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Nonprofits, the Property Tax, and PILOTs in New England

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Adam Langley, senior research analyst at the Lincoln Institute of Land Policy, explores a potential role for nonprofit payments in lieu of taxes (PILOTs) in addressing fiscal stress and suggested that localities approach PILOTs in a collaborative way marked by respectful dialogue, careful use of terminology, and justification for PILOT requests.

Published in: Government & Nonprofit
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Nonprofits, the Property Tax, and PILOTs in New England

  1. 1. 1 Nonprofits, the Property Tax, and PILOTs in New England Adam H. Langley December 2, 2016
  2. 2. 2 Somerville (MA) $275k/year from Tufts Boston (MA) $32m from 32 nonprofits Providence (RI) $8.2m from 7 nonprofits Springfield (MA) $210k from Baystate Medical Center
  3. 3. 3 • Fiscal challenges → Need new revenue sources Growing Interest in PILOTs
  4. 4. 4 • Fiscal challenges → Need new revenue sources • Health & education sector ↑ → Impact of tax exemption ↑ 12.1% 14.1% 14.0% 15.1% 16.2% 17.6% 17.8% 18.4% 20.8% 22.8% 24.3% 24.8% 24.8% 25.0% U.S. NH CT ME VT RI MA 2015 1990 Health & Education Sector’s Share of Private Sector Employment Growing Interest in PILOTs Source: Current Employment Statistics (BLS).
  5. 5. 5 • Fiscal challenges → Need new revenue sources • Health & education sector ↑ → Impact of tax exemption ↑ • PILOTs biggest in New England • Large nonprofit sector • High property tax reliance Growing Interest in PILOTs Source: Langley, Kenyon, and Bailin (2012). PILOTs in New England 58% of localities receiving PILOTs in New England 66% of PILOT revenue in New England
  6. 6. 6 Outline 1. Arguments For and Against PILOTs 2. Collaborative Approach to PILOTs
  7. 7. 7 Arguments For PILOTs 1. Nonprofits should pay for public services they consume 2. Unfair to expect city taxpayers to bear entire burden of subsidizing broadly dispersed benefits for nonprofits Arguments Against PILOTs 1. Nonprofits will have to raise fees or cut services 2. Limited revenue potential
  8. 8. 8 Limited Revenue Potential 131 16 18 11 8 2 93 28 18 19 19 9 0 20 40 60 80 100 120 140 0% - .25% .25% - .5% .5% - 1% 1% - 2% 2% - 5% 5% + No.Localities Percent of Revenues Pct. General Revenues Pct. Property Taxes Source: Langley, Kenyon, and Bailin (2012). “Payments in Lieu of Taxes by Nonprofits: Which Nonprofits Make PILOTs and Which Localities Receive Them.” 70% Localities PILOTs < 0.25% Revenue 11% Localities PILOTs > 1% Revenue
  9. 9. 9 Arguments For PILOTs 1. Nonprofits should pay for public services they consume 2. Unfair to expect city taxpayers to bear entire burden of subsidizing broadly dispersed benefits for nonprofits Arguments Against PILOTs 1. Nonprofits will have to raise fees or cut services 2. Limited revenue potential 3. Ad hoc, secretive, and contentious
  10. 10. 10 Collaborative Approach to PILOTs
  11. 11. 11 Respectful Dialogue with Nonprofits • Voluntary payments → Need buy-in from nonprofits • Local officials must: – Explain need for PILOT – Trustworthy partner that will use funds efficiently – Acknowledge nonprofit’s contributions – Listen to nonprofit’s concerns • PILOTs in nonprofit’s enlightened self-interest • Conversations take time
  12. 12. 12 Avoid the term “PILOT” • Worried about payments in lieu of taxes • May be willing to make PILOTs by other names – “Voluntary contributions” – “Service fees” • PILOT agreements – Voluntary – Do not undercut nonprofit’s tax-exempt status
  13. 13. 13 Justify the Amount of a PILOT • Cost of providing services to nonprofits – Police/fire – Street maintenance – Snow removal • Basis for calculating suggested payment – Assessed value – Square footage – Annual revenue
  14. 14. 14 Earmark PILOT for Nonprofit Priorities • Nonprofits more willing to make PILOTs if – Earmarked for their priorities – Aligned with nonprofit’s mission – Direct connection between the PILOT and public services benefiting the nonprofit
  15. 15. 15 Earmarked PILOTs in Worcester (MA) Worcester Polytechnic Institute Clark University $9+ million over 25 years ($270,000/year with 2.5% inflator) $6.7+ million over 20 years ($262,000/year with 2.5% inflator) PILOT Earmarks 1) Worcester Public Library 2) Improvements to public park adjacent to campus PILOT Earmarks 1) Worcester Public Library 2) Improvements to public park adjacent to campus 3) Enhancements for local area (public safety, streetscape improvements, etc.)
  16. 16. 16 Long Term PILOT Agreements • Long term agreements (5-30 years) – Predictable revenue stream for government – Known budget item for nonprofits • Base year payment + annual inflator
  17. 17. 17 Reduce Cash PILOTs to Reflect New Services • Nonprofits prefer to provide services • Governments prefer cash • Compromise: Some cash, some new services • Which services should count for offsets – Benefit local residents – New services? Above and beyond their business model? – Economic benefits should NOT count • How to do it: – Identify services most needed that nonprofits can provide – Local gov’t should be clear and consistent about priorities
  18. 18. 18 Collaborative Approach to PILOTs Respectful dialogue with nonprofits to make case for PILOT Avoid the term “PILOTs” Justify the amount of the PILOT Earmark PILOTs Long-term agreements Reduce cash PILOTs to reflect new services
  19. 19. 19 Thank You! Adam H. Langley ALangley@lincolninst.edu 617-503-2117 www.lincolninst.edu 113 BRATTLE STREET CAMBRIDGE MA 02138 LINCOLNINST.EDU @LANDPOLICY

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