The recent economic downturn in the USA has focused interest across municipalities, especially small college towns, in the PILOT (Payment in lieu of taxes) concept. Municipalities which are home to higher educational institutions, such as Washington College, are increasingly being squeezed as they have to fund a wide range of public services without the property tax revenue that such tax-exempt organizations are able to avoid.
This results in a higher property tax rate for the remaining non tax-exempt businesses & homeowners by reducing income for the municipality as a whole – this maybe by as much as 10-15%. That’s NOT to say that a PILOT scheme will see reductions of that scale if one is ever implemented – local taxation is much more complicated than that!
However, in addition to fairness, equity, and economic sustainability, such a PILOT agreement would help to address two other inefficiencies in the local economy. Firstly, reduce the incentive for the College to have a relatively high ratio of capital and land to labor, and secondly, the propensity for the College to own property instead of leasing from local businesses & residents, which has traditionally restricted the traditional trickle-down economic benefits of a local college to the wider community.
Washington College – Property Taxes
Washington College currently owns a very significant share of tax-exempt property in the town (possibly 45% of the land area). This share is actually increasing yearly as the College buys up more properties within the town, thereby reducing even further the town’s potential income from property taxes.
In addition, many of the buildings which are currently tax-exempt are actually ancillary structures not strictly being used under the charitable definition for educational purposes i.e. halls of residence, individual houses & cottages etc. At the same time as not contributing its fair share of revenue to the municipality, the College is able to take advantage of a very wide range of public services for which it generally doesn’t directly contribute in a financially transparent, equitable, or accountable way.
Current situation – Opaque & inequitable
It would be unfair & misleading to ignore the fact that the College brings economic, social, and cultural advantages to the town due to its function as a leader in tertiary education within the State, being a primary employer, attracting income derived from fees and donations, and making expenditures to run the institution. However, Chestertown is only a town with a college, it is NOT a college town in any true meaning of the expression.
The College may indeed be a major source of income & employment but the benefits to Chestertown should not be exaggerated. A more cogent economic argument could be made for the local agricultural industry which brings in annually over five times more revenue to the local region than the college but does not have the same advantages of tax-exempt status. Other major employers like La Motte and Dixon Valve would love to have a property tax exemption because they also bring jobs to the town. And what about the many small business and property owners who live outside Chestertown but pay taxes here and yet have no representation on the council? ‘Taxation without representation!’, is a cry which would certainly resonate with our forebears.
Property taxes are of course paid by college employees on their own homes but many of these people actually live outside of the town and much of the College’s everyday expenditure is spent outside of the county and is also tax-exempt.
The College does potentially provide scholarships for local high school graduates. On the surface this appears to be a generous allowance of tens of thousands of dollars per annum, but a closer look at the number of students who have actually taken advantage of this offer and graduated from Washington College is embarrassingly few.
The College has made small donations towards the cost of the local fire department but this is actually a remarkably cheap expense to protect itself from a major catastrophe and the institution makes little or no contribution towards the many other public services that it currently freely takes advantage of i.e. police, emergency services; water & sewerage infrastructure, waste management services, roads & footpaths, street lighting, street cleaning, snow removal, community development, planning services, parks & recreation, public works & administration. Not forgetting any debt burdens incurred in the management of these same activities.
Not only are Chestertown tax-payers subsidizing the college’s share of public services they are also underwriting the $65.5 million revenue bond (Washington College Project 2008A) which was issued in May 2008, and yet another bond issue passed more recently by the town council. In fact, the town has sponsored about five bond issues in the past decade.
Without the legal artifice provided by the Maryland Economic Development Revenue Bond Act and the good offices of the Municipality (i.e. the local tax-payers), the College would simply not be able to borrow sufficient funds at very low interests rates in order to exist, never mind expand. In effect, the town has facilitated the very expansion of the college that helps to erode the local property tax base.
