Nonprofits Say No

by by By Malcolm Burnley

illustration by by Robert Sandler

With 600 signatures, a ten-foot protest banner, and demands for $4 million, three dozen Brown University students marched into the university’s administrative offices on March 9. They were representing Brown For Providence, a student group lobbying for increased payments by the university to the city government, at the request of Mayor Angel Taveras. Taveras, facing a $22.5 million budget shortfall, is asking for $7.1 million in emergency assistance from the city’s nonprofits—including $4 million from Brown—nearly tripling of the current voluntary contributions they make of about $2.5 million annually.

Chants of “Brown Should Pay Its Fair Share!” erupted from students on the Main Green after they resigned their petition to an administrative assistant, having found President Ruth Simmons absent. Rebecca Rast, one of the student leaders for Brown For Providence, echoed the group’s frustration at deadlocked conversations between the city and school. “We should be helping Providence in a time of crisis,” she said in front of the brick edifice of University Hall. “Brown has a responsibility.”

But legally, since first breaking ground on University Hall in 1770, Brown has maintained the tax-exempt status established in its original charter. It currently pays just $3.6 million annually to the city—$2 million anchoring the current voluntary agreement, reached with Mayor David Cicilline in 2003, and $1.6 million in taxes on non-educational property. But Providence’s current fiscal crisis has left Rast and other city residents wondering whether Brown now has an ethical obligation, given its $2.5-billion endowment and nearly $1 billion in untaxed property holdings, to buffer its struggling host city, which has exhausted other alternatives. “The city is facing a huge deficit and we don’t want to see taxes go up in the city of Providence,” Rast said.

Despite raising taxes incrementally over the last decade, Providence’s double-digit unemployment rate has shrunk its tax base, and those funds are intended to cover almost 50 percent of the city budget. While debt has risen as a result, so has the cost of borrowing. On March 14, Fitch downgraded Providence's credit rating again, to a BBB rating, two steps above junk-bond status, and Moody’s followed suit two weeks later. With its cascading reputation, loans have become unaffordable due to exorbitant interest rates, and bond-issuing is no longer feasible. In the meantime, Taveras has imposed drastic cost-cutting to reduce the deficit from $110 million, where it stood when he took office in 2011, including controversial decisions to lay off teachers and close four elementary schools.

Without relief from nonprofits by June, Taveras has threatened, the city will file for Chapter 9 bankruptcy. Brown’s operating budget of $834 million exceeds the city’s by more than $200 million, and were Brown taxed like a for-profit business, it would pay between $27-38 million annually on its property. State legislators are trying to chop away at tax exemptions, envious of that figure. A bill introduced to the House Finance Committee by Representative John Carnevale (D. Providence-Johnston), supported by the Mayor, would remove certain tax exemptions from nonprofits and allow cities to charge them the equivalent of 25 percent of what they’d pay if fully taxed. The legislation could bolster Providence with approximately $24 million on its balance sheets for this year, however, remains in committee, and its chance of passage in the full House is uncertain.

“The big dog in town is Brown,” says Michael Van Leesten, who chaired the Commission to Study Tax Exempt Institutions, appointed by the City Council in 2010 to assess the impact of nonprofits. “Everyone knows it’s the anchor institution in town.”

Since last spring, President Simmons and Mayor Taveras have engaged in closed-door meetings to discuss increasing Brown’s annual contributions by $4 million, a three-fold increase of its current voluntary payments. According to Taveras, an agreement was reached last December, but when Simmons brought the proposal to the Corporation—the university’s financial authority and Board of Trustees—she was stifled. “The Corporation indicated that the president could move forward with a portion of what was being discussed,” explained Marissa Quinn, Vice President of Public Affairs at Brown. The Corporation was only willing to double, not triple the university’s payments, and tested Taveras’s resolve with his asking price. “The Mayor was disappointed with what we presented and rejected it,” she said, “and there’s been a hiatus in the discussions.”

Over the last month, the two sides have resumed meetings after being brought back together by Governor Chafee B’75, who hopes to avoid an embarrassing summer of insolvency in his capital. Yet almost a year after negotiations began, the two sides have yet to reach a deal, and the potential for municipal bankruptcy grows more tangible. Providence would join Harrisburg, PA as the only other state capital to make such a filing.

While some target Brown as the only benefactor capable of saving Providence, others argue that non-profits have no obligation to bail out the city. Not only does federal 501(c)(3) law provide protections from property taxation, but universities contribute healthily in tourism and jobs (Brown is the second-largest employer in the city, with almost 5,000 employees). Furthermore, non-profits played no role in the city’s outsized union problem. Due to decades-old pension contracts with city retirees, offering generous 5 to 6-percent cost-of-living adjustments—almost twice the rate necessary to keep up with inflation—Providence’s pension liability has ballooned to $901 million, the city’s starkest budget sinkhole.

