That, according to The Tax Foundation’s I. Harry David, is precisely the problem with these sorts of agreements.

Citing a much-discussed 2010 Lincoln Institute of Land Policy study [pdf], David warns that payment-in-lieu-of-taxes (PILOT) agreements “are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.” He continues:

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax. … Viewed either way, the payment is in an arbitrary amount.

The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt.

As a Tax Foundation paper noted in 2005, ”Most 501(c)3 charities … are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods.” Locally, both Brown and the Lifespan hospital group are both classified as 501(c)3 charities by the IRS.

David goes on to suggest some possible changes lawmakers could make to rationalize the way they structure these organizations’ contributions to government revenue. They could remove the tax exemption for charities altogether, or at least define “charity” more narrowly.

Alternatively, “if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard,” David suggests. That echoes the Lincoln Institute, which suggested cities with a significant amount of tax-exempt property (like Providence) should have a systematic, uniform PILOT program.

Boston, which has one of the oldest and most lucrative PILOT programs in the nation, formed a PILOT Task Force that proposed a new voluntary program in 2010. Here’s how the Land Institute summarized it:

Members of Boston’s PILOT Task Force have established a 25% standard, whereby the city would seek PILOTs equal to 25% of the property taxes that would be owed if the nonprofits’ properties were fully taxable. This goal was set “since approximately 25% of the City’s budget is allocated for core City services such as police protection, fire protection, and public works—services consumed by tax-exempt institutions” (City of Boston 2009, 26).

The Boston task force also said nonprofits only be included in the program if they owned at least $15 million in assessed property value. The city assessing department “seamlessly implemented all of the recommendations” with the 40 affected; law professor Eric Lustig details the aftermath in this New England Law Review article.

• Related: Taveras sees deal soon to get city cash from another hospital (May 11)

PROVIDENCE, R.I. (WPRI) – Johnson & Wales University has agreed to advance Providence $5 million by June 30, but Mayor Angel Taveras says he won’t count the full amount toward his 2011-12 budget needs despite protests by other tax-exempt institutions.

Read the rest of this story »

PROVIDENCE, R.I. (WPRI) – Brown University on Tuesday bowed to heavy pressure and agreed to pay the city of Providence $31.5 million over the next 11 years, bringing Mayor Angel Taveras a step closer to his goal of keeping the capital out of bankruptcy.

Read the rest of this story »

Update: All the mayor’s moves haven’t convinced Wall Street, however. Standard & Poor’s cut Providence’s bond rating from BBB+ to BBB on Tuesday, only two steps above junk status. S&P said that while Taveras has taken significant steps to fix the problem, “the city’s budget remains structurally imbalanced,” and Providence’s fiscal outlook is still negative (as opposed to stable).

Update #2: Want to read the Brown U.-Providence agreement for yourself? Download the PDF.

“I don’t think it’s reasonable for the city, having made mistakes and having become insolvent because of those mistakes, to turn to institutions that are successful and to demand that they pay for those mistakes,” Simmons told the Undergraduate Council of Students on Wednesday night, according to The Brown Daily Herald.

Spokesmen for Brown and Taveras continue to say the two sides are still discussing a final resolution to their differences over how much more the university should contribute to the city – Taveras wants it to increase by $4 million, while Simmons wants to keep the increase at $2 million.

• Related: Brown U. student: ‘It’s not our families’ job to fund Providence’ (March 7)

PROVIDENCE, R.I. (WPRI) – Providence Mayor Angel Taveras says Providence’s tax-exempt hospitals may not wind up making a cash contribution to the city budget but instead take over providing some services to residents that the city currently offers.

“We’re giving the hospitals ideas of ways they could help but still address their core missions,” Taveras told reporters after testifying before the House Finance Committee in favor of a bill that would allow cities to charge tax-exempt institutions 25% of the amount they would owe if their property was taxable.

State Rep. John Carnevale, the lead sponsor of the 25% bill, led the charge against the tax-exempts, saying it’s long past time the organizations contribute more money to the city budget to offset the cost of services from which they benefit, such as public safety.

