Who Pays?

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This is a story about numbers. The first number is 1978.

A story, with dateline New Haven, ran on page seven of The New York Times on May 29, 1978, with the headline, “Connecticut to Reimburse Cities for Tax Lost on Exempt Property.”

Explaining that, for the first time, a state government would make payments to municipalities as partial compensation for the presence of nontaxable nonprofit organizations, the story opened with an anecdote evocative of the Elm City’s property tax predicament.

“From his 13th-floor office window, Mayor Frank Logue [’48 LAW ’51] looked down at the Yale-New Haven Hospital and then at the hills beyond the city line — and beyond the city’s tax grasp — where most of the patients come from,” Matthew L. Wald, special to the Times, wrote.

He then quoted Logue, who governed the city from 1976 to 1979: “Only one in five patients in the hospital over there comes from New Haven, but its tax exemption hits us.”

The very same statement could come today from the mouth of Mayor Toni Harp ARC ’78, perhaps looking from her second-floor office window past the New Haven Green and beyond Center Church at Yale’s Old Campus.

After representing New Haven for 21 years in the Connecticut State Senate, Harp took the city’s helm this January, nearly 36 years after Logue reflected on what remains one of New Haven’s thorniest problems. Roughly 47 percent of the city’s grand list — the enumeration of its properties — is nontaxable, either in the hands of the government or of nonprofit institutions exempt from paying property taxes.

In recognition of the revenue problems tax exemptions create — most harmful, though certainly not unique, to New Haven — the state elected in 1978 to lend a hand. A $10-million hand. Of that sum, New Haven would get roughly $2.9 million for the fiscal year beginning July 1, the Times story reported.

A 100 percent reimbursement was not sought, the article said, in recognition for the benefits towns and cities receive from playing host to institutions such as Yale.

So they settled for a 25 percent in Payment in Lieu of Taxes (PILOT), as the program is called. The state was already doling out $7.2 million in compensation for state-owned property through a program dating back to the 1930s. In total, the state would give $17.2 million that year.

In 2014, the numbers are larger — much larger. Under a formula laid down in 1999, towns and cities are supposed to get 77 cents back from the state for every dollar they lose from tax-exempt colleges and hospitals. For nontaxable state buildings, the reimbursement is 45 cents on the dollar.

In New Haven, the payment should sum to $105.3 million, more than 20 percent of the city’s current operating budget for fiscal year 2013-’14.

Harp, who ran for mayor touting her clout in Hartford, put the matter succinctly.

“The state of Connecticut is a lifeline to New Haven,” Harp said.

THE COFFER HALF FULL

In recent years, that line has frayed. In 2014, New Haven is slated to receive $43.6 million in PILOT, well under half the amount it is owed: Just 29 percent of lost funds from colleges and hospitals and 33 percent from state-owned properties.

New Haven does not suffer alone. Statewide, the payments have not hit statutory levels in years. In the wake of the recession, Connecticut has had to tighten its budget, relying on a clause of a 1999 statute specifying that the payments to each municipality can be reduced based on fiscal constraints.

“As a former [New Haven] alderman, I always used to read it as ‘You should give us 77 percent,’” said Connecticut State Rep. Roland Lemar, who represents portions of New Haven and East Haven in the body that help decides New Haven’s fiscal future. “Most of my colleagues see it as, ‘We fund PILOT based on however much we’re lucky to have.’”

As New Haven’s budget dealings loom — and as it grapples with a major hole in state aid — some in city government are ready to do battle in Hartford for increased funding.

Harp promised a lighter touch.

“I’m going to go with my hat in hand,” she said, adding that budgetary requests from city department heads warn of a potential $19-million hole in the general fund. “If the state does find a surplus, they should give it back to the cities.”

Lurking behind the fragile relationship between the city and the state is a third player: Yale University, the largest employer in New Haven and a multi-billion dollar institution that pays virtually no property taxes on its prominent downtown footprint.

