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PILOTS Taking Off

As their cities struggle to find tax revenue, some colleges and universities are stepping up with payments in lieu of taxes.
University Business, Jan 2011

It wasn't long ago that the longstanding relationship between town and gown in both Pittsburgh and Providence absorbed a shock, as city officials rolled out plans to tax local colleges and universities.

In 2009, the mayor of Pittsburgh proposed a 1 percent tax on tuitions at the city's 11 higher education institutions to shore up the pension fund for city employees. The mayor in Providence, meanwhile, sought legislation to reduce a $17 million budget deficit with a levy of $150 a semester for each student at Brown University, Johnson and Wales University, and Providence College.

"By proposing a $300 annual tax on every student who enrolls at one of Providence's private colleges, the mayor would create a fee for the right to become educated in the city," Providence College President Rev. Brian Shanley, protested at the time in an op-ed response in the Providence Journal.

Pittsburgh institutional leaders also voiced strong reactions. "It seemed first of all an unfair tax to pass on to students and make Pittsburgh institutions less competitive," says Kenneth Service, the executive director of the Pittsburgh Council on Higher Education. "It gave the impression that the city was not welcoming to higher education."

'We didn't want to fund the deficits at city hall [but] the discussion became real' when city officials mentioned the public library needing support and how additional PILOT payments could help with improvements.
-Dennis Berkey, Worchester Polytechnic Institute

While both initiatives were withdrawn by year's end after hearty opposition and some compromise by the schools affected, they have left a lasting impression in their local communities and cast a longer shadow over institutions in other urban locations trying to cope with shrinking tax bases and dwindling state and federal aid.

Progress in Massachusetts

In Massachusetts--the only state in which the student population at private institutions exceeds that at public colleges and universities--a growing number of institutions are getting out ahead of any future encounters with the city tax collector. By including fixed payments in their long-term budgets, say school leaders, they are writing a new chapter to a largely positive history of town/gown cooperation and absorbing the added expense over time.

In Worcester, both Worcester Polytechnic Institute and Clark University began the current school year with considerable fanfare by announcing long-term agreements to significantly increase their payments in lieu of taxes (PILOTs).

In Boston, a mayoral task force has just wrapped up a two-year process of determining the PILOT contributions that the city's nonprofit institutions, including universities and hospitals, will make over the next 20 years. The increases will bring $20 million annually to the city, compared to the current level of $8 million.

And the increase in PILOT payments is not limited to the Bay State. Last year, Yale University responded to the recession-induced deficits of host city New Haven by increasing its contribution by 50 percent, to $7.5 million a year. In Philadelphia, which receives barely $1 million annually from all of its nonprofits combined, discussions have begun between leaders on both sides on raising that amount.

Worcester Polytechnic's Bold Initiative

"What's at stake is the quality of the relationship between the institution and the community," says WPI President Dennis Berkey of the decision to enter into a 25-year agreement, which he punctuated on the day of its announcement with an additional $50,000 contribution to the fund supporting a local park. "For WPI, there's been a long tradition of service, including community service, and the new PILOT fits into the larger context."

Berkey, who is in his seventh year at WPI's helm, adds that the school was already making substantial payments in lieu of taxes and paying $180,000 in real estate taxes on 28 buildings. When WPI recently constructed a new dormitory to replace an apartment house, for example, the school proactively committed to pay the same amount of property tax the city was generating from the former building.

WPI's approach has been encouraged by city officials, Berkey notes. "Some schools here have practiced it more than others."

Starting last July, WPI's PILOT increased to $270,000 with a 2.5 percent increase built in annually over the next 25 years, bringing the school's total contribution to more than $9 million by 2034. The school continues to pay its real estate taxes in addition.

Berkey admits that he was not inclined toward a more comprehensive agreement until he was able to shape its terms. "We didn't want to fund the deficits at city hall," he explains. "When the city said, 'The library needs support, and would WPI make additional PILOT payments for improvements?,' that's when the discussion became real."

WPI also stipulated that the increased PILOT contributions help revitalize Institute Park--a green space adjacent to campus--with an eye to increased safety, improved aesthetics, and better ecological conditions, including a periodic dredging of the pond within the park. That provision created even more of a win-win situation for both city and school, Berkey adds. "By making a 25-year agreement with us, the city could use the revenue stream for borrowing $1 million for the park renovation."

'What's come out of the PILOT task force is a greater awareness of what the nonprofits already contribute to their cities. Harvard and Boston University combined pay more in real estate taxes than the John Hancock building.'
-Rich Doherty, Association of Independent Colleges and Universities in Massachusetts

For WPI's part, the length of the contract cemented a predictable line item into the school budget and reaffirmed the school's tax-exempt status. "I also have assurances that, for the next 25 years, there will not be any additional taxing on WPI or its

students. I made sure that was written in," says Berkey, who adds that the larger commitment of dollars was not a hard sell to his constituencies.

"We got very positive publicity out of the agreement. My trustees saw right away that this was an opportunity to do something aligned with our interests. Libraries and parks are a good thing, and many of our alumni commented that they were proud."

Good Neighbors

Clark's 20-year agreement with Worcester also built upon a long and positive town/gown history and extended the idea that both entities would benefit, says Vice President for Government Affairs Jack Foley, who has worked at the university for almost 35 years.