Although ‘the bond & interest are the obligation of the Town payable solely from the receipts & revenues from the loan made to Washington College’, it does not change the fact that these huge figures remain every year on the ‘Long-term Debt’ page of Chestertown’s ‘Notes to the Financial Statement’. Claims by legal advisors and bonding agents that any potential default by the College would have no consequences for the tax-payer are somewhat economical with the truth and are unsubstantiated. No precedents actually apply and recent experiences have proved rating agencies to be highly unreliable sources for credit affirmation.
Options for fairness & transparency
Chestertown’s financial situation is under ever-increasing pressure due to the continuing decline in Federal aid to local government over the past decades and the erosion of the property tax base – recently accelerated by the collapse in property values. During the same period State aid to local government has generally flat-lined, but due to increasing levels of inflation this has effectively meant a reduction in real terms.
Chestertown has only very limited options to counter the relentless pressure on its finances. It can cut public services, raise taxes, increase user charges for local residents, increase its debt level, or have a combination of the aforementioned.
Another option is the introduction of a PILOT (Payment in lieu of taxes) agreement with the college which sees it paying an annual fee in return for the public services it currently receives for free. Such a system is currently (2012 figures only) in place in about 117 municipalities across 18 States – mainly in the N.E. United States. Clearly this is a highly sensitive issue but one that can no longer be swept quietly under the carpet.
A useful report by the PILOT Taskforce for the City of Boston may appear a little out of date (December 2010), but it certainly underlined the fiscal realities faced by any authority with tax exempt educational institutions within its boundaries. At the time, the total PILOT contributions in Boston for that year stood at $34 million. The report identifies individual colleges and their individual PILOT contributions, and makes some very useful recommendations:
- PILOT Programs should remain voluntary
- PILOT Programs should be applied to all non-profit groups – with exemption
for small non-profits
- PILOT contributions should be based on value of real estate
- Community benefits should be recognized and qualify as PILOT credit.
- PILOT Programs should be phased in
There is no point in Chestertown trying to reinvent the wheel when working models like this one already exist (a sample draft PILOT Agreement is even included in the report)
A similar PILOT agreement for Chestertown would help to redistribute the tax burden more fairly to include non-residents and could be based on an annual levy charged per student enrolled at the College. For instance, a tiny levy of only 0.75% on the annual basic educational fee of $54,462 currently charged for W.C. students could bring in about $408 per person, potentially over $491,000 in revenue for Chestertown each year. It’s true that not everyone pays the full going rate, many are on scholarships or get other discounts but let’s at least start to have a rational debate on a fair contribution from Washington College.
Further information :-
- The Definitive Guide on PILOT Schemes is by the Lincoln Institute of Land Management is found online
- ‘City of Boston – Mayor’s PILOT Task Force – Final Report & Recommendations’. See link
Gary Long says
My family relocated to Kingstown at the beginning of 2015. Prior to the start of last year we had been weekenders since 2006. We love the people of the eastern shore and the beauty of the region. Almost every aspect of the region is appealing, perhaps with the exception of the finger pointing that seems to be directed from time to time towards the largest nonprofit organizations in Chestertown: Washington College and University of Maryland Medical Center at Chestertown.
Recently there has been much dialogue written and spoken about Payment In Lieu Of Taxes, aka PILOT. Specifically, opinions for and against the idea that Washington College should pay a PILOT. I offer some insights having negotiated several six figure PILOTs with previous local municipalities on behalf of a nonprofit payer.
The local nonprofit organizations in this community, like all communities throughout the country are following the federal government’s IRS rules 501(c) (3), which defines the guidelines for tax exempt organizations. These organizations are not “avoiding taxes” they are in fact complying with the IRS criteria for tax exempt organizations. Many tax exempt organizations have a profitable balance sheet. The IRS guidelines do not require a nonprofit to make zero profit, but rather require nonprofit organizations to provide service to the community and thereby lessen the burden on the local community.
Unfortunately, as local, state and federal governments have found it increasingly difficult to balance their budgets, alternative sources of funding have been sought. One source that has been tapped in many regions of the country is a PILOT from local nonprofits. While this approach may appear to be logical because the nonprofit receives municipal services (police, fire, road maintenance) and does not pay taxes, it often discounts the services provided by the nonprofit.
