What do we know about the dynamics between nonprofits and local governments in the struggle for tax revenues from tax-exempt property owners? There are major studies that tabulate what municipalities such as Boston and Pittsburgh are trying to do, but they lack the on-the-ground stories of how these dynamics play out on both sides. This is not a catalogue of municipal and county attempts to exact money from nonprofits, but eight points of reference for understanding what is happening between the sectors in their struggle over property-related revenues—and four points for finding productive solutions.
PILOTs, Grounded: Eight Touchpoints of Government/Nonprofit Politics
First, it should be no surprise that there is scant public sympathy and support for the notion that large nonprofits such as hospitals, universities, and museums shouldn’t have to pay property taxes, but even within the nonprofit sector, sympathy and support is a little thin. Many smaller nonprofits simply do not see themselves as the targets of municipal revenue exactions. To an extent, it is a reflection of the aphorism that a difference in size may be a difference in kind. Most nonprofits don’t have much in the way of assets that local governments might target. Data from the National Center for Charitable Statistics for public charities (other than private foundations) for March 2012 show that among registered organizations filing a form 990, 85.9 percent had total assets of less than $1 million. On the other side of the scale, a paltry 0.6 percent had assets over $100 million. For entities classified as hospitals (a broader category of institutions than one might think), 22.7 percent of filers reported assets over $5 million. For universities, the proportions are much higher; 25.1 percent have between $10 and $100 million and 33.7 percent have more than $100 million. Those are numbers that most nonprofits won’t see in their cumulative lifespan.
This means that local voters, local municipal and county workers, and often local nonprofit staff don’t immediately see challenges to the tax-exempt status of large nonprofits as a question that concerns them. As a result, localities are quite open to questioning the tax-exempt status of the entities hoping to evade payments in lieu of taxes (PILOTs), as in Erie, Pa.’s negotiations with its local extension of the University of Pittsburgh Medical Center. Similarly, an activist citizen group in Pittsburgh demanded that the University of Pittsburgh Medical Center relinquish its tax-exempt status.
Hospitals may be more frequently subject to this request than other kinds of nonprofits because of questions about exactly how charitable they are, given that many nonprofit hospitals look and function a lot like for-profit hospitals. The recent series on North Carolina’s nonprofit hospitals in the Winston-Salem Journaldemonstrates that their paltry levels of charity care and top-level executive salaries appear virtually indistinguishable from their for-profit competition. Questions about what makes a nonprofit hospital a nonprofit could deepen as the nation approaches the implementation of the Affordable Care Act (ACA). Much of the public debate over the “nonprofitness” of nonprofit hospitals concerns the amount of “charity care” they are willing to provide, an issue that will be eliminated with national mandatory health insurance and required community health needs surveys. If the ACA survives the current challenge in the Supreme Court, hospitals might begin thinking about negotiating long-term PILOT deals to protect themselves against taxation formulas at a higher rate.
Second,this dynamic is hardly just focused on property-owning nonprofits, which is where the interests of other, smaller, less “profitable” nonprofits enter the fray. Municipalities and counties are looking to tap revenues that may be otherwise designated for nonprofits to fund municipal government functions—for example, the frequent City Council raids on Community Development Block Grant funds, including the public service component of CDBG, for in-house government purposes rather than as payments to nonprofits for community development services. It may not be evident to some people, but in many localities, there is increasing political pushback against nonprofits and their appetite for government resources. For example, Lynchburg, Va. killed virtually all of the nonprofit funding in its CDBG allocation in part so that the city could continue to chip in to a longstanding, money-draining redevelopment project with minimal CDBG-like low- and moderate-income benefit. Glendora, Calif.’s planning director in charge of that community’s CDBG program recommended cutting all nonprofits out of the CDBG budget. Often outside of the attention of large cities, nonprofits are taking it on the chin in the competition for government revenues, making efforts to exact money from reasonably well-heeled tax-exempt properties a logical next step.
