Financial Foundations Framework, Budgeting and Forecasting

Boston’s PILOT Project

Image of Boston from GFR

Many local governments have several tax-exempt properties within their boundaries. For those governments that rely on property taxes, tax-exempt properties can create a drag on the local budget: These properties pay no taxes but still must be served by local government. The City of Boston is one such government. Boston has several colleges, universities, and hospitals. As of 2007, the city’s Assessing Department estimated that the 16 colleges and universities they examined totaled $7.0 billion in property value, and the 12 hospitals examined totaled $5.7 billion in property value. The Assessing Department estimated that, if taxed at the commercial rate in fiscal year 2009, these institutions combined would have generated $345.0 million. By comparison, the commercial sector generated $764.5 million in the same period.

Local governments like Boston have a conundrum: how to balance A) the contributions that tax-exempt properties make to the local government budget and community well-being by virtue of their pro-social missions versus B) the resources these properties consume from the local budget. This conundrum is what is known in economics as a “common-pool resource” problem. The local government budget is “owned” by everyone in the community, but any single person has the incentive to avoid contributing to the pool (the budget) while still using resources from the pool (services).

Fortunately, the Government Finance Officers Association has developed a framework, based on Nobel Prize-winning work, to solve common-pool resource problems: Financial Foundations for Thriving Communities.