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How could Philly’s PILOT (Payments in Lieu of Taxes) program get better?

March 10, 2022 Category: FeatureFeaturedFundingLong

In 1991, Philadelphia public schools shared 176 librarians. Today, there are fewer than 10.

Advocates often argue investments in education can show a return on investment with economic gains by higher-performing graduates later. How can cities like Philadelphia pay for such sustained investments? If a sitcom isn’t the solution, advocates have long argued for big institutions to chip in.

One way to do that is through PILOTs (Payment in Lieu of Taxes).

Charitable nonprofit organizations are exempt from property taxes in all 50 U.S. states, according to the Lincoln Institute of Land Policy. Over the last 40 years, cash-strapped local governments have repeatedly instituted programs that encouraged nonprofits to contribute a portion of their exempted tax bill.

PILOT programs are operational in cities like Boston, Baltimore, Pittsburgh and Philadelphia to varying degrees.

Elsewhere, many of the largest institutions, like universities and hospitals, have avoided entering into PILOT agreements altogether.

From our Partners

As cities across the country once again confront racial inequality and neighborhood disinvestment, advocates are demanding more.

Last week, more than 200 Penn faculty and staff members delivered a letter to the school’s new Board of Trustees chair Scott L. Bok, urging him to change the university’s position on PILOTs—to make payments in lieu of taxes to the public schools. A coalition using the name Penn for PILOTs has launched a petition to further the message.

Their central demand: Penn should enter a formal PILOT relationship to contribute 40% of their exempted annual property tax bill as Philadelphia’s largest single property owner, which would amount to more like $40 million annually – perhaps one of the largest property tax bills in the country. 

If PILOTs represent one tool for larger investments in urban education and workforce development, it’s worth better understanding how the concept could work elsewhere.

What is the history of Payments in Lieu of Taxes (PILOTs)?

Though there were small earlier programs, the modern PILOT concept began in 1976  under President Gerald Ford. That federal program was established to distribute funds to jurisdictions that included large amounts of federal land that local governments could not tax.

Local programs followed. In the 1980s, federal aid to U.S. cities more than halved. For example, six percent of the entire City of Philadelphia budget in the early 1970s was made from a single federal program, the general revenue sharing fund. By 1989 it was zero. Twice that decade, successive Philadelphia mayoral administrations reviewed PILOT programs in part to replace that lost federal revenue, including outlining a series of recommendations in 1985. Neither were enacted. 

That same year, Boston’s Tax-exempt Property Steering Committee was formed and set several guidelines that developed into the well-regarded program it has today.

A decade later in Philadelphia, facing near bankruptcy and following a contested state court case, the administration of Mayor Ed Rendell enacted a program in which nonprofits would pay up to 40% of their exempted property tax — more than half of which would go to the School District of Philadelphia. Most of the agreements were set for five years. One of them was the University of Pennsylvania. When its agreement came up in 2000, the university declined to extend the program. 

That city’s program continued, and others followed. In the first decade of the new millennium, at least 117 municipalities in at least 18 states had PILOT programs, according to the Lincoln Institute.

What is the best PILOT model to follow?

Today’s PILOT gold standard is Boston, which has the country’s most established program, says Adam H. Langley, Associate Director, U.S. & Canadian Programs, with the Lincoln Institute. 

Boston also heavily relies on property taxes to fund its services — more than 70% of its 2021 revenue, according to city records. In contrast, the city of Philadelphia, which relies on its wage tax, generates just a quarter of its revenue from property taxes. Many cities get about two-thirds of its revenue from property taxes, according to Pew research. 

That means Boston has an outsized reason to get its PILOT program right. Its program calls on institutions that own over $15 million in assets to provide annual voluntary payments of 25% of their property tax bill, which they would get had they not been tax-exempt. For its part, Harvard University contributed just over $10 million to the city of Boston last year, though new legislation there intends to increase and make those payments mandatory.

The amount of money Boston has received from nonprofit institutions since PILOT was revitalized in 2012 has increased four times over. In Fiscal Year 2012, PILOT contributions totaled over $19 million; in 2020, they totaled over $87 million.

