There are PILOTs and then there are PILOTs.

We all know about the oft-used kind that waives about $50 million a year in property taxes for companies promising jobs and construction.  Less know are PILOTs paid by utility companies, including MLGW, to local governments in return for their tax-exempt status.

But a new voluntary PILOT is taking shape in a number of cities and in light of City of Memphis’s budgetary dilemma, it may be an idea for our city as well – ways that nonprofits, particularly hospitals and universities, are required to make PILOT payments since they own a lot of land, consume government services and pay to taxes.

Volunteers Wanted

The PILOT payments for nonprofits tend to be voluntary because of the considerable influence of these tax-exempt institutions, but while it is a nascent movement, Harvard University and Yale University pay their local governments $5 million and $7 million respectively.  MIT, Princeton University, and the University of California at Berkeley pay more than $1 million. 

In addition, a number of the leading hospitals in the U.S. are making payments, such as Johns Hopkins which agreed to pay $10.4 million over four years in 2001 as an alternative to the city-proposed energy tax.

In Pittsburgh, a voluntary PILOT from University of Pittsburgh and Carnegie Mellon University was increased in return for the city’s elimination of a plan to pass a 1% tax on all tuition paid by college students.  In some states, budgetary woes have sparked discussions in their legislative bodies, notably Hawaii and Georgia, about eliminating various nonprofits’ tax exemptions, but so far at least, it seems more like a shot across the bow to get the nonprofits to the negotiating table more than anything else.

A New Look

The executive director of the Indiana Association of Cities and Towns said: “We’re having to look at the public services nonprofits use and how we can adequately cover those costs.  We can’t give them away for free any longer.”  That said, it’s no denying that the nonprofits themselves are hurting as a result of the recession, but looking for the time when financial trends get more favorable, more cities, counties and states are at least putting the issue squarely on the table.

There was a time when Philadelphia had the most aggressive “payments-in-lieu-of-taxes and services-in-lieu-of-taxes.”  There, nonprofits owned 25.2% of city property with an assessed value of $3.1 billion, but they were exempt from $45.6 million in property taxes and $55.1 million in school district taxes.   Under a program begun in 1994, 42 “voluntary contributions” agreements were negotiated, generating $2.9 million in cash and $3 million in contributed services to city government.  The Philadelphia school district received $3.5 million in cash.    However, payments winnowed down to less than $1 million a year after a state law calmed fears from the nonprofits that their tax-exempt status was at risk unless they paid the voluntary PILOTs. 

Although payments are voluntary, city governments are certainly in a strong position to encourage them since they have authority over zoning, permitting, and code enforcement.  Meanwhile, the nonprofits are consumers of public services, including roads, fire protection and law enforcement.   

Budget ICU

According to a new report by the Lincoln Institute of Land Policy, nationwide, the tax exemption for nonprofits could total as much as $32 billion.  The report – the most comprehensive account of PILOT programs in use – said that since 2000, 117 cities and 18 states have used PILOT programs to increase their revenues.  While PILOTs remain a revenue source worth pursuing, it must be methodical and justifiable, correcting processes that have been haphazard, secretive and ad hoc.

Remember the anecdote about prolific bank robbery Willie Sutton being asked why he robbed banks.  His answer:  “Because that’s where the money is.”  That too is why cities are targeting hospitals.  Although they make up only 0.6% of the nonprofits registered with the IRS, hospitals account for 40.2% of the revenues and have 24.3% of the assets. 

By way of comparison, higher education makes up 0.4% of nonprofit organizations, generates 10.9% of revenues and holds 17.9% of assets. 

Accompanying new interest in voluntary PILOTs for nonprofit hospitals is a renewed interest in determining if they are meeting states’ charitable standards.  Already, this has produced rules in Utah requiring charity care plans, for publicizing the opportunity for charity care and for providing charity care commensurate with the value of their property tax exemptions.  In a few places, there have been questions about why nonprofit hospital executives are making seven-figure salaries, but so far, that’s been a minor theme. 

New Money

The momentum behind this new interest in taxing nonprofits comes from city budget officials who face bleak options for the future.  The National League of Cities reports that pessimism about meeting city fiscal needs is at its highest level and budget shortfalls are expected to worsen through 2012.

According to the Lincoln Institute study, nonprofits in Memphis have 1.9% of the total property value in Memphis, which seems low to us and we’re trying to double check it.  The report characterized it as a rough estimate.

The case in support of the PILOTs is pretty direct: nonprofits should pay for the public services they consume.  Based on the lessons of several cities, it seems that a carrot rather than stick approach could yield the best results.  There’s little question to us that most of the nonprofits here that would qualify for a PILOT payment have well-developed civic consciences and an appeal to community responsibility is the best way to approach this subject with them.

One thing is inarguable: local government has little option but to look for new revenues in new places.  The budget would be lean in the best of times, but gripped by the recession, City of Memphis has to consider new tax sources.  When you add the $57 million that has to be found to pay Memphis City Schools, it’s nothing short of imperative.