PILOTs: a comparative analysis.It is widely believed that one of the great untapped sources of municipal revenue is the local nonprofit sector and organizations which are currently exempt from paying property taxes. All it would take is a little initiative on the part of the local government or taxing authority and all budgetary problems would be solved. This is a compelling thought and one that is often believed by the members of the business community who perceive an "unfair competition" or the local citizenry cit·i·zen·ry n. pl. cit·i·zen·ries Citizens considered as a group. citizenry Noun citizens collectively Noun 1. reacting to scandals over nonprofit executive compensation or unethical unethical said of conduct not conforming with professional ethics. (or illegal) behavior. The fact is that the solicitation of payments-in-lieu-of-taxes (PILOTs) from nonprofit organizations Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. is a complex policy issue that can have significant consequences. PILOTs is an acronym acronym: see abbreviation. A word typically made up of the first letters of two or more words; for example, BASIC stands for "Beginners All purpose Symbolic Instruction Code. that is frequently used but which can refer to many different kinds of payments. It can involve different levels and types of governments, payments, and organizations. It may include state reimbursement to counties for state game lands or state reimbursement to local municipalities with extensive holdings of publicly owned Publicly owned can refer to:
Used here, "PILOTs" refer to the payment of monies by charitable nonprofit organizations (which are exempt from local property taxes) to local taxing authorities (usually cities, towns, counties, school districts, or other special taxing districts). In some cities and states these kinds of payments are more often called "voluntary contributions." This shift in language is due to local nonprofit organizations that make payments but do not want to give any credence to the idea that these monies are taxes in some other form. The City of Philadelphia, for example, changed the name of its "PILOT Program" to the "Voluntary Contribution Program" after local nonprofit organizations reacted strongly to the program's title. The term PILOTs also does not refer to user fees or service charges for municipal services This article or section deals primarily with the United Kingdom and does not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. that would be applied to both exempt and non-exempt organizations unless there is a legislative or constitutional basis for exemption from such fees based on its nonprofit status. PILOTs, therefore, would not include user fees or service charges for water, sewer, garbage, etc., if these fees and charges were equally applied to both for-profit and nonprofit entities. Simply put, PILOTs (or voluntary contributions) refer to those payments by a charitable nonprofit organization to a taxing authority for which there is no legal basis or requirement to expect or demand such payments. PILOTs - A Growing Trend PILOTs as a source of municipal revenue are not new. Harvard University Harvard University, mainly at Cambridge, Mass., including Harvard College, the oldest American college. Harvard College Harvard College, originally for men, was founded in 1636 with a grant from the General Court of the Massachusetts Bay Colony. has been contributing to the coffers of Cambridge, Massachusetts This article is about the city of Cambridge in Massachusetts. For the English university town, see Cambridge, England. For other places, see Cambridge (disambiguation). Cambridge, Massachusetts is a city in the Greater Boston area of Massachusetts, United States. , since the 1920s, while Boston has received such payments from nonprofit organizations since the 1930s. What seems to be new - and what has raised the public profile of PILOTs in recent years - is the increased and more aggressive solicitation of such payments by local government. Up until 1998, there had been no attempt to document the extent of these activities nationally. However, there seemed to be an increase in the number of activities. The nonprofit sector began to take the issue very seriously. For instance, the Independent Sector, the National Society of Fund-Raising Executives, and various other healthcare and educational organizations distributed material and position statements defending property-tax-exempt status and advocating against PILOTs. But there was no national picture of the extent of such activities, the monies being generated, or the kinds of nonprofits being solicited. Early Activities Boston's current PILOT program was initiated in 1983 (though, as noted earlier, the city has collected PILOTs since the 1930s). While Boston's program is