by Eric Donato, Assoc. Web Editor
Pittsburgh Mayor Luke Ravenstahl announced on March 20 that the city would challenge the University of Pittsburgh Medical Center’s status as an “institution of purely public charity,” which renders much of the $10 billion global health system’s properties tax exempt under state law.
UPMC’s tax savings as a result of
its “purely public charity” status amount to $42 million annually, according to
the Pittsburgh Post-Gazette.
The city’s
move is more than a policy decision concerning what UPMC’s “fair share” of the
tax burden should be. The litigation raises an issue of constitutional
dimensions that has troubled Pennsylvania for decades, and has raised the
question: can UPMC be taxed at all?
The
Pennsylvania Constitution and “Institutions of Purely Public Charity”
 |
| © insideupmc.blogspot.com |
However,
Article VIII, Section 2 permits the General Assembly to exempt “institutions of
purely public charity” from taxation. UPMC is currently considered an
institution of purely public charity, so the properties that it uses for
charitable activities are permitted to be (and are) tax-free.
The criteria by which an
organization is judged to be a purely public charity was created by the
Pennsylvania Supreme Court in the 1985 case Hospital Utilization Project (HUP)
v. Commonwealth. In that case, the court crafted the 5-part “HUP” test,
which demands that the institution in question:
1) advance a
charitable purpose,
2) donate or
render gratuitously a substantial portion of its services,
3) benefit a
substantial and indefinite class of persons who are legitimate subjects of
charity,
4) relieve the
government of some of its burden, and
5) operate
entirely free from private profit motive.
An institution must meet
all five prongs of the HUP test to qualify as a purely public charity under the
Pennsylvania Constitution.
The question of whether
UPMC actually meets the HUP test, however, remains an open question.
Litigation
“It depends on how the
courts decide to apply the test,” said Nicholas Cafardi, professor at Duquesne
Law School and an expert on nonprofit organizations. “If they apply the test
strictly, its a very difficult test to meet.”
This is particularly true with regard to the
fifth prong of the test, the requirement that UPMC “operate entirely free from
private profit motive.”
UPMC’s tax exempt status
has drawn heavy criticism because many of the organization’s executives receive
7-figure salaries.
Cafardi said that while
“generous executive salaries” by themselves may not be evidence of a private
profit motive, “if there’s a bonus tied to performance, well, then you’re
starting to look like a private business, aren’t you?”
According to IRS filings, UPMC’s CEO Jeffrey Romoff
received almost $6 million in compensation for the calendar year of 2010,
including bonuses tied to performance.
UPMC’s closure of its struggling Braddock facility
and opening of a new facility in the wealthier Monroeville area has added fuel
to claims that the organization is profit-driven, rather than charitable, in
nature.
Nonetheless, UPMC is “politically powerful”
Cafardi explained. “Could they convince a court that hitting them with a
property tax . . . would do more harm than good? That’s not the same thing as
applying the test as written. That’s just saying . . . you’re going to do this
to the area, and you’re not going to do good.”
UPMC has over 55,000 employees, and is western
Pennsylvania’s largest healthcare system and employer.
Cafardi suggested that the court may be swayed to
“adapt legal standards” for public policy reasons, and that perhaps this was
“an area where policy is a perfect reason for applying standards less than
rigidly.”
A Push Toward the Bargaining Table
Cafardi said that it is possible the litigation is
intended to extract an agreement from UPMC to voluntarily pay a portion of what
it would otherwise owe in property taxes if the organization lost the case.
“Would this be the first time a lawsuit was filed
in order to get big parties to talk to each other?” said Cafardi.
UPMC has similar PILOT (payment in lieu of taxes)
agreements with Erie county and South Fayette township.
“If they can do that in Erie and they can do that
in Fayette, why can’t they do that in Allegheny County?” said Cafardi.
Amending the Pennsylvania Constitution
The General Assembly has
not been content to leave the issue to the courts.
Legislation known as
Senate Bill 4, which was recently approved by the Senate and sent to the House
for consideration, would amend the Pennsylvania Constitution to give the
legislature the exclusive power to determine what constitutes a purely public
charity.
The state
constitution may only be amended after approval by the General Assembly in two
consecutive sessions and a vote by the electorate in a referendum.
In 1997, the General
Assembly attempted to wrest control over the definition of “purely public
charity” from the state’s highest court by passing Act 55. The legislation
provided guidance on the HUP test’s five prongs, and deliberately weakened the
test to make it easier for organizations to meet the definition of a purely
public charity. However, because it is the job of the judiciary (not the
General Assembly) to interpret the constitution, and because the HUP test is an
interpretation of the state constitution’s provision on purely public
charities, a narrow majority on the high court ruled that the legislation could
not weaken or otherwise redefine the test.
Amending the Pennsylvania
Constitution through Senate Bill 4 would surmount the obstacle presented by the
separation of powers. Should voters approve the measure, the criteria needed to
reach tax-exempt status would rest squarely with the General Assembly. The
resulting definition would likely be less stringent than the current HUP test,
and could potentially shield organizations like UPMC from litigtion of the sort
it faces now.
