The state Supreme Court has handed down a ruling that could jeopardize tax-exempt status for some nonprofit organizations.
Based on the case of a Pike County summer camp, the ruling tightens guidelines for establishing the legitimacy of property tax exemptions by reasserting the primacy of a court-created test over an easier legislative test.
The ruling reflects a new national trend for struggling local governments to squeeze nonprofits - especially hospitals and colleges - for help in funding services they depend on, such as police, fire and street repair, according to Robert Evans of EHL Consulting Group in Willow Grove, an expert on nonprofit property tax exemptions.
Mirror photo illustration by J.D. Cavrich and Tom Worthington II
A recent state Supreme Court ruling could lead to increased pressure on nonprofits, like Altoona Regional, to start or hike their contributions to their local municipalities to help pay for services such as police, fire and street repair.
"It's transformational," Evans said of the ruling. "It will have a serious ripple effect."
Others don't think it's that big of a deal.
Possible effects in Altoona
It's unclear how the ruling - or the incipient national trend - may affect local nonprofits.
Altoona Regional Health System expressed possible concern in a statement, but it already contributes - when it's in the black - at a level that is higher than demanded by the City of Boston, which seems to be leading the squeeze.
Penn State University, which has parts of its Penn State Altoona branch campus in Ivyside and downtown, didn't respond to a request for comment.
The changes from the Pennsylvania ruling may come not so much because of the strict legal implications, but because of the signal it sends about the shifting national mindset regarding nonprofits and their responsibilities, according to Evans.
It gives additional leverage for municipalities that choose to use it, he believes.
"The governments [will now] have the upper hand," Evans said.
That could include Altoona, which has just entered the state's Act 47 Distressed Municipalities Program, and which will be looking at all possible means to help regain solvency under guidance from a consultant who recently began working on a recovery plan.
Altoona has lots of non-taxable properties, although as City Manager Joe Weakland points out, much of them are government-owned and wouldn't be candidates for losing their tax exemptions - or payments in lieu of taxes (PILOTs), presumably.
Nonprofits on alert
It's too early to draw definite conclusions, but the ruling worries nonprofits, which already "have their backs to the wall," said Joe Geiger, executive director of the Pennsylvania Association of Nonprofit Organizations.
Municipalities can use their growing leverage to apply pressure in the media, shaming nonprofits into contributing PILOTs, according to Evans.
"This changes the discussion," said Rick Schuettler, deputy executive director of the Pennsylvania League of Cities and Municipalities - though he added that municipalities receiving decent PILOT payments may be reluctant to further press organizations that are providing them.
The change is likely to hurt only a small percentage of nonprofits, because most lease property and already pay real estate tax indirectly, according to Geiger.
The nonprofits it hurts are likely to be the bigger ones, because they're the ones most likely to own property, he said.
Pushing for payments
Boston has been the most aggressive municipality in the country in obtaining PILOTs, pushing for an annual 25 percent of what nonprofits would pay if they owned taxable property, according to Evans.
Municipalities are looking first to colleges, then hospitals, according to Evans. They will be following up with pressure on cultural institutions such as museums, then houses of worship, he predicted.
Municipalities in Pennsylvania have been slow to catch on to the trend, Evans said.
However, the City of Philadelphia has been looking hungrily at potential income from the University of Pennsylvania, Drexel and Temple, he said.
The current situation flowed from the tanking economy of 2008, according to Evans. Budgeting became difficult for municipalities, sending them looking for funds wherever they could find them, he said.
Unfortunately, it also made budgeting difficult for nonprofits, Geiger said.
Meeting the standard
The summer camp ruling gives precedence to a Constitution-based test the Supreme Court established in 1985 over a more liberal test established by the General Assembly 12 years later with Act 55 - The Institutions of Purely Public Charities Act.
The Act 55 test never explicitly overrode the prior court test, which came out of the case of the Hospital Utilization Project v. Commonwealth (the HUP test).