The property taxes the University does pay — more than $4.3 million for the golf course and University Properties retail locations — make Yale one of the five largest taxpayers in the city, according to Lauren Zucker, Yale’s assistant director for New Haven and state affairs. Those payments, combined with Yale’s vast voluntary contributions to the city, have put the question of Yale’s tax-exempt status to bed, Michael Morand ’87 DIV ’93, Yale’s deputy chief communications officer, insisted.

“What’s notable now … is that taxation of colleges and universities is not part of the conversation here because PILOT and the University’s voluntary payment have created a context where it’s not an issue and the focus can be on cooperation…,” said Morand, whose experience at Yale and in New Haven also includes a stint as a city alder in the early 1990s.

MORE, PLEASE

Taxation, however, is part of the conversation; lawmakers both in New Haven and across the state are making sure of that. As New Haven stares down its fiscal future — budget negotiations begin in March — city leaders are sending a message to Hartford: Give us what we deserve.

New Haven’s Board of Alders unanimously endorsed a resolution in early February calling on Connecticut Gov. Dannel Malloy and the General Assembly to fully fund PILOT. More than a dozen alders co-sponsored the resolution, drafted by freshman alder Mike Stratton, who represents Prospect Hill and Newhallville,

“This is not charity for the city of New Haven — this is our right,” Stratton said before the Monday evening vote. “Just give us our money.”

Stratton said the state has sought to substitute PILOT payments for piecemeal “pet projects,” putting cash into programs of its choice rather than giving autonomy to New Haven. The city is best situated to allocate its own money, he said.

New Haven is taking the hit for all of Connecticut, Stratton added. Nonprofit institutions — including universities, hospitals, museums and churches — benefit the entire state, indeed the region, but cripple New Haven’s ability to raise revenue, he said, echoing Logue’s logic from 1978.

“The whole region is freeriding on the backs of our taxpayers,” Stratton said. The city’s mill rate — which determines property taxes based on assessed value — is 41.88, one of the highest statewide. Under the current rate, the owner of a home with an assessed value of $200,000 would pay $8,376 in property taxes. Harp has said she does not want to raise taxes in the budget she presents to city alders by March 1.

The Board’s statement is largely symbolic, Stratton acknowledged. But it represents just one piece of the alder’s plan to convince the state to send more money to New Haven.

Stratton has also devised a lobbying strategy, which he has hired Bob Shea, a West Hartford lawyer, to execute.

“Bobby [Shea] is helping us navigate where the power is,” Stratton said. Shea did not return multiple requests for comment.

One idea Shea will float with state lawmakers is creating a board with regional oversight over the allocation of PILOT funds.

If the 77 percent and 45 percent thresholds were met, Stratton said, New Haven could lower its tax rate by a full 20 percent.

Nancy Wyman, Connecticut’s Lieutenant Governor, said reaching full PILOT funding this year is not possible. The state lacks the necessary funds, she said.

Harp made a more modest ask in the legislative agenda she laid out the same week the Board passed its resolution. She requested a $5-million increase in PILOT payments to New Haven, a proposal that Senate Majority Leader Martin Looney called “reasonable” at the time. Anything more, he said, would be difficult given the city’s financial constraints.

In his budget proposals — presented Feb. 6 at the opening of the legislative session — Malloy called for an $8-million statewide increase in PILOT for colleges and hospitals. If approved, the increase would mean just over $2 million more for New Haven, less than half of Harp’s stated goal and a fraction of the Board’s.

Stratton said he is after more than one-time upticks in funding. A small increase does little to “change the culture in Hartford” surrounding PILOT, he said. He called on New Haven’s state delegation to fight harder for city. Right now, “They’re taking the easiest road to compromise,” he said.

State lawmakers interviewed said more drastic alterations to PILOT funding this year are highly unlikely. The biennial budget is already in place. Legislative sessions during even calendar years rarely see new appropriations but rather amendments to the current budget.

