City of Pittsburgh quietly reverses course on legal challenges to tax-exempt properties

Just over a year into his term, former Mayor Ed Gainey launched an aggressive legal campaign with the goal of forcing large nonprofit organizations to contribute more money to help pay for vital city services.

The Gainey administration alleged that valuable properties owned by the nonprofits - predominantly UPMC, Highmark Health, the University of Pittsburgh, Carnegie Mellon University and Duquesne University, the so-called Big Five - did not meet the charitable mission of the organizations.

At the time, more than one-third of the property in the city was exempt from taxes and could have brought in millions of dollars in badly needed revenue for the city. For the former mayor, it would've been a victory that others in city leadership had failed to achieve despite decades of efforts.

"If you fail to meet our constitutional standard, then we will make sure that you will pay your fair share to our city," Gainey said at the time.

But in the years that followed, only a small number of the properties made it back onto the tax rolls - so few that the money the city recouped didn't cover the cost of the outside lawyers who were hired to wage the legal fights.

Now, six months into Mayor Corey O'Connor's administration, the city has been quietly reversing course and withdrawing many of the ongoing property appeals.

As the O'Connor administration has been dropping its appeals, the new mayor has taken a different approach to the longstanding challenge of collecting more money from nonprofits. (Alexandra Wimley/Post-Gazette)

The shift in tactic is a "marked change," in how the city handles these organizations, Pittsburgh Public School District Solicitor Ira Weiss said.

The withdrawals are coming amid an internal review of the city's legal challenges to the nonprofits, "assessing the strengths of its legal position in each case and the best interests of the taxpayers," said Molly Onufer, the mayor's press secretary.

But despite initiating the legal challenges, the city can't act alone.

Before Pittsburgh can withdraw an appeal, both the school district and the county have to agree because they have a stake in the outcome. Any properties that return to the tax rolls would benefit those governments as well - and, like the city, both are facing significant budget shortfalls.

As the O'Connor administration has been dropping its appeals, the new mayor has taken a different approach to the longstanding challenge of collecting more money from nonprofits - which include some of the city's largest and most valuable institutions.

Instead of suing the groups, which O'Connor said created an adversarial dynamic that pitted the city against the nonprofits, he suggested going to them with specific requests for funding.

It's an approach that has already brought in more than $18 million.

(Sebastian Foltz/Post-Gazette)

In the past few months, UPMC, the PNC Foundation, the University of Pittsburgh, the Heinz Endowments, the Richard King Mellon Foundation, the Pirates Charities and the Pennsylvania Laborers District Council have all contributed to help pay for snow plows, ambulances and upgrades to baseball fields among other initiatives.

Onufer said those contributions are not related to the city's decision to withdraw its appeals.

The funds have freed up money that can now be used to cover other expenses, helping take some of the pressure off the cash-strapped city.

But because of the combination of rising inflation and dwindling tax revenues, Pittsburgh is likely staring down a deficit of more than $24 million at the end of this year, according to the city's most recent financial estimates.

The financial pressures facing the city have driven renewed interest in the money that the city could be collecting from its nonprofits. A recent report found that if the groups were paying taxes at the same rate as everyone else, the city would receive an additional $37 million each year.

For decades, Pittsburgh mayors have struggled to find ways to compel the groups to pay more for city services. Before Gainey, other mayors attempted to sue the groups to force them to pay the government and drafted agreements under which the nonprofits would make regular, voluntary contributions that would cover some city expenses.

When Gainey was elected, he scrapped a plan from former Mayor Bill Peduto under which nonprofits had committed about $115 million. The problem, the Gainey administration said, was that none of the funds would be monitored by the city controller and would instead be controlled by a separate nonprofit.

Months later, Gainey launched the property appeals.

The Gainey administration alleged that valuable properties owned by the nonprofits did not meet the charitable mission of the organizations. (Pittsburgh Post-Gazette)

From the beginning, some were skeptical of Gainey's approach. In addition to doubts about how much money the challenges would bring in, real estate experts and others said the city was wasting resources by appealing the status of properties that were clearly exempt under the law.

In the first round of challenges, some of the properties targeted by the city were owned by disabled combat veterans, who are exempt from property taxes under a provision in the Pennsylvania Constitution.

In another slate of appeals, the Gainey administration listed Children's Hospital in Oakland and Allegheny General Hospital on the North Side as two of the properties they were challenging, both of which were found to align with the healthcare giants' charitable missions.

Other cities in the commonwealth have signed payment in lieu of taxes agreements with UPMC and Highmark Health - a deal that continues to be Pittsburgh's white whale.

In Erie, the two hospital systems agreed to pay half the amount they would otherwise owe if their properties were on the tax rolls. A similar agreement in Pittsburgh could bring in more than $33 million a year from the Big Five alone, according to the Keystone Research Center.

The O'Connor administration hasn't ruled out the idea of PILOT programs, but hasn't announced specific plans to bring in more money from the nonprofit community.

"Mayor O'Connor has been clear that he wants to build partnerships with our nonprofit community, business community, foundations and more," Onufer said. "We want to work with all partners to deliver on Mayor O'Connor's commitments to the people of Pittsburgh and that spirit of partnership has been shown to work well with the partnerships we have already seen."

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