DATELINE, October 21, 2007, Chicago
Living in the City of Chicago gives one a fairly good perspective on what pressures state and local officials believe they are facing these days. Mayor Daley is looking for new sources of revenue to finance city government. His answer is taxes on bottled water and a city-owned casino (one can only begin to imagine the corruption and patronage that would come with that). Meanwhile Cook County Board President Todd Stroger is proposing sales tax increases, doubling parking fees, and doubling the county's take from gas taxes to finance a crumbling and corrupt county government. Moving up the food chain, the state legislature and Illinois Governor Rod Blagojevich have been locked in a...
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mud-wrestling contest for the last six months over Illinois's state budget. That match was sparked by the legislature's almost unanimous refusal to approve Blagojevich's proposal to impose a major new tax regime on businesses.
Against this background, the Chicago school system continues to fail miserably, the Chicago Transit Authority is relying on an antiquated system and is perpetually on the verge of collapse, and a good chunk of the electorate is demanding free health care for low-income individuals, children, and the elderly. One fact is abundantly clear no matter how you come out on the merits of publicly-financed health care or publicly-subsidized mass transit: The political class believes it doesn't have enough money to meet the perceived needs of the electorate.
That's why we were not the least bit surprised to see another community look to the nonprofit property tax exemptions as a source of revenue. Erica Noonan of the Boston Globe reported last week that the suburbs surrounding Boston are focused on nonprofit property that is exempt from property tax. Should Nonprofits Chip In?, Oct. 18, 2007. While Boston is halfway across the country from Chicago, no doubt that Chicago and surrounding communities may look to the debate taking place in the Boston area.
It is not easy to change the exemption laws, particularly when they are written into state constitutions. As an alternative, some state and local governments have asked for something called PILOTs, or payments in lieu of taxes. For example, Harvard University pays the City of Cambridge $1.7 million in PILOTs annually. Providence, Rhode Island has also entered into voluntary agreements with several colleges and universities. There is some logic behind these agreements. The municipal governments point to fire and police protection, garbage service, and sewage treatment as costs that are directly affected by nonprofit organizations.
Noonan's article focuses on Newton, Massachusetts, the home of Boston College. It, according to Noonan, has over $1 billion in endowment. On the other hand, Newton isn't so well off. It is projecting a $10.1 million operating deficit. A blue ribbon citizen-advisory group pointed out that five local colleges owned $450 million in property that is exempt from property taxes. Private colleges have always been one of the primary targets for PILOTs. So the fact that a blue ribbon panel might be eyeing private colleges is not surprising. Interestingly, a Newton spokesperson has indicated that it will not ask the colleges or Newton-Wellesley Hospital to enter into PILOTs.
Far more notable is Farmington, Massachusetts' request that a dozen social services agencies enter into PILOTS. According to Noonan, Farmington has its eyes on organizations that operate homeless shelters, run programs for low-income youths, and programs that assist the mentally ill. Noonan cites other examples.
The nonprofit community instinctively opposes these requests, arguing that its members provide major benefits to the community, including lots of jobs. It also points out the direct benefits from nonprofit programs, be they cultural, educational, or pure charity. According to Noonan, Wellesley College publishes an annual report describing the benefits it provides to the community. In some cases, nonprofits point out that their revenue is subject to restrictions on how it can be used, implying that they are prohibited from paying property taxes by grantmakers.
Well, there are several lessons here for nonprofits.
Lesson 1: Perfect the Property Tax Exemption. In many cases, a nonprofit must file some sort of request in order to perfect its exemption from property taxes. All nonprofits should have a tickler system in place to make sure that timely requests for exemption are filed. In the current fiscal climate, it is hard to imagine local officials granting relief for a missed filing.
Lesson 2: Track and Monetize Community Benefits. That knock on the door from local officials could come at any time. Nonprofits should carefully track the benefits that they provide the community. Even though PILOTs are supposed to be voluntary agreements, local officials, by using the press to generate taxpayer resentment, can place considerable pressure on a nonprofit entity to enter into a PILOT. The nonprofit therefore wants to be sure that it is in a position to wage a timely campaign through the press in support of its property tax exemption. In short, Wellesley College offers a very good model for nonprofits.
Lesson 3: Watch Out for Subtle Pressure Tactics. Tax-exempt entities want to be on the watch for heavy-handed public officials. In some cases, local officials have been known to apply subtle pressure by using zoning and other government approvals as the stick. Direct linkage has been held to be illegal, but local officials can use red tape subtly to get their way. As a clarification, we have no reason to believe that any of the localities mentioned in Noonan's article are doing this.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
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