“A radical redetermination of our entire budget is not likely in the 90 days that we’ve got,” said Roland Lemar, House vice-chair of the Finance, Revenue and Bonding Committee.

Further, state spending is capped at roughly $21 billion per year, Lemar said. To fully fund PILOT, the state would have to “blow through that cap.”

Still, Lemar said, full statutory reimbursement is a worthy goal, one he has to figure out how to pitch as an urban legislator to his suburban counterparts.

AN EVER-SHRINKING PIE

PILOT funding is like a pie, said Connecticut State Sen. Len Fasano ’81, a Republican who represents parts of Durham, East Haven, North Haven and Wallingford — suburbs surrounding New Haven. As the number of nontaxable nonprofits balloons, and as their footprints expand, different municipalities demand a bigger share of the pie. If funding is static, one town’s increase has to mean another town’s loss.

Many cities get themselves into their own revenue crises, Fasano added, pointing to New Haven’s courting of Gateway Community College in 2012.

“The legislature doesn’t have control over the expansion that municipalities themselves are pushing for,” he said.

Rather than increasing PILOT funding, the state should clarify the process by which a nonprofit moves into a city and takes the property off the tax rolls, said Fasano, who sits on the Planning and Development committee. When Quinnipiac University took over the site of Anthem Blue Cross and Blue Shield in North Haven in 2007, the acquisition cost the city a fortune by making the property tax-exempt.

As the PILOT law stands, he said, the state overpromises and underperforms every year.

Fasano said problems of tax exemptions are not unique to New Haven — and the state already sends vastly more money to cities than to suburban towns. For every dollar New Haven sends to the state in taxes, it gets back nearly two dollars, he estimated; North Haven retrieves roughly 12 cents on the dollar.

“Don’t make it sound like you’re doing all these great services for the state, and we’re starving the city,” Fasano said. “If that much is coming from all of our pockets, you need to tell us what you’re doing with the money. And let us review it.”

Former New Haven Mayor John DeStefano Jr. said moving toward fully funded PILOT is important, but additional revenue should not change the need to control expenditures. He said the debate highlights the need to diversify the tax base.

An ability to levy a sales tax or to charge user fees would free New Haven from its exclusive reliance on property taxes, he said, which inevitably skyrocket when state aid falls.

“Right now, we’re fundamentally attached to the state’s economic wellbeing,” DeStefano said. “When the state catches a cold, the city of New Haven gets pneumonia.”

The best time to reopen the issue of the tax base would be when the economy is on firm footing, he added.

What seem like upward trends in the state’s current economic forecast might loosen up funds to at least address municipal budget needs this year, Harp suggested.

“If the [state] economy improves and the surplus deepens, that creates an opportunity to get more resources,” Harp said. Upgrades to information technology and more trucks for the Public Works Department are one-time payments that could be covered by isolated, single-year state contributions. Rebecca Bombero, a legislative liaison, said that following the passage of the Board’s resolution, the mayor’s office is putting consistent pressure on the state to up the payments. The mayor’s relationship with the governor is strong, Bombero added.

U.S. Sen. Richard Blumenthal LAW ’73 also pointed to the state’s budget surplus — of $500 million, not counting delayed bond repayments — as an avenue to redress New Haven’s revenue woes. Connecticut as a whole, Blumenthal said, is uniquely dependent on property taxes in funding education and other local needs.

Partially in recognition of that fact, Connecticut is one of just two states to compensate municipalities for tax-exempt property. Rhode Island also furnishes its cities and towns with PILOT.

“I CALL IT REVERSE PILOT”

Simply increasing PILOT does little to address underlying inequities in revenue, said Speaker of the Connecticut House Brendan Sharkey.

In a proposal that he said will take the form of a bill later this year, Sharkey said he wants to scrap the PILOT law altogether and impose property taxes on nonprofit institutions. Colleges and hospitals will then have to apply to the state for reimbursement, he said, but cities and towns will be guaranteed the revenue.