Third,while municipalities are looking to exact revenues from tax-exempt property owners, they are handing out discretionary tax abatements and tax exemptions to projects with little or no charitable impact.For example, there was recently a press discussion of tax abatements and exemptions in the town of Madison, N.J., hardly one of the Garden State’s more fiscally stressed municipalities. The debate took on something of a Shakespearean tone, referring to PILOTs as “taxes by another name.” However, in this case, the discussion was a positive discussion of offering tax abatements and tax exemptions to for-profit developers so that, with the promise of low and predictable annual service charges of 15 to 30 years, the developers could boost the sales prices of the condominiums they were developing.
In other words, with the promise of a long-term, low annual service charge on the condos, the developers could jack up the prices. What’s more, by converting what should be a property tax into a payment in lieu of taxes, the municipal government keeps more of the payment for municipal government needs while not necessarily sharing the booty with other overlapping jurisdictions such as the county government. Why? Because property taxes are shared, but payments in lieu of taxes are an agreement between the governing body and the property owner. If they decide to keep the payments in the municipality and deny shares to the school district, the county, or other jurisdictions, those other entities are just out of luck. So part of the attraction of PILOTs, like abatements for for-profit developers, is that the sponsoring municipality might be able to craftily keep all of the booty for itself. It’s taxes by any other name, as a certain female Capulet might have said. The politics of abatements and exemptions make tax-exempt property owners into pawns in games among taxing jurisdictions.
Fourth,public support for the religious exemption is waning as well. Where normally religious institutions would typically have been given wide berth on property tax issues, that is no longer the case. In part, this is because religious institutions have been seen as increasingly unsympathetic, notably due to scandals regarding the personal behavior of some church leaders or perceptions that the religious institutions are less charitably minded than some would expect. Although newspaper editorials typically brand church PILOTs as “non-starters,” the municipal-church dynamic is getting more attenuated.
For example, in Rockland, Maine, a Methodist church is suing, claiming it is entitled to more tax exemptions than the municipality has apparently granted. The Rockland church contends that it has been treated less favorably than secular nonprofits for tax purposes and asked the city to approve a specific exemption or abatement for the part of their property that they felt should not have been taxed—and twice the local governing body has rejected the church request. In Lancaster, Pa., the school district believes that a church that wants to build its first permanent meeting space should be taxed and perhaps even owes back taxes on the site. Palmer, Mass. has also asked a wide range of tax-exempts, including churches, for PILOTs.
Fifth, inexorably drawn by political gravity of a sort, the municipal movement toward exactions is looking for smaller and smaller property owners. For example, in Reading, Pa., now the nation’s poorest mid-sized city, the city government has been imploring nonprofits to ante up PILOTs of a few thousand dollars or otherwise to volunteer to do community clean-ups—services in lieu of taxes (SILOTs)—to help the city deal with the maintenance costs of parks and community spaces. And from Wisconsin, one nonprofit wrote to Nonprofit Quarterly’s website with this story: “Our tiny, volunteer-run 501(c)(3) nonprofit, Orphan Animal Rescue & Sanctuary, in Neenah, Wisconsin, is required to pay an annual PILOT to the City of Neenah in order to maintain our special use permit for our pet adoption center. The City justified this by saying we utilize public safety, public works, public health and city wide forestry services. Our first year we are required to pay $400; second year $425; third year $475. After the third year, the amount will change based on the percentage increase in the City’s tax levy (roughly 2 -3% per year). We receive no governmental funding; we survive on $5 and $10 donations and selling homemade craft items to stay afloat.”
With their big city counterparts exacting revenues out of universities and hospitals, no-less-fiscally-strapped smaller communities look to their tax-exempt property owners and find small nonprofits to tap for sums that look all but uneconomic for the municipality to negotiate and police. Of course, gravity will eventually pull on the PILOT thresholds of larger cities. How long will Boston’s $15 million minimum threshold for tax-exempt property owners to be dunned for PILOTs hold if the city finds its finances looking increasingly stressed?
