Tax Exempt Property

(from Maine Townsman, February 1991)
by Jo Josephson, Assistant Editor

The Rockland City Council recently sent out letters to the 41 tax exempt organizations in the city. Noting that the city was limited by law in taxing them for municipal services, the city councilors asked for a formula-derived "voluntary payment in lieu of taxes." There have been no takers yet.

Bangor is currently studying a proposal to establish a "fire utility" and charge a "fire fee" to all its property owners be they taxable or tax exempt. At this point, city officials say they have a lot of unanswered questions and admit it is questionable as to whether it could be done under current state law.

Bath officials recently sent out a $1,594 tax bill to a tax exempt housing development corporation for undeveloped property the corporation owns, saying the land is not currently being used for tax exempt purposes. The corporation sued the town, saying it was their "intent" to build affordable housing on the land, but before the case went to court dropped the suit.

Desperate measures? A grasping at straws? "it's symptomatic of the current property tax crisis," says Jeff Sosnaud, who chairs Bangor's year-old Tax Exempt Property Steering Committee.

With no where else to turn to for additional revenues, save an increase in the property tax rate, municipalities like Bangor, with a high percentage of tax exempt properties on their books (Bangor's is about 40 percent), are looking at ways to negotiate payments in lieu of taxes from them.

Saying that while they do not make money, tax exempt properties and institutions do make use of such municipal services as police, fire and snow removal and therefore should pay for them.

As the property tax crisis grows, municipalities are looking into every corner for revenues, the tax exempt properties being one, so it is not surprising that their investigations are being monitored and commented on by the daily press.

The Bangor Daily News is closely covering the progress of Bangor's fire fee proposal; an article in the Maine Times (2/1/91) has proposed that "Municipalities should require 'contributions' from churches, colleges, schools and military bases and other property owners now exempt from local property taxes."

And, in an editorial entitled "Service fees for the free riders," the Portland Press Herald (2/6/91) urged legislators to let municipalities impose service fees on property tax exempt institutions, saying "There's nothing wrong in requiring tax exempt organizations to pay their fair share of basic street, garbage, are and police costs. But convincing lawmakers of that won't be easy".

This article looks briefly at the law governing tax exempt properties and the current efforts by a few of Maine's municipalities to work within as well as around the law.

Maine Law

Property owned by the federal government, by state government, by county and municipal governments . . . Property owned by charitable and benevolent institutions and literary and scientific institutions. . . Property owned by veterans organizations, by religious organizations, by hospitals, health maintenance organizations and others. . .

While the above organizations may be exempt from federal income taxes, they are not by virtue of their federal exemption automatically exempt from local property taxes, says MMA's Senior Staff Attorney Richard Flewelling. It depends on how the property is being used, he says.

For example, a church may own a sanctuary, a parsonage, undeveloped land, and an elderly housing complex. Not all of the property is tax exempt under Maine law.

Under 36 MRSA 652 only the sanctuary is fully tax exempt. The parsonage is exempt only up to the value of $20,000. The elderly housing complex can be charged a service fee in lieu of taxes. And there must be a definite intention by the church to use the undeveloped land for tax exempt purposes in the immediate future otherwise it will be taxed for the land.

(For a guide to the law, see MMA's Assessors Manual, Chapter 9, "Exemptions").

Allowable Taxing and Fees

Taxing Parsonages. While the law states that parsonages (the principal residence provided by a religious society for its clergyman) are exempt to the value of $20,000, case law makes it clear that those communities which grant total tax exemption (beyond the $20,000 cap) either through ignorance of the law or as a gesture of good-will are acting illegally, says Flewelling.

According to the Maine Constitution, only the legislature has the power to tax and grant tax exemption, he reminds us.

It is not known how many communities do not tax their parsonages. But if the experience of the Central Maine municipality of Pittsfield is in any way representative there must be a goodly number.

Following its first professional revaluation since its founding in 1819, last summer the town of Pittsfield sent out its first tax bills to the nine churches in the community that owned parsonages valued at more than $20,000.

As the town manager described it, "it was an effort to comply with state law and equalize the tax base."