“We’re different than the unions,” says Daniel Egan, President of the Rhode Island Association of Independent Colleges and Universities, who voiced the need for long-term structural changes in the city, as opposed to relief from higher-ed institutions. Taveras has commissioned a city council subcommittee to work on pension reform and asked the unions for a 20-year COLA freeze, but thus far they’ve balked. “They’re a liability to the city’s budget and financial data sheet—we’re not,” said Egan, whose organization represents Brown, Bryant University, Johnson and Wales University, and Providence College.

Pension difficulties drained the city coffers back in 2003, when it faced a $60 million deficit, and the four private colleges and universities promised to contribute $48 million over 20 years to the city. In light of the current crisis, only a single institution—Johnson and Wales­—has agreed to increase its contribution (by about $1 million annually). “We thought we had a long-term solution in 2003. There needs to be some solution that doesn’t have us back at the table in six years. Righting that economic ship on the back of one sector is troublesome to our membership,” Egan said.

Quinn adamantly concurred: “We will not re-negotiate the 2003 agreement.”

“You look at New Haven, you look at Massachusetts. We’re looking at what other communities are doing,” said City Councilman Seth Yurdin, who is working with the Mayor on fixing the deficit. “The city’s in a financial crisis, but that’s not the moral argument for institutions to pay more. We’re saying that tax exempts here need to be at the same levels as elsewhere.”

Almost 25 percent of Providence’s budget is spent on city services absorbed by non-profits—including police and fire protection—which they receive pro-bono. Contributions from the 2003 agreement are known as PILOTs, or payments in lieu of taxes—essentially, voluntary compensation from non-profits that substitute for property taxes to afford these services. According to a 2010 study by the Lincoln Institute of Land Policy, over the past decade, PILOTs have been instituted in 18 states and 117 municipalities including Pittsburgh, Boston, and Philadelphia. PILOTs vary from lump-sum figures, like Brown’s $2 million to Providence, to percentage-based contributions according to property values. But all contributions are ultimately voluntary, limiting cities' power to leverage increases.

Boston’s PILOT agreement was brokered in 2009 by Mayor Thomas Menino, who asked his city’s 28 higher-ed and medical institutions to voluntarily pay 25 percent of what they’d normally be taxed. Though the Lincoln study called Boston’s system “the most revenue productive program in the country,” non-profits collectively contribute just $15 million each year, or about 20 percent of what Menino requested. Even so, Boston collects almost six times what Providence receives from its 2003 agreement, in part because hospitals collectively contribute $6 million to Boston. Providence’s medical centers make no voluntary contributions, though they own $1.2 billion in property value. Although Taveras has also had meetings with hospital leaders, their lack of sacrifice irks Egan, who insisted that before the colleges and universities boost their own payments, the hospitals should step up. “We have a struggling economy with families struggling and asking for financial aid for the first time. And then our city is asking us to pay more than we already do, without going to other players as well.”

But healthcare providers in Rhode Island, hit by a swell of uninsured patients during the recession, are heavily indebted.  In the last five years, uncompensated care in hospitals in Rhode Island has risen 58 percent, and two hospitals in the state—Westerly and Landmark—have been forced into receivership. In total, uncompensated care now costs hospitals $160 million. “The financial liability of hospitals in our state was never strong,” says Ed Quinlan, President of the Association of Rhode Island Hospitals. “The economy and the reduced funding by state and federal government are contributing to the financial instability of hospitals.”

In his State of The City address in February, Taveras described Providence’s finances as “tumbling into a black hole,” and staked non-profits as the cog to avoiding the fate of neighboring Central Falls. But when the receiver of that city, Robert Flanders—who had been hired as an advisor to Taveras— told Bloomberg News on March 27 that bankruptcy was unavoidable in Providence, the Mayor responded by saying “Providence is not Central Falls. I will do everything in my power to avoid that.” Taveras dropped Flanders as an advisor days later, trying to salvage optimism that a deal remains attainable before summer.

What remains to be seen is whether Brown will sweat, or circumvent, Taveras’s June deadline. The school is preoccupied with its own timetable for transitioning to a new president and administration on July 1, when Christina Paxson will replace Simmons. At her introductory press conference, Paxson responded to questions about handling discussions with Providence. “I’m very much of the view that universities and cities and regions should be partners. The current negotiations, President Simmons has had very productive conversations with people in the city,” she said, acknowledging that her predecessor has more familiarity with the terrain.

In her final State of the University address on March 15, President Simmons made no suggestion of an imminent agreement when questioned about it. Instead, she reiterated the University’s steadfast position, saying it has a “strong recognition that we will not thrive if Providence does not thrive.” That rhetoric is echoed on the other side. “If the city’s not successful, then the tax exempts won’t be successful,” Councilman Yurdin says.

A frustrated Van Leesten said that the commentary, despite an appearance of common ground, hasn’t changed from two years ago when he was doing research for the commission. Yet the stakes keep rising. “Brown doesn’t want to be nationally or internationally known as a school in a bankrupt city,” Van Leesten says. “We should get the big brains together…and recognize that we’re going to rise and fall on each other’s swords unless we work together.”

MALCOLM BURNLEY B ’12 is exempt.