“I call it ‘Reverse PILOT,’” Sharkey said. “We will have substantial discussion and debate about this. It will be heard in committee this year. I can’t say whether we’ll be able to work out all of the details by the end of the session.”

The logic behind the proposed change is two-fold, Sharkey said. First, cash-strapped municipalities should not be subsidizing private institutions, some of which have endowments that dwarf local budgets. Second, the designation of “nonprofit” does not account for the ways in which major universities are involved in generating profit, Sharkey said.

Sharkey said he thinks there is unique political will behind shifting the onus of taxation back onto nonprofits, namely because the process of haggling over PILOT funds has become acrimonious.

Stratton said the law could be worked out to set a certain exemption level after which nonprofits have to chip in. The first $1 million of property value could remain exempt, he said.

“A small church in Newhallville might still not pay any taxes,” Stratton said of the “Reverse PILOT” proposal. “It’s aimed at the bigger guys.”

Harp said Yale may have a legal claim against such a move. The University’s tax-exempt status is unique; it is written into Connecticut’s constitution, immutable by simple statute.

Sharkey said another possible loophole could exist for municipalities and nonprofits that can independently work out a mutually satisfactory arrangement. He pointed specifically to Yale as a model of how universities should orient themselves to their home communities.

When asked if Yale should up its payments, both Harp and DeStefano — who presided over a renaissance in town-gown relations along with former Yale President Richard Levin — said the University already contributes immensely. Voluntarily, Yale will give New Haven more than $8 million this year alone. Since 1991, when Yale’s payments began, the University has bestowed more than $82 million in voluntary contributions on New Haven. Now it also gives money to West Haven and Orange, owing to the expansion of West Campus.

Yale’s footprint, much of which occupies prime downtown real estate, constitutes no more than 6 percent of New Haven’s total acreage, Morand estimated.

But Yale’s tax-exempt property is immensely valuable — and would generate substantial revenue for the city if it were taxed. This property totals roughly $2.44 billion in value, according to Michael Condon, a municipal assessor for the city of New Haven.

Under that estimate, Yale would owe more than $102 million in property taxes. Yale-New Haven Hospital is worth roughly $748 million, which would generate another $31 million.

James Pascarella, the president of Hamden’s Legislative Council, said the perception of exempting Yale from an otherwise statewide change would be disastrous. Pascarella called the “Reverse PILOT” idea a “last-ditch response” to a decades-old problem of “people who are barely able to make ends meet essentially subsidizing huge corporate nonprofits.”

Quinnipiac gives Hamden an annual stipend of $100,000, which goes to various charities, not the municipal budget, Pascarella said. Unlike Yale, Quinnipiac does not have its own police force; when a fight breaks out on campus, the Hamden Police are called.

“We want a partnership,” Pascarella said. The single Quinnipiac official authorized to discuss relations with the town is away until March.

Sharkey said Quinnipiac has defended its actions — or inaction — by pointing to its federal nonprofit status. Though nonprofit designation is federal, Sharkey said, tax exemptions are all granted at the state level.

Sharkey and other proponents say they are prepared for substantial blowback from colleges and hospitals.

“I approach this fully aware that the proposal would impose a substantial burden on [nonprofits] in the short-term, which is why we should begin the conversation now,” Sharkey said. “Nobody likes to pay taxes. But we’re talking about equity.”

Lemar said the item would be “really, really politically challenging to pull off in 90 days.”

Connecticut State Rep. Pat Widlitz, House chair of the Finance, Revenue and Bonding Committee, said she would have “great difficulty” supporting such a bill. Finding the money to put into PILOT would be more politically palatable, she added.

Fasano simply said no.

