Q&A: PILOTs and SILOTs— What Is Drexel’s Responsibility?
Over the years, some in Philadelphia and elsewhere have called for nonprofit institutions like Drexel and other universities to make voluntary Payments in Lieu of Taxes (PILOTs).
These types of programs seek an annual payment from local nonprofit organizations to their municipality, calculated as a percentage of what the organization would pay in property taxes if it were not legally exempted because of their nonprofit mission.
In fact, Drexel, like many Philadelphia nonprofits, provides valuable programs and services in lieu of taxes, sometimes called SILOTs, to the City of Philadelphia and its schools. It’s also important to note that in addition to supporting a range of community programs, the University does make tax payments on its non-exempt real estate holdings. Each year, the University invests millions into educational services and facilities and research and civic engagement activities that benefit the city and its residents, its school district and the local economy. Drexel has become a major economic engine for Philadelphia.
DrexelNow asked Drexel’s Senior Vice President of Government and Community Relations Brian Keech to explain the University’s position on PILOTs and SILOTs and to clear up some common misconceptions about the PILOTs program.
Q: What are PILOTs vs. SILOTs?
A: Like other nonprofits, Drexel has been granted tax-exempt status by the Internal Revenue Service (IRS) because it furthers a valued social mission in higher education and provides a public benefit. There is a long-standing social contract between nonprofits and the government that tax-exempt nonprofits provide benefits and services that the government would otherwise be expected to deliver. That’s a commitment Drexel has enthusiastically embraced.
In some cities that don’t collect property taxes from nonprofits, including Philadelphia, nonprofit institutions like hospitals and universities, cultural institutions and religious organizations can participate voluntarily in PILOTs and pay some percent of what a for-profit company would have owed in property taxes.
But to talk about payments in lieu of taxes, or PILOTs, I think you have to also talk about services in lieu of taxes, or “SILOTS.” They should really be considered together. Fact is, Drexel provides the City of Philadelphia with millions of dollars’ worth of SILOTs — much more than we would ever be asked to pay in real estate taxes or PILOTs, which I estimate would be about $3 to $6 million. We do that because it is part and parcel to our mission and it also happens to exceed what the law requires of nonprofits to relieve government of some of its burden. We see these services as part of our mission of education, research and civic engagement. We also believe it is the right thing to do for our students’ educational experiences both on and off campus in Philadelphia. So it’s really a win-win that’s good for the broader community, as well as our students, faculty, and professional staff.
Q: What is Drexel’s financial contribution to the city? How does that differ from what the University would have to pay via PILOTs?
A: We currently invest between $25 to $50 million per year in programs and services that benefit the city, depending on the year. In fact, we often partner with the City of Philadelphia on these projects, and work closely with both elected officials and community members to accomplish mutually beneficial goals. The new Powel/SLA-MS school and the dredging of the Schuylkill River are two good examples of our joint efforts.
The Powel/SLA-MS school is not a project we could do every year, but we recently raised close to $42 million for it over several years. About 25% of that came from public sources: the School District of Philadelphia put in $7 million and, thanks to our State Senator Vincent Hughes, Governor Tom Wolf and Mayor Jim Kenney, the Commonwealth of Pennsylvania put in $3 million. Drexel raised the rest from private donors. We chose to invest our time and energy in spearheading this project to benefit the local community together with Drexel’s School of Education because it allowed us to leverage our faculty’s expertise, improve opportunities for our students learning to become teachers, conduct joint research projects with the School District and drive better educational outcomes for Philadelphia’s children.
If we had to pay the City directly, we would inevitably need to pull those funds from another area of the university budget. At Drexel, we have only one main source of revenue, tuition. So, adding PILOTS to the budget would force us to make tough choices to cut services somewhere else. It could be services we provide to the community, it could be academic programs. That approach does not benefit the community in Philadelphia, nor would it foster a good working relationship with the City, which we have cultivated over a long period of time.
Q: What are examples of services Drexel provides to the community?
A: These are services provided and paid for by Drexel that relieve city, state and federal government of some of the burden of providing those services. Through our institutional infrastructure and support, our faculty, students and staff play a key role in these types of services. So the results benefit not just our faculty members in terms of teaching and research and our students who get the training, but also the broader community beyond campus.
