Morristown Medical Center Tax Ruling Ripples Through Garden State

Andrew Kitchenman | November 17, 2015 | Health Care
While towns ponder generating revenue by taxing local facilities, nonprofit hospitals and their legislative advocates push statewide legislation

Morristown Medical Center
Morristown Medical Center’s agreement to pay property taxes in the wake of a court ruling that some aspects of its operations are for-profit is reverberating throughout the Garden State, as towns ponder collecting taxes from their own local hospitals.

Meanwhile, other New Jersey hospitals – as well as some elected officials – are already working to head off efforts to apply the Morristown tax decision statewide.

The hospitals and their legislative supporters are seeking statewide legislation to resolve the issue by January. But some municipal advocates are wary about this possibility, since they believe that towns would benefit more if they can press their tax cases individually.

A tax court judge ruled in June that nonprofit Morristown Medical Center and its owner, Atlantic Health System, was no longer exempt from paying property taxes because for-profit activities had become intermingled throughout the hospital’s operations. The hospital agreed to begin paying taxes and to pay back taxes on a portion of the hospital’s property.

The agreement didn’t pass unnoticed by officials in Newark, where City Councilwoman Gayle Chaneyfield Jenkins called for assessing property taxes on nonprofit Newark Beth Israel Medical Center.

Mayor Ras Baraka called her suggestion “premature and unnecessary” at a time when he’s in talks with other mayors about how to handle nonprofit hospitals statewide.

Concerns over a patchwork approach across the state are prompting Senate President Stephen M. Sweeney (D-Cumberland, Gloucester, and Salem) and Sen. Robert W. Singer (R-Monmouth and Ocean) to work on a bill that would set statewide rules for nonprofit hospitals to make some form of payments instead of property taxes to their host municipalities, but which would stop short of mandating property tax payments for all hospital real estate and buildings.

In the Morristown decision, Judge Vito Bianco found that the nonprofit hospital had strayed from the strictly charitable function it served when it was were originally granted exemptions.

In the 88-page opinion, Bianco ruled that, based on the trial evidence, nearly all of the hospital was taxable because it was impossible to disentangle the nonprofit and for-profit services and finances at Morristown Medical Center. In addition, he said the hospital failed to prove that its executives’ compensation wasn’t excessive. Former CEO Joseph Trunfio received $12.5 million over the three years reviewed in the case.

“[I]f the property-tax exemption for modern nonprofit hospitals is to exist at all in New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be,” Bianco wrote. “Clearly, the operation and function of modern nonprofit hospitals do not meet the current criteria.”

When an Illinois judge made a similar ruling in 2010, state legislators essentially made nonprofit hospitals permanently tax-exempt by establishing minimal financial standards for providing community benefits to qualify for exemptions.

Last week, the town of Morristown and Atlantic Health System headed off an appeal by the hospital by agreeing that Atlantic Health would pay taxes for 10 years – as well as 10 years of back taxes and penalties — on the portions of the hospital used for certain profit-generating activities. This includes 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.

The space to be taxed equals 24 percent of the total facility, although that percentage rises when a garage that was already taxed is included. The payments will equal roughly $1 million annually.

Rather than basing his legislation on the Morristown agreement – which Singer said would be too complicated to apply to all nonprofit hospitals – he is aiming for a bill with a straightforward formula that could be applied to every hospital. Singer suggested that the profitability of a hospital or the number of beds in the facility could be used in a formula.

“I think we want a simplistic way that every town can look at it and be done easily,” Singer said of a formula.

Singer is concerned that if the bill doesn’t resolve the property-tax issue for every nonprofit hospital, that every governing body with the authority to tax – from municipal, school, and county boards to local fire districts – would seek tax revenue from their hospitals.

Singer said the Legislature could easily pass a bill that says that nonprofit hospitals aren’t taxable – effectively reversing the tax court decision – but wants to work with Sweeney on a compromise acceptable to most hospitals and towns.

Singer is hoping that the bill is introduced and passed by the Senate in the first week of December.

