Bethlehem asks colleges, hospital to pitch in $1 million

Contributions from nonprofits sought to trim $4.8 million shortfall in budget

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BETHLEHEM, Pa. -- When Mayor John Callahan talks about Bethlehem's success, he often points to Lehigh University's picturesque campus climbing South Mountain or Moravian College's new dorms rising from the historic district.

The investment in education, he has argued, is crucial to the city's cultural success.

But now, Mr. Callahan is calling on those institutions to help secure the city's financial security. Nonprofits make up 19 percent of the city's property but they pay no taxes on that real estate. Mr. Callahan, who is looking to close a $4.8 million budget hole next year, has asked three nonprofits -- Lehigh University, Moravian College and Lehigh Valley Hospital-Muhlenberg -- to collectively pay $1 million to help balance the city's budget.

The nonprofits have yet to respond to Mr. Callahan's request. But the 8.5 percent property tax increase in the mayor's proposed budget is contingent upon their contribution. Without it, Mr. Callahan said, he might have to increase taxes even more for the "senior citizen living in half a double."

"I think the number is justified. There is a very real basis and rationale in relation to other communities," Mr. Callahan said. "I can't say at this point we'll get there, but I think it's a fair number, and I can support it and make a case for it."

David Thompson of the National Council of Nonprofits in Washington, D.C., said the colleges and hospital may find Mr. Callahan's tactic a bit intimidating.

While cities shouldn't be afraid to ask for help, he said, nonprofits should determine for themselves whether or how much they can give and still meet the goals of their mission.

"The budget gap in the city is smaller because of nonprofits," Mr. Thompson said. "This is especially true of the [schools and hospitals] because they bring in revenue. If you don't have an ed or med, you're not much of a city. They bring jobs and all the income that goes along with those things."

It's an argument that has played out across the country for decades and has increased in momentum as cities struggle to balance budgets on property taxes. Legislative solutions -- like diverting the 18 percent Johnstown Flood Liquor Tax toward municipalities hosting nonprofits -- have failed to gain traction. Municipalities now appeal directly to the nonprofits.

From Boston to Erie, at least 218 localities in 28 states have received voluntary contributions from nonprofits since 2008, according to an October study by the Lincoln Land Institute, a Massachusetts think tank. The Northeast, which has a large concentration of private colleges, accounts for up to 80 percent of the voluntary contribution programs, with Massachusetts and Pennsylvania among the leaders.

Boston, credited as have among the oldest programs, received $19.4 million from 33 nonprofits, the most of any local government.

And Pennsylvania has two of the top 10 communities receiving the most money: Erie received $2.8 million in 2011 (it shares it with the county and school district) and Pittsburgh received $2.6 million.

Absent a formal push, Bethlehem received small contributions this year, including $12,066 from Lutheran Manor of the Lehigh Valley and $46,600 from the Bethlehem Housing Authority.

Places like Fountain Hill, which is home to St. Luke's Hospital, and Allentown, which hosts two colleges and several hospitals, have received in-kind services and contributions from nonprofits. But they have no formal programs.

In Allentown's case, it has not been for lack of trying.

"Despite solid efforts over several years, including a formal analysis and outreach strategy from the city's financial adviser, PFM, performed in 2007, the city has not been able to secure large cash contributions from our larger nonprofit institutions," Allentown spokesman Mike Moore said.

Voluntary payments were "kick-started" in Pennsylvania with a 1985 court case that set standards for tax-exempt status, opening the doors for municipalities to threaten litigation, said Adam Langley, a research analyst at Lincoln Land Institute.

In the case, the state Revenue Department successfully challenged the tax-exempt status of the Hospital Utilization Project, which collected and sold health care data. The court found it did not qualify for a tax exemption because it was not deemed a charity. The case was over sales tax, but it had property tax implications as well.

It established five standards nonprofits must meet, opening the door for municipalities to challenge whether an organization is truly a charity. At least 1,000 nonprofits had their status challenged by 1994, according to the Lincoln Institute.

Erie was among the challengers. In 1990, the city won a court fight against a hospital service provider but brokered a deal that allowed the provider to reorganize as a nonprofit in exchange for voluntary payments to the city, according to published reports.

Today, Erie, its school district and Erie County share contributions from 10 nonprofits.

While some localities have sued, others have tried to shame nonprofits into paying, Mr. Thompson said, noting Boston sent mock tax bills to nonprofits and published a list of those who didn't pay them.

But some nonprofits have pushed back as their budgets and list of donors have shrunk. If cities effectively tax organizations, their plans could backfire, said Jennifer Ross, a spokeswoman for the Pennsylvania Association of Nonprofits.

"If the organization didn't exist, the local government would have to collect more money to cover the service," she said. "If there is a shelter keeping homeless off the street and now they have to pay taxes, there will be more people on the street."

If Mr. Callahan is successful, his proposal would account for only 1.4 percent of a $72.1 million budget.

Lancaster, which hosts Franklin & Marshall College and Lancaster General Hospital, collects 3.6 percent of its $49 million budget from voluntary contributions. It sends nonprofits mock tax bills and asks them to pay 33 percent of the bill. In 2011, that amounted to nearly $1.78 million.

"It's mostly geared toward larger organizations that really draw on municipal services: colleges," said Patrick Hopkins, Lancaster's business administrator. "There are responses to dorm fires -- burning popcorn in the microwave -- loud party issues that sometimes happen in college towns. Hospitals, although perhaps not as high of an impact, still require services."

According to the Lincoln study, $77.8 million of the $84.1 million nonprofits contributed to local governments came from colleges and hospitals. Across the country, 70 institutions of higher education and 63 hospitals make the payments.

In Bethlehem, Mr. Callahan is targeting only colleges and the hospital. He declined to break down exactly how much he is asking from each, saying he did not want to negotiate through the media.

But, he said, responding to fire alarms alone at those places cost the city $461,820 last year.

The city spent $283,800 responding to 220 fire calls in 2011 at Lehigh alone. There were 213 student arrests that year and 593 incident reports, costing an estimated $54,077 in personnel, according to the city.

Mr. Callahan applauded Lehigh for bringing in $432,857 in local services and earned income taxes. Lehigh also introduced the Gold Card, which students can use on campus and in the community, which brought $1.2 million to the local economy.

But he also estimated that if Lehigh, which is the city's largest landowner with 675 acres, were to pay property taxes, they would equate to $1,054,250. The college does pay $57,083 for one taxable parcel, its Campus Square.

If Lehigh aspires to be like Princeton, Yale or Franklin & Marshall, Mr. Callahan said, it has a lot of work to do in the community because those institutions contribute to their local governments.

Lehigh declined to say if it is considering Mr. Callahan's proposal.

"Lehigh contributes financial resources, as well as the energies and expertise of our faculty, staff and students," said spokeswoman Jordan Reese. "We will continue to work with the city on initiatives that take advantage of Lehigh's strengths to make Bethlehem a better place to live and work."

Moravian College spokesman Michael Wilson said officials there are discussing the matter and noted the college has worked on projects with the city in the past.

In a statement, Lehigh Valley Hospital spokesman Brian Downs said, "We have been engaged in ongoing dialogue with the mayor's office to see if there are other opportunities to further our mission of caring for the community by expanding our partnership with the Health Bureau through in-kind services."

City council is poised Wednesday to vote on a resolution supporting the concept of a $1 million voluntary contribution. But many are leery of passing the budget ordinance with that revenue included before the institutions have agreed to it.

Council is scheduled to vote on the budget Dec. 20.

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