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Taxing Times
Taxing Times

In troubled economic times, it pays to communicate an institution’s value to the community

By Caroline E. Mayer


©Matt Foster/Corbis

It makes headlines nearly every day: U.S. cities, counties, and states are grappling with record budget shortfalls. Cities, in particular, are looking for ways to close the widening revenue gaps they've incurred in the recession. Reluctant to impose new taxes on voters or unwilling to increase municipal debt, many are setting their sights on nonprofit institutions, long considered tax-exempt. Given the economic climate, many higher education administrators recognize that their institutions need to be more vocal and creative in providing and promoting the value they bring to their communities—not just to hold on to existing funding but, increasingly, to fight attempts by local governments to extract new fees and payments.

For instance, in 2009, the city of Providence, R.I., hoped to close a $17 million deficit by trying to impose a $150-per-semester fee on out-of-state students attending Brown University, Providence College, the Rhode Island School of Design, and Johnson & Wales University. Corresponding state legislation, if passed, would have applied to all of Rhode Island's private colleges. Around the same time, Pittsburgh officials sought a 1 percent tuition tax to help the city pension program avert bankruptcy. Both proposals failed. However, Carnegie Mellon University and the University of Pittsburgh both agreed to make voluntary payments to the city. In 2003, the four private higher education institutions in Providence agreed to pay the city $48 million over 20 years.

In many places, nonprofit institutions—primarily colleges and universities but hospitals and cultural organizations as well—are being asked to make voluntary contributions that are often referred to as payments in lieu of taxes (PILOTs), to help cover the cost of many of the public services these entities use, such as police and fire protection, sanitation, and street maintenance. City officials say these payments are needed to offset the potentially millions of dollars in property tax revenue that is lost when real estate is owned by a tax-exempt organization. But a handful of cities have gone even further, seeking some nontraditional fees.

Houston has imposed a drainage fee to help fund road and stormwater system improvement; Minneapolis levies streetlight fees. In both cases, nonprofits are not exempt. And in Nassau County on Long Island, N.Y., a new sewer fee (frequently dubbed a "toilet tax") for nonprofits is designed to close the county sewer system's $28 million deficit.

"We're seeing more of a cry for tax-exempt institutions to pay something," says Jack Foley, vice president for government and community affairs and campus services for Clark University, which last September reached a PILOT agreement with its hometown of Worcester, Mass. After paying an initial voluntary fee of $262,000, Clark's payment will increase by 2.5 percent annually for the next 20 years.

"It's in our enlightened self-interest to help our community," Foley says. "We recognize the city is cash-strapped and having problems, so we need to help. It benefits the city and our immediate neighborhood."

PILOTs on the rise

Over the past decade, at least 117 municipalities in 18 states have pressed nonprofits to make voluntary payments, according to a recent study by the Lincoln Institute of Land Policy.

"Interest in PILOTs has definitely grown in the last 20 years, and increased in the last few years as the recession has forced local governments to find new revenue sources to fund public services," says Adam Langley, a Lincoln Institute research analyst. PILOTs are mostly concentrated in the Northeast, he says, for two likely reasons: There's a higher concentration of nonprofits, and the region's cities have a greater reliance on real estate taxes for revenue.

Some institutions have been making voluntary payments for years, steadily increasing their contributions as the city's needs grow. Yale University, for example, initiated an agreement with New Haven, Conn., in 1991 to make an annual contribution of $1.2 million. That amount has steadily increased, to $7.5 million in 2010, making it the largest PILOT contribution in the country.

"The strength and future of Yale and our hometown are inextricably linked," says Michael Morand, director of state communications and special initiatives in Yale's Office of Public Affairs and Communications. "The university needs New Haven to be strong, and the city benefits when Yale is strong and grows."