“This would not be a party line vote. Democrats and Republicans would be against it, urban and suburban legislators would be against it,” he said. “In an election year, when you have the governor’s office at stake and legislators up for reelection, I doubt the bill ever gets debated on the floor of the House or Senate. It would be a hugely unpopular vote to have.”

BENEFICENCE OR BUST

Judith Greiman, president of the Connecticut Conference of Independent Colleges, said the “Reverse PILOT” proposal is bad policy — its legal complications aside.

She said reversing tax exemptions would “upend town-gown relations at a time that towns and non-profits that are major employers need to be working even closer together.” Further, she said, the change would hurt students, because it would likely increase the cost of college.

From Yale’s perspective, Morand said the change would disrupt an effective partnership between Yale and New Haven, one that has become a “poster child for how to get along,” he said.

“One should not mess with longstanding policies in that way,” Morand said in response to Sharkey’s proposal. “This has proven to work.”

The system — whether it is the fault of the state, the nonprofits or just bad economic times — does not work, according to city, state and national leaders. Yale and other nonprofits enjoy the services and benefits of New Haven, Blumenthal said — why should they not pay into them?

Morand countered that Yale does not call on most municipal services. By and large, students do not have school-age children who attend the New Haven public schools. The city’s public works department does not pick up trash in Yale dormitories. Morand said the University’s net budgetary impact on New Haven is “actually quite salutary.”

Fasano, who was born and raised in New Haven, agreed, putting the dynamic bluntly: “Without Yale, New Haven would perhaps be more like Bridgeport in terms of economic growth.”

Blumenthal said it is also a question of equity: New Haven is at a disadvantage, while Yale has immense resources at its disposal. Under Levin and now under Yale President Peter Salovey, the University has advanced “lightyears in helping New Haven,” Blumenthal said. But the future is uncertain.

“Do we want to rely on beneficence?” Blumenthal said. “Do we want to rely on the wisdom of really good leaders, like Levin?”

He answered his own question: “At some point, there may be a need to revisit the principle that nonprofits pay no local property tax.”

Voluntary payments are just that — voluntary. Yale’s payment formula has built-in growth: It is a calculation of the percent of fire services the University uses plus a figure tied to the number of employees and students on campus. When hundreds of new students arrive and begin to populate the two new residential colleges, Yale’s payments will likely increase.

When asked if the formula itself is static — or subject to discussion and debate — Morand said the current method works.

“Your University makes the single largest payment to any municipality … it’s already the single largest, and it has a built-in growth” he said. “It’s a question that need not be asked.”

But that did not answer the initial question: Could the formula itself be revised to reflect changes in the city and perhaps growing need on the part of New Haven?

“The University’s willingness is established,” Morand said.

The question was put a third time: Is the amount the University pays up for discussion or revision?

“The voluntary payment formula works extremely well and ties the University’s growth to growth in the payment,” Morand said.

WHO PAYS?

In the authoritativeWho Governs? Democracy and Power in an American City,” the late Yale political scientist Robert Dahl turned to New Haven to explore a mammoth question about power and governance: In America— indeed wherever popular government exists — who actually controls political decision-making? He theorized that power in New Haven was dispersed among many groups, not concentrated in the hands of the business elite. No single group held all the cards.

In a new preface to the book’s second edition, Dahl dwelled on the complexity of his initial question.

“The absence of satisfactory ways of measuring power and influence, and thus describing them accurately, presents a huge challenge,” he wrote.

In 1978, power aligned in Connecticut to reimburse the state’s towns and cities for a portion of the money they lose every year to tax-exempt properties. The Times story noted an unusual coalition of municipalities and tax-exempt institutions, “two traditional adversaries.”

Unlike power, money is an easy calculus. It adds up. Except when it doesn’t.

Money is zero-sum — and not just for Connecticut municipalities competing in 2014 over shrinking PILOT funds.

“Someone has to pay,” Stratton said. “For years, it’s been the taxpayers of New Haven. Maybe it’s time someone else pitches in.”

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