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Deal Strips Morristown Medical Center of Some of Its Tax-Exempt Status

Atlantic Health agrees to pay property taxes on 24 percent of Morristown Medical Center

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Yesterday’s settlement of Morristown’s long-running property-tax battle with Morristown Medical Center is already drawing attention, hardly surprising given that it follows a judge’s decision that could affect nonprofit hospitals coast to coast.

Under the terms of the agreement, medical center owner Atlantic Health System will pay the town $15.5 million, including $10 million upfront. That part of the settlement covers the years 2006 to 2015 and includes $5.5 million in penalties and interest that will be paid over the next five years.

But what has really grabbed the attention of healthcare and tax experts, legislators, hospital executives, and municipal officials is this: Morristown Medical Center has agreed to pay taxes on 24 percent of its currently untaxed property. The portions that will be taxed include space leased to private doctors, restaurants, and shops; spaces used by private doctors to deliver emergency services, as well as radiology, anesthesiology, and pathology; and hospital garages.

Ironically, and possibly to the relief of some observers, the agreement left untouched much of the hospital that would have been taxed if the decision by Judge of the Tax Court Vito Bianco were to be followed.

Bianco ruled in June that Morristown Medical Center had so intermingled its nonprofit and for-profit services and finances that it could no longer qualify for a tax exemption under state law.

If Bianco’s approach were to be applied across New Jersey, it would mean many millions of dollars in additional property tax revenue to municipalities -- and costs to hospitals. The bond-rating firm Moody’s has said the ruling was positive for the credit of municipalities that could gain tax revenue, and negative for the credit of New Jersey’s nonprofit hospitals and other not-for-profit organizations if they lose their property-tax-exempt status.

State legislators have expressed an interest in passing laws that, in words of Senate President Stephen M. Sweeney (D-Cumberland, Gloucester, and Salem) and Sen. Robert W. Singer (R-Monmouth and Ocean), would require hospitals to pay their “fair share.”

Municipal government advocate Mike Cerra said the settlement will be closely read across the state.

Cerra said most towns are in a “wait-and-see mode” on whether to start taxing their nonprofit hospitals. He is the New Jersey State League of Municipalities’ assistant executive director.

“This seems to be a good settlement for Morristown and both parties are happy,” Cerra said. He added that he’s unsure if a similar approach could be applied statewide, since each municipality-and-hospital relationship is unique.

Cerra expects the Legislature to attempt to address the issue, if not this year, then in the legislative session that starts in January.

“Both sides are entering into this cautiously and reflectively before proceeding,” he said. New Jersey Hospital Association CEO and President Betsy Ryan said her organization was pleased with the agreement.

“We do expect this issue to now move on to the legislative arena, and we look forward to being part of that dialogue with lawmakers” and Gov. Chris Christie, Ryan said.

David B. Wolfe, a property-tax lawyer who’s been watching the Morristown case, said that until there’s a change in state law, the Bianco ruling would be most important for towns that are considering their next step.

With the new tax year beginning on January 1, Wolfe expects some towns to act.

“I think it is likely that you will see … either assessors revoking exemptions and making the properties taxable … or you may see municipalities filing appeals,” of hospitals’ tax-exempt status in tax court, like Morristown, Wolfe said.

That’s why hospitals will be eager to see a new law.

Healthcare-industry consultant Matthew D’Oria said hospital executives will be looking closely at what portions of their facilities are similar to those to be taxed in Morristown.

Hospital executives “should assess what this settlement says and do an inventory of their facility and campus -- and begin to set aside reserves in the future to potentially cover” taxes, said D’Oria, a former state deputy health commissioner.

Morristown Mayor Timothy Dougherty and Atlantic Health System President and CEO Brian A. Gragnolati both praised the agreement in a statement.

Dougherty said it “provides a guaranteed revenue stream that allows the town to undertake plans for the future with confidence.”

He added that both sides wanted to avoid more litigation, and credited Gragnolati with bringing a fresh perspective and collaborative approach after he was hired to lead Atlantic Health System in March.

Gragnolati also said the hospital would be increasing its health-and-wellness programs in the community.

“The community and the hospital are interdependent,” he said. “We both gain.”

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