Members of the Penn community have long called on our university to make payments in lieu of taxes (PILOTs) to the Philadelphia public schools. In 2015, undergraduates began a concerted campaign. They conducted research, held rallies, and won support from the editorial board of the Daily Pennsylvanian and journalists in the city. Alumni have spoken out in favor of PILOTs. Beyond Penn, the idea has garnered support among advocates for public education, including the Our Cities Our Schools Coalition, Jobs with Justice, and the Caucus of Working Educators. In 2015, the City Council passed a resolution in favor of PILOTs.

In spring 2020, calls for PILOTs gathered strength as longstanding concerns about racial and economic inequality combined with acute concerns about budget cuts amid the COVID-19 pandemic. In May 2020, Philadelphia Jobs with Justice launched a city-wide campaign to finally win PILOTs at Penn and other wealthy non-profits. The campaign called on these institutions to contribute to an Educational Equity Fund governed by the school district and city government. The launch event featured Philadelphia public school students, parents, and City Council member Kendra Brooks.

As faculty and staff, we mobilized as part of this city-wide campaign, gathering over 1,100 signatures on our petition calling for Penn to pay 40% of its foregone property taxes to the Philadelphia public schools.

In November 2020, we achieved a first victory: Penn committed to a $100 million gift to the Philadelphia school district, spread across ten years. But this victory was just a first step: as we explain below, Penn’s gift falls short of the standard our community set. We therefore continue to mobilize to ensure that Penn increases its annual payments and makes them permanent parts of the city budget, not a time-limited gift.

Every Ivy League university except Penn already pays PILOTs. Penn would be joining the ranks of Harvard, Yale, Princeton, Brown, Columbia, Cornell, and Dartmouth in recognizing its financial responsibility to the community of which it is a part. Beyond the Ivy League, hundreds of other universities and wealthy non-profits have paid PILOTs to cities nationwide. For detailed information on these institutions and payments, see the 2016 and 2012 reports of the Lincoln Institute of Land Policy.

Penn itself paid PILOTs during the 1990s. In 1994, the city of Philadelphia faced a fiscal crisis, and Mayor Rendell issued an executive order stating that the city would reevaluate the tax-exempt status of large non-profits under the stringent standards of the Pennsylvania state constitution. Rather than risk a conflict over their tax-exempt status, Penn and other large non-profits decided to work with the city. They voluntarily paid PILOTs for the remainder of the decade.

The citywide PILOTs campaign has proposed that Penn and other large non-profits pay 40% of what they would owe in property taxes.

Using publicly available information, we can get an approximate sense of what that 40% would mean for Penn and the Philadelphia public schools. Based on Penn’s 2016-2017 annual budget, we calculate that Penn would have owed $500 million in taxes that year, of which $91 million would have been property taxes. Forty percent of the property tax assessment—the amount that Penn would have paid in PILOTs—would have been $36.4 million. Given the rise in property values since 2017, we estimate that Penn’s PILOT payment today would be roughly $40 million. To put that figure in perspective, $40 million is just over one-third of one percent (0.35%) of Penn’s unrestricted annual revenues for fiscal year 2021. It is less than two-tenths of one percent (0.19%) of the value of Penn’s endowment.

It is important that PILOTs be stable, predictable payments. A clear standard saves universities and city governments the difficulty of renegotiating agreements every year. And it allows the school district to plan effectively.

It is equally important that PILOTs be meaningful sums of money, not token amounts that simply aim to defuse public criticism. Public officials, residents, and researchers in Boston and New Haven have expressed concern that local universities are not in fact paying their fair share under local PILOT agreements. In Boston, for instance, the city asks large non-profits to pay 25% of what they would owe in property taxes, and allows institutions to substitute services-in-lieu-of-taxes for up to half of that sum. Harvard, Boston University, Boston College, and other institutions have regularly fallen short even of that standard. We believe that Penn must do better in order to truly fulfill its responsibility to the city of Philadelphia.

