Metro

Facing shortfall, Taveras continues calls for U. contributions

By and
City & State Editors
Monday, April 23, 2012

Correction appended.

At a February press conference announcing the city’s potential looming bankruptcy, Providence Mayor Angel Taveras’ staff gave reporters a packet that included a page specifically devoted to explaining the contributions the University needed to make to help avert financial disaster.

This emphasis underscored Brown’s strategic importance to the city’s attempts to close its budget gap. After cutting public services and jobs, closing schools and reducing some salaries in city government, the most recent budget hole today stands at $22 million – $7.1 million of which Taveras hopes will come from Providence’s major nonprofits. As the city’s largest property owner and the manager of a budget that dwarfs that of Providence, the University is a high-profile target in the Taveras administration’s effort to raise the funds.

The University and the city were publicly at odds following Taveras’ announcement that the city could declare bankruptcy in June if the budget deficit is not closed. The two parties have since engaged in weeks of negotiations behind closed doors – with the mayor and his staff negotiating opposite a University team comprising President Ruth Simmons and her staff, led by Beppie Huidekopper, executive vice president for finance and administration, and Richard Spies, executive vice president for planning and senior adviser to the president.

Many on the outside – Providence residents and Brown students alike – have called for the University to open its coffers to aid the city.

The University’s tax exemption is based in its 1764 charter, issued by King George III of England. Nonprofits nationwide are exempt from paying property taxes because they offer services that local governments may not be able to provide. But most of the country’s major nonprofits make voluntary payments in lieu of taxes. Brown currently pays more than $4 million to the city annually – $1.2 million in voluntary payments, $1.25 million in taxes on recently acquired or converted properties that should now be tax-exempt but the University has kept on the tax rolls voluntarily and $1.6 million in taxes on properties not used for educational purposes.

The University has an operating budget of $663 million and a $2.5 billion endowment. Payments to the city represent 0.6 percent of the University’s operating budget for fiscal year 2012, and the $4 million increase that Taveras is looking for would consume another 0.6 percent of the budget. Faced with these numbers, the University must decide if it can and should pay more.

Today, Taveras will make his annual budget announcement for the city council, which will include news that Brown and Providence have not come to an agreement on future contributions to the city. Negotiations are ongoing, but neither side will comment on the specifics of how they have progressed and when a deal might be reached.

 

‘Part of the solution’ 

Providence’s economic challenges are nothing new. Confronting a budget crisis in 2003, then-Mayor David Cicilline ’83 struck an agreement with the city’s four major colleges and universities worth $50 million over 20 years. The deal pegged the University’s annual voluntary payments at $1.2 million and established a 15-year period following property purchases by nonprofits during which property taxes levied incrementally decrease. Under this policy, colleges and universities agreed to pay full taxes on new properties for the first five years after purchasing them, two-thirds of full taxes for the next five years and one-third of full taxes for the last five years before transitioning to full tax exemption. 

Since his inauguration, Taveras has attempted to close an initial $122 million budget deficit. Taveras has called on the city’s seven major nonprofit schools and hospitals – Brown, Johnson and Wales University, Providence College, Rhode Island School of Design, Lifespan, Care New England and CharterCARE Health Partners – to increase their contributions to the city.  

The city’s long-term economic problems reflect structural issues with its municipal finance system. Despite extensive cuts to city expenses, including 10 percent of the mayor’s and city councilmen’s salaries, Providence structurally cannot earn enough revenue to cover existing costs due to increasing pension payments and limited property tax revenue, said David Ortiz, the mayor’s press secretary. 

While nonprofits contribute to Providence in many ways, the fact that 40 percent of city property is untaxed creates a revenue dilemma, Ortiz said, adding that the city has fewer legal tools to remedy this problem, like the ability to tax properties not directly related to institutional use. 

“The mayor is not looking to Brown University to solve the city’s problems, but the mayor is expecting Brown to be part of the solution,” Ortiz said. 

He said negotiations have improved since January, when Brown’s initial rejection of the city’s demands became public. The city alleged that Brown reneged on a deal to increase payments by $4 million, while the University maintained that such an agreement had not actually been reached. While Ortiz refused to comment on how exactly negotiations have shifted, he said, “since that press conference, negotiations have gotten much better.”

 Providence relies heavily on property taxes – state aid and property taxes are the city’s two main sources of revenue. 