But town-gown relationships are not always as cooperative or cordial, as The University of Scranton in Pennsylvania discovered last July when it sought a variance for a residence hall it was planning to build. The university has been making voluntary payments to the city since the mid-1980s; its 2009 contribution totaled $110,000. University officials had already told the mayor that the institution planned to increase its 2010 payment to $175,000, but city council leaders balked, demanding a payment of $250,000 in exchange for the easement. The dispute became public and ugly. The Rev. Scott R. Pilarz, president of the university, said in a statement that he would not allow the university's "integrity ... to be unfairly challenged" and refused to link any payment to a variance. Ultimately, the university decided to redesign the residence hall to eliminate the need for the easement and, as promised, sent the city a check for $175,000 last December.

Traditionally, says Gerald Zaboski, vice president for alumni and public relations at Scranton, "we've been like a beach ball: something that's easy to hit and doesn't hit back. [Last] summer, though, we did push back."

Making an impact

Fearful that more government officials may take a similarly hard line, many institutions are aggressively promoting their economic benefits to ward off decreases in state funding or demands for beginning or increasing voluntary payments.

At most institutions, an economic impact study is typically the first step. "These studies are important because they help remind people that universities are economic engines," says Alan Stone, a senior strategist for Northeastern University's external affairs division and a former vice president of public affairs at Columbia and Harvard universities.

Kent State University is using every opportunity to tout the results of its study, which found that the institution generates $2 billion for Ohio and puts more money into public treasuries than it takes out. The university is constantly working to put that message in front of government officials, says Iris Harvey, vice president for university relations. The day after the 2010 elections, for example, Kent State mailed congratulatory letters to the governor-elect and the winners of congressional and state legislative races, customizing each one with the specific number of alumni, faculty, staff, and students who reside in the district. "We were outright brazen in suggesting voter power," she says.

However, Stone notes, these studies have become more commonplace, so their impact is less than it would have been 15 years ago when they were relatively new. But that doesn't change the fact that institutions need to find a way to remind government officials and community members why these institutions were accorded tax-exempt status in the first place.

The struggling economy is just one reason why nonprofits have become popular targets, according to Stone. "Nonprofits are no longer invisible," he says. "The rise in their net worth—thanks to an increase in the stock market and donations before the recession—has made them much more open to public scrutiny. The public is more aware of their resources and frailties. And if you're a big, elite university, it's difficult not to be a target."

Princeton University, which had the fourth-largest endowment in North America according to a 2009 study by the National Association of College and University Business Officers, is learning that lesson. Its six-year agreement to make voluntary annual contributions of $1.2 million expires this year.

"It has seemed like a generous number to us, although there are people in the community who'd like it to be more than that," says Robert K. Durkee, vice president and secretary of Princeton.

Indeed, during one 2009 community meeting, a university official was booed while listing the benefits—direct and indirect—that the institution brings to the surrounding communities in New Jersey.

"For most of our history, we made a lot of these contributions very quietly," he says. "But some years ago we realized there was very little recognition in the community about what we've been doing. So we've become more public to make sure the community knows. Now, when we make a contribution or send a check, we'll try to attract attention to our contributions."

The voluntary payments are just a fraction of Princeton's contributions, Durkee says. An economic impact study found that the university's construction activity, purchases of goods and services, taxes, and spending by students and visitors generate 10,000 full-time jobs and nearly $1 billion in revenue. The institution is also one of the area's largest taxpayers, paying more than $10.2 million in 2007, including property taxes on commercial facilities as well as housing for faculty, staff, and graduate students, which could have been deemed tax-exempt.

Princeton's very presence and long-term stability has enabled its host communities to lower the cost of borrowing, according to Durkee. "That's a fairly significant benefit that's often overlooked."

Princeton, like many other institutions, eschews the term PILOTs, preferring the term voluntary contributions instead.

"PILOTs suggest that we should have paid taxes, so that's why we're making a payment," Durkee explains. "It doesn't acknowledge that society decided a long time ago that education and research properties should be tax-exempt because of our mission and that the donation really is a voluntary action on our part."

