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The Theory of PILOTs and Their Relevance in Public Administration

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Peter Melan
May 13, 2019

Local municipalities rely on a variety of taxpayers to maintain revenue. Non-profit organizations such as churches or educational institutions do not contribute any property tax revenue, but still utilize public services. This makes budgeting increasingly difficult. A payment in lieu of taxes, or a PILOT, has been a useful tool for municipalities to offset the rising costs of services and maintain their budgets.

A PILOT is beneficial in a situation where a non-profit organization is located in the municipality and is financially capable of making these payments to the governing body. A situation where a PILOT would not be favorable is in a case where the county government or state government is located in the local municipality. A city such as Harrisburg, Pennsylvania serves as both the county seat and state capitol for the Commonwealth and receives no PILOT, yet people who work and visit the city utilize public services daily.

The difficulty arises when a percentage of these entities are unable to make any financial contribution; however, they may offer other non-financial assistance to the citizens of the municipality. Public finance administrators should be cognizant of possible ways to request tax revenue from non-profit organizations and realize that the potential is present for anyone to withdraw their PILOT, absent a covenant or other type of binding agreement that ensures continuous payment.

In terms of PILOTs and how a municipality engages in a conversation with a hospital or college, one could ascertain that this is not considered rational and potentially creates a level of risk that the decision-makers may not fully embrace. The thought of receiving an annual payment is attractive to administrators and equally concerning to assume that this amount of money is perpetual. An agreement in place guarantees the revenue and protects the municipality in case of a breach or failure to pay. A PILOT is also not a guarantee that the non-profit entity will accept the terms and continue using municipal services with no requirement to participate. This refusal to cooperate only binds the municipality in its efforts to deal with rising costs of services and wages.

Another situation could be the case of significant casino host fees paid to a municipality that are necessary to maintain public safety and the infrastructure. Municipalities that relied on the host fees to be paid annually, which decision makers knew and were cognizant of, suddenly could face deficits. The deficit scenario came to fruition in the case of a single casino filing a legal action in Pennsylvania challenging host fees and its constitutionality. The immediate result was a lack of clarity and inability to properly budget, therefore creating a problem for decision makers.

A qualified administrator will also add to the capacity of the rationale behind the decision to implement a PILOT. It is unknown if politics will play any significant role in the ultimate decision. However it would not be uncommon for a respected and popular elected official to embark on a public relations tour of those non-profit organizations that may be a target for the PILOT. When decisions arise that require further analysis and intricate knowledge of financing, a qualified administrator is the authority in convincing decision-makers to take the best course of action.

Most municipalities are fortunate to employ professionals to run the organization. However in cases of smaller municipalities where leadership consists of an elected board with some form of clerical support, it is concerning that bounded rationality may not be considered. The result is an incremental approach. In the case of a PILOT, that may not be the most ideal theory and may not be implemented correctly or considered given the lack of expertise of innovative fiscal decisions that are beneficial to the municipality. The void of not employing a manager is tantamount to having politics factor into the decisions, which brings its own set of conflict and further complicates the matter.

When it comes to administrators who understand the concept of a PILOT, informed decisions can be made that benefit the organization. Using the concept of bounded rationality, its significance is lessened with a secured PILOT so that the decision-makers are not hastened to decide with little information, as in the case of previously allocated funds from casino host fees. In theory, elected officials use bounded rationality in their capacity as the legislative body and rely on information from the administration in order to make the correct decision. The political leaders rely on this information to be accurate. Any unreliability in the information places the legislative body in a precarious position as to whether or not embrace the PILOT as presented with the supporting information. The bounded rationality is proven only by fault of the administration, causing the PILOT and the agency that made the original promise to be in jeopardy.

Author: Peter Melan is an at-large councilperson in the City of Easton, PA and the chair of public safety. He is in his first year of graduate studies in Public Administration at Ohio University. Peter is known for his creativity in solving problems using non-traditional methods, and for his experience in project management and data analytics.

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