Report Issued on Property Tax Exemptions for Charity and Governments' Money Woes

• Published date: 01 November 2016
• DOI: http://doi.org/10.1002/npc.30259
• Date: 01 November 2016

Bruce R. Hopkins’ NONPROFIT COUNSEL

November 20166THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

REPORT ISSUED ON

PROPERTY TAX EXEMPTIONS

FOR CHARITY AND

GOVERNMENTS’ MONEY

WOES

The Lincoln Institute of Land Policy issued a report on

state real property exemptions, states’ and cities’ eco-

nomic straits, and payments in lieu of taxes (PILOTs). The

Institute reported that local governments “forgo roughly

4 to 8 percent of total property tax revenues each year”

due to the tax exemption for charitable organizations.

The report notes that charitable institutions pro-

vide benefits, such as “valuable services and jobs for

residents.” But they also “impose costs for police and

fire protection, street maintenance, and other public

services.” The property tax exemption, it is said, “can

fiscally strain local governments and shift a larger share

of the property tax burden to home owners and busi-

nesses.”

Some local governments ask nonprofit organizations

to make PILOTs, to contribute to the “cost of the public

services they consume.” The report states that, as of

2012, at least 218 localities in 28 states had received

PILOTs, amounting to more than $92 million per year.

The northeast region of the nation is said to account for

about 75–80 percent of PILOT activity.

The report explores the “growing interest” in PILOTs,

caused by anti-tax sentiment, the Great Recession, the

health and education sectors’ increasing share of the

US economy, and “declining support for the charitable

tax exemption.” It explains that nonprofit organizations

choose to offer PILOTs out of a sense of “community

responsibility” or “enlightened self-interest,” or in

response to “coercive tactics.”

The pros of PILOTs are said to be that nonprofits

“should pay for public services they consume,” the

benefits and costs of the property tax exemption are

“distributed unevenly,” and the greatest savings go to

nonprofits with the “most valuable properties, not those

that provide the most valuable services.” The cons are

that PILOT negotiations are “often contentious, ad hoc,

and secretive,” PILOTs provide limited revenue, and they

“could lead nonprofits to raise fees or cut services.”

The Institute offered these recommendations: keep

PILOTs voluntary and “avoid undermining the chari-

table tax exemption,” the parties should “communicate

respectfully,” the amount of a PILOT should be justi-

fied, PILOTs should be “earmarked for public services

consistent with a nonprofit’s mission,” long-term PILOT

agreements should be pursued, and reductions in PILOTs

should be arranged where the nonprofit organization

agrees to “provide new services to local residents.”

Commentary: The US Supreme Court, in 1970,

explained that charitable organizations foster “moral or

mental improvements” in their communities and thus

“should not be inhibited in their activities by property

taxation” (Walz v. Tax Commission of the City of New

York). The Court added: “The State has an affirmative

policy that considers these groups as beneficial and

stabilizing influences in community life and finds this

classification [tax exemption] useful, desirable, and

in the public interest.” And: Charitable organizations

“contribute to the diversity of association, viewpoint,

and enterprise essential to a vigorous, pluralistic soci-

ety.” Today, in some quarters, these political philosophy

principles, which have sustained this nation for decades,

fade into mere platitudes (if they are remembered at all)

in the face of practical needs, such as money. ◆

STUDY ON FOUNDATIONS’

INVESTMENTS ISSUED

The annual report of the Council on Foundations and

the Commonfund Institute, their study of investments

by and endowments of private and community foun-

dations, was made public at the end of August. One

hundred thirty private foundations and 98 community

foundations, representing $100.6 billion in assets, were

the database for the study, which covers calendar year

2015.

The private foundations participating in this study

reported an average return (all returns being net of fees)

of zero percent for the year, compared to a 6.1 percent

return for 2014 and a 15.6 percent return for 2013.

Participating community foundations realized an aver-

age return of –1.8 percent for 2015, as opposed to 4.8

percent for 2014 and 15.2 percent for 2013.

The largest private foundations generated an aver-

age return of 1.1 percent. Foundations with assets

between $101 and $500 million had an average return

of –0.5 percent; foundations of smaller size realized an

average return of 0.1 percent.

The effective spending rate averaged 5.4 percent

for private foundations and 4.8 percent for community

foundations. The highest rate—5.7 percent—was that

of private foundations with assets valued at less than

$101 million. The lowest rate was that of community

foundations of the same size range—4.4 percent. The

largest private foundations had an effective rate of 4.9

percent.

Governance note: 94 percent of private foundations

and 96 percent of community foundations reported

having a conflict-of-interest policy. Fifty-five percent of

private foundations apply their policy to the board and

investment committee, while 85 percent of community

foundations do that. [2.1] ◆