“What we really need to do is make sure that Providence has a tax climate and a business climate and a lifestyle that will attract people to come in and invest,” said Laurie White, president of the Greater Providence Chamber of Commerce, explaining that the current above-average tax rates are hostile to economic development, a problem at the heart of the city’s fiscal woes.

University-provided jobs generate income and sales tax revenue that goes to the state, meaning Brown’s tax benefits accrue to the state, while the city incurs the costs, noted Ward 2 City Councilman Sam Zurier. To compensate, the state pays the city about 20 percent of taxes received from the city, a sum that totaled $23 million in 2011.  “The state grant has been less generous than it needs to be,” Zurier said.

Rhode Island is one of two states with similar revenue-sharing programs. Connecticut pays its cities – like New Haven – 53 percent of that city’s income tax revenue.

Brown’s educational mission and research contributions have far-reaching positive effects, Spies said. “Because the benefits are spread so widely, the
costs should be, too,” he added, advocating that the public sector more actively defrays the opportunity costs of hosting nonprofits like Brown.

“In these difficult economic circumstances, there is a tendency to look for easy solutions to really difficult problems,” said Marisa Quinn, vice president for public affairs and University relations. “Providence has very limited streams of revenue, and that’s part of where this burden has come from.” 

Efforts to spur the University to increase its contributions have not just come from the mayor. Rep. John Carnevale, D-Providence and Johnston, has introduced legislation currently pending in the House Committee on Finance that would tax state nonprofits at 25 percent of their assessed tax rates to compensate for their consumption of city services. Senate Majority Leader Dominick Ruggerio, D-Providence and North Providence, and Senate Majority Whip Maryellen Goodwin, D-Providence, have introduced similar legislation to require nonprofits to reimburse municipalities for services. Carnevale introduced a comparable bill last year, but it was never put to a House vote. 

The Providence City Council Revenue Study Commission issued a report recommending Taveras ask nonprofits to pay $13 million to $18 million – two to three times the amount he is currently looking to raise. The commission examined the cost of providing services like police and fire rescue to nonprofits and deducted the amount the city receives from the state to cover these costs to arrive at this large deficit, Zurier explained. These funds could be raised by taxing the city’s nonprofits at 16 percent to 22 percent of their assessed rate.

But Quinn noted that the University provides its own public safety officers and emergency medical services, and the University compensates the city for false fire alarms. The University also invests in infrastructure projects, like the current repaving of Lloyd Street.

 

Budget constraints

Brown administrators argue that allocating more money to Providence is a zero-sum game – that money must be diverted from funding University priorities.

Spies expressed concern that redirecting University funds to help the city could also be detrimental to the local community. “If we compromise the mission, if we adversely affected our ability to serve that mission, the whole community would lose much more than it’s ever going to gain from direct dollar payments,” he said.

The University is familiar with the problem posed by funding constraints. Following the 2008-2009 financial crisis, Brown trimmed $65 million from its annual budget – more than 16 times the increased payments proposed by Taveras. “You ask people who were around here then – everyone felt it,” Spies said.

The city argues that the University’s $2.5 billion endowment, the largest of the city’s higher education institutions yet the smallest in the Ivy League, indicates the University’s ability to pay more. 

“Right now, if you take the difference between what Brown wants to give to the city and what the city wants from them, it’s $2 million per year,” Zurier said. “So we’re talking about one half of 1 percent. I don’t think the size of the endowment is a major factor when you’re talking about one half of 1 percent of your operating budget.”

The University’s endowment is an investment fund that contributes to its operating budget through the earnings it generates, though its principal cannot be touched to fund operating expenses or capital projects. Donors may direct contributions to the endowment toward a specific purpose, meaning that parts of the University’s budget legally cannot be used for contributions to the city.

 

Comparing contributions 

Since payments in lieu of taxes are negotiated on a case-by-case basis, there is a wide spectrum for universities’ voluntary payments to their communities. While Yale contributes nearly $8 million, the University of Pennsylvania contributed nothing to Philadelphia this year after their payment agreement with the city expired. Yale and Princeton both contribute generously to their respective municipalities, but their endowments and operating budgets notably exceed Brown’s. Johns Hopkins University, which has an endowment of roughly $2.5 billion, reached an agreement with Baltimore in 2010 to pay the city $6.8 million over six years as part of a $20.4 million deal the city struck with its nonprofits. 

