University-town PILOT negotiations could include fiscal impact-based approach

Representatives of the University and the newly-consolidated town of Princeton are set to renegotiate the terms of the University’s annual payment to the town’s budget sometime later this year. As a nonprofit entity, the University does not pay local taxes on property used for educational purposes but instead contributes a voluntary payment-in-lieu-of-taxes, or PILOT, to offset the impact of foregone property tax revenue.

Although 2012’s payment totaled more than $2.48 million, members of the local government have asked the University to increase its contribution and have suggested new ways that the PILOT amount could be calculated. While this year’s negotiations will determine the PILOT for 2013’s municipal budget, a separate deal to fix the payment’s amount for a longer time period will be negotiated after a new University president is selected.

Though the PILOT amount has usually been what University Vice President and Secretary Robert Durkee ’69 calls “an agreed-upon number,” it is the product of a push-and-pull negotiation over the dollar amount.

Liz Lempert, the new mayor of Princeton, told The Daily Princetonian in November that she hoped the next long-term PILOT agreement would generate a figure that better matched the cost of providing services to the University community. Lempert said she would like to see the negotiating parties consider a formula-based approach to determine a mutually-agreeable figure.

Several of the University’s peers use an estimate of their impact on the community budget to calculate their PILOT contributions. Boston University, Tufts and Harvard, for instance, all participate in a citywide PILOT program in Boston.

Boston’s program, which has been lauded as a national model for making PILOT negotiations systematic and transparent, asks 45 of the city’s nonprofit organizations that own property holdings valued over $15 million each to make a voluntary PILOT contribution. The city’s 2009 PILOT task force found that about 24 percent of Boston’s budget was spent on what were considered “essential services” that nonprofit institutions necessarily consume — such as police protection, fire protection and public works. To recoup the nonprofits’ share in the cost of these services, the city asks each nonprofit to give 25 percent of what it would owe in taxes if its property were not tax-exempt.

Replicating this model in Princeton would require a specialized examination of the services that benefit the University community. Boston’s formula requires nonprofits to share the cost of police services. Replicating this model in Princeton would require a specialized examination of the services that benefit the University community. Boston’s formula requires nonprofits to share the cost of police services. The University provides its own police force through the Department of Public Safety, though the community’s police service does provide armed support and additional investigative capacity.

Boston’s formula also does not include city administrative costs. Lincoln Institute fellow Daphne Kenyon, who is an expert on nonprofit PILOT agreements across the country, recommended that a cost-of-services approach to Princeton’s PILOT should include these administrative costs because a well-functioning local government is an asset to any university.

“I’m a strong believer that a university benefits from a fiscally strong local government, just as the local government benefits from hosting a high-quality university,” Kenyon explained. “I would argue that it makes sense for them to bear some of [the administrative costs].”

The 2013 municipal budget for the newly consolidated Princeton will not be available until later in the year, but an examination of the Township’s 2012 budget provides a rough estimate of how much the community spends on services that benefit the University. Last year, about 22.5 percent of the Township’s municipal budget was dedicated to general government administrative costs, health and human services, public works and utilities, planning and public safety costs, not including police services.

As of 2010, the University’s tax-exempt land was valued at $1.405 billion in local property assessment records. Were this property not exempt, the University would owe the city about $29 million annually in taxes on this land, city tax assessor Neal Snyder said. This would be in addition to the $8 million in taxes that the University already pays on its taxable properties.

If a potential formula excluding police costs requested 22.5 percent of what the University owes on its taxable property, the cost of services provided to the University community could be about $6.5 million. If full police costs were included, the University would owe 33.7 percent of what it owes on its taxable property, for a total cost of services of $9.8 million.

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Boston’s program also allows nonprofit institutions to reduce their contributions to the community by providing the community with necessary services rather than funds.

Were Boston’s program to be replicated in Princeton, some of the resources that the University occasionally provides for the town, such as aerial photography of the locality or the ambulance purchased for the First Aid squad in 2001, could be interpreted as community benefits that would reduce the amount of a new PILOT.

Durkee, who is the University’s point person in PILOT negotiations, declined to state whether the University would consider using a formula in the new PILOT agreement.

“I just want to wait until we have the conversations and then see what kind of consensus we can reach,” Durkee said, explaining that he did not want to say prior to negotiations what kind of approach the University will use. “We will look at, I’m sure, a broad range of considerations, and I hope we’ll come to a consensus.”

The University currently pays about $8 million on its taxable properties every year. This includes some properties used for graduate student housing that the University has kept on its tax rolls voluntarily. Durkee estimates that the University pays about $2.5 million on voluntarily taxed properties.

Other universities have reached agreements that calculate their cost to the local government by alternative measures. Yale, for example, computes its PILOT using the number of residence beds as an estimate of the size of its University community. In Cambridge, both Harvard and MIT adjust their annual PILOTs based on the number of square feet of exempt property they own.

Some citizens of Princeton have asked that the University go even further to cover its share of the budget. David Goldfarb, who served on the Borough Council for years, said in 2011 that the University should voluntarily agree to pay 100 percent of the taxes that it would owe if its properties were not exempt.

“Everybody in the town is subsidizing the University,” Goldfarb explained. “Everybody who owns property in Princeton is paying thousands of dollars every year to support Princeton University because the University is not paying on its exempt property.”

Goldfarb explained that the University, due to its large endowment and successful investments, is better able to pay its potential tax bill than virtually anybody else who lives in town. “If the University paid on all of its exempt property, it would still be less stressed financially than many residents who are faced with property tax bills that they have difficulty paying.”