But it essentially overrode the HUP test, because it allowed some nonprofits to obtain exemptions they wouldn't have obtained under HUP.
The summer camp ruling doesn't eliminate the Act 55 test. But it requires nonprofits to also comply with HUP, which will mean some likely won't make the cut anymore.
To qualify under HUP, an organization must advance a charitable purpose; donate a substantial portion of its services; benefit "a substantial and indefinite class of persons" who are legitimate subjects of charity; relieve the government of some of its burden; and operate entirely free from private profit motive.
Act 55 made that set of criteria easier by elaborating on each of the five HUP "prongs," specifying a variety of activities by which organizations can justify an exemption.
For example, an organization can satisfy the requirement to help relieve the government of its burden merely by advancing or promoting religion through a ministry.
In the summer camp case, the Commonwealth Court denied an exemption because the camp - operated by Mesivtah Eitz Chaim of Bobov Inc. - didn't help to relieve the local government of a financial burden, based on the HUP test.
The Supreme Court backed this interpretation, saying nonprofits must comply with HUP, as well as Act 55.
In a footnote that summer camp lawyer Howard Bashman finds exasperating, the high court also said the Commonwealth Court erred in denying the camp's request for exemption on the basis of HUP, but that it was letting the error stand.
According to the high court, it's true the camp didn't provide recreational opportunities for Pike County residents, but it did provide recreational opportunities for Brooklyn residents who were staying for a time in Pennsylvania. By doing so, it relieved Brooklyn-area governments of their responsibility to provide recreational opportunities, according to the high court.
"A charity can relieve the government of some of its burden, even if the beneficiaries are not in the jurisdiction from which it seeks a tax exemption," the Supreme Court stated.
But that error, key to propelling the case to the high court, was not part of the question the high court wanted to consider.
"[It's] outside the scope of our [examination,]" the high court stated in the footnote.
Bashman is trying to rectify the problem by asking the high court to remand the case for reconsideration.
The camp paid property taxes of about $50,000 a year under protest between 1997 and 2004, then owed unpaid taxes from 2005 on, Bashman stated in court papers.
Unless the camp obtains an exemption, it will need to stop operating, Bashman said in court papers.
In addition to pitting nonprofits against municipalities, the summer camp ruling pits lawmakers against the court.
While the high court wanted to correct what it considered a trespass on its turf by lawmakers, some lawmakers want to correct what they think is a trespass on their turf by the court.
The court has the last word on the Constitution, according to Drew Crompton, chief of staff for State Sen. Joe Scarnati, R-Jefferson.
But this is no "run of the mill" Constitutional provision, he said.
It states: "The General Assembly may by law exempt from taxation ... institutions of purely public charity" - provided the subject property is used for the institution's core purposes.
It explicitly invites lawmakers to set guidelines, according to Crompton.
In the Act itself, they say they're trying "to eliminate inconsistent application of eligibility standards ... reduce confusion and confrontation" and ensure against wasting money on lawsuits.
To disregard the careful application of lawmakers' policy experience in Act 55, specifying guidelines for deserving nonprofits to get tax exemptions, is "very unfortunate," Crompton said.
"It potentially could have serious impact," he said.
The summer camp ruling is tantamount to an invitation for local governments to reach "into the collection basket" to balance municipal budgets, Geiger said.
"Every dollar you take out of a charity takes from their ability to provide mission," he said.
With encouragement from the Hospital & Healthsystem Association of Pennsylvania, lawmakers have proposed a Constitutional amendment that would undo the summer camp ruling.
Its key provision: "If the General Assembly exercises its authority under ... this Constitution by legislation, no criteria other than those specified in the legislation may be used to determine the qualifications of an institution of purely public charity."
A Constitutional amendment must pass two sessions of the General Assembly, then a referendum.
Support for the court
Stuart Knade of the Pennsylvania School Boards Association thinks all the agonizing on behalf of nonprofits is nonsense.