“Like the Wizard of Oz, they hide behind that 501(c)3 [tax exemption],” Carnevale said during his extended, colorful testimony. “They’ve taken lessons from David Copperfield and put together the grandest illusion of all.” He argued the institutions are wealthier and less charitable than they claim.

Read the rest of this story »

• Related: Moody’s: Cities must balance tax-exempts’ cash, contributions (Feb. 15)

“I know it’s not going to be unanimous by any means,” Taveras told WPRI.com at City Hall on Saturday afternoon following this morning’s meeting with retirees. “I’m not even certain it will be a majority. … You can reach a binding agreement with unions; this is a much different situation.”

The mayor declined to offer a specific target for the number of retirees he hopes will go along with his proposal. Last summer, Central Falls receiver Robert Flanders asked retirees there to approve voluntary reductions in their benefits, but too few agreed to the deep cuts proposed for the plan to move forward. The city filed for bankruptcy Aug. 1.

“I can guarantee that if we don’t take action now it’s going to be a lot worse down the road,” he said. “It won’t necessarily be Angel Taveras that they’re dealing with. So I’m trying to make sure that they’re able to keep their pension.” He added: “I hope we can do it by agreement. If we can’t do it by agreement, we’ll try to do it [another way], consistent with the law. … But we have to do this.”

The mayor scoffed at the idea that he is picking a fight with the retirees over their pensions as a way to bolster his political standing with voters, who gave him a 60% positive job rating last month. “This is not the best way to promote myself,” he said. But he did express sympathy for some retirees’ anger and frustration.

“I agree – it’s not fair,” he said. “But this is where we are and we have to deal with the situation that we have in front of us, and if we don’t take action now it’s going to be a lot worse down the road. I’m trying to save the pension system so people can live with dignity.”

Separately, Taveras ruled out the possibility he would allow Lifespan and the city’s other large tax-exempt hospital groups to continue contributing no money directly to the city budget. “I wouldn’t be OK with it,” he said. “Everyone needs to be a part of it, hospitals included. … I do think they understand that, as well.”

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – Providence Mayor Angel Taveras says he’s “making good progress” in negotiations with Brown University over how much the Ivy League school should increase its contribution to the city budget.

Taveras and Brown President Ruth Simmons have met face-to-face twice in the last two weeks and spoke by telephone on Monday, the mayor told WPRI.com. “We’re planning to meet again soon,” he said. “She’s personally involved.”

Taveras met earlier this month with the CEOs of Providence’s large hospitals to plead the city’s case with them. “We’re pursuing that, as well,” he said. “Those conversations are ongoing.”

The mayor has asked Providence’s largest tax-exempt schools and hospitals to contribute an additional $7.1 million to the city budget as he tries to keep the state capital out of bankruptcy. An exclusive new WPRI 12 poll set for release Tuesday at 6 p.m. will show whether Rhode Islanders think the state should keep the city out of Chapter 9.

Taveras will meet Saturday morning with city retirees to ask them to accept voluntary reductions in their pension benefits. “You have to have structural change,” the mayor said Tuesday. “You cannot simply rely on more revenue to solve this problem.”

• Related: Moodys: Cities must balance tax-exempts’ cash, contributions (Feb. 15)

(photo: Ted Nesi/WPRI)

The government of Prime Minister Mario Monti … [said] it would change Italian law to ensure that the church pays property tax on the parts of its buildings used for commercial ends.

The church owns vast amounts of property in Italy, and the move is aimed at making sure that convents that offer bed-and-breakfast services or church buildings that rent space to shops pay their share of taxes.

The change — once it is formally drafted and approved by Parliament — could result in revenues of $650 million to $2.6 billion annually, according to municipal government associations. It could also set an example for other European countries that are struggling with debt — notably Greece and Spain — and where there is growing popular resentment over tax breaks for the church. …

Many church buildings fall into a gray area, taking advantage of a tax exemption for religious organizations’ buildings even if they are largely used for commercial purposes.

Sound familiar?

In Providence, $602.5 million worth of property owned by religious institutions is exempt from taxation, according to city documents. That’s equal to a little less than 9% of the city’s $6.7 billion in total exemptions.

