The Value of a Tax Break

Charities in the nation’s big cities receive at least $1.5-billion a year in property-tax subsidies

Sprawled across 110 acres of the Santa Monica Mountains, offering views of the Pacific Ocean and downtown Los Angeles, the Getty Center

sits on the most valuable parcel of property in the city.

The home of the J. Paul Getty Museum and other buildings owned by the J. Paul Getty Trust are worth $1.84-billion, according to the Los Angeles County tax assessor. Because the Getty Trust — whose assets total at least $8.6-billion — is tax-exempt, Los Angeles County lost $18.4-million in property taxes this year from that land.

The Chrysler Building’s stainless-steel spire rises 1,048 feet above Manhattan, making it one of the defining elements of the city’s skyline.

It is also one of the most valuable pieces of property in New York, assessed by the city at $155-million. It, too, is owned by a tax-exempt institution: Cooper Union for the Advancement of Science and Art, which has net assets of $311-million, according to its most recently filed federal tax return. Cost to New York City’s treasury for the tax exemption: $17.5-million this year.

With its distinctive glass barrel roof, the five-year-old Kimmel Center for the Performing Arts complex has become one of the most recognizable structures in downtown Philadelphia. City assessors put the value of the home of the Philadelphia Orchestra at $185-million. Amount lost to the city because the Kimmel Center, which has net assets of $255-million, is tax-exempt: $5-million.

Uneven Distribution

Throughout the country, properties like those — and thousands of others — cost cities and towns millions of dollars in lost revenue.

States offer the exemptions because they believe the benefits that nonprofit groups offer a community far outweigh the costs, but it is the local municipalities that generally feel the impact of the tax loss.

A Chronicle analysis of property-assessment rolls in 23 of the nation’s 30 most-populous cities shows that the property-tax exemption granted to nonprofit groups costs those municipalities alone more than $1.5-billion annually. (Seven of the largest do not assess the value of property that is exempt from taxation.)

Those losses are spread quite unevenly, however. More than half of the total is from property in just two cities: New York, which loses $605-million annually, and Boston, which loses about $258-million.

The impact is great in part because those cities are home to a large number of nonprofit groups. In New York, more than 14,600 nonprofit organizations own real estate worth $11.9-billion. And in Boston, more than 2,500 groups own property worth $7.9-billion.

But the high dollar figures are also the result of the fact that the cities have far higher tax rates than their peers. While Los Angeles nonprofit groups own $8.1-billion worth of land, more than in any other city except in New York, the impact is far less significant: Los Angeles loses only $81-million a year because of its charity property owners.

In many large cities, government-owned property, which is also exempt from taxes, makes even more of a difference to city budgets. In New York, for example, the city, state, and federal governments, along with public corporations like the Port Authority of New York and New Jersey, own $32.4-billion in tax-exempt property. That is nearly three times as much as the property owned by nonprofit groups.

New Dimension

Nonprofit groups and cities have clashed for decades over the fairness of the property-tax exemption, and whether charities should be forced to make payments to cities that cover at least some of the costs of the services they receive, such as trash collection and firefighting.

But now some of the disputes have taken on a new dimension: Cities and states have been considering narrowing the definition of just what groups deserve a tax break.

For example, Illinois last month reaffirmed a decision by the city of Urbana to strip a local hospital of its property-tax exemption. The state says the hospital doesn’t provide enough free care to the poor to deserve the exemption.

Some nonprofit leaders expect that more institutions could soon become targets as states and cities come under increasing pressure from homeowners to lower property taxes, a demand that could prompt cities to seek more money from nonprofit groups.

“If this is not already an issue in your city, you need to anticipate it becoming an issue,” says Henry Bogdan, director of public policy at the Maryland Association of Nonprofit Organizations, who has been representing nonprofit leaders in negotiations with Baltimore city officials who want nonprofit groups to help shoulder the cost of city-provided services.

Mr. Bogdan says that charities often end up as the underdogs because they typically don’t think about tax policies until they are asked to pay more money. That’s too late, he says.

“You need an effort across the nonprofit sector within your jurisdiction to think about how you’re going to react,” he says.

In Boston, charity leaders are dealing with a new round of controversy over the property-tax exemptions they receive. A special committee has been appointed to examine ways to obtain more revenue from universities, hospitals, and other large nonprofit institutions.

One approach the city is considering is to ask the state legislature to remove the tax exemption from any university property not used directly for academic purposes, such as dormitories and sports arenas. The 19 private colleges and universities in Boston own $2.9-billion worth of property, although city officials are not sure how much of that would become taxable under the proposal.

Boston’s largest nonprofit groups already pay the city $11.6-million to cover some of the costs of city services they receive. The payments equal about 5 percent of the taxes the city loses because of the property-tax exemption those groups have been granted.

But the city’s lawmakers say that is not enough, given the percentage of property such groups hold. Even after eliminating property owned by churches and other religious entities from the total, the tax exemption for nonprofit organizations costs the city about $220-million — more than 10 percent of its operating budget.

By comparison, only one other of the nation’s 30 largest cities loses tax revenue equal to as much as 5 percent of its budget: Denver, where the property taxes on nonprofit land would cover 6 percent of the city’s operating expenses.

Even the $605-million New York loses in taxes accounts for less than 2 percent of the city’s $36.9-billion budget.

Boston also relies far more heavily on property taxes to pay for the cost of municipal government than most other cities. Sixty percent of its revenue comes from property taxes, more than double the average for the rest of the nation’s largest cities.

For now, most of the discussion about the property-tax exemption has been conducted behind the scenes.

