As local governments continue to search for additional sources of revenue in times of fiscal uncertainty, a little known but long-standing mechanism is getting renewed attention.  The concept of payments in lieu of taxes, sometimes called PILOT, or payments to taxing districts for services, is gaining favor.  Last week the Wall Street Journal highlighted the resolution of a long-running negotiation between the City of Providence, Rhode Island and Brown University, as they reached a compromise on what payments the University should be making to the City even though the University’s vast real estate holdings are largely exempt from taxation by a colonial charter dating to 1764.

According to the City of Providence, Brown University owns buildings and land with a market value in excess of $1.0 billion.  However, the vast majority of those holdings are exempt from taxes.  Currently, Brown pays the City approximately $4.0 million per year including $2.5 million in voluntary payments.

The City has been experiencing unprecedented financial problems including a high unemployment rate and significantly underfunded pension plans.  Providence’s mayor has embarked on a program to increase payments in lieu of taxes from the City’s universities and health care industry.  Under the settlement with Brown, the University will pay an additional $31.5 million over the next ten years to the City.  Providence has reached similar arrangements with other universities and healthcare organizations in the City.

Section 15-30 of the Illinois Property Tax Code allows for similar voluntary agreements between taxing districts and the owner of an exempt property “for the direct and indirect costs of services provided by the district.”  In Illinois, these agreements can run for up to five years and are renewable in five year installments.

With property values at lower levels than in prior years, erratic State financial support, and taxpayers seeking assessment and tax relief wherever available, local government will continue to search for ways to provide services.  Payments in lieu of taxes are one option that will be getting additional attention in the current funding environment.