As a result the town added about $4,000 more to the town's coffers, including $1,271 from the Catholic Church which owned land and buildings valued at $88,700.

Church leaders interviewed by the local paper were reported to have agreed that the $20,000 exemption mark was too low and that it should be updated.

The town's assessor was reported as saying a measure introduced into the legislature in the mid-80's to raise the cap had failed because of a lack of funding.

The "lack of funding" probably refers to a 1978 amendment to the Maine Constitution which states that the Legislature must reimburse each municipality up to 50 percent of the property tax revenue lost because of statutory property tax exemptions or credits enacted after April 1, 1978."

Charging Fees in Lieu of Taxes. The law makes it clear that residential property that is used to provide rental income can be charged for the following services: fire and police protection; road maintenance and construction, traffic control, and snow and ice removal; water and sewer service; sanitation services; and any other services other than education and welfare.

According to the law, the establishment of the charges is not mandatory, but is rather at the discretion of the municipality in which the exempt property is located.

The statute also notes that the charges must be calculated "according to the actual cost of providing municipal services to that real property and to the persons who use that property."

Rockland City Manager Cathy Smith-Sleeper reports that two elderly housing projects and one "transitional' duplex owned by tax exempt organizations (two churches and the local poverty agency) pay such a service charge to the city.

The Catholic Church, which owns one of the elderly housing projects, pays a service fee of $17,687. The local poverty agency which runs a "transitional" duplex pays $719.

Their fees are derived from a formula drawn from the statute: the total mil rate less the cost of education and welfare, times the assessed value. In Rockland, the overall mil rate of $21.50 per $1,000, reduced by the cost of education and welfare comes to $11.60 per $1,000.

Taxing "Undeveloped" Land on Its "Actual" vs. "Intended" Use. When it comes to whether so-called undeveloped real estate owned by a tax exempt organization is taxable, a look at the case law that has developed over the years indicates that if there is a "definite intention" to use the land for tax exempt purposes in the immediate future, and it has no other actual use, then it is considered tax exempt; if there is no definite intention then it is taxable, says MMA's Flewelling.

Such intention, however, must be "objective", not "subjective"; the intention "must be demonstrable" in words and actions, warns Flewelling. "But you need not go as far as actually requiring that the use be under construction," he says.

The issue of 'actual use' vs. 'intended use' was the subject of a recent law suit in Bath.

The Bath Housing Development Corporation filed a law suit against the city over a $1,594 tax bill it refused to pay on land its subsidiary planned to build 22 duplexes on for first time home owners. The project had stalled, due to sewer problems and a sluggish housing market.

The city questioned whether the piece of property in its current state was being used for tax exempt purposes. Reports in the Times Record 11/27/90 quoted the city's attomey asking:"Can they buy land and just sit on it?" He was further quoted as saying "The purpose of the statute is to make sure the property being exempted is used for that tax exempt purpose."

The city's assessor noted that other vacant lands owned by tax exempt properties were taxed by the city, including one owned by the American Legion. So it made sense to tax this piece.

The questions raised by the situation have yet to be answered in a court of law, as the corporation, seeing a costly fight before it, withdrew the suit and paid the tax.

Working Around the Law

As indicated at the beginning of this article, several Maine municipalities are going around the statutes in their attempt to collect revenues from the tax exempt organizations and institutions in their midsts. Their attempts, actual and exploratory fall into two categories: voluntary service fees and mandatory service fees.

Voluntary Service Fees

Portland. Ten years ago, Ken Roberts, writing in the TOWNSMAN, "Requests for Voluntary Contributions From Tax Exempt Partially Successful" (Dec. '81), took a look at the efforts of a few Maine municipalities that were making an effort to obtain voluntary service fee payments from tax exempt properties.

One of those was Portland, whose goal at the time was to collect $1.1 million in voluntary payments and thereby reduce the tax rate by 20 percent or 8.23 mills.

The amount sought was specific: the cost of providing the basic services of police, fire and snow removal to these properties.

Six months into the project, the city reported it had collected about $10,000 from about a dozen tax exempt properties.

It is safe to say that Portland's efforts are alive and well ten years later.

