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November 25, 2009

Local governments & nonprofits:

Forum looks at problems, solutions

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The Pittsburgh region isn’t alone in its struggles with public policy over what sort of support tax-exempt nonprofit organizations should provide local government.

In light of the public policy controversy that is playing out locally and elsewhere around the country, Pitt’s Johnson Institute for Responsible Leadership recently invited a panel of experts to a town hall-style dialog on the issues and possible solutions.

Pennsylvania has long been a poster child for dysfunctional relationships between nonprofits and local governments, said Johnson Institute director Kevin Kearns, who said it wasn’t difficult to see a flare-up looming.

The added strain of tight municipal finances has turned up the heat on the long-simmering tensions, virtually guaranteeing that the issue would again come to a boil as local government officials look to plug budget gaps through proposed taxes and fees that would impact local nonprofits.

However, Kearns admitted that as he began planning the forum last summer, he didn’t foresee exactly how timely the Nov. 6 event would be. Attendees awoke that morning to headlines announcing the Allegheny County Council’s approval of an “essential services fee” based on the size of buildings on tax-exempt property. Criticized as a thinly veiled tax on nonprofits, the move has since been vetoed by county executive Dan Onorato, but other proposals are being tossed into the pot at city, county and state levels.

In the weeks since, Pittsburgh Mayor Luke Ravenstahl’s proposed “fair share tax,” intended to raise $16 million in part through a 1 percent fee on college tuition, also has met with local backlash.

Most recently, state Senator Wayne D. Fontana (D-42) announced he planned to introduce a proposal next month that would allow an “essential services fee” on tax-exempt property owners who do not participate in voluntary financial agreements with their municipalities.

“This could go on for awhile,” Kearns told the University Times, expressing his personal doubts as to whether the political will for action could be found at the state level due to the division of urban and rural interests across Pennsylvania.

“There’s probably no solution in the short term,” he said, given that the legislature lacked the political will to pass a state budget in a timely manner, let alone tackle the thorny issue of nonprofits’ tax exemption.

Although he finds it difficult to predict what will happen, he foresees a series of piecemeal fixes before the legislature provides a systematic one.

Assessing the local situation, Kearns said he sees it becoming more and more dysfunctional and heavy handed. “I hope it stops soon.” Kearns said on one hand, local governments shouldn’t tap nonprofits to solve legacy issues — such as the city’s plan to tax students in an effort to shore up underfunded pension obligations. “That’s a legacy problem resulting from past fiscal mismanagement, not a service fee,” he said.

He did note that a student fee similar to the $52 local services tax imposed on non-residents who work in the city likely could be assessed. But rather than being based on tuition, he said, to be equitable it should be a flat fee based on some sort of logic.

For their part, nonprofits should abandon the argument that they shouldn’t be taxed because they are economic engines for the region, Kearns recommended. “Their argument has to be made on mission grounds, not economic ones,” he said, noting that plenty of companies that pay taxes likewise are economic engines.

Instead of upping the rhetoric, the parties need to sit down together to determine what makes sense, he said. The solution may involve nonprofit payments. It may involve finding different revenue sources for the city, he said.

Kearns said he felt the Nov. 6 forum succeeded as a good conversation, bringing together experts with a multiplicity of viewpoints to present a balanced perspective on a complicated issue. He prefaced the forum with the disclaimer that Pitt, as a nonprofit and owner of tax-exempt land, has a stake in the outcome of the proposed government actions. He clarified that the goal of the discussion was not to advocate for a position or present biased arguments, but to examine the topic from a broader perspective and learn from the experience of others.

Video of the entire session is available in two parts at and

As a postscript to the event, Kearns has co-authored an article with recommendations for municipal governments and nonprofits that is to appear in an upcoming issue of Nonprofit Quarterly.


The debate over what, how and how much tax-exempt organizations should contribute toward public services has all the characteristics of a classic wicked problem, said Kevin Kearns, director of Pitt’s Johnson Institute for Responsible Leadership.

“There are multiple actors and stakeholders — all of whom have different values and belief systems. There are problems where the data are not necessarily reliable or totally transparent and where options are almost unlimited in terms of the range of feasible solutions,” he said during a discussion on the relationship between tax-exempt organizations and municipalities held Nov. 6 at the University Club.

The issue is not merely a technical one of facts and figures, dollars and cents, Kearns said, but also a deeper one that is rooted in democratic philosophies regarding the limits on what governments can do and what they can ask other sectors to do.

“It’s a problem with tremendous interdisciplinary aspects, some of which are economic, some of which are financial/accounting in nature… and many of which are fundamentally political,” Kearns said.

In a dialog titled “Tax-exempt Organizations and Municipal Finance: Examining Legal Precedents and Financial Realities,” the Johnson Institute brought together local and national experts to discuss the unique problems that arise in municipalities where high concentrations of property tax-exempt nonprofits make their home.

