TAX ASSESSMENT AND TAX EXEMPTION APPEALS: CRITICAL TO DISTRICT REVENUES. There is much to talk about!

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1 TAX ASSESSMENT AND TAX EXEMPTION APPEALS: CRITICAL TO DISTRICT REVENUES Howard L. Kelin, Esq. Denise E. Elliott, Esq. Kegel Kelin Almy & Lord LLP 24 North Lime Street Lancaster, Pennsylvania (717) There is much to talk about! The law regarding real estate taxation has changed considerably over recent years. In 2011, the Consolidated County Assessment Law replaced separate tax assessment laws that had been in effect for (a) Second Class A and Third Class Counties, and (b) Fourth Class through Eighth Class Counties. o We still have separate laws for First Class Counties (Philadelphia) and Second Class Counties (Allegheny). o This consolidation did more than simply combine the prior assessment laws it also codified an important change regarding interest due on tax refunds. 1

2 School districts in various counties are now feeling the impact of the Pennsylvania Supreme Court s Downingtown decision, which allows taxpayers to benefit from the common level ratio every year, even if the common level ratio is higher than 85%. In the area of tax exemptions, in 2012 the Pennsylvania Supreme Court expressly rejected the General Assembly s effort for the legislature to replace the courts in establishing criteria for a purely public charity. This has led to a proposed change to the Pennsylvania Constitution. Basic Rules of Tax Assessment Every Business Manager Must Know Following are ten basic rules school business officials must understand regarding tax assessment cases. 1. Your county assessment office determines a tax assessment amount for every tax parcel. Tax exempt parcels are included and have an assessment but as a practical matter, nobody ever challenges the assessment because no taxes are due. 2

3 Basic Rules of Tax Assessment Every Business Manager Must Know 2. Laws against spot reassessments prohibit a county assessment office from adjusting a property s tax assessment based on the price at which the property is sold. Taxpayers can file an appeal based on a recent purchase price. School Districts and municipalities can also file an appeal based on a recent purchase price. Weissenberger v. Chester County Board of Assessment Appeals, 62 A.3d 501 (Pa. Cmwlth. 2013) There are ongoing attempts in the General Assembly to negate the right of taxing authorities to file such appeals. The County, though, can only adjust the tax assessment if (1) there is a change to the improvements on the property, or (2) there is a countywide reassessment. Basic Rules of Tax Assessment Every Business Manager Must Know 3. The tax assessment amount for each parcel is intended to reflect the fair market value of the property during the base year, which is the valuation year used for the county s last countywide reassessment. Example: Lancaster County uses a base year of 2005, the year of valuation for its last countywide reassessment. All properties in Lancaster County are currently assessed based upon their perceived fair market value in

4 Basic Rules of Tax Assessment Every Business Manager Must Know Some other base years : York County = 2006 Dauphin County = 2001 Berks County = 1994 Chester County = 1996 Basic Rules of Tax Assessment Every Business Manager Must Know 4. To translate a parcel s tax assessment amount to the property s current fair market value, you must apply the common level ratio (the CLR ) to the property s assessment amount for the applicable tax year. This gets complicated! The common level ratio for each county is issued each year by the Tax Equalization Division (or the TED ) of the PA Department of Community and Economic Development until April 18, 2013, this was an independent state board called the State Tax Equalization Board or STEB. The CLR figures for every county are supposed to be issued before June 30 each year but sometimes are issued later. 4

5 Basic Rules of Tax Assessment Every Business Manager Must Know 5. The CLR is in part retroactive. The CLR figures issued each year are based on real estate sales information for each county from the prior year. The CLR figures issued in June 2013 are thus called the 2012 CLR figures. The 2012 CLR figures for each county compare 2012 real estate values within the county to real estate values within the county during the county s base year. Basic Rules of Tax Assessment Every Business Manager Must Know Example of retroactivity of the CLR: o The 2012 CLR for Lancaster County, which was issued in 2013, is 80.6%. o This means that real estate values within Lancaster County in 2012 (the valuation year for the CLR issued in 2013) are 124.1% of what they were in the 2005 base year. 100%.806 = 124.1% 5

