Chicago Will Levy Fees on Cash-Strapped Nonprofits

January 6, 2011; Source: The Gazette | Chicago is facing a major budget shortfall—over $630 million—and Mayor Rahm Emanuel and the city’s aldermen are resorting to cuts and revenue-generating measures to bridge the gap. Among these options is a levy on nonprofits.

The Gazette reports about the phased-in elimination of fee waivers for water, sewer, and other city services for nonprofits which Chicago officials say will generate millions of dollars for the refurbishment of the city’s aging water infrastructure, including the replacement of hundreds of miles of water and sewer pipes.

Payments-in-lieu of taxes or PILOTS, are an attractive solution for cash-strapped state and local governments. They have been increasingly in use this past decade, as municipalities feel more justified in demanding that nonprofits pay their fair share. After all, these are tough times, and everyone is pitching in.

While this might not be much of a burden for larger nonprofits, such as universities and medical centers, with multimillion-dollar budgets, PILOTS can be devastating for community-based organizations that are having a hard time as it is to stay afloat. These nonprofits are doubly slammed with funding cuts and increased demand from struggling individuals and families. Now they are hammered by additional government levies.

Jimmy Lago, chancellor of the Roman Catholic Archdiocese of Chicago, said in a testimony to the City Council that the water and sewer fees will cost the Archdiocese, with its 643 water accounts for parishes, schools, and other facilities, more than $2.1 million. Lago stressed that the financial burden on Chicago parishes and schools will increase on average upward of $10,000.

“Adding these additional taxes and fees would have a very harmful impact on many inner-city parishes and schools and the other struggling schools and religious facilities that surround them,” Lago testified. “For some parishes, these fees could range to more than 20 percent of their annual revenue.”

State and local governments are justified in seeking ways to cut costs and increase revenue. Shifting the burden on nonprofits, which they rely on to provide for those most in need, however, might not be the best approach.

The Rev. Donald Craig, a parish priest, warns that the city’s move might force some nonprofits to close their doors. He points out that nonprofits provide a variety of services for Chicago’s homeless, elderly, disabled, children, and low-income families.

“Are they all going to City Hall for food or housing or clothing?” Craig asked. “I think not.”— Erwin de Leon

Originally posted on Nonprofit Quarterly, Nonprofit Newswire, January 8, 2012.

Nonprofits Help, Not Burden, State and Local Governments

October 24, 2011; Source: The Wall Street Journal | Straddled by chronic budget shortfalls, state and local governments have been desperate for new sources of revenue. Some are now eyeing nonprofits that have not only been long-term partners of governments but are struggling themselves with shrinking revenues and increasing demand.

Chicago Mayor Rahm Emanuel, for instance, is keeping his campaign promise to start charging nonprofits for water and sewage services. His proposed 2012 budget calls for a25 percent increase in water and sewer fees and the elimination of water fee exemptions for non-profits. This move is projected to net the city $7 million in needed revenues.

This is nothing new. There are those who have been clamoring for nonprofits to pay their fair share, since they do not pay property taxes. Nonprofits are increasingly being asked for payments-in-lieu-of-taxes or PILOTs.

Nonprofits however do pay back, arguably more than they get. Nonprofits help governments provide services and goods at a discount, employ people in the community, pay payroll and sales taxes, and by New York City’s experience, rent office space that would otherwise remain unoccupied.

The Wounded Warrior Project, an organization dedicated to assisting injured veterans returning from Afghanistan and Iraq, has doubled its space in midtown Manhattan to 9,400 square feet. The Roosevelt Institute, which helps run the FDR Presidential Library and Museum and manages the Four Freedoms Center, signed a major lease expansion of 10, 400 square feet.

As the Wall Street Journal points out, “nonprofit organizations have long been a mainstay of New York’s office market especially in older buildings in Midtown South, downtown and side streets in Midtown.” This year, despite hard times, at least 10 nonprofits have signed leases for more space than under their expiring leases

It is understandable that there are those who demand that nonprofits help carry the load, but perhaps they should be fair and tally as well how much these organizations give back. Nonprofits can also do a better job at tooting their horn and letting us all know how much they contribute to our collective well-being.

Originally posted on Nonprofit Quarterly Nonprofit Newswire, October 24, 2011.

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.

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

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.