Parcels Move from Exempt to Taxable…Maybe

Six years after County Council enacted an ordinance saying they wanted properties receiving a tax-exemption as an institution of purely public charity to be reviewed periodically and seven months after County Council held a hearing involving the region’s largest non-profit health provider, about 20 owners of parcels that were deemed exempt have indicated that those parcels should indeed be taxable.

Recall that, as we noted in a Brief at the end of 2012, the County Chief Assessment Officer was given the job of conducting a review of properties that qualified as tax-exempt under the state’s Institutions of Purely Public Charity Act once every three years to determine if the exemption was justified. Lo and behold three years after the ordinance was passed no review was done. Same deal four years later, five years later, etc. County Council chose to conduct a hearing regarding the status of UPMC, and soon after the County Executive told the Assessment Office to get moving and carry out the dictates of the 2007 ordinance.

Inquiries on 2,800 parcels were sent out. The value of the 20 properties comes to $8.7 million: at the County millage rate of 4.78 mills, the County would collect $41,000 in real estate taxes. Twelve of the parcels are located in the City of Pittsburgh, meaning the City and the Pittsburgh Public Schools would collect money from those properties. The remaining eight are spread throughout other municipalities and school districts. It should be noted that several of the parcels that appeared in the article now indicate that something is in error and they should not be on the list.

When the Controller’s office looked at this issue last June in a Taxpayer Alert they estimated that the County had around $23 billion in exempt property post-reassessment. That means the value of the 20 properties moving to the taxable side represents about 0.03% of the total exempt value. Realizing that much of that total is owned by various levels of government which would not be scrutinized under the ordinance, the percentage of these properties as part of what is left over would rise, but without seeing how much of the total is accounted for by state, Federal, and authority ownership it is not clear by how much.

County Data Collection Moves Forward

Recall that near the end of 2012 County Council held a hearing on the tax-exempt status of UPMC even though, under County law, that is not the Council’s job and soon after it was declared that the Office of Property Assessments would begin doing what it was supposed to do under the 2007 ordinance. Under a three year time frame as set out by that ordinance this would be the third time that the County would have a handle on whether tax exemptions granted to charitable organizations would be justified-instead, since the process fell by the wayside, just about two-thirds of the County’s charitable organizations have responded to a letter from the County on the issue.

Some have asked for an extension. The County’s solicitor noted "…If we got a good faith request, we gave them more time." And why shouldn’t they? To reiterate, Council passed the ordinance calling for the review once every three years in 2007. When the condition of the County’s tax-exempt files and the failure to do the scheduled review was revealed the only answer was that things "fell through the cracks". What is the County going to say to non-profits taking their time? Hurry up and get things done?

Universities Need to Visit History Department

Pursuing a court case against the University of Pittsburgh Medical Center (UPMC) will tangentially affect the City’s institutions of higher education according to the Pittsburgh Council of Higher Education, which in turn will affect the task force working on non-profit issues (such as payments in lieu of taxes) that was created as a condition of the oversight board for approving the 2013 budget. Sounds like a house of cards or a big city version of the domino theory.

Because if the City challenges the medical system’s charitable status, as it has made clear it wants to, then the universities will feel threatened, and then any talk of cooperation on the task force will crumble under the specter of a lawsuit.

The universities indicate through a letter to the Mayor that they would prefer to move on to less controversial subjects like "…the city’s burgeoning pension obligations and the imposition of a tax on those who commute to the city". If the universities’ focus sounds eerily familiar it should: it was not long after the Mayor floated a variety of taxes and fees to see what would stick that what survived was the "post secondary education privilege tax" on college tuition. After that was eventually dropped in late 2009, the universities (along with one large Pittsburgh corporation) promised to go to Harrisburg and seek reform for pensions (this was post Act 44, but prior to the garage privatization plan) and possibly spreading the tax burden on to others. We noted at the time that "the universities should not, and in good conscience cannot, move from celebrating their hard work against the tuition tax to helping the City lobby Harrisburg for some other tax, most likely to be one imposed on people who cannot vote for the City’s elected officials."

There is a glimmer of hope four years later: the Council letter did note "The ultimate solution is not to look at another source of funding, but rather looking at the financial stresses of the city…Maybe there are some approaches that would reduce the need for funds". There’s been no shortage of recommendations on that line of thinking.

