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Pittsburgh’s ‘eds and meds’ are economic drivers. But their tax status largely passes the bill for government to the rest of us.

Pittsburgh Mayor Ed Gainey is in the process of conducting private talks with UPMC and Allegheny Health Network leaders in an effort to get the hospital giants to “pay their fair share” to the city. While Pittsburgh officials have wrestled with the issue for decades, they need only look about 100 miles north for an example of what a solution can look like.

The city of Erie has long-standing agreements with hospitals owned by UPMC and AHN for payments in lieu of taxes, or PILOTs. Under the agreements, the nonprofits pay half of what they would owe in property taxes if they were not exempt from them. 

All told, the two major nonprofits are set to pay more than $1 million into Erie’s 2022 budget — a larger revenue source than the city’s deed transfer tax, amusement tax or parking tax. The sum is greater than the budgets of many city departments and is about 1.1% of all revenue. 

Erie is noted as among the top U.S. cities when it comes to collecting PILOT money. Pittsburgh, meanwhile, saw its once-considerable PILOT income dwindle in the new millennium, down to less than half a million today — while booming hospitals, universities and other nonprofits own up to a fifth of Pittsburgh’s property and don’t pay taxes on it. In 2020, Erie collected $13.39 per capita in PILOT contributions. Pittsburgh collected $1.07.

Could Pittsburgh, with Gainey at the helm, obtain PILOT agreements similar to the ones Erie has? Doing so with the five largest nonprofits would net the city $17.3 million annually, according to a report by the city and county controllers. 

There are several reasons Pittsburgh’s situation is different from Erie’s. Not least of which is that Erie’s major PILOT agreements were created when UPMC Hamot and AHN Saint Vincent hospitals were independent. They were later bought by UPMC and AHN in 2011 and 2013, respectively, and the two chains continued honoring the PILOT agreements. 

An AHN spokesperson told PublicSource in an email that the group uses different strategies to support the different cities it inhabits.

“Our significant investments in and contributions to the health and vitality of the greater Erie region (including the PILOT agreement), for example, have been proportionally matched, if not exceeded, by the similar investments” in Pittsburgh, wrote Dan Laurent, AHN’s vice president for corporate communications.

A UPMC spokesperson did not answer whether their Erie PILOT deal could be replicated in Pittsburgh, and pointed out that the Erie deal was in place long before UPMC was involved there. Gainey’s office did not respond to a request for comment.

In chains

Several experts and local officials said the independence of the hospitals in the 1990s contributed to the ease of creating the PILOT agreements.

“It’s possible that for a smaller hometown organization, they are more in tune with what’s needed in the hometown,” said Paul Lichtenwalter, the finance director for Erie since 2004. 

Michael Hicks, a professor and local public finance researcher at Ball State University, said he thinks it’s easier to negotiate with independent hospitals because they have lower profit margins.

“When the stakes are lower for everyone, the negotiations are easier,” Hicks said. “When you’ve got $100 million or $200 million on the table, that makes it very high stakes.”

“I think it would create a pretty major problem if all of a sudden we lost that revenue.”

Erie Mayor joe schember

Large hospital chains have far greater ability to wage legal battles, which may make them less likely to settle on a PILOT agreement rather than risk losing their nonprofit status in court.

“Now it’s far more difficult [than in the ’90s] because the hospitals have huge, huge revenues and they’re aggressively protecting those revenues,” Hicks said. “And they’re fighting a rearguard effort by cities around the country trying to challenge nonprofit status.”

Pittsburgh was part of that effort in the 2010s when then-Mayor Luke Ravenstahl sued to revoke UPMC’s tax-exempt status. The next mayor, Bill Peduto, withdrew the lawsuit, insisting it was not likely to yield results for the city.

Mutually beneficial

Ravenstahl’s lawsuit contributed to a less-than-adoring relationship between the city and the nonprofit. Eight years later, Gainey’s campaign rhetoric about UPMC needing to “pay its fair share” renewed the discussion.

