Taxation and Non-Profit Organizations

Property Tax Exemption and Municipal Revenue: Philadelphia’s Efforts to Solicit Payments-in-Lieu-of-Taxes from Charitable Nonprofit Organizations

The International Journal
of Not-for-Profit Law

Volume 1, Issue 4, June 1999


In June 1994, the City of Philadelphia implemented a “Payments-in-Lieu-of-Taxes (PILOTs) and Services-in-Lieu-of-Taxes (SILOTs) Program” whereby all nonprofit charities located within the city would contribute some portion of their assessed property tax burden to the City. By June 1996 most charitable nonprofit organizations had been granted “home free” status while dozens more were providing millions in new revenue to the City through individualized PILOT/SILOT agreements.

This paper provides some brief background on PILOTs within the Commonwealth of Pennsylvania and reports on a 1996 case study of Philadelphia’s “Voluntary Contribution Program.” Included in the case study strategy were in-depth interviews with city personnel and area nonprofit executives and analysis of public and (when available) nonprofit organization documents.


Across the United States at the local, state and federal level, the issue of tax exemption and the benefits associated with tax exempt status are being scrutinized. Whether a local government seeking payments-in-lieu-of-taxes (PILOTs), a state government concerned about fund-raising abuses or the federal government’s effort to raise standards of accountability among charitable nonprofits, in recent years the nature of charitable nonprofit organizations, the responsibilities they owe to their local communities and the (tax) benefits received in exchange, have become part of the larger policy debate.

The issues raised by such activities are myriad–from questions of motivation and rationale on the part of these units of government; to the debate over what constitutes a charitable organization in our postindustrial economy; to the interaction between and among societal expectations of charities, existing constitutional mandates, and state and federal tax laws; to concerns about impacts and outcomes (both short and long-term) on government, the nonprofit sector and society at large. Such issues are significant, with outcomes that could change the manner in which societal needs are met and managed. They are, thus, worthy of our attention.

One area of particular focus has been charitable property tax exemption and the financial burden these exemptions place on local units of government. In recent years, nowhere have these questions been more closely examined than in Pennsylvania and few, if any, cities have been more aggressive in pursuing payments-in-lieu-of-taxes (PILOTs) than Philadelphia. As such, Pennsylvania and, more specifically, Philadelphia, offer a unique laboratory to explore these issues.

This paper provides a brief overview of these activities in Pennsylvania and presents specific findings from a case study of the City of Philadelphia’s “Voluntary Contribution Program”–its effort to solicit tax-like payments from its nonprofit charitable community.

PILOT Initiatives in the Commonwealth of Pennsylvania

The term “payments-in-lieu-of-taxes” (PILOTs) is used in various ways. In the states of Connecticut and Rhode Island, it refers to the payment by the state to a local government deemd to have an excessive burden of tax-exempt property. In some states it refers, again, to payment by the state to counties for excessive amounts of state game lands or game reserves. In public housing circles, it is used to refer to monies that the federal government pays to local governments for land used for federal public housing authorities. Used here, PILOTs refer to payments made by an organization to a taxing authority for which there is no legal basis to expect, demand or require such payments. PILOTs, therefore, refer to those efforts to solicit “tax-like” monies for municipal services from charitable nonprofit organizations who are exempt from the payment of property taxes.

Though some cities are known to have received PILOTs for years (e.g., Cambridge and Boston), it is the Commonwealth of Pennsylvania which has had the most (and the most significant) activity with PILOTs in recent years. Pennsylvania also is an excellent example of how legal issues play an important, if not essential, role in the success of PILOT programs.

It was a 1985 Pennsylvania Commonwealth court decision which cleared the way for successful solicitations of PILOTs–or “voluntary contributions” as some people like to say–throughout the state. In a case related to sales tax exemption for a health-related services (nonprofit) corporation, Commonwealth Court articulated five aspects to a “purely public charity.” All five of these must be met in order to be considered a purely public charity in Pennsylvania; the five are:

  1. Advances a charitable purpose;
  2. Donates or renders gratuitously a substantial portion of its services;
  3. Benefits a substantial and indefinite class of persons who are legitimate subjects of charity;
  4. Relieves government of some of its burdens; and
  5. Operates entirely free from a private profit motive.

