Pittsburgh Mayor Bill Peduto inherited an improved financial situation when he took office Jan. 6, but also some unfinished business.

"Our work is not done," the former councilman said at his inauguration.

Peduto wants Pittsburgh, despite a nine-year march out of junk-bond status that has included 10 upgrades, to remain in Pennsylvania's workout program for distressed communities, known commonly as Act 47, and leverage its status to forge a long-term program of payments in lieu of taxes, or PILOTs, with the city's many nonprofit organizations.

His predecessor, Luke Ravenstahl, had advocated an exit from Act 47, calling the distressed label a "black cloud."

Universities and hospitals - public finance wonks call them "eds and meds" - have helped Pittsburgh transform from a tired Rust Belt city.

"[We must] develop a plan that will allow us that will allow us to work with our nonprofit community to satisfy what would be their obligation under a payroll prep tax in a way that is fair and equitable to the city of Pittsburgh and to these large institutions," Peduto wrote in a letter to Gov. Tom Corbett. "We must develop a sustainable stream of compensation for the services that our city provides to large nonprofit institutions so that we can achieve the other measures of fiscal health laid out above without raising taxes on our residents."

The three major bond rating companies now have Pittsburgh in the A range. Standard & Poor's elevated the Steel City's general obligation rating three notches in June to A from BBB. Moody's Investors Service and Fitch Ratings rate the bonds A1 and A, respectively. All assign stable outlooks.

Nonprofits such as Carnegie Mellon University and the University of Pittsburgh and its high-profile medical center, consume many acres of nontaxable land. Health care, meanwhile, has been a battleground in western Pennsylvania, home to the raucous merger joust between insurer Highmark Inc. and the University of Pittsburgh Medical Center that has lasted since 2011, when Highmark began to stalk the struggling, five-hospital West Penn Allegheny Health System.

The battle still rages. Highmark last year closed on its purchase of West Penn and wants it to compete directly with UPMC, triggering yet more brawling from courtrooms to the media. UPMC won't renew a contract with Highmark to cover UPMC hospitals in Pittsburgh's Allegheny County, with the tussle spilling over to Erie of late.

Peduto, should his PILOT plan materialize, would join such cities as New Haven, Conn., and Rhode Island capital Providence, the respective homes to Ivy League universities Yale and Brown, as well as Boston, the Massachusetts capital and home to a plethora of colleges and other nonprofits.

William Rhodes, who chairs the public finance department at Ballard Spahr LLP and serves as practice leader of the Philadelphia law firm's municipal recovery initiative, suggests Peduto come to the table prepared.

"You need the best crystal ball you can get," said Rhodes. "My advice to Mayor Peduto is to have the numbers in front of you, make sure he has information available, then have a separate discussion with all the nonprofits.

"In Pennsylvania, the cities that are also county seats are centers for 'eds and meds' already."

Wilkes-Barre, the 41,000 population seat of Luzerne County, forged an agreement with King's College and Wilkes University. And up the road in northeast Pennsylvania, Scranton, another Act 47 community and the 76,000 seat of Lackawanna County, built increased PILOT payments into its recovery plan.

In Providence, where nonprofits take up roughly 45% of all real estate, Mayor Angel Taveras in 2012 worked out an agreement for nearly $50 million in increased PILOT payments over the next decade. That supplemented a compromise with retired police officers and firefighters over pension benefit cuts to help the city erase what Taveras early that year called a "Category 5 fiscal hurricane" and avoid a possible bankruptcy.

Relations between city officials and nonprofits, often nicknamed "town and gown," can be fractious. Providence officials chafed at comments in 2012 by Ruth Simmons, Brown's president at the time, that reeked of academic elitism.

"Universities have become, in many ways, the most successful sector in society," Simmons said told the Brown Daily News before retiring that year and handing the presidency to former Princeton dean Christina Hull Paxson. "I don't think it's reasonable for the city, having made mistakes and having become insolvent because of those mistakes, to turn to institutions that are successful and to demand that they pay for those mistakes."

City and Brown officials worked through the acrimony and ironed out an agreement that also included other nonprofits, including Providence College and the Rhode Island School of Design, and various hospitals.

New Haven, also where 45% of property is tax exempt, gets a voluntary $8.3 million annually from Yale. According to a spokesman for Mayor Toni Harp, $2.7 million was a fire service payment and $5.6 million under a voluntary payment agreement.

Harp, a former state senator who succeeded John DeStefano as mayor last month, would like $5 million more to cover police officers, firefighters and other public-works employees.

During DeStefano's 20-year tenure, which largely coincided with that of Yale president Richard Levin, New Haven and Yale worked more in synch than in years past. The Democratic mayoral primary tussles in 1977 and 1979 between Yale-educated Frank Logue and former police chief Biagio "Ben" DiLieto - each won once - reflected that schism, although DiLieto strove to improve relations with Yale during his five two-year terms.

DeStefano and Yale have collaborated on downtown revitalization, a science park and the redevelopment of state Route 34 to enhance biotech growth.

Ballard Spahr's Rhodes said cities should understand that nonprofits can contribute in other ways, such as redevelopment incentives. Long-term capital projects, for example, could produce indirect income through construction fees.

Rhodes warned cities not to scare away nonprofits.

"It's easy to say they don't pay real estate taxes but they get police and fire protection. No doubt they get a better deal, but not every nonprofit is in the same situation," he said.

Moody's, in a special commentary in 2012, said increased PILOT revenue poses long-term risks for some local governments because they could impair jobs-intensive capital projects and even encourage them to relocate.

In Boston's case, Moody's, which rates the city Aaa, called the willingness of nonprofits to increase payments a credit positive for the city and surrounding governments, citing stagnant property tax revenues, state-imposed property tax caps and a high volume tax appeals.

Also in Massachusetts, Worcester and Boston suburbs Newton and Framingham have taken steps to increase voluntary payments.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.