Large institutions—universities, hospitals, and nonprofit organizations—are referred to as anchors because of their permanence and their stabilizing physical and social ties to surrounding communities. Beyond fulfilling their respective missions to educate, heal, cultivate the arts, or provide other services, these “eds and meds” are proven economic engines. They employ large workforces, occupy and manage big pieces of real estate, purchase vast quantities of goods and services, attract investment through capital projects and research activities, and provide local constituents access to food, retail, and other amenities. In many instances, anchor institutions are the largest nonpublic employers in their cities. Indeed, HUD estimated that eds and meds employed more than 7 million people and generated $1 trillion in economic activity in 2009 (Brophy and Godsil 2009).

In some instances, a mutually beneficial dynamic evolves between an anchor institution and its community, creating economically sustainable commercial corridors, vibrant streets, and dense, diverse neighborhoods. Plenty of great college towns across America showcase this productive interplay. But in many other cases, especially in underserved urban areas, institutional and civic leadership must be more entrepreneurial, actively championing projects, programs, and policies to achieve these outcomes. This process, known as an anchor strategy, provides the framework that guides local efforts to work with institutions to capitalize on and maximize the impact of their presence.

In theory, the value of engaging anchor institutions to achieve positive neighborhood or community outcomes is self-evident: all parties benefit, and it’s a smart way to do business. But in practice, the community and its institutions must work together to redefine how to align and leverage their goals, economic interests, and activities to achieve a win-win outcome. This article explores why it is difficult to undertake meaningful anchor strategies that fundamentally change how the anchor and its community relate to one other. We also draw on some of the lessons learned from successful efforts in areas such as Philadelphia, Detroit, and Cleveland, where comprehensive civic engagement has become the norm at some of the country’s leading medical and educational institutions.

Parameters for Success

The important thing to stress is that individual tactics are necessary but insufficient to constitute a strategy. A strategy is a long-term engagement, implemented through tactics that evolve over time. In addition, anchor strategies involve partnerships with multiple organizations and people in the surrounding community—relationships that must also evolve over time to respond to community needs and goals designed to make the area more livable.

Effective and transformative anchor strategies have three fundamental features: they are place-based, institutionally embedded, and comprehensive.

The Advantage of Intermediaries

Many anchor strategies benefit from having strong local partners to shepherd the work. These intermediaries often buttress anchor staff capacity to pursue broader local engagement and benefits. A properly funded community development corporation (CDC) or community development financial institution (CDFI) with a local representative at its helm can be an effective intermediary.

Intermediaries are more nimble than large anchor institutions and thus able to negotiate among numerous partners and take actions unencumbered by bureaucracy. Most successful intermediaries are local organizations with long histories in the region, credibility within the community so that they are not seen as tools of the anchor or funders, and the ability to provide neutral ground for discussing and pursuing the anchor work. If the community is skeptical of a fully anchor-driven effort, a partnership with a local, trusted intermediary can provide legitimacy.

A local CDC’s ability to leverage an anchor-sponsored initiative in Detroit provides a good example. Midtown Detroit Inc. (midtowndetroitinc.org) manages Live Midtown (livemidtown.org), an employer-assisted housing program supported by Wayne State University, Henry Ford Medical System, and Detroit Medical Center. As MDI’s President Susan Mosey notes, “It is important to have local people shepherding this work on a day-to-day basis. This builds familiarity with the initiatives and creates the credibility and buy-in that the anchor strategies need to be successful.” Indeed, with MDI’s help, the anchor institutions’ financial commitment of $5 million over five years was matched by contributions from local funders and the state housing finance agency. This success spurred major downtown employers—including Quicken Loans, DTE, Compuware, and Blue Cross Blue Shield—to create their own $5 million Live Downtown program. Between the two programs, more than 1,600 employees have moved to midtown and downtown Detroit, reducing vacancy rates in the corridor to less than 3 percent (Welch 2014).

Place-Based

Place-based strategies have a specific and easily identified geography that the anchor directly affects, including the buildings, open spaces, gateways, and street networks that connect an institution to its community. Beyond the physical orientation of an institution are the places that its constituents—its employees, students, patients, clients, or visitors—live in and patronize. Strong mixed-use neighborhoods surrounding institutions support the street life that defines a vibrant district, encourage pedestrian activity, and create the residential density that in turn creates community.

An anchor’s “placemaking” activities—communally shaping public spaces to heighten their shared value—must engage tactically with other stakeholders to be considered strategic. Such tactics may include reinvesting in the neighborhood through housing construction and rehabilitation; supporting targeted commercial and retail development; improving public spaces and public safety; and strengthening local services such as schools, nonprofits, and community resources. These activities benefit the anchor in a number of ways and create a stronger neighborhood, thus increasing the institution’s attractiveness to potential clients (students, patients, and staff) and generating goodwill among residents and local officials.

Institutionally Embedded

An anchor strategy must be part of an institution’s DNA. This integration starts when leaders commit to their organization’s role as an anchor and communicate it throughout the entire organization. Leadership then follows through by committing significant amounts of time and resources across all institutional functions.

To be effective, anchor work usually requires changes in the organizational culture, such as altering the reward structure, adopting new mission statements and success metrics, and critically examining internal and external communications. Once internal programs, administrative units, facilities management personnel, and governing boards are all working together toward collective goals, an anchor strategy can begin to transform the surrounding community.

Comprehensive

Eds and meds touch their surrounding communities in a multitude of ways—by employing local residents, occupying vast physical footprints, educating or healing community members, and producing waste, among other impacts. In addition to placemaking, a comprehensive anchor strategy must address the following intersections.

Personnel

Given that anchor institutions are often a city’s largest employer, hiring decisions and the provision of employee benefits can have a profound impact on the social and economic fabric of the community. By increasing the percentage of workers drawn from within its footprint, the institution can simultaneously lift the neighborhood economy, provide jobs to those who may be un- or under-employed, and create goodwill among its neighbors. Employer-assisted housing is another critical investment in both personnel and the surrounding neighborhood (Webber and Karlstrom 2009). When employees can live closer to the anchor institution, it’s a win-win, reducing housing and transportation costs for workers while lowering turnover and absenteeism for employers.

Procurement

The purchasing power of large anchor institutions can be vast, with annual outlays for goods and services in the hundreds of millions of dollars. Capturing even a portion of the procurement stream for local companies can have a significant impact on the local economy. For example, the University of Pennsylvania was able to inject $57 million into the West Philadelphia economy with only 9 percent of its annual purchasing (ICIC and CEOs for Cities 2002).

The benefits of local procurement are obvious, but redirecting that process and realizing the benefits is not a trivial undertaking. For example, the anchor may incur substantial indirect costs for community outreach as well as training to ensure reliable supplies of locally produced goods and services. In addition, the existence of reliable, cost-competitive local providers is not a given. Moreover, large institutions may have highly decentralized purchasing processes, and getting each department to adhere to new policies can take time and effort (ICIC and CEOs for Cities 2002). Again, trusted local intermediaries can help to facilitate the shift to local suppliers.

Policy

The relationship between anchor institutions and local or regional governing bodies is often complicated. As private institutions, anchors may feel that they do not need to answer to local government. Indeed, they may see local government as ineffective, inefficient, or obtrusive to executing their optimal business strategies. For their part, local and regional governments may view anchor institutions as free riders that consume public services and other public benefits while enjoying exemptions from property taxes—the main revenue source for local governments. To ease these tensions, some institutions have voluntarily provided “payments in lieu of taxes” (PILOTs) to compensate municipalities for this lost revenue (Kenyon and Langley 2010). But a successful anchor strategy will determine additional ways to promote mutually beneficial work that enhances the future of the institution while addressing local/regional policy issues. Wim Wiewel, president of Portland State University, has been especially clear on this point, citing his institution’s adoption of “Let Knowledge Serve the City” as its motto in the early 1990s. In his words, “We serve the metro area and we are proud of it.”

Planning

Someone has to coordinate these elements into a cohesive initiative. Large anchors have a great deal of in-house planning skill and regularly engage in long-term planning for their enterprises. When they decide to take on a strategy, anchors can utilize this skill to determine the best ways to engage with the community and local and regional stakeholders. In addition, working through the anchors’ strategic planning processes is a way to institutionalize the anchor strategy so that it outlasts the term of a president or CEO and becomes the normal way of doing business.

Understanding Anchor Institutions

A successful anchor strategy is neither created nor implemented in a vacuum. For any of the above activities to be part of a genuine anchor strategy, anchors must undertake them in strategic concert with other stakeholders in the area. For example, initiating an employer-assisted housing program or setting local purchasing goals can benefit employees or community residents, but these efforts are not part of a comprehensive anchor strategy unless they are connected to an overall, institution-wide approach to local engagement and interaction. To achieve this type of interaction, it is important to understand how anchor institutions work.

Large, nonprofit institutions such as eds and meds are fundamentally risk-averse and slow to change or take on new roles. Embarking on an anchor strategy thus entails a fundamental shift in the way anchor leaders think and how their organizations operate—something that may take time, involve important and difficult discussions or negotiations, and require strong leadership and incentives from both inside and outside the organization.

Universities and hospitals are anchor institutions not only because they are rooted in place and have a critical impact on the local economy, but also because they are big. With size come layers of bureaucracy, multiple players who need to participate in anchor work, and an inability to make quick, nimble moves.

Figure 1 depicts the typical structure of a university. At the top is the board of trustees, drawn from civic, industrial, and scientific leadership and generally composed of alumni or other school affiliates. Trustees interact with the campus intermittently and focus on managing the university’s reputational and financial risk. The president is typically an academic who may or may not have a background in management. Presidents concentrate on fundraising and managing the university’s reputation. Academics usually see universities as places for free thought, insulated from market and capital forces. They often view the administration with suspicion or skepticism. Administrators typically have accounting or management backgrounds and prioritize job security. These priorities and attitudes combine to create a culture that does not reward risk and punishes failure.

Hospitals have similarly large bureaucratic structures. The main decision-making bodies are generally the board and the CEO, both of which focus on minimizing institutional risk and handling finances responsibly and profitably. Administrators prioritize meeting the requirements of their positions and ensuring job security through institutional protection, while healthcare professionals such as doctors and nurses may focus on treating patients or conducting research while looking no farther than the borders of the hospital campus.

