As the public debate continues over whether large local nonprofit entities such as UPMC deserve a tax exemption, a bill is quietly circulating in Harrisburg that would fundamentally change who gets to make that decision.
Simply put, the proposed amendment to the state constitution -- HB 724/SB4 -- would give the state Legislature, rather than the judicial system, final say on what is a "purely public charity" eligible for tax exemption.
The Senate passed the bill, 30-20, last month, and the House Finance Committee has approved a version.
Because the bill would amend the state constitution, it must pass both houses in consecutive legislative sessions and then go before the voters for approval. So although any resolution is still a ways off, the stakes are large enough that both sides are already staking out their positions.
The bill's supporters say it would provide statewide consistency in defining what is or is not a charity, so nonprofits would not be subject to different court rulings in different parts of the state.
Opponents, meanwhile, see the bill as an end-run by hospitals and other big nonprofits to shift tax exemption authority to legislators -- and away from the increasingly restive communities that have shown they're willing to go to court to force hospitals, universities and other nonprofits to pitch in more.
"I just think this will undermine the ability of local governments to hold mega-charities accountable," said Pittsburgh Councilwoman Natalia Rudiak, who represents South Hills neighborhoods. "What also disturbs me is their attempt to make a change to the constitution without a single public hearing. I think that sets a dangerous precedent."
The issue has formidable advocates on both sides.
Among those supporting the bill are the Hospital & Healthsystem Association of Pennsylvania, the Association of Independent Colleges and Universities of Pennsylvania, the Pennsylvania Catholic Conference and United Way of Pennsylvania.
In a Jan. 28 memorandum to colleagues, Republican Sens. Mike Brubaker and Joe Scarnati said the legislation became necessary once the Pennsylvania Supreme Court last year denied property tax exemption to a Pike County camp because it said the camp did not provide relief to the local government's burden, one of the required criteria under a 1985 court decision.
The senators say the camp did qualify as a public charity under Act 55, which, following several public hearings, was passed in 1997 in an attempt to clarify the requirements for tax exemption.
"By elevating its own judgment above the will of the General Assembly, the Court has created uncertainty as to the qualifications for public charities in Pennsylvania," the senators wrote.
But many officials representing municipalities and school districts believe the 1997 law makes it too hard to challenge a nonprofit's tax-exempt status.
Those opposed to the bill include the Pennsylvania Municipal League and the Pennsylvania State Association of Township Commissioners, who say tax exemptions put an unfair and unsustainable financial burden on municipalities.
"There is no question that many of institutions contribute not just financially but to the quality of life where they are located," said Richard J. Schuettler, deputy executive director of the Pennsylvania Municipal League. But when tax-exempt entities sit on 30 percent or more of a municipality's real estate, the tax burden on everyone else becomes onerous, he said. "It's part of the reason why there are so many more municipalities entering financial distress. Our view is that everyone has to pay some kind of fair share."
The Pike County ruling was based on the earlier court decision that set a five-point test for tax exemption; the ruling did not mention the 1997 law.
The rationale for tax exemption is that hospitals, universities and other nonprofits benefit their communities in a variety of ways, such as providing care for the uninsured or supporting research that benefits the community.
The question of just how much benefit is provided was the topic of a New England Journal of Medicine article authored by a group of researchers led by Gary J. Young, director of the Northeastern University Center for Health Policy and Healthcare Research in Boston. After reviewing tax documents for more than 1,800 tax-exempt hospitals, they found that on average the 7.5 percent of hospitals' operating expenses went to community benefits.
"Is that enough? For the most part, there are no quantitative criteria," said Mr. Young in a phone interview. "Nowhere in the tax code at the state or local level is there an explicit requirement for hospitals to provide community benefits in the same amount they receive exemptions."
Pittsburgh Mayor Luke Ravenstahl believes UPMC does not do enough to justify its tax-exempt status and last month sued UPMC, demanding six years of back payroll taxes and revocation of the health system's tax exemption.
On Friday, UPMC responded by filing suit against the city and Mr. Ravenstahl in federal court, accusing the city and the mayor of unfairly targeting UPMC. They said UPMC contributed more than $622 million to the community last year, including $288 million for research and education, $238 million in uncompensated care and $96 million for community service programs. That's in addition to its $100 million commitment to the Pittsburgh Promise program that helps city high school graduates pay for college.
Spokesman Paul Wood has said they believe UPMC will "easily qualify for the tax-exempt status."
Other communities are seeing similar battle lines being drawn.
In December, the Warren County Board of Assessment Appeals ruled that the 89-bed Warren General Hospital, the local YMCA and some other nonprofits no longer qualified for tax exemption.
Forest Hills attorney Jack Cambest, who is representing the assessment appeals board, said the board's ruling rose from questions about the amount of charitable service the hospital provided in relation to its revenues, as well as questions about physician compensation.
Warren General CEO John Papalia said the ruling took them by surprise and they are appealing in court. He said the hospital provided $6.4 million in uncompensated care and other community benefits last year, nearly 9 percent of its revenue, and he is "extremely confident" they meet all the required criteria for tax exemption.
"We will take this as far as we need to in the courts," he said.
Given the lengthy process of amending the state constitution, the Mega-Charities Protection Act may or may not come into play before the city's challenge of UPMC's tax status is resolved.
Because of UPMC's international prominence, though, "people are going to be looking to see what the outcome is. It could be a very, very critical case," Mr. Young said. "It is probably sending chills down the spine of many hospitals."
Steve Twedt: email@example.com or 412-263-1963.