The Delaware Valley Hospital Council and the Hospital Association of Pennsylvania are scrambling to devise an acceptable alternative to a plan by the city of Philadelphia to essentially tax the property of all not-for-profit organizations in the city, including 40 hospitals.
The plan, which could raise as much as $40 million annually for the city and the Philadelphia school district, takes effect Dec. 1.
By that date, the targeted institutions must decide whether to accept the city's offer to make discounted payments to the city in lieu of property taxes. If they don't, they may wind up defending their tax exemptions in court.
The Philadelphia plan, dubbed the PILOTs/SILOTs program, is the latest development in the nearly 10-year-old property-tax dispute between local Pennsylvania municipalities and tax-exempt organizations, most notably not-for-profit hospitals.
The ongoing dispute has its roots in a 1985 decision by the Pennsylvania Supreme Court, which created a five-part test that traditionally tax-exempt organizations had to pass to avoid property taxes as "purely public charities."
Under one part of the test, an organization must operate entirely free from a profit motive. Hence, any organization whose revenues exceed its expenses has become a target for local tax assessors, which could even include churches and cemeteries.
Dozens of Pennsylvania's more than 200 not-for-profit hospitals have been forced to either pay property taxes or make payments or provide services in lieu of property taxes because of the decision (March 29, 1993, p. 26).
However, the assessor's reach didn't touch Philadelphia's 40 not-for-profit hospitals until August 1992, when the city began collecting financial information from each of the institutions, including copies of their annual filings with the Internal Revenue Service.
The Delaware Valley Hospital Council responded by commissioning a study of the economic benefits to Philadelphia that its hospital members provide as employers, and the community benefits they provide as tax-exempt public charities.
The report, released in October 1992, said Philadelphia hospitals provided more than $414 million in community benefits in 1991. About $127 million, or about 31% of the total amount of benefits, represented charity-care and bad-debt costs. The balance included Medicare and Medicaid payment shortfalls and the value of other services provided to the community.
But the report didn't sway Philadelphia Mayor Edward Rendell, who on June 30 of this year unveiled his PILOTs/SILOTs program and made it effective by executive order the same day.
In 1992, Philadelphia hospitals earned a combined $169.7 million profit on total revenues of about $4 billion, according to the latest available data from the American Hospital Association. The data are based on figures from 36 of the 40 not-for-profit hospitals.
Under the mayor's plan, any tax-exempt organization whose property-tax exemption is in doubt under the 1985 court test can opt to make payments in lieu of taxes, or PILOTs, or provide services in lieu of taxes, or SILOTs, to the city.
Annual payments in lieu of taxes would be equivalent to 40% of an organization's estimated property-tax bill. The amount could be reduced to 33% if an organization entered into an agreement with the city by Dec. 1.
Also, up to one-third of any payment could be made up of predetermined community services of an equal value. An advisory board would determine the value of the services.
Organizations that don't take the city up on its offer may have their property-tax exemptions challenged before the local property assessments board, and possibly in state court.
According to the mayor's office, the program could generate as much as $40.3 million in revenues from the more than 2,000 tax-exempt organizations located within Philadelphia's city limits, assuming all 2,000 paid 40% of their estimated annual property-tax bill.
Of that, about $14 million, or nearly 35%, would come from not-for-profit hospitals, nursing homes and other healthcare facilities, the report said.
The city does not anticipate 100% compliance at the 40% rate, said Greg-ory Rost, Philadelphia deputy mayor for policy and planning.
Mr. Rost said some organizations will meet the test for exemptions, others may be quasi-public organizations exempt from taxes and some may take their chances before the tax assessors.
Mr. Rost said no hospitals have entered into a PILOTs/SILOTs agreement with the city, but he added, "We're negotiating with quite a number of hospitals right now."
In fact, representatives from 556-bed Hahnemann University Hospital in Philadelphia attended the mayor's press conference in June and pledged their support to the plan. Many local observers expect Hahnemann to cut a deal with the city by Dec. 1.
But a spokesman for the Pittsburgh-based Allegheny Health, Education and Research Foundation, with which Hahnemann merged in November 1993, declined to comment on whether Hahnemann would participate in the city's program.
Allegheny's flagship hospital, Allegheny General, Pittsburgh, is paying the city of Pittsburgh about $10 million to settle its own tax dispute (June 8, 1992, p. 6).
Hahnemann earned about $6.1 million on total revenues of about $356.6 million last year, according to HCIA, a Baltimore-based healthcare information firm.
Meanwhile, the Delaware Valley Hospital Council and the Hospital Association of Pennsylvania are putting together an alternative plan that they hope would be acceptable to the city.
"The problem we have with the city's plan is that it's based on real estate and tax-exemption issues," said Leonard Karp, the council's vice president for public information and government relations. "We're looking for another way to get money to the city."
The council and the state association are developing a plan under which hospitals would make voluntary contributions to a new foundation, which would help finance community health programs in the city.
Mr. Karp said the plan would benefit the city and its not-for-profit hospitals. First, the city gets funding for needed services. Second, hospitals' property-tax exemptions would be untarnished. Also, hospital contributions to the foundation would be strong evidence of hospitals' charitable mission in the event of any further attacks on their exemptions at either the state or federal level.
However, Mr. Karp acknowledged that the council would have to have firm commitments from hospitals to donate to the foundation before taking the idea to the city.
The council is working on the final details of the plan, which will be considered at the council's next board meeting later this month.