Yale is the peer institution many point to as a model for town-gown relations. “Yale is the example we use as the most generous university,” said Adam Langley, co-author of a 2010 Lincoln Institute of Land Policy report on payments in lieu of taxes. With an operating budget of $2.7 billion and an endowment of $19.4 billion – more than seven times the size of Brown’s – Yale contributed $8.1 million annually in voluntary payments this year. With voluntary and required payments, Yale is New Haven’s biggest taxpayer. It is also New Haven’s largest employer.

Yale has increased its payments to New Haven several times since it first established a voluntary payment plan in 1990. Most recently, Yale increased its voluntary payments from $5 million to $7.5 million in 2009. 

While Taveras’ requests from Brown have been very public, Yale’s decisions to increase payments were not the result of public pressure from New Haven officials, but rather mutual understanding of difficult economic realities, said Michael Morand, Yale’s director of communications. “I think most independent universities in the 20th century had some level of difficulty with their hometowns,” he said.  

In negotiations thus far, Brown’s representatives have stressed the need for an increase in payments to align with the University’s mission. But there are “not strings attached to the voluntary payments” from Yale to New Haven, Morand said.

Princeton, like Yale, touts a relatively amicable financial relationship with its community. And like Yale, Princeton boasts a much larger endowment – $17.1 billion, with an operating budget of $1.5 billion.

“The relationship is much more collegial at the moment at Princeton than it is in Providence,” said Robert Durkee, vice president and secretary at Princeton.

Princeton contributes to two separate municipalities – Princeton Township and Princeton Borough – both through taxes and voluntary payments. The university pays $4.1 million to the borough and $3.5 million to the town
ship in property and sewer taxes, Durkee said. In addition to paying taxes on properties used for non-educational purposes as mandated by New Jersey law, Princeton also pays voluntary taxes on some of its other properties, like graduate housing.

Last year, the university made a $1.2 million voluntary contribution to the borough based on a six-year progressive agreement that automatically increased the university’s payments to avoid annual renegotiations, Durkee said. The agreement expired last year, but the university voluntarily increased its payments to the borough to $1.7 million this year anyway, he said.

“Both the borough and the township have very good bond ratings because of the presence of the university,” Durkee said, adding that this translates to lower borrowing costs for the municipalities. 

In March, Fitch Ratings downgraded Providence to two levels above junk bond status, and Moody’s Investors Service downgraded the city’s bond status to three levels above junk bond status.

Princeton has generously contributed to the Princeton Public Library and the Princeton schools, and it owns and subsidizes the town’s only movie theater, he noted. And in response to the small size of the local volunteer fire department, the university began a program to allow employees to be on-call during the day in case of a fire, Durkee added.

“There are lots of people in Princeton that believe that the university has made an appropriate contribution to the community,” Durkee said, but “there are probably lots of people in town that would like us to do more.”

 

What Brown can do

Some of Brown’s contributions to the city are hard to quantify. “Research has a lot of benefits for the world, and it might not be immediate,” said Langley, the author of the report. 

Roughly 1,600 students serve the community through Swearer Center programs, said Roger Nozaki MAT’89, director of the Swearer Center for Public Service, and an additional 1,700 students serve the community through other student groups. Overall, 55 percent of students volunteer in Providence at some point in their academic careers, Quinn said. 

Nozaki noted that Brown professors also give back to the city – 22 faculty from 17 disciplines participate in the Engaged Scholars Initiative, a Swearer Center program that provides resources and support for faculty teaching and research that benefits the local community. 

And while the net contribution Brown students and faculty make through community service is not measurable, statistics hint at the impact. For example, students in schools served by the National College Advising Corps program at the Swearer Center are 14.4 percent more likely to attend college, Nozaki noted.

But most of Brown’s positive impact is less centered on Providence. “The benefits are accruing to the whole nation, not just the city,” Langley said.

Brown plays a central role in the development of the desired Knowledge District, a hub of research and technology startups the city and investors hope to foster, said White. 

Opponents of increasing payments from the University have pointed to its role in the emergence of a knowledge economy. Dan Egan, president of the Rhode Island chapter of National American Independent Colleges and Universities, said the city should pursue increased taxes on properties Brown plans to purchase in the Jewelry District instead of looking to raise voluntary payments. Brown paid taxes on all but one of its properties in the Jewelry District in 2012. 

