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City Tax Burden Skips UC Properties

Tuesday May 11, 2004

EDITOR’S NOTE: This is the first of a two-part series. Part two will appear in the May 14 edition. 


In a state plagued by a crumbling infrastructure, troubled schools and an electorate increasingly unwilling to shell out more tax dollars, Berkeley voters are unique among California cities in their willingness to levy new taxes on themselves to fund schools, libraries and other civic improvements. 

But that burden falls mainly on residential and commercial property owners—a dwindling majority in a city dominated by a massive property-tax-exempt University of California campus and a host of other exempt properties. 

The city’s last study on exempt properties, completed in December, 1994, stated the obvious: “Berkeley has an unusual number of properties which are tax exempt,” ranging “from the University of California campus and properties, government owned properties, Alta Bates/Herrick Hospitals and properties, the Graduate Theological Union and properties, to properties owned by churches, private schools and other tax-exempt institutions.” 

The 1994 study estimated that the total tax loss caused by various exemptions on assessed property and even larger unlisted blocks, most notably the UC Berkeley campus, produced an annual property tax shortfall of $23.4 million—nearly two thirds of the $36.6 million collected that year from non-exempt property owners, most of them homeowners. 

“In conclusion,” wrote then-City Auditor Anna Rabkin, “Berkeley’s tax exempt institutions create a massive, hidden fiscal impact on the community. The trend of shifting the tax burden onto residential property taxpayers appears to be increasing, both as a result of Proposition 13 and due to the apparent growth of tax exempt institutions.” 

That Prop. 13—a constitutional amendment passed by California voters in 1978—has inflicted considerable damage on local governments in California comes as no surprise to anyone familiar with its authors, Howard Jarvis and Paul Gann. 

The flames of Proposition 13 were fanned by the soaring rise in California property values between 1975 and 1978—the same incendiary force that sent rents soaring and led to rent control in both Santa Monica and Berkeley. 

Homeowners, stunned by whopping tax increases, eagerly embraced the proposals Jarvis had earlier floated without success. Proposition 13 put a one percent cap on annual tax increases and rolled back assessments to 1975—before the real estate spike that led to its passage. 

Proposition 13 inflicted a double blow on local government by including commercial and industrial property under the same tax protections as residential property. By 1997, the Center on Budget and Policy Priorities was estimating that annual non-residential property tax losses to California cities and counties were running up to $5 billion a year. 

Cities have responded by floating special fee and assessment districts—which, also thanks to Prop. 13, must carry by a two-thirds vote. 

A preliminary compilation of non-UC exempt Berkeley property last July came up with a total value of $354 million, with Alta Bates Hospital leading the list with exemptions of $104.6 million, followed by the Graduate Theological Union with $12.1 million, the Pacific School of Religion with $7.7 million and the Herrick Foundation at $4.3 million. 

There is no formal estimate of the value of University of California exemptions, since state-owned property isn’t appraised. 

Not only are university-owned properties exempt, but so are properties leased by the university so long as they are used for educational uses. Conversely, university property leased to for-profit companies is taxable. 

In Berkeley, the ongoing metastasis of the UC campus onto previously taxable properties led the drafters of the city’s December, 2001, General Plan to incorporate Policy LU-35 into the Land Use Element, calling on the city “to discourage additional UC expansion (with the exception of housing) in Berkeley and also discourage the University from removing additional properties from the City’s tax rolls.” 

Nonetheless, the city has bestowed its preliminary blessings on a major UC expansion into downtown—the museum and hotel complex recently vetted by a special Planning Commission task force. While the hotel and convention center would pay property taxes, the museums are exempt by law, as would any other educational uses in the complex.  

Exemptions are a problem nationwide, and one partial solution adopted by the federal government and some states to offset losses from exempt properties is the PILOT program, short for Payment In Lieu Of Taxes. The purpose of this program is to provide funds to compensate for property taxes lost on exempt property owned by governments and non-profit and charitable institutions exempt from paying taxes on the real estate they own. 

The federal Bureau of Land Management is the country’s largest PILOT payer—though the acronym is PILT in federalese—shelling out the lion’s share of the Interior Department’s $227.5 million in fiscal year 2004 PILOT funding. 

