Two Cities Steering their Pilot Programs: But to Where?

Like Pittsburgh (population 310k, 55 square miles), Boston, Mass. (population 609k, 49 square miles) is trying to get more money from its tax exempt properties, especially those properties owned by the health care and university community.

Here’s how some of the comparative data stacks up: Both cities have collected voluntary donations under PILOT (payment in lieu of taxes) payments for years. Recent data shows that Boston received about $13.3 million in PILOTs; Pittsburgh, during the recent years of Act 47 and the establishment of the Pittsburgh Public Service Fund, received contributions in the area of $14 million over the three year period of 2005-2007.

Keep this in mind that according to published reports and the Boston City Assessor’s office that the value attributed to that City’s health care and higher education institutions alone is $12.7 billion: by comparison Pittsburgh’s total exempt value (non-profits, government, etc.) was $7.7 billion in 2008. Pittsburgh’s taxable property value ($13.2 billion) is slightly higher valued than Boston’s exempt property.

Boston wants to have a gradual movement toward having the non-profit community pay up to 25% of their assessed value in a PILOT to the city. Pittsburgh’s recent approach was to propose a raft of fees, such as charging for water use and possibly hospital stays, before settling on the now dead tuition tax.

Both cities likely are quick to acknowledge that the non-profits deliver wonderful benefits but pay no taxes. It is also fair to say that it is likely that neither has conducted a study measuring all of the related costs and all of the related benefits from the non-profits to determine whether or not, on net, the city derives a loss or a benefit. Until that happens, the PILOT talk fails to achieve liftoff.

Poor City, Poor County

Now, both the City of Pittsburgh and Allegheny County are pushing ahead with plans to pry money out of the non-profit community, which, by and large, means the institutions in the City.

Both governments are facing difficulties balancing their out-year budgets so they are flailing around looking for any source of potential revenue they believe they might be able to intimidate or shame into coughing up money. The irony could not be more complete.

Hospitals and universities are endlessly hyped in marketing and self-promotion literature as the great drivers of the local economies. And they are. A large share of net new job growth is traceable to health care and education.

After imposing tax, regulatory and labor climates that are inimical to private sector expansion, the two governments (assisted by costly school districts) find themselves in position where raising taxes is likely to be counterproductive. Quite a conclusion for big government advocates. So what’s left to do? Go after non-profits that might have some extra money lying around. The question: where will they go when they milk all they can out of those institutions and it also turns out to be self-defeating and counterproductive and when they find still do not have enough cash coming in to fund government?

Cutting spending comes to mind. But why not do the cutting now before more revenue chasing does more harm to the area’s economy?

Is Pittsburgh’s Pension Solution Local or Not?

That’s the question that needs ananswer the day following the Mayor’s inauguration ceremony at which, when talking about how to close the gap between the assets and liabilities of Pittsburgh’s pensions, he said "our options locally are extremely limited".

Recall that just a few months ago the Mayor practically begged for independence when it looked like the state was moving toward a modest reform of municipal pension plans. Wanting a "chance to solve this locally" by leasing/selling parking garages, the bill was opened to get Pittsburgh out and the reform provisions were watered down to the point of being ineffective.

So which is it? On the one hand we see the Mayor wanting the supposedly "pain free" options of a boost to the $52 Local Services Tax (levied by a municipality on anyone who works within the municipality) or a way to wring money out of non-profits. Even if the state were to entertain a request from the City-after having been told they were going it alone on pensions-and the $52 tax were to be increased, they would likely permit it across the state in all municipalities, thus increasing taxes on City residents that the Mayor says are taxed enough already. And the non-profit community cannot conjure up money for the City without curtailing investment or cutting services to the City.

Maybe the Mayor has received initial numbers on how much the parking garage deal would net and is not happy. Remember that the City has to show the state that the pensions are at least 50% funded by 2011 in order to avoid a takeover under the provisions of the current legislation. The City wanted to meet that threshold by turning the garages over to the private sector-and the state needs to honor their decision.

Humbug: Coal to the Coalition for More Taxes

Monday, December 21st marked the demise of the proposed tuition tax, also known as the “Post Secondary Education Privilege Tax” and the “Fair Share Tax”, as the City and the Pittsburgh college and university community reached an accord in which the Mayor and Council agreed to table the tax. But what has arisen in its stead brings a new set of very troubling concerns. 