He said he finds it troubling that the city is focusing on increased payments from colleges, a sector that he said has consistently contributed to Providence’s well-being. 

“What happens in a lot of places and what’s happened in Rhode Island is those ideas bubble up, but at the point where they begin to reach the next stage they have to go someplace else because that’s where the lab techs are or that’s where the venture capitalists are,” Spies said. “The idea of creating a knowledge economy is trying to bring enough pieces of the spectrum at all ends of the pipeline where people want to do this stuff, so their ideas come together and aren’t starved or drowned.”

Spies said that the discussion of Providence’s economy should be focused on “value creation” of knowledge capital instead of the redistribution of existing capital through payments. “Whatever we might be able to and be willing to contribute in dollars, it’s dwarfed by the contributions we made doing what we do at a really high level,” he said.

 

Split opinion

In a recent Herald poll, 37 percent of respondents reported that they do not think the University should contribute more money to the city. Thirty percent believe Brown should contribute more, and 33 percent are unsure. The near-even division of the student body’s beliefs reflects uncertainty on the issue.

“Brown definitely brings good things to the community and doesn’t deserve to be attacked,” said Wendy Rogers ’14, a Pawtucket native, noting that her position on the relationship between Brown and the community has evolved since she began attending the University.

Ben Noble ’13, a representative on the University Resources Committee, criticized the city and mayor for publicly singling out the University when Brown already gives millions of dollars each year. “That is not right,” he said, suggesting the city “take what it can get.”

“Brown does not have enough money,” Noble said. “There are so many projects, initiatives and renovations, and the University doesn’t have the resources.”

“I know that Brown budgeting is tight,” said Beth Caldwell ’12, a homeless rights activist with Housing Opportunities for People Everywhere. This winter she saw more than 200 people sleeping in the streets due to lack of shelter space, reflecting contracting government budgets. “That’s really hard for me to see and not say that Brown doesn’t have a certain commitment to make some sacrifices,” Caldwell said.

For Cranston native Gabriella Corvese ’15, the issue of the University’s contributions to the city hits close to home. “It’s weird picking between my home state and my university,” she said. Like many Rhode Islanders, Corvese said she thinks the University needs to do more for the city. “But it’s difficult for me to say that because I’m on financial aid,” she added.

“Every dollar we give to Providence is less that we can spend on Brown students,” Noble said. It boils dow
n to a choice between funding public sector pensions or Undergraduate Teaching and Research Awards and financial aid, he added.

Caldwell suggested the University put on hold investments in projects aimed at advancing the University, like development, to instead meet the more pressing needs of the city’s financial crisis. “I always want to push against the idea that it’s either financial aid or it’s Providence doesn’t go bankrupt,” she said.

 

Can Brown afford to pay more? 

The answer to this question does not lie strictly in the University’s budget, but rather in the implications of the decision. Providence’s fiscal reality may call for sacrifices on all sides. But if Brown increases its payments now, it could set an unfavorable precedent for future requests.

If the city is in an “extraordinary situation,” like the one Providence finds itself in today, perhaps an “extraordinary solution” is needed from Brown, Langley said. But if the University steps up payments in response to the mayor’s request, it could create an expectation under which Brown would be called upon to rescue the city in times of need. 

“If the city views Brown as some mechanism (to close its budget gaps), that may be what is making the negotiations between the city and the University difficult, because I would suspect the University would not want to be viewed in that fashion,” said Marion Orr, director of the Taubman Center for Public Policy and American Institutions. “I don’t think the University wants to put itself in the position of being viewed by the city as an institution that can bail it out.”

The University has stated that an agreement must be mutually beneficial and align with its mission. “I don’t think it’s reasonable for the city, having made mistakes and having become insolvent because of those mistakes, to turn to institutions that are successful and to demand that they pay for those mistakes,” Simmons told the Undergraduate Council of Students two weeks ago. 

“We sought to reduce expenditures as much as is possible without reducing city services to such an extent that the city is not recognizable,” Ortiz said. But until the city can manage increasing pension liability and create a sustainable system of property tax revenue, Providence will continually be “on the brink,” he said.

 

An earlier version of this article incorrectly reported that Ben Noble ’13 said the University had many “projections.” In fact, he said the University had many “projects.” The Herald regrets the error.