UPMC among nonprofits eager to avoid paying property taxes
September 26, 2012 8:00 AM
Erie County Exec. Barry Grossman at UPMC Hamot Medical Center in Erie, Pa.
By Jonathan D. Silver / Pittsburgh Post-Gazette
Most nonprofits that own land are eager to avoid paying property taxes, and UPMC -- the biggest private-sector beneficiary of tax-exempt status in Allegheny County -- is no different.
But in a rare move, UPMC this year guaranteed South Fayette a steady flow of money on a parcel it is buying from the township for an $18.5 million branch of Children's Hospital of Pittsburgh of UPMC, even though the land could become tax-exempt.
By voluntarily agreeing to pay South Fayette the equivalent of taxes on 50 percent of the assessed value of the property, the $10 billion nonprofit is entering into a contract so unusual that only one other tax-exempt facility in its expansive multicounty network has a similarly structured arrangement -- UPMC Hamot in Erie, Erie County.
Having two deals for the same amount -- 50 percent of the assessed value -- occur in the last year certainly caught the eyes of Allegheny County and Pittsburgh officials, who are constantly seeking new revenue sources.
"It's something we are taking a look at," county Executive Rich Fitzgerald said recently. "We are working on it, and it does make sense. The 50 percent area seems to be about fair. There's a lot of valuable land that's now off the tax rolls."
The hospital system owns nearly $1.4 billion in tax-exempt property in Allegheny County -- $1.2 billion of it in Pittsburgh.
If UPMC were to sign the same type of 50-percent Payment In Lieu Of Taxes agreement on only its new Children's Hospital in Lawrenceville, valued at $308 million, the city, county and school district could reap a combined $4.7 million a year.
Mr. Fitzgerald is not singling out UPMC in his quest for PILOT agreements. He said he has met with representatives of the hospital system and other institutional nonprofits and discussions are "very positive and ongoing."
Pittsburgh Mayor Luke Ravenstahl said he was aware of the deal UPMC struck in Erie but unaware of the one in South Fayette.
"If they're doing it there, why can't they do it here as well?" the mayor said.
Here are payments UPMC would make if it paid 50 percent of the value of its tax-exempt land:
Allegheny County: $3.95 million
City of Pittsburgh: $6.6 million
Other municipalities: $224,000
Pittsburgh Public Schools: $8.5 million
Other school districts: $1.7 million
Joe King, president of the Pittsburgh firefighters union, is concerned about the massive loss of taxable real estate in the city and what it means to revenue that could buy badly needed fire trucks.
He was stunned and angered when told that the hospital system had PILOT deals -- UPMC prefers to call them "community benefit agreements" -- with some communities such as Erie or South Fayette.
"If that's the case, then I want the same deal. I'll take 50 percent of something rather than zero percent of nothing."
UPMC, through its various arms, has at least five PILOTs with taxing bodies in three counties -- Allegheny County, Braddock, Cranberry, Erie and South Fayette. But the Erie and South Fayette deals are the only ones that use a benchmark of half the assessed value of property.
Other communities that are home to tax-exempt UPMC properties -- Franklin Park, O'Hara, Harmar, Penn Hills, West Deer, Monroeville, McKeesport and, most notably, Pittsburgh -- have no PILOT programs.
Pittsburgh receives about $50,000 a year from UPMC, but city Controller Michael Lamb said most of that money is less a PILOT agreement than a payment to lease the land under UPMC St. Margaret near Aspinwall.
While UPMC has pledged up to $10 million a year for a decade to the Pittsburgh Promise scholarship fund that subsidizes city school students' college tuition, Mr. Ravenstahl said, "If that number falls well below the 50 percent threshold, there are questions that should and will be asked."
However, the Pittsburgh Foundation, which oversees the Promise for the school district, only raised half of its $15 million annual goal this past year. Because UPMC's donation is a match to the foundation's total -- UPMC gives $1 to the Promise for every $1.50 the foundation raises -- UPMC only paid $5 million to the Promise this past year.
An analysis of UPMC's tax-exempt property shows that if the hospital system were to agree to a PILOT on its tax-exempt property in Pittsburgh, taxes on 50 percent of the assessed value would mean an additional $6.6 million a year to the city and $8.5 million to Pittsburgh Public Schools. Allegheny County could receive nearly $4 million through a 50 percent PILOT.
"It wouldn't be an exorbitant amount of money" for an entity as wealthy as UPMC, Mr. Fitzgerald said.
State Sen. Wayne D. Fontana, D-Brookline, agreed: "They employ a lot of people. They're economic engines. They do research and development. But you still get goods and services from the city of Pittsburgh and Allegheny County that you should pay for in some way, shape or form."
