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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The Frayed Safety Net: Strained State and Nonprofit Budgets

A friend recently emailed me asking for help. She had lost her job and, despite her vast professional experience, has been having a hard time finding work and now stands to lose her home. Unfortunately, her situation is far from unique.

The economy may officially be on the mend, but millions of Americans remain unemployed. The latest report from the Bureau of Labor Statistics pegs the unemployment rate at 9 percent. This rate is higher for teenagers (24.9 percent), African Americans (16.1 percent), and Latinos (11.8 percent).

Unemployed individuals and their families rely on the social safety net held together by governments and nonprofits during hard times. Governments enlist human service organizations to provide employment, housing, food and other essential programs that keep people afloat.

But state governments are facing budget gaps that result in less funding for nonprofits.  For fiscal year 2012, which begins July 1 in most states, 44 states and the District of Columbia project shortfalls amounting to $112 billion. For FY 2013, 26 states are already projecting deficits totaling $75 billion. This bleak outlook is worsened by the fact that nonprofits have already been struggling with government contracting glitches and payment problems and making do with declining revenues.

It is particularly dire for nonprofits in states with the largest budget shortfalls in the nation. In Arizona, government contracting is widespread, with human service nonprofits averaging six contracts each.  In Illinois, nine out of ten nonprofits have contracts with the state, which has been late in paying its subcontractors. Four in ten nonprofits in Maine, New Jersey and Nevada are in the throes of budget deficits.

Nonprofits’ predicament doesn’t auger well for my friend and the millions of others who are out of work. The safety net they need now more than ever is frayed and there’s no recovery in sight.

Originally posted on Urban Institute’s MetroTrends Blog, May 13, 2011.

Where’s the Slack to Tax in Community Nonprofits

US cities and other municipalities struggling with budget deficits are desperately seeking more funds and new sources of revenue. And they are beginning to eye neighborhood nonprofits.

The property tax exemption enjoyed by charitable organizations costs local governments anywhere between $8 and $13 billion a year. Elected officials now say that it’s about time these nonprofits pay their fair share, seeing as how they don’t pay taxes on valuable real estate. One revenue raising option is PILOTs– or payments in lieu of taxes.

PILOT Contributions as Percentage of Total Municipal Revenue

PILOT revenue as percent of budget

PILOTS aren’t new.  By Lincoln Institute of Land Policy calculations, PILOTs have been already used in at least 117 municipalities in 18 states over the last decade. But a spate of PILOT initiatives have cropped up over the past year. Last fall, Worcester, Massachusetts negotiated agreements with area colleges. Clark University signed on to pay the city $6.7 million over 20 years. Last January, the Scranton School District asked local nonprofit organizations to make voluntary financial contributions after the mayor and city council tried the more formal PILOTs route. Last April, Boston asked 40 major nonprofits – hospitals, universities, and cultural centers – to pay up to 25 percent of what they would owe if their properties were not tax-exempt.

Although PILOTS generally target larger nonprofits, especially “eds and meds,” some executives and legislators are looking to expand PILOTS to all nonprofits in addition to universities, colleges, and medical centers. In Boston, for instance, the task force that recommended the city’s revenue-raising plan initially recommended applying the PILOT program to all nonprofit groups with properties worth $15 million or more.

Taking  PILOTs this far into nonprofit territory opens flood gates  that  will drain the coffers of smaller, community-based organizations – roughly 75 percent of all charities – that are struggling themselves now in the Great Recession’s wake and lack the capacity and resources of larger nonprofits.

Last month, the town manager of Palmer, Massachusetts, goaded by budget shortfalls and Boston’s lead, asked 25 nonprofits, including churches and a youth summer camp, to make annual payments.

What will happen to nonprofits like these that serve the unemployed, homeless, poor, and hungry  and run on very tight margins themselves? Payments in exchange for their tax-exempt status will likely put some over the edge. In 2009, half of human service nonprofits froze or cut employee salaries while four out of five drew on scant reserves. Another 21 percent opted to reduce programs and services.  So where’s the slack to tax?

The head of an association of community-based health and human services pretty much said it all at recent discussion on PILOTs. “Which of our clients should we stop serving? Which of your taxpayers do you want us to fire?”

Originally posted on Urban Institute’s MetroTrends Blog, June 15, 2011. Re-posted on the Nonprofit Quarterly, July 5, 2011.