Deputy City Manager Mark Green reports that in fiscal year 1990, the city had collected slightly more than $600,000 in voluntary service fees from 15 of the 150 tax exempt entities it had sent letters to. The majority of the money came from two organizations: Regional Waste Systems (RWS) which contributed over $400,000 and Blue Cross/Blue Shield which contributed over $70,000, reports Green.

"If all 150 organizations that received the letter had responded fully ( not all do) the city would have received slightly more than $2 million," says Green.

The formula used took into consideration only three items: fire, police and snow removal, which in FY 1990 amounted to about $12.4 million which translated into a rate of $6.54 per $1,000 of assessed property value.

At $6.54 the request is about 19 percent of the city's full tax rate, says Green. Portland is currently undergoing a revaluation; its properties are said to be at 40 percent full value, current valuation figures for 1989 indicate there are about $600 million worth of tax exempt properties in their midst. Given a $1.9 million valuation, the tax exempts make up about 24 percent of the local property tax base.

Portions of the letter sent out to the 150 tax exempt entities follows:

"In an attempt to alleviate the problem of maintaining quality service provisions by means of an extremely limited tax base, the City of Portland is appealing to the tax exempt community for assistance. Because the unique value of each organization is recognized as an asset to the City, we ask your assistance only in the provision of the very basic services of police and fire protection and snow removal."

Rockland. The City of Rockland is a newcomer to the voluntary service charge arena. And while it has had no takers to date to its early January request for contributions in lieu of taxes, City Manager Cathy Smith-Sleeper is not discouraged, saying she sees the effort as a "seed planting," one that may bear fruit in the future, while its raises consciousness now.

Rockland's formula for its voluntary payment in lieu of taxes is the same it uses for charging service fees to rental units owned by its tax exempts.

If everyone contacted for a voluntary contributon responded positively and fully to the city's request, Smith-Sleeper figures the city would receive about $358,000 enough to reduce the mill rate by $1.33 per $1,000 of valuation.

Rockland's 1989 valuation stands at about $290 million; its tax exempt properties totaled about $34 million, or about 10 percent of the total valuation.

Mandatory Service Fees

Bangor. As a regional service center, Bangor has over $400 million worth of tax exempt properties in its midst.

Filling 66 pages of a computer print out, the exempt properties include such cityowned properties as the Bangor International Airport as well as the Eastern Maine Medical Center, Eastern Maine Vocational Technical Institute and HussonCollege.

If correctly valued, the tax exempts make up between 35 percent to 40 percent of the total property valuation of the city," says Bangor City Manager Edward Barrett. Barrett notes that "the tax exempts are dramatically below the actual market because it is hard to justify spending a lot of time assessing non-taxable properties."

In an attempt to get these entities to pay their way (an attempt several years ago to obtain monies voluntarily never went anywhere), the Bangor City Council recently established the Bangor Tax Exempt Property Steering Committee.

Its stated purpose was to "develop policies to be adopted by the City Council for the purposes of managing the City's tax base effectively." Among the duties the committee was charged with pursuing were to:

—encourage owners of currently taxable property who seek tax exempt status to make a voluntary annual payment to the city;

— initiate legislation by the State legislature to provide for compensation to the City for certain State-owned properties and properties owned by independent authorities and districts;

—develop and implement procedures for the negotiation of payments in lieu of taxes by tax exempt organizations. . ."

The committee was to include a member of the board of assessors, the director of administration, a member of the Bangor business community, two members of the Bangor City Council, and three representatives of a tax exempt institution. Currently those tax exempt organizations are represented by representatives of the city's two hospital: Eastern Maine Medical Center and St. Joseph's Hospital.

While the committee is charged with looking into a variety of options, it is currently focusing on the possibility of establishing a "fire utility " that would charge all property owners, taxable and tax exempt, a "fire fee" based on the square footage of their property.

Barrett says fire was chosen because it is the city's most expensive department, with a budget in excess of more than $4 million. Its 100 fiehghters and three fire stations reflect the demands of having, among other things, a large regional 400 bed hospital in its midst, he says.

As stated in the draft ordinance establishing the utility and fee, "a substantial amount of property which places a demand on the are service is currently nontaxable and therefore does not contribute toward the property tax support of the are service."