a broad-based program, only 38 organizations made such payments in 1998. In that year, these organizations contributed $19.4 million to municipal revenue. Activity in the state of Utah in the 1980s was not directed specifically towards the solicitation of PILOTs, but more towards the examination of the legitimacy of tax exempt status of charitable nonprofit organizations. During the 1970s, there had been a general narrowing of the interpretation of the term "charity," which limited property tax exemption tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various for certain organizations. This was followed by years of continued examination, administrative rulings, and challenges to the exempt status of various healthcare organizations. Finally, in 1985, the Utah Supreme Court The Utah Supreme Court is the state supreme court of Utah. It has final authority of interpretation of the Utah Constitution. The Utah Supreme Court is composed of five members: a chief justice, an associate chief justice, and three justices. ruled that "nonprofit status" does not necessarily qualify a charitable organization This article is about charitable organizations. For other uses of the word charity, see Charity. A charitable organization (also known as a charity) is an organization with charitable purposes only. for property tax exemption. As a result, by the late 1980s, county assessors had challenged the property tax exemption of virtually every hospital in the state. In all but two counties, however, the cases were resolved at the local level in favor of the hospital. With some success in Boston and heightened attention in Utah, the national focus quickly shifted to Pennsylvania where hundreds (if not thousands) of nonprofit organizations were being solicited for PILOTs. It seemed as if nonprofits throughout the country were being solicited and the legitimacy of property tax exemption for the nonprofit sector was being systematically challenged and eroded. [TABULAR DATA FOR EXHIBIT 1 OMITTED] PILOT Activities Around the U.S. Despite a growing number of anecdotes and increasing public attention, there was no effort to obtain a national picture of PILOT activities until 1998. While there was information on specific cities and within specific associations of nonprofits (e.g., the YMCA YMCA in full Young Men's Christian Association Nonsectarian, nonpolitical Christian lay movement that aims to develop high standards of Christian character among its members. or hospital industry), there was no clearinghouse of information for the nation. With funding from the National Center for the Revitalization re·vi·tal·ize tr.v. re·vi·tal·ized, re·vi·tal·iz·ing, re·vi·tal·iz·es To impart new life or vigor to: plans to revitalize inner-city neighborhoods; tried to revitalize a flagging economy. of Central Cities at the University of New Orleans History UNO was founded in 1958 as the New Orleans branch of Louisiana State University, originally as "Louisiana State University in New Orleans" or "LSUNO", but became more independent and changed the name to "University of New Orleans" in 1974. , such an effort was initiated with the question, "Are PILOT activities growing in scope or is it simply a few high-profile cities and states?" It was found that among large U.S. cities, only seven cities Seven Cities may refer to:
There are, however, a few caveats to be wary of when drawing the aforementioned conclusions. First, this project focused on the 50 largest U.S. cities and the largest city in any state not found in a list of the 50 largest. This produced a total sample of 73 cities of which information was received from the municipal finance director in 51 cities. Feedback from key informants in 20 of the remaining 22 cities indicates no presence of PILOT activities in these cities. Information from these key informants, however, could be incorrect and PILOT activities may indeed exist. A second qualification concerns the sample itself. This project assumed that these efforts would be more likely to take place in larger cities, hence large cities became the unit of analysis. Not only was anecdotal information focused in large cities, larger cities had the organizational resources and sophisticated administrative processes to develop and implement such programs. It may be, however, that these activities are in fact more prevalent in smaller cities where the disproportionate level of exempt property Exempt property, under the law of property in many jurisdictions, is property that can neither be passed by will nor claimed by creditors of the deceased in the event that a decedent leaves a surviving spouse or surviving descendants. has more of an impact on municipal financial health. A third note of caution concerns the project's source of information, i.e., municipal finance directors. It may be