"There's a trend nationally of universities working with communities in less than amiable ways," Foley observes, "but since 1985, we've had a partnership with the neighborhood and larger Worcester community that's become a national example."

Besides subsidizing 250 new units of housing available to Worcester residents, Clark has pursued an aggressive program to locate faculty and staff in the city, provided local scholarships to 40 students over the past 15 years--a $4.5 million contribution--and paid $75,000 a year in property tax.

"To be investing in the neighborhood is nothing unusual. It's not like we're starting from the beginning," Foley maintains. "The relationship we have with the city of Worcester is extraordinarily positive, and it starts from a position of respect and appreciation of what we do for each other. It's one thing to say you're bringing benefits to the community, but you need to show the real benefits and make sure the public and city officials see them. In that way, you make advocates of your neighbors and local businessmen."

Under the new agreement, the school is making a $262,000 PILOT contribution this year, with an annual 2.5 percent escalator clause, plus maintaining its property tax payments. Besides targeting improvements to the city library system and local parks for its increased PILOT contributions, Clark also won the concession that the city would close a street that bisected the campus and created hazards for pedestrians.

Boston's PILOT Task Force

Negotiations between the city of Boston and nearly three dozen nonprofits were more extensive, culminating at the end of last year in a sweeping agreement for hospitals and universities alike to ante up 25 percent of what any nonexempt landholder would owe the city.

Along the way, both sides repaved a two-way street of understanding each other's contributions. Rich Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, admits that Boston's nationally renowned non-profits--from universities to hospitals--are fair targets in financial hard times. "The 'Meds and Eds' are seen as corporate leaders, and it's understandable to look to them for additional financial support," he says.

On the other hand, says Doherty, who testified before the task force, city officials now better appreciate what schools are bringing to the community. "What's come out of the PILOT task force is a greater awareness of what the nonprofits already contribute to their cities. Harvard (which has much of its campus on the Boston side of the Charles River) and Boston University combined pay more in real estate taxes than the John Hancock building," the nearly 60-story structure that's one of the city's priciest

business addresses. Doherty adds that MIT and Smith College are respectively the largest taxpayers in Cambridge and Northampton, in the western part of the state.

Boston institutions also are taking stock of and quantifying their contributions to the surrounding community, since they can deduct a portion from the newly increased amount they will owe this year under the new PILOT agreement. In the case of Wentworth Institute of Technology, those off-campus contributions range from providing volunteer activities to clean up the surrounding streets to more involved service learning projects.

"For one project," points out Wentworth President Zorica Pantic, "our students designed a Wi-Fi network for a local depressed neighborhood and helped them get the funding to run it."

Pantic is hoping that those services will count against the $700,000 annual PILOT bill Wentworth is scheduled to pay, an order of magnitude greater than the $40,000 the school gave the city in 2010. "We can live with it," she says of the increased contribution, "although it's helpful that it's going to be phased in over five years. We've already put it in our five-year budget plan."

What's also helpful, Pantic adds, is the task force's guarantee that any PILOT contributions will remain voluntary, which will protect local institutions from being tied to payment levels they cannot afford. Still, Pantic is looking ahead to modest tuition increases as well as revenue from new masters programs in Architecture and Construction Management and in Engineering to defray the coming PILOT expenses.

An Uneasy Peace

In Pittsburgh and Providence--the most recent epicenters of the attempt to tax universities--the atmosphere is not so collaborative. Tax advocates in both cities reportedly dropped their campaigns when several schools privately agreed to increase PILOT payments. "Each institution prefers not to disclose its particular contribution," says the Pittsburgh Council on Higher Education's Kenneth Service, who adds that neither have local universities reached any comprehensive agreement with the city. "The idea of the tax is gone. The agreement was that the institutions and their leadership would stay in conversation with the mayor."

PILOT--the term loosely applied to the almost $5 million a year the city receives from its resident nonprofits--has become something of a four-letter word. "Our schools are convinced that what we do should not be considered PILOT," Service insists.

Officials at Brown, meanwhile, would not comment for this story. "We don't feel like we've gotten to the other side of the process," says spokesperson Sarah Kidwell, referring to the aftermath of the city's nationally-publicized attempt to tax local colleges.

There are other conflicts looming as the once inviolable tax-exempt status of universities continues to come into question. A year ago, a majority of mayors in New Jersey supported a resolution to get authority from the state legislature to tax students.

In Princeton, New Jersey, a borough councilman and a Princeton alumnus no less, has been advocating that the venerable university with the better than $12 billion endowment come up with much more than $1.2 million in annual PILOT payments. His argument: Princeton manages that hefty endowment no differently than any hedge fund handles its assets, and that even affluent communities need all the revenues they can find just to make ends meet.

This past year, the Internal Revenue Service got into the act, requiring private universities to more accurately value tax-exempt perks, such as the market rental value for the president's house, in reporting compensation packages on tax returns. The IRS audited more than 30 colleges and universities to detect inconsistencies in how they disclosed compensation for their executives.

For all the recent attention and turmoil about what higher education institutions are paying in taxes and PILOTs, though, WPI's Berkey suggests taking a more old-fashioned--and tried and true--approach of building long-term partnerships with their host communities. "We have a long tradition of service in Worcester, so the PILOT fits into a larger context," he notes. "And what's good for Worcester is good for us."

Ron Schachter is a Boston-based freelance writer.