New report sheds light on Providence’s PILOT program with tax-exempt organizations

Providence City Council members plan on reviewing the city’s Pay in Lieu of Taxes agreements on Thursday.

Providence City HallBlake Nissen for the Boston Globe

PROVIDENCE — Ahead of negotiations with large local tax-exempt institutions, Providence City Council members plan on reviewing the city’s Pay in Lieu of Taxes, or PILOT, agreements on Thursday.

Last year, the Council asked the Finance Department and Mayor Jorge O. Elorza’s office to review the city’s PILOT agreements it has with local nonprofits, which are exempt from paying property taxes. Property taxes are the largest revenue generator for the city.

A newly published report by the city’s chief financial officer Lawrence J. Mancini and finance director Sara Silveria sheds light on the controversial agreements that rule tax structures for nearly 39 percent of the city’s land parcels (or 44 percent of all properties), accounting for about $8 billion in assessed value.

The report, which was obtained by the Globe, explained that about 28 percent of Providence’s total land parcels are owned by the largest nonprofits based within city borders, including some major universities and hospitals. Tax revenues, including those generated by any tax stabilization agreements, account for nearly 66 percent of the city’s annual budget. State aid accounts for 18 percent of the city’s overall budget and the remaining 16 percent is supported by departmental fees, charges for service, and local PILOT agreements.

Despite new development and property improvements, the city isn’t seeing an expansion on its tax base — less than 1 percent each year— according to the report.

“This limited natural expansion, combined with the acquisition of taxable parcels by large nonprofits, does not provide sustained financial growth that the city requires to maintain and expand city services,” wrote the authors. They explained that the city has “limited means” to generate additional revenue because most fees and charges are set by state lawmakers.

The city could increase property tax rates, but commercial rates are already the second highest in the state, so doing so would create an additional burden for those non-tax-exempt, like residents and businesses.

The report explained that while property values increased by more than $2.4 billion, Rhode Island law states that the city is limited on how much it could increase its tax levy. Since fiscal year 2013, the maximum amount by which any city or town can increase its tax levy is 4 percent. Without that cap, the $2.4 billion increase in property values would have increased Providence’s taxable gross assessments by 22 percent.

So state aid plays a big part of the city’s fiscal stability — a risk since all state aid is subject to annual appropriation in the budget.

The state reimburses up to 27 percent of taxes that would have been collected if a tax exempt entity were taxable. It is paid out to municipalities on July 31 annually. In 2021, the state doled out more than $34 million to Providence.

But that’s only a sliver of what Providence could earn if tax-exempt entities could be taxed.

According to a Globe investigation last year, if Brown University was not tax exempt, it would owe the city of Providence about $49 million annually. Johnson & Wales University would owe nearly $13 million, and Providence College another $16.2 million.(Brown does pay some taxes, but only pay for parts of properties that are not “mission-driven” — that is, those that are for commercial use, not for education. That amounts to approximately $1.7 million annually.)

Hospitals are also tax exempt. Rhode Island and The Miriam Hospital (both owned by Lifespan) would owe the city more than $30 million annually.

All together, the total assessed value of the land owned by the city’s largest tax-exempt institutions (specifically large hospital groups and higher education institutions) is over $3.56 billion. So if those parcels were taxed in full, like they are as other businesses, the city would see more than $130 million in revenue flowing in.

Instead, in 2021, the state doled out a little over $34 million to Providence through the PILOT program. This comes after the economic fallout from the COVID-19 pandemic caused the city to lose $6.5 million in the last quarter of FY2020 alone. And expenses are continuing to mount.

The city is required to pay its retirees’ pension each year through an actuarially determined contribution, or ADC. The ADC is about $93.6 million as of 2022. The City’s general fund is responsible for $77.8 million, but the ADC amount will increase about 5 percent annually. By 2040, this payment will exceed $140 million from the general fund alone, according to the report.

The reports authors make the case that the city will have to expand efforts to responsibly stabilize the fiscal future of Providence while both preserving existing services and providing the city the flexibility to invest in future needs.

“It is critical that the city and large tax-exempt property owners form transparent, collaborative agreements that outline fair contributions and that our anchor institutions can contribute to our shared future while maintaining a high quality of city services for residents,” read the report.

And while all cities have large tax-exempt institutions, Providence’s has one of the largest shares of them in New England: 39.3 percent. About 24 percent of Boston’s tax base is exempt from property taxes compared to Springfield’s 19 percent, Worcester’s 27 percent, and Brockton, Mass.’s 12 percent.

New Haven, which has a smaller population and generated a $43.6 million revenue in FY2020, Providence, with 50,000 more people, generated a $7.2 million revenue that same year from PILOT agreements. Bridgeport, Conn., which has 35,000 fewer people than Providence, generated a $12.5 million revenue from their PILOT program.

According to a study by the Lincoln Institute, property tax rates for residents and businesses are significantly higher because of nonprofit institutions’ tax-exempt status.

Theresa Agonia, a spokeswoman for the Mayor’s office, told the Globe on Wednesday that the city anticipates beginning conversations with the largest nonprofits “soon.” But, she said, the city is still prepping for them and could not provide a timeline as to when they will begin.

The report stated a number of goals that would “strengthen the fiscal stability of the city’s future,” including a PILOT agreement that would standardize a formula that determines what contributions an institution will make, allow the contribution to be adjusted annually based on services to the city by an institution, and provide opportunity to adjust annual contribution based on acquisition or relinquishment of new property by exempt institutions.

The report also recommended that these PILOT agreements would continue to be “multi-year agreements.”

Brown, which is typically pointed to as the most well funded of the tax-exempt organizations with its $6.9 billion endowment but is also a large employer in the state, does pay into two Memorandums of Agreement with the city, as do other nonprofits. Brown pays about $4.4 million each year through a 20-year memorandum of understanding that was signed in 2003 and a second agreement signed in 2012. They also pay about $2.3 million in fees each year for their space at 121 South Main St., which is occupied by Hemenway’s restaurant.

However, the 2003 agreement is set to expire in June 2023, and has not yet been amended to renew. City officials have previously declined to say what amount the city would ask entities like Brown to pay annually in a new agreement.

“We have little bit of time to think about that, and we will have a transition in the mayor’s office. We just started thinking about this,” Brown President Christina H. Paxson told The Public’s Radio last week. “Brown supports the city of Providence. We have to. We should. It’s the right thing to do.”

She added, “Right now, we make payments to the city in excess of $6 million a year. And that doesn’t include other things that we do that add value directly to schools and things like that.”