that the finance officer did not have complete information on the various informal PILOT arrangements currently in place. For example, one respondent indicated that there "might be" one organization which contributed "something" to the city, but that he "did not know for sure." This respondent was sure, however, that there was no program or effort to solicit such monies from local nonprofit organizations. This city was excluded from the list of those cities that solicit PILOTs; furthermore, no other respondent indicated this kind of ambiguous information. This leads to a final cautionary note concerning the extent to which these solicitations may be occurring informally or outside the realm of municipal government auspices. For example, it may be that large cities are not aggressively pursuing PILOTs as a source of revenue but that other units of government (such as school districts) are doing so. This caution in our conclusions brings us to a discussion of PILOTs in the Commonwealth of Pennsylvania - a state which, in terms of PILOT activity, stands in conflict with the rest of nation. PILOTs in Pennsylvania In 1986, the first public effort to solicit PILOTs from a nonprofit charity began and involved the city of Pittsburgh and the YMCA. The situation generated a great deal of state attention and led the way in an explosion of PILOT activities throughout the Commonwealth of Pennsylvania. By 1994, a survey of county assessment officers indicated that more than 1,000 nonprofit organizations had been formally solicited for such payments. In 1994, Philadelphia instituted its Voluntary Contribution Program affecting hundreds more nonprofits. The 1994 county assessment officers survey revealed two types of solicitation patterns: a) formal and b) informal. A formal solicitation is one where a government openly challenges the exempt status of a nonprofit organization with a board of assessment. Either an assessment board finds against the nonprofit organization and mandates the payment of taxes, or there is a settlement prior to trial in which the nonprofit organization "volunteers" to make some contribution to one or more governmental units. Sometimes these formal challenges occur repeatedly. One hospital was challenged in formal hearings several years, but retained its exempt status each time. The governmental authority indicated that it would continue until exempt status was revoked or the nonprofit agreed to some contribution. In the end, the hospital agreed to a contribution involving both money (PILOTs) and services (SILOTs). Determining the extent of these kinds of informal solicitations was impossible. First, these agreements did not go through county assessment offices. While people may have heard things or even read about them in the local paper, the assessment office did not officially know of these activities or have any role in the solicitation. Second, these agreements were between a single taxing authority (e.g., a school district) and a nonprofit organization, even though multiple taxing authorities might have benefited (e.g., the town and county). These activities were occurring largely outside the bounds of public scrutiny. Third, these agreements often included "no publicity" clauses, which prohibited either party from revealing the terms of the agreements and the amount paid. In such agreements, the money would be considered general revenue and could not therefore, be tracked in public documents. Rationale to Pursue PILOTs Throughout the country, governments are encouraged to solicit PILOTs because of a need for revenue. The rationale to pursue PILOTs from nonprofit organizations is as follows: 1) cities need revenue to provide services; 2) municipal services are supported by property tax revenue; 3) nonprofit organizations are exempt from property taxes; 4) nonprofit organizations use services without paying for them, and 5) many nonprofits appear to have a surplus of financial resources. Therefore, cities seek payments or contributions from nonprofit organizations to pay for the services used. In most states, when a local government seeks PILOTs, there is sufficient legislative and judicial history to ensure that nonprofit organizations are able to make a legitimate case for their continued exemption from these "taxes." In Pennsylvania, this ability to defend exempt status changed drastically in 1985 with a decision in a court case related to a nonprofit organization's sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. exemption. This case involved the Hospitalization hospitalization /hos·pi·tal·iza·tion/ (hos?pi-t'l-i-za´shun) 1. the placing of a patient in a hospital for treatment. 