PILOTs: a comparative analysis.

• Author: Leland, Pamela
• Position: Payments-in-lieu-of-taxes

It is widely believed that one of the great untapped sources of municipal revenue is the local nonprofit sector and organizations which are currently exempt from paying property taxes. All it would take is a little initiative on the part of the local government or taxing authority and all budgetary problems would be solved. This is a compelling thought and one that is often believed by the members of the business community who perceive an "unfair competition" or the local citizenry reacting to scandals over nonprofit executive compensation or unethical (or illegal) behavior. The fact is that the solicitation of payments-in-lieu-of-taxes (PILOTs) from nonprofit organizations is a complex policy issue that can have significant consequences.

PILOTs is an acronym that is frequently used but which can refer to many different kinds of payments. It can involve different levels and types of governments, payments, and organizations. It may include state reimbursement to counties for state game lands or state reimbursement to local municipalities with extensive holdings of publicly owned (and therefore, exempt) property.

Used here, "PILOTs" refer to the payment of monies by charitable nonprofit organizations (which are exempt from local property taxes) to local taxing authorities (usually cities, towns, counties, school districts, or other special taxing districts). In some cities and states these kinds of payments are more often called "voluntary contributions." This shift in language is due to local nonprofit organizations that make payments but do not want to give any credence to the idea that these monies are taxes in some other form. The City of Philadelphia, for example, changed the name of its "PILOT Program" to the "Voluntary Contribution Program" after local nonprofit organizations reacted strongly to the program's title.

The term PILOTs also does not refer to user fees or service charges for municipal services that would be applied to both exempt and non-exempt organizations unless there is a legislative or constitutional basis for exemption from such fees based on its nonprofit status. PILOTs, therefore, would not include user fees or service charges for water, sewer, garbage, etc., if these fees and charges were equally applied to both for-profit and nonprofit entities.

Simply put, PILOTs (or voluntary contributions) refer to those payments by a charitable nonprofit organization to a taxing authority for which there is no legal basis or requirement to expect or demand such payments.

PILOTs - A Growing Trend

PILOTs as a source of municipal revenue are not new. Harvard University has been contributing to the coffers of Cambridge, Massachusetts, since the 1920s, while Boston has received such payments from nonprofit organizations since the 1930s. What seems to be new - and what has raised the public profile of PILOTs in recent years - is the increased and more aggressive solicitation of such payments by local government.

Up until 1998, there had been no attempt to document the extent of these activities nationally. However, there seemed to be an increase in the number of activities. The nonprofit sector began to take the issue very seriously. For instance, the Independent Sector, the National Society of Fund-Raising Executives, and various other healthcare and educational organizations distributed material and position statements defending property-tax-exempt status and advocating against PILOTs. But there was no national picture of the extent of such activities, the monies being generated, or the kinds of nonprofits being solicited.

Early Activities

Boston's current PILOT program was initiated in 1983 (though, as noted earlier, the city has collected PILOTs since the 1930s). While Boston's program is a broad-based program, only 38 organizations made such payments in 1998. In that year, these organizations contributed $19.4 million to municipal revenue.

Activity in the state of Utah in the 1980s was not directed specifically towards the solicitation of PILOTs, but more towards the examination of the legitimacy of tax exempt status of charitable nonprofit organizations. During the 1970s, there had been a general narrowing of the interpretation of the term "charity," which limited property tax exemption for certain organizations. This was followed by years of continued examination, administrative rulings, and challenges to the exempt status of various healthcare organizations. Finally, in 1985, the Utah Supreme Court ruled that "nonprofit status" does not necessarily qualify a charitable organization for property tax exemption. As a result, by the late 1980s, county assessors had challenged the property tax exemption of virtually every hospital in the state. In all but two counties, however, the cases were...