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For College Towns, Having a World-Famous University Is a Mixed Blessing

Just ask New Haven, the home of Yale.
by | October 2018

The sun hadn’t yet risen in New Haven one day this summer when a line started forming outside the new L.L. Bean store on Elm Street. People were queuing up to get first crack at the gift certificates advertised as part of a grand opening weekend, a three-day gala with music, food, a block party and a free yoga class. 

Yale University is the landlord for the new store, which is the latest addition to the Shops at Yale at Broadway, a 9,000-square-foot retail triangle just a block north of the main campus. The exact university boundary is hard to identify because Yale’s presence is stitched throughout New Haven. It comprises not only academic and research buildings and dormitories, but also the hundreds of homes Yale has bought for faculty and staff, and equally important, commercial land holdings valued at more than $100 million. The university has reshaped a city where the Ivy League campus once felt like a world of its own, separate from the factory town where thousands of workers assembled bolt-action rifles. 

When the new L.L. Bean opened in August, it wallpapered a nearby column with pictures of its signature duck boot. The boot’s color matched Yale’s blue. It was not a coincidence. Yale is New Haven’s biggest player in commercial retail development. The Shops at Yale, the Chapel Street Historic District and the Whitney-Audubon Arts and Retail District are almost entirely under university control. In many of the commercial corridors, quirky local businesses have been displaced by high-end national retail chains. Where Cutler’s Records used to sell used and new vinyl albums, the British clothing brand Barbour now offers a line of trendy cotton jackets. Patagonia, Lou Lou and J. Crew are all part of the Shops at Yale, and coffee shops and bistros, all Yale tenants, line up along adjacent Chapel Street. Lauren Zucker, the university’s associate vice president for New Haven affairs and university properties, admits she often has to think like a mall operator. Yale isn’t in the retail business to lose money. Still, she insists, the university places aesthetics ahead of pure profit in selecting commercial tenants. “If you wanted to make a quick buck in retail,” she says, “you’d lease it to a fast food restaurant or a bank.”

That a university with more than 300 years of history and a $27 billion endowment would have to decide on the location of a frozen yogurt store speaks to the university’s vested interest in all of New Haven. Former Mayor John DeStefano has called the relationship between the university and the city, once frosty but thawed since the late 1980s, a matter of “mutual self-interest.” The city, long battered by economic headwinds, needs the injection of capital, the jobs that come with the expansion of a large research institution, and the affluent talent base that follows. Yale needs New Haven to provide an attractive backdrop for its campus to compete against Columbia, Harvard and Princeton universities in attracting top students and talented faculty members. As Amy Cotter, who studies town and gown politics at the Lincoln Institute of Land Policy, says, “Universities are fooling themselves if they think the community and the region around them are not part of the draw.” 

 


The university owns the Shops at Yale, a retail triangle just a block north of campus. (Shutterstock)

 

The connection between a university and its host city has traditionally been one marked by mutual benefit, but also mutual suspicion and, in the worst cases, mutual disdain. Even Harvard, an icon in Greater Boston, has felt the wrath of local politicians, most notably in the 1990s when it used an outside agency to buy Boston property secretly because university officials believed anyone knowingly selling to Harvard would demand top dollar. That move earned an angry rebuke from then-Boston Mayor Thomas Menino. But the town and gown relationship has taken on a new dimension in recent years as universities’ abilities to drive the economic engine both benefits and clashes with the needs of the local communities.

It’s a challenge for cities all across the country. With 14,000 employees, Yale is the largest single employer in New Haven. Harvard ranks second and the University of Massachusetts ranks fourth among employers in Greater Boston. The University of Southern California has for more than a decade been among the largest private employers in greater Los Angeles. In at least 25 metropolitan areas in America, higher education institutions and their accompanying hospitals, a sector often dubbed “eds and meds,” account for roughly 1 in 6 local jobs, according to an analysis of 2016 federal data by the Martin Prosperity Institute. 

Mayors in New Haven, Boston, Philadelphia and Pittsburgh have all been largely supportive of benefits from the expansion of the universities. But the growth comes at a steep dollar cost to these college towns. Boston, Cambridge, Mass., New Haven, Philadelphia and Pittsburgh have collectively lost billions in property tax revenues because of the tax-exempt status of their universities and affiliated medical centers. 

According to a Lincoln Institute study in 2009, universities in Boston were sitting on more than $12 billion in real estate, which if taxed would have generated more than $340 million for the city. Through voluntary contributions in lieu of taxes, colleges and hospitals in Boston sent the city about $14 million that year. Tom Murphy, the former mayor of Pittsburgh, says this is the predicament cities who play host to major research universities invariably confront. “You want the universities to grow, you need the jobs they provide,” Murphy says. “But as they grow, you lose property off the tax roll.”

