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Senate Budget Chairman Seeks to Revisit Hospital Property-Tax Exemptions

Dozens of municipalities have challenged hospitals and their current tax-exempt status

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Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Bergen)

A leading Senate Democrat is crafting a plan to revise a century-old law that permits the vast majority of New Jersey hospitals to avoid paying property taxes, a situation that has already prompted dozens of lawsuits in municipalities seeking to change this status quo.

Budget Chairman Paul Sarlo, (D-Bergen), said he is working on a bill that would require hospitals to pay regular fees, based on the number of beds or a similar mechanism, to their host communities to help fund local roads, first responders, and other costs now covered largely by municipal property taxes.

Sarlo announced his plan — which would echo elements of a bill passed last session by lawmakers, but left unsigned by Gov. Chris Christie — during a conversation with state Department of Health Commissioner Cathleen Bennett on Thursday, as the Senate budget committee reviewed the department’s spending plan for fiscal 2018, which takes effect July 1. As Sarlo envisions the proposal, the DOH would oversee the hospital-fee system, removing the issue from the control of local tax officials.

Hospital officials welcomed the news; 41 healthcare facilities are now locked in legal battles with local officials over their tax-paying status — a number that has grown steadily since a tax-court judge ruled in 2015 that Morristown Memorial Hospital owed millions in back taxes. The facility eventually settled with the town for $15.5 million, but the lawsuit prompted other communities to begin questioning the tax-exempt status of their own local hospitals.

100 years of tax-exempt status

New Jersey’s 58 not-for-profit hospitals have been exempt from property taxes since 1913, and the statute has not been updated in decades. But as small community hospitals expanded, merging with others and sprouting affiliated specialty services and outpatient clinics — some operating as for-profit entities — communities like Morristown began to question if it was appropriate to treat these operations with churches, community organizations, and other from paying local property taxes.

The DOH’s $1.6 billion proposed budget for fiscal year 2018 does not feature funding directly related to these tax appeals, but it does include nearly $665 million to help Garden State hospitals, including Charity Care to offset what they spend on treatments for uninsured patients and money for graduate medical education, Bennett said. While the hospital property-tax question had been a priority for lawmakers in the fall of 2015 and winter of 2016, it has received little attention recently.

Sarlo said Thursday the time had come to revisit the question. “This issue has not gone away with municipalities that are homes to large hospitals continuing to provide community services that are paid for by local taxpayers,” he said, noting that many hospitals now have profitable divisions.

“They should be helping to pay their fair share to compensate for vital services, including homeland security, emergency response, snow removal, and the myriad of municipal services. There is often a greater demand for these services by many of the hospitals that can have a significant impact on their home communities,” Sarlo added.

No details yet

Officials at the New Jersey Hospital Association said Friday they had no details yet on Sarlo’s proposal, but were glad to hear the issue was back in the spotlight. New lawsuits continue to be filed — last summer 30 communities had filed tax-appeal challenges — and older ones are now entering the costly discovery phase.

“We applaud Senator Sarlo for his leadership and attention to this important issue. We haven’t seen the details of his plan, but we look forward to talking with him further about how we can resolve this vexing statewide issue,” said NJHA President and CEO Betsy Ryan, a leader in the quest for a statewide legislative solution. “The legal bills are mounting for both sides, and we believe everyone is best served if we legislate, not litigate, this matter.”

While hospitals don’t currently pay property tax, the NJHA stressed that they provide a myriad of other community benefits, including free or discounted healthcare, wellness programs, and support groups — items that totaled some $2.7 billion in 2015. Hospitals are frequently the largest employer in a community as well, and they provide 144,000 jobs statewide.

Sarlo agreed that the mounting legal disputes don’t benefit the municipalities or the hospitals, but he also believes these facilities should contribute more financially to their host communities. He is now working on an alternative to a bipartisan bill (S-3299) by Senate President Stephen Sweeney, (D-Gloucester), which the legislature quickly adopted in January 2016, with industry support, after the Morristown decision sparked litigation elsewhere. That measure would have created a system of host-community fees based on the number of beds in each facility.

But Christie pocket vetoed that bill, saying that he favored a two-year moratorium on any lawsuits while a panel of experts could review the issue. Sweeney and other leaders insisted at the time that two years was too long to wait, and other lawmakers introduced a handful of stop-gap measures, but they have received little attention since last spring.

Bennett, however, said it makes sense to take the time to carefully recraft this policy. “One of our concerns is that when you haven’t looked at something in fifty years, I think you really do need to have some experts around talking about it, evaluating it, thinking about what it means,” the commissioner told Sarlo. “We do know that our hospitals are trusted community institutions. They provide great economic impact to the communities they reside in. And they provide great community benefits,” Bennett added. “And that all needs to be weighed” as the state considers these changes, she said.

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