The second in a two-part series about an odd new city-revenue scheme. Last time: an introduction to PILOTs.

In my last blog, I wrote about a bizarre way certain cash-strapped cities are trying to raise revenue: asking legally tax-exempt nonprofits to voluntarily pay a portion of what would have been their real-estate tax bill. These payments in lieu of taxes (PILOTs) have played an important role recently in Providence, Rhode Island.

In 2012, Providence received an estimated $23 million from nonprofits in the city through PILOTs. This is almost a quarter of what Providence would have collected if the state removed the property-tax exemption for charities. Property taxes make up about 50 percent of revenue for governments in Rhode Island, one reason why PILOTs are long-standing in this area. Brown University, for example, has a history of making payments to the city of Providence in place of the taxes from which it is exempt; in 2003 five Providence-area educational institutions entered into a multi-year arrangement under which Brown agreed to pay $2 million to $4 million a year through 2022. However, increasing fiscal troubles for Providence during the recession, including a $22 million deficit in fiscal year 2012, led the city to seek more money.

In March 2012, state legislators submitted a bill that would allow municipalities to charge nonprofit educational institutions and hospitals an assessment of 25 percent of the taxes they would have been charged had their property been fully taxable, characterizing the charge as an essential-services fee. A reason cited was that financially struggling Providence was “unable to win satisfactory payments in lieu of taxes from several major tax-exempt institutions in the city.” The bill is still undecided, but such pieces of legislation will determine the fate of the nonprofit property-tax exemption in the long run.

On June 22, 2012, the City Council of Providence struck a deal with Brown University. (Separately, Providence obtained major PILOT agreements with another educational institution and a hospital.) Brown agreed to give the city $31.5 million in PILOTs over the next 11 years. In exchange, Providence gave the university parking privileges on 10 blocks of nearby streets. Such an explicit quid-pro-quo aspect highlights the complex and idiosyncratic nature of many PILOT agreements. Cities may use not only threats but also remuneration to induce payments in lieu of taxes from nonprofit organizations.

The typically informal and haphazard nature of such agreements ensures that the battle in Providence and other cities will continue.