On the eve of a showdown in Pennsylvania Supreme Court, PinnacleHealth system safeguarded its disputed property tax exemption by agreeing to pay $10 million to settle a long-running tax battle with local authorities.
In reaching terms with Dauphin County, the city of Harrisburg, and the Harrisburg school district Nov. 17, not-for-profit PinnacleHealth averted a winner-take-all hearing that could have seen Pennsylvania's court of last resort uphold or reverse two lower court decisions that denied PinnacleHealth's tax exemption for 1994 and 1995.
Calling the Supreme Court hearing "a very high-stakes gamble," Kenneth Chestek, an Erie, Pa., lawyer representing the Harrisburg tax authorities, said, "Both parties finally got tired of taking chances and agreed to compromise."
Previously, a county court and a state appeals court said PinnacleHealth's original two hospitals behaved more like for-profit businesses than public charities worthy of property tax exemptions. Among the evidence cited by the courts included the fact that the hospitals bought physician practices-a common business activity engaged in by many not-for-profit hospitals (Feb. 2, p. 4).
Had PinnacleHealth lost in court again, the system would have had tax liabilities to date of about $40 million.
Under a memorandum of agreement, PinnacleHealth said it will withdraw its appeal of earlier rulings, pay $7 million in lieu of past taxes and pay another $1 million annually through 2001. About 25% of the PinnacleHealth payments will go to the city, 60% to the school district and 15% to the county.
For their part, the taxing authorities agreed to withdraw their challenge to PinnacleHealth's property tax exemption. Beyond 2001, PinnacleHealth may continue to make voluntary payments to the local governments, if all parties agree. "Philosophically, we've always felt that hospitals should make some payment to municipalities for services," said Chris Markley, general counsel at PinnacleHealth. But from the start the governments' position "was that Pinnacle should be 100% taxable, and that was something that our board in particular didn't feel was appropriate."
PinnacleHealth was formed through the 1996 merger of 453-bed Polyclinic Health System and Capital Health System, which owned 398-bed Harrisburg Hospital. The system completed its Harrisburg monopoly earlier this year when it merged with 99-bed Community General Osteopathic Hospital. PinnacleHealth also includes 115-bed Seidle Memorial Hospital, primarily a skilled-nursing facility, in Mechanicsburg.
The property tax exemptions of Community General and Seidle Memorial were not at issue in the case and are not part of the agreement.
PinnacleHealth's Harrisburg General and Polyclinic hospitals employ more than 3,000 people and provide about $17 million in community benefits.
Huge amounts of property in Harrisburg, the state capital, are occupied by tax-exempt government offices and not-for-profit organizations, Chestek said. The thin tax rolls have starved the local governments for cash, he said, helping to explain their persistence in seeking payment from the hospitals, starting more than five years ago.