 

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Tuition Tax—R.I.P.

The tuition tax, also known as the "Post-Secondary Education Privilege Tax", also known as the "Fair Share Tax" has been put to rest after weeks of almost coming up for a vote before City Council only to be temporarily shelved time and again. All along proponents had the necessary five votes and an opinion from an attorney that the tax would stand up to a court challenge.

So what comes next? Obviously the City is determined to obtain $15 million to put toward pension costs. According to early news reports on the tax being tabled, there is a collation of universities and colleges, along with some of the City’s corporate interests, that will work toward getting "significant legislation in Harrisburg". What could it be? Certainly an increase in the $52 Local Services Tax-levied on everyone who works in the City-would not help many of the same college students targeted by the tuition tax since many have jobs. And a boost in that tax would certainly be enabled for all municipalities (except for Philadelphia) since that’s what happened just five years ago when the last pieces of "significant legislation" were crafted for Pittsburgh.

All of this smacks of the "don’t tax me, tax the fellow behind the tree" mentality on the part of the college community-they won’t see a tuition tax, but would be perfectly fine with enabling a new or higher tax instead of holding the City accountable for its continued growth in expenditures in recent and coming years.

And what makes this coalition think that legislators would be agreeable to help? Just a few short months ago the City was a big part of the collapse of the initial plan for municipal pension reform (the City wanted exempted so as to pursue the parking garage lease plan). Now the "heavy hitters" want to return to the Capitol to pursue a new a pension solution? Good luck with that. What other revenue sources can there be? The City has obtained the RAD sales tax, payroll tax, casino money, etc. They need to take a much more hard line approach to their costs.

County Calls Both Sides of Non-Profit Coin

Will there be signs of an identity crisis at County Council’s regular business meeting tomorrow night? On the one hand, Council is scheduled to take up business regarding the issuance of over $1 billion in refinancing bonds through the County Hospital Authority for the benefit of UPMC. The taxpayers are not on the hook for any of the bonds, the purpose of which, according to the legislation, is "to benefit the health and welfare of the citizens of Allegheny County, Pennsylvania".

Soon thereafter, at the same meeting, Council is expected to consider two separate pieces of legislation, both concerning the tax-exempt status of parcels owned by UPMC. One would direct the Solicitor to "undertake a challenge to the tax exempt status of all parcels owned by UPMC within Allegheny County". The second would deal specifically with the parcels comprising the UPMC Braddock hospital site, the hospital slated for closure by UPMC.

Council is purely within its rights under the state’s tax exempt property law (The "Institutions of Purely Public Charity Act" of 1997) and if there are properties in use by the medical system that don’t meet the law’s test then those properties would have to pay real estate taxes if they are not already. For instance a 2009 report by the state’s Legislative Budget and Finance Committee noted that the University of Pittsburgh (not UPMC) paid $700k in real estate taxes to the City, County, and School District in 2007.

So would County Council breezily approve the refinancing deal and then show a hard line approach on the parcel legislation? It is hard to say. Even City Council has brought up the idea of adding additional layers of approval for building projects located in zoning districts labeled industrial or medical-educational while praising the benefits of "eds and meds". That goes without mentioning the "educational privilege tax" proposal.

This season is shaping up to be a challenging one for the non-profit community in the region.

Higher Education: Target One for More City Revenue

Another City Council plan to extract money from higher education in Pittsburgh has surfaced. Under the plan proffered by Mr. Burgess the City will negotiate a payment in lieu of taxes based on the value of land on which colleges and universities sit and the value of city services provided to the students at these institutions.

The Councilman’s approach is superior to the Mayor’s plan to levy an education privilege tax on students based on the tuition they pay. Mr. Burgess would at least try to determine the value of City services used by students. However, his plans falls short for several reasons.

First, the Burgess plan would base the estimate of student service use on what the City spends on other residents. But this obviously misses the mark. Most colleges have their own campus police forces and effectively replace city police for routine patrols and non-felony investigations. Then too, how many campus fires have City fireman responded to in recent years?

Large institutions and commercial establishments also pay separately for garbage collection so one of the City’s most expensive services provided to residents is not consumed by students. Beyond these drawbacks, the City cannot provide services to the students without providing services to the faculty and administrative staff. And since many of them live in the City and pay taxes, the estimate for students would have to take that into account. A very messy problem at best.

