June 22, 2014; Scranton Times-Tribune and the Standard Speaker

Local governments in Pennsylvania continue to confront the tax-exempt status of nonprofit colleges, hospitals, and other institutions as they struggle annually to balance their budgets.

Two new reports from the Scranton area tell of the challenges facing the region’s three largest cities, which receive sharply differing amounts of help from local nonprofits. For example, Wilkes-Barre gets more than twice as much from its nonprofits in payments in lieu of taxes (PILOTs) than Scranton, even though a smaller percentage of real estate is tax-exempt. And Hazleton, with half the tax-exempt land of Wilkes-Barre, gets no PILOTs.

The Scranton Times-Tribune reports that these disparities highlight a long-standing problem cities face as they try to meet their annual costs. The state constitution allows for exemptions for nonprofits from real estate and other taxes in Pennsylvania, but it never accounted for what that would mean for cities.

“[The] real estate tax is [a] leading source of revenue in communities,” the executive director of the Pennsylvania Municipal League, the lobbying group for cities, told the paper. “It’s a problem everywhere…If the state is going to mandate that these properties be exempt, then the state has an obligation to compensate for the unfunded mandate.”

But the Times-Tribune reports that such efforts “have gone nowhere.”

Everyone acknowledges the value nonprofits bring to local communities. Their employees pay income taxes and spend money that supports businesses. Their buildings are generally well kept, and they can bring vitality and character to a neighborhood while also producing offshoot businesses that generate taxes. Most offer vital community, educational, and human services.

“The problem is, because of the reliance on the property tax, it becomes very much a focus. Everybody has to pay a fair share, period,” says the Municipal League spokesman.

In Scranton, about a third of the city’s assessed real estate value is tax-exempt. If the city could tax all that land at its present millage rates, it could raise $11.5 million. Wilkes-Barre is about a quarter tax-exempt, which could mean almost $3.5 million more. About an eighth of the assessed value of Hazleton real estate is tax-exempt, which costs the city about $594,000.

There is a reason that there is much more tax-exempt land in cities, as opposed to their surrounding boroughs and townships, officials said. Historically, cities have been the centers of commerce and activity and the principal population centers, so property used for nonprofits was located there.

After World War II, as more city residents moved to suburbs, nonprofits stayed in the cities, unable to move for economic reasons or believing it was unnecessary to do so. Even with the population shifts, new nonprofit hospitals and colleges were rarely built in surrounding towns, and existing hospitals and colleges—almost always the largest nonprofits—expanded dramatically. Over the last 80 years, as local cities shrank in population, their tax bases shrank proportionally even as the amount of tax-exempt land grew, the Times-Tribune points out.

PILOTs came about as government officials asked local nonprofits to contribute something to city coffers to make up for the taxes lost because they are tax-exempt, based on the premise that cities still provide the services—police, fire, roads—nonprofits need. The results of their requests vary.

Wilkes-Barre does best, says the article; PILOTs have been around for a long time, and the city gets increases when it requests them. Local nonprofit leaders view PILOTs as part of the culture there. Scranton, on the other hand, hasn’t had nearly as much success convincing nonprofits to contribute. Some say it has a lot to do with a historically adversarial relationship between city hall and local nonprofits, including threatening legal action.

Scranton’s mayor is now planning a subtler approach:

“Our plan…is to go to the nonprofits and ask them for help. Whether it be a donation or doing a project or buying a fire truck, something they could see a direct result from their money…We’ll certainly look at how Wilkes-Barre is getting more money than we are…We want to partner with them. We don’t want it to be adversarial.”

Hazleton does the worst of the three Northeast Pennsylvania cities—the city gets no money from nonprofits. Two years ago, Hazleton’s mayor turned to churches, the public library, the historical society, and other local nonprofits to bail out a cash-starved city. City officials at the time had just learned that Hazleton would face a $14 million budget deficit by 2016 if it did nothing to bolster its funding levels, according to the Hazleton Standard Speaker.

But his request for help fell on deaf ears. All but one of Hazleton’s nonprofits ignored a letter that he wrote asking for PILOTs. The lone response came from a local priest, who offered to pay the city in pierogies [dumplings], the mayor recalled. “Nobody responded except a priest…who was very smart-alecky in his remarks.”

So, in December 2013, the Hazleton City Council ratified a fee for maintaining the city’s storm water collection system, using a complex formula that accounts for property size, zoning designation, and the amount of porous and nonporous surface area. But unlike property taxes, the storm water fee was assessed on all properties—including nonprofits, schools, and churches.

The fee helped reduce a projected 83 percent tax hike projected for 2013 to 45 percent.—Larry Kaplan