From storefront charities to sprawling medical centers, nonprofit groups are discovering that their property-tax-exempt status no longer shields them from cities casting for cash to make ends meet.
City officials across the nation are rethinking the sacred covenant between governments and nonprofits that historically have escaped property taxes because of the contributions they make to their communities.
Boston now requires its biggest nonprofits to collectively pay millions of dollars "in lieu of taxes." Madison, Wis., is considering the same. In Minnesota, home to one of the nation's most vibrant nonprofit sectors, cities are taking other steps.
The Mankato City Council last month voted to require all property owners to fund city lighting, not just property taxpayers. Bemidji and 17 area cities and townships are working to form a fire district that could be financed by a protection fee paid by all real estate owners.
"In the past 10 years, we've seen a surge in the number of cities looking for new ways to get revenue," said Anne Finn, assistant government relations director at the Minnesota League of Cities. "More and more cities are finding that property taxes aren't getting to the bottom line. If they can take something like street lighting off the property tax rolls, and make it a fee, then they can collect from all properties that benefit."
Nonprofit leaders bristle at the trend. They argue that the new fees are the start of a slippery slope to impose taxes on organizations that, by law, are exempt from property taxes.
"It overlooks all the contributions that nonprofits make to their communities," said Pam Determan, executive director of VINE Faith in Action of Mankato, who testified against the city lighting fee.
"For example, we regularly respond to calls from government officials requesting help, for example, for elderly people who need home repairs. We give 28,000 rides a year to the elderly, disabled and people going to work. We have meals on wheels."
VINE's lighting payment, about $960 a year, saps money directly away from those services, she said.
"Where will it end?" added Jon Pratt, executive director of the Minnesota Council of Nonprofits. "Snow removal fees? Street maintenance fees? Lighting fees? You could take the entire municipal budget and divide it into a thousand pieces. Then the whole concept of tax exempt is gone."
Is it fair?
Nonprofit groups are exempt from property taxes in all 50 states. The logic is that they provide services that otherwise might fall upon the government, or services that strengthen and benefit their communities.
Although they pay no property taxes, nonprofits employ nearly 300,000 workers in Minnesota alone, and pump money into their local economies. And they aren't the biggest tax-exempt group. Forty-three percent of non-taxable land in Minnesota is owned by the government and 22 percent by schools, according to the Minnesota Department of Revenue.
A city's amount of tax-free land varies widely, from about 25 to 30 percent in Minneapolis and St. Paul to more than two-thirds in places like Falcon Heights, the Minnesota League of Cities reports.
But is it fair that 75 percent of real estate owners pay for 100 percent of city services? asked Pat Hentges, city director of Mankato, where 23 percent of the land is tax free. The City Council's decision last month to create a lighting fee paid by all will generate about $500,000 a year, said Hentges, and remove that burden from property tax rolls.
Under the ordinance, nonprofits must pay 5 cents per linear foot of street frontage, he said. The local American Red Cross will pay about $10 per month. Minnesota State University Mankato will pay the most, about $1,160 per month.
"[Without this], taxpaying properties pay 100 percent of the cost," said Hentges. "Now they pay 80 percent."
The debate over who should pay, and how much, has blasted into public consciousness in recent years. The obscure topic is now the subject of national conferences, scholarly research at Washington think tanks and countless media articles.
"This became hot in about 2009 and it continues to receive an enormous amount of attention," said Daphne Kenyon, a property tax scholar who suddenly has found herself in big demand.
The issue has gained heat along with the nation's anti-tax climate, the fiscal crisis, and changing attitudes toward nonprofits, said Kenyon, of the Massachusetts-based Lincoln Institute of Land Policy.
"And it's a human drama story," she said. "It's not just cold numbers."
The biggest money-makers are "payments in lieu of taxes," used most widely in Boston. They require nonprofits, typically the largest, to pay a portion of the real estate taxes for their land.
Park Nicollet Health Services, for example, agreed in 2007 to pay property taxes to St. Louis Park for a parcel of land it bought from the city, said Park Nicollet spokesman Jeremiah Whitten. It paid $20,640 last year, the city reports.
Far more common are smaller fees for waste-water treatment or lighting. More than 25 Minnesota cities have lighting fees.
St. Paul is the granddaddy of these fees. About 100 years ago, the city approved a fee for dust control "because back then, there were a lot of dirt roads," explained St. Paul city engineer John Maczko.
"Then it grew into filling potholes and other services," he said, "and it became a roadway maintenance fee."
That fee now pays for everything from street and sidewalk repairs to snow plowing to boulevard trees. It accounts for 12 percent of the city's general fund, Maczko said, or about $27 million.
It's simply part of life for St. Paul nonprofits. The University of St. Thomas, for example, paid $112,000 in city fees last year, said university spokesman Doug Hennes.
Minneapolis does not have any added fees, city officials said. The City Council passed a lighting fee in 2009, but it was never implemented because of opposition and other factors. The city found other revenue sources, they said.
'In this together'
The proliferation of new fees is a violation of the "social compact" between government and nonprofits, argued David Thompson, vice president of public policy for the National Council of Nonprofits.
"The rhetoric from cities is "paying their fair share,'" said Thompson. "Our message is that the current city budget hole is smaller because of what nonprofits do."
It also raises a different question about "fairness," nonprofit leaders said. Is a street light in front of a nonprofit of more benefit to the people who drive by at night than the people who work inside during the day?
Kenyon urged both sides to recognize their mutual needs.
"As we move forward, cities and nonprofits should realize that they are in this together," advised Kenyon. "Nonprofits are an important part of the city economy, but they need to help out the city economy if it is in dire straits."
Jean Hopfensperger • 612-673-4511