Gov. Chris Christie proposed a two-year freeze on taxing nonprofit hospitals and announced a commission to review hospital property tax exemptions in New Jersey at a press conference at a hospital in Elizabeth on Friday.
The proposed moratorium would freeze litigation on the tax issue. However, a law would need to be passed by the New Jersey Assembly and Senate in order for the moratorium to go into effect.
“It gives us time to come up not just with a solution but with the right solution, and that’s what we should be looking to do,” Christie said.
Last summer, New Jersey Tax Court Judge Vito Bianco ruled that a Morristown hospital must pay property taxes on a portion of its property because it essentially operates as a nonprofit/for-profit hybrid. The hospital did not appeal, and instead settled the case with the municipality in November.
More than a dozen municipalities in New Jersey are now challenging the tax-exempt status of nonprofit hospitals in their communities.
New Jersey Hospital Association President and CEO Betsy Ryan Friday called Christie’s proposal a reasonable approach that would let the state “take a deep breath” while working to address the uncertainty created by the tax court decision.
But Assembly Speaker Vincent Prieto (D., Hudson) said two years was too long.
“The Assembly will continue working with all parties on an immediate solution,” Prieto said in a statement.
In January, Christie vetoed a bill that would have preserved tax exemptions for hospitals, requiring them instead to pay annual fees to municipalities at a rate of $2.50 per bed per day. The New Jersey Hospital Association supported the bill, but the League of Municipalities opposed it and argued that the fees would be too low.
New Jersey law dictates that properties owned by nonprofits must be used exclusively for charitable purposes to qualify for the property tax exemption. Any portion of the property used for profit can be taxed.
In the Morristown case, Bianco questioned property tax exemptions for modern nonprofit hospitals in his 88-page ruling, citing case law.
“If the property tax exemption for modern non-profit hospitals is to exist at all in New Jersey going forward, then it is a function of the legislature and not the court to promulgate what the terms and conditions will be,” he wrote. “Clearly, the operation and function of modern non-profit hospitals do not meet the current criteria for property tax exemption.”
Bianco said hospitals have changed from their early origins. Medical centers function similar to for-profit hospitals, operating as “labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”
Today’s nonprofit hospitals generate significant revenue and pay their professionals competitive salaries when compared with the for-profit world, the judge said. The former Morristown Medical Center CEO was paid more than $5 million a year during the period at issue in the case. Several other hospital administrators received $500,000 a year or more in compensation. Private physicians and medical practices there also earn and retain income on the hospital’s property.
In his ruling, Bianco said the hospital failed to establish the reasonableness of the salaries it paid to executives. The hospital had interests in for-profit operations and failed to draw a clear line between those operations. The hospital also failed to show where its nonprofit activity ends and where it for-profit activity with private physicians begins.
After the ruling, the Morristown Medical Center agreed to pay the town $15.5 million. The town of Morristown will receive $10 million up front, and another $5.5 million in penalties and interest in annual installments over the next 10 years. The payments will settle hospital tax appeals spanning the years 2006-2015. Going forward through 2025, approximately one-quarter of the property will be taxed at an assessed value of $40 million. The deal is expected to yield another $1.05 million per year in tax payments to be split with the town and the public school district.
The hospital issue could have ramifications for nonprofit schools as well. In Princeton, some residents have questioned whether certain Princeton University properties should be exempt from paying property taxes. A group of residents has filed a lawsuit challenging the exemptions and claiming that some buildings are used for profit-making ventures. The case is expected to go to trial in the fall. Bianco is the judge. Princeton University has tried and failed several times to have the case dismissed, and has also tried unsuccessfully to have the case heard by a different judge in Trenton.