2. the term of confinement in a hospital. Utilization Project (HUP HUP Hangup (Unix command) HUP Hospital of the University of Pennsylvania HUP Hungarian Unix Portal HUP Home Use Program HUP Heisenberg Uncertainty Principle HUP Hot Uniaxial Pressing HUP Heavy Utility Personnel ); the decision created what became known as the "HUP test." In Hospitalization Utilization Project v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court outlined five characteristics of a "purely public charity" that provided constitutional protection for any exemption privileges allowed by the legislature. These five characteristics, all of which must be met in order to benefit from various state and local exemptions, are listed in Exhibit 3. Because of divergent interpretations of the characteristics, meeting these became a "test" that many nonprofits failed to achieve when challenged in boards of assessments hearings or the courts. The significance of the HUP case - and the ensuing en·sue intr.v. en·sued, en·su·ing, en·sues 1. To follow as a consequence or result. See Synonyms at follow. 2. To take place subsequently. judicial chaos related to a definition of a charity in the Commonwealth - cannot be overestimated. Yet, while certainly the strongest enabling component, an environment of judicial uncertainty was not the only factor in the increasing solicitation of PILOTs in Pennsylvania during the late 1980s and 1990s. Another explanation was the growing public scrutiny of, and skepticism toward, the nonprofit sector throughout the Commonwealth. One factor in this growing skepticism was a high-profile scandal involving a medical center in the northwestern part of the state. This medical center lost its exempt status due to a number of questionable activities including the ownership and operation of non-mission-related properties, such as a lakefront marina. Eventually, this corporation regained its exempt status after divesting itself of these properties. The organization also agreed to make payments to several local taxing authorities. Another factor which contributed to this growth in public skepticism was the 1993 Philadelphia Inquirer's week-long series "exposing" the nonprofit sector, "Warehouses of Wealth: The Tax Free Economy." Asserting to be a comprehensive (though admittedly concise) look at the nonprofit sector both in Philadelphia and nationally, the series brought national attention to the nonprofit sector in Pennsylvania. Also published in book form, the series spawned similar exposes on the sector and raised matters of executive compensation in other cities throughout the state and country. To sum up, during the early and mid-1990s, Pennsylvania was ripe for such PILOT activities. Philadelphia was, at the time, on the verge On the Verge (or The Geography of Yearning) is a play written by Eric Overmyer. It makes extensive use of esoteric language and pop culture references from the late nineteenth century to 1955. of bankruptcy and many other cities were in desperate need of additional revenue streams. Added to this was an environment of judicial uncertainty, which raised the question of exempt status for many traditional nonprofit organizations. Finally, there was a sociopolitical so·ci·o·po·li·ti·cal adj. Involving both social and political factors. sociopolitical Adjective of or involving political and social factors climate in which "calling nonprofits into question" was popular and applauded. All of these factors played a role in the dramatic increase of PILOT activity throughout the Commonwealth during this period. Today in Pennsylvania, the environment for PILOTs is quite different. There have been two critical Pennsylvania Supreme Court decisions, one involving a healthcare organization and the other involving a private college. While these critical decisions did not answer all the questions deriving from the HUP test, they affirmed the exempt status of these organizations in a manner to silence most proponents of PILOTs. In addition, legislation was adopted, which clarified the interpretation of the five criteria and established basic ground rules regarding who is and is not a charitable organization in the Commonwealth. Implications of PILOTs That cities need more and new sources of municipal revenue is undisputed, and the idea that there is an untapped source of revenue in the nonprofit sector is an attractive one. Literally millions of dollars have been generated in a few cities, and while it may be a small percentage of the budget, it is still "new money." There are costs in gathering these monies for which there needs to be accounting. In the various research projects mentioned, none of the units of government could isolate the costs of soliciting and receiving such monies. Programmatic pro·gram·mat·ic adj. 1. Of, relating to, or having a program. 2. Following an overall plan or schedule: a step-by-step, programmatic approach to problem solving. 