The Municipal Fiscal Crisis and Payments in Lieu of Taxes by Nonprofits (Land Lines Article)

Author(s): Kenyon, Daphne A. and Adam H. Langley
Publication Date: April 2011

6 pages; Inventory ID LLA110403; English

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Collaboration on PILOT Agreements
In seeking PILOT agreements, local officials sometimes resort to adversarial pressure tactics, which can backfire and jeopardize important relationships between municipalities and nonprofits. A more collaborative approach is usually more successful when local officials work to build genuine support among nonprofits for a PILOT program that is rooted in shared interests and mutual dependence for each other’s long-term success.

Many large nonprofits like hospitals and universities are quite immobile, and other smaller nonprofits may be committed to serving their local communities even if they could relocate with relative ease. The long-term success of these organizations depends on the municipality’s success. Because population loss, crime, and crumbling infrastructure can imperil a nonprofit’s future, having a local government with the capacity to provide quality public services is in its own self-interest.

Similarly, nonprofits are often major employers and provide services and activities that attract people to a city and improve the quality of life for local residents. Thus, the success of these organizations is also crucial for a municipality’s future. Even if the nonprofits are tax-exempt, their presence can significantly expand the local tax base by attracting businesses and homeowners.

Recognition of these shared interests by both sides is crucial to reaching sustainable PILOT agreements. Private conversations between high-ranking municipal and nonprofit officials can help break down barriers that sometimes block PILOTs. To make the case for PILOTs, municipalities often appeal to the nonprofits’ sense of fairness and community responsibility—arguing that it is fair for nonprofits to pay for the cost of public services they consume, and that a contribution will directly benefit the community.

These conversations should also touch on what the nonprofits need for their future success. In practice, municipalities are often most successful in obtaining PILOTs when nonprofits need something from the local government, such as building permits or zoning changes. The quid pro quo nature of these agreements is often viewed negatively—as a form of extortion or special treatment. However, accommodating these requests is often in a municipality’s own interest.

For major nonprofit development projects, a shortened approval process with less red tape can cut overall costs significantly, and such discussions can result in more creative arrangements. For example, as part of a 20-year PILOT agreement with Clark University, the City of Worcester, Massachusetts agreed to work with the university to convert a short section of a street into a pedestrian area.

When local officials use more aggressive tactics to obtain PILOTs, such as trying to shame nonprofits into making payments or threatening to challenge their tax-exempt status in court, the organizations may become defensive and less willing to cooperate. Charitable nonprofits have a strong record of defending their property tax exemptions, so such divisive tactics are likely to leave a municipality with no PILOT, potentially significant legal fees, and a damaged reputation.

Problems with PILOTs
PILOTs have the potential to provide crucial revenue for municipalities with large nonprofit sectors, but there are many problems with these payments compared to more conventional taxes and fees.
First, at the same time that municipalities face a fiscal crisis caused by the recession, nonprofits face their own fiscal crisis due to declining endowment values and donations. In addition, government contracts—a major funding source for health and human service nonprofits—were cut, and some government entities are delaying contracts or payments. A 2009 survey found that 80 percent of nonprofit organizations were experiencing fiscal stress in the wake of the recession (Center for Civil Society Studies 2009). To nonprofits facing uncertain financial futures, it appears unfair for local governments to begin requesting PILOTs at this time (National Council of Nonprofits 2010).

Second, some degree of horizontal and vertical inequity in PILOT programs is almost inevitable, because their voluntary nature means there is no way to ensure that nonprofits with similar property values make comparable PILOTs. For example, even with Boston’s long-standing PILOT program, the four largest universities in the city made very different contributions in fiscal year 2009. Boston University paid $4,892,138 (8.53 percent of what it would pay in property taxes if taxable); Harvard University paid $1,996,977 (4.99 percent); Boston College paid $293,251 (1.92 percent); and Northeastern University paid only $30,571 (0.08 percent).

Third, PILOTs are a limited and frequently unreliable revenue source, rarely accounting for more than 1 percent of total revenues. This limited revenue potential must be weighed against some potentially significant costs associated with reaching PILOT agreements, such as upfront administrative costs, time spent by high-ranking officials negotiating agreements, or costs to obtain accurate assessments of exempt properties. PILOTs can also be an unreliable revenue source from one year to the next if they rely on short-term agreements.
Finally, the process used to reach PILOT agreements is often contentious and secretive, with contributions determined in an ad hoc manner lacking objective criteria. A collaborative approach can make PILOT requests less controversial, but reliance on private conversations also makes the process less transparent.

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