Penn can certainly afford to pay PILOTs. Moreover, it can and should do so without endangering its core research and teaching mission. There are multiple ways that the university can generate tens and even hundreds of millions of dollars. Take three examples:

• Endowment spending. Penn’s endowment in June 2021 was $20.5 billion, and the annual return on investment for fiscal year 2021 was a record 41.1%. Over the last three decades, the endowment has grown over 24-fold, from $825 million in 1991. Penn administrators have explained that they aim to limit endowment spending to approximately 5% per year, although they have publicly acknowledged that they could spend more of the endowment than they do. Indeed, in 2021, they showed what they can do: facing a budget deficit, the university chose to raise the spending rate on the endowment to 7%—the maximum allowed under Pennsylvania law. If Penn raised the spending rate from 5% to 7% again this year, it would generate $410 million. If it simply raised the spending rate from 5% to 5.2%, it would generate $41 million—roughly the amount of a PILOT to the public school system.
  
  Administrators at Penn have publicly acknowledged that they could spend more of the endowment than they do. They simply prefer not to increase spending much beyond 5% a year. We question that decision and the priorities it conveys. We are not alone in our judgment. Legal scholars have long challenged the arguments commonly heard for restricting endowment spending at wealthy universities. See, for instance, Henry Hansmann, “Why do Universities Have Endowments?” and Peter Conti-Brown, “Scarcity Amidst Wealth.”


• Reducing salaries for highly compensated administrators. According to Penn’s 990 Form for 2020, if the 43 highest paid Penn employees reduced their salaries by 20%, the university would save $10.7 million. There is ample precedent for such a reduction: in the face of the COVID-19 pandemic, many of Penn’s peer institutions adopted voluntary salary reduction measures for highly compensated administrators. Brown President Christina H. Paxson and Provost Richard M. Locke took a 20% reduction in their salaries, and members of the senior administration volunteered to take 15% reductions in their salaries. At Cornell, President Shirley M. Collado and the entire senior leadership and reports teams elected to reduce their salaries for fiscal year 2021. At Duke, our former Provost and Duke’s current President, Vincent Price, reduced his salary by 20% and the salaries of the Provost, Executive Vice President and Chancellor were reduced by 15% of the amount over $285,000. Moreover, about 300 university employees who earn over $285,000 had their salaries reduced by 10 percent of the amount above that threshold. Price called these actions the “best and most equitable path … [in] this difficult moment.” Many other universities, including Notre Dame, Georgetown, the University of Michigan, and the University of Wisconsin announced similar voluntary salary reductions for highly paid leadership and employees.


• Borrowing. In extraordinarily harsh economic years such as 2002, the university’s debt rose to 90% of the value of its endowment. (In 2002, the total endowment was $3.39 billion and Penn’s total liabilities were $3.056 billion.) Today, Penn might consider contracting debt, especially given our extraordinarily low interest rates. In fiscal year 2021, Penn’s total liabilities were $10.888 billion or 53.1% of the value of the endowment. If Penn borrowed to increase its total liabilities from 53.1% to 54% of the value of the endowment, that would generate $184.5 million.
  
  Executive Vice President Craig Carnaroli stated early in the COVID-19 pandemic that the university intended to increase borrowing only for capital investments. We question the priorities conveyed by that choice. Penn can borrow for many purposes central to its core mission and social responsibilities.
  

Penn administrators have argued that our university fulfills its obligations to the city and the public schools through targeted programs that the university designs and administers—whether competitive scholarships, academically based community service courses, investments in University City, support for the Penn Alexander School and Henry Lea School, free and low-cost health care provided to city residents, or free summer programs for high school students.

