As Pittsburgh and academic officials warily work toward a deal that might forestall a tuition tax on city college students, they're laboring in the shadow of a 5-year-old plan to have tax-exempt groups help fund government -- one that ultimately didn't pan out, leaving city officials with a budget problem and a once-bitten attitude.
In 2004, city officials, and some state leaders, thought they could count on $6 million a year in donations from the city's hospitals, universities and other tax-exempt institutions. In recognition of that, they abandoned plans to try to tax the payrolls of nonprofit entities.
But donations never reached the target amount, and an offer from a tax-exempt umbrella group this year amounted to less than $2 million annually. Now, as Mayor Luke Ravenstahl and university presidents wrestle with alternatives to a proposed 1 percent tuition tax, the idea of a $6 million annual commitment to the city has resurfaced in private talks and in a letter yesterday from three state senators.
"The  deal was that the nonprofits and the corporate community would make sure that they maintained $6 million a year [in donations to the city], in exchange for not getting [charged] the payroll preparation tax," said state Sen. Jim Ferlo, D-Highland Park, who yesterday issued a letter to local institutions asking them to make good on the pledge. "If that were forthcoming, I think this tuition thing could be resolved at this point."
"I have no knowledge of an agreement in 2004, but it's something we need to find out," said Carlow University President Mary Hines, who is chair of the Pittsburgh Council on Higher Education. Is a $6 million contribution from the city's tax-exempt groups a possibility? "I really have no idea if it's doable or not."
Instead, battle lines are drawn. City Council today is likely to postpone, for a week, its vote on the tuition tax.
In the General Assembly, state Rep. Paul Costa, D-Wilkins, has introduced legislation to quash the tax. On the other hand, Sen. Wayne Fontana, D-Brookline, has floated a proposal to let municipalities assess nonprofit institutions based on the square footage of their buildings, and he joined Mr. Ferlo and Sen. Jay Costa, D-Forest Hills, in calling for $6 million in voluntary payments.
Similarly, there were a lot of moving parts in late 2004, when the city that had just entered into state fiscal oversight and was trying to pass its first recovery plan while seeking new taxing power from the state. Then-Mayor Tom Murphy was shuttling between the offices of legislators and the city's big four tax-exempt institutions -- the University of Pittsburgh Medical Center, Pitt, Carnegie Mellon University and Allegheny General Hospital.
"I think we were after $15 million initially" from the tax-exempt institutions, Mr. Murphy, now a senior resident fellow with the Washington, D.C.-based Urban Land Institute, said in an interview yesterday. The city's "only hook," in his words, was a proposed payroll tax that could be applied to the tax-exempt institutions.
Mr. Murphy said that UPMC CEO Jeffrey Romoff, Pitt Chancellor Mark Nordenberg, CMU President Jared Cohon, and AGH leaders "agreed at some point that [$6 million a year in contributions] would be their goal, and they could get that."
Pitt and CMU representatives denied that their universities' leaders were part of such a commitment. A UPMC spokesman responded that UPMC has been the largest donor to the city. West Penn Allegheny Health Systems did not comment.
A state-backed recovery plan introduced to City Council in June 2004 counted on $6 million a year from tax-exempt institutions, from 2005 through 2009 and presumably beyond. The city then went to Harrisburg seeking authority for tax changes.
During complex talks, legislators, city officials and Gov. Ed Rendell's administration opted to tax business payrolls at 0.55 percent. Tax-exempt groups were excluded, some say, only because of the expectation of a $6 million-a-year donation.
"It was going to be $6 million from the nonprofit community going forward," said Jay Costa. "That commitment was very much tied into what happened regarding the payroll preparation tax."
He and Mr. Ferlo said that Greater Pittsburgh Chamber of Commerce President Barbara McNees and then-state Department of Community and Economic Development Secretary Dennis Yablonsky helped solidify the $6 million commitment.
Mr. Yablonsky is now CEO of the Allegheny Conference on Community Development, of which the Chamber of Commerce is an affiliate. The Allegheny Conference board includes Mr. Romoff, Mr. Nordenberg and Mr. Cohon, among other leaders of tax-exempt and business institutions. Mr. Yablonsky declined comment through a spokesman, and Ms. McNees did not return calls for comment.
State Rep. Dan Frankel, D-Squirrel Hill, said he didn't recall any "quid pro quo" linking the $6 million to exclusion from the payroll tax. "Extension of any kind of taxation to the nonprofits would have been a tough sell" in the House, he said.
After the payroll tax was approved, with tax-exempt institutions excluded, the city entered into a pact with the Pittsburgh Public Service Fund, representing more than 100 nonprofit organizations. That agreement resulted in an average of $4.67 million a year in payments covering 2005 through 2007 -- short of the $6 million target. The city also collected less than $1 million a year from other tax-exempt organizations under longstanding side-deals.
When Mr. Ravenstahl's administration talked with fund leaders in 2008 and 2009, they faced a tougher economy and a perception that the city's fortunes had improved. Complicating matters, some fund members, led by UPMC, committed to the Pittsburgh Promise program for college tuition aid to public school graduates.
Mr. Ravenstahl again aimed for $6 million a year. He said he had "one-on-one discussions, and individual commitments were made. ... It was difficult to get all of the people in the room and say, 'We need $6 million.' "
He said he offered to commit to putting the money toward the city's worsening pension fund shortfall. But the city only got pledges of $5.5 million over three years -- an average of $1.83 million a year.
Council hasn't acted on that offer. If it was accepted, and the city got all of the money pledged, then it would likely log around $24.5 million in contributions from tax-exempt institutions from 2005 through 2010. That's around $11.5 million shy of what it would have received if it got $6 million a year.
That gap between expectation and receipts was a factor in the tuition tax proposal. The other big factor is the need to find $15 million a year to bolster the pension fund.
Yesterday, influential Sen. Jane Orie, R-McCandless, swung behind the push to bar the tax. "If they are allowed under current law to adopt such an ill-conceived tuition tax on college students, who we are desperately trying to have stay in Pennsylvania after they finish school, we need to pre-empt their consideration," she wrote in an e-mail response to questions.
Mr. Ravenstahl countered that the "city's financial future is dependent on these discussions and the generation of $15 million."
"We believe that the entire nonprofit community has a role to play in doing more than they're doing right now."
Bill Schackner contributed to this report. Rich Lord can be reached at firstname.lastname@example.org or 412-263-1542.