Sixth,the political scuttlebutt is often targeted against nonprofits that are exclusive in the populations they serve. Certainly that applies to large universities where tuition, fees, and room and board are higher than the average family income in their host communities. But one can see a challenge to nonprofit property owners whose nonprofit services are restricted to specific subpopulations, minimizing their attractiveness or identity as nonprofits that have a community benefit. This is particularly true of religious nonprofits whose community benefit might be limited to a narrow group. That is, in part, the argument of the Tax Foundation, which suggests, in a recent commentary on the Providence, R.I. negotiations with Brown University and other tax-exempt property owners, that most 501(c)(3) public charities were neither charitable (which they define as operating based on totally charitable giving) nor providers of public goods or services.
Seventh,there are often transactional triggers or trade-offs with PILOTs. For example, in a rural community where an Orthodox Jewish nonprofit purchased a former ski resort for use as boys and girls camps, one of the triggers prompting local government attention was the camp’s request for tax-exempt bonds. That is, what raises the tax exemption issue for some properties is that they needed something from the localities. In the case of the former ski resort, it was access to bond financing. In the case of a Londonderry, N.H. church, it was municipal approval of a land use variance to allow for a day care center on its property. For the University of Scranton, it was an aerial easement. The need for a governmental response triggers the ability of the government to request a nonprofit payment. A more recent example is the charge that Princeton University supposedly “bought” itself Princeton Township approval of an arts and transit zoning district in return for a $500,000 PILOT plus some other emoluments. In the nonprofit camp and Lancaster church situations, the transactional triggers occurred on properties that, under previous, private owners, had been fully taxable. PILOTs may be voluntary in theory, but when a tax-exempt property owner needs the local government to fulfill a need that any other owner might request—a building permit or a zoning variance, for example—the municipality has the power to grant the request or to quietly delay and withhold until the voluntary nature of the payment in lieu looks all but mandatory.
Eighth,it is sometimes difficult to separate the issue of a payment in lieu from other issues that may reflect punitive actions toward unpopular nonprofits. For example, a Billings, Mont. nonprofit purchased a hotel to be used as a pre-release residential and treatment facility for female ex-offenders. Partly to mollify neighbors who objected to the placement of the facility and serendipitously as a way to raise money, the mayor promised that the nonprofit would pay a $40,000 PILOT on the property. The power of the local government to invent payment in lieu strategies that might be seen as punitive by some shouldn’t surprise students of the underside of local government politics.
The upshot of this list is that there are a variety of strategies that local governments are pursuing to exact monies from tax-exempt property owners, but is there a similar range of strategies being employed by nonprofits and municipalities, working together, to find productive, sensible solutions? With the exception of the occasional instances of municipalities using PILOTs punitively, the local government conundrum is understandable and difficult to simply reject out of hand. Can the struggle between nonprofits and municipalities be shifted from a virtual standoff to a productive dialogue addressing local government revenue constraints and the tax-exempt sector’s purposes and functions in American society?
A Flight Plan for Productive Solutions on PILOTs
A school district outside of Philadelphia recently published a draft letter to nonprofit property owners suggesting they consider voluntary PILOTs. In response, one local nonprofit that provides services for disadvantaged children began contemplating strategies for how it could expand its own fundraising to include a pitch for funding for the school district. The nonprofit’s reaction reflects a strong sense of responsibility and connection to the school district, but adding local government revenue-generation needs to nonprofit fundraising strategies is something of a nonstarter with individual donors who probably pay their own fair share of taxes for local government. The same may be true for institutional donors, such as foundations and corporations, that might be willing to support the nonprofit service but not necessarily an open-ended call to meet local government revenue needs.
Is the dynamic between municipalities and their tax-exempt property owners a standoff with neither side budging? Are nonprofits hoping that they can pull off a strategy like the Pittsburgh Public Service Fund, banding together as a coalition to offer something to municipal governments? Are municipalities (and taxpayers) viewing whatever might be offered by nonprofits as begrudgingly insufficient? Four less than satisfactory guidelines emerge from the stories of PILOT negotiations occurring around the nation.