For example, Drexel contributes about $2 million annually to community organizations that provide safety, streetscaping, business development, neighborhood cleanup and other services. Some of these include the University City District (UCD), The Enterprise Center (TEC) and the Schuylkill River Development Corporation (SRDC). We, and other local universities, paid hundreds of thousands of dollars last year to help dredge the Schuylkill River. That does benefit us because we have a rowing team, but it also benefits the City in supporting jobs and through taxes paid at Philadelphia’s hotels and restaurants that accommodate people who come to watch the races.
Drexel has also invested almost $90 million over the past decade in the Liberty Scholars program, which helps low-income Philadelphia students attend Drexel for free. In a typical academic year, Drexel invests nearly $13 million in full scholarships to support some 250 students from lower income Philadelphia families. That's in addition to need-based financial aid received by many other low and moderate-income families in our city and region.
Drexel also provides much-needed tutoring and other services to Philadelphia students at local public schools, which is one way we invest in building a more diverse pipeline of future college-ready students.
We support more than a million dollars a year in uncompensated health care through The Stephen and Sandra Sheller 11th Street Family Health Services Center. The clinic, staffed by our physicians and other health care professionals, provides primary care, behavioral health, dental, physical therapy and other vital health-related services to low-income, uninsured or underinsured Philadelphia residents.
There’s also the Dornsife Center for Neighborhood Partnerships, which is Drexel’s community center for West Philadelphia residents and partners. It was established in 2012 with a gift of $10 million from David and Dana Dornsife ’83. The University both invests directly in staff and programming for the benefit of the community and has attracted private investment in these programs, which comes out to about $1 million annually.
Q: What about services for Philadelphia public schools?
As I mentioned, Drexel raised close to $42 million for a new K-8 school building on the former University High School site in University City to house students from Samuel Powel Elementary and the Science Leadership Academy Middle School, or Powel/SLA-MS for short. The modern building will open in 2021. Both schools will continue to be owned and operated by the School District of Philadelphia. We’re excited about this because of both the benefits to the children who will be learning in a new, state-of-the-art school, and the opportunities it presents for our faculty and students in the School of Education. The collective investment that we will make with that school in the years to come is immeasurable.
There’s also a $30 million Department of Education Promise Neighborhood grant Drexel obtained in collaboration with the City of Philadelphia and the School District of Philadelphia in 2016 — $6 million per year, for five years — to support seven neighborhood schools in the Promise Zone. Drexel has also raised $8 million for the West Philadelphia Action for Early Learning (AFEL) Initiative, which is a collaboration Drexel has with other educational and social services agencies and community stakeholders to support early childhood education for students and their families in the 19104 ZIP code.
Occasionally, our faculty members secure grants that directly benefit the city. In 2014, Drexel received a $1.45 million grant to create a program called DragonsTeach for faculty to teach Drexel science, technology, engineering and mathematics (STEM) majors how to teach STEM; in 2017, the School of Education received a $1.2 million grant from the Philadelphia School Partnership to expand the program with DragonsTeach Middle Years, for Drexel STEM majors learning to teach STEM to middle school students. That’s an example of what we can bring to the table: our expertise, money and outside resources that we’re able to attract and then partner with the school district.
Q: What is Drexel’s position on making Payments in Lieu of Taxes ?
A: We understand why PILOTs may sound appealing to some, but believe that's based on both a misunderstanding of the role of nonprofit institutions in our civic life, and also a lack of information about just how many millions of dollars Drexel is already investing in Philadelphia and its public schools each year. The fact is, as a nonprofit, the University must, and does, relieve the government of some of its burden and provide our community with benefits and resources that would otherwise fall to taxpayers. In addition, all non-profits including Drexel, are prohibited from engaging in campaign related activity at any level (federal, state or local elections). Drexel adheres to these federal regulations to maintain its non-exempt tax status and even has a policy outlining these prohibitions in the code of conduct.
Drexel provides a wide range of financial support to community organizations in our neighborhoods and valuable services in lieu of taxes, because it is at the core of our mission. Education, research and civic engagement fit together in ways that benefit both campus and community. Service to our students’ educational experiences, service to society in research and development of new technologies and medicines that improve and save lives, and service directly to our city and community in all the ways we’ve been discussing. That’s something we’re proud of and it adds up to much more than we would end up paying in PILOTs: four to five times more in any given year.