These cultures produce decisions that may seem logical for the institutions themselves, but they often do not align with community goals. For example, the university may build parking lots around the school, often at the edges of campus, to provide easy access for faculty, staff, and students. But doing so incentivizes employees and students to drive, curbing the chance that they will live in neighborhoods within walking distance and visit nearby shops. Parking lots also create an asphalt barrier that insulates the campus from the community. Similarly, the institution’s procurement policies may be based on getting the lowest price for the most predictable outcomes, meaning that they contract with large, often national vendors for their goods and services rather than with local providers. Finally, a university often locates open space, recreational facilities, and other amenities within its confines, allowing only limited interaction with community members. To change how these types of decisions are made, it is essential to alter the anchor leadership’s view of the institution in relation to its community and understand how to change ingrained habits and mindsets.

Promoting Community Engagement

There are a number of ways that local leaders, philanthropists, community groups, and other stakeholders can move an anchor institution toward a new role in the neighborhood.

Identify Champions

Leadership is often the key to a successful anchor strategy. The philosophy and approach of the chancellor, president, or CEO can determine whether an institution sees itself as an anchor, how it acts once it defines itself as such, and whether those actions are enduring. As Benjamin Kennedy of The Kresge Foundation advises, “Be opportunistic! Every single person at an institution doesn’t have to buy in—only the key people do. Your champions are the ones who will transform the institution and instill the anchor outlook.”

A strong leader committed to an anchor strategy can lay the foundation for meaningful community engagement and impact. The approach must be embedded within the senior administration and trickle down throughout the institution, so that staff members who are directly responsible for particular pieces of the strategy—such as human resources staff, procurement officers, and professors engaged in community research projects—understand their new priorities. This transition can be achieved in part through changing the reward structure and communicating strategically, by amending the vision statement, and regularly describing anchor work and accomplishments in internal messaging.

An anchor strategy has a greater chance of success if multiple parties actively echo support for it. Within the anchor institution, it can be immensely helpful to identify staff members who champion the idea of community engagement and work with local groups to devise mutually beneficial strategies. Outside the anchor, it is useful to recruit local leaders to push the institution to take on a new role. For example, local philanthropy in Cleveland and Detroit played a large part in coaxing institutions to come together to devise anchor strategies for their surrounding communities.

Explore Multi-Anchor Opportunities

If a neighborhood houses more than one anchor institution, multiple organizations can participate in the effort. This approach has proven highly successful in Cleveland, where hospitals, universities, and cultural organizations, along with local philanthropies, financial institutions, and the City of Cleveland, have joined together to implement the Greater University Circle Initiative.

Although a multi-anchor strategy adds complexity by increasing the number of people and organizations that must buy into the work, it can also magnify the initiative’s impact by bringing additional resources to the table and expanding the number of champions. Furthermore, the leaders of each anchor institution can encourage and reinforce each other’s work, while distributing perceived risk.

Identify Self-Interest

At a basic level, a hospital or university may undertake an anchor strategy because its leaders believe that improvements to the surrounding community would benefit the institution. For example, Dr. Wallace D. Loh, president of the University of Maryland, College Park, has focused on improving quality of life in the neighborhood because he was concerned that local conditions detracted from the university’s ability to attract and retain faculty and staff.

Anchor strategies have other, more indirect benefits. While a university or hospital may make unilateral decisions about what happens on its own land, it can also face issues that require support from outside forces, including local government and community residents. Creating strong and longstanding relationships with local leaders through anchor work can help the organization win support for future plans. By thinking holistically about their relationship with the surrounding community, anchor leaders are often encouraged to reconceptualize their basic goals of educating or healing. Dr. Lucy Kerman, vice provost, University and Community Partnerships at Drexel University, sums it up this way: “Anchor work must be aligned with the university’s self-interest, and be rooted in the appropriate role of the institution. We may not be directly creating affordable housing or running a school, but we are partners in a system that creates mixed-income opportunities and provides strong educational opportunity.”

Bring Resources to the Table

Of course, it may all come down to resources. Financial incentives encourage institutions and their partners to take on anchor work, strategize about their role in the community, meet regularly with stakeholders, and invest in anchor activities. For their part, local stakeholders may see the opportunity to engage the anchor institution but lack the ability or tools to get involved without new funding.

In Detroit, for example, the anchors came to the table for many reasons, but one key factor was the financial resources offered by the two partners that brought them together: the Hudson-Webber and Kresge Foundations. Their capital kick started the conversation and continues to undergird the work today. By offering matching money for specific tactics, the foundations incentivized the anchors to commit their own funds. Today, the anchors not only support specific initiatives but also provide operating resources to Midtown Detroit Inc., the neighborhood planning and development organization that supports and staffs much of the anchor work. In this way, philanthropic resources seeded the initiative while helping to create the infrastructure necessary for its successful implementation and sustainability.

Connecting Strategy to the Community

At first glance, community needs and goals—good schools, safe streets, amenities and services, job opportunities, public spaces, and housing—do not correlate directly with an anchor’s outputs. Indeed, if an institution generates successful graduates, high-quality health care, and top-notch research, it concludes that it has done its job as both a local and a global citizen.

But by aligning community goals with an institution’s inputs—faculty, staff, patients, students, visitors, real estate, goods and services—anchor strategies can connect the institution’s mission to community aspirations. Hiring local residents for institutional jobs enhances an anchor’s economic impact within the community, aiding local households as well as the overall area. When institution staff members shop, live, and dine in the neighborhood, it stimulates the local economy. Using the framework of the five Ps, anchor/community engagement can advance community aspirations from goals to outcomes.

• Placemaking. Both the community and institution can benefit from thoughtful implementation of an institution’s real estate programming, which can promote an open campus with active edges and limit uses such as parking or storage. Improving the condition of blocks surrounding the university or hospital, opening up access to public spaces, and focusing on issues such as street lighting or storefront improvements all make for a safer and healthier environment for residents, prospective students and patients. The inputs that could play a role in this process are faculty, staff, students, patients, visitors, and real estate. The community goals that can be affected include safe streets, amenities and services, job opportunities, public spaces, and housing variety.
• Personnel. By hiring locally, an anchor strategy provides job opportunities for area residents. As the employment rate rises, the community will become safer, benefiting both residents and the anchor institution. The main input in this case is staff.
• Procurement. The anchor institution can bolster the local economy by contracting with local vendors, creating job opportunities, safer streets, and more amenities and services. The anchor can also generate positive public relations regarding its local outreach. Again, staff is the main input.
• Policy. By directing its research and teaching prowess toward local issues, the anchor can help to meet community aspirations for good schools, improved public safety, job opportunities, and health care, thus bolstering its own reputation in the region. To accomplish this, the anchor can tap staff, faculty, students, and visitors for activities such as service learning, health care outreach, and experiential teaching.
• Planning. Crafting all of these efforts into a cohesive mission requires that leaders of anchor institutions link each input with community aspirations. An anchor can also provide planning talent to help build concurrence between its own plans and the plans of the neighborhood or municipality. The lead input in this case is staff, with anchor employees working together to identify how various strategies align with community goals in order to create win-win propositions.

Conclusion

A place-based, institutionally embedded, and comprehensive anchor strategy can have significant impacts on a local and regional economy. But building and implementing such a focused strategy takes a great deal of time and patience. Putting all the elements together—getting the partners involved, convincing them of their self-interest in undertaking anchor work, identifying strong leaders and using them to change the ethos of their institutions, identifying intermediaries and ensuring they have the capacity to play their roles, lining up financial incentives—requires the commitment and coordination of many moving parts.

In many cases, the anchor work is based on trust, often among groups that have not worked together in the past. Building these relationships involves in-person contact and the development of strong alliances. Furthermore, this effort must occur within the context of working with large anchor institutions. Those who wish to work with anchors to change the way they do business must understand how and why institutions act the way they do, and how they make decisions. When all these components come together, anchor strategies can transform the community, the region, and the anchor itself.

About the Authors

Beth Dever is an independent consultant working for the Ford Foundation. Omar Blaik is CEO and George Smith is vice president of U3 Advisors. George W. McCarthy is president and CEO of the Lincoln Institute of Land Policy.

References

Brophy, P., and R. Godsil. 2009. “Retooling HUD for a Catalytic Government: A Report to Secretary Shaun Donovan.” Philadelphia: Penn Institute for Urban Research.

Initiative for a Competitive Inner City (ICIC) and CEOs for Cities. 2002. “Leveraging Colleges and Universities for Urban Economic Revitalization: An Action Agenda.” Boston: ICIC and CEOs for Cities.

Kenyon, Daphne A., and Adam H. Langley. 2010. Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests. Cambridge: Lincoln Institute of Land Policy.

Webber, H., and Mikael Karlström. 2009. “Why Community Investment is Good for Nonprofit Anchor Institutions: Understanding Costs, Benefits, and the Range of Strategic Options.” Chicago: Chapin Hall at the University of Chicago.

Welch, Sherri. 2014. “Midtown Detroit Expands Boundaries for Housing Incentives.” Crain’s Detroit Business. April 28.

Históricamente, las comunidades con alta concentración de instituciones sin fines de lucro, como hospitales, universidades y museos, han tenido que enfrentar problemas fiscales debido a la menor base gravable por la presencia de estas propiedades exentas de impuestos.

Para Boston, Massachusetts, este impacto ha sido particularmente severo, dada la preponderancia de propiedades exentas de impuestos combinada con una gran dependencia del impuesto sobre la propiedad para sus ingresos municipales. A partir de la década de 1970, Boston comenzó a solicitar pagos de sus organizaciones sin fines de lucro como una manera de compensar la pérdida de ingresos y la creciente demanda de servicios públicos asociadas con las instituciones que alberga en su seno.

Si bien estos pagos en lugar de impuestos (Payments in Lieu of Taxes, o PILOT) se han ido ampliando a lo argo del tiempo, la ciudad de Boston permanecía insatisfecha con su programa PILOT. Los ingresos del programa PILOT representaban una pequeña parte del presupuesto general de la ciudad, y el tamaño de las contribuciones de las instituciones sin fines de lucro ha sido muy variable. Desde 2008, Boston ha desarrollado e implementado una nueva estrategia para su programa PILOT que ha recibido considerable atención a nivel nacional. Este artículo examina las condiciones que condujeron al desarrollo de un nuevo programa PILOT en Boston, describe su estrategia e informa sobre la experiencia de la ciudad en su primer año 1completo de implementación.