Those organizations which could not proof compliance with all five aspects risked the loss of charitable exempt status within the state, thus losing all subsequent state and local exemption privileges (e.g., exemptions from state income tax, property tax, school tax, sales tax, etc.).

The problems arising from this definition of a charity (now commonly known as the “HUP test”) were not related to the criteria themselves. In fact, many organizations and groups came out publicly in support of this conceptualization of a nonprofit charity. The problems arose from the application and interpretation of the criteria by various Boards of Assessments and courts throughout the Commonwealth during the early 1990s.

As a result of ambiguity in these decisions, local units of government were very successful in soliciting PILOTs from nonprofit organizations because these organizations were often unwilling to risk and expensive legal battle with little (perceived) chance of success. While nonprofit leaders were (and remain) unwilling to publicly discuss these efforts in terms of municipal “blackmail,” research indicated that for some, a negotiated settlement was the preferred choice. The local unit of government would get some (needed) revenue and the exempt status of the nonprofit organization would remain intact. By 1994 more than 1,000 nonprofit organizations–from hospitals and colleges, to social service agencies, youth-service organizations and veterans groups–had been solicited for such payments (Leland, 1995). Given efforts by the City of Philadelphia and other known activities subsequent to 1994, these numbers increased dramatically in the next few years (those exact figures are not available).

State legislation adopted in 1997, which was supported by both the nonprofit community and municipal leaders, seems to have reduced the ambiguity of the 5-point HUP test. The legislation as well as recent favorable court decisions has led nonprofit leaders and many municipal leaders to believe that local units of government are in a much weaker position in “forcing” nonprofit organizations to pay PILOTs. Some municipal leaders, however, assert that they are still able to raise such monies from nonprofit organizations. Only time will tell … as late as fall 1998, at least one major city in the Commonwealth continued to solicit PILOTs from local healthcare organizations.

Philadelphia’s Voluntary Contribution Program

In June of 1994, the City of Philadelphia implemented the “Payments-in-Lieu-of-Taxes (PILOTs) and Services-in-Lieu-of-Taxes (SILOTs) Program” whereby all nonprofit charities located within the city would contribute some portion of their assessed property tax burden to the City (or face a court challenge to tax exempt status). By June 1996 (with the program now titled the “Voluntary Contribution Program”) most nonprofit charities in the city had been granted “home free” status while dozens more had begun providing millions in new revenue to the City as a result of negotiated PILOT/SILOT agreements.

The possibility of soliciting PILOTs or so-called “voluntary contributions” from local nonprofit charities was not a new idea in Philadelphia. The administrations of both Mayor William Green (in 1980) and Mayor Wilson Goode (in 1984-85) considered the idea. A specific proposal emerged in 1985 with recommendations to solicit only hospitals and universities and to cast the PILOT in terms of a contribution to defray identifiable municipal service costs. Neither administrations chose to act further upon the idea.

After Rendell was elected to office, then-Chief of Staff David Cohen gathered various city administrators and nonprofit executives for a meeting to discuss the pros and cons of the PILOT issue. Without any decision made one way or the other, a period of information-gathering followed. A final decision to go forward with some type of program was made in December 1993. For the next 6 months, a working group, chaired by Greg Rost (then-Deputy Mayor and head of the Mayor’s Office of Policy and Planning) and composed of members of various organizations and departments including the Board of Revision of Taxes, the City Solicitor’s Office, and the Philadelphia Industrial Development Corporation, met and developed the program. It was adopted by Executive Order on June 30, 1994. A detailed description of the City’s program follows.

Program Specifics

The Report of the Mayor’s Special Committee on Payments-in-Lieu-of-Taxes (PILOTs) and Services-in-Lieu-of-Taxes (SILOTs) was released on June 30, 1994. The Report outlined the specifics of the program and articulated the rationale behind the program, namely the belief that most nonprofit organizations in the City of Philadelphia would fail to meet Pennsylvania’s legal definition of a purely public charity (the HUP test) if challenged in a court of law. It was asserted that the practice of paying excessive executive salaries and/or basing salaries on the performance of the organization, as well as and the creation of various subsidiary commercial enterprises which competed with area small businesses, placed nonprofit organizations in the community “at risk” of losing exempt status. It suggested that the benefits of the program were four-fold: (1) the recovery of municipal service costs, (2) the promotion of equity with the private sector, (3) the recovery of lost revenue (due to the location of a nonprofit entity where a for-profit could exist), and (4) an increase in charitable service to the community through the SILOT component.