6 Basic Rules of Tax Assessment Every Business Manager Must Know Some other 2012 CLRs issued in June 2013: York County = 89.2 Dauphin County = 76.3 Berks County = 78.1 Chester County = 60.2 Basic Rules of Tax Assessment Every Business Manager Must Know 6. The CLR is not only in part retroactive, it is also in part prospective. The CLR is applied prospectively to tax assessments for the year after it is issued. The 2012 CLR figures, issued in 2013, are applied to the 2014 tax year (for school districts, the school year). Thus, 2012 values are used for 2014 appeals two year gap is a big problem when values drop quickly! 6

7 Basic Rules of Tax Assessment Every Business Manager Must Know Example of prospective application of the CLR: o As noted previously, the 2012 CLR for Lancaster County, issued in 2013, is 80.6%. o The CLR of 80.6% is applied to tax assessments in Lancaster County for 2014 (or in for Lancaster County s school districts). Basic Rules of Tax Assessment Every Business Manager Must Know 7. There are two ways the CLR is used in tax assessment appeals: First, if a property has been appealed, and you want to know the fair market value necessary to uphold the current tax assessment, divide the assessment by the CLR: o Example: A property is assessed at $1 million, and the CLR applicable to the tax year is 80%. o $1,000,000 divided by.80 = a fair market value of $1,250,000 is necessary to maintain the current tax assessment of $1 million. o This figure of $1,250,000 is sometimes called the implied fair market value, meaning the fair market value implied for a property that is assessed at $1 million where the CLR is 80%. 7

8 Basic Rules of Tax Assessment Every Business Manager Must Know Second, if a taxpayer (or a taxing authority) submits an appraisal providing an opinion of a property s fair market value, and you want to know the new tax assessment based on that opinion, multiply the appraiser s opinion of fair market value by the CLR: o Example: A property is assessed at $1 million, the CLR applicable to the tax year is 80%, and an appraiser says the fair market value of the property is $750,000. o As stated in the prior example, a fair market value of $1,250,000 is necessary to maintain the current assessment of $1 million. o To see what the new assessment would be if the taxpayer s appraisal if found to be correct: ($750,000 FMV opinion of appraiser) x (CLR of.80) = $600,000 Basic Rules of Tax Assessment Every Business Manager Must Know 8. Appraisers use three methodologies to determine a property s fair market value typically all three approaches are not used. Sales comparison approach determining the property s value based on recent sales prices of other properties that are comparable to the subject property. Income approach determining the property s value based on what an investor would pay for the stream of rental income to be derived from the property. Cost approach determining the property s value based on what it would cost to reproduce the subject property in today s dollars, with deductions for the property s physical depreciation and obsolescence. 8

9 Basic Rules of Tax Assessment Every Business Manager Must Know 9. A major aspect of the new Consolidated County Assessment Law is that where taxpayers are entitled to a tax refund as the result of a court decision, the taxpayer is entitled to receive interest on the refund from the date the overpayment was made not from the date the court established a new assessment. 53 Pa. C.S 8854(c). Need to move cases along! Business managers should urge prompt action by legal counsel at the outset of the appeal. Basic Rules of Tax Assessment Every Business Manager Must Know 10. An important decision for a business manager in a tax assessment appeal is often whether to engage an independent appraiser (and whom to engage). Can be a somewhat expensive investment. Not all appraisers are equal in quality or cost. Best to have a bench of trusted appraisers obtain quotes and deadlines from all for each job. 9

10 Legal Developments and Best Practices in Tax Assessment Appeals We will be addressing: 1. Two arguments allowed by the Consolidated County Assessment Law to reduce assessments. 2. Downingtown decision under Uniformity Clause of the PA Constitution. 3. Advocacy before the Board of Assessment Appeals. 4. Negotiating settlements. 5. District initiated assessment appeals. 1. Two Arguments Allowed by the Consolidated County Assessment Law to Reduce Assessments. First argument permitted by 53 Pa. C.S. 8844(e)(2) (rarely used): The assessment amount, taking into account the county s base year valuation, is higher than the fair market value of the property during the base year. Example: For property assessed at $1 million in a county using a base year of 2005, the taxpayer can argue that the value of the property in 2005 was less than $1 million. 10

