The Politics of Neighbors: You Don’t Get What You Deserve. You Get What You Negotiate.
This piece was originally published in February 2009 by the Ann Arbor News.
In January 2009, the Ann Arbor News reported that: “The University of Michigan wants to help the local economy, but giving the city an in-lieu-of-tax payment isn’t the way to do it, U-M President Mary Sue Coleman said.” Mayor John Hieftje responded to Coleman’s comment by assuring taxpayers: “We’re going to continue to work on that.” He’s had a decade to “work on that,” however. Other members of City Council, such as Fourth Ward’s Council member Marcia Higgins, and Margie Teall and Second Ward’s Steven Rapundalo have had almost that long to “work on that.”
While the current administration accepts fiscal policy dictates from Dr. Coleman, Ann Arbor taxpayers pay for the bulk of municipal services provided to the University of Michigan. To be fair, U of M does pay for a fraction of some of the services it receives. For instance, in 2008 U of M paid $808,232.78 for fire protection. That amount reimbursed taxpayers for about six percent of the total $13 million dollars spent on fire protection.
Pushing nonprofits to make payments in lieu of taxes (PILOT) is nothing out of the ordinary. Around the U.S., college leaders and city councils have hammered out agreements—under the auspices of so-called PILOT Programs—that provide those communities with millions in annual payments. In some communities, PILOT payments are adjusted annually for inflation. Harvard contributes yearly PILOT payments to the cities of Cambridge, Boston and Watertown. The annual $2.8 million dollar Cambridge-Harvard PILOT payment agreement has been renewed every decade since 1968. MIT has made PILOT payments to Cambridge since 1928.
Nearby Boston has one of the most aggressive PILOT programs in the United States. Officials there believe that if nonprofits can afford to build or expand, they can afford to contribute generously toward municipal services. Over 50% all land in Boston is controlled by non-profits, and in 1999 Harvard agreed to pay that city $40 million dollars over the next 20 years in PILOT payments. In smaller cities, such as Urbana, Illinois, elected officials have crafted PILOT programs to counteract the erosion of their tax bases when colleges and other nonprofits purchased additional property. This is what recently happened when U of M purchased the Pfizer buildings and land, a 170-acre parcel; officials estimate that the city will lose 4-5 percent of its total tax base. The $83.7 million dollar general fund, from which our municipal services are funded, will lose $1.4 million per year in tax revenue beginning in 2010.
Dr. Coleman suggests the Pfizer facility may create 2000 new jobs over the next ten years. However, before the city recoups any lost property tax revenue from home buyers who may move to Ann Arbor for those jobs, the purchase will allow University of Michigan to expand opportunities to increase revenue from patents and licenses that result from its research activities.
In 2004, U of M spent $752,527,056 dollars on sponsored research expenditures, according to the Association of University Technology Managers (AUTM). That same year, U of M filed 149 patents, executed 73 licenses and options, and took in $10.6 million in patent revenue. That revenue places U of M solidly among the top 20 university patent revenue earners in the U.S. Thus, the Pfizer facility purchase has the potential to catapult the University of Michigan further up the AUTM’s patent revenue list, perhaps closer to the University of Wisconsin-Madison, which earned $47.6 million dollars in revenue from patents and licenses in 2006.
John F. Ryan is a Property Tax Policy consultant who helped the city of Springfield, MA craft its PILOT program in 2005. Ryan says, “Some organizations recognize the value of services they receive from the local government and are willing to pay their fair share of those costs.”
According to Mr. Ryan, Dr. Mary Sue Coleman’s response to elected officials who recently called for U of M to make payments in lieu of taxes was, well, predictable. Dr. Coleman insists, “the best way for the university to help the city and local economy is to attract new employees who will buy homes in the area and boost business near the Pfizer property.”
Mr. Ryan explains: “For their part, tax exempt entities generally resist calls to begin or increase their contributions to local jurisdictions. They often respond by enumerating the positive beneficial impact they have on the locality, including creating jobs, making local purchases and paying miscellaneous taxes and fees….”
In Providence, Rhode Island, elected officials aggressively pursued PILOT agreements with four local universities while lobbying for legislation that would have changed the state’s tax-exemption law. Today, Providence collects $3.8 million annually from the University of Rhode Island, Brown, and the Rhode Island School of Design.
In the Midwest, according to a piece in the New York Times, the City Council in Evanston, Illinois “caused a stir when it adopted a tuition tax of $15 a quarter on students at Northwestern University and three other colleges to help pay for city services.” Northwestern officials immediately met with city council members to devise other ways the university might help defray costs associated with the municipal services it receives.
“In many cases…a nonprofit only negotiates a PILOT or some other voluntary contribution after being…faced with the prospect of some other, mandatory tax or payment levied by the local government,” says Mr. Ryan.
Strategies used by elected officials in Cambridge, Providence, Boston and even New Haven, CT, where Yale officials make annual PILOT payments of $2 million per year, demonstrate that Ann Arbor needs elected leaders who can and will craft an aggressive PILOT program. For many years, we’ve been misled into thinking that it simply cannot be done because, according to the fractured logic circulated, the University of Michigan cannot be taxed thanks to its autonomy granted by the state’s Constitution.
A PILOT program is not a tax. It would allow our city government to pursue “good neighbor” payments not just from the University of Michigan, but from other large non-profits in town, as well. For Ann Arbor taxpayers, a PILOT program could very well mean we could see some respite from shouldering the heavy financial burden of having nonprofit neighbors with big plans for everything, in particular, expansion. PILOT payments are voluntary payments, and a PILOT program could bring in $4-$6 million dollars in additional revenue to Ann Arbor.
A little bit more….
The simple truth is that a PILOT can be negotiated.
It has been asserted that Ann Arbor has no leverage to negotiate a PILOT. As someone who has spent two decades negotiating agreements with colleges and universities, as well as Fortune 100 companies, I can tell you that’s simply untrue. The truth is that negotiating with the University presents difficulties to certain Council members, and especially the Mayor: they are employees of the University. The Mayor, for instance, is employed as a temporary, part-time lecturer, his wife as a part-time accompanist at the School of Music. Exerting the necessary leverage to win a yearly $4-$6 million dollar payment from the University might very well cost them their part-time, temporary jobs, and the almost $40,000 U of M pays them each year.
I taught at U of M many years ago after graduate school, and after several years of teaching in Italy. It was a wonderful experience that I have no desire to pursue again, and certainly not while Mayor. Ann Arbor desperately needs a PILOT program, and has needed one for a decade. Our city can have one when the roadblocks to exerting the necessary leverage needed to negotiate one are eliminated.
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