New Jersey faces a catastrophic $40 billion unfunded pension gap — the difference between the money the state currently has on hand in the state’s pension funds and what it will cost to fully fund benefits for the future. This gap is $5 billion more than the state budget proposed by the governor for the coming year.

The Christie administration’s budget contained no dramatic increases in pension payments, and the state’s unions have not indicated any willingness to provide additional pension give-backs. With this backdrop, everyone is looking for new sources of funds that do not require additional taxation.

A suit currently in the courts could provide dozens of New Jersey municipalities with a substantial source of new revenue. A dozen municipalities across New Jersey are challenging the tax-exempt status of 35 nonprofit hospitals located in their towns. The suit was sparked by Morristown winning a $15.5 million settlement against Atlantic Health System, a tax-exempt charity and the parent of Morristown Medical Center.

The Morristown ruling by Tax Law Court Judge Vito Bianco was that there was little in the way that the hospital operated that distinguishes it from for-profit hospitals. “Nonprofit hospitals have changed significantly, from their early origins as charitable alms houses providing free basic medical treatment to infirmed poor.”

According to the judge, the hospital created “labyrinthine corporate structures, intertwined with both nonprofit and for-profit subsidiaries and unaffiliated corporate entities . . . If it is true that all nonprofit hospital operate like the hospital in this case, as was the testimony here, then for purposes of property-tax exemption, modern nonprofit hospitals are essentially legal fictions.”

Legal experts have indicated that the case, which is the first to allow taxation of a hospital’s main campus, could have multimillion-dollar implications for nonprofit medical centers across the state, and will more than likely find its way to the state Supreme Court.

In an attempt to forestall additional appeals from municipalities throughout the state, the NJ Hospital Association quickly garnered broad support for Senate Bill 3299 bill that would have maintained the property tax status of nonprofit hospitals with for-profit medical providers on site, as long as the hospital remains organized as a nonprofit institution under state law.

Under the bill, nonprofit hospitals would in lieu of property taxes pay an annual community service contribution to their host municipalities. The contribution fee would be a paltry $2.50 per day for each hospital bed and $250 per day for each satellite emergency care facility. Fees would increase 2 percent annually to cover inflation. In the midst of his presidential campaign, Governor Christie “pocket vetoed” the legislation which had bi-partisan support. His action was praised by the League of Municipalities.

In a time when resources are incredibly scarce, we have not seen the end of this issue. Recently, Elizabeth reached a settlement with Trinitas Regional Medical Center that will provide them with $250,000 a year from 2016 to 2019. After that a new settlement will be negotiated. JFK Medical Center agreed to pay Edison a “community service fee” of $500,000 in 2016 and 2017, and that fee will continue in subsequent years unless a new agreement is negotiated. While I’m sure there is little sentiment to dramatically alter the nonprofit status of New Jersey’s hospitals, various options are available to legislators other than the current idiosyncratic negotiate-and-settle approach.

One possibility is what was done in Illinois, where a law was passed requiring hospitals to conduct an annual evaluation of economic value of charity care and community services provided in the previous year to determine whether this exceeds the value of its tax exemption. If it falls short the deficit is paid to the municipality.

Another option would be some sort of PILOT — payment in lieu of taxes — arrangement with local government that would at least cover the wide range of municipal services they are providing to hospitals and larger education institutions.

An additional approach would be similar to what was worked out in Morristown, where municipalities separated the for-profit and non-profit activities of the hospital and negotiated a payment formula based on the assessed valuation of the percentage of the hospital campus that is leased to private physicians, privately operated restaurants, gift shops, etc.

New Jersey’s hospitals should take a hard look at this issue and consider offering municipalities more than the token payments contained in Senate Bill 3299. Similarly government needs to recognize the enormous contribution that nonprofits make to the quality of life in our communities and not alter the financial viability of the sector by taking away the property tax exemption of our state’s charities.

Governor Christie has called for maintaining the status quo for two years while a nine-member bipartisan commission studies the issue. The goal of the commission should be to develop policies that address how far charities can stray from their non-profit purposes without jeopardizing the full extent of their tax-exempt status. This is one of the few cases in which I agree with a policy recommendation of our governor.

Irwin Stoolmacher is president of the Stoolmacher Consulting Group, which advises charities in fundraising and strategic planning.

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