The program created an incentive for a negotiated settlement, allowing nonprofit organizations to enter into PILOT/SILOT agreements with the City at a much lower “tax” rate than if found to be taxable in a court challenge. The specific components of the program included:

  1. A PILOT/SILOT payment equal to 40% of the annual property tax it would owe if not tax-exempt.
  2. An incentive program whereby those organizations with agreements in place by December 1, 1994, would have a reduced rate of 33% of the annual property tax.
  3. The calculation of the annual property tax would be based on assessed values held by the Board of Revision of Taxes and the City’s millage rate.
  4. The School District would be a full participant in the process (receiving 55% of any monies received).
  5. Up to 33% (one-third) of the PILOT obligations could be replaced with SILOTs.
  6. All PILOT/SILOT agreements would be overseen by a PILOTs/SILOTs Advisory Board and formalized by a contract between the nonprofit , the City, the School District, the Center City District and any other special service districts which may be created.
  7. Special provisions would be made for any nonprofit organization found to meet the 5 criteria in the HUP test.

Anticipated Revenues

According to the report from the Special Committee, tax exempt properties accounted for 25.2 percent of City property with an assessed value of $3.1 billion. Nongovernmental nonprofit organizations were estimated to hold land valued at $1.2 billion and were exempted from $45.6 million in city taxes and $55.1 million in school district taxes.

It was estimated that if every nongovernmental nonprofit organization participated in the program, the total yield (at the 40% rate) would be $40.28 million. The report further stated that health and educational organizations alone could contribute $24.25 million. The Special Committee did recognize that some nonprofit organizations would meet the HUP test and might be exempt from all payments.

Program Implementation/Chronology of Events

After the Mayor implemented the program on June 30, 1994, the City contacted all nonprofit organizations by letter that owned property in the city. Approximately 580 institutions, representing nearly 2,200 individual properties, were contacted. In follow-up to the general mailing, representatives from the Mayor’s Office of Policy and Planning, the City Solicitor’s Office and the Board of Revision of Taxes met with groups of nonprofit organizations (such as United Way, the Delaware Valley Hospital Council, and the Greater Philadelphia Cultural Alliance) to explain the program and its intent. During this period, after a request from the hospital community, the program’s title was changed from the “PILOT/SILOT Program” to the “Voluntary Contribution Program.” The City also agreed to include a “hardship status” in the deliberations, i.e., an organization which might otherwise be expected to contribute monies and services could be held to a minimum payment if it could prove financial hardship.

Nonprofit organizations were required to submit an application for property tax exemption by December 1, 1994. These materials were reviewed during the fall of 1994 and winter 1995. Over 300 organizations submitted materials to the Advisory Board. Most received “home free status” (i.e., the determination that the organization met the HUP test of a purely public charity) and were not expected to participate in the Voluntary Contribution Program. Negotiations were initiated with 46 nonprofit organizations who appeared not to meet Pennsylvania’s current legal definitions of charity. All 46 were eligible for the reduced incentive rate (i.e., 33 versus 40 percent). It should be noted that the determination as to whether the entity did or did not meet the test of a charity was made by the Voluntary Contribution Program Advisory Board, not by the Board of Revision of Taxes or a court of law.

Program and Revenue Status on July 1, 1996

By July 1, 1996, 42 Voluntary Contribution agreements were in place.Twenty five involved healthcare organizations, 10 involved educational institutions and 6 were from professional or scientific societies. One agreement jointly involved both a healthcare and education institution. All agreements except one were for a 5-year period of time. The annual contributions made through these agreements are summarized in Table 1.

