A new policy the Pasadena City Council passed Monday provides a path for the city to eke money from nonprofits looking to expand.
Normally, when a developer proposes a project, the city can count on future property taxes spurred by increased property values to help cover the cost of city services — police, fire, libraries, parks. But tax-exempt organizations don’t pay property taxes.
The motion, approved 6-2 Monday, allows the city manager to negotiate development agreements with nonprofits who come to City Hall with requests to build.
Had the measure not passed, the city would have lost $200,000 annually, a deal negotiated last summer with the ArtCenter College of Design when officials there proposed four new buildings to house hundreds of students.
That agreement was contingent on the city passing this policy within a year. It was due to expire Tuesday. It requires the ArtCenter to pay $50,000 per year for each building once they’re operational, or about one-fifth what property taxes would have yielded had a for-profit owned the buildings.
Because Pasadena is home to numerous nonprofit institutions, including universities and museums, this arrangement of “payments in lieu of taxes” can lessen the impact of new residents, employees and visitors, according to a staff report.
Councilmen Gene Masuda and Steve Madison voted against it, saying the policy as presented was too vague.
“It’s a dangerous area because it gives so much discretion to the city to impose taxes, essentially, on institutions that are legally exempt from taxes,” Madison said.
He could envision a scenario in which these types of agreements could be applied to every nonprofit in the city, he said.
“This is not a proposed tax on all nonprofits in Pasadena,” Mayor Terry Tornek responded, adding these deals are voluntary, negotiated on a case-by-case basis and not imposed by the city.
A spokesman with Caltech, which has never entered into a development agreement with the city, voiced opposition to the policy, also citing the danger of a slippery slope.
Payments in lieu of taxes are widely used across New England — particularly in Massachusetts — but Pasadena is only the second municipality in California to implement this type of policy, according to researcher Daphne Kenyon, who studies the issue for the Lincoln Institute of Land Policy.
They’re not a cash cow, she said. “But for certain places that have a lot of tax-exempt property from nonprofits, you want to look at it as a possibility.”
Pasadena is home to more than 1,000 nonprofits, but the vast majority are not major landowners, according to records from the Los Angeles County Office of the Assessor.
Typically, payments in lieu of taxes agreements coincide with major construction projects, oftentimes proposed hospitals or schools, she said.
In 2014, then-Governor Jerry Brown passed a law that made these types of deals illegal when cities are negotiating with low-income housing developers.
Kenyon noted these deals can sometimes lead to conflicts between local governments and nonprofits, especially if they’re used in negotiating tactics.
She pointed to Princeton University which made regular payments to the city of Princeton, New Jersey under a similar agreement until there was a land deal the university needed. They threatened to stop the payments and withdraw from the contract unless the deal went their way, she said.
This led to a lawsuit against the university, filed by the city’s residents, who contested the school’s nonprofit status. The suit was ultimately settled in 2016 for $18 million.
A more common conflict stems from deals that could be seen as unfair, she said, especially if these agreements are being made on a case-by-case basis, as Pasadena plans to do. Some nonprofits may feel slighted if a neighbor got a better deal.
To avoid some of these issues, council members told city staffers to tighten up the language and present an updated version in September. Ideally, it would provide clear guidelines for the agreements, Tornek said.
Right now, Pasadena has only struck one of these deals with ArtCenter. And Tornek isn’t expecting many more — maybe five in the next 20 years, he said.
EDITOR’S NOTE: This article has been edited to correct the City Council vote.