philosophical Fight

Lawmakers and others seeking increased revenue from nonprofits argue that each dollar the municipality exempts for nonprofits means that local residents have to pay more.

“It’s an unfair burden on taxpayers,” said Seth McCoy, a spokeswoman for Boston City Council President Stephen J. Murphy, who has been pushing for several years to seek more revenue from nonprofits. “When these institutions make a larger financial contribution, it lessens the tax burden on individuals.”

Many colleges recognize that they have a stake in sustaining their municipalities, which is why they make the agreements in the first place. “My primary goal in life is to make Boston University a better institution, but it can only be a better institution if the city thrives,’’ said Boston University President Robert A. Brown in a recent Boston Globe article about the city’s desire to increase the value of its agreements. (The university currently pays about $5.1 million annually. The new plan asks it to increase that amount to $6.8 million over the course of five years.)

But not all institutions are as willing to cough up money, and few would be content paying the full cost of property taxes or having a mandatory tax imposed.

Colleges and universities argue that they already contribute to the local tax rolls. Many pay taxes on non-tax-exempt buildings adjacent to campus. Most colleges also contend that they contribute substantially to the local tax base by bringing in students and faculty, who then pay property and sales taxes and help support local businesses.

“It really has to be looked at in terms of the unique circumstance of each university,” said Francesco C. Cesareo, president of Assumption College, in Worcester, Massachusetts, a city that has been trying to establish PILOT agreements for several years. “What is an institution already contributing to a city and what would that city and university gain and lose from an agreement?”

Local Debates

In the past few years, a number of municipalities have attempted to extract more revenue from higher education institutions using a variety of methods.

The city of Boston has been working with the nonprofits within its borders to try to increase the revenue it derives from them. It recently came up with new guidelines that ask nonprofits to contribute 25 percent of what they would pay in property taxes. That amount can be reduced if the institution demonstrates that it provides benefits to the city. Institutions are also free to completely ignore the request.

Most institutions are far from the 25 percent mark. Boston College, which would be asked to pay about $1.7 million in five years, currently pays the city about $297,000. Northeastern, which would have to pay $4.3 million to meet the new terms, currently pays only about $31,000.

“A key component of this is that it is voluntary,” said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, which represents 21 campuses in Boston and about 60 colleges statewide. “We know that this is a broader conversation and we have a responsibility to be clear for independent higher education in the rest of the country. It is not a mandatory payment, and that’s why a number of institutions will be philosophically comfortable making a payment in the mutual interest of a well-run city of Boston.”

Other cities have attempted to derive revenue through different means or to force a new payment in lieu of taxes.

In 2009, the mayor of Pittsburgh suggested imposing a 1 percent tax on tuition for students at the city’s 10 nonprofit colleges and universities to help the city meet pension obligations. That plan was scrapped when a few of the universities agreed to make new contributions to the Pittsburgh Public Service Fund.

Kenneth P. Service, executive director of the Pittsburgh Council on Higher Education, which represents the city’s colleges, said the city is still working to establish a more stable agreement with the universities and other nonprofits.

In 2010, Baltimore’s government proposed a $350 tax on each bed at hospitals and universities. That plan was scrapped, and the city’s universities, including Johns Hopkins University, agreed to pay the city about $20.4 million over the next six years.

“Because these programs are entirely voluntary, municipalities often have to use public pressure to extract an agreement,” said Donald Heller, director of the Center for the Study of Higher Education at Penn State. “They can point to large endowments of billions of dollars and make their case.”

In some cases, universities can use the PILOT agreement to get concessions from the local government. That was the case in Worcester, which had been working for several years to negotiate PILOT agreements with the 11 colleges within its borders. For a long time, the universities held a united front against making deals. But in 2009, two of the larger colleges in the area negotiated agreements in exchange for concessions from the city on other issues, such as the closure of city roadways through campus.

The city is still seeking PILOT agreements from the rest of the colleges.

It is not always the governments who seek to make universities pay more. Princeton University is being sued by local residents who say the university should pay property taxes on about 20 campus buildings they argue don’t directly relate to the college’s educational mission. One of the buildings cited houses the Princeton University Press; others include a gym and fitness center, the McCarter Theatre, and the McCosh Infirmary. The suit was partially motivated by a property tax revaluation that occurred in 2010 that caused taxes on moderate homes to increase and in some cases double.

Worth the Fight?

Some have argued that PILOT agreements are a bad way to raise revenue because they tend to lack transparency or stability, two qualities that experts favor in tax policies. When cities become dependent on the PILOT revenue, the regular payments can be used as leverage for a university to get its way on issues, or, at least, may be seen that way.

New PILOT agreements also often wouldn’t go a long way toward fixing municipal governments’ budgets. “You can’t plug a deficit in a city based on increasing a PILOT agreement alone,” said Heller, of Penn State. “It’s more a symbolic gesture to show institutions doing their part.”

Protracted battles over PILOT agreements can also strain local relations, as they did in Easton, Massachusetts, where Stonehill College pulled its annual gift to the town after it was hit with a large fine for launching a construction project without a permit. The town had asked the college in 2008 to increase its $20,000 annual contribution, which the college did not do.

Kenyon said the best PILOT agreements tend to be those that benefit both the local government and the nonprofit, since they get buy-in more easily. Her report also notes that they don’t necessarily work for all locations. “They are most appropriate for municipalities that are highly reliant on the property tax and have a significant share of total property owned by nonprofits,” the report states.

“The main thing we try to stress is that these need to be win-win agreements,” Kenyon said. “If they evolve in an environment of contention, they’re going to be a waste of everybody’s time, and they won’t generate any consistent money.”

 

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