3. tasks were distributed among departments of planning, assessment, revenue, accounting, and legal services legal services n. the work performed by a lawyer for a client. . Respondents in one city went to great lengths to communicate that "no new people were hired" to run their PILOT program. And yet, the reality is that almost a dozen key administrators (and other additional support staff) spent the better part of a year developing and implementing a program that has a five-year time limit. But beyond direct programmatic costs, there are also the costs of public "good will." While some citizens may applaud efforts to solicit funds from those "big, bad nonprofits with those highly paid executives," how might the public react to the solicitation of smaller, more traditional charities? In the spirit of equity and fairness, some taxing authorities in Pennsylvania challenged the exempt status of every exempt organization including convents, food and shelter programs, and low-income housing programs. No nonprofit group - including veterans organizations, churches, Meals on Wheels n. 1. A program that delivers hot meals to persons, such as the elderly or disabled, who are confined to their homes and unable to cook for themselves; also, the meals thus delivered. Such programs are usually conducted by governmental or charitable organizations. , the Girl Scouts Girl Scouts, recreational and service organization founded (1912) in Savannah, Ga., by Mrs. Juliette Gordon Low (1860–1927). It was originally modeled after the Boy Scouts and Girl Guides, organizations created in Great Britain by Sir Robert Baden-Powell during , the Boy Scouts, etc. - was immune. Taxing authorities throughout the state have spent hundreds of thousands (if not millions) of dollars in legal fees only to lose the case in court. This has left many taxpayers angry and frustrated frus·trate tr.v. frus·trat·ed, frus·trat·ing, frus·trates 1. a. To prevent from accomplishing a purpose or fulfilling a desire; thwart: . The costs to nonprofit organizations are clearer. There are the obvious financial outlays as well as the financial opportunity costs Opportunity costs The difference in the actual performance of a particular investment and some other desired investment adjusted for fixed costs and execution costs. It often refers to the most valuable alternative that is given up. , i.e., any monies that are spent in taxes are monies not available for something else. While some organizations are able to re-direct those costs to third parties (such as insurance companies), the reality for many smaller nonprofit organizations is much different. In a 1994 study of 10 nonprofit organizations in Pennsylvania whose exempt status had been either formally or informally challenged, there were a number of negative repercussions repercussions npl → répercussions fpl repercussions npl → Auswirkungen pl . Programmatic consequences included a reduced level of service, higher user fees, a change in client demographics (i.e., fewer lower-income clients), less innovation and risk, greater financial instability, and wasted human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. . The organization's leadership, especially the chief executive, had the added burden of directing a response to the challenge or solicitation. This was in addition to ongoing responsibilities, anxiety and turmoil in upper-level management, and excessive stress and dissension within the Board of Directors. While not all of these potential impacts were found in every organization, some organizations experienced significant negative consequences. Municipalities that are considering PILOT activities, therefore, should not only anticipate their own benefits (and costs), they also need to ask what impact such programs will have on the capacity of their own nonprofit community. More specifically, can the municipality MUNICIPALITY. The body of officers, taken collectively, belonging to a city, who are appointed to manage its affairs and defend its interests. afford a nonprofit service community with diminished strength and capacity? It may be, in fact, that there are nonprofit organizations for which a PILOT payment is relatively financially meaningless. Maybe these nonprofit organizations should be contributing to the local revenue base. It also may be, however, that financial appearances are very different from financial realities and the payment of PILOTs by some nonprofit organizations would result in significant and negative results. Conclusions Whether and how a local unit of government should seek PILOTs from local nonprofit organizations is a much larger question than the images of deep-pocket nonprofits may suggest. Clearly, some communities have successfully implemented such activities and have raised monies needed for municipal services. It is also clear that most large cities have not