 

Gifted with its huge endowment, Yale has created an urban center that would not exist without its money and influence. Each summer, parents, prospective students and tourists flock to the city to lay eyes on an institution older than the country itself, and to spend money in the Yale-controlled business district. This is the New Haven that nearly all the visitors see. But it is not the only New Haven. Once a manufacturing hub where the rifle maker Winchester Repeating Arms employed more than 15,000 workers, the industrial core of the city has been hollowed out over the last 40 years. Poverty has followed and persisted. Currently, 1 in 4 New Haven residents lives at or below the poverty line. 

For many years, as the town struggled and the university grew, Yale remained an island seemingly cut off from the ills of the city. A statewide fiscal crisis in the late 1980s began to change that. New Haven was on the verge of bankruptcy in part because the state was underfunding aid meant to compensate cities for the taxes lost to large nonprofit landowners like Yale and the university’s hospital. Douglas Rae, who teaches management and political science at Yale and was chief of staff to the mayor in the early 1990s, helped broker a deal where Yale would voluntarily pay New Haven a fee each year to offset the cost of public services that benefited the university. It wasn’t so much a partnership; it was the university throwing the city a lifeline that would in turn help Yale. “The university,” Rae says, “was willing to make modest concessions to the city, but wanted wherever possible to justify it through direct self-interest that alumni would understand.” 

Yale was slowly acknowledging that its fate was tied to New Haven. The “Yale bubble” was pierced for good in 1991, when a varsity lacrosse player, Christian Prince, was murdered walking to his apartment near the campus. “The Prince murder,” Rae says, “was the event that caused Yale University and the Yale Corporation to say we have to give the highest priority to the community around us.”

Former Yale President Richard Levin took office in 1993, shortly before DeStefano became mayor. They each served nearly 20 years. And it was under the leadership of the two that town and gown would enter a marriage of sorts. 

 


Under former President Richard Levin, Yale aggressively expanded its real estate footprint. (AP)

 

Under Levin, the university began to aggressively extend its real estate footprint both commercially and in residential real estate. Yale purchased the financially challenged Chapel Street Historic District and became landlord to the businesses in that district. It began to extend its reach into the residential neighborhoods through handsome housing subsidies offered to faculty and staff. Yale offers $30,000 in cash assistance to employees who buy in the city, with an additional $5,000 for those who purchase homes in the long-blighted Dixwell neighborhood. In all, the program has invested $31 million since it was launched. “Certainly, there are pros and cons when the university and its students and faculty expand their footprint in the city,” says the Lincoln Institute’s Adam Langley. Yale employees buying homes are contributing to the city’s tax base. But the investment has come at a cost. 

The housing cash incentive has helped fuel gentrification in places such as East Rock, a traditional Italian enclave where rising home prices and corresponding spikes in property taxes have pushed out working class white residents. The Dixwell and Dwight neighborhoods have also felt the impact of Yale’s homeownership program in the form of displacement.

DeStefano and Levin’s transformation of New Haven resembles events in other cities with powerful universities. The neighborhoods surrounding the University of Pennsylvania in Philadelphia have seen similar shifts in the housing market thanks to home-buying subsidies and major investments by Penn in the nearby University City neighborhood. Housing prices have tripled there in the last 15 years, while the black population in University City has declined by more than half. 

As Yale has reshaped -- and in many ways, revived -- its host city, it has left a gaping hole in the city budget. Thanks mostly to the university, a full 54 percent of all the property in New Haven is tax exempt. Student housing, academic buildings, research facilities and Yale’s sprawling hospital complex all escape taxation. Despite these exemptions, Yale is still the fourth-largest property taxpayer in New Haven, because of the size of its retail presence. But of the $3 billion in real estate Yale owns, it pays property tax on roughly 3 percent -- the commercial space it rents out in the city. Since 2014, Yale has invested $700 million in new construction, all of it tax exempt.

 


The areas highlighted in blue encompass Yale’s tax-exempt academic properties (but not its taxable commercial land holdings).

 

The sales tax money collected in New Haven goes to the state, which in turn sends some of it back in the form of state aid. Under its payment in lieu of taxes (PILOT) program, the state is supposed to reimburse the city at a rate of 77 cents for every $1 of untaxed property owned by an institution of higher learning. But the cash-strapped state has never met the terms of the agreement, and in recent years has sent New Haven 33 cents on the dollar. The reduction in state aid through PILOT, coupled with city pension obligations, caused Standard & Poor’s to downgrade New Haven’s bond rating to BBB+/Negative in July. 