Federal military installations and the Department of Energy also make PILOT payments to local governments whose schools, roads and other infrastructure and service elements are impacted by their presence. 

Rhode Island offers cities and towns payments amounting to 27 percent of the taxes lost from otherwise tax exempt state owned facilities. Vermont pays cities half of the estimated taxes on state-owned property. Massachusetts also offers PILOT fees to municipalities, though in recent years legislators have severely underfunded the program. 

A 1960 Connecticut law mandates that the state pay PILOT fees equivalent to the full share of property taxes to towns hosting state prisons or where the state owns more than half the property in the municipality, and 40 cents on the dollar on state property comprising less than half of the municipality’s real estate. A 1978 Connecticut law authorizes state-paid fees of 77 cents on the dollar to replace taxes lost from other all other exempt properties, including hospitals, private colleges and universities. 

In reality, the Connecticut legislature typically underfunds the program, and PILOT fees are prorated based on the amount actually appropriated. For the current fiscal year, one university city—New Haven, home to Yale—pocketed $32.7 million in PILOT fees, considerably less than its full statutory entitlement. 

Connecticut’s program was launched in 1968, and the original legislation authorized compensation to local government for taxes lost on state-owned property amounting to 100 percent for state prisons and 40 percent for all other state-owned facilities. A 1978 amendment added state compensation of 77 percent of lost property taxes and assessments for hospitals and private colleges and universities. 

The Massachusetts PILOT fee program dates back to 1910, and compensates municipalities only from taxes lost on the land itself and not the considerably more valuable buildings and other improvements. 

The statewide base for Massachusetts PILOT payments was land valued at $1.86 billion, and authorized payments were based on a statewide rate of $16.58 per $1000 of assessed land values. The total authorized by law was $30.8 for all municipalities—but legislators only appropriated $21 million, a move decried by state auditor Joseph DeNucci. 

Rhode Island launched its own PILOT program in 1986 to reimburse municipalities for the lost property tax revenues on non profit hospitals and institutions of higher learning, with reimbursement fixed at 25 percent taxes owed on property of equivalent value. Two years later, state hospitals, veteran’s homes, and prisons with more than 100 inmates were added to the list. In 1997 legislators upped the reimbursement rate to 27 percent. 

Vermont’s PILOT program pays municipalities $1 per $100 in assessed value on state-owned land. 

Some institutions offer voluntary PILOT funds. In New Jersey, Princeton University voluntarily pays taxes on otherwise-exempt faculty and graduate student housing and for the president’s estate. 

But in California, the University of California, the state universities and community colleges are statutorily exempt from local taxes, and they have successfully resisted all efforts to require them to pay any compensation. 

It’s not that California state government doesn’t provide any PILOT funds, observes Peter Detwiler, a consultant to the California Senate Local Government Committee. The most notable payments are made under the Williamson Act Subvention Program, created by the legislature in 1965 to encourage the preservation of “green belt” agricultural regions around municipalities. 

Farmers and ranchers who sign contracts to keep their land developer-free have their property assessed based on its value for agricultural use rather than the higher values that would result from exploiting for commercial and residential development. 

To make up for the resulting loss of taxes, the state offers compensation—$38 million to counties and $60 million to school districts in the current fiscal year. 

Acknowledging that Berkeley might have the greatest property tax losses of any UC campus, Detwiler said that the benefits from sales tax and other revenues generated by the university’s presence could significantly mitigate the impact of loss property tax revenues. 

The latest proposal to offset some of the costs universities, colleges and other otherwise-exempt public agencies impose on local governments comes from California Assemblymember Lonnie Hancock, a former Berkeley mayor and the spouse of current Mayor Tom Bates. 

Hancock’s Assembly Bill 2902 would amend the state Public Resources code to ban public agencies such as UC from implementing plans for developments governed by the California Environmental Quality Act (CEQA) that would require other agencies to implement mitigations unless the implementing agency agrees to pay a fair share of the costs. 

Both the UC and state university systems have announced their opposition, citing the City of Marina ruling—making the upcoming Supreme Court hearing all the more important for local governments, the state and taxpayers.  

With UC Berkeley’s recently unveiled Long Range Development Plan projecting an additional 1.1 million square feet of off-campus development by 2020, Hancock’s measure becomes a matter of critical importance to Berkeley City officials. ˇ