One in a series explaining key terms and concepts of Pennsylvania government. Today’s topic: payments in lieu of taxes, or PILOTs.
Seeking a better understanding of Pennsylvania’s issues and proposed solutions? Sometimes, complicated jargon and concepts can get in the way. That’s why we started Explainers, a series that tries to lay out key facts, clarify concepts and demystify jargon. Today’s topic: payments in lieu of taxes or PILOTs.
University of Pennsylvania students demonstrated at the university president’s holiday party last month to urge Penn to make regular donations to Philadelphia’s cash-strapped public schools.
Local governments throughout the Commonwealth have made similar, if less dramatic, appeals to their resident nonprofits in recent years.
They are asking for PILOTs, or payments in lieu of taxes. The voluntary payments are made to local governments by nonprofit organizations, which use local services, like fire protection and roads, but are exempt from paying property taxes because they perform charitable work.
In cities struggling to balance budgets and fund their pension obligations, financially healthy nonprofits that own a significant amount of tax-exempt property can be an attractive target for raising revenue. Cities often want nonprofits to pitch in some amount of money to make up for foregone taxes and the costs of public services.
PILOTs are most commonly paid voluntarily by large landholding nonprofits, especially hospitals and private colleges, in cities and states that rely on property taxes more than other funding sources to run local governments. Other nonprofits choose not to make tax-replacement donations because they contribute to their communities in other ways.
Why are cities interested in soliciting PILOTs and why do nonprofits dislike the idea?
The percentage of tax-exempt property in some Pennsylvania communities is substantial. For example, a 2006 report in the Chronicle of Philanthropy estimated that the value of tax-exempt property owned by nonprofits in Philadelphia amounted to 10.8 percent of the city’s total property value — the highest percentage among the 23 large U.S. cities the journal analyzed.
A report released by the state Auditor General’s office in December calculated the county, municipal and school district property taxes that 10 Pennsylvania counties would have received last year if all property within their borders were taxable. The assessed value of tax-exempt properties in the counties — including tax-exempt government-owned property, schools and public universities, as well as the property held by tax-exempt nonprofits that are generally targeted for PILOTs — ranged from $189 million (or eight percent of the total assessed property value) in Monroe County to $24 billion (or 25 percent of the total assessed property value) in Allegheny County.
Nonprofits have commissioned studies to prove their value to their communities in jobs, neighborhood improvement, economic development and charitable service — benefits that they say far surpass the amount of cash generally raised through PILOTs. They fear that making payments “in lieu of taxes” will lead to the suggestion that they ought to pay taxes, which could harm their financial health and charitable work.They also do not like the haphazard — and sometimes coercive — ways communities seek PILOTs. In 2012, for example, Scranton city council’s president and solicitor vowed to object to every zoning variance application submitted by tax-exempt nonprofits as a way to stop properties from leaving the tax rolls, the Scranton Times-Tribune reported. In 2013, the city budget anticipated $1.3 million in PILOTs, but Scranton received just $30,000 through September that year. Current city leaders have said they will take “a more practical approach” to soliciting contributions from nonprofits.
Some experts suggest that the most successful PILOT programs are collaborative, consistent and tailored to their communities.
Where are PILOTs being collected?
The best list comes from the Lincoln Institute of Land Policy, which conducted a nationwide survey of municipalities in 2011. It found that at least 218 local governments in at least 28 states had received payments in lieu of taxes since 2000, but it likely missed many municipalities that had received relatively small PILOTs. More than three-quarters of all payments documented in the study were made in the northeastern United States, where the nonprofit sector is largest and communities are particularly reliant on property taxes for revenue, with the most activity in Massachusetts and Pennsylvania.
The study found that 30 Pennsylvania “localities” — municipalities, counties and school districts — had collected PILOTs from 133 nonprofits, for a total one-year revenue of $10 million.
Erie and Pittsburgh were among the ten U.S. places that received the most PILOT revenue in a year. In Erie in 2011, the city, county and school district split a total of $2.8 million in voluntary payments. That same year, Pittsburgh received $2.6 million from a coalition of 46 nonprofits.
The top 10 cities are unusual, though. In general, PILOTs range from $100 one-time payments made by churches and tiny arts organizations to the $10 million Harvard University paid to Boston, Cambridge and Watertown, Mass. in 2012. Most PILOTs are small. The median payment in the study was $30,000.
Which nonprofits qualify for property tax exemptions in Pennsylvania?
Pennsylvania has been struggling for decades to define the standards that charities should meet in order to qualify for property tax exemptions. The state constitution permits the legislature to exempt “purely public charities” from paying taxes, but a series of state Supreme Court decisions and laws have advanced different tests for determining who qualifies, with both the court and legislature claiming the authority to set the rules.
In 1985, the state Supreme Court established five criteria that defined a purely public charity. The standard was difficult to meet and in the following decade local governments challenged charities’ property tax exemptions or used the threat of a challenge to secure PILOT deals from nonprofits.
The Pennsylvania General Assembly passed Act 55 of 1997, which relaxed the standards and relieved some pressure on nonprofits to make PILOTs since they were less likely to lose a legal challenge to their exemption. In Philadelphia, collection of PILOTs was robust in the mid-90s. Then, PILOT revenue dropped from $8.8 million in 1996 to $800,000 in 2001, according to a 2002 book on the subject published by the Urban Institute. The drop continued, with nonprofits paying Philadelphia $492,000 in PILOTs in 2011, according to the Lincoln Institute of Land Policy.
In 2012, the state Supreme Court reaffirmed its authority to define public charities and re-established its five-part test. The General Assembly last year took the first step in the long process of trying to pass a constitutional amendment to take back the authority to set the standard.
Can PILOTs solve struggling cities’ financial problems?
No, but they can make a difference in cities where tax-exempt properties make up a significant percentage of the taxable land area, or in cases where a nonprofit is based in a city but its charitable contributions are largely directed to people outside the municipality.
The Lincoln Institute of Land Policy found that PILOTs accounted for one percent or less of total general revenue in 165 out of 186 towns, cities, school districts and counties that said they received voluntary payments. The percentage of general revenue was higher in college towns with relatively small budgets — Lancaster, for example, collected PILOTs in 2011 from Lancaster General Hospital and Franklin & Marshall College worth 2.5 percent of the city’s general revenue — but even in those places PILOTs almost never added up to even five percent of the local government’s revenue.
“PILOTs will never be a panacea for cash-strapped governments—they simply do not generate enough revenue,” the study found, but the payments “can still provide useful funding” to help cover the costs of local services used by nonprofits.
Did this explainer answer all your questions about PILOTs? If not, you can reach Laura Legere via email at email@example.com or through social media @LauraLegere. Have a topic on which you’d like us to do an Explainer? Let us know in the comment section below, or on Twitter @PaCrossroads.