How Worcester Loses Out on $20 Million in Property Taxes Annually
Friday, April 20, 2012
Tax exempt properties make up 21 percent of the tax base here, according to a report from the Worcester Regional Research Bureau (WRRB), “Benchmarking Economic Development in Worcester: 2012.” Recent trends show that figure is likely to climb.
“There is not a lot of wiggle room for municipalities when it comes to the discussion about tax exempt properties,” City Manager Michael O’Brien said in a statement released to GoLocalWorcester. “We are bound by federal and state laws. Many of these tax-exempt properties provide a significant public benefit, while others create jobs, stability, and economic spin-off. Some have put us on a global stage for name recognition and marketing.”
At the same time, “Tax exemptions shrink the tax base, decrease local revenues and shift the burden to homeowners and businesses,” O’Brien said. “The bottom line is the language of the law is clear.”
Burden on residents
The city’s overall tax base is 78 percent residential, up 13 percent since fiscal year 1984. Property taxes in fiscal year 2011 accounted for 38 percent of all general revenue in Worcester.
Standing on the sidelines and not paying any property taxes are more than 1,500 exempt nonprofits and institutions, including Worcester’s two biggest employers: UMass Memorial Healthcare and UMass Medical School. In 2010, all tax exempt properties would have paid a combined $21 million in taxes under their current value, according to figures the city manager’s office provided to GoLocalWorcester. Here's a list of the exempt properties: Download PDF
That doesn’t make them evil, according to Steve Eide, senior research associate for the WRRB. And it doesn’t mean the city isn’t economically healthy.
“Based on my initial impression (of the report), the percentage of tax exempt properties doesn’t seem to be a good predictor of the overall health of the local economy,” he said, adding the bureau included the information in its report because “it comes up a lot.”
Third among cities
“We’re trying to go beyond the debate,” said Eide. “I think the typical back-and-forth is not very helpful. You may have a good economy or a bad economy with a high percentage of tax exempt properties.”
He cited the cities of Cambridge and Boston. In Cambridge, 28.4 percent of the overall tax base was exempt in fiscal 2011, while 28.1 percent was exempt in Boston. Worcester ranked third among all Massachusetts cities, with 21.4 percent of its tax base exempt from taxes. Yet, Eide noted, both Cambridge and Boston have AAA bond ratings and are considered “really strong in terms of local government and economy.” New York-based Fitch Ratings gave Worcester a general obligation bond rating of AA- in October last year.
The city’s percentage of nonprofits still ranks much higher than the state average of 12.8 percent, which Eide said is not necessarily a concern.
“The main thing to know is a large percentage of tax exempt properties is not a problem,” Eide said. “The economy has changed way beyond forces the city can control. It has shifted from manufacturing to education- and health-based.”
That has resulted in a switch from largely taxable businesses and properties to a wider swath of nonprofit and tax exempt organizations and employers. Of the top nine employers in Worcester, five are either schools or medical facilities. Four of them are tax exempt: UMass Memorial Health Care, UMass Medical School, Reliant Medical Group and Quinsigamond Community College. Both UMMHC and UMMS are the biggest employers in the city, with 13,466 and 5,914 employees respectively, according to the WRRB report.
“It should be emphasized,” the report states, “that these institutions contribute significantly to the local economy through their real estate investments … providing jobs and patronizing local businesses.”
O’Brien, recognizing the loss of property tax, negotiated so-called PILOT (payment in lieu of taxes) agreements with several tax-exempt colleges and universities, including the Massachusetts College of Pharmacy and Health Sciences, whose campus is in the heart of downtown Worcester. The school in 2008 agreed to contribute $1.25-1.5 million over 25 years to the Worcester Public Library. Likewise, Clark University is spending $6.7 million over 20 years (payments started in 2010) for improvements at both the library and Main South neighborhood, where Clark is located. WPI also has a PILOT agreement, which started in 2009 and continues for 25 years. As part of that agreement, WPI agreed to increase its voluntary annual payment to approximately $270,000, and increase it by 2.5 percent per year. The school also pays $180,000 in real estate taxes on properties that qualify for tax exemption. By 2034, the school will have paid more than $9 million to the city.
Critics contend that schools that maintain massive endowments such as The College of the Holy Cross, do not contribute enough or at all to the city. Holy Cross has an endowment fund worth more than $370 million and does not pay a PILOT, but recently agreed to spend $80,000 a year over the next five years – about $400,000 – to support the Worcester Public Library’s bookmobile. Assumption College also does not have a PILOT agreement with the city.
It is important to note the state pays Worcester annually to help make up for some of the lost taxes from institutions located on state-owned property. According to the local aid report from the Massachusetts Department of Revenue, the state paid $446,382 to Worcester in fiscal 2012. The WRRB report noted the state paid the city $254,000 for the property owned by UMass Medical School.
The college is planning a new 72,000-square-foot Healthcare and Workforce Development Center in downtown Worcester. Property taxes will be paid on that property, he said, because it will be operating under a lease. All but one of the QCC sites throughout the Worcester County region are leased properties, he said.
“It is a balance for any city, but institutions bring a tremendous amount of value and resource,” said Allen. “We understand the burden of the city hosting a tax exempt, but it is an investment the city is making for a return on economic development.”
It could be difficult for the average taxpayer to understand laws that, in many cases, leave cities confined as to how they can control tax exempt properties.
“Joe taxpayer doesn’t know anything about the levels of government,” Allen said. “As a taxpayer, I want to know are those nonprofits providing a return on my investment. If you care about paying $100 every year, maybe you’re not seeing the value of the services provided by these nonprofits.”
‘Good news, bad news’
The city can and does what it can when dealing with tax exempt businesses and institutions, such as determining whether it is willing to pay a PILOT, according to Andreoli. Other considerations might include ensuring the organization meets the standards of law to become tax exempt and whether it has looked elsewhere for regional services.
Having so many tax exempt properties can be a curse and a blessing, according to District 3 City Councilor George Russell, who as a lifelong city resident has seen the landscape change mightily over the years.
“It’s a good news, bad news thing,” Russell said. “The good thing is these nonprofits bring a lot of stability and jobs to the city. But obviously you don’t want to lose the tax base. As they continue to grow and expand, they buy more property and that can be a concern.”
With the city reliant on the business of “Eds and Meds,” as the WRRB report phrased it, that growth isn’t likely to slow. UMass is among those expanding its scope in both size and service. Two of the projects being done as part of the city’s downtown revitalization involve nonprofits. That means more property is being gobbled up and taken off the city’s tax base.
At the same time, however, it also means real estate investments are being made, jobs are being provided and area businesses are gaining new customers.
“Other cities,” Russell said, “would love the chance to be in the situation we are. Just look at all the jobs they bring and the prestige they bring to the city. But obviously you’re going to have concern about your tax base.”
Working in partnership
In the end, O’Brien said, the city must take advantage of everything tax exempt businesses offer, while making sure there are enough property taxes coming in.
“We need our taxable base and we need our tax exempts all to participate in the costs of municipal services,” O’Brien said. “That participation can take many forms. I believe there have been dynamic changes in city government in the last nine years, and in that time, we have worked collectively with our colleges and universities on a number of initiatives, including payments in lieu of taxes.
“These agreements were based on a mutual understanding of our mutual benefits. These agreements are not going to solve fiscal challenges but they do begin to create a level of equity among our tax base. It is a constant balance. It is that balance that keeps a community strong and able to weather tough economies and thrive in the good times.”
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