Study gives towns road map to PILOTs

As more revenue-seeking New Hampshire municipalities investigate how they can collect payments in lieu of taxes from charitable nonprofit organizations, they need to assure these agreements are more transparent and consistent, according to a new report by a Massachusetts-based land policy institute. Payments in lieu of taxes, or PILOTs, are voluntary payments that tax-exempt nonprofits make to local governments as a substitute for property taxes. Since they are voluntary, there is no standard agreement that cities and nonprofits can use to hammer out PILOTs. As a result, these agreements are often “haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits,” according to “Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests,” authored by Daphne Kenyon and Adam Langley of the Lincoln Institute of Land Policy in Cambridge, Mass. The reason for the existence of PILOTs is twofold: They can provide revenue to cash-strapped municipalities, while at the same time making nonprofits pay for the public services they consume, including police and fire protection, sewers and waste management and roads and public works. The report found that at least 18 states have had PILOTs since 2000. Massachusetts had the overwhelming majority, with more than 80 municipalities with PILOTs, while New Hampshire — along with New York, Connecticut and Rhode Island — each had between two and three municipalities collecting PILOTs over the 10-year period. Getting nonprofits to agree to a PILOT can be a challenge, since they are — or should be — completely voluntary. Beyond appealing to a nonprofit’s sense of community responsibility, municipalities may also try more coercive tactics to establish a PILOT, states the report. Threats of new fees, fear of being challenged over exemption status, potential resistance when trying to secure building permits or gain government contracts could all drive a nonprofit to agree to a PILOT, the report notes. In New Hampshire, government officials have recently called into question high salaries paid to nonprofit hospital executives, scrutiny that could lead to an increase in PILOTs, the report states. “In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation,” notes the report, which includes a case study of the MacDowell Colony in Peterborough. In 2005, the town challenged the tax-exempt status of the 450-acre artists’ colony for, among other reasons, failing “to meet the statutory requirement that residents of New Hampshire be admitted to a charity’s benefits.” After selectmen offered a substantial PILOT, which MacDowell refused, they revoked the organization’s tax-exempt status, without which the colony would be required to pay $160,000 per year in property taxes. MacDowell appealed, and the New Hampshire Supreme Court ruled in favor of the colony, stating that its promotion of the arts benefits the general public, which includes residents of New Hampshire. “While defending MacDowell’s charitable status required significant time and resources, the colony’s board of directors felt the issue was sufficiently important to pursue at the highest level,” wrote the colony in a 2008 press release. “MacDowell hoped the case would set a precedent, one that would safeguard other charitable organizations from increasing pressure by municipalities to pay taxes they do not owe.” While PILOTs do have benefits — they can provide essential revenue for some municipalities, export tax burden to nonresidents, and reduce inefficient location decisions by nonprofits — the report warns about some of the dangers: payment levels are haphazard, PILOT revenue is limited and unreliable, and could lead nonprofits to raise fees, cut services or reduce employment. — KATHLEEN CALLAHAN/NEW HAMPSHIRE BUSINESS REVIEW