Commonwealth course correction

Massachusetts is home to some of the oldest and most extensive PILOT programs. Both Harvard University and the Massachusetts Institute of Technology have been making payments to the city of Cambridge since the late 1920s. In Boston, medical and educational nonprofits contributed more than $16.5 million in PILOTs in fiscal year 2010.

Yet these programs have come under fire recently, partly because they have been negotiated on an ad hoc, institution-by-institution basis, meaning that some have been paying far more than others. For instance, Harvard's most recent payment was more than $2 million while Northeastern University paid just over $30,000. Some Boston politicians also say that the payments are too small considering that the properties belonging to colleges, universities, and hospitals would have generated $345 million in taxes if they were not tax-exempt, according to the 2010 final report from the task force formed to study Boston's PILOTs.

The task force concluded that the PILOTs should remain voluntary, but all nonprofits with property holdings of more than $15 million in assessed value should pay 25 percent of the amount of taxes they would pay on their real estate if it were fully taxed. (The percentage was determined to be the portion of the city budget that is spent on public services such as police, fire safety, snow removal, etc.) The task force acknowledged that increasing these payments could cause nonprofits to invest less in community commitments, so it suggested adjusting the payments, crediting as much as 50 percent—possibly more in exceptional cases—for community programs such as health clinics, local scholarships, and summer jobs programs. Under this formula, Harvard would pay an additional $600,000 each year for the next five years while Northeastern's contribution would increase by nearly $715,000.

"It's a mixed result," says Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. "The recommendations have some characteristics of a tax, and that concerns us, but we're pleased the task force insisted that participation be voluntary and [that it] recognizes our community commitments."

However, he also recognizes that institutions have to better communicate the value and benefits they bring to the places they call home. Doherty says institutions need to remind their communities about the amount they spend on local construction, the contribution they make to the local hospitality industry, and the dollars they already pay in taxes.

"Schools may be tax-exempt, but some are also their town's largest taxpayer," he says, citing MIT in Cambridge, Smith College in Northampton, and Williams College in Williamstown.

In general, institutions don't pay taxes on revenue generated by activities that are directly related to their educational and research missions. However, revenue from unrelated business activities, such as profit-making ventures and those that compete with commercial businesses, is subject to federal taxes. Education-related property and buildings are considered tax-exempt while commercial property and facilities leased to third parties are frequently subject to property taxes.

No time for humility

Many colleges and universities are working on improving their communications and tooting their own horns, even if they face no immediate threat of a PILOT. As Scranton's Zaboski says, "We can't assume they just love us and we're great. We need to be out on their turf telling our story."

Many institutions are turning to advertising, public relations efforts, even focus groups, to make their case. No matter the method they choose, the principles they're following are fundamentally the same.

Keep the message simple and personal. Oxford Brookes University in the U.K. is running ads on the backs of buses featuring photos of its students and employees as a way to demonstrate its contributions to the local economy.

"We're trying to explain why having this university on the city's doorsteps matters," says Susannah Baker, director of communications at Oxford Brookes. "When residents see a local employee or student nurse who may one day take care of them, we hope they realize the university is not just a bunch of students going to classes, but something that has a real impact on their lives."

The ads began after the university concluded an extensive economic impact study. School officials previewed the data with a group of prominent business executives to see which information received the best response, and the personal stories won out. The result was a simple message: "Oxford Brookes contributes £1 million pounds a day to the U.K. economy, but it's the people who make it happen."

Baker believes this effort played a critical role in winning local approval for a new library. "Without compelling evidence of an economic impact—three members of the city council specifically referred to our contributions—I think we might have found it much harder to reach agreement."

Stress local roots. Kent State has long emphasized its reputation and rankings in student recruitment. Now, Harvey says, university officials have added a talking point aimed at legislators: We are locally vital.