But the city of Philadelphia needs functioning public services that serve all people and that are governed by democratic procedures.  Penn in turn needs a city with robust democratic governance and the capacity to carry out government responsibilities.  No amount of philanthropy or research-based intervention can substitute for public schools available to all, financed by all, and capable of being held accountable through public procedures.  Penn’s practice of investing in its immediate neighborhood and providing targeted enrichment programs to select students is not equivalent to meeting its obligation—as all residents do—to contribute to the public governance and institutions that serve every person in the city.  Moreover, there is no need for Penn to choose between its existing community programs and its responsibility to make payments in lieu of taxes.  Universities throughout the Ivy League have long shown that it is possible to do both.

Penn’s state and local tax exemption relies on its classification as a “purely public charity” under the Pennsylvania constitution and subsequent state legislation. The constitutional definition, as interpreted by the Supreme Court, is quite restrictive. Organizations must meet all five of the following standards to qualify for a state tax exemption:

1. Advance a charitable purpose;
   
2. Donate or render gratuitously a substantial portion of its services;
   
3. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
   
4. Relieve the government of some of its burden; and
   
5. Operate entirely free from private profit motive.

In 1994, Mayor Ed Rendell recognized that Penn and other wealthy universities and hospitals did not fully fit the description of "purely public charities." He issued Executive Order 1-94, which gave those institutions a choice: either forfeit their state tax exemptions or agree to make voluntary payments in lieu of taxes to the city. The result was a 1994 PILOTs agreement between the city and its wealthy non-profits: Penn and other institutions agreed to make payments in lieu of taxes rather than have the city bring them to court and challenge their tax exemptions under the state constitution.

The 1994 PILOTs agreement survived only as long as Mayor Rendell was in office. When he left in 2000, the mayor's office did not continue to enforce it, and Penn and other institutions stopped making payments. Meanwhile, Penn hired the Rendell administration staffers who had implemented the PILOTs program, leaving City Hall without the expertise and experience to administer such a program.

Since Mayor Rendell left office, some opponents of PILOTs have alleged that state law has changed in ways that foreclose the possibility of a new PILOTs agreement. This is false on two counts.

First, it is true that the Pennsylvania state legislature in 1997 passed a law that offered a broader definition of a "purely public charity"—one that Penn might meet. However, in 2012, the Supreme Court of Pennsylvania ruled that this law does not supersede the state constitution's restrictive definition; it merely adds criteria to it. Therefore, Penn and other wealthy non-profits remain vulnerable to the challenge that the Rendell administration made in 1994—that is, the city government could again threaten to challenge Penn's tax exemption under the state constitution, which could convince Penn to make voluntary PILOTs payments to avoid confrontation in court.

Second, and more importantly, PILOTs are perfectly legal whether or not Penn meets the standards for state tax exemption—that is, whether or not the city government could or would threaten to take Penn to court and try to revoke its state tax exemption. PILOTs are not taxes. They are not compulsory. They are voluntary payments in lieu of taxes. These voluntary agreements offer wealthy institutions a way to acknowledge and fulfill the responsibility they have to cities that lack the legal authority, the will, or the political capital to tax them.

In 2020, when Penn pledged a gift of $100 million over ten years to the Philadelphia public schools, it demonstrated that it can legally make such voluntary agreements. No one challenged the legality of that gift. PILOTs would differ only in their size and longevity: they would be larger payments, and they would be permanent annual commitments.

For an analysis of the legal questions surrounding Penn’s tax-exempt status, see "PILOTs in Philly," a report by the Penn Law National Lawyers Guild Working Group.

The city of Philadelphia effectively subsidizes Penn and other wealthy non-profits through the act of tax exemption. The financial losses to the city are significant. The Philadelphia Inquirer found that in 2019, 17% of all property in the city, valued at $29.6 billion, was tax-exempt. This arrangement reduced the city’s annual property tax revenues by $414 million. Penn is the largest private property owner in the city. It holds over $2.5 billion worth of tax-exempt property—nearly ten percent of the citywide total.