Tax Exempt Myopia

The City and County are justifiably working assiduously to assess and collect taxes from large non-profits that actually have for-profit operations or that do not meet the Supreme Court’s five part test to qualify as tax exempt. Too bad both the City and County have long supported and promoted some of the worst examples of tax dodging by for profit enterprises.

And what would that be? Think Heinz Field, PNC Park and CONSOL Arena to name three. With combined property value approaching a billion dollars, these structures represent over $25 million in foregone property tax revenues owing to the tax exempt status of the facilities.

Ironically, one of the complaints about UPMC has been the high salaries of some of its top officials. Why ironic? Consider the yearly pay of many of the athletes performing in the three venues. Several are well above the $5 million mark that has raised so much ire when attached to the head of UPMC. This is not to justify the UPMC head’s compensation. For a tax exempt non-profit, it is does seem out of touch with a prudent approach to pay.

But the point is that the teams and the players using the tax exempt facilities are in effect being subsidized by the low rent they pay to utilize them. If a market based rent were being paid, the total for the three facilities could be above $50 million year, some of which would be used to pay taxes if the facilities were not tax exempt. So, the taxpayers get hit twice. They put up the preponderance of the money needed to build the structures, get no property tax revenue and pittance for rent.

Now that is a sweet deal.

Another Tax Plan for Pittsburgh’s Non-Profits

Noting that non-profits in the City of Pittsburgh own a lot of property and employ a lot of people but are tax exempt and not a lot of them participate in helping the City through payments in lieu of  taxes, a state Senator has supported extending Pittsburgh’s Payroll Preparation Tax (PPT) to non-profits having 250 or more employees. 



The PPT is a flat rate levy of 0.55 percent on the total payroll of businesses within the City. This tax was imposed by Act 222 of 2004, signed into law on December 1 of that year, and was part of a package of tax reforms that led to abolishing the mercantile tax and the business privilege tax-two very onerous taxes that were not based on company earnings and were quite punitive for some businesses.


Act 222 of 2004 does mention charitable organizations.  It says they should calculate the PPT but would only be liable for activities that do not meet the requirements of the IRS Code or the state’s law on public charities. The law also notes that nothing in the Act would prevent a non-profit from making agreements with the City to provide services or make voluntary payments.


The Senator’s memorandum on the proposed legislation states that his proposal would reduce the PPT on for-profits to 0.5 percent and levy the PPT on large non-profits at a rate of 0.4 percent.  The memorandum notes that non-profit employers with more than 250 employers account for over 70 percent of all non-profit employment in the City.  Governmental entities including authorities were not subject to the tax when the Act was written and will not be in the future in light of the constitutional provision exempting government entities.


The issue of extending the tax to non-profits was debated prior to Act 222 becoming law.  Indeed, the first Act 47 recovery plan for Pittsburgh noted “there are constitutional impediments to levying this tax on charitable organizations… [and would likely] lead to litigation between the City and the institutions.” 


Pittsburgh is the only municipality in the Commonwealth to have a payroll preparation tax (it was created only for Cities of the Second Class and Pittsburgh is the only one in that class) but there are large non-profits in other corners of Pennsylvania.  A 2009 study by the Legislative Budget and Finance Committee identified 183 municipalities that are home to either a non-profit general acute care hospital, a private four year college or university, a state related or a state owned college or university, or some combination of the four. 


Could a selected group of non-profits in one city be subject to a tax that only exists in that Pennsylvania city?  Can that city treat non-profits differently based on their size?  Why should a charitable organization with 250 employees pay the tax but those with 249 employees not?  Even more to the point, since the Pennsylvania Constitution allows tax exempt status for charitable organizations as defined in statutes adopted by the General Assembly, how would it be constitutional to allow a municipality to levy a tax on charitable organizations that have been granted exempt status under Pennsylvania law?  These are just some of the long list of technical and legal questions raised by the proposal that will have to be addressed by legislative committees if the bill ever reaches the committee hearing stage.  


Moreover, there can be little doubt that in the event the proposed legislation moves forward, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax, especially the larger ones currently in the crosshairs of the proposed tax bill.  These groups have many loyal and powerful friends who will point out all the good the non-profits do for Pittsburgh to help maintain its high rankings in many desirable amenities and in their attention to community needs.  These friends will almost certainly importune Harrisburg so as to make sure this bill never gets out of committee. 


It is unknown and perhaps unpredictable at this point whether the proposed PPT reduction on for-profit businesses will prompt that sector to mobilize and urge the Legislature to adopt the lower tax rate planned for them as part of the scheme to levy the PPT on non-profits. 


