1 PSCI 335: Healthy Schools EXAMINING THE UNIVERSITY OF PENNSYLVANIA’S ARGUMENTS AGAINST PILOTS An Analysis of the University of Pennsylvania’s Claims Against Payments in Lieu of Taxes Nopakit Lerthirunvibul, Jocelyn Pickens, Ashley Van, Ling Zhou with Devan Spear and Mary Summers 2 Table of Contents INTRODUCTION………………………………………………………………………………...3 CLAIM 1: WAGE TAX…………………………………………………………………………...6 CLAIM 2: PENN ALEXANDER……………………………………………………………….11 CLAIM 3: NETTER CENTER…………………………………………………………………16 CLAIM 4: TRANSACTIONAL RELATIONSHIP………………………….………………….26 CONCLUSION……………………………………………………………………………….…36 BIBLIOGRAPHY……………………………………………………………………………….39 3 Introduction: Philadelphia’s public schools are in crisis. A report released in January of 2015 by Pew Charitable Trusts found that Philadelphia spends less per pupil than almost any other education system in the country, including the cash-strapped city of Detroit.1 The history of this funding crisis has its roots in the decades-long struggle between the school district and those responsible for its funding. In 2001, Philadelphia’s history of chronic budget difficulties led to a state takeover of the schools and the establishment of the School Reform Commission (SRC). More recently, former governor Corbett reversed former Gov. Ed Rendell’s funding formula, which would have put Philadelphia’s funding on an equal footing with the rest of the state.2 As a result of these budget cuts, the School District of Philadelphia (SDP) eliminated 5,000 staff positions and 31 schools in the past two years, 24 of which were shut down just last year.3 This past fall, Governor Tom Corbett had to advance the city $265 million so that schools could open on time.4 This paper explores the role played by the University of Pennsylvania, an elite, highly endowed Ivy League institution, in relation to the Philadelphia school district. Because of its nonprofit status, Penn does not pay any property taxes. It also chooses not to take the option elected by most other Ivy League institutions: to make “payments in lieu of taxes” (PILOTS) to support the city’s schools and other public institutions. We look at the university’s arguments against paying PILOTS and argue that regardless of its decision on PILOTS, Penn could and should be making a more significant, more measurable contribution to the city’s schools. 1 Graham, Kristen, “Phila. District Spends Less Per Pupil Than Most Other Cities.” Philadelphia Inquirer, Jan. 17, 2015. Web May 2015. http://articles.philly.com/2015-01-17/news/58153804_1_palmer-leadership-learning- philadelphia-school-district-formula. 2 The Facts,” Fund Philly Schools, Accessed April 24, 2015, http://www.fundphillyschools.org/the-facts. 3 Motoko Rich, “Philadelphia Teachers Hit by Latest Cuts,” The New York Times, October 14, 2014, accessed April 24, 2015, http://www.nytimes.com/2014/10/15/us/philadelphia-teachers-hit-by-latest-cuts.html. 4 Motoko Rich and Jon Hurdle, “Philadelphia Schools to Open on Time Amid Millions in Budget Cuts,” The New York Times, August 15, 2014, accessed April 24, 2015, http://www.nytimes.com/2014/08/16/us/philadelphia- schools-to-open-on-time-amid-millions-in-budget-cuts.html. 4 Because property taxes make up roughly half of school district funding, the exemption of the city’s wealthy “eds and meds” from paying property taxes has become a much-debated part of the discourse around the school funding crisis. The legal definition of a non-profit, or “purely charitable,” institution in Pennsylvania is highly contested and has changed several times. In 1985, the Pennsylvania Supreme Court ruled in Hospital Utilization Project v. Commonwealth that non-profits are required to meet five criteria to qualify for tax-exempt status. This “HUP Test” stipulates that a nonprofit institution must: 1. Advance a charitable purpose 2. Freely donate a substantial portion of its services 3. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity 4. Relieve the government of some of its burden 5. Operate entirely free from private profit motive5 During a severe budget crisis for the city in the late 1980’s, Mayor Ed Rendell used this court ruling (and the potential it offered to contest the nonprofit status of institutions that might not fully meet these criteria) to negotiate Payments in Lieu of Taxes (PILOT) agreements with a number of Philadelphia’s “ed and meds.” During this period the University of Pennsylvania agreed to make annual contributions of $1.93 million to the city for five years.6 After legislators in Harrisburg passed a law limiting the ability of cities to determine the tax-exempt status of non- profits, however, the city no longer continued to require institutions like Penn to make PILOT payments. Then in 2012, the Supreme Court of Pennsylvania struck down that law; and the 5 Lisa Petkun, “What is a Purely Public Charity in Pennsylvania?,” Law Firm of Pepper Hamilton, September 12, 2001, accessed May 2015, www.pepperlaw.com/publications/what-is-a-purely-public-charity-in-pennsylvania-2001- 12-09/. 