Downtown Dayton: 80 percent of property is exempt from taxes

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Take a tour of the most valuable tax-exempt properties in downtown Dayton at mydaytondailynews.com

Building projects in Dayton have brought construction jobs and new looks to the cityscape, but many haven’t delivered one thing the city and the school district desperately need: property tax revenue.

Forty-one percent of all the assessed property value in the city of Dayton — a whopping $2.6 billion — is exempt from paying property taxes. That’s an 11 percentage point increase from 2002, when $1.9 billion, or 29.4 percent, was tax-exempt, a Dayton Daily News analysis of Montgomery County real estate tax records found.

That trend is more concentrated downtown. Almost 80 percent — more than half a billion dollars — of the assessed value in the central business district is exempt from taxes. In 2002, 63.4 percent of downtown’s assessed value was tax exempt.

Exempt properties include real estate owned by governments and schools, as well as nonprofits such as hospitals and churches.

That means new construction projects such as the Miami Valley Hospital and Dayton Children’s Hospital expansions, the CareSource headquarters, and all but 2 percent of the value of the General Electric building on the expanded University of Dayton campus will not help Dayton Public Schools, the human services levy, the city, the Dayton Metro Library, Sinclair Community College, Five Rivers MetroParks or the county.

No one is more alarmed by the trend than Craig Jones, treasurer for Dayton Public Schools, which gets about two-thirds of the city’s property tax revenue.

“I knew it was growing, I didn’t know that large of a percentage,” Jones said. “About a third of our revenue comes from our property taxes.”

When voters approve a tax levy, he said, they are voting on a dollar amount that will go to the school district.

“That dollar amount can’t go above what the voters have approved, but it can go down,” Jones said. “And that’s what’s happening because of loss of value.

“When the values go down, we start losing money at some point. So yes, it is a concern.”

Nationwide issue

Experts say the increase in tax-exempt property is nationwide and driven by the decline in manufacturing and the rise in service industry jobs.

“Within the service sector, education and health care are quite important” and are often tax-exempt, said Daphne Kenyon, a fellow at the Cambridge, Mass.-based Lincoln Institute of Land Policy. “So you’re not the only city that’s experiencing this.”

The trend means that homeowners and businesses must bear a greater share of the property tax burden, Kenyon said.

Mike Maciag, data editor for Governing magazine, said the newspaper’s analysis “certainly lines up with what’s happening nationally.”

A 2012 study by the magazine found that in 16 of 20 cities studied, the value of tax-exempt properties had grown from 2006 to 2011.

State capitals and county seats, such as Dayton, usually have greater shares of exempt properties because they have more government buildings, universities and hospitals, said Maciag, a University of Dayton graduate.

“Those three groups are really the bulk of exempt properties, for the most part,” he said.

In fact, the top three owners of exempt property in Dayton represent exactly those three groups. They are:

The top 10 owners of exempt properties in Dayton control 2,558 parcels worth more than $1.9 billion. Of those, four are hospitals, three are governmental units and two are institutions of higher education: UD and Sinclair. Also on the list is Dayton Public Schools.

Shelley Dickstein, Dayton’s assistant city manager, said health care is one of the strongest growth industries in the city and region.

“Much of the health care activity and growth is in companies that are tax-exempt,” Dickstein said. “All of our hospitals are nonprofit status. CareSource is a nonprofit organization.

“If you look at our top 25 businesses, and in the greater region, not just the city of Dayton, the majority of them are nonprofit organizations or organizations that have a tax-exempt status.”

Those organizations are “extremely valuable” to the city, Dickstein said.

“They are generating thousands of jobs and are really contributing to the wealth of our community,” she said.

“So, on the one hand they are sustaining and growing our economy, which is a really good thing. On the other hand, they’re not generating real estate taxes, which is what really supports our school system.”

And while the city’s tax-exempt properties are growing in number and value, all other major property classes — residential, commercial and industrial — are declining, the analysis found.

Between 2002 and 2015, residential properties in the city increased in number by about 2 percent, but lost close to $445 million in assessed value. Industrial and commercial properties both decreased in number by about 12 percent and lost a combined $331.3 million in value.

Giving up a lot

That’s something city officials are trying desperately to turn around. To do that, they say, the city has to use tax abatements as an economic development tool in an attempt to lure businesses and new development.

“In our weak market, we have to work a little harder in attracting that investment,” said Dickstein who leads the city’s economic development programs.

According to county figures, the city has about $54.8 million of tax exemptions on the books in abatements and enterprise zones. It has another $42.1 million in tax increment financing agreements with property owners, which funnels much of the property taxes for a period of years into infrastructure improvements to support new development.

Together, those property tax breaks account for less than 2 percent of the city’s assessed value, but it’s still real money to schools.

The school board doesn’t get to weigh in on all tax abatements, said Jones. But the city is required by state law to get board of education approval for bigger packages. When they do, it puts the board in a difficult position, he said.

“On the other hand, we’re approving a tax exemption and giving up tax revenue,” Jones said. “And then at some point down the line we’re going to come to the voters and ask for a property tax levy.”

When the city has to go back to the taxpayers to ask for more money, he said, some residents inevitably question why the board gave up so much money in exemptions.

According to figures from the county auditor, the schools get 60.5 percent of all owner-occupied residential property taxes and 67.9 percent of all commercial and industrial property taxes.

