Faced with ever-widening budget gaps, the very real potential of even less financial support from Concord and more demands for services placed on localities, New Hampshire municipalities may be tempted to look even more deeply into taxing religious institutions, community centers and other tax-exempt nonprofits for help in balancing their books.
Payments in lieu of taxes - or PILOTs - are voluntary payments that tax-exempt nonprofits make to local governments to offset property taxes. PILOTs help to fund the municipal services the nonprofit consumes, including police and fire protection, snow plowing, waste management and roads and public works.
In the wake of the recession, PILOTs are an increasingly attractive revenue source for municipalities, says economist Daphne Kenyon, co-author of "Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests," released in December 2010 by the Cambridge, Mass.-based Lincoln Institute of Land Policy.
"Particularly with the election we just had, we're in the midst of a big anti-tax climate," says Kenyon, a policy fellow at the Carsey Institute of the University of New Hampshire. "There's increased interest in
revenue that doesn't come from taxes."
"This is a key issue for the nonprofit community", says Mary Ellen Jackson, executive director of the N.H. Center for Nonprofits. "The nonprofit tax exemption is there for a reason."
But Laura Thibodeau, city assessor of Keene - which has PILOTs with five nonprofits, including four housing authorities - says she "definitely" thinks more municipalities will look into PILOTs in the near future to close budgets. "(Municipalities) are trying to gain as much revenue as they can so that the tax burden is not as heavy on the tax-paying population."
Peterborough town assessor Leo Smith agrees. "We're going to try again, at least this year, to talk to folks that have been reluctant to contribute in the past."
'More like businesses'
Increased scrutiny of the state's nonprofits causes a long-term shift in attitude toward nonprofits, says Kenyon, causing some to question whether their exemption is justified. This was seen in 2010, when Attorney General Michael Delaney launched an inquiry into six-figure - and in some cases, higher - salaries being paid to executives at non-for-profit hospitals.
"Nonprofits in many ways act more like businesses than they used to," says Kenyon. "Eventually, that changes the public's perception."
Maura Carroll, executive director of the not-for-profit Local Government Center - which annually pays a $70,000 PILOT to Concord - says that a much larger group of entities now receives tax exemptions than foreseen when the law was first enacted, which "does have an impact in a state where the primary revenue source at the state level is property taxes."
In Concord, more than a quarter of the city's properties are tax-exempt, says assessor Kathryn Temchak. In the 2011 fiscal year, PILOT revenues amounted to more than $665,000, which she says is a "fairly substantial" chunk of the city budget.
"There is a cost to having nonprofits," says Carroll. "It doesn't mean they're not wanted, it's just that those businesses that are for-profit help to offset their costs."
The Center for Nonprofits does not actively recommend PILOTs.Jackson says this is because the nonprofit sector already adds revenue to the community in several ways. Not only do many nonprofits rent, but they also supply services that the community would otherwise be required to provide, she says. For example, a nonprofit teen center that keeps kids off the streets can reduce other municipal costs, she says.
Since many nonprofits operate on "incredibly lean, threadbare budgets," PILOTs divert funds that could otherwise be used to further the group's mission, says Jackson.
So since PILOTs are voluntary, why would nonprofits agree to them?
The simple answer is that PILOTs appeal to the nonprofit's sense of community - or "being a good neighbor" - which, says Kenyon, can be particularly beneficial when it's time to apply for zoning changes or building permits.
However, PILOTs don't always arise solely as an act of goodwill. Though by definition voluntary, often PILOTs are paid after a nonprofit's tax exemption status is challenged by the municipality. When faced with potentially losing its exemption, a nonprofit may settle with a PILOT - a smaller financial burden than paying costly court fees or full property taxes, says Kenyon.
Such was the case with both Dartmouth-Hitchcock Medical Center in Lebanon and Frisbie Memorial Hospital in Rochester, both of which negotiated PILOTs following a challenge of their tax-exempt statuses.
In 2006, the city of Rochester denied Frisbie's tax exemption applications. After appealing to the Supreme Court, the hospital settled with the city, agreeing in 2008 to pay $120,000 per year for 15 years to offset its tax-exempt properties.
Similarly, the town of Lebanon denied Dartmouth-Hitchcock's 1997 tax exemption applications, billing it for taxes between 1997 and 2001.After appealing in court, the town and medical center settled on a 20-year PILOT of about $1 million per year, at an increase of 2.5 percent each year.
It's not just the state's larger institutions that have PILOTs. The Peterborough Players, a professional theater group, and The Family Center, a resource center serving several communities surrounding Peterborough, both make PILOTs to the town.
The Appalachian Mountain Club pays a PILOT to Carroll for its Crawford Notch Facility (negotiated after its exemption status was challenged). Families in Transition, which provides affordable housing to the homeless, makes a PILOT to Manchester. Dartmouth College does not have a formal PILOT, but voluntarily pays $3.5 million in taxes to Hanover on properties that would otherwise be exempt. The New Hampshire Interscholastic Athletic Association makes a PILOT to Concord.
One problem that the Lincoln Institute report found was that PILOT payments vary wildly and are often "haphazard" and "secretive."
Generally, nonprofits are asked to pay the municipal part of their tax rate, which covers the services they consume, says Brad Cook, a shareholder at Sheehan Phinney Bass + Green.
But, says Kenyon, this payment level is not standard across the board.
"The level of PILOT amounts normally depends more on the aggressiveness of municipal officials than on property values or the level of public services consumed by nonprofits," notes the report.
In Peterborough, a nonprofit's rate of payment is determined on a "case-by-case basis," says Smith. While some nonprofits are "very receptive" to paying the town portion of the tax rate, others negotiate what they can afford to pay based on their budgets, he said.
PILOTs are not always formalized by contracts, sometimes taking the shape of a one-time gift to the community, says Carroll of the Local Government Center.
The Lincoln Institute report found that PILOT revenue is limited and unreliable, and could lead nonprofits to raise fees, cut services or reduce employment. On the flip side, it also found that PILOTs can provide essential revenue to some municipalities and can help to export tax burden to nonresidents, because revenues for large nonprofits often come from people living outside the municipality.
Cook advises nonprofits considering a PILOT to avoid a multi-year commitment for two reasons: fluctuating budgets can make a payment viable one year but not the next; and the implicit difficulty that would arise when trying to terminate a payment that had come to be expected.
"Legally, it wouldn't be hard (to discontinue a PILOT). Practically, I think it would be hard," says Cook. "That's why I counsel not-for-profits to think carefully."
Carroll says the Local Government Center has encouraged members to "sit down and have a conversation" with nonprofits, to explain their burden on the budget and ask whether they can offer assistance.
"Communities know that nonprofits struggle too," she says. "It's a very difficult balance to strike for both."
"Is there tension out there? Absolutely," says Jackson. "It's a tough situation. Nonprofits understand how stressed government is and how tight these budgets are. We're all sort of in this together."
Kathleen Callahan can be reached at firstname.lastname@example.org.
This article appears in the April 22 2011 issue of New Hampshire Business Review