Q: How is Philadelphia different from other cities, like Boston, that have asked nonprofits for PILOTs and SILOTs?
A: Like apples and oranges, you can’t really compare the two cities. Boston collects almost all of its taxes from property taxes: more than 90 percent. In Philadelphia, a relatively small proportion of the city’s tax revenues — less than one-fifth — are derived from property taxes. In fact, the single biggest portion of the city’s tax revenues — over half — comes from the city wage tax. By that measure, universities and hospitals are already among the city’s largest generators of tax payments. In Boston, there is no wage tax. As a result, nonprofits and their employees there contribute very little in taxes to the city government. Philadelphia has a much more complex tax structure, and it’s already one of the highest taxed cities in the country.
Q: How much does Drexel contribute to Philadelphia’s wage tax?
A: Our employees pay more in wage taxes than the real estate tax would actually cost the institution — about $17.5 million per year. With somewhere between 6,000 full-time employees and 8,000 or 9,000 altogether, including part-time student workers, we generate a significant amount of taxes to the City. Those numbers also don’t include employees of Tower Health at St. Christopher’s Hospital for Children, which Drexel owns jointly with Tower.
Over the last 25 years, Drexel has grown to become an economic engine for the City, contributing significantly more in wage taxes, attracting research funding and supporting important community organizations like University City District, the Enterprise Center and the Schuylkill River Development Corporation. In 2002 we stabilized MCP Hahnemann University from bankruptcy, saving thousands of jobs when we brought the medical school, the nursing school, the school of health professions and a school of public health to Drexel while making us a key part of Philadelphia’s thriving health care sector. Less than a decade ago, we also merged with the Academy of Natural Sciences, the oldest natural history museum in America, to not only benefit our own teaching and research mission, but also a valuable civic institution for lifelong learners. And finally, this past December we partnered with Tower Health to purchase St. Christopher’s Hospital for Children out of bankruptcy. All of that saved thousands of jobs, attracted additional investment, created new research opportunities with funding from outside Philadelphia and, of course, not only kept those wage taxes flowing, but significantly increased them as well. We also created a law school from scratch, strengthened recently by a very generous $50 million gift which allowed us to restore a beautiful, historic Center City building for the Kline School of Law that had been vacant for years.
Those are massive civic investments that benefit Drexel’s educational and research mission, but they also greatly benefit Philadelphia by savings jobs, generating wage taxes and providing services such as health care and cultural programming. That’s on top of those other services that I talked about earlier.
Q: In Philadelphia, is there currently a PILOTs program in place?
A: There is, but it’s related to the Keystone Opportunity Zones. A Keystone Opportunity Zone (KOZ) is a tax-free zone; to encourage development on those sites, organizations get tax breaks from the “use and occupancy” tax, for example. Employees who works in those zones still have to pay city wage taxes, and companies and other organizations located there also have to pay the “school income tax” at 110 percent of its value. In order to get the Keystone Opportunity Zone designation, you have to sign a PILOTs agreement with the City of Philadelphia. We currently have about $200,000 dollars’ worth of PILOTs agreements on the KOZ sites that we and/or our third-party development partners leasing those sites pay to Philadelphia every year. So PILOTs do exist, and Drexel does pay them, just not in the way people are thinking about.
Q: What are some things you’ve seen in the public conversations about PILOTs and SILOTs that are misconceptions? Is there anything you’d want people to know?
A: I think it’s important to point out that Drexel doesn’t generate a profit. We don’t have investors trading a stock on Wall Street. We don’t send out dividends. Our limited resources only go to support our educational mission — which means primarily our people: students, faculty and professional staff, as well as our campus facilities and our wider community.
Some have called for elected officials to write legislation to make PILOTs mandatory, but state and local governments can’t do that because federal tax regulations prevent them from overriding existing laws. That change would have to come at the federal level by Congress. This type of change would also have an impact all non-profits, not just large non-profit colleges, universities and hospital systems, but religious congregations as well as cultural institutions. Nationwide, the effect would be enormous and seriously undermine philanthropy that supports these services.