Taxing Alternative: Peduto administration rethinking nonprofit contribution system

Turn on the TV or open a newspaper, and you can barely escape the dispute between Highmark and UPMC, or the struggle of low-paid service workers clamoring for a union or better benefits. But for the fledging administration of Mayor Bill Peduto, there’s a whole other issue involving local nonprofits to resolve.

With the city’s growth being driven by tax-exempt hospitals, universities and other large nonprofits, says Peduto’s chief of staff, Kevin Acklin, “There’s a disconnect between how our economy is being run and how our government is being financed.”

Since 2005, some local nonprofits have been contributing to the city through the Pittsburgh Public Service Fund, which deposited up to $5 million a year in city coffers. But the fund expired in 2013, and Acklin is seeking a larger sum … and a different approach.

Acklin says he wants nonprofits to contribute closer to $23 million a year — just under 5 percent of the city’s 2013 budget. That sum equates to what large nonprofits — those with annual revenue of more than $1 million — would pay under the city’s 0.55-percent payroll-preparation tax.

But Acklin adds the administration wants to “get away from the short-term tin-cup discussion” of seeking annual contributions to its general fund. Instead, Peduto may offer nonprofits a chance to earmark money for specific causes. Those could include anything from shoring up the pension fund to subsidizing affordable housing. To make sure the money was spent according to their wishes, Acklin says, nonprofits might have seats on an advisory committee or other body.

The idea is to “give the nonprofit community an opportunity to help transform the city,” says Acklin. In early talks with nonprofits, he says, “The response has been positive, but the devil’s in the details.”

Reynolds Clark, a University of Pittsburgh administrator who chaired the Public Service Fund, says the administration’s proposals “are a good basis for moving forward.” Earmarking funds for specific projects or investments, he says, addresses “a concern that the money was going down a big black hole.”

Notably, Acklin says that each nonprofit’s contributions should be disclosed publicly. Under the Public Service Fund approach, contributions from nonprofits were bundled together in a lump sum, leaving residents guessing about who paid what. Clark says disclosure might be viable, “as long as it’s approached as a glass half-full rather than half-empty.” He notes that in the Fund’s first year, each nonprofit’s contribution was leaked to the media, and “some folks got bashed: ‘They’re only paying this much?'”

Still, Acklin’s $23 million annual goal “is a bit unrealistic,” says Clark. In fact, it’s nearly as much as the Public Service Fund’s $24.7 million total contributions since 2005.

“Mr. Acklin is saying, ‘If they were paying the payroll-preparation tax …,'” Clark says. “But a lot of the nonprofit community feels very strongly that’s not a good starting point” because it emphasizes the “quantitative” over “qualitative” benefits that nonprofits offer. “The city has to acknowledge the value of these organizations,” Clark says. At Pitt, that could include everything from the security offered by campus police to the value college-student tutors could provide to kids in city schools.

Individual nonprofits are reacting cautiously.

In a statement, Carnegie Mellon University noted that university presidents “had a very positive meeting” with Peduto last December: “We look forward to … continuing our constructive dialogue.”

“We look forward to a productive relationship with the Mayor,” echoed UPMC. Highmark, meanwhile, says Peduto’s ideas “have merit,” especially “given the services [nonprofits] receive” from the city.

Acklin says he’s looking to Boston as one model for Pittsburgh’s efforts. Boston’s Payment in Lieu of Taxes program applies to educational, medical and cultural nonprofits with property worth more than $15 million. The city calculates a bill for each nonprofit, though it allows them to deduct up to 50 percent of the bill by documenting “community benefits” like scholarships or free admission. While the payments are strictly voluntary — and numerous nonprofits pay less than the city requests — they are also disclosed publicly.

Acklin hopes Pittsburgh could have its own framework in place by year’s end, but it may not be easy. During the Ravenstahl administration, the city sued to revoke UPMC’s tax-exempt status — a suit that Clark says “is still hanging out there” in terms of how nonprofits respond. During his 2013 campaign, Peduto supported the UPMC suit and pledged to review other nonprofits’ finances to see if the city should challenge their exemptions as well. (Acklin says that while that remains an option, the new administration is not currently reviewing other nonprofits’ finances.)

UPMC has also been the target of a spirited unionization drive by the Service Employees International Union — a key part of Peduto’s political coalition. Acklin confirms that labor leaders have expressed concern that UPMC might use a big contribution to try buying the city’s silence in the labor fight, but says, “I don’t think either side should be worried about the mayor selling them out.”

Ultimately, says Clark, how nonprofits respond “depends on whether we’re sitting at a roundtable or across the table” in an adversarial discussion. “And I truly believe Mr. Acklin and the mayor are round-table guys.”

This article appears in Mar 5-11, 2014.