Publications

PILOTs Give Local Government Revenues a Lift (2002)

by Mark Murphy

Imagine you're sitting down with the mayor of a city struggling with a budget shortfall, looking for ways to increase revenue and avoid cuts in your members' jobs and benefits. The mayor won't even consider a tax increase. Frustrated and at an impasse, you look out the window, see that it has started to snow outside, and notice a city snowplow passing in front of the hospital across the street. Then you notice that most of the pedestrians are students walking toward the expansive campus of the private university located a couple blocks away. You ask the mayor, "Do you collect any taxes on the nonprofits in the city?" The mayor replies, "Just some fees, a tax on the electric bill, things like that. But nothing close to what we would get if we could tax the value of the real estate. Why do you ask?"

With the recent downturn in the economy and the return of shortfalls to local government budgets, jurisdictions around the country — like the city in our example — find themselves in a difficult fiscal situation. While cities and counties have largely opposed raising broad-based taxes, many are looking for new sources of revenue. One strategy that some jurisdictions have used is to solicit payments from nonprofit organizations that are typically exempt from taxes. These "payment-in-lieu-of-taxes" arrangements, or PILOTs, are getting renewed attention today. PILOTs can be a good way for local governments to defray the cost of providing services for tax-exempt groups, and they can also provide badly needed revenue when budgets are tight and large amounts of local real estate are exempt from property taxes. However, jurisdictions considering implementing a PILOT need to understand what they are, how they work and how best to solicit payments from tax-exempt entities.

What are PILOTs?

PILOTs are voluntary or negotiated payments made by tax-exempt organizations (such as a nonprofit organization or sometimes another governmental entity) to local governments. The payment terms of PILOTs — as well as the types of payers and recipients — vary widely from case to case. Most PILOTs are voluntary payments made by nonprofit organizations. These payments can be largely symbolic donations by a nonprofit organization to a jurisdiction from which the nonprofit is exempt from taxes, or payments to cover the cost of police, fire, snow removal or other local services the nonprofit receives, or even major contributions that approximate or exceed what the jurisdiction would collect from taxing the property to promote the fiscal security of the jurisdiction or to fund a specific public initiative. Most of the time, the payments do not equal what the jurisdiction would collect if the property were taxed, but do provide at least some relief to the local government. Some well-known PILOTs include Harvard University's payments to Cambridge and Boston, Mass., and Yale University's annual payment to New Haven, Conn. Harvard paid Cambridge $1.6 million in fiscal year 2001 on tax-exempt property, and agreed in 1999 to pay Boston $40 million over 20 years for property it owns in that city. Yale contributes more than $2 million per year to New Haven on tax-exempt property for fire services, in addition to paying taxes on non-educational property.

Some PILOT programs are sponsored by governments. In Connecticut, the state government makes direct payments to local governments based on the amount of property owned by the state or by nonprofit colleges and hospitals. The state program pays a percentage of the taxes that would be paid if the property were not tax-exempt: for example, up to 100 percent of the lost value for correctional facilities; up to 65 percent for state hospital property; and up to 77 percent of the lost value for property owned by private, nonprofit colleges and hospitals. The state of Rhode Island also makes payments to local communities for state-owned land. The federal government makes contributions to counties in 49 states and the District of Columbia for tax-exempt, federally managed land. Those payments (known as PILT payments) consider the amount of federally managed land in the county (not including office buildings, military facilities or correctional facilities), the county's population and other revenue shared with the county. These government-sponsored payments face criticism, however, for being insufficiently funded. Since these programs are subject to annual appropriation, the total amount of funds available to local governments is determined each year by state or federal legislators. Funding rarely if ever approaches authorized levels, and local government groups argue the payments are insufficient compensation for the loss of taxable property.

