PILOTs: A symptom of changing nonprofit-government relations

The finances of U.S. cities and municipalities are getting squeezed by decreasing state and federal funding, leaving elected officials little choice but to scrounge for new revenue sources. During the past year, a steadily increasing number of municipalities have turned to neighborhood nonprofits and negotiated “voluntary payments”– payments in lieu of taxes (PILOTs) – to help pay for public services. It’s time, local governments say, for these tax-exempt organizations to do their fair share.

Local governments have mainly targeted “eds and meds,” larger nonprofit universities and medical institutions. Last fall, the city of Worcester negotiated agreements with area colleges, and Clark University signed on to pay the city $6.7 million over 20 years, the Worcester Telegram reported. In New York, Syracuse University agreed earlier this summer to help out its struggling hometown with a $2.5 million payment over the next five years, according to the local press.

PILOTs aren’t new. By Lincoln Institute of Land Policy calculations, these arrangements have been already used in at least 117 municipalities in 18 states over the last decade. In Boston, nonprofit organizations have been making these payments of their own volition for decades. In April however, the city officially asked 40 major hospitals, universities and cultural centers to pay up to 25 percent of what they would owe if their properties weren’t tax-exempt. The task force that came up with the idea also suggested that all nonprofits with properties worth $15 million or more contribute as well.

Some municipalities however are beginning to eye smaller nonprofits with little or no taxable properties. In May, the town manager of Palmer, Mass., goaded by budget shortfalls and Boston’s lead, asked 25 nonprofits, including churches and a youth summer camp, to chip in annual payments. The amounts requested ranged from $75.95 from the Three Rivers Chamber of Commerce to $115,572.90 from Wing Memorial Hospital, according to The Springfield Republican. Essentially requiring payments that have until now been voluntary, as Boston has done, raises the question of what is happening to the implicit compact between nonprofits and governments. By some lights, tax exemptions are what nonprofits get in exchange for delivering public goods and services that governments can’t or won’t provide.

But when nearly 33,000 human service nonprofits across the country have government contracts and grants, and government funding accounts for more than 65 percent of total revenue of human service nonprofits — totaling more than $100 billion nationally, as it now does according to a study done by the Urban Institute — isn’t the partnership between nonprofits and governments changing?

Is a paradigm shift afoot? Or are steps toward a new grand bargain merely a product of difficult economic times?

Either way, taking PILOTs this far into nonprofit territory opens flood gates that will drain the coffers of smaller, struggling community-based organizations – roughly 75 percent of all charities – that lack the capacity and resources of larger nonprofits.

What will happen to nonprofits like these that serve the unemployed, homeless, poor and hungry but that run on very tight margins themselves? Payments in exchange for their tax-exempt status will likely put some over the edge. In 2009, 82 percent of small human service nonprofits in Massachusetts reported deficits. Half froze or cut employee salaries while a third drew on scant reserves. Another 28 percent reduced programs and services, according to survey results collected by the Urban Institute’s Center on Nonprofits and Philanthropy for its National Study of Nonprofit-Government Contracting.

As the head of an association of community-based health and human services put it in a recent discussion on PILOTs: “Which of our clients should we stop serving? Which of your taxpayers do you want us to fire?”

Which indeed?

Originally published in The Provider, Vol. 32, No. 7, Summer 2011.


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