Facing big budget deficits and dwindling revenues in the wake of the worst economy in years, some cities have their eyes on a resource that has been largely off limits up to now: property-tax payments from local colleges.

In Pittsburgh, the mayor is threatening to make Duquesne University pay taxes on a building it wants to buy and take off the city's tax rolls. Lasell College, another private institution, is embroiled in a lawsuit with Newton, Mass., over the city's classification of a campus retirement facility as noneducational, and therefore taxable. In New Haven, Conn., the city council has passed a resolution demanding that Yale University pay the equivalent of the property taxes it would owe if it were a for-profit company.

Although town-gown disputes over tax-exempt property are nothing new, they tend to intensify during bad economic times. Colleges see their exemption as integral not only to their identities but also to their budgets -- which, they argue, must remain healthy if the colleges are to keep contributing to local economies. At the same time, cities and other jurisdictions want colleges to give back something to cover the municipal services they use, like fire and police protection.

"There's a pretty steady drumbeat from communities around the country for some kind of payments or services," says Matthew W. Hamill, vice president for external affairs at the National Association of College and University Business Officers.

While colleges and cities have often had tense relationships over taxes, their rapport has generally improved over the past three decades, says Maureen L. McAvey, a senior resident fellow at the Urban Land Institute, a nonprofit group that specializes in land-use issues. Cities now put greater value on higher education for its social and economic benefits, and colleges are more aware of the effect they have on local communities, she says. In 2002, for instance, Harvard University made an unusually large deal to pay Watertown, Mass., $480-million over 52 years to compensate the town for property taxes on land and buildings that the university owns.

Not all of the costs and benefits that colleges and cities get from each other can be quantified, which makes determining the size of tax-alternative payments difficult. "There's always been some question as to who comes out better in a negotiation," says Ms. McAvey. But the current fiscal crunches around the country are pushing cities to try to squeeze more money from all sources, including nonprofit organizations.

Even if colleges have already set up payment agreements, local governments sometimes ask for additional money, particularly if a college is seen as having deep pockets. Cities can get quite creative in their requests, Mr. Hamill says. For example, city officials sometimes will refrain from issuing building permits unless negotiations for payments are reopened.

In Evanston, Ill., for example, the city and Northwestern University agreed this month to settle a three-year-old federal lawsuit over the city's inclusion of some university-owned property in a historic district. The designation would have required Northwestern to seek the city's permission to renovate, tear down, or construct buildings there. University officials maintained that the city had created the district only because Northwestern had refused to pay Evanston money in lieu of taxes.

In exchange for a one-time payment of $700,000 by Northwestern, the city will exclude 14 of 56 university properties in the historic district, including a dormitory, a gymnasium, the student-health center, and several parking lots.

Backs to the Wall

Many cities are already struggling with tax codes that limit their ability to tax people who work inside city limits but live outside them. The cities are further hampered by the amount of property within their borders that is owned by colleges, religious institutions, and other tax-exempt entities.

Pittsburgh, for instance, will have trouble fixing a $42-million budget deficit in 2004 because 30 percent of the city's land is tax-exempt, says Craig J. Kwiecinski, spokesman for Tom Murphy, the city's mayor. State lawmakers are considering a plan to create a foundation, which colleges and other nonprofit groups would finance, that would help cities with tax-exempt properties pay for the services that the organizations use.

"Our goal is for everyone to pay their fair share," Mr. Kwiecinski says.

Municipal rancor grew, though, when Duquesne arranged last summer to buy a $22-million office building to convert into a dormitory. Mr. Kwiecinski says the city, county, and local school district stand to lose more than $700,000 a year in property taxes as a result of the sale, which is still in process. Mayor Murphy warned Duquesne officials in December that he would not allow the building to become tax-exempt unless the university chipped in more money to pay for city services.

Levying taxes on the building would help neither the university nor the city, says David M. Mastovich, Duquesne's director of public affairs. The university, which employs 3,500 people, is crucial to the city's economic success, he says, arguing that $700,000 in property-tax payments each year would divert funds needed to keep Duquesne nationally competitive. The university does not pay a tax alternative to the city.

Proposal in New Hampshire

Duquesne's argument is also being made in New Hampshire. Two bills were introduced in the state legislature last month that would affect eight private colleges that already pay property taxes on their dormitories, dining halls, and other noneducational facilities. The eight institutions are trying to reduce that tax bill, which amounted to $1.8-million in all last year.

Under the plan being considered by the State Senate, the colleges would be exempt from the 20 percent of their property-tax bill that goes to the state. A proposal in the House of Representatives would continue to have colleges pay their full tax bill, but the state would reimburse them with money that would pay for scholarships to in-state students.

The New Haven, Conn., Board of Aldermen passed a nonbinding resolution last July asking Yale and four other colleges to pay sums equal to the difference between their current payments and the taxes they would pay if they were for-profit organizations. In taxes and tax-alternative payments, Yale already gives New Haven more than any other nonprofit organization in the city, $24.6-million in the 2004 fiscal year, up 156.3 percent in the past decade.

Connecticut has a program that reimburses cities for 77 percent of what colleges would pay if their property were not tax-exempt. (New Hampshire and Pennsylvania lawmakers are discussing the creation of similar programs.)

After officials in several Connecticut cities complained that they needed more money to provide necessary services, state lawmakers last year tried to pass a bill that would have raised the payment to 100 percent. The state's $1.2-billion deficit in 2003, however, contributed to the proposal's defeat.

New Twist

A ruling in December by a Massachusetts court may indicate where future squabbles over colleges' tax-exempt property may be headed. The case involves Lasell College, a private liberal-arts college in Newton that opened a retirement home on its campus.

As baby boomers approach retirement, the idea of living in retirement communities on or near colleges is becoming more popular. More than a dozen colleges, including Indiana University at Bloomington, Ithaca College, and the University of Arizona, have such facilities nearby. Similar communities at other colleges are in the works. The colleges' levels of involvement range from none to full ownership.

At Lasell Village, which opened in 2000, residents must agree to log 450 clock hours of approved academic study, physical education, or volunteer work a year, at the college or elsewhere. The facility is home to 210 residents.

Thomas E.J. de Witt, the college's president, says the retirement facility qualifies as "educational" under both state tax law and the Dover Amendment, a state law that allows a broad interpretation of "educational" activity by nonprofit organizations.

But Elizabeth Dromey, Newton's tax assessor, counters that despite the academic requirement for its residents, Lasell Village is predominantly residential and should be taxed accordingly.

Before the community was built, the college agreed to pay about $250,000 a year to the city in lieu of taxes, Ms. Dromey says. Once she saw how the facility operated, however, the city came back with a tax bill for $400,000. The college paid the bill and sued the city in the state's appellate tax court, which found in the city's favor. The college has appealed, and the case will be taken up by either the State Court of Appeals or the Superior Court, the highest court in the state.

Traditional interpretation of tax law does not favor Lasell, but its officials believe the courts will ultimately approve Lasell Village's tax-exempt status. "It's an educational institution," says Christopher M. Jedrey, an attorney with McDermott, Will & Emery, a law firm specializing in nonprofit organizations that has worked with Lasell on the project. It is "just not one we're used to seeing."