None of this means there are no legitimate questions about what constitutes a qualified charitable organization.  Take for instance the rise of the mega-hospital such as UPMC where revenues have, on occasion, exceeded expenditures by large amounts or when a university steps over the line into areas of for-profit activity.


Now would be the perfect time for the Legislature to review and update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly what constitutes for-profit and non-profit activities.  The Legislature can and should work on assisting taxing bodies in determining what if any for-profit activities exempt organizations are involved in. It might be as simple as requiring charitable organizations to file with state and local taxing bodies the equivalent of a Federal form (or copies of their Federal report) that contains information and explanations about for-profit activities to the state and local taxing authorities.  Does the City know how much it collects from property taxes or payroll taxes attributable to non-profit activity that does not meet the charitable test?  If not, that surely needs to be learned and quickly. 


Bottom line for the proposed PPT bill: Non-profits that qualify as charitable organizations and have been granted tax exempt status under Pennsylvania laws and by the IRS will not be taxable under Pennsylvania’s Constitution.  To levy any taxes on these organizations will require either an amendment regarding Article VIII, Section 2, paragraph v of the Pennsylvania Constitution or a General Assembly rewrite of laws spelling out the criteria required to be granted tax exempt status.  Neither will happen any time soon, if ever, given what is at stake for the parties involved. 


Something needs to be done to put a stop to the almost annual controversy over non-profits and whether they should somehow be taxed. 

A Collegial Relationship

A few years ago, 2009 to be exact, the County’s tangled web of relations between itself and UPMC, the County’s role as the body that assesses property value and certifies that parcels exempt from real estate taxation really should be, the County’s role as promoter of economic development and leaning heavily on "eds and meds", and the County’s role as viewing itself as needing to intervene in matters such as UPMC’s decision to shutter the hospital in Braddock all intersected at one Council meeting, one that we wrote about then. That’s because on the same night that County Council decided it wanted to explore what UPMC owned and whether everything was deserving to be exempt (presumably as a tactic to scare UPMC into changing its mind) it had to decide whether the County-acting through its related Hospital Development Authority-would issue $1 billion in bonds on behalf of UPMC.

The issue of the Authority acting as a debt issuing vehicle rose again in 2011 when the UPMC-Highmark battle was at its apex. Again, we wrote about that debate and the $330 million borrowing request that, in case the County wanted to exert influence by not issuing the debt, another state level authority stood ready. The County did not issue the bonds.

So why bring these instances up? Because at the end of 2012 County Council held a hearing on UPMC which it promised would be the first of many on finding out if property owners classified as charitable and exempt really deserved all their exemptions. As an article today pointed out, the classification system the County has on exempt property is a mess, but tomorrow night the Council will take up business deciding whether its Higher Education Building Authority should issue over $80 million in debt for two private universities in the City of Pittsburgh and, after that, whether the Authority needs a new lease on "municipal" life, which amounts to fifty years additional. The County does not pledge its revenues or the state’s by issuing the bonds but it has the opportunity to make plenty in fees and payments. That’s the decision point it has to deal with when deciding if it wants its instrumentalities to help the institutions it is trying to get to act a certain way.

Diagnosing the UPMC Hearing


Allegheny County Council held a public hearing recently regarding the University of Pittsburgh Medical Center, better known as UPMC.  Based on the motion passed by Council in November the purpose of the hearing was “…to allow the opportunity for public comment regarding the tax exempt status of property owned by [UPMC] within Allegheny County pursuant to the Institutions of Purely Public Charity Act”. 


The twelve Council members who were present at the November meeting voted in favor of holding the hearing. The Council member who would chair the hearing said at the time “it’s a good idea to have this meeting and air it out properly in front of everybody” though the “it” and the “everybody” were never exactly clear.  The motion said “tax-exempt property” but some believed “labor relations” was the intent. 


A day after that quote an opinion piece appeared stating “given the backdrop of labor politics, the event should not be a club aimed at UPMC, but a lens through which a broad system of tax exemption and its public impact get close examination”.  However, a newspaper report detailing the meeting stated “…many of the speakers talked more about what they said was UPMC’s opposition to union organizing efforts by the Service Employees International Union.” 