Restricciones sobre la base imponible de Boston

Tradicionalmente Boston ha estado en el centro de todos los debates acerca de los programas PILOT. La confluencia de varias fuerzas políticas, fiscales y demográficas ha creado una mezcla volátil para la ciudad y sus instituciones sin fines de lucro. Boston es el centro económico y cultural de Nueva Inglaterra y alberga algunos de los hospitales y universidades más renombrados del mundo. Como capital del estado de Massachusetts, Boston también cuenta con una gran cantidad de edificios y establecimientos gubernamentales. Uno de sus desafíos más inusuales es su pequeño tamaño geográfico en comparación con su área metropolitana. Boston es la vigesimo-segunda ciudad más grande por población, pero representa la décima más grande por área metropolitana. En consecuencia, las instituciones exentas del pago de impuestos que prestan servicio a toda el área metropolitana están concentradas dentro de los límites relativamente pequeños de la ciudad. De hecho, más del 50 por ciento de la superficie de Boston está exento del pago de impuestos (figura 1).

Boston también tiene una estructura de ingresos que es única entre las demás ciudades de su envergadura, principalmente porque no cobra impuestos sobre los ingresos, nóminas, ventas ni ninguna otra fuente de ingresos significativa. En lugar de ello, Boston depende en gran medida del impuesto sobre la propiedad, que representa dos tercios de todos los ingresos de la ciudad (figura 2). Si bien Nueva York y Chicago también cuentan con una gran cantidad de propiedades institucionales exentas del impuesto sobre la propiedad, estas ciudades sí aplican tributos sobre los ingresos, las ventas y otras actividades económicas generadas por las universidades, los hospitales y otras instituciones de gran envergadura sin fines de lucro. En contraste, Boston no recibe ningún ingreso directo de la actividad económica generada por este vibrante sector sin fines de lucro.

Más aún, el crecimiento del impuesto sobre la propiedad en Boston está restringido por las cláusulas de la Propuesta 2½, que impone un límite legal sobre el nivel de los impuestos sobre la propiedad. La limitación más significativa es que el valor de dicho impuesto en las propiedades existentes sólo puede aumentar un 2,5 por ciento por año. El otro límite importante de la Propuesta 2½ es que la tasa global efectiva del impuesto no puede superar el 2,5 por ciento de la valuación fiscal de la propiedad. La tasa de Boston, 1,8 por ciento, está muy por debajo de este límite, de manera que esta cláusula no influye tanto como en otras comunidades de Massachusetts en lo que se refiere a las propiedades exentas del pago de impuestos. El impacto combinado de la concentración de propiedades exentas de impuestos, el alto grado de dependencia del impuesto sobre la propiedad, y los límites al crecimiento de este tributo debido a la Propuesta 2½ ha dado como resultado un impacto fiscal más profundo en Boston que en la mayoría de las otras ciudades.

Conciliación de los beneficios y costos de las instituciones sin fines de lucro

A pesar de estos impactos fiscales, Boston tiene afortunadamente un vibrante sector sin fines de lucro. La ciudad alberga a algunos de los hospitales y universidades más prestigiosos del mundo, que brindan atención sanitaria, investigación y educación excepcionales a sus clientes. Además de cumplir con sus misiones caritativas, estas instituciones de gran envergadura generan un nivel significativo de actividad económica, que constituye la espina dorsal de la economía de Boston, basada en el conocimiento. La industria de atención a la salud por sí sola genera 125.000 puestos de empleo en Boston.

Hay una desconexión económica, sin embargo, entre los beneficios brindados por las instituciones sin fines de lucro y el costo de eximir sus propiedades del pago de impuestos. Los beneficios de las instituciones sin fines de lucro de Boston no se circunscriben a los límites de la ciudad; los beneficios educativos, científicos y culturales se extienden a la región, al estado, al país y, en muchos casos, al mundo entero. No obstante, el costo de proporcionar servicios públicos a estas instituciones y la pérdida de ingresos debido a las exenciones del pago de impuestos recaen exclusivamente sobre los contribuyentes de Boston.

Este punto es crítico para comprender la importancia del programa PILOT para una ciudad como Boston. Muchos observadores creen que el interés actual en PILOT se debe a los problemas fiscales de corto plazo asociados con la reciente recesión. De acuerdo a esta corriente de opinión, una vez que la economía se recupere y las perspectivas municipales se aclaren, la presión por implementar programas PILOT disminuirá. La experiencia de Boston contradice esta aseveración. La ciudad ha lidiado con el impacto fiscal causado por su sector sin fines de lucro durante un largo período de tiempo, tanto en situaciones fiscales buenas como malas. Hay una desconexión fundamental entre los beneficios institucionales y los costos fiscales y, en última instancia, es aquí donde reside el origen de este debate. Hasta que estos beneficios y costos se concilien, la tensión financiera entre la ciudad y sus instituciones sin fines de lucro continuará.

Cómo medir el impacto fiscal de las propiedades exentas del pago de impuestos

El impacto de las propiedades exentas del pago de impuestos sobre la ciudad en su conjunto, ha sido desde hace tiempo el centro de un acalorado debate en Boston. Una pregunta frecuentemente planteada es la de cuánto pagarían las instituciones sin fines de lucro en caso de que sus propiedades fueran plenamente gravables. Durante mucho tiempo esta pregunta no pudo responderse. Como las propiedades exentas no pagaban impuestos sobre la propiedad, la ciudad tenía muy poco incentivo para mantener datos y valuaciones exactas y al día de las propiedades institucionales. No obstante, el interés constante del impacto fiscal de las propiedades exentas exigió que se diera respuesta a esta pregunta.

Dada la escasez de recursos disponibles para iniciar un proyecto de valuación de las propiedades exentas, Boston tuvo que recurrir a métodos creativos para generar valuaciones confiables, minimizando al mismo tiempo el costo de recopilación de datos. La ciudad contaba con un tipo particular de declaración de impuestos que las instituciones sin fines de lucro tienen que presentar todos los años, como también amplia autoridad legal para solicitar a los dueños de estas propiedades los datos necesarios para valuar sus propiedades.

Boston pudo utilizar estas herramientas para recopilar información detallada sobre las propiedades de las instituciones sin fines de lucro, en particular sus características físicas (superficie, edad, condición) y el uso dado a las mismas. La mayoría de las instituciones principales cuenta con datos exactos sobre sus propiedades. Una vez que los tasadores tuvieron acceso a estos datos, pudieron introducir la información en el sistema de valuación masiva asistida por computadora (computer-assisted mass appraisal, o CAMA) de la ciudad para determinar su valuación. Se realizaron después inspecciones de los predios para verificar la información proporcionada por las instituciones y comprobar la exactitud y fiabilidad de las valuaciones generadas por el sistema CAMA.

Las valuaciones resultantes se compartieron luego con las instituciones. Se entregó a cada una de ellas los detalles de las estimaciones de valuación de sus bienes inmuebles, y se les dio la oportunidad de reunirse con los tasadores para revisar los resultados y exponer cualquier duda al respecto. La ciudad incorporó los comentarios de las instituciones para completar la valuación final de las propiedades. Dado que este fue el primer intento que hizo la ciudad para generar valuaciones de las propiedades sin fines de lucro, esta revisión conjunta resultó valiosa para verificar la calidad de los datos, y también permitió compartir los resultados preliminares del impacto sobre los ingresos municipales de las propiedades exentas de cada institución.

El análisis, completado en 2009, reveló que las propiedades de instituciones educativas y médicas exentas del pago del impuesto hubieran generado US$347,9 millones en ingresos si fueran gravables (Ciudad de Boston, 2010). Para poner este monto en perspectiva, hubiera sido el equivalente a aproximadamente un cuarto de todos los gravámenes tributarios de la ciudad en el año fiscal 2009, que ascendieron a US$1.400 millones, y a aproximadamente la mitad de los ingresos generados por las propiedades de oficina, comercios minoristas y hoteles que pagan tributos comerciales (figura 3).

Comité de trabajo del programa PILOT

Una vez que se utilizó la información de las valuaciones para determinar la cantidad de impuestos que cada institución pagaría si no estuviera exenta, se descubrieron varias deficiencias del programa PILOT actual. Si bien el programa anterior fue considerado uno de los más exitosos programas PILOT del país, la cantidad de ingresos recaudados fue pequeña comparada con los ingresos que las propiedades exentas hubieran generado si fueran gravables. Los pagos PILOT de instituciones educativas y médicas en 2009 ascendieron a US$14,5 millones, o sea un 4,2 por ciento de lo que las instituciones hubieran pagado si las propiedades fueran gravables, y solo un 1 por ciento de los gravámenes tributarios totales de la ciudad. Además, el nivel de participación varió mucho entre las distintas instituciones. Algunas instituciones realizaron contribuciones sustanciales bajo el programa, mientras que otras realizaron pagos limitados o decidieron no participar en absoluto.

Para resolver estos problemas, el alcalde de Boston, Thomas M. Menino, nombró un comité de trabajo que revisara el programa PILOT con la petición de:

• establecer un nivel estándar de contribuciones para todas las instituciones principales exentas del pago de impuestos que contaban con bienes inmuebles;
• desarrollar una metodología para valuar los beneficios comunitarios;
• proponer una estructura programática que creara alianzas permanentes de largo plazo entre la ciudad y sus instituciones sin fines de lucro;
• clarificar los costos asociados con la provisión de servicios municipales a las instituciones sin fines de lucro; y
• si hacía falta, hacer recomendaciones sobre cambios legislativos necesarios a nivel local o estatal.

El comité de trabajo del programa PILOT estuvo compuesto por una amplia gama de participantes: dos líderes de universidades locales, dos de hospitales sin fines de lucro, y dos de la comunidad empresarial de Boston además de un representante del concejo municipal, uno de los sindicatos del sector público y otro de las organizaciones comunitarias. El comité de trabajo se reunió a lo largo dos años para explorar tanto los beneficios como los costos para Boston de albergar a sus instituciones sin fines de lucro, y cómo se deberían considerarse estos factores en el proceso del programa PILOT. Uno de los puntos clave del debate fue cómo asegurar que las instituciones contribuyeran al programa sobre una base consistente. En diciembre de 2010, el comité de trabajo recomendó al alcalde Menino las siguientes pautas para el programa PILOT.

El programa PILOT debería seguir siendo voluntario

Los miembros del comité de trabajo se persuadieron de que una exigencia legal o legislativa de participar en el programa PILOT iría en contra del espíritu de alianza entre la ciudad y sus instituciones sin fines de lucro. Esta alianza es crítica para alentar una participación amplia y uniforme.

Todas las instituciones sin fines de lucro deberían participar

Gran parte del debate sobre PILOT se había concentrado anteriormente en los hospitales y las universidades. El comité de trabajo, sin embargo, propuso que todas las instituciones sin fines de lucro que poseían bienes inmuebles exentos del pago de impuestos en Boston deberían contribuir al programa PILOT. Para proteger a las instituciones más pequeñas con menos recursos, el programa PILOT se limitó a aquellas cuyas propiedades se habían valuado en más de US$15 millones.

