On December 7, 2015, Senate President Steve Sweeney (D-Deptford), Senator Robert Singer (R-Lakewood) and Senator Joe Vitale (D-Woodbridge) introduced legislation, Bill S-3299, which would require New Jersey acute-care tax-exempt hospitals to make payments, or annual service contributions, to offset the cost of services provided by the municipality in which they are located. This Bill, The Hospital Community Service Contribution Bill (“Bill”), was introduced in response to the Morristown Medical Center tax court decision in which Judge Vito Bianco ruled that Morristown Medical Center was liable for unpaid property taxes for the years 2006 through 2008.
Following the decision, Atlantic Health, the parent corporation of Morristown Medical Center, settled with the Morristown Town Council agreeing to pay an upfront payment of $10 million and, in addition, annual installments for the next 10 years to cover $5.5 million in penalties and interest for the years 2006 through 2015. In addition, prospectively, approximately one-quarter of the property will be taxed at an assessed value of $40 million from 2015 to 2025 which will approximate another $1.05 million in annual tax payments; to be shared between the town and the Morris School District.
Please refer to our recent Withum Weekly Pulse alerts dated July 15, 2015 and November 18, 2015; respectively, for a more detailed discussion with respect to this case. It is important to note that the payments prosed under the Bill would allow hospitals to maintain their property tax-exemption status.
The Bill would require New Jersey tax-exempt acute-care hospitals to make an annual service contribution of $2.50 per day for each licensed hospital bed and $750 per day for each facility providing satellite emergency care. The fees collected will be used to fund services provided by the local municipalities such as emergency services, police and fire protection or to reduce any existing property tax levies. In addition, a hospital may reduce its annual service contribution by any amount that it already contributes to the municipality through a voluntary payment.
Tax-Exempt hospital with 500 licensed beds
(500 x $2.50 X 365) = $456,250 annually
Less: Current Voluntary Payment: ($100,000)
Amount Due Annually: $356,250
Quarterly Payment: $89,062.50
According to the Bill, five percent of the annual service contributions made by tax-exempt hospitals would be remitted to the county in which the hospital is located. The Bill also provides that hospitals that operated with a negative operating margin in the prior year or those that were not be in full compliance with bond covenants during the prior year would have the ability to apply to the New Jersey Health Care Facilities Financing Authority and request an exemption from the payment. Such applications would be due by February 1st and are required to include a copy of the hospital’s audited financial statements, or other information that would prove a loss from operations or non-compliance with bond covenants if audited financial statements are not available by February 1st. An exemption from the annual service contribution is valid for the current tax year.
The annual community service contribution is payable in equal quarter installments on February 1st, May 1st, August 1st, and November 1st.
Under the Bill, the Nonprofit Hospital Community Service Contribution Study Commission would be established to analyze and evaluate the entire annual service contribution system and make recommendations that the Commission believes would improve the system.
Senator Vitale stated, “The fact that the payment formula sets a reasonable payment schedule that is predictable and consistent is a benefit for the hospitals and the municipalities, eliminating uncertainty and unpredictability.”
Senator Sweeney was quoted, “The healthcare industry has changed substantially over the years with hospitals engaged in a broad range of activities and services. There is also a dramatic increase in competition among other hospitals and with other healthcare providers. The business has changed, but the tax laws have not. This legislation will have the hospitals pay their fair share while at the same time preserving their tax-exempt status.”
Senator Singer added, “These hospitals are an important part of the communities they serve, providing medical care, creating jobs and contributing to their local economies. We recognize and appreciate their value. These payments will help compensate for the services the hospitals receive from the municipalities, including law enforcement and firefighters.”
New Jersey Hospital Association’s (“NJHA”) President and Chief Executive Officer Betsy Ryan has held discussions with the sponsors of the Bill. NJHA has developed a member task force to review this issue and wants to ensure that the final bill would protect tax-exempt hospitals from additional legal challenges against their property tax-exempt status. Ryan stated that “any solution must recognize that New Jersey’s not-for-profit hospitals are exempt from local property taxes. Hospitals should be protected from any additional legal challenges on their tax status. And financially challenged hospitals should be spared from making municipal contributions that would further threaten their viability.”
In addition, the recent EY Community Benefit Report prepared for NJHA entitled “2013 New Jersey not-for-profit hospitals’ community benefits and economic impact analyses” released in December of 2015, provides that New Jersey’s tax-exempt hospitals provided $2.4 billion in community benefits in 2013, absorbing a $1 billion cost in financial assistance and other care to means-tested populations. Other ways in which these hospitals help drive economic activity for their communities were also outlined in the report.
New Jersey tax-exempt hospitals should watch for further developments of the Bill which was introduced in response to the recent Morristown Medical Center tax court decision. The Bill was referred to the Senate Budget and Appropriations Committee which met on December 10th and is again scheduled to meet on December 21st.
For questions or assistance, please contact a member of Withum’s Healthcare Services Group by filling out the form below.
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