“If we say no, if we don’t approve a tax exemption program, an abatement or a TIF (tax increment financing agreement), then it looks like we’re bad partners,” Jones said.

“I know everybody is really pushing economic development and jobs, but the costs to it and the impacts to the schools is not always readily seen or acknowledged.

“The city is asking us to give up a lot of revenue – more revenue than I would like us to give up.”

Lasting exemptions

Most of Dayton’s exempt property belongs to governments, the school district, parks, colleges and cemeteries, according to the county auditor’s office. Those types of exempt properties account for $1.64 billion, or 25.6 percent, of the city’s assessed value.

Charitable nonprofits, churches and other like organizations account for $876.4 million, or 13.7 percent, of the city’s total value.

Tax abatements and enterprise zones — the discretionary exemptions used to attract development — account for $54.8 million, or about 0.9 percent of the city’s total value.

Property tax exemptions are written into state law, and have been around for a very long time. Indeed, Kenyon said, such exemptions for nonprofits “go back to the beginning of the history of the property tax in the United States.”

“But one of our key points in all of our research is that this issue should be approached in a collaborative way — that it’s good to have a discussion between city officials and nonprofits,” she said.

That’s especially key in some states, such as Massachusetts, where cities that cannot collect municipal income taxes are more reliant on property taxes than Ohio cities.

Cities such as Boston have attempted to make up for declining property tax revenue by negotiating voluntary payments in lieu of taxes from nonprofits, Kenyon said. They usually get a small fraction of what the assessed value would generate from a for-profit, she said, but it’s better than nothing.

Some states, she said, have begun to challenge exemptions of some nonprofits.

In Illinois, for example, the Supreme Court ruled in 2010 that a county was right in revoking the tax-exempt status for Provena Covenant Medical Center because it did not provide enough charitable care to the community.

“If you think about the health care sector, you have both nonprofit and for-profit hospitals,” Kenyon said. “And there are people who say, ‘Gee, when I look at the hospital sector, nonprofit hospitals tend to act an awful lot like for-profit hospitals.’ They pay their CEOs healthy salaries. You know, how much charity care do they give?”

Jones said the Dayton Board of Education hasn’t gone in that direction. But they’ve talked about it.

“We have internally kind of questioned whether an organization really is tax exempt,” he said.

Hospitals and care

Bryan Bucklew, president and CEO of the Greater Dayton Area Hospital Association, said the area’s hospitals can’t be accused of acting like for-profit organizations.

When the Provena ruling was handed down, Bucklew looked at the Illinois qualifications for nonprofit status. He said all the region’s hospitals would have qualified.

Just in Montgomery County, he said hospitals provide more than $250 million a year in uncompensated care.

If the local hospitals were to operate as for-profits, Bucklew said, a number of services, such as mental and behavioral health, would be shut down.

“No hospital is making money on providing mental/behavioral health service for psychiatric services, for psychiatric intensive care units,” he said.

“But we need to continue to provide those services, because those are needed in the region.”

In addition, Bucklew said, the hospitals deserve credit for continuing to invest in their urban facilities — part of the reason Dayton’s exempt property values have increased.

“You have a lot of other communities across the country that have closed service lines or closed hospitals in urban settings and moved into the suburbs,” he said. “But every one of our major hospitals in the city of Dayton has chosen to invest in their urban campus.”

CareSource chief administrative officer Dan McCabe said the growing nonprofit is a valuable addition to downtown. The organization, which is Ohio’s largest Medicaid managed care provider, built its headquarters near the Great Miami River in 2009.

“Like all tax-exempt, not-for-profit organizations, we don’t pay property taxes,” McCabe wrote. “However, we do have 2,000 employees working downtown, who pay more than $2.5 million in income taxes to the City of Dayton. Being a positive force in the downtown Dayton community is at the core of who we are.”

McCabe said that since 2006 the CareSource Foundation has provided more than $10.1 million in grants across Ohio, with almost half invested in the Dayton region.

City and schools

Dickstein said the shift to tax-exempt properties is a serious concern for the city.

“Clearly it puts pressure on us, particularly as it relates to resources for the school system,” she said. “That’s what worries us the most.”

When the city does grant tax exemptions for business or development, Dickstein said, it looks hard at the costs, pushes back if the request is too large, and attempts to negotiate the best deal for the schools.

But, she said, the city has to offer some incentive to encourage new development.

When the University of Dayton, for instance, acquired 40 acres of NCR property that was formerly taxable, it was taken off the tax rolls and there was nothing the city could do about it.

On the other hand, she said, the Water Street development, which is getting tax abatements, will be bringing land formerly owned by the city and the school district back into the tax base. And if the Montgomery County Fairgrounds gets redeveloped, she said, that will be a huge boost for property taxes — after tax abatements expire.

“If you look at the fairgrounds, if you look at the Water Street stuff, these are all properties that in their current condition or status are not generating one cent of tax dollars to the schools,” Dickstein said. “So you can argue pretty loudly that if we continue as is, they’re getting zero in tax dollars.

“If we attract $100 million, and they have to be patient for the first 10-to-15 years, then they can capitalize on some of that investment.”

Jones said the schools and the city have a good working relationship, and he understands what Dickstein and her people are up against. But it’s still hard for the schools to be patient.

“Tell that to a parent of a child who is entering kindergarten, and the 15 years (of tax abatements) are beyond when they will graduate,” Jones said. “Tell that child they don’t have revenue for a teacher, for supplies, for computers their whole K-to-12 experience.”