Cómo deter minar los pagos del programa PILOT

Se consideraron muchas alternativas para establecer las bases de contribución del programa PILOT, incluida la consideración de una cuota por estudiante o cama de hospital, o de un cargo proporcional a la superficie de suelo o superficie edificada. El comité de trabajo determinó que la manera más equitativa sería la de un cargo proporcional al valor de las instituciones en su totalidad, lo cual reflejaría su tamaño y de la calidad de sus propiedades inmuebles. Hubo un consenso general en que las instituciones sin fines de lucro deberían contribuir con el monto necesario para compensar su consumo de servicios esenciales, como protección policial y servicio de bomberos, y de servicios públicos, como limpieza de calles y remoción de nieve. Estos servicios consumen aproximadamente un 25 por ciento del presupuesto de Boston, y el comité de trabajo determinó entonces que una contribución al programa PILOT del 25 por ciento del monto tributable total de la institución sería razonable.

Crédito por beneficios a la comunidad

El beneficio público proporcionado por las instituciones sin fines de lucro fue un punto central del comité de trabajo, el cual recomendó que estas instituciones recibieran un crédito de hasta el 50 por ciento en sus contribuciones al programa PILOT por los beneficios brindados a la comunidad. Este crédito reconocía las contribuciones significativas en servicios efectuadas por las instituciones sin fines de lucro, los cuales benefician directamente a los residentes de Boston. El monto del crédito se limitó al 50 por ciento de las contribuciones al programa PILOT para asegurar que las instituciones pagaran un monto significativo en dinero. No obstante, el comité de trabajo expresó que, en caso de presentarse una oportunidad excepcional para un cierto programa o servicio, este límite del 50 por ciento podría excederse a discreción de la ciudad.

Si bien el comité de trabajo no ofreció detalles específicos sobre los servicios que podrían hacerse acreedores a un crédito en el programa PILOT, proporcionó pautas generales sobre los tipos de servicios que serían elegibles. Para ello, los servicios comunitarios deben beneficiar directamente a los residentes de la ciudad de Boston, respaldar la misión y las prioridades de la ciudad, ofrecer maneras de colaboración entre la ciudad y las instituciones sin fines de lucro para alcanzar metas comunes, y ser cuantificables.

Período de introducción

Finalmente, el comité de trabajo recomendó que la nueva fórmula del programa PILOT se introdujera a lo largo de un período no menor de cinco años. Dado el cambio en el alcance del programa PILOT de la ciudad, el comité de trabajo entendió que las instituciones iban a requerir tiempo para realizar todos los ajustes necesarios en sus presupuestos y planes financieros para adaptarse a las mayores contribuciones del programa PILOT.

Implementación del nuevo programa PILOT

Cuando el alcalde Menino aceptó las recomendaciones del comité de trabajo en diciembre de 2010, la ciudad tuvo que elaborar un plan para implementar el nuevo programa PILOT. Primero se enviaron cartas a todas las instituciones que cumplían con los criterios del programa. Cada carta incluyó una copia de las nuevas pautas del programa PILOT y un análisis detallado del cálculo del monto que la ciudad iba a solicitar con la nueva fórmula. La carta también indicó que la ciudad iba a solicitar una reunión con cada institución en los meses siguientes para intercambiar ideas sobre el nuevo programa.

Estas reuniones fueron un paso fundamental en la implementación del programa, al brindar un foro para que cada institución pudiera hacer preguntas sobre el programa y expresar sus preocupaciones. Si bien estas sesiones fueron diseñadas originalmente para proporcionar información a las instituciones sobre el nuevo programa, también sirvieron para que la ciudad recogiera las opiniones de las instituciones, lo cual a su vez sirvió de guía para la puesta en marcha del programa.

El anterior programa PILOT de la ciudad incluía contratos que fijaban los términos del compromiso de cada institución con el programa PILOT. Si bien los contratos eran útiles como referencia, su valor como instrumento legal era cuestionable, ya que los pagos del programa PILOT seguían siendo voluntarios. Por ejemplo, la ciudad nunca intentó forzar pagos bajo los términos de un contrato PILOT. Cuando la ciudad tuvo que decidir usar o no contratos en el programa nuevo, la perspectiva de negociar, escribir y ejecutar más de 40 contratos con las distintas instituciones resultó abrumadora. Dado que las pautas ya proporcionaban los detalles de la participación solicitada a cada institución, la ciudad decidió usar estos documentos como referencia en su relación con las instituciones y obvió la necesidad de elaborar contratos individuales.

Experiencia del primer año del programa

En octubre de 2011 se enviaron las solicitudes de pago de las primeras cuotas para el año fiscal 2012 a todas las instituciones participantes, y los resultados fueron sorprendentes. La ciudad recaudó un total de US$19,5 millones en pagos en efectivo, un aumento del 28,4 por ciento sobre la recaudación del año fiscal 2011, realizada según el programa PILOT anterior. Esto monto superó el 90 por ciento de lo solicitado por la ciudad, reflejando un nivel de participación extraordinario en este primer año de un programa nuevo y voluntario (figura 4). Boston también recibió un nivel equivalente de contribuciones en servicios comunitarios provistos por las instituciones sin fines de lucro, en línea con las pautas del programa PILOT.

Un componente clave del éxito inicial del programa fue el énfasis en promover un espíritu de alianza entre la ciudad y sus instituciones. Debido a su experiencia previa, la ciudad comprendió que una actitud de confrontamiento no sería efectiva en el corto o largo plazo. Al mismo tiempo, las instituciones tuvieron que reconocer que, en su calidad de organizaciones caritativas, debían rendir cuentas a las comunidades que las albergaban. Esta rendición de cuentas fue facilitada en parte por el alto grado de transparencia del proceso. Las reuniones del comité de trabajo fueron abiertas al público, y los materiales utilizados en las deliberaciones fueron publicados en el sitio web de la ciudad.

Este tema de transparencia continuó en la fase de implementación del programa. La información con el detalle de la participación de cada institución en el programa, los pagos en efectivo y los servicios comunitarios provistos también se publicaron en el sitio web de la ciudad. Las instituciones que no participaron plenamente del programa también tuvieron la oportunidad de comunicar sus razones. También se divulgaron detalles específicos sobre los servicios comunitarios proporcionados por las instituciones, lo que les ofreció una oportunidad para destacar y promover sus valiosas contribuciones de servicio.

La importancia de los servicios comunitarios

En sus intercambios con los líderes de las instituciones sin fines de lucro durante la implementación del nuevo programa, la ciudad descubrió que las instituciones tenían una clara preferencia por brindar servicios comunitarios en vez de hacer pagos en efectivo. Dado que los servicios son parte esencial de las misiones caritativas de la mayoría de las instituciones sin fines de lucro, esto no fue una sorpresa. Por otro lado, la ciudad generalmente prefiere los pagos en efectivo, ya que le otorgan flexibilidad para asignar recursos para satisfacer las necesidades más prioritarias de la comunidad.

Para conciliar estas dos preferencias divergentes, la ciudad ha reconocido que tiene que seguir desarrollando su capacidad para alinear la porción de servicios del programa PILOT con sus propias demandas de servicio. En la actualidad, las instituciones ofrecen sus beneficios comunitarios por iniciativa propia. Si bien estos servicios tienen valor para la ciudad y sus residentes, quizás no estén entre las prioridades actuales de servicios de la ciudad. Aun en casos en que las solicitudes específicas de servicios surgieron de un funcionario municipal para satisfacer una necesidad de corto plazo, tales solicitudes ad hoc carecen del proceso de priorización y revisión propio de un presupuesto disciplinado.

Se deberían planificar y priorizar las solicitudes de servicios para el programa PILOT para maximizar su valor para la ciudad. Bajo una estructura de servicios de este tipo, la ciudad podría quizá reducir o reemplazar el costo de ofrecer un servicio, o quizá podría brindar un servicio nuevo para cumplir con una necesidad que no había podido satisfacer previamente. Por medio de una planificación cuidadosa, el direccionamiento de recursos institucionales hacia áreas de prioridad reduce el compromiso financiero de la ciudad y permite que la ciudad obvie los pagos en efectivo a cambio de servicios institucionales, que dichas entidades prefieren. Este proceso de planificación también beneficia a las instituciones, ya que pueden planificar mejor sus compromisos de servicio al programa PILOT. Mientras el programa continúa en su fase de introducción, será fundamental que la ciudad y las instituciones puedan trabajar en forma cooperativa en una estrategia estructurada de servicios comunitarios para que continúe con éxito.

Conclusiones

El proceso seguido por Boston para construir su nueva estrategia para el programa PILOT ha sido tanto cuidadoso como inclusivo. Los conocimientos y las perspectivas de los miembros del comité de trabajo, junto con las décadas de experiencia de la ciudad sobre el tema de propiedades exentas del pago de impuestos, han podido generar pautas reconocidamente equitativas y razonables. El proceso también demostró que para que un programa PILOT sea exitoso, la ciudad y las instituciones tienen que ser socios, no combatientes.

Esta filosofía ha sido la base de la implementación del nuevo programa PILOT en Boston. Sin embargo, a pesar de su éxito inicial, queda mucho por realizar. La ciudad tiene que equilibrar su necesidad de ingresos con la preferencia de las instituciones por brindar servicios. Si los funcionarios municipales y las instituciones locales pueden seguir colaborando en el programa PILOT, se podrá alcanzar un equilibrio que beneficiará tanto a las instituciones como a sus clientes y los residentes de Boston.

Sobre el autor

Ronald W. Rakow ha sido comisionador del Departamento de Valuación de la Ciudad de Boston desde 1992, y en 2011 asumió también el cargo de Subgerente de Finanzas. Fue nombrado en 2010 miembro de la Junta Directiva de la Autoridad del Centro de Convenciones de Massachusetts y en la actualidad es presidente del Comité de Investigación de la Asociación Internacional de Tasadores (International Association of Assessing Officers, o IAAO).

Referencias

Ciudad de Boston. 2010. Informe final y recomendaciones del comité de trabajo del alcalde sobre el programa PILOT, diciembre.

Departamento de Valuación de la Ciudad de Boston. 2009. Análisis de propiedades exentas del pago de impuestos. Instituciones educativas y médicas. Año fiscal 2009.