Communication, compromise and cooperation ranked high among panelists’ suggestions for moving forward.

Noting that both nonprofits and local governments are starved for resources, Nonprofit Quarterly magazine columnist Rick Cohen said this is a case of mutual starvation in which both sides are looking at each other for resources.

Because Pittsburgh is not unique in its position as a city with a high percentage of tax-exempt properties within its bounds, the discussion, moderated by Cohen, touched on the history and status of the local situation and presented examples of what is occurring elsewhere.

GSPIA professor Sabina Deitrick outlines her research on the impact of local nonprofits.

GSPIA professor Sabina Deitrick outlines her research on the impact of local nonprofits.

Providing the local perspective were School of Education faculty member and former City of Pittsburgh finance director James Turner and Graduate School of Public and International Affairs professor Sabina Deitrick. Adding the broader view were Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations; professor Evelyn Brody of the Chicago-Kent Law School, and Woods Bowman of DePaul University’s School of Public Service, who is an economist, a former Cook County, Ill. finance director and a former Illinois state legislator.

By the numbers

GSPIA’s Deitrick framed the local situation with details from her research on the economic impact of the region’s nonprofit organizations.

While it’s difficult to quantify and to value the tax-exempt properties owned by nonprofits within the city, what is known is that the nonprofit sector “is big, it’s growing, and fairly geographically concentrated in the city of Pittsburgh,” Deitrick said.

“Certainly all three of those have implications for the current debate today on what’s going to happen on property taxes and taxing within the sector itself,” she said.

Deitrick’s 2007 research, co-authored with Christopher Briem of Pitt’s University Center for Social and Urban Research, showed that the region’s nonprofit sector in 2006 directly employed about 148,000 people and accounted for more than $16 billion in gross regional product, with an economic impact (including direct expenditures as well as indirect and induced expenditures) equating to nearly 300,000 jobs.

Compensation in the nonprofit sector totaled $6.2 billion in 2006, up 8.5 percent in inflation-adjusted dollars from 2002. The research found half of the region’s nonprofit employment is located within the city and about 25 percent of the city’s 300,000 jobs are in the nonprofit sector.

The majority of the region’s 3,200 nonprofit organizations have expenses of less than $100,000, Deitrick said. “Most of them are grassroots-level organizations. That certainly has implications when you’re talking about property taxes. …Most of them won’t be involved in that discussion.”

However, others in the so-called “eds and meds” — education and health care — sector are economic engines in the region. “Health care, education and human services alone accounted for 90 percent of the nonprofit concentration in the city of Pittsburgh,” Deitrick said.

The nonprofit sector tends to be more resilient during recessions, Deitrick said. In spite of the budget cuts and financial strains being seen now, the sector’s employment figures “don’t change as drastically as they do in the for-profit sector,” Deitrick said. “It’s a source of regional resilience and it has been a source of regional resilience since the decline of the steel industry.”

Whether that resilience will continue in light of the current recession remains to be seen.

In examining the sector’s performance over the past two recessions, “In some cases in parts of the state there was growth or flatness, and it wasn’t the same kind of decline we’re looking at today,” Deitrick said. “Within a recession like this one, which is clearly a lot bigger than the last two, the sector’s going to show downturns. Over time will it be stronger than other parts of the economy? I don’t know, but as we looked at the last two, it was not nearly as impacted as other parts of the economy.”

The value of nonprofits

According to the National Center for Charitable Statistics, there are more than 41,000 charities operating in Pennsylvania — not including faith-based organizations (which add another 18,000) and those not required to file with the state, said Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations. “Is it such a problem that we have an abundance of nonprofit organizations improving the quality of life?”

In addition to employing many Pennsylvanians — one person in nine in the state works for a nonprofit, while the national average is one in 11 — virtually all nonprofits pay some taxes and not all have property and sales tax exemptions, Geiger pointed out.

He also pointed out the role nonprofits play in retaining nearby property values, arguing, “It’s great that there’s a museum, and a theatre and a church and a youth sports program in the community. Why would people want to live in a community where there were no nonprofit organizations?”

Legal status of nonprofits

Geiger noted that prior to the passage of Act 55 in 1997, local governments were challenging nonprofits’ tax-exempt status in court. Previously, a charity bore the burden of proof as to whether it qualified. But as a result of Act 55, the challenger has to prove that the nonprofit is not eligible based on the standards spelled out in the act.

“What Act 55 did for nonprofits was it reduced significantly the number of challenges that were occurring between local government and charities over tax-exempt status,” Geiger said. “It doesn’t mean the issue went away,” he added, noting that some local governments “got creative” in what they called taxes, while others disregarded the law and still mounted court challenges.

“You see charities who obviously meet the criteria being challenged and you think in terms of what’s the drain on the charity who has to go through with the court case to address the challenge? That’s money taken off the table for fulfilling the mission that they offer.”

