Should hospitals pay property taxes?
FREEHOLD TOWNSHIP - CentraState Healthcare System, which long has enjoyed a tax break that comes with its nonprofit status, is gearing up for a fight over an issue that New Jersey's homeowners are plenty familiar with: a giant jump in property taxes.
Administrators here say a recent court decision could put them on the hook for another $2 million, and they are considering their options. Namely, they're wondering if they should continue programs that aren't profitable.
"I’m not suggesting the hospital is going to close; that’s not an issue," said John T. Gribbin, CentraState's president and chief executive officer. "But we’re going to have to look hard at programs that don’t carry their own weight."
It's an issue hospitals up and down the Shore likely will face after a state Tax Court judge earlier this year ruled that Morristown Medical Center was a nonprofit company in name only and should have been assessed property taxes like any for-profit business.
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Moneymaking operations?
The ruling by Judge Vito Bianco sent tax assessors, hospital administrators and lawmakers scrambling for a solution. But it also raised questions: Are hospitals in fact money-making entities no different from your local supermarket or manufacturing plant? Should they pitch in to pay for the cost of municipal services? Don't municipalities benefit from having them there?
The answer varies hospital by hospital. Generally speaking, nonprofit hospitals have received tax-exempt status. But if they lease out space to for-profit businesses – a doctors' group, a cafeteria operator, a fitness center – they are required to pay taxes, said Christopher Stracco, a lawyer who specializes in municipal tax issues with Day Pitney in Parsippany.
In light of the recent decision, "I would think that municipalities will scrutinize applications for tax exemptions from nonprofit hospitals more carefully," Stracco said. "The simple reason being most municipalities are cash strapped and they're all looking for ways to obtain revenue. And if they have an exempt entity that otherwise wouldn't be exempt, that’s one way to do it.”
CentraState is an example. It has 2,600 employees, making it one of western Monmouth County's biggest employers. It has 285 in-patient beds. And it has five properties that are exempt from property taxes, ranging from the hospital to assisted-living facilities.
It opened in 1971 thanks to a fundraising drive by local residents and business owners who wanted a hospital to serve the local community. But in recent years its business model has gotten more complicated. It employs physicians, for example, who use space in the hospital to operate for-profit businesses. And it hosts a health and wellness center that offers pilates, yoga, a sauna and state-of-the-art equipment.
It pays $1.7 million a year in property taxes, or about 43 percent of its maximum assessment, Gribbin said, but if it lost its nonprofit status, it could be assessed more. Administrators received a letter from the township earlier this year from the township, asking detailed information about its operations.
"We have over 500 physicians on staff," Gribbin said. "They wanted information about every one of them. Names, addresses, where they spend their time."
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Nonprofit vs. for-profit
It didn't used to be a problem. New Jersey's nonprofit hospitals have been specifically exempt from property taxes since 1913 when they were charitable centers that provided free medical treatment to the poor.
Today, however, they compete with for-profit hospitals. They employ and provide office space to for-profit doctors. Some of them partner with for-profit insurance companies and fitness centers. Some of their executives have compensation packages that are similar to Fortune 500 CEOs.
That all came to a head when Morristown said Atlantic Health System's Morristown Medical Center, which opened in 1893 in a former parsonage, essentially had evolved into a for-profit company. The hospital owned five private physician practices. It provided loans to other for-profit health care companies. Its parent company owned a for-profit insurance company. And the president and chief executive officer of its parent company had a compensation package worth nearly $6 million in 2007 alone, according to court documents.
Morristown said the hospital should have paid property taxes in 2006, 2007 and 2008. And Judge Bianco in a ruling last June agreed. He sent the two sides to work out a settlement.
The result: The hospital agreed to pay the town $15.5 million, including $5.5 million of penalties and interest. And 24 percent of the hospital's property will be taxed at an assessed value of $40 million, making the annual tax payment $1.05 million through 2025.
"The court finds that the hospital fails the profit test on several grounds," the judge wrote.
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Nine Jersey Shore hospitals
The decision opened the door for towns at the Shore that host nonprofit hospitals to contest property tax exemptions. On the table: CentraState in Freehold Township; Bayshore Community Hospital in Holmdel; Monmouth Medical Center in Long Branch; Jersey Shore University Medical Center in Neptune; Riverview Medical Center in Red Bank.
Also, Ocean Medical Center in Brick; Community Medical Center in Toms River; Monmouth Medical Center's Southern Campus in Lakewood; and Southern Ocean Medical Center in Stafford.
Tax assessors for at least three towns contacted by the Asbury Park Press – Freehold Township, Long Branch, and Holmdel – said their towns were pursuing property taxes they previously were denied.
The cases likely will wind up in state Tax Court and could take years to decide, said Michael Imbriaco, Freehold Township's tax assessor.
"As with any municipality that has a hospital, we are now aware there’s a potential the hospital might be taxed in the future," Imbriaco said. "We are giving ourselves the opportunity for protecting the township’s rights."
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State bill
Lawmakers are trying to step in.
Sen. Robert Singer, R-Ocean, Sen. Stephen M. Sweeney, D-Gloucester, and Sen. Joe Vitale, D-Middlesex, introduced a bill last Monday that would allow hospitals to keep their nonprofit status, but make payments. The formula: $2.50 a day for each hospital bed and $750 a day for each facility that provides satellite emergency care.
The money would provide property tax relief and pay for public safety services. And 5 percent of the payments would go to the county where they hospital is located.
"The (hospital) business has changed, but the tax laws have not," Sweeney said. "This legislation will have hospitals pay their fair share while at the same time preserving their tax-exempt status."
"I think it's a reasonable starting point for discussion," said Betsy Ryan, president and chief executive officer of the New Jersey Hospital Association, a trade group, said.
Still, Gribbin sat in his office last Tuesday sounding more and more like an executive of a for-profit company.
It has been a tough year. CentraState is the Shore's last independently owned hospital. It was left out of Horizon Blue Cross Blue Shield's top network in the insurer's new plan and worries it will lose customers. And now it could be stuck with a higher tax bill, prompting administrators to wonder if they will need to cut back on some of the services they provide.
What would happen if it is required to pay the maximum assessment? "We’d probably get a bill tomorrow for another $2 million," Gribbin said. "It’s going to hurt."
Michael L. Diamond; 732-643-4038; mdiamond@gannettnj.com
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