Fire was also targeted, says Barrett because unlike police and public works, fire protection allowed for a standardized approach to billing: area (square footage and/or acreage).

Simply stated, the fee would be derived by dividing the total fire budget by the total square footage of all properties (taxable and tax exempt); that figure (the cost per square foot) would then be multiplied by the actual square footage of the particular property to come up with the "fee.".

The city, which owns $70 million in tax exempt properties, including the $25 million Bangor International Airport, would be billed along with all of the other tax exempts. Many are self-supporting municipal enterprises and therefore a fee would not drain the municipal budget, explains Barrett.

To implement the fee, a fire utility would be established as a separate enterprise fund of the city.

At the time this article went to press, there were many unanswered questions. First and foremost: "Can we legally do it?" While the issue has been referred to legal counsel, Barrett says that the gut feeling is that under the current state law, it is questionable whether this fee would be upheld in the courts.

"Most likely it will be seen as "a tax by any other name and we will want to pursue specific state authorizing legislation to charge tax exempts with service fees," says Barrett.

"After all, tax exempts are charged for sewer and water and electricity," says Barrett. "What's the difference between charging for electricity and charging for fire protection?" he asks.

The second question is what is the impact this fee would have on the average home owner or the small charitable organizations whose grants and contributions are drying up during these tight times. In other words how fair will it be? asks Committee Chairman Jeffrey Sosnaud.

The answer to that question is awaiting specific figures. At the time this article went to press the city's assessing department was developing the square footage numbers to come up with a proposed square foot rate.

Depending on the cost, will we need to differentiate between different types of tax exempts, the small churches and the Good Samaritan organizations and the large institutions like Eastern Maine Medical Center?" he asks, noting that there is a lot of concern on the committee over this.

Of we had access to other avenues of taxation, like the sale tax, we would not be going down this road," says Barrett.

"We've pulled this out of a hat in desperation because of the over-reliance on the property tax; I'm not sure we will like what we see," confesses Sosnaud.

Whatever happens, Sosnaud says "the money is not going to solve the property tax crisis that exists in Bangor; it's not a panacea."

Transfer Cost To Quasi-municipal Entity

Another option Bangor's committee is exploring is the possibility of recovering costs by transferring them to an existing quasi-municipal entity such as a sanitary or water district.

Special purpose districts have the legal power to assess service charges but are not usually similarly bound by the statutory tax exemptions that prevent a municipality from recovering costs of those same services from tax exempt properties," says MMA's Flewelling.

Bangor is considering a proposal to take the cost of the water used in fire protection out of the tax bill and put it onto the water bill as a way of spreading the cost to the tax exempt property owners.

According to Barrett, 10 percent or about $385,000 of Bangor's $4 million are budget is for water (hydrants). What would that transference mean in terms of increased water rates to the individual homeowners? Would the transference cost more in fees than in property taxes are just two of the questions associated with this proposal?

Barrett says the city is currently pursuing the idea with the Public Utilities Commission.

Legislative Initiatives

Bills have been periodically introduced in the Maine Legislature to give municipalities power to charge all tax exempt organizations for municipal services. They have yet to gain approval. But that doesn't stop the municipalities from trying.

Senator John Baldacci of Bangor is sponsoring a bill this session that was drafted by the MMA that would allow not only Bangor but all cities and towns in Maine the option of levying service charges on all tax exempt properties not just those that provide rental income, as the current law allows.

"AN ACT to Increase the Authority of Municipalities to Levy Service Charges on Certain Tax Exempt Property" would amend 36 MRSA 652(1)(L)(1) to allow municipalities by a vote of their legislative bodies to:

"set a mil rate for exempt property that does not exceed 50 percent of the mil rate applicable to taxable property in the prior year. . . "

It would not amend the existing limit on service fees which is set at two percent of an organization's gross annual revenues.

As an editorial in the Bangor Daily News (2/16/91) notes the proposal by the MMA ..."is an important step in resolving a historic inequity In the way municipalities pay for basic services." But admits it "will be contested bitterly. . . (and) will emerge amended and altered after a thorough scouring by hospitals and fraternal organizations and religious groups."