Other types of arrangements, such as economic development tax incentives, can provide for a negotiated reduction in property taxes for a business. These are also sometimes referred to as PILOTs. However, these arrangements involve private, for-profit businesses that are not normally exempt from taxes, are typically established by local industrial development agencies and result in lost revenue, not additional revenue. Some utilities also make PILOT arrangements with local communities on a separate basis from the property tax.

No statistics are kept nationally on the number of PILOTs in local jurisdictions, or on the amounts collected. However, there is evidence that jurisdictions have been more aggressive in soliciting PILOTs from local nonprofit organizations over the past 15 years. (See the information box for a selection of cities known to collect PILOT contributions from nonprofit organizations.)

Why do governments solicit PILOTs? Why do organizations pay them?

The reason local governments solicit PILOT payments is simple — they generate revenue. The rationales jurisdictions cite when soliciting contributions include the loss of revenue from tax-exempt property, the cost of local services to the organization, budget shortfalls and a civic duty to be a "good neighbor" to the community. In certain jurisdictions, the large amount and high value of tax-exempt property eliminates a large share of the tax base, adding to the burden on other residents and businesses. PILOT proponents argue that it is not fair for residents to pay higher property taxes so that relatively wealthy organizations can pay no taxes whatsoever, especially when they receive costly services.

No information exists on the number or location of PILOT programs nationwide. Here's a selection of cities that collect PILOT payments from nonprofit organizations.

          

Baltimore, Md.
Boston, Mass.
Cambridge, Mass.
Detroit, Mich.
Indianapolis, Ind.

 Minneapolis, Minn.
New Haven, Conn.
Philadelphia, Pa.
Pittsburgh, Pa.
Palo Alto, Calif.		           

Sources: "PILOTs: A Comparative Analysis," Government Finance Review (June 1999); news reports.

The motivation for tax-exempt organizations to pay PILOTs is more complicated. Some organizations recognize the value of services they receive from the local government and are willing to pay their fair share of those costs. These organizations also may wish to generate good will in the community by contributing to local revenues. In many cases, however, a nonprofit only negotiates a PILOT or some other voluntary contribution after being approached by the local jurisdiction, or even faced with the prospect of some other, mandatory tax or payment levied by the local government.

In fact, a tension often exists between local jurisdictions and the nonprofit organizations based there — even among nonprofits already paying PILOTs. Differences over what is the appropriate amount to contribute arise when PILOT agreements are renegotiated, when the jurisdiction is experiencing fiscal difficulties, or when the nonprofit organization purchases additional property that subsequently becomes tax-exempt. Cities such as Washington, D.C., and Cambridge, Mass., have found it difficult to cope with the fact that half of all property within their city limits is tax-exempt. The Bush administration's budget for fiscal 2003 proposes to cut federal PILT payments by 20 percent, which would impact many counties with a large federal presence, especially in the West. And smaller cities such as Worcester, Mass., and Urbana, Ill., have faced the erosion of their tax bases when colleges and other nonprofits purchase additional property. Harvard's recent 20-year PILOT agreement with Boston was negotiated after city officials were frustrated and alarmed by the university's purchase of 52 acres of property within the city.

For their part, nonprofits usually resist calls to begin or increase their contributions to local jurisdictions. They often respond by enumerating the positive beneficial impact they have on the locality, including creating jobs, making local purchases and paying miscellaneous taxes and fees. The nonprofits also may cite their accomplishments in serving community needs and warn that increased contributions to government will mean less of those services.

Local officials sometimes force the issue with nonprofits that have not contributed by halting or slowing building permits or zoning approvals, by proposing to levy some alternate tax on nonprofits or even by challenging the organization's tax-exempt status. The result is usually a negotiated settlement that allows the jurisdiction to collect some revenue while at the same time letting the tax-exempt organization project a positive image in the community and avoid an alternative that could be worse. That was the case in Baltimore, Md., last year, where 16 of the city's largest nonprofit organizations agreed to contribute $20 million to the city over 4 years, after the mayor dropped a proposed energy use tax on nonprofit organizations within the city. Several Pennsylvania cities and counties mounted legal challenges to local nonprofit organizations' tax-exempt status in the early 1990s. Many of these attempts were successful in collecting PILOT payments even after they lost initial challenges in court.