The economy’s impact

Today, both the economy and the delay in the state budget are impacting nonprofits, and experts suggest that 10-20 percent of nonprofits may not survive. “We’re in the perfect storm,” Geiger said. “Government has an increasingly difficult time balancing their budgets. … Companies are closing their doors. They’re laying people off. It’s pretty hard to justify giving more money to charities when you’re laying people off and closing your doors. Foundations are suffering with the investments.”

In addition, it’s estimated that 83-87 percent of donations to nonprofits come from private individuals. “But if you’re anxious about losing your job, or if you’ve lost your job, you’re going to be thoughtful about [whether you are] going to be able to give more money or the same amount of money to charities,” he said.

“So charities are suffering as much as government in terms of how do we balance our budgets,” Geiger said. “I think that there needs to be an intentional civil dialog moving forward on how we’re going to resolve these issues.”

The search for a solution

Geiger said, “I think we need to be thoughtful and intentional and more collaborative in our approach to the future. … Where are we going to be 15 years from now if we don’t start turning around this dialog; if we can’t get our act together and have that dialog, and have that community solution-finding between government and nonprofit?”

Former City of Pittsburgh finance director James Turner called for local collaboration. “There isn’t an easy answer that I know of, but state government does respond to pressure. All politics are local and when local organizations get together, state legislators do respond.”

Geiger agreed that nonprofits and government must be willing to compromise. “I have obligation and responsibility to bring the best information I can to the table…  It’s got to ultimately be more than ‘what’s in it for me?’”

Statewide options

Turner noted that the immediate problem facing city and county governments “is that there are huge tracts of land and buildings that could either be purchased and used by a private operation or a nonprofit operation, one of which will contribute immediately in property taxes and the other one indirectly.”

He said he didn’t fault either the local officials or the nonprofits for their positions.

With regard to the current local issues, “I actually believe both parties are doing exactly what they should do now. I think local government, the City of Pittsburgh, should challenge, and I think institutions like the University of Pittsburgh should defend to the depth of their ability, which is why I don’t believe this problem can be solved locally.”

He said, “We’ve got to align the interests of nonprofits and major governments because they are the engines of our future,” reiterating that the issue can’t be resolved locally. “I think this has to be done at the state level,” he said.

Turner noted that the state of Connecticut reimburses local governments a percentage of the value of their communities’ tax-exempt properties. However, he said he finds it problematic that the reimbursement is “subject to the whim of the appropriation of the state legislature” because it has no dedicated revenue source behind it.

If the government agrees it has a burden to support tax-exempt properties, Turner said, “I think the burden should be shared equally statewide. So, for example, if statewide 15 percent of all value is in tax-exempt property, you could set up a program in which anything above 15 percent was reimbursed on a state level, or programs like that.”

Geiger noted bills with such provisions have been introduced in Harrisburg in every legislative session since Act 55 was passed, without success.

In outlining similar property tax struggles elsewhere, Chicago-Kent law professor Evelyn Brody pointed out that states grant the property tax exemption to nonprofits, but it is the local taxing jurisdictions that feel the effects.

“I believe the states have an obligation to do something about this problem,” she said, noting that “spillover” effects impact the municipalities that have more tax-exempt properties. “The center city has the higher education and the hospitals and the cultural institutions; the benefits are enjoyed more broadly than that — by people who live in the suburbs, by people who live elsewhere in the state, elsewhere in the country and maybe worldwide.”

DePaul professor Woods Bowman agreed that action should be at the state level. “The problem isn’t just the number of local governments, but how they overlap,” he said, noting that there are six taxing bodies that get a part of his property tax payment in Illinois. “Get rid of some of these governments,” he said, calling for consolidation.

However, the biggest problem with municipal funding in cities and counties, Bowman said, is that the entities rely too heavily on property tax revenue. “They’re trying to solve 21st-century problems with a 19th-century revenue structure,” he said.

Financial myths and realities

Some nonprofits such as hospitals, universities and cultural organizations are seen as wealthy because they tend to be very visible, own lots of property, and may have big endowments, Bowman said, labeling the view a “fiscal illusion.”

Endowments compensate for the fact that unlike for-profit businesses, nonprofits can’t sell stock to raise capital for expansion or improvements, nor can they spread business risk among stockholders. While hospitals and universities do charge for their services, endowments pay for parts of their operations that they can’t charge for — basic research, for instance.

Bowman clarified that nonprofit organizations are not exempt from property tax, but the charitable use of property is. “If a property is not being used for a charitable purpose, it is taxable,” he said. In addition, tax-exempt property owners get no free ride. Like other property owners, they are subject to sewer fees, assessments for street improvements, business occupation taxes, utility taxes and the like.

