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This article is part of a weeklong America 360 series on Providence.
PROVIDENCE, R.I. — The old Rhode Island Hospital Trust bank was built downtown nearly a century ago to project permanence, with its 12 stories framed in steel and covered in limestone. The bank even etched its name over the Westminster Street entrance years ago as if to announce that the building would never serve any other purpose.
We know now that banks go out of business. So what does a city do with a 1917 York & Sawyer monument to commerce? Today, the building houses the library of the Rhode Island School of Design, a nationally renowned art school. The vaults, too, have been repurposed, as climate-controlled storage for the school's 35-millimeter film.
Properties like this are everywhere: grand banking halls without the banks, ornate department stores that no longer sell a thing. The city's primary growth industry now — higher education — has moved in.
That's been a positive story for a struggling downtown. But it comes at a cost. Universities, alongside hospitals — the coveted "eds and meds" at the center of many economic revitalization plans — typically don't pay property taxes as nonprofit organizations. That means cities like Providence are leaning on an industry whose growth, by definition, slowly chips away at the local tax base.
Last year, about $6.4 billion in real estate, or nearly 40 percent of the total property value in Providence, was tax-exempt by the city's count. That includes not just the four major schools, but also hospitals, churches, cultural institutions, and government buildings. (Providence happens to be both a college hub and a state capital.) Higher education accounts for just 8 percent of the city's total property, but its presence looms large.
When the city confronted a fiscal crisis in 2011, RISD, Brown University, Johnson & Wales, and Providence College looked like the most deep-pocketed institutions in town. The city was facing a $110 million budget deficit. And, in a bean-counter's fantasy, it estimated that those four schools, with the three major hospitals in town, would have paid more than $111 million in annual tax revenue to the city, were it not for their nonprofit status.
The city and schools ultimately reconciled those two numbers through painstaking negotiations that tried to balance the city's dire finances against the very meaning of "nonprofit." Increasingly, though, the two sides are at odds in other New England college towns sustained by property taxes, and now in places beyond the region. Providence's solution illustrates a dramatic, temporary stopgap, but it still raises questions about the long-term blueprint for how a community, built around nonprofits, can fund its services and serve its institutions at the same time.
"How do we address this so it's not an ad-hoc approach every decade?" asks Marisa Quinn, Brown's vice president for Public Affairs and University Relations. The answer here, or anywhere, is not entirely clear.
This debate first flared up in Providence in 2003, when the city was facing an earlier deficit of $60 million. Then-Mayor David Cicilline, now a U.S. representative for the state, negotiated an agreement with the four schools to contribute $48 million over time to the city, partly in recognition that their expanding campuses were taking property off the tax rolls. That deal was supposed to last for two decades.
Then in 2011, newly elected Mayor Angel Taveras went back to the institutions to ask for more. He believed the city might be facing bankruptcy. "We needed shared sacrifice,'" Taveras says. "Everyone needed to be part of this."
In the years since 2003, however, the universities' finances had begun to erode alongside the city's. Brown lost a third of its endowment when the stock market collapsed in 2008. It still hasn't fully recovered, Quinn says. Two of the university's four schools cut their staffs.
"Post-2008 was a different world, a different reality," says Dan Egan, president of the Association of Independent Colleges and Universities in Rhode Island. "You had students at our institutions whose parents were writing checks in September for a full ride, and then after 2008, after the Wall Street collapse, they were in line for financial aid now — sometimes in very large numbers."
If anything, it looked as if the universities had made tough decisions during the recession. The city had not. Now, university officials were being asked to pay for the city's mistakes — again.
"One of the arguments we heard was that our presidents were now the giants of industry," Egan says. And with that shift in many communities, critics have questioned whether higher education should retain its nonprofit status at all.
At the same time, the federal government has been pressuring colleges and universities to lower tuition, or at least slow its rise. That message sits in direct conflict with the pleas of local officials to pay out (and pass the cost onto students).
In Providence, the four schools were adamantly against reopening their 2003 agreement. They also insisted that they would not come to the table this time without the rest of the city's not-for-profits coming, too. They wanted Taveras to bring in the hospitals. They wanted the Rhode Island Legislature to increase state contributions to municipalities that are full of nonprofits. They wanted to see the city negotiate concessions with unions and retirees.
In reality, though, these schools could no more bear a bankruptcy than Taveras could. "I said, 'Look, philosophically, I don't want to be a president of a successful institution in a failing city,'" says John Bowen, the chancellor at Johnson & Wales. "It just doesn't make any sense."
In negotiating with the city, Bowen settled on a strategy that the other schools eventually adopted: The deals had to be transactional. The schools weren't giving away money unless they received something in return. Only an agreement like that could help them argue that they were keeping their nonprofit status intact.
Ultimately, on top of the 2003 agreement, Johnson & Wales agreed to what could amount to $11.5 million in new payments over 10 years. In exchange, it was able to acquire a new parcel of land and three stretches of roadway that had technically been city-owned property. RISD agreed to pay an additional $2.75 million to the city; Providence College, $3.84 million; and Brown, $31.5 million, all over about a decade.
Each of them negotiated their own goodies, such as leases on new parking spots or the acquisition of a few blocks of public streets. Between the 2003 and 2012 agreements, Brown will be giving the city about 10 percent of what it spends in aid on its own students every year.
The city, in turn, will not get the full $111 million it would have if the universities and hospitals were any other kind of property-holder. But Taveras got to claim an additional $48 million in revenue from the seven big tax-exempt nonprofits over 11 years. He also got to say that all of these payments were "voluntary," an awkward hallmark of "payment in lieu of taxes" deals in any city.
"They are, technically voluntary," says Adam Langley, a research analyst at the Lincoln Institute of Land Policy, who has studied these types of agreements. "Certainly, there is more coercion in some places than others."
Earlier this year, the city of Pittsburgh sued the University of Pittsburgh Medical Center trying to strip its nonprofit status. The hospital network had become the state's largest employer and richest nonprofit in town. It no longer made sense, Mayor Luke Ravenstahl argued, for the city to subsidize it. Boston, on the other hand, runs a less contentious payment program that it stresses is voluntary. The city is very public, though, about making clear who volunteers.
It's hard to ignore the dynamic that all of these cities can ask for concessions from universities that they'd never ask of businesses, in no small part because universities can't pick up and leave. Bowen alone had leverage. Johnson & Wales now has campuses in four cities across the country. In the midst of all this, officials from the city of Charlotte sent Bowen a letter trying to entice him to relocate his headquarters to a place without Providence's financial problems.
Johnson & Wales will stay in Providence, for now. But that offer underscores one of the reasons these ad-hoc local deals are ultimately unsustainable, both for the host cities and for the schools that agree to them. When these agreements expire, Providence will likely still have an economy built on nonprofits. And in the meantime, Johnson & Wales now has a new problem.
"Before I even go ahead and enroll one student, I'm $7 million in the hole," Bowen says, considering his own competitors in other cities. "That's a cost that they do not have."
This article is from the archive of our partner National Journal and part of our Next Economy coverage.