NEW YORK (Reuters) - In 1978, after New York City had barely escaped bankruptcy, Mayor Ed Koch went looking for cash from an unlikely source: the city’s colleges and other nonprofits, which do not pay taxes on their valuable land.
Koch was trying to do then what cash-starved cities are now pulling off: extracting more money from colleges, universities and private hospitals to help restore bare-boned budgets.
Two weeks ago, Providence, Rhode Island, Mayor Angel Taveras struck a deal with Brown University, which doubled its annual voluntary contribution to nearly $8 million for five years.
Brown’s city property is worth $1 billion and its $2.5 billion endowment is four times the size of Providence’s budget. The city has laid off workers and reformed its public pensions in an effort to stave off a potential bankruptcy.
Across the country, at least 154 municipalities in 27 states have persuaded nonprofits to make voluntary payments in lieu of taxes for the period from 2000 to 2011, according to researchers at the Lincoln Institute of Land Policy in Cambridge, Massachusetts.
“It’s in the university’s best interest to help the city thrive. And the city has to realize it can’t kill the goose,” said Daphne Kenyon, co-author of Lincoln’s report, regarded as the most comprehensive on the issue.
Universities are often the biggest employer in town. But their relationships with their hometowns can get complicated - by students rioting in the streets after sporting events or other disturbances.
In exchange for police, fire protection, sanitation and other city services, some colleges have long contributed money, services or both.
Less commonly, they also may pay a portion of what they would otherwise owe in property taxes. Such voluntary agreements are concentrated in the Northeast, with 85 jurisdictions that use the pacts located in Massachusetts alone. Cities in Indiana, Illinois and elsewhere also use such deals, Lincoln said.
When such deals are not easy to get, cities find other ways to squeeze nonprofits. This year in Chicago, Mayor Rahm Emanuel ended free water service to more than 6,000 nonprofits, including churches.
“There’s push-back now,” said Kim Griffo, executive director of the International Town & Gown Association in Clemson, South Carolina. “Cities are saying, ‘What are you going to do for us?'”
Elite East Coast schools with big endowments are facing particular scrutiny, Lincoln’s Kenyon said.
Princeton University recently agreed to increase its contributions to both Princeton Township and Princeton Borough, in New Jersey, which are slated to merge to save costs.
In 2011, the university paid $1.7 million to the two municipalities. For 2012, it increased its payments to nearly $2.5 million. It also paid $7.7 million in property taxes - a third of which was tax-exempt, university Vice President Robert Durkee said.
Princeton also helped the two municipalities save about $250,000 on aerial photography - which the school is already performing for some of its programs - required for the post-merger remapping of election districts.
Ithaca, New York, home to Cornell University and its $5.3 billion endowment, is “facing a stark financial climate in the upcoming years,” the city says on its website.
Cornell, however, makes no payments in lieu of taxes. But it does make other voluntary contributions to the city. For 2013, its payment will be $1.23 million, up from $1.19 this year, said John Gutenberger, Cornell’s director of community relations.
Mayor Svante Myrick has “talked to us about other ways we can collaborate,” Gutenberger said. “Ways that have a little more staying power than just writing a check and saying, ‘We’ll see you again next year.'”
Universities sometimes sponsor programs that have other community benefits, such as tutoring, paying stipends for employees to buy homes in the area, redevelopment and funding for social organizations.
“EMOTIONS RUN HIGH”
Getting colleges to pay their hometowns doesn’t always go smoothly. In a move that angered many in 2009, Pittsburgh Mayor Luke Ravenstahl proposed a tax on college students’ tuition fees. He dropped the plan after schools upped voluntary payments.
“Emotions run high. It’s tough to part with that money as an institution, because you know there’s going to be consequences across the campus,” said International Town & Gown’s Griffo. “Ultimately it trickles down to the student.”
Agreements are usually negotiated individually, and they can vary from city to city and school to school.
In Boston, home to one of the largest networks of colleges and universities, Mayor Thomas Menino convened a task force to create city-wide guidelines on payments in lieu of taxes.
Under the new program, in the first half of 2012 Boston got almost $10 million - more than 90 percent of the total that Boston officials requested and a 30 percent increase over what would have been paid under the old rules, the city said.
If it were not exempt, the $13.6 billion in real estate owned by Boston’s 45 biggest nonprofit medical, educational and cultural institutions would have generated $423.4 million in taxes in fiscal year 2011.
Though many see the effort as a good example of collaboration, Menino’s office sent out notices indicating how much nonprofits should pay. That prompted Tim Delaney, president of the National Council of Nonprofits, to call the program “Orwellian” and “coerced.”
Reporting By Hilary Russ, editing Tiziana Barghini and Dan Grebler