Local governments are not universally successful in collecting PILOT payments from nonprofits, however. The city of Evanston, Ill., has been unable to get Northwestern University to agree to a PILOT arrangement, despite years of effort including a prior threat to enact a tax on student tuition. The city of New Berlin, Wis., dropped an effort to collect PILOT payments from a Lutheran Church day care center in 2000 after the church sued the city over the city's negotiating tactics, which included withholding zoning change approvals on the property.

Nevertheless, PILOTs remain popular with local politicians because they understand that taxpayers don't appreciate carrying a higher tax burden because some groups are exempt — especially when those exempt groups appear to have ample resources to pay.

Instituting PILOTs in your local government

Where PILOT arrangements between local government and tax-exempt organizations could be beneficial, the key is getting political leaders to act. A well-planned union political action campaign may be required to convince a county's board of supervisors or a city's mayor to approach nonprofit leaders.

The first step in any effort of this kind is education. Many political leaders show interest in the concept of PILOTs, but have little prior knowledge about them. Local union leaders can use the following themes to educate government officials about implementing a PILOT in your community:

Make the first call

Local political leaders contemplating a PILOT program should meet with local nonprofit organizations to gauge their willingness to contribute toward services and the jurisdiction's revenue base. In some cases, nonprofit officials are willing to help. For instance, Trinity College in Hartford, Conn., voluntarily contributes $6 million per year for an inner-city development project to its host city — even when the state government already makes grants to cities for nonprofits. Trinity makes the contribution because the college's leadership believes it their obligation to the city.

Make your best case

If your jurisdiction provides any services to local nonprofits, such as police, fire, snow removal or other services for which the local government is not reimbursed, that is an issue that may persuade the nonprofit of its obligation. It could also anger local taxpayers and give the nonprofit some less-than-desirable publicity. If the union can help the city calculate the cost of those unreimbursed services, that may help even more.

Similarly, if the local jurisdiction is forced to cut vital services because of a fiscal crisis, relatively wealthy nonprofit organizations may be willing to contribute to a PILOT in order to burnish their image in the community. Reluctant organizations may bear reminding that in times of economic hardship, a community's needy population needs services, not reminders of the positive benefits the nonprofit has made in the past.

Make them blink

In the end, since these contributions ultimately are voluntary, a jurisdiction's use of persuasion or negotiating tactics often make the difference between success and failure at getting nonprofit organizations to make PILOT payments. Local jurisdictions have in some cases reached agreement with nonprofits after proposing alternative taxes or fees, slowing development of commercial property by nonprofits, demanding payment for local services like fire service or snow removal, or even threatening to challenge an organization's tax-exempt status. The former mayor of Ithaca, MY, described the process to The Chicago Tribune as, "OK, if you stick to every legal right that you have, we'll do the same. ... And things like building permits and zoning law, we will adhere to every fine line of the law."

PILOTs can be an important source of revenue to augment property tax collections for many local governments, and can ease the tax burden on residents, Many cities have been successful in obtaining PILOT payments from nonprofit organizations in their communities — especially when the jurisdiction provides services to the organization, and when the local government's finances are impacted by the amount of tax-exempt property held by nonprofits. Local governments can pursue PILOT payments from nonprofits by approaching them directly with an appeal to their civic obligation or a demonstration of the cost of unreimbursed local services. As a last resort, jurisdictions can propose alternative taxes or fees on nonprofits, challenges to an organization's tax-exempt status or limits on further real estate purchases by nonprofit groups to prevent additional losses of taxable property.

For more information, please e-mail, call (202) 429-1215 or write to: AFSCME Department of Research and Collective Bargaining Services, 1625 L Street, N.W., Washington, D.C. 20036-5687.

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