Using the spending on residents as a measure of the amount spent per student is simply not a meaningful way to approach this issue.

At the same time, how does Mr. Burgess intend to estimate the tax revenue paid directly or indirectly by students? Many students live off campus in nearby housing and pay rent to property owners who in turn pay a portion of that rent to the City, County and school district. Their presence creates purchasing power to support shops, dining and tavern facilities that simply would not exist without that spending. Those businesses pay property taxes, license fees, LST taxes, wage taxes and payroll preparation taxes to the City. Indeed, many students are employed in the City and pay wage and LST taxes to Pittsburgh, undoubtedly at levels that exceed their usage of city services.

Finally, evaluating the value of land for the tax exempt institutions will present enormous theoretical and practical problems. The land derives a great deal of its value because of the presence of the institutions and the people, businesses and housing facilities needed to support the institutions.

In short, unless or until some organization with the resources and public confidence necessary to carries out a full blown, credible study of the taxes paid and services used by the institutions, all the talk of education privilege taxes or land taxes should be put on hold.

Non-Profits Face Two-Pronged Battle

The state and the City of Pittsburgh are prepared to lean a bit harder on the non-profit sector in order to shore up their spending plans. The state wants to extend the sales tax to tickets sold to cultural attractions like the zoo, ballet, and museums and the City wants to enact a host of new fees and charges on things like hospital admissions, college and university students, and water use by large non-profits to provide some $10 to $15 million per year for its pension costs.

Of course, none of the targeted parties like the idea. On the sales tax, various officials noted "The cost of tickets is a big factor. Adding on an additional tax can only hurt attendance in the short term and the long term"…"this proposal would only place an additional burden on us. We definitely feel it could adversely impact our visits"… "Honest, this proposal has come entirely out of the blue, without any prior discussion, and that is what we find so puzzling." Hmm. Wonder if any of the affected venues in Allegheny County would like to get the input of businesses that have been collecting the extra 1 percent sales tax that has gone to support many cultural and recreational attractions helped through the Regional Asset District. That proposal came out of the blue as well: no public meetings, no referendum, and no broad based discussion. It was sold as having minimal impact on business but that has not been the case.

On the City proposal, one quote stands out: "UPMC has always supported the city". The region’s largest employer was a big contributor to the voluntary Public Service Fund and the major driver behind the Pittsburgh Promise. Perhaps they thought that would be enough to convince the City to avoid talk of more fees and charges aimed at the non-profit sector. But not so: instead the non-profit giant’s enabling act has not prevented the City for searching for even more money,

Is there a glimmer of hope for these organizations? Perhaps, but not in this corner of the state. Another news article today pointed out that the County wants to build a package of consistent and recurring revenues for its budget, including "$4 million from contributions by nonprofits to county finances". Is it time for the non-profit community to take a stand?

Loss of Residents is the Mayor’s Real Problem

In recent statements emanating from the Mayor’s office and City Council, there has been a theme of tortured logic to the effect that non-residents and non-profits must contribute more to the City’s coffers to pay for the services they use and presumably for the privilege of visiting or working in Pittsburgh.

The idea turns reason on its head, especially in light of the enormous amount of taxes non-residents contribute to Pittsburgh. Here’s the Mayor’s real problem: The huge loss of residents over the last several decades, a decline that continues with more people leaving each year. Residents have departed Pittsburgh to get away from high taxes, horrendous public schools, inept and financially clueless City governance and the stranglehold public sector unions have on the City government, the schools and public transit.

The loss of residents has a serious negative impact on real estate values throughout the City, causing them to stagnate or decline as the supply of residences rises relative to demand. And since the property tax is the City’s largest single source of revenue, the inability to grow property values forces the City to go after other sources of funds. And now, the old canard about non-residents and non-profits not contributing enough has raised its ugly head once again because it is politically expedient to do so.

Rather than deal with the spending and untenable legacy cost buildup that excessive deference to unions have created, the Mayor and Council choose to look endlessly for more ways to generate revenue. This five years after the Legislature gave the City new taxing power and 15 years after the RAD tax was implemented in large part to provide money to Pittsburgh.

With this governance, residents will continue to leave and businesses will shy away from the City unless they receive enormous subsidies to offset the taxes they must pay.