Act 55 was actually "tax exemption run amok," Knade said, and the summer camp ruling was a corrective. With Act 55, lawmakers were simply trying "to lower the bar," he said.
Historically, tax exemptions were reserved for groups that care for people who are "utterly incapable of providing for themselves," he said.
Act 55 provides exemptions for other kinds of organizations that "have no business calling themselves charities," he said.
Undeserved exemptions may sound harmless, Knade said. But they're not, because they shift the burden of supporting government onto others, who have no choice about the subsidy they're providing, he said.
Correcting it, cutting undeserved exemptions, as the court has moved to do, means cutting taxes for the rest of us, he said.
Return to past
While Geiger lobbies for nonprofits, he doesn't want simply to erase the summer camp ruling and return to the recent status quo.
He'd like to return to the pre-HUP days when governments saw charities as valuable partners.
That could happen if community leaders get together to see what they can do "to make a healthy community," Geiger said. "Rather than shaking big sticks," he said.
Healthy communities require a "three-legged stool" of healthy government, healthy businesses and healthy nonprofits, he said.
Despite the attention the summer camp ruling has commanded, some observers don't think much will change.
Easy does it
Some nonprofits might need to reapply for exemptions, but the ruling won't cause a full turnaround, said Douglas Hill, executive director of the County Commissioners Association of Pennsylvania.
Some borderline nonprofits might lose exemptions, as when a church runs a day care center or rents housing in operations that aren't part of its ministry, said A.C. Stickel, City of Altoona controller.
Likewise, an organization running a business in an old church building or a church running an operation with profits benefiting an individual might stand to lose nonprofit status, Stickel said.
But overall, there won't be much impact for the city or Blair County, he predicted.
While some municipalities may go after college properties, Altoona probably won't go after Penn State's, according to Stickel.
The college has invested "an enormous amount of money" into those properties to the benefit of the community, he said.
That investment has resulted in an increase in earned income tax revenue for the city, while eliminating blight, he said.
Still, college leadership has already stated a willingness to explore the possibility of a PILOT, Stickel said.
He's not sure that would do much good, though, because it would merely shift money from the state to the three local taxing bodies, he said.
"It would take it out of one pocket and put it into another," he said.
Altoona Regional may be uneasy, even though it has what may be a fairly generous PILOT agreement in place with the three taxing bodies.
"We are concerned about any additional financial challenges that would impede our efforts to enhance local health care," said hospital spokesman Dave Cuzzolina.
However, the hospital is already paying more than 25 percent of its theoretical tax bill, when revenues exceed expenses, based on that PILOT agreement, and a check of the hospital's many city properties, with assessed value of $28 million.
The 10-year agreement ending in 2016 calls for the hospital to pay $612,000 to the city, county and school district.
If the hospital has a positive margin less than the amount specified in the agreement, half goes to the taxing bodies in proportion to their total assessed values, and the rest goes to the hospital.
The hospital has actually been paying half those specified amounts even when it has an operating loss, Cuzzolina said.
The percentage of non-taxable value is usually high in core cities like Altoona, because they host much of the institutional life of the region.
One-third of Altoona's $284 million in assessed value is non-taxable, according to Blair County Chief Assessor Mike Baldner.
However, those assessment numbers for non-taxable properties tend to be inflated by the carelessness of assessors in those cases - because those assessments are academic, Baldner said.
Owners almost always appeal those values successfully when they convert to taxable uses, he said.
So there's worry, hope and uncertainty.
It's wrong to balance municipal budgets on struggling nonprofits, Geiger said.
Not all nonprofits deserve exemptions, Hill said.
"The status quo in this area has shifted and will probably not shift back, even as the economy continues to improve," stated Evans and Avrum Lapin of the EHL Consulting Group in a May 2011 article on the Giving Institute website. "We think it is absolutely an issue that will not go away."
Mirror Staff Writer William Kibler is at 949-7038.