Departamento de Valuación de la Ciudad de Boston. 2012. Reseña del programa PILOT, año fiscal 2012. http://www.cityofboston.gov/Images_Documents/FY12_Second_Half_PILOT_Status_Report_for_Web_tcm3-33007.pdf

Oficina de Gestión de Presupuesto de la Ciudad de Boston. 2012. Presupuesto adoptado para el año fiscal 2013. http://www.cityofboston.gov/budget/default.asp

Correction: Under the heading “Experience from the First Year,” the percent increase in FY2012 over what was collected in FY2011 under the previous PILOT program was incorrectly reported. The correct percentage is 28.4. Both the PDF and text version below list the correct amount.

Historically communities with high concentrations of nonprofit institutions such as hospitals, colleges, and museums have struggled with the reduced tax base associated with these tax-exempt properties. For Boston, Massachusetts, the preponderance of tax-exempt property, combined with a high reliance on the property tax for local revenue, has made this impact particularly acute. Beginning in the early 1970s, Boston began seeking payments from its nonprofit organizations as a way of offsetting the loss of revenue and the increase in public service demands associated with the institutions it hosts.

Although these payments in lieu of taxes (PILOTs) expanded over time, the City of Boston remained dissatisfied with its PILOT program. The revenue from PILOTs represented a small fraction of the city’s overall budget, and the size of contributions from nonprofit institutions varied widely. Since 2008 Boston has developed and implemented a new approach to PILOTs that has received considerable national attention. This article examines the conditions that led to the development of Boston’s new PILOT program, describes its approach, and reports on the city’s experience in its first full year.

Constraints on Boston’s Tax Base

Boston traditionally has been at the center of any discussion regarding PILOTs. The confluence of several political, fiscal, and demographic forces has created a volatile mix for the city and its nonprofit institutions. Boston is the economic and cultural center of New England and is home to some of the world’s most renowned hospitals and universities. As the state capital of Massachusetts, Boston also hosts a large number of government office buildings and facilities. Among its more unusual challenges is the city’s small geographic size in relation to its metropolitan area. Boston is the 22nd largest city by population, but it represents the 10th largest metropolitan area. As a result, exempt institutions that service the entire metropolitan area are concentrated within the city’s relatively small boundaries. In fact, over 50 percent of Boston’s land area is exempt from taxation (figure 1).

Boston also has a revenue structure that is unique among its large-city peers, primarily because it has no income, payroll, sales, or other significant source of tax revenue. Instead, Boston relies heavily on the property tax, which represents two-thirds of all city revenue (figure 2). While New York or Chicago also have large amounts of institutional property exempt from the property tax, those cities are able to tax the incomes, sales, and other economic activity which the universities, hospitals, and other large nonprofit institutions generate. In contrast, Boston receives no direct compensating revenue associated with the economic activity that is generated by its vibrant nonprofit sector.

Further, the growth of the property tax in Boston is constrained by Proposition 2½, a statutory limit on the level of property taxes. The most significant limitation is that the property tax levy for existing properties can increase by only 2.5 percent per year. Proposition 2½’s other primary limitation is a cap on the overall effective tax rate of 2.5 percent. As Boston is well below this limit at 1.8 percent, the impact of exempt property is not a factor for this provision as it is in other Massachusetts communities. The combined impact of the concentration of exempt property, the high reliance on the property tax, and the limits placed on property tax growth by Proposition 2½ result in a more profound fiscal impact of exempt property in Boston than in most major cities.

Reconciling the Benefits and Costs of Nonprofit Institutions

Despite these fiscal impacts, Boston is fortunate to have a vibrant nonprofit sector. The city hosts some of the world’s most prestigious hospitals and universities that provide exceptional health care, research, and education to their clients. In addition to fulfilling their charitable missions, these large institutions are significant economic generators that form the backbone of Boston’s knowledge-based economy. The health care industry alone accounts for 125,000 jobs in Boston.

There is an economic disconnect, however, between the benefits of nonprofit institutions and the costs of providing their properties with tax exemptions. The benefits of Boston’s nonprofits do not stop at the city’s borders; the educational, scientific, and cultural benefits of Boston’s institutions accrue to the region, state, country and, in many cases, the entire world. Yet the cost of providing public services to these institutions and the loss in revenue from removing their properties from the tax base fall squarely on Boston’s taxpayers.

This point is critical to understanding the importance of PILOTs to a city like Boston. Many observers believe that the current interest in PILOTs is driven by the short-term fiscal stress associated with the recent recession. According to this school of thought, once the economy recovers and the municipal outlook brightens, the pressure for PILOTs will ebb. Boston’s experience contradicts this assertion. The city has struggled with the fiscal impact caused by its nonprofit sector over a long period, through good fiscal times and bad. It is this fundamental disconnect between institutional benefits and fiscal costs that is the ultimate source of this debate. Until these benefits and costs are better reconciled, financial tension between the city and its nonprofits will continue.

Measuring the Fiscal Impact of Tax-Exempt Property

The impact of tax-exempt property on the city as a whole has long been the focus of spirited public discussion in Boston. One question that has often been asked is how much nonprofit institutions would pay if their properties were fully taxable. For a long time this question could not be answered. Since tax-exempt property paid no property taxes, the city had little incentive to maintain accurate data and up-to-date assessments for institutional property. However, the continuing focus on the fiscal impact of exempt property clearly required an answer to this question.

Given the scarce resources available for a project to value exempt property, Boston needed to be creative in coming up with a method to generate reliable assessments while minimizing the costs of collecting data. At the city’s disposal was a particular type of tax return that nonprofit institutions are required to file annually, as well as broad statutory authority to request from property owners the information necessary to value their properties. Boston was able to leverage these tools to collect detailed information on the property owned by nonprofit institutions—specifically, the physical characteristics (size, age, condition) and uses. Most major institutions maintain accurate data on their property holdings. Once the assessors had access to these data, they were able to plug the information into the city’s computer-assisted mass appraisal system (CAMA) to generate assessments for the properties. Site inspections were performed to verify the information provided by the institutions and to ensure the accuracy and reliability of the CAMA-generated assessments.

The resulting assessments were then shared with the institutions. Each was given the details on the valuation estimates for their real estate holdings and provided with an opportunity to meet with assessors to review the results and raise any concerns. The city incorporated this feedback to complete the final value for the properties. Given that this was the city’s first effort to generate assessments for nonprofit property, this review step provided a valuable check of valuation data quality as well as an opportunity to share the preliminary results of the revenue impact of their property tax-exemptions with each institution.

The analysis, which was completed in 2009, revealed that educational and medical tax-exempt property would have generated $347.9 million in revenue if it were taxable (City of Boston 2010). To put this amount in perspective, it would equate to approximately one-quarter of the city’s total tax levy of $1.4 billion in Fiscal Year 2009, and would be equivalent to roughly half the revenue generated by the office, retail, and hotel properties that make up the commercial tax levy (figure 3).

PILOT Task Force

Once the assessment information was used to determine the amount of tax each institution would pay in a nonexempt scenario, a number of shortcomings of the current PILOT program became apparent. While the former program was considered one of the more successful PILOT programs in the country, the amount of realized revenue appeared small when compared with the revenue that exempt properties would generate if they were taxable. PILOT payments from educational and medical institutions in 2009 totaled $14.5 million, or 4.2 percent of what institutions would pay if their properties were taxed, and equivalent to just 1 percent of the city’s property tax levy. In addition, the level of participation varied widely among institutions. Some institutions made substantial contributions under the program, while others made limited payments or chose not to participate at all.

To address these concerns, Boston Mayor Thomas M. Menino appointed a task force to review the PILOT program and asked it to:

• set a standard level of contributions to be met by all major tax-exempt landowning institutions;
• develop a methodology for valuing community benefits;
• propose a program structure that creates longer-term, sustainable partnerships between the city and its nonprofits;
• clarify the costs associated with providing city services to nonprofits; and<
• if necessary, provide recommendations on legislative changes needed at the local or state level.

The PILOT Task Force membership drew from a wide spectrum of participants: two leaders each from local colleges, nonprofit hospitals, and Boston’s business community; and one each from the city council, public sector unions, and community-based organizations. The Task Force met over a two-year period to explore both the benefits and costs to Boston of hosting its nonprofit institutions and how these factors should be considered in the PILOT process. Also key was the discussion on how to ensure that institutions contribute to the program on a consistent basis. In December 2010, the Task Force recommended the following PILOT guidelines to Mayor Menino.

PILOT Program Should Remain Voluntary

The Task Force members believed a legal or statutory requirement for PILOTs runs counter to the spirit of partnership between the city and its nonprofit institutions. That partnership is critical to encouraging broad and uniform participation.

All Nonprofits Should Participate

Much of the PILOT discussion previously focused on hospitals and universities. The Task Force, however, felt all nonprofits that own tax-exempt real estate within the city should contribute to the PILOT program. To protect smaller institutions with fewer resources, the PILOT program was limited to those nonprofits with property valued at more than $15 million.

Determining PILOT Payments

Many alternatives were considered for the basis of PILOT contributions, including a per-student or per-hospital-bed fee, or a charge based on the amount of land or building area. The Task Force determined that a charge driven by the assessed value of the institutions—reflecting size and quality of real estate holdings—would result in the most equity. There was a general consensus that nonprofits should contribute some amount toward their consumption of essential services such as police and fire protection, as well as public works such as street cleaning and snow removal. These services consume approximately 25 percent of Boston’s budget, and the Task Force found that a PILOT equal to 25 percent of an institution’s fully taxable amount was reasonable.

Credit for Community Benefits

The public benefit provided by nonprofit institutions was a major focus of the Task Force, which recommended that institutions receive up to a 50 percent credit on their PILOT in exchange for community benefits. This credit recognized the significant inkind contributions made by nonprofit institutions that directly benefit Boston residents. The credit was limited to 50 percent of the PILOT amount to ensure significant cash contributions from each institution. However, the Task Force felt that if an exceptional opportunity for a program or service were available, the 50 percent cap could be exceeded at the city’s discretion.

While the Task Force did not offer detailed specifics on the services that were eligible for PILOT credit, it did provide general guidance on the types of services that should qualify. To be eligible, community services must directly benefit City of Boston residents, support the city’s mission and priorities, offer ways for the city and nonprofit to collaborate to meet shared goals, and be quantifiable.

Phase-in Period

Finally, the Task Force recommended that the new PILOT formula be phased in over a period of not less than five years. Given the change in scope of the city’s PILOT program, the Task Force understood that institutions would require time to make the necessary adjustments in their budget and financial plans to accommodate increased PILOT amounts.