Property taxes are critical to funding our public schools. The city of Philadelphia collects a relatively wide range of taxes, but property taxes represent the majority of local contributions to the school district's budget. According to the Pew Charitable Trust, Philadelphia collects relatively little in property taxes when compared with the thirty largest cities in the United States, and that is not because rates are low. A significant problem is the city’s large quantity of tax-exempt property. Philadelphia’s property tax revenues per capita are below the median for the thirty largest cities in the country. Philadelphia’s local tax-supported expenditures for public education are below the median, as well.

Wage taxes do not represent a significant source of funds for the public schools. Property taxes, which Penn does not pay, provide the majority of the local revenue for the school system.

Furthermore, wage taxes are paid by employees, not by Penn as an institution; they are withheld from our take-home pay. We pay these taxes because we have an obligation to contribute to the public governance. Penn as an institution has that same obligation, and it does not fulfill it simply by employing people who pay their own taxes. Every employer in the city—whether a car dealership, grocery store, bank, or university—generates wage tax revenue indirectly. That does not exempt them from paying their own property taxes.

While this gift is a step in the right direction, Penn has further to go. The university’s commitment to pay $10 million per year falls short of the standard that our community has set. Together with parents, teachers, students, community organizations, and members of the City Council, we have called on Penn to pay 40% of what it would owe in property taxes every year. As we explain above, we estimate that that would come to approximately $40 million per year—four times what the university has offered.

Moreover, the chronic underfunding of the Philadelphia Public Schools cannot be resolved with a limited commitment of ten annual payments; it requires a system of public finance that ensures that the city's wealthiest institutions pay their fair share every year on a permanent basis. The University of Pennsylvania is Philadelphia’s largest private property owner, and in the city of Philadelphia, property taxes are the principal source of local revenue for public education. Year in and year out, Penn’s property tax exemption deprives the public school system of funds that students, teachers, and staff need and deserve. Year in and year out, the poorest big city in the United States subsidizes one of the richest universities in the country by forfeiting a portion of its property tax revenues. A time-limited gift will not make up for Penn’s accumulated debt to the public schools, nor will it ensure that Penn contributes what it owes in the future.

Public schools are not charities, and public education is not a gift or a privilege whose provision can rightly depend on occasional acts of beneficence. The provision of public education has long been one of the most firmly and universally established responsibilities of government in the United States. Generations of Americans have held to the idea that every child is entitled to an education that is freely available to all, financed by all, and governed by all through legitimate democratic procedures. Private charity cannot sustain such a system. To suggest as much degrades the egalitarian, democratic promise of public education.

For these reasons, we remain resolved that Penn must make annual payments in lieu of taxes (PILOTs) to the public schools—40% of what it would owe in property taxes, on a permanent basis, with the funds governed by the School District and City of Philadelphia. No time-limited gift will substitute, and no gift will quiet our calls for Penn to fulfill this basic civic responsibility.

Penn’s gift to the public schools is earmarked to remediate environmental hazards in schools, including asbestos and lead contamination. In 2020, the School District estimated that it would cost $125 million to remove asbestos and lead from all areas occupied by students. Penn’s pledge of $100 million will thus make a significant difference, although spread across ten years, it will amount to less than $100 million in 2020 dollars.

What this gift won’t do is change the quality of education that children receive in the Philadelphia public schools or resolve the district’s routine, long-term physical plant needs. Students, teachers, and staff need much more than buildings free of asbestos and lead. They need adequate numbers of teachers, librarians, school nurses, counselors, and bilingual staff. Schools need the resources to provide art, music, and physical education classes to every student. They need adequate ventilation, heating, and cooling systems to reopen safely and stay open during frigid winters and June heat waves.

If every child in Philadelphia is to receive a quality public education, the school district needs a reliable, significant stream of revenues every year, not time-limited gifts targeted to acute crises. There is a reason that Penn’s pledge was touted as the largest gift ever given to the Philadelphia School District: schools are not funded by gifts but by taxes.