Maybe we will never know for sure whether this was supposed to be a fact-finding mission or a show trial.  In the spirit of the holiday season, let’s give Council the benefit of the doubt on three points; one, the meeting really was aimed at examining UPMC properties exempt from taxation  to ascertain whether the justification for each parcel was warranted; two, the chair could not stop the large numbers of people from speaking on issues tangentially related to the topic at hand (salaries, pay levels, and organizing come to mind) thereby depriving many who might have  been ready to speak to the tax-exemption issue of that opportunity (they have been encouraged to submit their comments in writing); and third, there will be a sincere effort to examine other tax exempt property owners and that the UPMC hearing was just the first of many (the Council meeting chair was quoted as saying “We’re not picking on UPMC. They just happen to be the biggest and the first”).

However, even assuming all the benefit of the doubt is warranted, what transpired was in direct violation of the ordinance Council passed to determine if properties are deserving of their tax-exemption. 


Council passed ordinance #3504-07 in November of 2007 to establish “a County policy for periodically reviewing the status of all properties qualifying for exemption from property taxation under the Institutions of Purely Public Charity Act”, the state law that sets out the parameters for non-profit tax exemption. 


But this County ordinance does not give Council the power to review tax-exemptions: that’s the job of the Chief Assessment Officer.  The ordinance’s language added a new section to 5-210.12 of the Administrative Code stating:


“All properties granted tax-exempt status by the Chief Assessment Officer under the provisions of the Institutions of Purely Public Charity Act…shall be subjected to a parcel review by the Chief Assessment Officer…at least once every three years…the Chief Assessment Officer shall determine whether each property or any portion thereof continues to qualify for tax-exempt status , and shall forward written notice of this determination to the legal or equitable owner of the property and all taxing bodies within which the property is located”.


Nothing in that language assigns Council or the public responsibility for determining whether a tax-exemption is warranted under state law.  Was the Chief Assessment Officer (currently a contract employee holding the title of “acting” director) or assessment office staff present at the hearing?  Were they invited? Is Council forwarding the recorded comments to the assessment office? Will officials from municipalities and school districts where UPMC owns property get any information on the findings of the hearing?


In addition, note that the ordinance language states the review is to be done every three years.  Since the ordinance was passed in 2007, all exemptions subject to review should have been done in 2010 and the County should be gearing up for another review next year.  Clearly, something happened on the way to implementation-much like the delays in carrying out the County Charter’s required Sunset reviews. 


A news article in September quoted the Council member who chaired the hearing-and who sponsored Ordinance #3504-that something “fell through the cracks…and what we have to do is sit down with [the County Executive] and talk about that”.  In that same article the administration said that the tax-exempt review process had not been formalized and that it would start once the reassessment was over.  Since the reassessment is supposed to be completed December 20th it is curious as to why the UPMC hearing took place December 5th.  Two days after the hearing it was reported that the administration was prepared to direct the Office of Property Assessments to begin the process of reviewing exemptions, thus enforcing the ordinance six years after its enactment.  Is there confusion over territory in this episode? 


Lastly let’s examine something the ordinance does not do; a sin of omission, perhaps.  State law allows tax exemptions for many types of property, not just those owned by non-profits.  Ordinance #3504 does not instruct the Chief Assessment Officer to review all tax-exempt property every three years, only the tax-exempt property owned by non-profits under the provisions of the Purely Public Charity Act. 


That means the County is not going to scrutinize the broad swathes of property owned by Federal, state, local, school, and authority governments.  A report done by the County Controller’s office in June looked at exempt property in the County based on land use codes.  Roughly the same percentage of property value is held by higher education, churches, and hospitals as that attributed to County, municipal, and school district uses.  But stadia and the convention center owned by the Sports and Exhibition Authority, and property owned by the array of authorities at the County, City, and municipal level (redevelopment, housing, transit, airport, parking, etc.), school districts, municipalities, and the County itself won’t come under the auspices of #3504.  Council’s thinking in 2007 must have been that only non-profits are expansionist and take taxpaying properties off of the tax ledgers and that such action must be justified every three years. 


There is merit in reviewing tax-exempt property to see if the exemption is truly justified.  It is not clear if anyone involved in the UPMC hearing, either from County government or members of the public who attended came away with a better understanding of the issue of property tax exemptions.  That is a shame, but with plenty of tax-exempt non-profits, and Council’s pledge to be vigilant, along with the Executive’s directive to the Office of Property Assessments to do the job Council gave it, the public might be become well-informed of the topic in the months and years to come. 