Implementing the New PILOT Program

When Mayor Menino accepted the Task Force recommendations in December 2010, the city needed a plan to implement the new PILOT program. First, letters were sent to all institutions that fell within the criteria of the program. Each letter included a copy of the new PILOT guidelines and an analysis detailing the calculation of the PILOT that the city would request under the new formula. Each letter also indicated that the city would seek a meeting with each institution in the coming months to discuss the new program.

The subsequent meetings were a critical step in the implementation, providing a forum for each institution to ask questions about the program and to voice concerns. While these sessions were designed originally to provide information to the institutions on the new program, they also provided significant, valuable feedback for the city that in turn offered further guidance on the rollout.

The city’s previous PILOT program included contracts that laid out the terms of each institution’s PILOT commitment. While the contracts were useful as a reference, their value as a legal instrument was questionable since PILOT payments remained voluntary. For example, the city had never sought to enforce payment under a PILOT contract. As the city faced the question of whether contracts would be employed in the new program, the notion of negotiating, drafting, and executing over 40 contracts with institutions was daunting. Given that the guidelines already provided the details of each institution’s requested participation, the city felt those documents should form the basis of the relationship with the institutions and decided to forgo the use of PILOT contracts.

Experience from the First Year

In October 2011, requests for payment of the first installments for FY2012 were sent to all participating institutions, and the results were impressive. The city collected a total of $19.5 million in cash payments, a 28.4 percent increase over what was collected in FY2011 under the previous PILOT program. This represented over 90 percent of what the city requested—an extraordinary level of participation given the first year of a new, voluntary program (figure 4). Boston also received an equivalent level of contributions in the form of community services provided by the nonprofit institutions, consistent with the PILOT guidelines.

A key component of the program’s initial success was the emphasis on promoting a sense of partnership between the city and its institutions. Based on its prior experience, the city understood that a more confrontational approach would not be effective in the short or long term. At the same time, the institutions needed to recognize that as charities they have a level of accountability to their host communities. This accountability was encouraged in part by providing a high degree of transparency in the process. Task Force meetings were open to the public, and materials used during the deliberations were posted on the city’s website.

This theme of transparency continued in the implementation phase of the program. Information detailing each institution’s participation in the program, from cash payments to the community services provided, was also posted on the city’s website. Institutions that had less than full participation in the program were given the opportunity to communicate their reasons. Specific details on the community services delivered by the institutions were also disclosed, providing an opportunity for institutions to highlight and promote their valuable service contributions.

The Importance of Community Services

In its discussions with nonprofit leaders during the implementation of the new program, the city discovered that institutions have a decided preference for providing community services over making cash payments. Given that service delivery is at the core of most nonprofits’ charitable missions, this was not surprising. Conversely the city generally places a higher value on cash payments, which provide flexibility in applying resources to meet the highest-priority service needs of the community.

To reconcile these two divergent preferences, the city has recognized that it must further develop its ability to harness the community-service portion of the PILOT program to meet its service demands. Currently community benefits often are offered by the institutions based on their own initiative. While these services have value to the city and its residents, they may not be among the city’s current service priorities. Even in cases where specific requests for services came directly from a city official to fill a near-term service gap, such ad hoc requests lack the prioritization and review that is associated with a more disciplined budgeting process.

Requests for PILOT services should be planned and prioritized to maximize their value to the city. Under such a structure services are more likely to either reduce or replace the cost to the city of providing a service, or to provide a new service to meet a priority that the city had been unable to deliver previously. Through careful planning, directing institutional resources to priority areas reduces the city’s financial commitment and makes it is easier for the city to forgo cash in favor of institutionally preferred services. This planning process is also beneficial to the institutions, as they are better able to budget for their PILOT service commitments. As the program continues through its phase-in period, the ability of the city and institutions to work cooperatively on a structured approach to community services will be critical to the continued success of the PILOT program.

Closing Thoughts

The process Boston has followed to construct its new approach to PILOTs was both thoughtful and inclusive. The expertise and perspectives of the Task Force members, combined with the city’s decades of experience on the issue of exempt property, led to program guidelines that were recognized as fair and reasonable. The process also demonstrated that for a PILOT program to be successful the city and its institutions must be partners, not combatants.

This philosophy has formed the basis of Boston’s approach to the implementation of its new PILOT program. And, despite its early success, there is still much work to be done. The city needs to balance its need for revenue with the institutions’ preference for services. If city officials and local institutions can continue to work cooperatively on the PILOT program, a balance can be struck that will work to the mutual benefit of the institutions, their constituents, and the residents of Boston.

About the Author

Ronald W. Rakow has been commissioner of the City of Boston Assessing Department since 1992, and he took on the additional role of deputy chief financial officer in 2011. He was appointed in 2010 to the Board of the Massachusetts Convention Center Authority, and is currently serving as the chair of the Research Committee of the International Association of Assessing Officers (IAAO).

References

City of Boston. 2010. Mayor’s PILOT task force final report and recommendations, December.

City of Boston Assessing Department. 2009. Exempt property analysis: Educational and medical institutions, Fiscal Year 2009.

City of Boston Assessing Department. 2012. FY 2012 PILOT recap. http://www.cityofboston.gov/Images_Documents/FY12_Second_Half_PILOT_Status_Report_for_Web_tcm3-33007.pdf

City of Boston Office of Budget Management. 2012. Fiscal year 2013 adopted budget. http://www.cityofboston.gov/budget/default.asp

The foreclosure crisis and its impact on the U.S. economy seem far from abating as mortgage delinquencies and foreclosure filings continue to climb. According to RealtyTrac, a total of 2.8 million properties had foreclosure filings during 2009, or one out of every 45 residences. That foreclosure rate was 21 percent higher than in 2008 and 120 percent higher than in 2007. Maintaining home ownership has proven to be a tenuous, if not impossible, proposition for many homeowners.

Some researchers, policy makers, and advocates are questioning whether conventional, market-oriented home ownership is the best form of housing for low-income households and communities. While others continue to extol the many benefits of home ownership, they question the way it is structured and suggest that alternative models of resale-restricted, owner-occupied housing may help low-income homeowners keep their homes more successfully.

Research on one of these alternative models, the community land trust (CLT), found delinquencies and foreclosures to be far lower among the owners of CLT homes than the owners of unrestricted, market-rate homes during the market downturn of 2007–2009. This article presents these findings and examines aspects of CLTs that may help to explain the sustainability and success of CLT home ownership.

Community Land Trusts

CLTs are nonprofit organizations that utilize public and private funds to provide affordable home ownership opportunities for low-income households (usually those with gross incomes less than 80 percent of the area median income). Traditionally, CLTs purchase and retain title to the land under detached houses, attached townhouses, or multi-unit condominiums. The land is leased to residents who hold a deed to their individual homes. Some CLTs use other legal mechanisms, including deed covenants, second mortgages, or cooperative housing models, to convey ownership and subsidize properties.

CLTs provide homeowners with pre-purchase and post-purchase stewardship services to protect them from high-cost or predatory mortgage lending. CLTs also intervene to cure delinquencies and prevent foreclosures. In exchange, homeowners accept limitations on the resale price and the equity they may remove from their homes. Through this arrangement, households unable to afford market-rate homes are able to realize most of the financial and social benefits of home ownership, while CLTs are able to maintain affordability of their homes for future buyers.

Reevaluating Low-Income and Minority Home Ownership

Cross-sectional investigations have found that home ownership is the most robust explanatory factor of wealth in low-income and minority households. Home equity made up 56 percent of the wealth in households within the bottom quintile on income in 2000 relative to 32 percent for all households (Herbert and Belsky 2008). Before the housing market crisis, home equity accounted for approximately 62 percent of wealth for African-Americans and 51 percent for Hispanics, but only 44 percent for whites (McCarthy, Van Zandt, and Rohe 2001).

The financial benefits of home ownership may only be realized if low-income households are able to enter and sustain it. Longer durations of tenure greatly increase the likelihood of financial returns. When studies have examined home ownership over time, they find that low-income households take longer to enter owner-occupied housing and are more likely to return to renting; indeed, roughly half of low-income households exit home ownership within five years of purchase (e.g., Reid 2005).

Risk factors associated with losing one’s home are more common among low-income and minority homeowners. They are more likely to obtain high-risk loans for purchase and refinance, and they are more vulnerable to trigger events, such as unemployment or health issues, which are associated with higher incidents of delinquencies and foreclosures (Immergluck 2009). Almost half of low-income households are severely cost-burdened by their housing expenses (Joint Center for Housing Studies 2008). Length of tenure, loan terms, affordability, and trigger events may impact sustaining home ownership and affect the likelihood that low-income and minority homeowners will accumulate wealth or debt.

Costs of Foreclosure to Communities

The costs of foreclosure extend well beyond the households that lose their homes, impacting the immediate neighborhood and surrounding municipality. Studies in Columbus (Ohio), Chicago, and New York City have shown that foreclosed properties significantly diminished nearby housing values, and that rates of depreciation were greater for lower-income than higher-income neighborhoods. Depreciation leaves remaining homeowners vulnerable to negative equity, default, and foreclosure. Foreclosures, which are associated with rises in vacant properties and crime, tend to cluster in low-income and minority neighborhoods (Immergluck 2009).

Foreclosures also impose costs on municipalities due to vacant property demolition, administrative fees, and outstanding or declining property taxes. Apgar and Duda (2005) modeled the costs of a foreclosure in Chicago and found that more than a dozen agencies could be involved in over two dozen activities, which were estimated to cost the city up to $34,199 per foreclosure. Moreno (1995) estimated the cost to Minneapolis and St. Paul for the foreclosure of houses with FHA mortgages and found that municipal losses were approximately $27,000 per foreclosure. Higher rates of delinquencies and foreclosure filings during 2009 portend continued losses for households, neighborhoods, and municipalities.

Overview of the CLT Study

In March 2010, the National Community Land Trust Network (the Network) designed and conducted the 2009 CLT Delinquency & Foreclosure Survey (Thaden 2010). All 229 CLTs in the Network’s database were invited to participate in the online survey, and 53 CLTs (23 percent) completed it. Eleven respondents did not have CLT homes with outstanding mortgages at the end of 2009, so they were not included in the final analysis. The remaining 42 CLTs in 22 states had 2,279 resale-restricted, owner-occupied homes in their portfolios, 2,173 of which had outstanding residential mortgages as of December 31, 2009. The median number of mortgaged homes for these CLTs was 30.

The primary purpose of the survey was to examine how many residential mortgages held by CLT homeowners (referred to as CLT loans) had been seriously delinquent, entered the foreclosure process, or completed the foreclosure process in 2009. Survey items were designed for comparison with results from the Network’s 2008 survey, as well as results from the 2008 and 2009 National Delinquency Surveys conducted by the Mortgage Bankers Association (MBA).