Other suburban communities and school districts in Allegheny County where UPMC has tax-exempt property could reap a combined $1.9 million with a 50 percent PILOT.
But when Pittsburgh Public Schools signed its deal with UPMC's donations in 2007, it promised not to seek a PILOT or even challenge any of UPMC's tax exemptions for 10 years.
City Council President Darlene Harris is eager for UPMC to give money to the city over and above its contribution to the Pittsburgh Promise.
"The Pittsburgh Promise isn't the city of Pittsburgh," she said in June.
PILOTs rare today
PILOTs are a voluntary way for charitable organizations that own real estate, but pay no property taxes, to appease often-struggling taxing bodies with diminished tax bases that still have to foot the bill for providing services (such as police, fire and road maintenance).
UPMC's signing of PILOT agreements appears to be a strategic effort to avoid costly tax litigation in cases it might lose, such as with a deal in Cranberry; carry over previous arrangements struck by a predecessor hospital that then merged with UPMC, like in Erie; to close a land deal for property, as in South Fayette.
UPMC refused to answer questions about its PILOT agreements, including how many exist, why and when they are agreed to, and how requests from taxing bodies for payments are handled.
UPMC spokesman Paul Wood has said the hospital system "would not necessarily oppose legislation that, say, requires nonprofits to pay real estate taxes as long as it's not punitive and applies to all nonprofits equally in a nondiscriminatory fashion."
However, Mr. Wood also has said any taxes paid on property would curtail other spending by UPMC.
"Any sort of additional tax on UPMC would only serve to limit the amount of money UPMC could reinvest to serve the city, county and region, create new jobs, or contribute to community benefits like the Pittsburgh Promise or the new Center for Innovative Science in Lawrenceville with its 375 soon-to-be-created jobs," according to Mr. Wood.
Allegheny County Controller Chelsa Wagner, whose office issued a study of tax-exempt properties earlier this year, is philosophically opposed to UPMC -- the beneficiary of public services and tax breaks -- directing how its contributions are allocated.
"I do think UPMC makes many contributions in different ways to our community," she said. "At the same time, to say, 'We are the entity that's going to measure what our contribution should be and where it should go' is really a luxury no one has."
In the 1980s and '90s, PILOT agreements were more common, thanks to a state Supreme Court decision that gave taxing bodies leverage in challenging property tax exemptions. Nonprofits had to meet a five-point test to qualify for charitable status that would merit a property tax break.
In 1997 a new state law governing charitable groups that favored nonprofits over taxing bodies caused tax challenges to lapse, and PILOTS went out of fashion. Municipalities, counties and school districts no longer could be confident that threats of litigation would end in a deal for an annual payment.
There were exceptions, however. The Sherwood Oaks retirement community, now part of UPMC, signed a PILOT in 2004 -- it has since been renewed through 2015 -- with Cranberry, Seneca Valley School District and Butler County.
Although historically a mix of tax-exempt and taxable, the nursing home sought complete exempt status about a decade ago, officials said. The county rejected the request, setting up a possible legal battle. The parties negotiated in 2003 and hammered out an agreement.
The trio of taxing bodies "agreed to exempt them as long as we could get a substantial in-lieu-of [payment], and that would save thousands upon thousands upon thousands of dollars on both sides in terms of attorney fees," said Ed Rupert, Butler County's director of property and revenue.
Sherwood Oaks, valued at $10.6 million, pays the county about $44,000 a year, the township $28,000 and $189,264 to the school district this year.
In South Fayette, UPMC's willingness to pay what will eventually total about $35,500 a year was driven by a dollars-and-cents calculation -- and competition.
Running against a proposed retail development, UPMC dangled the prospect of a Payment In Lieu Of Taxes as a tactic to enhance its winning bid for land the township owned on the site of an old movie theater.
UPMC wanted to build an outpatient pediatric center near Interstate 79. During a Dec. 12 presentation to the township, UPMC increased the cost of the development and guaranteed a "real estate payment on a minimum of 50 percent of the building's assessed value."
At least half the facility is expected to contain private doctors' offices, township Commissioner J. Deron Gabriel said. He speculated that UPMC might have figured that South Fayette would prevail in challenging fully tax-exempt status and decided to forgo a legal battle.
Crunching the numbers showed the nonprofit coming out ahead of its commercial rival for the site by about $30,000 in total property taxes and other taxes during the first five years. UPMC also boosted its offer by adding a $100,000 sweetener for future construction on the vacant theater site.
But, unlike in Erie, no other local government will benefit from the South Fayette deal. The South Fayette School District, which would stand to take in much more than the township from taxes on the site, had no ownership stake in the land. As a result, it was not part of the deal, and UPMC has not cut the district in for a similar PILOT.
