Cash-strapped local NJ governments may demand property taxes from nonprofit hospitals

Local governments in New Jersey may turn to nonprofit hospitals as potential sources of revenue following Morristown, N.J.-based Atlantic Health System's agreement to pay the city $15.5 million to end a series of property tax appeals related to Morristown Medical Center.

A judge in a New Jersey state court eliminated Morristown Medical Center's property tax exemption in June after determining it operated more like a for-profit hospital than a charitable one. The hospital negotiated an agreement with the town, which was approved Nov. 10.

Under the terms of the agreement, Morristown Medical Center will pay the town $15.5 million, including $5.5 million of penalties and interest paid in annual installments over the next 10 years. Additionally, from 2016 through 2025, about 24 percent of the hospital property will be taxed at an assessed value of $40 million. This represents an annual tax payment of $1.05 million.

"Clearly, this is an open invitation for a number of towns," Frank Ciesla, head of the health law practice at Giordano, Halleran & Ciesla, said Wednesday, according to a report. "I think you're going to see a lot more in the way of litigation."

Since nonprofit hospitals are some of the largest landowners in some municipalities, local governments could begin assessing taxes on their property, leading to appeals as hospitals seek to clarify their status, Mr. Ciesla told

In his ruling in the Morristown Medical Center Case, Judge Vito Bianco said it has become difficult to distinguish between nonprofit and for-profit hospitals due to the former's corporate structures, high executive salaries and frequently for-profit subsidiaries. "Modern nonprofit hospitals are essentially legal fictions," he wrote, noting the tax code that provides hospitals with property tax exemptions is more than a century old.

The New Jersey Hospital Association has formed a task force to examine the possibility that other hospitals may have to pay property taxes, and plans to meet with the New Jersey League of Municipalities on the issue. It hopes New Jersey legislators will devise a solution that limits court battles and brings certainty to hospitals' financial liabilities.

"We do expect this issue to now move on to the legislative arena," said Betsy Ryan, president and CEO of the NJHA, according to the report. "We're in the midst of working with our members to see what the solution might look like. We are looking forward to working with the Legislature and the governor."

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