State reimbursements for tax-exempt properties have steadily declined over the past five years, leaving already distressed municipalities even more strapped for cash.
The PILOT, or Payment in Lieu of Taxes, program, pays municipalities a percentage of what they would receive for a property if that property were not either state-owned or being used for a tax-exempt purpose, such as a hospital or a community college.
The current PILOT program is authorized to reimburse 100 percent of lost property taxes for any towns where more than 50 percent of the town is state-owned property, and at 45 percent for all other towns. Reimbursements for tax-exempt hospitals and private colleges can be up to 77 percent.
However, the laws that govern the program allow those percentages to be reduced if the amount allocated by the legislature was not enough to cover the amount of lost property taxes, which has been the case for years.
According to estimates from the Connecticut Conference of Municipalities, the statewide reimbursement rates for tax-exempt properties have steadily declined over the last five years. State-owned property reimbursement rates have decreased from 27 percent in 2015 to 14 percent in 2020. Reimbursement for hospitals and colleges have decreased from 34 percent in 2015 to 22 percent in 2020.
“It takes some of these communities and makes them almost completely unsustainable,” said Joe DeLong, Executive Director and CEO of the conference.
“The state, frankly, should meet its obligations,” he added.
Restructuring the program
State Sen. Martin Looney, D-New Have, is proposing a bill that would restructure the way that state reimbursement funds for these tax-exempt properties to include an equity component that would take into account a community’s level of need, as well as the amount of tax-exempt property in the area.
Looney said that the current way of calculating reimbursement does not take into account a community’s level of need. For example, taxes for a hospital in a wealthier community like Greenwich are reimbursed at the same rate as one in New Haven or Hartford.
“We need to build more equity and response to actual need into our PILOT formula,” said Looney.
Looney has been proposing a change to the PILOT program since 2014. His current proposal would create a three-tiered system of reimbursement based on a mathematical formula that would take into account the total number of tax-exempt properties in the region — including properties like churches, which are not reimbursable through the PILOT program — and the municipality’s net grand list per capita, a number that combines property tax base per person with income per person.
Towns and cities with a large number of state-owned or non-taxable properties and a low net grand list per capita, such as New London, would be placed in the first tier, where they would receive a reimbursement of 50 percent of the taxes that would have been paid by tax-exempt properties. Towns in the second tier would receive a reimbursement of 40 percent, and towns in the third tier would receive a reimbursement of 30 percent. This way, Looney said, wealthier towns would continue receiving essentially the same amount they always had in property tax payments.
Funding for southeastern Cities
Mayor Michael Passero of New London said that the reimbursement that New London currently receives for state-owned properties is around 12 percent. Passero said that this is particularly damaging for the city, putting pressure on a small tax base with a low median household income to support services that assist the whole county, such as the domestic violence agency Safe Futures, the non-profit Thames Valley Community Action Agency, and Lawrence and Memorial Hospital.
“It’s not disproportionately put on New London — it’s totally put on New London,” said Passero, adding that the state “sees fit to foist this responsibility” on the most economically disadvantaged communities.
According to data from 2019, the median household income in the city of New London was $37,331. The median household income in the county was $69,411. The majority of New London’s approximately 30,000 residents, said Passero, are black and brown.
“It’s not sustainable any longer,” said Passero. “I think New London and southeast Connecticut is a great microcosm to look at the real impact and the real social injustice of what’s happening.”
New London is also the site of the state-owned State Pier property, which the Connecticut Port Authority is currently developing into an off-shore wind facility.
Pete Nystrom, the mayor of Norwich — which has a median household income of $53,682 — said that there are instances in which the state has taken some of the city’s most commercially valuable properties to use for state purposes, like the DMV.
“Cities need development,” he said. “They’ve taken very marketable commercial properties off the highway, and gobbled them up.”
About twenty-three percent of the properties in Norwich are tax-exempt. According to the finance office, the city lost $9,955,390 in property taxes from state-owned properties, colleges and hospitals this year. It received $1,427,515 through the PILOT program — a reimbursement rate of 11.6 percent for state-owned properties and 18.6 percent for colleges and hospitals.
“All cities and towns have suffered with the lack of PILOT growth,” said Nystrom.
Passero said he’d like to see the state reimburse 100 percent of the city’s lost property taxes.
“Every dollar they exempt somebody from paying taxes, that’s a dollar that the families in New London have to pick up,” he said.
Funding for small towns
In addition to helping cities with large amounts of tax exempt properties, like New London, Looney said he wanted to give additional aid to smaller, distressed municipalities. He said that under his formula, towns with a net grand list per capita of below $100,000 would also automatically end up in the highest tier. Looney said he believed this would help the smaller rural towns in eastern Connecticut.
State Sen. Cathy Osten, D-Sprague, said that many of the towns in her district, like Sprague and Montville, have tax bases that are unable to support the needs of the communities, either because their populations are small or because they are distressed.
However Osten said that a 50 percent reimbursement rate may not make a large difference to towns like Sprague, a town of 3,000 people that has very few properties that are reimbursable through the PILOT program. She said she hopes the legislature will be able to address this in the mathematical formula that will be used to calculate the tiered system.
“That’s the component that will take the longest to figure out,” said Osten.
Osten said the bill could also help support the municipalities that include tax-exempt tribal lands, which under the PILOT program are eligible for 100 percent reimbursement. Osten said she is including this as a provision in her own bill concerning online gaming.
Looney there are no requirements for how many towns would end up in each tier, nor are there strict requirements for where the cutoff will be between tiers. However, he said he anticipates that the top tier will be the smallest, and the third tier will be the largest.
Looney said he wants to fund the program with income that comes from taxing recreational marijuana and sports betting. He also said he wants to increase the tax on capital gains and dividends from 6.99 percent up at least one percentage point.
“I anticipate broad based support,” said Looney, “But debate over how to pay for it.”
Passero said he thinks that, because of the current leadership in the senate, this session is the best chance they have ever had to get this legislation passed. However, he is concerned that the opportunity to pass the bill could be hampered by the pandemic.
But DeLong said the pandemic makes it even more critical to address the issue. It’s important for us, he said, “to position our communities to be economically competitive…so that everyone has the ability to participate in the economy going forward.”
Nystrom said that in a session where far fewer bills would probably make it through, looking at something like the PILOT program would be a good choice.
“They should be focusing on these kinds of issues,” he said. “If they just focus on budget issues, that would be a great start.”