But that approach has not persuaded nonprofit organizations to increase their payments, in part because City Council members have no power to change the state law that grants property-tax exemptions to nonprofit groups, says Stephen J. Murphy, the City Council member who chairs the special committee.

“They know the law is on their side and there is little we can do,” Mr. Murphy says.

Some nonprofit officials plan to resist the efforts by the city. They say that asking charitable organizations to give the city money is counterproductive.

Paul Grogan, president of the Boston Foundation and a former vice president at Harvard University, says that the city’s economy relies heavily on its universities, hospitals, and cultural institutions.

“The number of people they employ and the talent they attract is just staggering,” he says. “They underlie the rest of the economy. You wouldn’t have the health-care institutions you have in Boston without the research universities. You wouldn’t have the technology base. You wouldn’t even have the tourist industry we have. The city is acting against its own interest in pursuing these institutions as parasitic and not paying their fair share.”

City officials in many smaller municipalities also are seeking payments from nonprofit groups.

Pittsburgh — the nation’s 56th most-populous city — has been facing a growing fiscal crisis since 2002, when state financial analysts determined it had a $32-million budget deficit that would grow into the hundreds of millions if steps were not taken to raise revenue and cut spending.

City officials turned to local nonprofit institutions — which own $3.4-billion worth of property, the equivalent of 17 percent of Pittsburgh’s taxable property — and asked them to provide $9-million a year to subsidize city services they rely on.

Local groups balked at the amount, but they decided they needed to pitch in. Last year, a group of big nonprofit organizations formed the Pittsburgh Public Service Fund, to which the groups have donated $13.25-million that is being paid to the city over three years.

Even though the amount the charities are providing is less than initially sought, city administrators are pleased that nonprofit groups stepped forward with the money.

“One of the things we don’t do is bash the nonprofits,” says Paul Leger, director of the city’s Finance Department. “We think they provide benefits to the community, and we want a mutually beneficial relationship.”

In Billings, Mont., which is facing a budget crunch, officials recently ordered three local charities to pay more than $50,000 to the municipal government. In two of those cases, the city had given vacant land to nonprofit organizations so they could build their facilities; in the third instance, a nonprofit group bought a building that had been a Howard Johnson hotel to house its operations, taking it off the tax rolls.

Christina Volek, the acting city administrator of Billings, says the municipality’s budget woes are the result of state law that limits property taxes. In addition, she says, voters in November are being asked to approve a measure that would force the city to cut other local taxes — a move that if passed would put extra pressure on the city budget and potentially on local nonprofit groups. “We could be looking at having to lay off 40 police officers and 40 firefighters,” she says. “That’s about one-third of our total officers.”

Alternative Approaches

While most cash-strapped cities have focused on asking nonprofit groups to pay a percentage of the amount they would owe in property taxes, other cities have looked for alternative approaches.

Colorado Springs has enacted a new fee to pay for its storm-water drainage system, and is requiring all property owners to pay it, including nonprofit groups.

Baltimore expanded its energy and telecommunications tax last year, so that it covers a wider range of city businesses, including nonprofit organizations that are exempt from paying property taxes.

Nonprofit groups own $2.1-billion worth of property in Baltimore, an amount that is equivalent to 5 percent of taxable property in the city. Now local groups are providing about $7-million annually through the energy and telecommunications levy.

Mr. Bogdan, of the Maryland Association of Nonprofit Organizations, says that the key lesson he has learned in more than five years of sparring with city officials is that charity leaders need to cultivate good relations with local leaders long before an economic downturn.

“Once the crisis comes it’s too late to start doing intensive education of public officials about all the value you’re adding to your community,” he says.

He says charities should also think far in advance of what they can do to lighten the load of government, with an eye toward heading off any requests for new payments.

“We raised the question of whether there were services that particularly the larger institutions would be able to provide instead that would translate into dollar savings: managing a school, picking up some functions of the public-works department,” he says. “But setting that up takes time, and once a crisis comes, something’s got to be done with a budget that’s supposed to be enacted in six weeks.”

Perhaps no city in the nation better exemplifies the type of relationship Mr. Bogdan is suggesting that nonprofit organizations establish with municipal leaders than San Francisco.

For more than 40 years, city officials have relied on an expansive array of nonprofit groups to provide services that the government provides in many other places.

Tax-exempt property owned by nonprofit organizations costs the city $42-million in tax revenue annually, The Chronicle’s analysis found.

But Pamela H. David, executive director of the Walter & Elise Haas Fund, in San Francisco, says, “City officials here would never think of trying to get money from the nonprofits.”

“In San Francisco, the attitude is that we need to find more money to fund the nonprofit institutions so they can provide more services to the city,” adds Ms. David, who spent 12 years working for the city, serving as director of the Mayor’s Office of Community Development before moving to the Haas Fund.

She says that city officials regularly consult with nonprofit organizations on major issues confronting San Francisco. As in her case, Ms. David adds, many city officials have previously served in executive positions or on the boards of nonprofit organizations, and vice versa.

As a result, nonprofit executives have an easier time demonstrating the value of their organizations to political leaders than do their counterparts in some other cities, she says. Sandra Hernández, chief executive officer of the San Francisco Foundation and the city’s former director of public health, says nonprofit groups have extensive political support, from both elected officials and the voters.

“We have had deficits where mayors have had to figure out how to reduce spending, but when they try to reduce it on the backs of the nonprofits who have contracts for government services, that is extremely unpopular,” she says. “It’s not quite as bad as closing a firehouse, but pretty difficult to do.”