How Providence Solved Its Town & Gown Tensions by Asking Its Universities to Pay Up

Nearly 40 percent of Providence’s land is occupied by nonprofits that do not pay taxes. That worked fine until the city needed cash.

The Rhode Island School of Design's library is housed in the old Rhode Island Hospital Trust bank building in downtown Providence. It's just one of the ways in which local not-for-profits are reclaiming older buildings and parcels of land throughout the city.
National Journal
Emily Badger
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Emily Badger
Dec. 18, 2013, 6:41 a.m.

This art­icle is part of a weeklong Amer­ica 360 series on Provid­ence.

PROVID­ENCE, R.I. — The old Rhode Is­land Hos­pit­al Trust bank was built down­town nearly a cen­tury ago to pro­ject per­man­ence, with its 12 stor­ies framed in steel and covered in lime­stone. The bank even etched its name over the West­min­ster Street en­trance years ago as if to an­nounce that the build­ing would nev­er serve any oth­er pur­pose.

We know now that banks go out of busi­ness. So what does a city do with a 1917 York & Saw­yer monu­ment to com­merce? Today, the build­ing houses the lib­rary of the Rhode Is­land School of Design, a na­tion­ally renowned art school. The vaults, too, have been re­pur­posed, as cli­mate-con­trolled stor­age for the school’s 35-mil­li­meter film.

Prop­er­ties like this are every­where: grand bank­ing halls without the banks, or­nate de­part­ment stores that no longer sell a thing. The city’s primary growth in­dustry now — high­er edu­ca­tion — has moved in.

That’s been a pos­it­ive story for a strug­gling down­town. But it comes at a cost. Uni­versit­ies, along­side hos­pit­als — the coveted “eds and meds” at the cen­ter of many eco­nom­ic re­vital­iz­a­tion plans — typ­ic­ally don’t pay prop­erty taxes as non­profit or­gan­iz­a­tions. That means cit­ies like Provid­ence are lean­ing on an in­dustry whose growth, by defin­i­tion, slowly chips away at the loc­al tax base.

Last year, about $6.4 bil­lion in real es­tate, or nearly 40 per­cent of the total prop­erty value in Provid­ence, was tax-ex­empt by the city’s count. That in­cludes not just the four ma­jor schools, but also hos­pit­als, churches, cul­tur­al in­sti­tu­tions, and gov­ern­ment build­ings. (Provid­ence hap­pens to be both a col­lege hub and a state cap­it­al.) High­er edu­ca­tion ac­counts for just 8 per­cent of the city’s total prop­erty, but its pres­ence looms large.

When the city con­fron­ted a fisc­al crisis in 2011, RISD, Brown Uni­versity, John­son & Wales, and Provid­ence Col­lege looked like the most deep-pock­eted in­sti­tu­tions in town. The city was fa­cing a $110 mil­lion budget de­fi­cit. And, in a bean-counter’s fantasy, it es­tim­ated that those four schools, with the three ma­jor hos­pit­als in town, would have paid more than $111 mil­lion in an­nu­al tax rev­en­ue to the city, were it not for their non­profit status.

The city and schools ul­ti­mately re­con­ciled those two num­bers through painstak­ing ne­go­ti­ations that tried to bal­ance the city’s dire fin­ances against the very mean­ing of “non­profit.” In­creas­ingly, though, the two sides are at odds in oth­er New Eng­land col­lege towns sus­tained by prop­erty taxes, and now in places bey­ond the re­gion. Provid­ence’s solu­tion il­lus­trates a dra­mat­ic, tem­por­ary stop­gap, but it still raises ques­tions about the long-term blue­print for how a com­munity, built around non­profits, can fund its ser­vices and serve its in­sti­tu­tions at the same time.

“How do we ad­dress this so it’s not an ad-hoc ap­proach every dec­ade?” asks Mar­isa Quinn, Brown’s vice pres­id­ent for Pub­lic Af­fairs and Uni­versity Re­la­tions. The an­swer here, or any­where, is not en­tirely clear.

This de­bate first flared up in Provid­ence in 2003, when the city was fa­cing an earli­er de­fi­cit of $60 mil­lion. Then-May­or Dav­id Ci­cil­line, now a U.S. rep­res­ent­at­ive for the state, ne­go­ti­ated an agree­ment with the four schools to con­trib­ute $48 mil­lion over time to the city, partly in re­cog­ni­tion that their ex­pand­ing cam­puses were tak­ing prop­erty off the tax rolls. That deal was sup­posed to last for two dec­ades.

Then in 2011, newly elec­ted May­or An­gel Taver­as went back to the in­sti­tu­tions to ask for more. He be­lieved the city might be fa­cing bank­ruptcy. “We needed shared sac­ri­fice,’” Taver­as says. “Every­one needed to be part of this.”

In the years since 2003, however, the uni­versit­ies’ fin­ances had be­gun to erode along­side the city’s. Brown lost a third of its en­dow­ment when the stock mar­ket col­lapsed in 2008. It still hasn’t fully re­covered, Quinn says. Two of the uni­versity’s four schools cut their staffs.

“Post-2008 was a dif­fer­ent world, a dif­fer­ent real­ity,” says Dan Egan, pres­id­ent of the As­so­ci­ation of In­de­pend­ent Col­leges and Uni­versit­ies in Rhode Is­land. “You had stu­dents at our in­sti­tu­tions whose par­ents were writ­ing checks in Septem­ber for a full ride, and then after 2008, after the Wall Street col­lapse, they were in line for fin­an­cial aid now — some­times in very large num­bers.”

