Boston's PILOT Project: How the City of Boston and local tax-exempt institutions worked together to support the local budget using (PILOTs).

• Author: Kavanagh, Shayne
• Position: RETHINKING REVENUE

Many local governments have several tax-exempt properties within their boundaries. For those governments that rely on property taxes, tax-exempt properties can create a drag on the local budget: These properties pay no taxes but still must be served by local government. The City of Boston is one such government. Boston has several colleges, universities, and hospitals. As of 2007, the city's Assessing Department estimated that the 16 colleges and universities they examined totaled $7.0 billion in property value, and the 12 hospitals examined totaled $5.7 billion in property value. The Assessing Department estimated that, if taxed at the commercial rate in fiscal year 2009, these institutions combined would have generated $345.0 million. By comparison, the commercial sector generated $764.5 million in the same period. (1)

Local governments like Boston have a conundrum: how to balance A) the contributions that tax-exempt properties make to the local government budget and community well-being by virtue of their pro-social missions versus B) the resources these properties consume from the local budget. This conundrum is what is known in economics as a "common-pool resource" problem. The local government budget is "owned" by everyone in the community, but any single person has the incentive to avoid contributing to the pool [the budget) while still using resources from the pool (services). Fortunately, the Government Finance Officers Association has developed a framework, based on Nobel Prize-winning work, to solve common-pool resource problems: Financial Foundations for Thriving Communities. The Financial Foundations framework consists of five "pillars" described below and shown in Exhibit 1.

* Establish a long-term vision. Give people a reason to look beyond their immediate self-interest and work together for a better future.

* Build trust and open communication. Create the conditions for people to work together.

* Use collective decision-making. Develop forums for working together, giving stakeholders the opportunity to be part of decisions.

* Create clear rules. Put the systems in place for making and carrying out decisions.

* Treat everyone fairly. Promote and protect mutual trust and respect.

In this article, we will use the Financial Foundations Framework to describe how Boston addressed this common-pool resource problem and gained about $17 million in new cash payments in lieu of taxes [PILOTs) from tax-exempt properties annually and $50 million in new in-kind contributions annually. (1,2) This compares to Boston's operating budget of $3.76 billion in 2022. We should recognize that Boston has enjoyed an unusual degree of success with its PILOT program among local governments. Other cities have tried to mimic features of the Boston program but with less success. By using the lens of the Financial Foundations framework, we hope to reach deeper into why Boston's program has worked. A deeper understanding should allow for more successful replications.

Boston did not start from zero. Over many years, it has arrived at a series of disparate agreements with owners of tax-exempt properties. For the sake of brevity, we will refer to these owners as nongovernmental organizations (NGOs), City officials were pleased to be getting some contributions, but there was a sense that the success was uneven and that the city could do better.

The starting point was a clear vision (Pillar 1), This started with acknowledging that NGOs create costs for the city but don't contribute their share to the budget. Further, not only do NGOs benefit from municipal services, they benefit from a thriving urban environment that the municipal government helps to maintain. These conversations were happening in 2009, so resource scarcity from the 2008 Great Recession emphasized the need to secure contributions from all stakeholders that benefited from city services. However, the vision can't be purely about filling the coffers of local government. As we will see, the PILOT program also recognized the contribution to the community made by NGOs and seeks to better coordinate the efforts of NGOs and the city government on pursuing shared goals. See the sidebar on this page for more on how to form a vision that NGOs (and others) can convene around.

Another part of the vision...