initiated such programs and that the most successful cities are those places which have an economic, legal, and political environment that supports the solicitation of PILOTs. Ultimately, the payment of PILOTs by nonprofit organizations is a complicated matter that raises questions not only of the role and function of the tax-exempt sector Tax-exempt sector The municipal bond market where state and local governments raise funds. Bonds issued in this sector are exempt from federal income taxes. , but the interdependence of the public and nonprofit sectors in meeting the needs of a local community. Exhibit 2 U.S. CITIES WHICH CURRENTLY DO NOT SOLICIT PILOTS FROM NONPROFIT ORGANIZATIONS ACCORDING TO according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. MUNICIPAL FINANCE DIRECTORS [n = 51] Albuquerque, NM Anchorage, AK Billings, MT Birmingham, AL Boise, ID Buffalo, NY Charleston, WV Cheyenne, WY Chicago, IL Columbia, SC Columbus, OH Dallas, TX Denver, CO Des Moines Des Moines, city, United States Des Moines (dĭ moin`), city (1990 pop. 193,187), state capital and seat of Polk co., S central Iowa, at the junction of the Des Moines and Raccoon rivers; inc. , IA El Paso El Paso (ĕl pă`sō), city (1990 pop. 515,342), seat of El Paso co., extreme W Tex., on the Rio Grande opposite Juárez, Mex.; inc. 1873. , TX Fort Worth, TX Houston, TX Jackson, MS Jacksonville, FL Kansas City Kansas City, two adjacent cities of the same name, one (1990 pop. 149,767), seat of Wyandotte co., NE Kansas (inc. 1859), the other (1990 pop. 435,146), Clay, Jackson, and Platte counties, NW Mo. (inc. 1850). , KS Kansas City, MO Las Vegas Las Vegas (läs vā`gəs), city (1990 pop. 258,295), seat of Clark co., S Nev.; inc. 1911. It is the largest city in Nevada and the center of one of the fastest-growing urban areas in the United States. , NV Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. , CA Manchester, NH Memphis, TN Miami, FL Milwaukee, WI Nashville, TN New Orleans New Orleans (ôr`lēənz –lənz, ôrlēnz`), city (2006 pop. 187,525), coextensive with Orleans parish, SE La., between the Mississippi River and Lake Pontchartrain, 107 mi (172 km) by water from the river mouth; founded , LA Oakland, CA Ogden, VT Phoenix, AZ Portland, OR Sacramento, CA San Antonio San Antonio (săn ăntō`nēō, əntōn`), city (1990 pop. 935,933), seat of Bexar co., S central Tex., at the source of the San Antonio River; inc. 1837. , TX San Diego San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. , CA San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden , CA San Jose San Jose, city, United States San Jose (sănəzā`, săn hōzā`), city (1990 pop. 782,248), seat of Santa Clara co., W central Calif.; founded 1777, inc. 1850. , CA Seattle, WA Sioux Falls Sioux Falls, city (1990 pop. 100,814), seat of Minnehaha co., SE S.Dak., on the Big Sioux River; settled 1856, inc. as a village 1877, as a city 1883. Settlers abandoned the site in 1862 because of Native American raids, but with the establishment (1865) of Fort , SD St. Louis, MO Tucson, AZ Virginia Beach Virginia Beach, resort city (1990 pop. 393,069), independent and in no county, SE Va., on the Atlantic coast; inc. 1906. In 1963, Princess Anne co. and the former small town of Virginia Beach were merged, giving the present city an area of 302 sq mi (782 sq km). , VA Washington, DC Exhibit 3 THE FIVE CHARACTERISTICS OF A "PURELY PUBLIC CHARITY" IN PENNSYLVANIA 1) Advances a charitable purpose. 2) Donates or renders gratuitously gra·tu·i·tous adj. 1. Given or granted without return or recompense; unearned. 2. Given or received without cost or obligation; free. 3. a substantial portion of its services. 3) Benefits a substantial and indefinite class of persons who are legitimate subjects of charity. 4) Relieves government of some of its burden. 5) Operates entirely free from private profit motive. See Hospitalization Utilization Project v. Commonwealth of Pennsylvania 507 Pa. 1,487 A.2d 1306 (Pa Commonw. Ct. 1985) PAMELA J. LELAND, PHD., formerly on the faculty of the Center for Public Service at Seton Hall University Seton Hall University is a private Roman Catholic university located 14 miles from Manhattan in historic South Orange, New Jersey. Founded in 1856 by Archbishop James Roosevelt Bayley, Seton Hall is the oldest diocesan university in the United States. , is currently with the YWCA YWCA abbr. Young Women's Christian Association YWCA n abbr (= Young Women's Christian Association) → Asociación f de Jóvenes Cristianas YWCA in Wilmington, Delaware Wilmington is the largest city in the state of Delaware and is located at the confluence of the Christina River and Brandywine Creek, near where the Christina flows into the Delaware River. . She can be contacted via E-mail at pleland@kennett.net. |
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