The Network’s survey replicated the definitions used by the MBA for loans that were (1) “In the Foreclosure Process,” which includes loans in the process of foreclosure regardless of the date the foreclosure procedure was initiated; and (2) “Seriously Delinquent,” which includes loans that were at least 90 days delinquent or in the process of foreclosure. The secondary purpose of the Network’s survey was to explore the practices and policies of CLTs that may help to explain the primary results.

Delinquencies, Foreclosures, and Cures

When comparing the performance of CLT loans to that of conventional mortgages for market-rate homes, it is important to emphasize that CLT loans are held by low-income households. MBA and Residential Mortgage-Backed Security (RMBS) loan samples are not limited to low-income borrowers. Considering that low-income homeowners in the market are more prone to delinquencies and foreclosures, the differential outcomes reported below may have been even greater if loans held by low-income borrowers could have been isolated for comparison in MBA and RMBS samples.

Serious Delinquencies and Foreclosure Filings in 2009

Figure 1 presents the percentages of CLT loans and MBA prime and subprime loans that were seriously delinquent or in the foreclosure process at the end of the fourth quarter of 2009. Only 0.56 percent of CLT mortgages were being foreclosed (12 out of 2,151 loans; CLT median = 0, range = 0–2), whereas the percentage of MBA loans in the foreclosure process was 3.31 percent for prime loans, 15.58 percent for subprime loans, 3.57 percent for FHA loans, and 2.46 percent for VA loans (MBA 2010). When all types of MBA loans were combined, the overall MBA percentage was 4.58 percent. Overall, MBA loans were 8.2 times more likely to be in the process of foreclosure than CLT mortgages.

On December 31, 2009, 1.62 percent of CLT mortgages were seriously delinquent (34 out of 2,099 loans; CLT median = 0, range = 0–6), while the MBA loan percentage was 7.01 percent for prime loans, 30.56 percent for subprime loans, 9.42 percent for FHA loans, and 5.42 percent for VA loans. A prime loan within the MBA sample was 4.3 times more likely to be seriously delinquent at the end of 2009 than a CLT mortgage.

2008 and 2009 Comparisons

The percentage of CLT mortgages in the foreclosure process at the end of 2008 was 0.52 percent (10 out of 1,930 loans), demonstrating a percentage point change of .04 over one year. For all MBA loans, the percentage in the foreclosure process at the end of 2008 was 3.30 percent, showing a percentage point increase of 1.28 by the end of 2009. The respective percentage point increases were 1.43 for prime loans, 1.87 for subprime loans, 1.14 for FHA loans, and 0.80 for VA loans.

The percentage of CLT mortgages that were seriously delinquent at the end of 2008 was 1.98 percent (36 out of 1,815 loans), demonstrating a percentage point decrease of -0.36 (figure 2). The percentage of MBA prime loans that were seriously delinquent at the end of 2008 was 3.74 percent, a percentage point increase of 3.27. The percentage point increases were 7.45 for subprime loans, 2.44 for FHA loans, and 1.30 for VA loans (MBA 2009).

In sum, the percentage of MBA loans that were in the foreclosure process or seriously delinquent increased from the end of 2008 to the end of 2009, while the percentages for CLT loans remained consistently lower.

The CLT Network’s surveys gathered additional information not collected by the MBA. During 2009, 0.42 percent of CLT loans completed foreclosure (9/2,160) compared to 0.26 percent during 2008 (5/1,928), which illustrates a percentage point change of 0.16. When homeowners are foreclosed upon, CLTs have a vested interest in recovering the property from the lender in order to minimize the loss of the public subsidy and preserve the affordability of the unit. No foreclosed CLT homes were lost from CLT portfolios during 2009.

2009 Cure Rates

The 2009 Network survey also gathered information on the number of serious delinquencies during the year and the total that were resolved. The percentage of CLT loans that had ever been seriously delinquent during 2009 was 2.80 percent (58/2,075). Respondents reported that 29 out of 57 were cured (51 percent).

CLTs have unique contractual rights to implement stewardship activities and intervene with homeowners and lenders in order to make mortgage payments current or preclude foreclosure completion. Respondents were asked to explain how they provided these cures, which included facilitating short-sales, offering financial counseling or referrals to foreclosure prevention programs, providing direct grants or loans to homeowners, arranging sales and purchases of a less expensive unit, and working with homeowners and lenders on permanent loan modifications.

Fitch Ratings, a global rating agency, reports cure rates for RMBS loans. They define cure as the percentage of delinquent loans returning to a current payment each month. The percentage of RMBS delinquent loans in August 2009 that had been cured was 6.6 percent for prime loans and 5.3 percent for subprime loans. Since CLTs define cures as resolving impractical financial situations for their homeowners, rather than solely as making mortgage payments current, RMBS and CLT rates are not comparable. However, these findings indicate that CLTs more often terminate serious delinquencies through a broader range of activities.

Stewardship Activities of CLTs

Intrinsic to the CLT model is a commitment to stewardship, which aims to promote positive outcomes and sustainable home ownership for residents long after they have purchased a CLT home. While stewardship is a core component of every CLT’s programming, its implementation can vary greatly. Therefore, the survey collected data on the prevalence and variety of stewardship activities in an effort to explain the low rates of delinquency and foreclosure among CLT homeowners.

The greater affordability and lower loan-to-value ratio found in CLT homes may explain part of the difference between CLT and MBA loans. However, stewardship is almost certainly a contributing factor. Without the protective shield of the CLT, low-income CLT homeowners would be prey to the same economic pressures and circumstantial factors that threaten home ownership sustainability among their market-rate counterparts. Survey results indicate that CLTs are implementing stewardship policies and practices in the following five areas, which may help to explain why CLT loans have outperformed the market.

Pre-Purchase Education

Homebuyer education enables sound mortgage decisions and prepares individuals for the responsibilities of home ownership. Because owning a CLT home entails unique contractual rights, responsibilities, and resale restrictions, supplemental education is offered frequently. The study found that 85 percent of CLTs required general homebuyer education and 95 percent required CLT-specific education prior to purchase.

Pre- and Post-Purchase Stewardship

Pre-purchase stewardship also included referrals to CLT-trained lawyers and lenders, an activity reported by 83 percent of the respondents. A one-on-one meeting of prospective homebuyers with a financial counselor was required by 71 percent of CLTs. Approximately 50 percent of all CLTs offered such post-purchase stewardship services as ongoing financial literacy training; staff outreach to homeowners; formal communications to remind them of policies; referrals for contractors or repairs; and mandatory meetings with defaulting homeowners.

Prevention of High-Risk Loans

Research finds that subprime and predatory lending have occurred more often during acquisition of refinance and home equity loans than during purchase (Immergluck 2009). Eighty-three percent of CLTs required their homeowners to seek the CLT’s permission to refinance or take out home equity loans, thus ensuring that the loan terms will not compromise affordability or home ownership sustainability and that homeowners comprehend the loan’s impact on their equity.

Detection of Delinquencies

CLTs also adopted policies and practices to monitor and detect homeowners who may be headed toward serious delinquency. Most CLTs charge a monthly ground lease fee (typically $10–50) to offset their costs. According to 90 percent of respondents, late payment of these fees was used as an indicator that a homeowner may be late paying their mortgage. Further, 69 percent of CLTs reported that they detected delinquencies through informal interactions with homeowners, and 55 percent of CLTs reported that 80–100 percent of seriously delinquent homeowners contacted the CLT on their own volition. Close to 50 percent of CLTs reported that lenders were legally obligated to notify the CLT of delinquencies or foreclosure proceedings.

Intervention with Delinquent Homeowners

CLTs reported an array of interventions with homeowners at risk of foreclosure. Two activities that are instrumental components of federally sanctioned foreclosure prevention programs were also implemented by CLTs: 71 percent contacted lenders as soon as they became aware of delinquencies; and 57 percent provided homeowners with direct financial counseling. Over half of CLTs reported other activities that enable residents to keep their homes, such as providing rescue funds for outstanding mortgage payments. For homeowners unable to keep their homes, 49 percent of CLTs reported activities to prevent completed foreclosures, such as facilitating sales to low-income buyers or directly purchasing the homes.

Discussion and Conclusions

The prevalence of stewardship activities among the nation’s CLTs may help to explain why CLT loans are outperforming most market-rate loans in terms of delinquencies and foreclosures. It may also explain the high cure rates among CLT mortgages that become seriously delinquent, as CLTs intervene to arrest the slide toward foreclosure. In this respect, CLT home ownership appears more sustainable than private market options for low-income homeowners, suggesting that CLTs may provide a less speculative and more reliable avenue to wealth accumulation for low-income and minority homeowners.

Low-income households can only enjoy the economic benefits of home ownership if they are able to remain homeowners for a number of years. If they lose their homes to foreclosure—or simply return to renting after discovering that the costs and burdens of home ownership are too difficult—low-income households cannot build wealth. The findings of the Network’s survey make clear, however, that few CLT homeowners are losing their homes to foreclosure. Moreover, other research on CLT homeowners has found that they far exceed the 50 percent home ownership retention rate reported among conventional market, low-income homeowners. Preliminary results from a study by The Urban Institute, which includes three CLTs, found that over 91 percent of low-income households remained homeowners five years after buying a CLT home. They either continued to occupy their CLT home or resold it to purchase a market-rate home (Temkin, Theodos, and Price, forthcoming).

CLT home ownership not only lessens foreclosures and increases the chances of success among the population most at-risk of losing their homes, but it also indirectly prevents costs of foreclosure for neighbors, municipalities, and lenders. Such exemplary performance implies that greater investment in this model, including its stewardship activities, is both warranted and overdue.

Only one-third of CLTs reported receiving any funding for foreclosure prevention activities during 2009, while many reported increasing stewardship activities to buffer homeowners from the economic downturn and foreclosure crisis. The study also found that only one-third of CLTs received funding to create new CLT units from foreclosed and vacant housing stocks during 2009. Hence, CLTs are not adequately resourced to create home ownership opportunities from the crisis, which could help to preclude negative outcomes associated with unsustainable home ownership in the future.

Jacobus and Abromowitz (2010) call for a reevaluation of the ways that the federal government encourages home ownership. They recommend targeting existing resources to purchase-subsidy programs like CLTs in order to more efficiently use public dollars and expand and maintain home ownership opportunities. This study provides further support for that policy recommendation.