(photo: Enrique Cornejo/Wikipedia)

Payments in lieu of taxes, or PILOTS, “represent a potential revenue boon for local governments with high concentrations of tax-exempt properties in their tax bases, many of which are in the Northeast,” Moody’s analysts wrote in a research note Tuesday that singled out Boston as a successful example.

“Though far from immanent, greater PILOT revenue comes with long-term risks for some local governments should PILOTs grow so large that they impair not-for-profits’ ability to create jobs and stimulate the economy, or encourage them to move elsewhere,” Moody’s said, adding: “In general, local governments are still far from that tipping point.”

“Efforts by local governments to bolster PILOTs appear to be shaping into a trend,” according to Moody’s. In addition to Providence and Boston, Scranton, Pa.; Worcester, Mass.; Framingham, Mass.; and Newton, Mass., have all sought larger voluntary payments recently.

Mayor Angel Taveras wants Providence’s seven big tax-exempt organizations to pay the city $7.1 million more a year. Brown University has resisted his push to up its contribution by nearly $4 million, and the hospitals – which currently contribute nothing to Providence’s budget – have said little about whether they’ll play ball.

In Boston, tax-exempts have boosted their PILOTs by 24% over last year’s amount in response to Mayor Tom Menino’s request for an increase of more than $6 million. The largest payment last year came from Boston University, which paid $5.08 million, or 8.8% of what its tax bill would be.

A notable difference between Boston and Providence is the different attitudes of their hospitals.

Partners Healthcare, which owns $2.8 billion in tax-exempt property, paid Boston $4.34 million in 2010-11, or 5% of what its tax bill would be. Lifespan, which owns nearly $1 billion in tax-exempt property in Providence, would pay the city more than $1 million if it contributed at the same rate as Partners.

Lebanon, N.H., gets more than 5% of its budget from PILOT deals, Moody’s said, while Princeton, N.J., gets nearly 2% of its tax revenue from PILOTs and New Haven, Conn., gets more than 1% of its general fund budget from them. Providence wants to fund about 1.5% of its $614 million budget with $9.1 million from the tax-exempts this year.

While more money from tax-exempts would be a “credit positive” for local governments, Moody’s said municipal leaders need to balance that against the possibility that siphoning off more from them will hurt their economies.

“In many regions of the U.S., research universities and academic medical centers are the largest employers and also promote economic development through startup company spinoffs,” Moody’s said. Providence’s seven biggest tax-exempts employed 20,837 workers in 2011, which was 19.5% of total employment. Brown is the city’s largest employer.

“Placing a greater PILOT burden on these entities could reduce their financial and operating strength and ultimately reduce the employment and economic benefits they could create in the future,” Moody’s said. In Brown’s case, the university is projected to run a $9.4 million budget deficit next year, the school said Saturday.

Moody’s downgraded Providence’s credit rating last March and expressed concern earlier this month about the city’s deteriorating financial outlook. Taveras on Wednesday is expected to announce a deal with Johnson & Wales for higher payments and meet again with Brown’s president. He will sit down with the hospital CEOs on Friday.

• Related: At-a-Glance: How much Providence’s tax-exempts own and pay

(photo: Brown University)

Providence Mayor Angel Taveras and his aides certainly don’t see it that way. But the seven tax-exempt institutions they’re targeting for a bigger contribution to Providence’s budget employ one in five workers there, making each of them one of its main employers, city documents show.

The gang of seven are Brown University, Lifespan (Rhode Island and The Miriam hospitals), Care New England (Women & Infants and Butler hospitals), CharterCARE (Roger Williams Medical Center and St. Joseph Health Services), Providence College, Johnson & Wales University and the Rhode Island School of Design.

Those seven tax-exempts employed 20,837 workers in Providence in 2011, which was 19.5% of total city employment, according to R.I. Economic Development Corporation data city auditors prepared for bondholders. Brown is the city’s No. 1 employer with 5,162 workers, or 4.83% of total city employment.

The seven’s share of employment in Providence has held about steady during the recession despite an overall reduction in their payrolls. They employed 22,104 Providence workers in 2008, which was 19.7% of city employment at the time, according to R.I. Department of Labor and Training data.