Standard & Poor’s report predicted that the city, despite its large and wealthy university, would have to turn to its homeowners to pay more in property and car taxes to fill the budget gap. “This could prove difficult,” the report noted, “given New Haven’s overall high amount of tax-exempt property and weaker wealth and income factors relative to other Connecticut municipalities.” 

Yale has attempted to fill some of the gap left by the state. This year it will increase its voluntary contribution in lieu of property taxes from $7.5 million to $10 million. But as pension and health-care costs continue to stress the city financially, and the state continues to cut back on aid to cities, New Haven will face fiscal headwinds despite the success of its famous tenant. “We are looking at fiscal strains to New Haven that voluntary contributions by Yale are not going to cope with,” Rae says. “I don’t think we are near what would be realistic levels in terms of New Haven’s financial needs in the next 25 years.”

 

As big universities go, Yale is far from the worst tax evader. Its voluntary contribution is actually the largest in the nation paid by a single university to its host city. By comparison, the University of Notre Dame, which has an annual television deal with NBC worth $15 million to broadcast its football games, voluntarily gives the city of South Bend $500,000 under its PILOT program. In Pittsburgh, neither the University of Pittsburgh nor Carnegie Mellon University provides a contribution in lieu of taxes directly to the city, despite recent efforts to establish voluntary payments. 

Pennsylvania is an interesting case. It compensates municipalities which are home to state parks, but it refuses to reimburse Pittsburgh and Philadelphia for the revenue losses caused by large research universities. Pittsburgh tried to sue the University of Pittsburgh Medical Center in 2014 over its tax-exempt status, but pulled back and has since tried to negotiate a voluntary payment system. The University of Pittsburgh, the medical center and Carnegie Mellon have chosen instead to contribute to Pittsburgh Promise, a program that pays college tuition for graduates of the city’s public schools. Similarly, in Philadelphia, the University of Pennsylvania and Drexel University have balked at direct payments to the city, and have not committed to a plan favored by Mayor Jim Kenney that would use revenue from those institutions to help shore up funding for K-12 schools in lower-income districts in the city. 

 


In Philadelphia, the University of Pennsylvania has balked at the idea of direct payments to the city. (Shutterstock)

 

Penn and a handful of other colleges and universities in the Philadelphia area fund what is called the University City District, a partnership between the colleges and neighborhood nonprofits which provides additional policing, street cleanup, funding for street lighting and job placement for low-income residents. Since the mid-1990s, Penn has spent more than $2 million a year on programs and poured $640 million in payments to the Philadelphia Police Department for additional patrols around campus. 

Kenney has considered trying to establish a PILOT program funded by the universities, but that would be difficult. A Pennsylvania law bars cities from taking legal action against universities that fail to compensate them for the cost of public services. Prior to the enactment of that law in the 1990s, Philadelphia collected $9 million a year in PILOT payments from its universities. Opponents of a new PILOT program point out that Philadelphia levies a wage tax on all who work in the city. While New Haven is almost entirely dependent on property taxes, Philadelphia collects much more in wage taxes than it does from taxes on property. 

Although many universities agree to voluntary PILOT programs, the agreements leave a tremendous amount of leverage with the universities. Take Harvard. In 2014, when Harvard offered $4.3 million, or just a bit more than half of what Boston city officials asked for, the university pointed to the more than $45 million it had given to Boston and Cambridge in the preceding decade. Officials continue to accuse Harvard and other Boston-area universities of being “one-sided” in their community relationships. “The frustration is that you’re talking about a university -- this isn’t John Smith Vocational School,” then Cambridge Councilman Marc McGovern said. “Harvard has more money than many third-world countries. They are going to be expected to do more.”

Yale says its obligation to New Haven has never been to make the city whole for hosting the university, but to recognize the interdependence of the two entities. This is a common argument. “The current law in states around the country is that nonprofits are completely exempt from taxes,” says Langley of the Lincoln Institute. “And part of the reason for that is these nonprofits and these anchor institutions do provide a lot of important benefits to the cities where they are located.”

Still, officials in New Haven have been growing more aggressive about lobbying for a higher PILOT contribution from Yale. Connecticut state Sen. Martin Looney has called on Yale to guarantee 50 cents on the dollar to New Haven. Some have pushed for the city to sue Yale in an effort to tax the school’s endowment. Those efforts would be in vain, however. Yale’s nonprofit status is enshrined in the Connecticut Constitution.

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