PILOT Agreements – Initial Review

Quick summary of the “payment in lieu of tax” agreements – history and current status:

In the late 1980s, Centre County attempted to collect property taxes from Penn State. Penn State filed suit in Centre County Court, claiming to be tax exempt as an agency of the Commonwealth. The case made it to the Supreme Court in 1992, on the issue of whether that question had already been settled with finality through a 1939 Centre County decision.

The Pennsylvania Supreme Court ruled that because of “significant changes in the factual circumstances of the University’s relationship with the Commonwealth and in the property’s uses” over the previous 50 years, the issue was worth another look, and remanded the case back to the Centre County Court for further proceedings.

At that point, the parties entered into a settlement agreement, and withdrew the case from the courts. The “PILOT” agreement, for “payment in lieu of taxes” had Penn State agree to pay some taxes on property leased to third parties. The 1992 version was later amended in 2005 and 2008.

Under the agreement, Penn State only pays about $642,000 to the Borough of State College, directed to the capital fund, each year.

According to State College Borough website, Centre County assessed Penn State’s property within Borough boundaries at about $262.9 million in 2015. According to a page at the Borough’s website, if that property were fully taxable at the millage rates applied to other Borough property owners, Penn State’s resulting 2015 real estate tax payment to the Borough would have been about $3.8 million.

Therefore, corporate Penn State enjoys a tax savings of $3.2 million per year within just the Borough, with the lost revenue compensated for by higher taxes on other State College property owners and lower levels of State College public services than we would otherwise be able to afford. All other local taxing authorities, including the townships, the State College Area School District, and Centre County, forego revenue on the Penn State-owned property within their respective jurisdictions as well.

Meanwhile, from 1994-1997, Dauphin County attempted to collect property taxes from Penn State’s Milton S. Hershey Medical Center. Penn State filed a suit in Dauphin County Court. That case also went up to the Supreme Court in 1999, which ruled that Penn State no longer qualified as “an instrumentality of the state” because the legislature no longer controlled governance of the institution through a majority of the Board of Trustees and state and federal support were no longer a majority of funding (outweighed by private tuition payments).

The Pennsylvania Supreme Court then remanded that case back to the Dauphin County Court to decide whether Penn State qualified for local real estate tax immunity as a “purely public charity.” The Dauphin County Court in 2000 ruled that neither Penn State University nor the Milton S. Hershey Medical Center qualify as purely public charities, because neither operate “entirely free from private profit motive.”

Penn State appealed that county court ruling to Commonwealth Court, but while the case was pending, again entered a PILOT agreement with local Dauphin County taxing authorities and withdrew the case from court, again agreeing only to pay a small fraction of the tax liability that would otherwise apply to the University’s extremely valuable property.

For reference, in the University’s 2015 IRS 990 filing, Penn State still describes itself as “an instrumentality of the Commonwealth of Pennsylvania,” and as “a federal. State or local government or governmental unit described in section 170(b)(1)(A)(v)” of the IRS code. On Schedule D of the 2015 IRS filing, the University listed “land, buildings and equipment” with a book value of $4.6 billion.

The 2005 PILOT agreement between Penn State, Centre County, State College Borough, Patton Township, Harris Township and Ferguson Township listed a 20-year term, and is the document now in effect, set to expire on December 31, 2024.

It contains a number of extremely troubling provisions hampering local governmental bodies in the fulfillment of their obligations to the taxpaying citizenry.

For example, Penn State anticipated that “third parties” such as other land development corporations or other Centre County property owners or taxpayers, might challenge the PILOT agreement on equal protection or other grounds.

The agreement at Section 7 stipulates:

“The County and Municipalities agree that during the term of the Settlement Agreement they shall not initiate or participate in any legal action seeking to challenge the tax exempt or tax immune status of the University.”

Further, at Section 10(c), the parties agreed

“to contest any Court proceedings filed by a third party seeking to declare invalid any of the material provisions of the Settlement Agreement” and “not support or encourage any Court proceeding by a third party seeking to declare invalid any of the material provisions of this Agreement.”

The 2008 amendments – adopted in response to a Court challenge filed by Centre County in 2007 and several assessment appeals – took the restraints further, committing the parties to an annual meeting to be held each September or October to identify parcels subject to taxation, challenges to be raised through “non-binding private mediation” within 60 days after the meeting, with the mediation panel “not bound by formal rules of evidence.”

After the mediation panel’s recommendation, all parties have 30 days to accept it, or file a Declaratory Judgment action in Centre County court regarding the classification of the disputed parcels.

Research ongoing.

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