"We say that in as many ways as we can—in our press releases, in speeches by all administration officials, in one-on-one conversations with business leaders, and in meetings with state legislators and congressional members," she says.

Make the information easily accessible and positive. The University of Washington created an interactive online map detailing the institution's importance to and presence throughout the state. Click on any of the 49 legislative districts and a tally of local students, alumni, and employees appears with a comprehensive list of the university's services and programs in that particular area.

"We're trying to reach out and broaden the public's appreciation of what we do," says Randy Hodgins, vice president of external affairs at UW. "We're hoping for an ‘aha moment'—when a reader stops and says, ‘I had no idea UW was doing all these things.'"

UW is also counting on its employees and other stakeholders to act as boosters for the institution. To help them spread the message, the Office of External Affairs created a PowerPoint presentation, which has been used in training sessions, with simple talking points about the university's mission, its values, and its importance to the state as an employer and revenue generator.

It's nothing "too wonky to understand and absorb," and it offers a positive portrayal of higher education, Hodgins says.

Assume nothing. After Pittsburgh officials came close to imposing a tuition tax on students, area institutions realized that they may have been taking too much for granted.

"We tend to assume that because we're higher ed, everybody thinks we're a good thing," says Kenneth P. Service, executive director of the Pittsburgh Council on Higher Education. "But we need baseline research to find out how the public really feels and whether they think we are paying our fair share."

The council has held focus groups that have revealed some eye-opening preliminary findings, Service notes. "Most of the respondents were unaware of the tax-exempt status of universities and colleges, and most also believe that colleges and universities make money."

Engage the community. Clark University has found that the best way to build public support is to work with community groups to construct or rehabilitate buildings for high-quality affordable housing, help improve area schools, and provide scholarships for local students.

"Nothing is more effective in making your case than having neighbors say good things about the work of the institution and the impact upon the community," Foley says. "It's easy to do, especially if you offer something of real value to a parent. In that case, you've made a friend for life."

In Short

Balancing Act. Cities likely will hit their fiscal nadir sometime this year, according to the National League of Cities, meaning many will be looking for additional revenue sources. Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests, a recent report by the Lincoln Institute of Land Policy—a resource for research on issues regarding land use, regulations, and taxation—discusses the growth in PILOTs, explains the rationale for and against them, and features case studies of different initiatives in several states. For municipalities that may consider PILOTs, it offers recommendations and suggests alternate methods for raising revenue.

Deep Impact. If your college or university is planning to conduct an economic and community impact study, visit to view the reports of peer institutions. The website features nearly 100 studies from every U.S. region going back to the early 1990s. In addition to informative links about economic development related to higher education, the site includes articles about the effects of these studies. The Economic Impact of Colleges and Universities, an academic working paper by three university economists, discusses common mistakes made by consultants—and the institutions that hire them—in evaluating a school's impact on a region.

What's the Big Idea? In the U.K., the big idea is Universities Week, a national campaign that began last year to emphasize the impact that its higher education institutions have on the economy, culture, society, and more. Leading up to this year's program, which will take place June 13–19, universities can take advantage of campaign resources and branding materials for their activities and events. Institutions looking for interesting ways to communicate with the public about what they have to offer can find inspiration at The "Run an Activity" section includes an "Ideas Bank" of planning suggestions while the "Big Idea Case Studies" section features campus stories, many with video.

Get Social. Social media tools like Facebook and Twitter have become important methods for communicating an institution's value to the community. If you're not as proficient at using social media as you'd like to be, there's still time to register for the CASE Social Media & Community Conference being held in San Francisco April 13–15. With sessions designed for novice and experienced users, the conference will provide a useful, comprehensive introduction to social media along with strategies for professionals dealing with complex issues such as integrated marketing and brand monitoring. If you can't attend, register for the CASE Simulcast to participate online.

About the Author Caroline E. Mayer

Caroline E. Mayer, a former business reporter for The Washington Post, is a freelance writer in Arlington, Virginia.




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