Property tax exemption is a political, not an economic issue, Bowman said, “the question being how high taxes should be.”

He said it’s a myth that property tax exemption causes revenue loss to governments.

Unlike other taxes, a property tax is designed to raise a specific amount of money, he said. Local governments decide each year how much money they need to balance their budget, and a millage rate that will raise that amount of money is set.

Higher property taxes do impact land values, he said, noting that areas with higher property taxes have lower land values and vice-versa.

“When you buy a piece of property you’re also buying a permanent obligation to pay taxes on that thing,” he said. “People do look at the property taxes before they decide to buy.”

Higher tax rates, which do result from property tax exemption, are capitalized into land values. “So taxpayers residing in a community when the property is removed from the tax rolls are losers because they have to pay higher taxes and the property is now worth less. But future property taxpayers are not affected,” he said. “It’s not a revenue issue to the government. And as far as pre-existing property, when a person buys into a neighborhood … they are getting a discount on their property by virtue of the higher tax rates that result from property tax exemption.”

Bowman said, “Taxpayers blame property tax exemptions for high tax rates; they don’t see the offsetting lower property values — that they got a break when they bought the property in the first place. But even if they did, they don’t want to think their property is worth less as a result of these tax exemptions,” he said.

Capitalization also works in reverse, he said. “If the property tax exemption were abolished, today’s taxpayers would benefit” through lower tax rates and higher land values. But future generations wouldn’t benefit, just as they’re not disadvantaged by the exemption today because the tax burden is a factor in the value of the real estate. “The issue will never go away because current taxpayers will always perceive a benefit and they’re correct in that.”

Bowman said, “The issue is basically a political one. The economic arguments, no matter how good they are, will never prevail.” Key to the issue: “People must perceive nonprofits as assets to the community. Nonprofit leaders can believe their organizations are assets to the community but they’ve got to convince the community of that fact. It is a never-ending job,” he said.

Bowman noted that in his home area of Chicago, there are conflicting political currents with regard to nonprofits. The county is pressing nonprofit hospitals to provide more charity care while the city is giving the same hospitals the significant benefit of free water. In addition, the city encourages nonprofits to take property off the tax rolls downtown. “There are 50,000 students going to school in downtown Chicago every day,” he said. “They all are occupying buildings that are off the tax rolls. It creates 24-hour activity on the streets. People enjoy going downtown at night … there’s always activity on the street. People feel safe and it’s this huge university community that’s created. That’s another way the interests of nonprofits and governments can align.”

Nonprofit Quarterly magazine columnist Rick Cohen (standing) moderates the discussion as panelists Evelyn Brody of the Chicago-Kent Law School and Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations listen to a question from the audience.

Nonprofit Quarterly magazine columnist Rick Cohen (standing) moderates the discussion as panelists Evelyn Brody of the Chicago-Kent Law School and Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations listen to a question from the audience.


Payments in lieu of taxes, or PILOTs, Bowman said, “are the worst way to deal with the conflict.”

He argued that PILOTs tend to have differential effects on nonprofits because some voluntarily pay, while others don’t. Likewise, not all taxing bodies benefit from them. “Schools rarely see any money from these PILOTs,” he said. “It goes to the municipal governments because they’re the ones who have the muscle.”

On top of it all, PILOTs don’t raise much money, he said, “When I look at the dollars that are raised by these things, they seem like they’re not worth the effort.”

He argued that school districts should have a role. “In most states and most regions, schools take most of the property tax, yet all the focus is on the municipal governments,” he said. “If you’re going to deal with this, you’ve got to get the schools into it.”

Bowman favors SILOTs, or services in lieu of taxes. “A hospital might provide a free health clinic, for example,” he said.

He argued that SILOTs are mission-related and can be based on a nonprofit’s capacity. “Everyone gets to do what they’re best at and at a financial level that they can afford. It’s visible and measurable too. … The PILOT agreements tend not to be public; people tend not to know exactly who’s giving how much. But if you’re offering services, they’re out there for everybody to see.”

Another option would be a one-time fee. “If you really want to deal with this … deal with new property that’s coming off the tax rolls,” he said, suggesting that owners could be subjected to a one-time impact fee for taking property off the tax rolls that could be incorporated into the fundraising campaign a nonprofit mounts when it wants to take on a capital project.

Cohen pointed out that determining levels for SILOTs can be problematic, given the diversity of services provided by nonprofits. He questioned how to calculate the value and amount of services to be provided. Another concern is that not all nonprofits are service providers, Cohen said, questioning whether nonprofits such as advocacy groups, institutes or research-related agencies could be considered less valuable.

Evelyn Brody of the Chicago-Kent Law School pointed out there also is a potential risk of extortion of the services by the political powers that be: “You’re a school, provide tuition to my constituents,” she said.

—Kimberly K. Barlow

Filed under: Feature,Volume 42 Issue 7

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