If any­thing, it looked as if the uni­versit­ies had made tough de­cisions dur­ing the re­ces­sion. The city had not. Now, uni­versity of­fi­cials were be­ing asked to pay for the city’s mis­takes — again.

“One of the ar­gu­ments we heard was that our pres­id­ents were now the gi­ants of in­dustry,” Egan says. And with that shift in many com­munit­ies, crit­ics have ques­tioned wheth­er high­er edu­ca­tion should re­tain its non­profit status at all.

At the same time, the fed­er­al gov­ern­ment has been pres­sur­ing col­leges and uni­versit­ies to lower tu­ition, or at least slow its rise. That mes­sage sits in dir­ect con­flict with the pleas of loc­al of­fi­cials to pay out (and pass the cost onto stu­dents).

In Provid­ence, the four schools were adam­antly against re­open­ing their 2003 agree­ment. They also in­sisted that they would not come to the table this time without the rest of the city’s not-for-profits com­ing, too. They wanted Taver­as to bring in the hos­pit­als. They wanted the Rhode Is­land Le­gis­lature to in­crease state con­tri­bu­tions to mu­ni­cip­al­it­ies that are full of non­profits. They wanted to see the city ne­go­ti­ate con­ces­sions with uni­ons and re­tir­ees.

In real­ity, though, these schools could no more bear a bank­ruptcy than Taver­as could. “I said, ‘Look, philo­soph­ic­ally, I don’t want to be a pres­id­ent of a suc­cess­ful in­sti­tu­tion in a fail­ing city,’” says John Bowen, the chan­cel­lor at John­son & Wales. “It just doesn’t make any sense.”

In ne­go­ti­at­ing with the city, Bowen settled on a strategy that the oth­er schools even­tu­ally ad­op­ted: The deals had to be trans­ac­tion­al. The schools wer­en’t giv­ing away money un­less they re­ceived something in re­turn. Only an agree­ment like that could help them ar­gue that they were keep­ing their non­profit status in­tact.

Ul­ti­mately, on top of the 2003 agree­ment, John­son & Wales agreed to what could amount to $11.5 mil­lion in new pay­ments over 10 years. In ex­change, it was able to ac­quire a new par­cel of land and three stretches of road­way that had tech­nic­ally been city-owned prop­erty. RISD agreed to pay an ad­di­tion­al $2.75 mil­lion to the city; Provid­ence Col­lege, $3.84 mil­lion; and Brown, $31.5 mil­lion, all over about a dec­ade.

Each of them ne­go­ti­ated their own good­ies, such as leases on new park­ing spots or the ac­quis­i­tion of a few blocks of pub­lic streets. Between the 2003 and 2012 agree­ments, Brown will be giv­ing the city about 10 per­cent of what it spends in aid on its own stu­dents every year.

The city, in turn, will not get the full $111 mil­lion it would have if the uni­versit­ies and hos­pit­als were any oth­er kind of prop­erty-hold­er. But Taver­as got to claim an ad­di­tion­al $48 mil­lion in rev­en­ue from the sev­en big tax-ex­empt non­profits over 11 years. He also got to say that all of these pay­ments were “vol­un­tary,” an awk­ward hall­mark of “pay­ment in lieu of taxes” deals in any city.

“They are, tech­nic­ally vol­un­tary,” says Adam Langley, a re­search ana­lyst at the Lin­coln In­sti­tute of Land Policy, who has stud­ied these types of agree­ments. “Cer­tainly, there is more co­er­cion in some places than oth­ers.”

Earli­er this year, the city of Pitt­s­burgh sued the Uni­versity of Pitt­s­burgh Med­ic­al Cen­ter try­ing to strip its non­profit status. The hos­pit­al net­work had be­come the state’s largest em­ploy­er and richest non­profit in town. It no longer made sense, May­or Luke Raven­s­tahl ar­gued, for the city to sub­sid­ize it. Bo­ston, on the oth­er hand, runs a less con­ten­tious pay­ment pro­gram that it stresses is vol­un­tary. The city is very pub­lic, though, about mak­ing clear who vo­lun­teers.

It’s hard to ig­nore the dy­nam­ic that all of these cit­ies can ask for con­ces­sions from uni­versit­ies that they’d nev­er ask of busi­nesses, in no small part be­cause uni­versit­ies can’t pick up and leave. Bowen alone had lever­age. John­son & Wales now has cam­puses in four cit­ies across the coun­try. In the midst of all this, of­fi­cials from the city of Char­lotte sent Bowen a let­ter try­ing to en­tice him to re­lo­cate his headquar­ters to a place without Provid­ence’s fin­an­cial prob­lems.

John­son & Wales will stay in Provid­ence, for now. But that of­fer un­der­scores one of the reas­ons these ad-hoc loc­al deals are ul­ti­mately un­sus­tain­able, both for the host cit­ies and for the schools that agree to them. When these agree­ments ex­pire, Provid­ence will likely still have an eco­nomy built on non­profits. And in the mean­time, John­son & Wales now has a new prob­lem.

“Be­fore I even go ahead and en­roll one stu­dent, I’m $7 mil­lion in the hole,” Bowen says, con­sid­er­ing his own com­pet­it­ors in oth­er cit­ies. “That’s a cost that they do not have.”

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