It was standing-room only at the official release event for Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests, the latest Policy Focus Report published by the Lincoln Institute of Land Policy. Along with media coverage of the report, the turnout – with rigorous representation of both the municipal and nonprofit side -- surely reflects the heightened interest in PILOTs. No surprise, to be sure, as the public finance crisis for local and state governments keeps rolling along, and cities and towns frantically search for new sources of revenue. Nonprofits, particularly medical facilities and colleges and universities, are worried.
PILOTs are collected from charitable nonprofit organizations that are exempt from paying property taxes in all 50 states and the District of Columbia. Currently, at least 117 municipalities across 18 states have PILOT programs in place; 82 of those cities and towns are in Massachusetts. Boston has one of the longest standing and most revenue-productive programs in the U.S., and Cambridge, home to MIT and Harvard, has the oldest, dating back to the 1920s. New Haven and Yale University have worked out another model program. The basic idea is that while these nonprofits are by law - and in several states mandated by state constitutions - tax-exempt, they might reasonably be asked to make a voluntary contribution that is a fraction of what they would pay if they paid property taxes. The payments typically constitute a very small percentage of overall revenues collected by municipalities; Boston's collection of $15.7 million in the 2009 fiscal year, for example, amounted to .66 percent of the total city budget that year.
Boston Mayor Thomas M. Menino convened a task force to improve the PILOT program and increase the level of contributions more evenly across institutions. Boston University leads the way with $4.8 million, followed by Harvard University with $1.9 million. Boston College contributes $293,251, and Northeastern University a mere $30,157. City Councilor Stephen Murphy, appearing at the Nov. 30 event at Boston's Nine Zero, between the State House and Boston City Hall, said he hopes a phased-in expansion of the program will bring in $40 million per year in five years. The final recommendations of the task force are due out any day now.
While Boston seeks to improve its model program, many other cities have been getting into the PILOTs business, primarily in the Northeast and Mid-Atlantic, but also in the Midwest, plus North Carolina, Georgia, Montana, and California. Baltimore recruited nonprofits to locate there as an economic development strategy - marketing the location as less expensive than Washington, D.C. but still close-by - and was so successful, had to establish a PILOT program.
Some cities and towns have been more aggressive than others as they seek revenue from nonprofits. Pittsburgh, Princeton, and Providence tried to establish a controversial "tuition tax," and some state Legislatures have contemplated an "endowment tax" on higher education institutions as well. In New Hampshire, the town of Peterborough challenged the tax-exempt status of the MacDowell Colony, founded in 1907 to promote the arts and including an artists-in-residence program. Selectmen argued that all but one of the artists were from out of state, failing to meet the requirement that residents of New Hampshire be admitted to a charity's benefits. Having gotten the institution's attention, they proposed a PILOT program, which the hard feelings all around.
To avoid a process that is uneven, ad-hoc and contentious, say report authors Daphne Kenyon and Adam Langley, cities should first decide if a PILOT program is appropriate, then collaborate with nonprofits to structure the program so it's reasonable, predictable, and transparent - all as part of a town-gown partnership that is mutually beneficial. Cities can set a target based on the cost of public services directly benefitting nonprofits, and use the assessed value of tax-exempt property or square footage to calculate suggested contributions. An apt time for a PILOT is also when property goes from a for-profit function to tax-exempt.
Richard Doherty, president of the Association of Independent Colleges and Universities of Massachusetts, provided a spirited defense of tax-exemption, noting that it goes back some 200 years, as nonprofits provided essential services that government does not. Many institutions provide community benefits in many ways, in the public education system or by revitalizing parks and public space, which does not get calculated sufficiently in setting PILOTs contributions, Doherty said.
Nonprofits are responsible for billions in economic activity and are job engines for many cities, Doherty said. He advised against a one-size-fits-all, systematic or formula-based approach, favoring the Connecticut and Rhode Island systems, where the state reimburses cities and towns for some of the property tax revenue they don't collect from nonprofits.
It’s clear that PILOTs won’t be going away anytime soon. Media coverage included a national story by the Associated Press, the State House News Service, the Chronicle of Higher Education, Inside Higher Ed, the Chronicle of Philanthropy, and numerious blog posts, including this one by Mary Newsom at the Charlotte Observer. In addition, Daphne Kenyon and Adam Langley appeared on the Emily Rooney Show on WGBH-FM and other NPR stations, and this column on the subject appeared on Citiwire.