On an annual basis, the City will receive $2.9 million in cash with approximately another $3 million in contributed services. The Philadelphia School district will receive $3.5 million in cash. Clearly the healthcare community is providing the greatest portion, contributing almost 79.6 percent of the cash and 77 percent of the contributed services. Seven organizations, all healthcare institutions, were granted “hardship status” and pay only $10,000 a year. This $10,000 is divided between the City and the School District, 45 percent and 55 percent respectively.

Table 1

Annual Payments and Services Received Through Philadelphia’s Voluntary Contribution Program

Type of Org. Money to City Money to School District SILOTs Total
Healthcare* $ 2,315,547 $ 2,796,034 $ 2,307,464 $ 7,419,045
Educational* $ 561,258 $ 677,722 $ 667,076 $ 1,906,056


$ 31, 437 $ 37,961 $ 4,940 $ 74,338
TOTAL $ 2,908,242 $ 3,511,717 $ 2,979,480 $ 9,399,439

* A healthcare institution and an educational institution (with organizational ties) collaborated to create a single agreement. In accounting for this, the payments and services generated from this agreement were divided into two equal portions with half assigned to the healthcare category and half assigned to the education category.

Discussion and Analysis

In reviewing this program initiative, one of the more glaring outcomes is the dramatic difference in the program’s anticipated vs. actual revenue. The initial report suggested that more than $24 million could be expected from the healthcare and educational community alone on an annual basis. Clearly $9.4 million is substantially less than this (and includes a number of other, albeit small, professional/scientific organizations). Even if one accounts for the reduced level of assessment given as an incentive (from 40% to 33%), the actual monies and services received are only half of what was originally projected.

One explanation for this may be the fact that seven healthcare organizations were granted hardship status, thus significantly reducing possible revenues.

Another more significant explanation involves the City’s willingness to reconsider the assessed values of properties. According to one key informant, the City “would not budge” on the formula (i.e., the 40/33 percent of the property tax amount) but would negotiate around the value of the properties themselves. Interviews with city employees from both the Mayor’s Office on Policy and Planning and the Board of Revision of Taxes (BRT) supported this claim, suggesting that, because the properties had been off the tax rolls (some properties had never been assessed), there had been no incentive within BRT to insure that the values of exempt properties were currently reflective of the market.

However, this need to lower the value of properties is inconsistent with expectations articulated in the original report which suggested that revenues received might be greater than originally projected. The report included the following:

Tax-exempt properties are appraised like other property by the BRT, but because the assessments do not add to the tax base, they may not be as up-to-date and accurately assessed as taxable properties. The assessment may, therefore, be lower than the true worth of these institutions. … The value of these assessments may increase upon closer scrutiny, and the PILOTs/SILOTs program could yield higher revenue than estimated in this document.

There is, however, some evidence that the assessed values and thus, anticipated revenues, were “high” to begin with. As one city administrator offered, if the assessed values were low, there would be no motivation on the part of the nonprofit organization to come in and negotiate. This individual went further, suggesting that the City was not concerned that the anticipated revenues might be inflated since it dramatically made the point to the public regarding the value of exempt properties and the “free ride” that nonprofit organizations were receiving at the public’s expense.

Another aspect of Philadelphia’s Voluntary Contribution Program which merits discussion is the extent to which the City did not want to alienate the nonprofit community as it sought to generate these monies. According to city representatives, the program was intended to be a “kinder and gentler” approach to the PILOT issue. (Indeed, “kinder and gentler” was a mantra repeated by several city administrators across several departments.) The City did not want to drive away existing or future jobs nor did it want to engage in expensive legal battles. Its intent was to be non-confrontational, uniform and fair. At the same time, however, it was acknowledged that agreements between the City and a nonprofit organization were “legal agreements in lieu of litigation.”

The issue of “fairness” in the level of contributions deserves further attention. By being uniform is its application of the formula, the City was attempting to be fair to all nonprofit organizations. But the City also wanted to be treated fairly. According to one administrator, where the City was concerned, fairness superseded uniformity, meaning the City would negotiate individually with a nonprofit (reducing uniformity) if the City were treated fairly, i.e., gathering sufficient resources in the process. Further examination of this issue might prove fruitful. For example, how do the final amounts of contributions paid by the nonprofit organizations compare when amount of property and annual organizational budgets are accounted for?