When PILOT discussions emerge in a community the default approach is often, “let’s look at what other towns have done.” I suggest that local leaders should craft local solutions, rather than relying on the misaligned experience of others, such as Boston or Chicago. I offer some considerations to the local elected officials and nonprofit leaders as they ponder the merits of a PILOT and ask my fellow citizens to consider the complete picture of the town’s income gaps, the nonprofits compliance with IRS rules and the merits of PILOTs:
1. Consider private dialogue, not public leveraging. A discussion about a PILOT being paid by a nonprofit should start in private between elected leaders and nonprofit leadership. A non-quorum group from town council could meet with leaders from the nonprofit (the President of Washington College is one of the most gifted economic minds in the country) to dialogue about the town’s economic needs and value the nonprofit brings the community. Often these dialogues result in like-minded leaders creating lasting solutions for the town and the nonprofit.
2. When pursuing PILOTs, ALL nonprofits that own tax exempt real estate need be evaluated for payment, not just the ones with the largest balance sheets. This consideration means, not only the college, but also the hospital, thrift shops and nonprofit arts endeavors. If a small nonprofit cannot afford to pay a PILOT, then a Service In Lieu Of Tax. A SILOT can be an alternative to paying dollars. A nonprofit would offer service at town sponsored events, such as volunteering at the Tea Party or Down Rigging weekend.
3. A methodology for PILOT payments needs to be established and memorialized so that the rationale is understandable and payments are predictable for the town and the nonprofit. Otherwise a “slippery slope” can be created when public funding falls short in the town and the nonprofit is looked at to pay a bigger PILOT. The notion of “unfair burden” needs to be balanced. The town should not feel overburdened in providing services and the nonprofit should not be overburdened to bridge every budget short fall.
4. A seemingly universal concern from municipalities and taxpayers when raising the need for a PILOT is that a nonprofit often acquires ratable (taxable) property that in turn becomes tax exempt. A simple solution is to memorialize an agreement that moving forward any ratable property purchased by the nonprofit will have the nonprofit continue to pay taxes on the purchased property at current assessed rate and future assessed rates. This approach allows the town to continue to maintain its tax base while allowing the nonprofit to grow. The approach can truly meet everyone’s needs.
My list is offered as a starting point and surely is not all inclusive. When the elected and nonprofit leadership work with the citizens, they can craft solutions that are best for the community as a whole. Finger pointing or division will take everyone farther away from mutual goals. Certainly, nonprofits as a tax exempt organizations receive services without paying; but, the IRS rules allow them to do this. Additionally, no one should discount that nonprofits like Washington College and the Hospital provide access to many events free of charge. Free lectures and events at both the college and the hospital are a nearly weekly event. Students of the college and employees of the college and the hospital spend their dollars in Chestertown. Many groceries or pizzas are sold to college students, which in turn allows those businesses to meet their payrolls, paying local tax payers while the owner also pays his or her property taxes.
As citizens we should strive to remain balanced, acknowledging budget short falls do exist and public services are consumed by nonprofits. We should ultimately hold both elected and nonprofit leaders accountable for creating sustainable solutions for the entire community.
Gary Long
Kingstown
Ted Newcomen says
Gary
This was a well written viewpoint on the proposal for PILOT payments by Washington College – an issue which has been swept under the carpet for way too many years.
I’m sure the current College President Sheila Bair would welcome the opportunity to discuss this topic with town leaders. She certainly understands the issues. In her previous job as head of the FDIC she saw to it that tax payers underwrote the holdings of people invested in the shaky financial system, much like Chestertown tax-payers currently underwrite the bonds issued by the college. And prior to that job she was on the faculty of the University of Massachusetts-Amherst which has had a PILOT scheme in place with the local community since 1999! This is an excellent model PILOT agreement & one which she should be familiar with
See the link https://www.umass.edu/newsoffice/article/umass-amherst-and-town-amherst-announce