Non-profits Are Non-Payers

{Reproduced from the Philadelphia Inquirer}

Anthony Campisi, March 5, 2010

Editor's note: This story appears in today's Daily News. It's Our Money decided to look into which big non-profits participate in the city's voluntary "payments in lieu of taxes" program, and what they pay. What we found might surprise you.

For a city or state, having a big nonprofit entity - like a hospital or university - within your borders is a double-edged sword. On one hand, nonprofits create jobs and provide services. On the other hand, they use city services but don't pay property taxes.

Some cities have tried to find a middle ground with these entities by collecting something called "payments in lieu of taxes," or PILOTs. Basically, the entities agree to fork over a certain amount of money, and the city doesn't challenge their nonprofit status.

Philly has had a PILOT program since 1995. But, at a time when the city is struggling to raise money to plug a budget deficit, it doesn't appear to be very successful.

Last year, Philly's PILOT agreements with 17 institutions brought in only $686,922. In a $3.7 billion operating budget, that's a rounding error. Boston collects $4.9 million from Boston University alone.

Even more surprising are the names of the institutions that are, and aren't, contributing, "It's Our Money" has found.

Though PILOTs were designed to snag money from the city's big hospitals and universities, the largest contributor was the Cathedral Village retirement community, in Roxborough, at $275,000. (Cathedral Village had no idea until a reporter mentioned this.)

Some big institutions contributed nothing at all. Most conspicuous in its absence was the University of Pennsylvania, the city's largest nongovernmental employer. It declined to renew a PILOT agreement that expired in 2000. Drexel, Temple, St. Joseph's and the Children's Hospital of Philadelphia also lacked PILOT agreements.

All of these institutions either declined to comment for this story or didn't return calls.

Thomas Jefferson University, the Albert Einstein Health Care Network and the Temple University Health System all had agreements through 2009. But not all contributed much. The Temple health system, for instance, paid $5,000 for each of its three hospitals last year.

The city is renegotiating PILOT agreements with six institutions whose agreements expired at the end of the year.

Things weren't always this bad. When then-Mayor Ed Rendell signed the city's first PILOT agreements in 1995, 46 nonprofits agreed to pay a total of $9.4 million annually.

How did a nearly $10 million-a-year program involving some of the city's largest institutions diminish to the point that a retirement community in Roxborough is its most generous participant?

The city blames Act 55, a state law that effectively eliminated the city's leverage in its negotiations with "eds and meds."

Before the act was signed into law in 1997, a series of state Supreme Court rulings that narrowly defined what constituted a nonprofit under the state Constitution gave nonprofits reason to believe that the city could sue them and strip them of their tax-exempt status.

Rendell used this possibility as leverage: Large institutions were told that if they agreed to sign PILOT agreements worth 40 percent of their assessed tax values, the city would promise not to sue.

He even sweetened the deal, in the end charging the nonprofits only 33 percent of their assessed real-estate values.

Act 55 changed the equation, however.

Christopher Cummings, chairman of the real-estate practice at Stradley Ronan Stevens and Young, said that Act 55 was intended to clearly define what organizations had to do to qualify for tax-exempt status, ensuring a more "businesslike" approach to PILOTs and stopping threats against nonprofits by cash-strapped municipalities.

Rendell, for instance, once threatened to levy a rooming- house license fee on dormitories under construction at Penn and Temple. The fee, Cummings said, had previously been assessed only on flophouses.

At the same time, the law was meant to "encourage" PILOTs, said Cummings, who represents nonprofits.

When told the current status of the program, he said he was "a little shocked."

"Something's wrong somewhere," he said.

The problem, according to Deputy City Solicitor James Zwolak, is that the statute makes it easier for nonprofits to claim tax-exempt status by clarifying the definition of a nonprofit that the courts had settled on.

Under the law, any organization that doesn't have to pay sales taxes can probably avoid paying real-estate taxes, too. And though Act 55 has a provision encouraging participation in PILOTs, the law doesn't force institutions into the agreements.

(To be clear, nonprofits do pay real-estate taxes on space used for explicitly moneymaking purposes, like retail. PILOTs apply only to space set aside for nonprofit uses like research and education.)

Ending tax exemptions?

Across the country, cash-strapped states and municipalities are considering ending the tax-exempt status of nonprofit groups.

Here in Pennsylvania, bills that would allow localities to tax new real-estate purchases by nonprofits have been introduced by both houses of the Legislature (though neither measure is expected to advance far this session). And Pittsburgh Mayor Luke Ravenstahl recently used the threat of a 1 percent tuition tax to get area colleges to increase their PILOT contributions in that city.

Not everyone thinks large nonprofits should be forced to pay more, however.

Rob Wonderling, president and chief executive officer of the Greater Philadelphia Chamber of Commerce, argued that the city's eds and meds "are significant economic-development assets."

The chamber believes that it's important to take into account the money that nonprofits save the city. Some universities, for instance, run their own police forces, which take some of the burden for policing those neighborhoods off the Philadelphia Police.

Priscilla Koutsouradis, spokeswoman for the Delaware Valley Healthcare Council of HAP, a regional hospital trade group, said that her organization also opposes mandatory PILOT payments.

She said that hospital finances are suffering in the face of the recession, with the margins of hospitals in southeastern Pennsylvania dropping 85 percent, on average, in the first six months of fiscal 2010.

But Amie Downs, chief of staff to state Sen. Wayne D. Fontana, D-Pittsburgh, who introduced one of the bills in the Legislature, argued that nonprofits still have an obligation to support municipal services.

Even colleges with their own police forces rely on municipal fire departments, she said, adding that "plenty" of organizations pay taxes to support services that they never use.

Downs said that Fontana simply wants to make sure that nonprofits carry their fare share of the burden.