Without a state law, Singer foresees local governments “drooling” over the possibility of more revenue. But he noted that many hospitals have thin operating margins and could go out of business if they’re hit with another significant bill.

Officials who are “just going to go out there and (tax hospitals) and not think there’s going to be consequences would be foolish,” Singer said, criticizing Chaneyfield Jenkins for her call for taxing Newark Beth Israel.

“Would she say, ‘Oh, isn’t that wonderful — we taxed 1,000 people out of work,” he said, adding: “Be careful what you wish for.”

Sweeney wants a “legislative solution that is fair and equitable,” adding that legislators are “taking a thorough and thoughtful approach that isn’t rushed,” said Richard McGrath, his spokesman.

Hospitals “should pay their fair share, but we are aware that any legislative response could be significant for nonprofit hospitals, the people they serve, their home communities, and the taxpayers,” McGrath said.

One top healthcare executive, Barnabas Health President and CEO Barry Ostrowsky, said in a statement that nonprofit hospitals, “all of which exist in municipalities and use local services, should expect to contribute to support their local communities.

“It must be kept in mind, however, that our facilities are all major economic engines in these communities,” through employment, hiring vendors, and providing community benefits, said Ostrowsky, who added that system executives “look forward to the legislative solution” being discussed.

Advocates for municipalities are wary of the statewide legislation outlined by Singer. Mike Cerra, the assistant executive director for the New Jersey State League of Municipalities, praised the Morristown settlement.

“I think any legislation probably would need to give both parties — both the municipality and the hospital – the greatest amount of flexibility to negotiate on their own, based on the local circumstances,” Cerra said. “The problem with a statewide solution is that we want to avoid a one-size-fits-all approach.”

Not every municipal official agrees. Evesham Township Manager Tom Czerniecki said Evesham officials haven’t followed the Morristown case closely, but would have interest in a statewide approach. Virtua Marlton Hospital is in Evesham.

“I think the state should have a uniform policy,” Czerniecki said, noting that the state sets uniform rules for assessing residential and business property, which local assessors then follow.

If each town has a different approach to hospital taxation, “then what happens (is) you start getting into bidding wars with neighboring towns for hospitals … I don’t think that’s something we should get involved in. I think a uniform approach would be welcome.”

He noted that in addition to being a major employer, Virtua makes voluntary contributions to local recreation programs.

Although Virtua “doesn’t contribute to property taxes, I feel that they contribute to the community in so many other ways,” Czerniecki said. “I think, because of that, it (taxing) has never come up as an important issue.”

New Jersey Hospital Association President and CEO Betsy Ryan said hospitals are looking for a sense of certainty regarding local taxes, which was lost through the Morristown case.

“We want to be a part of constructive dialogue with legislators,” Ryan said, with a goal of a state law “that municipalities and hospitals believe is fair – and viable.”

Hospitals aren’t alone in the nonprofit sector in their concern about taxes. Linda Czipo, executive director of the New Jersey-based Center for Non-profits, said some municipalities see all nonprofits as a potential source of revenue.

“We’ve got a situation in which municipalities are scrambling for revenue,” she said. But when towns require taxes or other payments “there’s a real cost to that in terms of services.”

Assemblyman Herb Conaway Jr. (D-Burlington) expressed a similar position.

“We ought to be very careful about a policy that would imperil the good work that’s done” in nonprofit hospitals, Conaway said.

The first post-Morristown test case may be in Newark.

Chaneyfield Jenkins called for a special city council task force to review the tax-exempt status of Newark’s nonprofit hospitals.

Mayor Ras Baraka said his administration has been meeting with mayors across the state for weeks to discuss the issue.

He said Chaneyfield Jenkins’ call for a task force “is premature and unnecessary. We have been exploring many opportunities to chart a path forward, including revenue generation.”

Chaneyfield Jenkins responded yesterday by saying that she was “shocked and surprised” by Baraka’s comments.

“As a former city councilman, the mayor knows better than anyone that the City Council is a co-equal branch of city government that has a right and a duty to look for ways to bring tax relief to city residents,” Chaneyfield Jenkins said.