Local governments want not-for-profit hospitals to provide financial support to help them meet their rapidly increasing fixed costs. Reluctant to increase tax rates, municipalities want not-for-profit hospitals to make payments in lieu of taxes (PILOTs) or, in some cases, to pay property taxes, according to a recent Sector-in-Depth report from Moody’s Investors Service.
The authors of the report noted that the amounts are fairly small for not-for-profits, but still are credit negative for hospitals “which are operating in a revenue-pressured environment.” (Local Governments Increasingly Turn to Universities and Not-for-Profit Hospitals for Support, Moody’s Investors Service “Sector in Depth,” September 18, 2015.)
Historically, most not-for-profits have been exempt from property taxes under state law, and historical legislative efforts to allow local governments to levy a property tax have failed. Instead, many local governments, especially in the Northeast, have entered into arrangements to collect PILOTs, which usually generates less revenue than a direct tax on property.
Large not-for-profits such as hospitals and universities pay an average of 92 percent of existing PILOTs. These larger organizations are more capital intensive and generate more revenue than smaller not-for-profits such as churches and cultural organizations.
To date, most PILOTs paid by not-for-profit hospitals have been “manageable” at less than 5 percent of their operating budgets. But even the smallest of these payments adds expenditure pressure to hospitals operating in a revenue-constrained environment.
PILOTs typically are voluntary contributions; and they have tended to work well.
Local governments have recognized the importance of hospitals to the local economy and their impact on jobs and essential services. But the pressure is mounting to allow municipalities to tax not-for-profits.
There have been legislative initiatives in at least 15 states in the past two years to mandate contributions to local governments. In 11 states, these proposals included property taxes. Some proposals have failed, but Connecticut has passed a bill that allows collection of property taxes from certain universities and hospitals, effective October 1, 2015. And the senate president in New Jersey said he will work toward moving a bill that requires hospitals to financially support the municipalities in which they are located.
(Source: Local Governments Increasingly Turn to Universities and Not-for-Profit Hospitals for Support, Moody’s Investors Service “Sector in Depth,” September 18, 2015.)
Read the full report in iProtean’s upcoming Finance course Integrating Population Health Management into Your Strategic and Financial Plans, Part Two.
(iProtean again thanks Moody’s Investors Service for allowing us to share this and other reports with our subscribers.)
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