About the Authors

Emily Thaden, M.S., is a doctoral candidate in the Community Research and Action Program at Vanderbilt University and is employed as the Shared Equity Development Specialist at The Housing Fund in Nashville, Tennessee.

Greg Rosenberg, J.D., is director of the CLT Academy of the National Community Land Trust Network and the former executive director of the Madison Area Community Land Trust. He was a contributing author to The Community Land Trust Reader (Lincoln Institute, 2010), and is a graduate of the University of Wisconsin Law School.

References

Apgar, W. C., and M. Duda. 2005. Collateral damage: The municipal impact of today’s mortgage foreclosure boom. Minneapolis, MN: Homeownership Preservation Foundation.

Herbert, C.E., and E.S. Belsky. 2008. The homeownership experience of low-income and minority households: A review and synthesis of the literature. Cityscape: A Journal of Policy Development and Research, 10(2): 5–60.

Immergluck, D. 2009. Foreclosed: High-risk lending, deregulation, and the undermining of America’s mortgage market. Ithaca, NY: Cornell University Press.

Jacobus, R., and D.M. Abromowitz. 2010. A path to homeownership: Building a more sustainable strategy for expanding homeownership. Washington, DC: Center for American Progress (February).

Joint Center for Housing Studies. 2008. State of the nation’s housing 2008. Cambridge, MA: Harvard University, Joint Center for Housing Studies.

McCarthy, G.W., S. Van Zandt, and W.M. Rohe. 2001. The economic benefits and costs of homeownership: A critical assessment of the literature (Working Paper No. 01-02). Washington, DC: Research Institute for Housing America.

Moreno, A. 1995. The cost-effectiveness of mortgage foreclosure prevention. Minneapolis, MN: Family Housing Fund.

Mortgage Bankers Association. 2009. Delinquencies continue to climb in latest MBA National Delinquency Survey. Washington, DC (March 5).

–––—. 2010. Delinquencies, foreclosure starts fall in latest MBA National Delinquency Survey. Washington, DC (February 19).

Reid, C.K. 2005. Achieving the American dream? A longitudinal analysis of the homeownership experiences of low-income households (CSD Working Paper 05-20). St. Louis, MO: Washington University, Center for Social Development.

Temkin, K., B. Theodos, and D. Price. Forthcoming. Balancing affordability and opportunity: An evaluation of affordable homeownership programs with long-term affordability controls. Washington, DC: The Urban Institute.

Thaden, E. 2010. Outperforming the market: Making sense of the low rates of delinquencies and foreclosures in community land trusts. Portland, OR: National Community Land Trust Network. (This report is also available as a working paper on the Lincoln Institute Web site.)

One of the longest standing debates in community economic development is between “place-based” and “people-based” approaches to combating poverty, housing affordability, chronic unemployment, and community decline. Should help go to distressed places or distressed people?

This policy brief covers key issues surrounding the use of nonprofit payments in lieu of taxes (PILOTs): payments made voluntarily by tax-exempt nonprofits as a substitute for property taxes. It describes the current use of PILOTs in the United States, explores some reasons why nonprofits offer PILOTs and why there is growing interest in these payments, weighs the pros and cons of PILOTs, and offers recommendations.

Across the globe, implementing the Paris climate agreement is expected to cost more than US$12 trillion over 25 years.

So it’s not surprising that much of the conversation since the agreement was finalized in December has been about climate finance. And one of the big topics in climate finance—particularly among city leaders—is “green bonds.”

But what exactly are green bonds, and why should local authorities care about them? Here’s a brief explanation of the major issues.

What Is a Green Bond?

A green bond is a type of debt instrument much like any other bond—except that the proceeds must be earmarked for projects that produce a positive environmental impact.

The first bonds marketed this way were issued by the European Investment Bank in 2007 and World Bank in 2008. Since then, other development banks, corporations, and governments have joined the trend. According to the Climate Bonds Initiative, a research group that tracks the market, total green-bond issuances shot up from US$3 billion in 2012 to about US$42 billion in 2015.

Local authorities represent a growing slice of this market. They see green bonds as one tool that could help pay for renewable energy, transit systems, and water infrastructure, among other things.

The U.S. state of Massachusetts sold the first municipal green bond in June of 2013, followed a few months later by the city of Gothenburg, Sweden. Other recent issuers include the city of Johannesburg; the transit authorities of New York City, Seattle, and London; and the water authority of Washington, DC.

Are Green Bonds Any Different Than Other Municipal Bonds?

Not really. The mechanics work the same as any other municipal bond issuance. The main difference is the environmental aims of whatever the city is using the bond proceeds to pay for.

In addition, green-bond issuers face some additional paperwork—essentially to prove to investors that their money is actually being used to benefit the environment.

To some degree, green bonds are a marketing tool. Labeling a bond that will pay for subway repairs as “green” makes it more appealing to investors. “The reality is a lot of cities are issuing green bonds, they’re just not calling them that,” says Jeremy Gorelick, who teaches municipal finance at Johns Hopkins University in the U.S. city of Baltimore.

That may be true in advanced economies such as the United States, where a mature municipal-bond market has been functioning for more than a century. In the developing world, most cities are unable to issue bonds at all, and for a variety of reasons. In many countries, cities need to obtain legal authority from their national governments to issue a bond in the first place. They also have a lot of work to do in terms of establishing creditworthiness.

Gorelick, who is advising the city of Dakar, Senegal, on its efforts to issue its first municipal bond, recommends that cities in this situation not aim for the bond market right away. He says they can first try borrowing from central governments or their related municipal development funds before approaching development finance institutions for concessionary loans or commercial banks for market-rate debt. The idea is to build creditworthiness and the sort of transparent accounting that bond investors active in debt capital markets will demand.

Why Are Cities So Interested in Green Bonds?

There are many reasons. The key one is that investors really want green bonds in their portfolios right now. As a result, municipal issuers have seen sales of green bonds “oversubscribed”—a good problem for a city to have.

When Gothenburg issued its first green bonds in 2013, “we didn’t know if there would be any interest from investors,” says Magnus Borelius, Gothenburg’s head of treasury. Within 25 minutes, investors had placed €1.25 billion worth of orders—many times more than expected—and Gothenburg had to begin turning them away. “We were overwhelmed,” Borelius says.

Cities benefit from strong investor demand in a number of ways. Most important, it means they can attract new kinds of investors, diversifying the pool of people and institutions with an interest in their city. “It’s good to have a lot of investors know you have access to capital,” Borelius says. Since issuing green bonds, he adds,  “we’ve had increased contact with investors—they’re more interested in the city, and they’re coming to visit us.”

Strong investor demand “puts the issuer in an advantageous position,” says Lourdes Germán, a municipal finance expert with the Lincoln Institute of Land Policy. Local authorities can use their leverage to increase the size of their offering, demand a longer payback period, or seek better pricing. While some cities have reported getting more favorable pricing on green bonds, Germán says issuers shouldn’t count on it. “It remains murky whether calling it ‘green’ gets better pricing,” she says.

What’s in It for Investors?

A growing number of investors want to see their money going toward environmentally sustainable projects. Some are motivated by the fight against climate change; others are simply hedging climate risks in their portfolios.

The result is that more pension funds and private-asset managers these days have some kind of mandate to think green. For example, last month, the Swedish public pension fund AP2 said it was allocating 1 percent of its €32 billion portfolio to green bonds. When you’re talking about huge institutional investors, commitments like this add up quickly.

On top of that, municipal bonds, at least in established markets like the U.S., are generally viewed as safe investments. So green bonds issued by cities are particularly desirable. “Institutional investors have a fiduciary duty and won’t invest in a product that won’t deliver a return,” says Justine Leigh-Bell, a senior manager at the Climate Bonds Initiative. “We have here an investment-grade product by blue-chip issuers where the risk is low.”

How Do You Know If a Bond Is “Green”?

There are no hard rules around that—which is a concern for both investors and environmentalists. However, the market for green bonds is evolving quickly, and some voluntary standards are emerging for issuers.

One, developed largely by large banks through the International Capital Market Association, is called the Green Bond Principles. Another was developed through the Climate Bonds Initiative and is known as the Climate Bonds Standard. The People’s Bank of China also recently released its own guidelines on green bonds.

Nobody has to use these standards, but there’s a strong push in the direction of doing so. “If I called my fire truck ‘green,’ investors might raise an eyebrow,” Germán says. “But it’s a two-sided market, so there’s some check and balance. An issuer will raise that money only if an investor believes it’s really for a green purpose.”

A growing number of municipal issuers are seeking out third-party opinions to validate their bonds’ “greenness.” That’s what Gothenburg does. The Swedish city also has created a “green bond framework” to be transparent with investors about what the city considers “green” and how it selects projects.

“It’s still early days in this market,” says Skye d’Almeida, who manages the sustainable infrastructure finance network for the C40 Cities Climate Leadership Group. “So it’s very important to avoid any ‘greenwashing’ scandals where cities say they issued a green bond and investors find out down the track that it wasn’t green. That would erode confidence in the market. So having some independent party verify and being very transparent about the use of the proceeds is something cities should be prepared to do.”

Does It Create a Lot of Extra Work or Cost for the City to Issue a Green Bond?

Some. Leigh-Bell puts the cost of an independent review at between US$10,000 andUS$50,000, depending on who is doing the review and other factors. That’s a rounding error on deals that are often valued in the hundreds of millions of dollars.

Issuing green bonds can create extra work for city staff. Ahead of an issuance, there’s the need to scour the city’s capital investment plans for projects that qualify as green. Afterward, there’s work involved in tracking the use of proceeds and reporting that information to investors. According to d’Almeida, these jobs have the positive side effect of forcing people to work across their silos—finance staff must collaborate with transportation or environmental staff, for instance.

Borelius says that has been the case in Gothenburg. “The first question people ask me about green bonds is, ‘How much extra work is it?’” he says. “If you don’t put treasury people and sustainability people at the same table, it will be a lot of extra work. But if you’re issuing a green bond, you should have that in place.”

Johannesburg Mayor Mpho Parks Tau agrees that mobilizing around green bonds has paid organizational dividends. Asked recently if labeling bonds “green” is mostly about marketing, the mayor responded that the exercise has been useful for aligning local government as an institution around his environmental agenda. “We are able to say to the institution, actually, the bulk of our capital program is going to be about sustainability.”

Christopher Swope is managing editor of Citiscope.

Image credit: Dennis Tarnay, Jr. / Alamy

This article originally appeared at Citiscope.org. Citiscope is a nonprofit news outlet that covers innovations in cities around the world. More at Citiscope.org.