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Hospital Payments to Towns Discussed as Alternative to Property Taxes

Tax-court decision has healthcare industry, state legislators talking about potential compromises

Credit: Newsworks
State Senate President Stephen Sweeney (D-Gloucester)

Leading voices in the healthcare industry and Legislature are talking about ways that nonprofit hospitals might make payments to towns short of facing property-tax bills for their entire properties.

These discussions come on the heels of a state tax court decision which gained national attention by highlighting the extent to which nonprofit hospitals are involved in for-profit activities.

One potential solution could be based on “payments in lieu of taxes,” or PILOTs, which some redevelopment projects pay to local municipalities. In PILOT arrangements, property owners pay municipalities a set amount each year that is less than what they would pay if they were being calculated based on the entire worth of their properties. The idea is gaining support across party lines, with Senate President Stephen M. Sweeney (D-Cumberland, Gloucester, and Salem) issuing a joint statement with Sen. Robert W. Singer (R-Monmouth and Ocean) endorsing the idea that hospitals should have to pay “their fair share.”

At the same time, the senators expressed concern over the impact that Judge of the Tax Court Vito Bianco’s decision in a tax case involving Morristown Medical Center could have on other hospitals.

And while hospital-industry representatives decried Bianco’s ruling, powerful voices in the industry – including Cooper University Health Care Chairman George Norcross and Barnabas Health President and CEO Barry Ostrowsky -- have expressed a willingness to make payments to towns..

The proposal is of keen interest to municipalities with hospitals within their borders. New Jersey State League of Municipalities Assistant Executive Director Mike Cerra said league officials are interested in sitting down with legislators to discuss the issue.

“We appreciate the sentiment that’s being expressed because clearly, with this tax ruling, there seems to be a common-ground opinion that when a nonprofit hospital is venturing into some for-profit activity, that the host municipality should receive their fair share,” Cerra said.

On June 25, Bianco ruled that Morristown Medical Center had so intermingled its charitable and for-profit activities that nearly all of its property could no longer be considered exempt from property taxes.

Hospital officials had argued that they had followed long-established and universal practices by hosting services offered both by doctors employed by the hospital and by self-employed physicians who operate for-profit businesses.

But Bianco found that hospitals had strayed from the strictly charitable function they once served when they were originally granted exemptions.

The additional PILOT revenue would be a boon to municipalities, some of which have a shortage of commercial property owners paying property taxes. An anlsysis by Moody’s Financial Services found that Bianco’s decision could have a positive effect on the bond ratings of municipalities that pursue hospital property taxes.

In their joint statement, Sweeney and Singer noted that Bianco’s decision reflects in rapid changes in the healthcare industry. They said their legislative staffs “are gathering data, studying the issue, and meeting with the stakeholders to fully understand the issue and its impact.”

“Any legislative solution should not be rushed. We must take a careful and thoughtful approach,” Sweeney and Singer added.

The two state senators noted the importance of hospitals as local employers.

“We need to be aware of the effect any changes could have but believe that there is a responsibility that the hospitals pay their fair share,” said their joint statement.

Ostrowsky said in an interview with NJBIZ that there may be “some way for those of us who manage not-for-profit assets” to contribute to local towns. He added that the Legislature should determine any solution, not judges.

In response, Norcross issued a statement saying, “Barry Ostrowsky is 100 percent right – New Jersey hospitals should be focused on the financial health and well-being of our communities as much as we are on the physical health and well-being of our patients, especially in urban areas where poverty and chronic health problems are so often linked.”

Norcross added that Cooper has been “a leader in rebuilding Camden’s future.”

“I look forward to being a partner with other hospitals and legislative leaders to develop a viable plan that ensures that our responsibilities to our patients and our communities are met,” Norcross said.

If the PILOT approach becomes the basis for resolving the nonprofit hospital tax issue, several issues will have to be worked out, including how much hospitals should pay, what those payments hould be based upon, and whether that will resolve concerns that have been raised – such as the fact that PILOTs, unlike property taxes, do not contribute money to schools or county governments.

Singer said he’s looking for a solution that satisfies both municipal governments and hospitals.

“You’ve got to maneuver it in such a way that it makes sense -- it helps the municipalities with the burdens that they have, but it doesn’t put an undue burden on the hospitals themselves,” Singer said.

Singer said he plans to talk with League of Municipalities officials next week.

“The municipalities also understand that hospitals are the largest employers,” and don’t want to harm their operations, he noted. “This is not an adversarial situation. This is how like-minded how groups who want the best for their communities work things out.”

New Jersey Hospital Association President and CEO Betsy Ryan said association leaders are absorbing different “policy approaches being discussed,” and discussing them with their hospital members and legislators. She added in a statement that it’s premature for the association to have a formal position on the issue, “but we’ll get further direction from our members and continue to work with lawmakers.”

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