Negotiating In-Lieu Payments

A 20-page handbook on how to negotiate payments in-lieu-of-taxes (PILOTs) that was prepared by the Massachusetts Government Finance Officers Association may be of interest to those cities and towns in Maine with large numbers of tax exempt properties

Not only does the handbook provide formulas for determining what the payments should be, it also includes a step-by-step approach to negotiating the payment, a sample contract and a glossary of terms.

As noted in the introduction, "There are no existing laws in the Commonwealth of Massachusetts which legitimize the (PILOT) concept. Existing agreements between tax exempt entities and their host community are based upon good faith and public relations rather than any legal requirement."

As further noted, "It would be ill advised to approach a tax exempt organization in pursuit of a PILOT payment without first: defining the community's payment goal. A payment request which has no analytical justification has little chance of acceptance by the tax exempt organization."

Much of the handbook is devoted to examples of the two approaches used in establishing a payment plan: one is based on figuring the average tax per square-foot; the other, is based on a careful cost analysis of the services provided.

According to the handbook, in fiscal year 1990, of the 351 communities within the state, 215, or 61 percent claimed to have collected PILOT payments. It was anticipated that $40,175 529 would be collected from this revenue source of local receipts. However, in reality, 36 communities, or 10 percent anticipated the collection of more than $36 million, or 90 percent of all PlLOT payments.

Copies of the handbook may be obtained by contacting: Jo Josephson at the Maine Municipal Association

Statistical Summary of Tax Exemptions

The accompanying table and charts display the level of tax exempt property throughout the state. The data is based on local assessment figures reported in the 1989 Municipal Valuation Retum Statistical Summary which is compiled by the Property Tax Division of the State Bureau of Taxation.

The data presented in this analysis is meant to be an approximation of valuation. It cannot be assumed that the data is an exact representation of actual property values. There are several reasons for this. First, the valuation figures are what the local assessors report to the state. Local assessing practices vary among towns. Therefore, valuation in one town can not be directly compared to valuations in another town. This limitation can be overcome by using state valuations, however state valuation figures are only reported for taxable property and not for tax exempt property.

Second, less attention is given to the assessment of tax exempt property than to taxable property by local assessors. The reason is that a town and its property owners are more concerned about property that is taxable because it is the base which can be used to generate the required revenues for service delivery. Assessment of tax exempt property is often an estimation. Therefore the numbers reported here may be understated.

With these data limitations in mind, the figures reported in this analysis are used to present an estimation of the levels of tax exempt property statewide and its relation to taxable property.

Tax exempt property falls into two categories: institutional and individual. Institutional property includes federal, state and local public property as well as private property held by churches, hospitals, literary and scientific institutions, and benevolent and charitable organizations. Individual tax exempt property includes exemptions for veterans, Indians, and the blind.

Statewide, 13% of property, approximately 6.7 billion dollars, is tax exempt. Of this $6.7 billion which is exempt, municipal property represents the largest amount at approximately $1.7 billion or 27% of all tax exempt value. It is followed closely by federal property which is valued at approximately $1.29 billion dollars or 19%.

Together, federal, state, and local property including quasi-municipal property represents approximately 62% or $4.08 billion of all tax exempt property value statewide. Literary and scientific institutions account for $737 million or 11 %. Churches account for $473 million or 7%. Charitable organizations account for $370 million or 6% and hospitals for $294 million or 4%. Taken together exemptions for individuals account for $175 million or 3%.

There are two distinguishable groups among the towns with the largest amount of tax exempt properties statewide. One is composed of the larger towns and cities which serve as regional service centers, including Portland, Lewiston, Bangor, Augusta, Waterville, South Portland, Biddeford, Westbrook, Bath, Presque Isle, Sanford, Windham and Saco. Among other things they are home to hospitals, museums and numerous government buildings, not to mention the central offices of many charitable organizations.

The other group is composed of municipalities which have one or two large tax exempt properties. Brunswick has the Federal Naval Air Force Base and Bowdoin College. Limestone contains Loring Air Force Base. Chelsea has the veterans hospital, Togus. Orono has the University of Maine and Topsham has the naval air station.