Of course, just because the nonprofits employ a lot of workers in Providence doesn’t necessarily mean those people wind up contributing a lot to the city’s budget. They don’t pay income tax to Providence, unlike in New York City, which levies an income tax on residents and city workers. They may not live in Providence at all.

“The mayor has said many times that he recognizes and appreciates the important contributions that our tax-exempt institutions make to the culture and economic life of our city and the health care of our city,” Taveras spokesman David Ortiz said.

“But that does not mean that we do not have to resolve the issue that the mayor has raised in recent months, and certainly in the past week, regarding the city’s very real need for the tax-exempts to do more to pay for the services that they receive,” he said.

The same city documents show a retreat by for-profit employers in Providence.

The number of private companies ranked among Providence’s principal employers fell from eight in 2008 to six in 2011. The number of workers they employed plunged by more than half, from 9,910 to 4,020.

Five of Providence’s top eight private business employers in 2008 had disappeared from the list by 2011: Bank of America, Citizens Bank, Verizon, Pinkerton Northeast/Securitas and Textron. Three new private employers were added: Mars 2000, H. Carr & Sons Inc. and Employment 2000.

The only three private companies that appeared on both lists were GTECH, A.H. Belo’s Providence Journal Co. division and National Grid. GTECH lost four jobs, The Journal Co. added 135 and National Grid axed 400.

Other major employers on the 2011 list included Blue Cross & Blue Shield of Rhode Island, Rhode Island College and AAA Southern New England. Blue Cross and AAA are registered as nonprofits, while Rhode Island College is part of state government.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

(photo: Brown University)

“You have to look at the role hospitals play in their community,” Ed Quinlan, president of the Hospital Association of Rhode Island, told WPRI.com on Thursday. “Executive compensation is determined by hospital boards based on the financial performance of the hospital, based on the financial stability of the hospital – there’s multiple factors.”

Local hospital chain Lifespan’s CEO George Vecchione earned $9.5 million in fiscal 2009, after getting paid $3.2 million in 2008 and just under $3 million in 2007, federal income tax filings show. House Speaker Gordon Fox cited Vecchione’s compensation on “Newsmakers” last month as evidence that all nonprofits should contribute.

Quinlan declined to say whether a portion of the money Lifepsan uses to pay Vecchione should be redirected to the city that’s home to three of its hospitals: Rhode Island, Hasbro Children’s and The Miriam. ”I couldn’t respond to a specific case, because I’m not party to those discussions,” he said.

Providence Mayor Angel Taveras said Thursday the city is on “the brink of bankruptcy” and will be forced to file for Chapter 9 if retirees don’t agree to concessions and tax-exempt colleges and hospitals don’t contribute more to the budget. The schools began making voluntary payments under a 2003 agreement, while the hospitals never have.

That’s because they spend an enormous amount of money annually providing medical services to residents who never pay, unlike many cites which have public acute-care hospitals, Quinlan said. Total uncompensated care provided by Rhode Island’s 12 hospitals rose from $105 million to $160 million over the last four years, he said.

“Providing over $100 million in uncompensated care is the ultimate form of shared sacrifice,” Quinlan said. The state has reduced its Medicaid reimbursement for charity care from $35 million to $4 million over the same period, he said.

“We share the impact of a distressed state budget,” Quinlan said. “Private hospitals being asked to offset lower payments from state government is different. We’re not asking the city of Providence to offset lower payments from state government.”

“You know, the governor declared this ‘the Year of the Cities and Towns,’” Quinlan added. “There has not been, in recent years, a year for hospitals.” Two of Providence’s five hospitals – Rhode Island Hospital and St. Joseph’s – had a negative operating margin in 2011, he said.

Taveras said Thursday he wants to hold a meeting with the CEOs of the hospitals to discuss the city’s budget woes. Quinlan called that “appropriate.” He didn’t rule out the possibility of payments from them to Providence, saying: “No one is establishing markers. But I think we each have to establish the realities of our financial situations.”