Watching other deals closely
UPMC Hamot's PILOT deal -- inked earlier this year -- was a renewal of a deal first agreed to with then-independent Hamot Medical Center in 1988, when Erie's taxing bodies demanded that the hospital pay $100,000 or face a legal challenge to its tax-exempt status.
The two sides battled in court. In a landmark ruling, the taxing bodies won. Rather than pay on the entire taxable value, the hospital cut a deal to maintain its exemption but pay half the assessed value of its property to the city, school district and county. The deal was renewed in five-year increments. UPMC's purchase of Hamot in February triggered the need to modify the paperwork.
"The UPMC people were new to this whole thing, and I think they were a little leery about it," Erie County Executive Barry Grossman said. "They didn't quibble at all [about the money]. They just quibbled about having to go through the process."
UPMC now pays nearly $1.2 million a year through the PILOT. That makes it the fifth-largest PILOT in the nation for a hospital, according to an analysis by Daphne A. Kenyon, an economist and visiting fellow at the Lincoln Institute of Land Policy in Cambridge, Mass.
The city of Boston has one of the oldest and most lucrative PILOT programs, having brought in $31 million from local nonprofits in fiscal 2010. Massachusetts General Hospital, with 2011 revenue of nearly $3 billion, tops the hospital list, paying Boston $3.5 million a year, Ms. Kenyon said. Lancaster General Hospital, an $849 million system in Lancaster County, Pa., is next in line, paying $1.38 million to the city of Lancaster as part of an informal agreement and $1.5 million through a PILOT in combined cash and services to the school district.
"As goes the city, so goes Lancaster General Health," hospital spokesman John Lines said. "The health and well-being of our community is critically important, and we understood without those contributions the well-being of the city would be severely challenged."
Inspired by the Hamot deal, Monroeville Deputy Mayor Diane Allison determined to get an agreement with UPMC East, the hospital that opened in July.
"We have reached out to UPMC. We're currently awaiting their decision on the amount. We've asked for a certain amount based on the taxes the property would be paying if it was a taxable property," she said.
Although UPMC East cost $250 million to build, Ms. Allison said Monroeville assigned the same value to UPMC East as the value of nearby, 34-year-old Forbes Regional Hospital, owned by UPMC's rival, West Penn Allegheny Health System -- $65 million.
But, like in South Fayette, Monroeville and the Gateway School District are not collaborating.
A difficult balance
Braddock represents a municipality that enjoys a PILOT agreement involving a facility that is no longer there.
After UPMC closed its Braddock hospital in January 2010, it committed to pay the city $90,000 a year for five years in lieu of wage taxes that hospital employees had paid. Braddock Mayor John Fetterman said the deal is actually equal to about 15 years worth of wage taxes that were paid by former UPMC employees.
In Pittsburgh, near Aspinwall, UPMC does not own the land on which UPMC St. Margaret sits on Freeport Road, but it pays Allegheny County $15,000 a year through a PILOT agreement. The payment has been made since 1995, two years before St. Margaret became part of the UPMC system.
At least three municipalities in Western Pennsylvania -- Farrell, Greenville and Hempfield, all in Mercer County -- receive money from UPMC without a formal agreement.
The payments appear to be a holdover from the era after Sharon Steel Corp. closed and Horizon Health System pitched in to help the area. Horizon, created from Shenango Valley Medical Center and Greenville Regional Hospital, merged with UPMC in 1998.
Despite all of those deals, in McKeesport, city and school district officials said they were reluctant to push UPMC for a PILOT on the local hospital for fear of alienating the nonprofit and prompting them to shutter UPMC McKeesport.
UPMC has never threatened to leave the financially distressed community, but the prospect lurks in the back of officials' minds.
"You can't ignore the fact that they're a very large employer and we'd have to consider what would happen if they weren't here. No one has used that as a bargaining chip," said Democratic state Sen. Jim Brewster, McKeesport's former mayor. "If you make a business feel uncomfortable, whether it be financially or from an infrastructure perspective, they're going to take their business elsewhere."
That concern reflects a balance of power that seems backward to Ms. Wagner, the Allegheny County controller.
"If you can have elected officials speaking unanimously, that is very, very powerful," Ms. Wagner said. "We should be in a position of power, but we've taken a back seat. It's the responsibility of government to step up and say, 'This is what we demand of you.' "
Mr. Fitzgerald provided no detail on his efforts to woo nonprofits to sign PILOT agreements. The voluntary nature of the agreement means the county cannot force UPMC or anyone else to agree to payments on tax-exempt property. Nor can the county prevent UPMC from dialing back its investments in other areas if it chooses to do so to compensate for new expenditures through a PILOT.
"We're just going to do our best. It makes it very difficult to do it," Mr. Fitzgerald said. "You hope what you get for the taxpayers is not hurting another area."