February 1 2007

Pennsylvania’s universities are terrific economic and social assets, both regionally and statewide. But what’s the bottom line impact on their host municipalities? IssuesPA takes a closer look.

(February 2007) Leaders of host municipalities have maintained for decades that they absorb most of the direct and indirect costs associated with hosting a university – while the economic benefits are spread over a much wider area. To test this assertion and to begin to identify the real impact of universities on the host municipality, the Pennsylvania Department of Community and Economic Development and five municipalities commissioned a study. Participating municipalities – each hosts to state universities – include the City of Lock Haven, the Town of Bloomsburg, and the Boroughs of Edinboro, Millersville, and West Chester. The Pennsylvania Economy League, Central Division, completed the study, which was first released in November of 2006.

Comparing host municipalities to those without a university

Though colleges and universities bring undisputed economic and social benefits to a region, their presence adversely impacts the host municipality’s fiscal resources. To measure the real impact of hosting a university, the Pennsylvania Economy League (PEL) studied the revenues, expenditures and services of participating cities against a control group of municipalities that don’t host universities. The demographics and characteristics of both groups of municipalities were very similar – except for the presence of a college or university. Analyzing the differences in the revenues and expenditures of the municipalities (and there were considerable differences!) provided tangible evidence of the impact of universities.

Per capita revenues in host municipalities are lower than in other municipalities. College town municipalities consistently collect less revenue per capita in earned income tax, real estate tax, and total taxes than their municipal counterparts. These differences are significant: $53 per capita earned income tax and $94 per capita in real estate taxes in college towns compared with $102 and $151, respectively, for other municipalities. The total tax differences were $175 per capita for host municipalities compared to $296 for the control group. And despite lower revenue levels per capita, spending per capita on public safety and parks and recreation services was higher in college towns than in other municipalities.

One reason for the lower revenues for host municipalities is the reality that universities do not contribute property taxes but do own a significant amount of property within the municipality. For example, Edinboro Borough is atypically dependent upon the Earned Income Tax, deriving 68 percent of total tax revenue from that one source. Conversely, only 27 percent of tax revenue is derived from property taxes where of a total of $286.5 million in total assessed valuation is diluted by $125.5 million in tax-exempt valuation. Of this exempt valuation, $113.5 million (90 percent) is attributed solely to Edinboro University.

The presence of a relatively large student population (over 15 percent of total population) likely contributes to the lower per capita revenue for host municipalities. Students often do not work or work part-time, and their home municipality, not the host municipality, usually receives their earned income tax. This puts a higher per capita tax burden on the residents of the host community.

How to mitigate the impact of a university on the municipality

In Pennsylvania, financial issues that arise between universities and their host municipalities are resolved through negotiations at the local level—or remain unresolved. The state universities included in this study (Bloomsburg, Edinboro, Lock Haven, Millersville and West Chester) each voluntarily contribute to the host town’s public services, particularly fire protection, and these contributions are often substantial. However, they are not always consistent and cannot be budgeted by the municipalities.

PEL looked to other states for insight on how to resolve the negative fiscal impact of the university on the municipality. One possible solution includes payment in lieu of taxes (PILOT), a direct method to compensate municipalities for hosting state-owned facilities (including hospitals and prisons as well as universities) and privately-owned facilities that are tax exempt. Another approach is state support for specific services, especially the additional municipal costs related to police and fire protection. Here, the state authorizes payments, directly to the host municipality, which take into account the value of all university or state-owned buildings as a proportion of total market value. Both of these approaches would require new legislation in Pennsylvania.

Often the best method of preserving “town/gown” relations is direct negotiated agreements between the university and its host municipality. Ongoing collaboration can help address compensation for the fiscal impact of continuing expansion, a one-time need for a specific piece of equipment (fire truck, street sweeper, plow, etc.), and can help assure that payments keep pace with ongoing, rising costs. This approach works well only when guidelines for planning, fiscal impact analysis and ongoing communication are in place.

The best solution, the study concludes, is a combination of a straightforward state funding formula and mandated negotiations at a local or regional level. The balance between the economic and social benefits generated by state universities and the growing demand for services as these facilities expand is difficult to maintain. And current momentum is unfavorable for many of the municipalities, which host universities. This is critical for municipalities – and should be important to universities as well. Deterioration of services such as public safety or recreation, or increasing levels of fiscal distress, might well have the effect of making state universities less attractive to prospective students, faculty and administrators.

To download the full study, click here.