Like the colleges, the hospitals point to their positive economic impact on Providence and the state [pdf], as well as their comparatively strong prospects for growth, in arguing they shouldn’t be forced to fork over as much money to the city budget as Taveras wants.

All but three of Boston’s 12 tax-exempt medical institutions made voluntary payments to the Massachusetts capital as of fiscal 2009, according to a study by the Lincoln Institute of Land Policy. The size of the payments ranged between $2.2 million from Mass. General and $77,534 from Spaulding Rehabilitation Hospital.

“Boston has one of the longest standing [payment in lieu of taxes] programs and the most revenue productive program in the country,” the study found. Boston got $15.7 million from its tax-exempts in fiscal 2009. That was less than 1% of the city’s annual budget and 4.3% of what they would have paid under the commercial property tax rate, the study said.

Quinlan said nonprofit hospitals in Boston and New Haven, Conn., are “significantly different” from those in Rhode Island because their financial conditions are stronger.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

• Interactive: How much Providence’s tax-exempts own and how much they pay

But in other ways, they’re different – and Mike Stanton’s terrific Projo profile of Mayor Angel Taveras offers me an opportunity to point out a key distinction of which I’m not sure many people are aware (emphasis mine):

Taveras says talks have intensified with the city’s nonprofit hospitals and universities about contributing more ….

Another test will be his efforts to collect more from the city’s nonprofit hospitals and universities. Taveras says he must balance the city’s financial plight with the role that those institutions play in helping the city and state develop a “knowledge economy” in the old Jewelry District and on the downtown land freed up by the Route 195 relocation. …

Brown president Ruth Simmons says that charging nonprofits, such as Brown … could force the university to lay off employees, while overlooking Brown’s value to the city as an economic engine.

Still, she praises the new mayor’s intelligence and toughness, says that his decisions seem based on facts, not politics, and welcomes “a fact-driven discussion.”

Here’s the thing: The Cicilline administration’s 2003 deal to get $50 million in voluntary payments in lieu of taxes (PILOTs) over the next 20 years only included the four private colleges. The schools also pay taxes on some non-exempt properties and reimburse the city for police and fire services. The three types of direct payments totaled $7.9 million in 2009-10, according to their association.

By contrast, the big hospitals – Rhode Island Hospital and The Miriam, both owned by Lifespan; Women & Infants and Butler, owned by Care New England; and Roger Williams Medical Center, now owned by CharterCARE – don’t have any PILOT agreement with the city, and thus don’t make any direct contribution to its budget.

“There are no formal payments,” Amanda Barney, a spokeswoman for the Hospital Association of Rhode Island, told me. ”It’s all in the form of the benefit that [the hospitals] provide to the community through employment, uncompensated care and those sorts of things.” Of course, the colleges point out that they provide indirect benefits of their own.

I raise this because lumping the universities and the hospitals together doesn’t seem particularly fair to the schools or particularly helpful as the city grapples with its financial crisis.

In this case, Brown President Ruth Simmons is standing in for all the nonprofits – but she did agree to the 2003 deal, which the hospital executives haven’t done.

What, for instance, does Lifespan CEO George Vecchione think should happen? He made an astonishing $9.3 million in 2009 - an amount equal to one-third of Providence’s $29 million budget deficit this year. (Simmons earned a comparatively paltry $884,771, IRS filings show.)

On a less populist note, the final report [pdf] released last fall by the Providence City Council’s Commission to Study Tax-Exempt Institutions estimated a gap of up to $6.2 million between the city’s revenue from tax-exempts and the cost of providing services to those organizations. Vecchione could cover that and still keep $3.1 million.

The commission offered Providence a range of suggestions, including pushing the General Assembly to appropriate more PILOT reimbursement money or using Boston’s model, which allows nonprofits to itemize the services it provides the community to show how it makes up for part of the foregone property-tax revenue. It also suggested negotiating a PILOT payment with the hospitals mirroring the one with the universities.

For the record, the report found the nine “major tax-exempt institutions now own 15% of the land within the city (23% of all non-public land),” with an assessed value of $3.1 billion. It also included this neat map comparing the footprint of tax-exempt properties in 1985 and 2005:

(map: Providence City Council)