6Prameet Kumar, "Exploring Penn's financial contribution to the city." The Daily Pennsylvanian (Philadelphia, PA), March 27, 2012. 5 option of asking wealthy nonprofits to make PILOTS was once again on the table.7 In the context of the sharply worsening financial crisis for the school district, advocates such as Donna Cooper, Executive Director of Public Citizens for Children and Youth (and a former member of Rendell’s mayoral and gubernatorial staff), argued that they should do so.8 As discussed below, the University has put forward several different lines of argument against such proposals, while at the same time quietly supporting another effort to pass state legislation that would allow the legislature, rather than the courts, to define nonprofit status. In mounting their case against PILOTs, Penn and several other institutions of higher education in the Philadelphia area commissioned a study and report on their contributions to the city by Econsult Solutions, Inc.. This report, The City of Philadelphia and its Higher Eds: Shared Goals, Shared Missions, Shared Results, released on October 17, 2013, argued that local universities have already done an excellent job of meeting educational and civic missions without paying PILOTs. It concluded that PILOTs would be detrimental to higher education nonprofits and the City of Philadelphia alike.9 In the Spring 2014 semester, a team of three students in PSCI 335 wrote a paper that took an in-depth look at the PILOTs debate and argued in favor of Penn taking the lead in supporting the city and its schools through PILOTs. In the present paper, also written for PSCI 335, we delve further into Penn’s arguments and examine three major claims that the university upholds in defense of their position against PILOTs. We begin by looking into the claim that Penn 7 Will Bunch, “Eds, Meds, Taxes Fuel Protest,” Philly Daily News, January 21, 2015, accessed May 2015, http://articles.philly.com/2015-01-21/news/58272449_1_local-nonprofits-pennsylvania-supreme-court-pilot- payments. 8 Susan Snyder, “A Debate on Raising Funds From City’s Universities and Nonprofits,” Philadelphia Inquirer, September 27, 2013, accessed April 2013, http://articles.philly.com/2013-09-27/news/42430184_1_penn-alexander- nonprofits-property-taxes. 9 Econsult Solutions, Inc., "The City of Philadelphia and its Higher Eds: Shared Goals, Shared Missions, Shared Results," September 18, 2013, http://www.econsultsolutions.com/report/35740/. 6 supports Philadelphia through the wage tax and does not need to provide additional contributions through PILOTs. Then, we take a look at the argument that the university already makes adequate contributions to the city and its schools through the support that Penn provides the Sadie Tanner Mossell Alexander University of Pennsylvania Partnership School and the Netter Center for Community Partnerships. Lastly, we analyze the idea put forward in the Econsult report that PILOT programs inevitably involve a transactional approach to city/university relations that would turn partners into adversaries, resulting in conflict rather than in mutual service. In the following pages, we provide additional background and analysis with regard to these claims. While we remain agnostic about whether PILOTs are the best way that the University of Pennsylvania could provide support to the School District, we argue that the claims presented by the University as reasons against making PILOTs are unconvincing. As a highly endowed, elite institution with a strong commitment to civic engagement, Penn should be making a more significant, measurable contribution to the city’s schools; if not through PILOTS, then by other means. CLAIM 1 Since the University of Pennsylvania provides sufficient economic contributions to Philadelphia through the wage tax, it does not need to provide additional contributions through PILOTs The City of Philadelphia and its Higher Eds: Shared Goals, Shared Missions, Shared Results, a study funded by the University of Pennsylvania and other local colleges and universities, argues that these institutions provide significant financial contributions to the city; and thus, that there is no fiscal responsibility to provide additional contributions through PILOTs. The report cites the contributions made to the city by these institutions’ capital projects, 7 attraction of visitors, and employment of city residents.10 In addition, it argues that the city of Philadelphia with its heavier reliance on wage taxes than property taxes represents a very different fiscal setting than East Coast cities with PILOT programs, such as Boston and Providence, whose budgets are almost entirely dependent on property taxes. In Boston, for example, 91% of all tax revenue comes from property taxes, despite 50% of all property holding tax-exempt status.11 The scarcity of taxable property in Boston left the city’s tax-base insufficiently supported and its budget in peril.12 In these circumstances the use of PILOTs became a means for wealthy nonprofits to shore up Boston’s tax base. The situation in Philadelphia, however, the Econsult report argues, is very different.