UPMC Presbyterian Shadyside (Photo by Ryan Loew/PublicSource)

Erie officials say a friendly relationship has been key to maintaining PILOT agreements after all these years despite legal changes that might allow the nonprofits to end them

“We have great relationships with both hospitals,” said Erie Mayor Joe Schember. “I know both CEOs, we’re together a lot, they invite me to things, I invite them to things. … I believe what we do together works for what’s best for Erie in the long term.”

Schember, who became mayor decades after the agreements were formed, said municipal leaders would be well advised to focus on building relationships before making firm monetary demands. He said in his five years as mayor, he’s never heard a conversation about ending the agreements.

“We’re hoping they see the value in what the city does for them and we can continue to work together in a mutually beneficial way,” he said.

Nonprofits consume city services without paying property taxes to fund them. Schember cited Erie’s public safety and homelessness issues, saying that budget cuts forced a reduction in the city’s police force decades ago and that PILOT revenue allows the city to avoid further cuts.

“I’m hoping that most nonprofits will want to help keep Erie a safe place to live, work and play,” Schember said.

Another Western Pennsylvania city, Altoona, has a significant PILOT agreement with UPMC. The Blair County city of 43,000 is budgeted to receive more than $225,000 from UPMC’s hospital there this year, about $5.25 per capita and more than the city pays for tax collection, legal services, engineering services, waste management or public transit.

‘A better balance’

While UPMC and AHN don’t provide large sums of cash to Pittsburgh, they do provide community benefits. UPMC lists food assistance, care for low-income and homeless people, substance use treatment and elder care as some of its charitable endeavors in the Pittsburgh region. 

Leaders in Pittsburgh and Erie alike say cash payments are nonetheless needed.

“They are in many ways a good neighbor and excellent for our region,” said acting Allegheny County Controller Tracy Royston, who co-authored a report this year outlining the need for PILOT agreements in the region. “But as much as they do, they also put a demand on our resources and our services. So I think there needs to be a better balance there.”

The report released by Royston and City Controller Michael Lamb referenced nonprofit investments in The Pittsburgh Promise (a scholarship program for city students) and OnePGH (a fund established for voluntary contributions from nonprofits) as considerable benefits. But, they wrote, “It is important to stress that neither relieve residents of the burden of financing local government nor do taxpayers have input or oversight as to how funds are spent.”

The controllers proposed a PILOT model wherein nonprofits would pay 25% of their exempted real estate tax burden. This is half the 50% rate paid by the Erie nonprofits, a decrease that could partially offset the drastically higher amounts of money involved in Pittsburgh.

“We were just thinking that to go from zero to 25% would be significant,” Royston said. 

“It’s possible that for a smaller hometown organization, they are more in tune with what’s needed in the hometown.”

Paul lichtenwalter

The controllers’ report advocates for taking a systematic approach to setting up PILOTs in the region — something Erie has succeeded in doing.

“At least the last 30 or 40 years, it’s been the way business is done,” Schember said. “Both sides accept it. Both sides see the value of it.”

The Allegheny County controller’s office recommended a decade ago that the county real estate team evaluate which nonprofits should have their tax-exempt status challenged. Royston said the idea never took off in the county administration and she was told there weren’t enough resources. 

Erie officials say they couldn’t easily do without the payments.

“I think it would create a pretty major problem if all of a sudden we lost that revenue,” Schember said, noting that it would hamper efforts to “rebuild Erie” after decades of population decline — an existential task that Pittsburgh is facing, too.

Charlie Wolfson is PublicSource’s local government reporter and a Report for America corps member. He can be reached at charlie@publicsource.org and on Twitter @chwolfson.

This story was fact-checked by Punya Bhasin.

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Charlie Wolfson is an enterprise reporter for PublicSource, focusing on local government accountability in Pittsburgh and Allegheny County. He is also a Report for America corps member. Charlie aims to...