Like many other cities, the current PILOT agreements Philadelphia does have are few. Almost $30 billion of real estate in Philadelphia is tax exempt, or 17% of the total. That accounts to a $414 million annual loss in revenue, according to a 2019 Inquirer analysis. Even at Boston’s lower 25% PILOT threshold, Philadelphia could collect more than $100 million in new property taxes, or three percent of the city’s 2021 total revenue.

How could Boston’s model be brought to other cities?

First, Langley said it takes a high-rate of participation. Though advocates there want to increase and make the program mandatory, Boston’s success has been in high rates of participation. That requires a relatively lower threshold and consistent governance.

Second, Boston does a good job of estimating property values for exempt properties. “That data is oftentimes not widely available,” said Langley. The city of Boston has invested in reliably assessing those properties — which can be trickier than a standard home with many house sales to compare against. Boston asks nonprofits to contribute 25 percent of what they would owe if they were taxable. 

Langley said: “That 25 percent is based on how much of the city’s budget goes toward core public services that directly benefit the nonprofits themselves — police, fire, street maintenance, snow removal, etc.” 

The PILOT program in Boston is voluntary; it’s not legally required. 

Another important element of Boston program’s is that they give nonprofits what they call community benefits. “They offset the cash PILOT that the nonprofit would be asked to contribute if the nonprofit is providing services that are directly benefiting city residents above and beyond the nonprofit’s core mission,” he said. These are commonly called Services in Lieu of Taxes, or SILOTs.

Why do some nonprofits reject PILOT programs?

Nonprofit leaders who oppose PILOT programs commonly have three criticisms.

One, nonprofits point out that they’re tax exempt for a reason. Nonprofit organizations are responses to market failure; they are vehicles to address social issues we care about but that might not be served by the open market. That requires a financial leg-up, which a PILOT program would erode.

Two, universities in particular routinely argue they make a far greater economic impact than any city services they use. For example, University of Pennsylvania administrators frequently cite its other investments in the city, including specific school programs it administers. (A university spokesperson did not respond to a Generocity call seeking comment.) Others point out they are hubs for economic development.

Third, the voluntary and political nature of PILOT advocacy efforts worry many of these nonprofit leaders. Here the current climate in Boston is again instructive. Though it has the country’s largest and most established municipal PILOT program, there are routine criticisms that nonprofits there are not giving enough. Nonprofit leaders argue that setting the precedent will not end the debate.

Now what?

The new chair of Penn’s Board of Trustees Bok, who has not taken a clear position on PILOTs, assumed the role in July 2021, replacing David L. Cohen, a staunch opponent of PILOTs. In the early 1990s, when he was Philadelphia Mayor Rendell’s well-regarded Chief of Staff, Cohen led the effort to establish that city’s first PILOT program.

That program was part of an historic effort to stave off bankruptcy. Philadelphia rode a wave of urbanism that saw its fate and population rise. But like many cities, its worst problems were exacerbated by the pandemic. Income inequality and gun violence have surged. Advocates fear declining educational outcomes and the impact that can have in workforce preparedness and the ability for residents to thrive. 

Penn for PILOTs would want that money to go to the schools to deal with issues including the lead and asbestos problems, said Jolyon Thomas, associate professor of Religious Studies at Penn and a program spokesperson. Thomas noted other problems that could be within scope from Penn’s investments alone: contaminated water, vermin, COVID protections and high school counselors overwhelmed with caseloads (he cited a single counselor in charge of 600 or 700 students). 

Akira Drake Rodriguez, a Penn faculty member and author of Diverging Space for Deviants, said Philadelphia has a number of large and growing nonprofit institutions with significant endowments and significant property holdings and “by paying PILOTS we could see a great increase (in solutions) into a number of problems that we have in the city of Philadelphia as one of the largest poorest cities in the nation.”  

It is a call that is familiar in cities across the country.

PILOTS would improve the overall livability of the city, both for people who are affiliated with these institutions and those who are not. “Currently it doesn’t seem like everyone who lives in Philadelphia is having the same access to public assistance services. That’s something I think PILOTS could change,” added Rodriguez. 

Maybe start with a librarian or two.

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