First,the nonprofit sector can’t duck the issue. It is now de rigueur that municipalities have taken note of the Boston model or the recent dynamics in Providence, R.I. These examples are now an automatic part of any mayoral or city council person’s PILOTs platform. It is a rare politician who abjures the opportunity to suggest that nonprofits pay something or pay more in the form of PILOTs or various kinds of user and licensing fees. And it is no longer just the politicians, if it ever was. Tax assessors in general have little social dimension to their analysis, particularly as the range of nonprofit activities on tax-exempt properties may not look like classical images of some mythologically “pure” charity.
The notion that the nonprofit sector can simply reject any and all demands, given a diversity of tax-exempt property owners that ranges from multi-billion dollar universities to barely cash-flowing food pantries and homeless shelters, simply makes no sense. The ability of municipalities to “unbundle” the range of services that local government provides through property tax revenues and convert them to user fees makes the municipal request something that is basically unavoidable. Nonprofits have to be able to think through collaborative strategies, perhaps along the lines of the Pittsburgh model, to figure out how they will deal with local government requests and their own abilities to help municipal governments find long-term revenue solutions. Those nonprofits which band together in this way may want to consider doing so with greater transparency as to the commitments of the nonprofits within the coalition than has been the case with the Pittsburgh Public Service Fund.
Second, at least for urban areas, nonprofits have to engage their localities in the search for broader solutions, as nonprofits paying PILOTs or fees won’t reverse the constrained nature of municipal budgets. Leaving aside the challenges of big cities, the challenges of smaller cities merit nonprofits joining local government officials in strategies of property tax reform. For example, in New London, Conn., the local newspaper recently editorialized about what it called the “tax loss” between what tax-exempt owners were paying in PILOTs ($5.5 million) and what the paper thinks nonprofits should have been paying ($20 million more). But rather than play tug-of-war with tax-exempt property owners, the newspaper addressed the need for property tax reform, regional tax sharing, and revising the formula for what the state might contribute to help urban centers with more of a burden for the tax-exempt functions that serve the region rather than just the locality. By engaging local governments along the lines recommended for New London, nonprofits become partners with revenue-strapped governments rather than a sector looking at local government revenue issues from behind an all-or-nothing barricade.
Third,tax reform has to include the state government, which must help municipalities that host and provide a more regional or statewide service. For example, southern New Jersey hosts substantial tracts of land that are designated as official open space and owned by environmental nonprofits such as the Nature Conservancy. Gov. Christie slashed open space property payments that the state used to make to host communities by one-third. If the state values the nonprofit provision of certain goods such as open space, health care, education or the arts, then it should be involved in the structuring of more comprehensive solutions.
Fourth,the nonprofit sector has the ability to think about its tax relationship with host communities as an economic development strategy. In Worcester, Mass., for example, the city has negotiated specific relationships between tax-exempt property owners and specific municipal functions, such as support for libraries. Anyone who has negotiated with private property owners knows that a tax relationship with a specific governmental function is possible and positive. This is essentially converting the tax exemption discussion into an anchor institution development strategy. Generic statements of the value and impact and multipliers from nonprofits don’t go far, since private employers can generate their own numbers on jobs and economic multipliers. If municipalities were to think of their nonprofits as anchor institutions for constructing development strategies, you have something positive for communities to build on.
In the movies, the trope is “follow the money.” But beneath the debate over whether tax-exempt property owners should ante up for PILOTs, the story is one of politics, and, in the words of the late Tip O’Neill, “all politics is local.” Rather than slugging it out in a scrum with local governments (which are often as revenue-starved as many nonprofits), the nonprofit sector can and should be a partner to local government, drafting the talent within 1.8 million 501(c) entities plus another few hundred thousand churches to come up with long-term solutions that serve the overlapping interests of nonprofits and government alike.