Bloomberg News

Wal-Mart Favored Over Hospitals in Nonprofit Pinch: Taxes

January 24, 2013

Pittsburgh’s biggest nonprofit hospitals and universities, whose jobs helped revive the Steel City economy, may have to shoulder some of its tax burden too.

A levy based on payroll size would be paid by those with 250 employees or more under a bill being written by state Senator Jim Ferlo, a Pittsburgh Democrat. It would also reduce a similar tax on businesses in Pennsylvania’s second-largest city.

The move falls in line with similar efforts across the U.S. to impose payments such as municipal user fees on nonprofit organizations, said David L. Thompson, vice president of public policy at the National Council of Nonprofits in Washington. He said these steps have been taken with increasing frequency as local governments cope with the lingering effects of recession.

“Nonprofit employers have been great community leaders and citizens until the governments ran out of money, in which we became scofflaws and somehow not paying our fair share,” Thompson said.

For Ferlo, it’s about budgets.

“The philanthropy and the goodwill don’t help the city operating budget pay for collective bargaining awards for police,” Ferlo said. “It doesn’t help pay for the asphalt. Everyone should be asked to step up to the plate.”

Since 2000, at least 218 jurisdictions in 28 states have collected payments in lieu of taxes from nonprofit organizations, whose charitable status exempts them from most taxes, according to a report from the Lincoln Institute of Land Policy in Cambridge, Massachusetts. More than 90 percent of so- called PILOTs came from schools and hospitals.

Colleges Targeted

Cities in several states -- Rhode Island, Massachusetts, Vermont, New Jersey, North Carolina and Michigan -- are targeting nonprofit colleges to replenish their coffers, said Tony Pals, a spokesman for the National Association of Independent Colleges and Universities in Washington.

For some jurisdictions, the payments are critical. Providence, the Rhode Island capital, sought to stave off bankruptcy when it reached an agreement in May with Brown University, raising the amount the school will contribute to the city by $31.5 million over 11 years. Moody’s Investors Service in a Jan. 17 report credited the move with helping Mayor Angel Taveras make “significant progress” in closing a $110 million budget gap last year.

Hospitals, museums and universities are becoming increasingly businesslike by selling merchandise and providing services secondary to their missions, said Daphne Kenyon, a visiting fellow at the Lincoln Institute and a co-author of its report on PILOTs. That has changed the public’s view of such organizations from purely charitable groups to entities that should make some payment to their host communities, she said.

‘More Entrepreneurial’

“Nonprofits do things that look like what for-profits do; they’ve become more entrepreneurial,” Kenyon said. “So people think, why should they be completely tax-exempt? Why shouldn’t they make some contribution?”

Yet the hospitals and schools that municipal officials have targeted often face their own fiscal straits, according to Thompson of the nonprofits council. These organizations sometimes are regarded as holding readily available “pots of money,” he said. “In reality, nonprofits are struggling as much or more than the governments and don’t have the spare cash that’s presumed.”

In Pittsburgh, nonprofit groups get city services without paying a fair share of the costs, Ferlo said last week in a memo to Senate colleagues. That’s “unsustainable” as the largest charitable organizations expand to account for an increasing portion of the property-tax base, he said.

Task Force

Tax-exempt employers, including governmental organizations, make up 33 percent of the tax base in Pittsburgh, according to a report produced under the state’s financially distressed community program.

Mayor Luke Ravenstahl has been asked to set up a task force to build a long-term partnership with nonprofit groups before the end of 2014 to encourage them to pay more. The panel hasn’t been formed, said Joanna Doven, a spokeswoman for Ravenstahl.

Ferlo said the measure he’s developing may provide a “working model” for the Pittsburgh panel.

Designed as an amendment to a law authorizing a payroll tax on municipal businesses, the measure would let the city extend the levy to larger nonprofit groups. Hospitals, colleges and others would pay a 0.4 percent rate, while the current charge for businesses would fall to 0.5 percent from 0.55 percent, according to Ferlo’s note to lawmakers.

Raising Revenue

Ferlo said the net effect would raise as much as $10 million for the city’s budget, which is $470 million this year. The payroll tax, as currently structured, is expected to generate $54 million, according to budget documents.

Tax-exempt organizations with 250 workers or more account for 70 percent of such employment in the city, Ferlo said. The nonprofit University of Pittsburgh Medical Center had the most, with 38,700 or almost 13 percent of all local jobs in 2011, according to a municipal financial report for that year.

The five largest Pittsburgh employers in 2011 were all tax- exempt organizations, with businesses, including Wal-Mart Stores Inc. (WMT:US) and Pittsburgh-based PNC Financial Services Group Inc. (PNC:US), rounding out the list, the city report shows.

Susan Manko, a medical center spokeswoman, declined to comment on Ferlo’s proposal. The hospital, with fiscal 2012 operating revenue of about $9.6 billion and operating income of $351 million, said it contributed $565 million in community services, such as programs for the poor and charity care, in the previous year.

Model Measure

Ferlo’s plan would apply only to nonprofit organizations in Pittsburgh, where state approval was required in 2004 to implement the payroll tax on businesses. Ferlo said other cities in the Keystone State “could use this as a model to get some reasonable income” from tax-exempt operations. About half of the property-tax base in Harrisburg, the insolvent state capital, is exempt. Its fiscal recovery plan calls for voluntary payments by charitable groups.

“Most of these communities have not been able to negotiate so-called payments-in-lieu-of-tax initiatives,” Ferlo said. “There should be something written into law and uniform and equitable.”

Ferlo’s proposal, if passed, would be unique among municipalities collecting money from nonprofit groups, the Lincoln Institute’s Kenyon said. User fees are more common. In Minneapolis, for example, charges for street maintenance and lighting are applied based on the square-footage of properties owned by charitable organizations, according to her report.

Ferlo said he didn’t talk to leaders of Pittsburgh’s nonprofit groups as he formulated his proposal.

Collaboration is preferable, Kenyon said.

“The nonprofits sector and the local government thrive when they realize they need to work together, and that they both have an interest in having a strong, fiscally solvent government and a cordial relationship,” she said.

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net


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