Another aspect of fairness concerns the extent to which the entire nonprofit community was examined by the Advisory Group. The fact that among a final 300 nonprofit organizations, only 45 entered into PILOT agreements, and that these were exclusively healthcare, educational institutions or professional associations, might lead one to conclude that the City targeted these kinds of organizations initially. Given the high profile challenges of some cultural and human services organizations which had occurred in Pennsylvania and the presence of several such significant organizations in Philadelphia, the lack of older, larger, wealthier human service or arts organizations in the Voluntary Contribution program was (and is) glaring.

Reactions to this issue of “targeting” vary according to where one searches for answers. Representatives from the City strongly assert that every organization was individually examined and that only those organizations which appeared to meet Pennsylvania’s definition of a charity were granted “home-free” status. At the same time, however, they acknowledge that in meetings with representatives from the arts community and the human service community, they worked hard to reduce the anxiety in these organizations and to communicate that it was not the City’s intent to hurt cultural or human service organizations. Interviews with key informants from the human service and arts fields substantiated this. One association executive said that after the meeting she organized between her member agencies and the City, she did not give the program “any further thought.” Her agencies may have had to fill out the paperwork and go through the process but it seemed clear to her that they were going to be excluded from the program.

Another possible explanation to the absence of human service organizations is the possibility that Philadelphia’s human service organizations may indeed meet the definition of a charity when similar organizations elsewhere in the Commonwealth might not. Consider, for example, the YMCA. In Pittsburgh, after a long court battle, the Triangle YMCA ultimately decided to contribute some portion of its property tax to the City of Pittsburgh and the County of Allegheny because one floor of a seven story building was a healthclub used mostly by downtown professionals. This led to scrutiny of YMCAs across the state. Yet, in Philadelphia the YMCA has no sophisticated healthclub which caters to upper-income executives. Instead it has three sites, all in poor neighborhoods, with the largest programs directed toward children.

As for the absence of any arts and cultural organizations in the Voluntary Contribution Program, several key informants pointed to the fact that Mayor Rendell had made “arts and culture” a cornerstone of his economic development initiatives. They suggested that the Advisory Committee may not have wanted to create any disincentives for further expansion of these kinds of jobs.

Representatives of the healthcare community maintain, however, that the City intended this to a program for healthcare and educational organizations all along. Certainly there was precedent for such limited focus from previous mayoral administrations. The fact that there is such a clear distinction between those types of nonprofit organizations granted home-free status and those not exempted, does raise questions as to the sincerity of the review process by the Advisory Board.

The amount of monies generated by the program as well as this issue of fairness in its implementation are only two of the issues worth further scrutiny. Additional questions include the impact of these payments on individual nonprofit organizations and the extent to which the relationship between the public and nonprofit sectors has changed as a result of this program. As discussed in the next section, these impacts and outcomes may be short-lived.

The Future of Philadelphia’s Voluntary Contribution Program

A number of factors directly impact the future of Philadelphia’s Voluntary Contribution Program. First is the administrative nature of the program itself. Mayor Rendell implemented the program through an Executive Order with no statutory obligation. After Rendell’s second term concludes, a new mayor may choose to explicitly dismantle the initiative or simply choose not to renew the Voluntary Contribution agreements when they expire.

Potentially a more significant factor is the adoption of state legislation in 1997 which clarified the definition of a “purely public charity” as articulated in the HUP test. Certainly passage of clarifying legislation does not preclude the initiation of PILOT/SILOT agreements between cities and their nonprofit organizations; however, because it provides clear standards and thresholds for charitable behavior, it does reduce the threat of a court challenge. Short of “good citizenship” arguments, there appears to be little incentive for nonprofit organizations to agree to such payments.


Presented here are findings and analysis of data from a case study of Philadelphia’s Voluntary Contribution Program. An issue worthy of further examination is the issue of fairness in the implementation of the program. Yet the most glaring outcome to date, is the (relatively) small amount of money being generated by the program–less than $10 million annually for a city and school district with a combined budget of almost $4 billion. Given such small revenues and its potential short lifespan, one cannot help but wonder how extensive or significant the impact of this program will be. In the end, however, it may be simple: as one city administrator suggested: a million dollars is a million dollars that he didn’t have before.