New Report on Non-Profit Payments

Back in May of this year we wrote a blog entry on a report by the Lincoln Institute for Land Policy about the characteristics of PILOT agreements between tax exempt non-profit organizations and local governments across the country. The blog noted the value of the report but pointed out that a lot of the data was incomplete owing to the fact that many localities that may have PILOT programs may not identify them as such. Note that locally the agreements between Pittsburgh and its non-profits have just been ruled public record after a request to the state.

Lincoln has followed up with a newer, more comprehensive working paper on the topic. The data is still lacking in spots: Pennsylvania shows 24 municipalities, two counties, and three school districts having PILOT agreements. Some have a specific number of non-profits making payments, others do not. Some have a dollar amount of contributions, others do not. For 2011 the report shows Pittsburgh receiving $2.6 million from 46 non-profits, which is the consortium of non-profits under the Pittsburgh Public Service Fund. The Institute classifies the payments as either "long-term contracts", "routine annual", "voluntary property tax payments", "irregular one-time", or "unknown". The last category is which Pittsburgh’s arrangement falls into under the report’s typology.

Room (For Improvement) at the Inn

If you had a relatively new and shiny airport and there was no interest-none whatsoever-from people in the hotel industry to build a hotel to capitalize on travelers, perhaps that would be telling you something about the demand for rooms. But not the leaders of Allegheny County government circa the turn of the century: by hook or by crook they wanted to have a hotel there, and, with no private interest and local government authorities that were "maxed out" according to one of the former County commissioners, they turned to an authority from Dauphin County to get the job done.

This tale comes back to the surface due to an article that shows neither the County, nor the municipality or the school district where the hotel is located, have received a payment in lieu of taxes. Smacks of a "sweetheart deal" when it is discovered that all other expenses took precedent over tax payments and, because of all the other dealings the Authority was involved in, there is no money for tax payments. Ironically, one former County commissioner said that the hotel was needed to "attract more flights": one would think that the airport would have spun off development, not the other way around. Sounds eerily like the situation with the convention center and its quest for a headquarters hotel. If the hotels were so integral to the success of these facilities, why were they not included in the initial plans?

If an out of county property owner failed to make tax payments on a property he would be put on the delinquent rolls and be labeled a tax cheat or an absentee property owner. And when there is a discussion about tax-exempt properties very rarely does the property owned by public sector entities get mentioned. Why does a public authority not get the same treatment? This is an episode County taxpayers, and those writing checks for property taxes in the airport area, should not soon forget.

County to Get Handle on Tax Exempt Properties

All non-profit property is exempt from taxation, but not all tax-exempt property is exclusively non-profit. That’s one of the important layers that have to be peeled off by the public, as well as by policymakers, when they discuss the status of tax-exempt property and say that if tax-exempt property were taxable taxing bodies would reap a bounty of dollars.

As yesterday’s Blog pointed out, there is merit in reviewing whether or not a property is truly deserving of a tax-exemption under the Pennsylvania Constitution or statutory provisions. That’s what the County Controller wants to do, as that office has issued its inaugural Taxpayer Alert discussing tax-exempt property, a recent court case, and the makeup of exempt property in Allegheny County.

The alert points out that "the total appraised value of exempt properties in Allegheny County is nearly $17 billion. After the latest reassessment this total to rose to over $23 billion". That means the rate of change in exempt value is roughly 35% from 2012 to 2013. But is that rate of change bigger than the rate of change for taxable property? It was $58 billion in 2011 according to the Controller’s CAFR.

How about in proportional terms? Based on the 2011 numbers, the $16.5 billion in exempt value represented 28% of total taxable residential and commercial value in the County (the $58 billion mentioned above). If taxable value rises to around $86 billion upon certification, the projected rise in exempt value to $23 billion keeps the ratio at around the same level as currently.

Then we have to turn to the original point above: just because a parcel is exempt from taxation does not mean it is a hospital, university, church, or charity. This was the analysis we did about a decade ago when looking at the City of Pittsburgh’s exempt parcels. The Alert shows that, based on land use codes (which may or may not have shortcomings), about 36% of the County’s total tax-exempt value can be attributed to church, hospital/charity, or higher-ed. About the same share, 38%, is tied to County government, school districts, or municipal government. A big piece (21%) is identified as "other", which could mean non-profit but could also include a lot of property owned by public authorities (unless those are counted under the county or municipal total). It is doubtful that even a serious examination of exempt parcels is going to lead to taxes being imposed on the County Courthouse or the slew of municipal centers or school buildings, meaning that the tax "loss" attributed in the Alert to various taxing bodies is overstated.