11 1. Two Arguments Allowed by the Consolidated County Assessment Law to Reduce Assessments. Second argument permitted by 53 Pa. C.S. 8844(e)(2) (traditionally used): The assessment amount, taking into account both the county s base year valuation and the applicable CLR, is higher than the current fair market value of the property. Example: For property assessed at $1 million in a county using a base year of 2005, with a CLR of 80%, the taxpayer can argue that the current FMV of the property is less than $1,250, Two Arguments Allowed by the Consolidated County Assessment Law to Reduce Assessments. Second statutory argument, pursuant to the statute, 53 Pa. C.S. 8844(e)(2): The assessment = o (FMV) x (Established Predetermined Ratio as set by each county, which is 100% in 42 of 67 counties). o UNLESS the Common Level Ratio is within 15% of the EPR, in which event the assessment = (FMV x CLR). 11

12 1. Two Arguments Allowed by the Consolidated County Assessment Law to Reduce Assessments. Second statutory argument, pursuant to the statute, 53 Pa. C.S. 8844(e)(2): Thus, in counties where the EPR is set at 100%: o If the CLR is 85% or higher, the assessment = FMV o If the CLR is below 85%, the assessment = FMV x CLR However, Downingtown is widely construed to negate the statutory 85% rule, and to require application of the CLR without regard to the EPR confusing, yes? 2. Downingtown Decision under Uniformity Clause of the PA Constitution Downingtown Area School District v. Chester County Board of Assessment Appeals, 590 Pa. 459, 913 A.2d 194 (2006) PA Supreme Court held that even if the CLR is within 15% of EPR, the Uniformity Clause of PA Constitution permits appeals that compare the tax assessment of a parcel to the tax assessment of other similar parcels. 12

13 2. Downingtown Decision under Uniformity Clause of the PA Constitution Uniformity Clause requires that taxes are uniform upon the same class of subjects. In Downingtown, shopping center assessed at $5.8 million sold for $10.4 million. The parties stipulated the FMV was $8.5 million. The CLR was 85.2% and the EPR was 100%. School district appealed and argued that per the sales price (as a reflection of FMV) and the statutory scheme, the assessment should be $8.5 million, with no decrease due to the CLR being above 85%. 2. Downingtown Decision under Uniformity Clause of the PA Constitution Taxpayer presented uncontested evidence that the ratio of assessed value to actual value for comparable properties within the County was as high as 69% and as low as 34%. Based on this wide range, the Supreme Court held that prohibiting a uniformity challenge under the 85% rule violates the PA Constitution. 13

14 2. Downingtown Decision under Uniformity Clause of the PA Constitution Bottom line: Regardless of whether CLR is at 85% or higher, taxpayers can argue lack of uniformity by comparison to assessments of other similar properties. A taxpayer can argue that although its assessment is accurate based on FMV of the property, the assessment must nonetheless be reduced, because other similar properties within the same county are underassessed, and thus, the taxpayer s assessment violates the Uniformity Clause. 2. Downingtown Decision under Uniformity Clause of the PA Constitution More bottom line: Although not entirely clear, some county assessment boards have concluded that CLR must be applied even if the CLR is above the 85% rule and Downingtown type argument is not asserted by taxpayer. 14

15 3. Advocacy Before the Board of Assessment Appeals APPEAL DEADLINES 1 st Class County: Appeals must be filed on or before the 1 st Monday in October 2 nd Class County: Appeals must be filed by the last day in February of the year in which the assessment first becomes effective. All other counties under Consolidated County Assessment Law, 53 Pa. C.S. 8844(c): Appeal deadline is September 1 unless Commissioners designate sometime in August. 3. Advocacy Before the Board of Assessment Appeals APPEAL PROCESS 1. Taxpayer (or taxing authority) files appeal from assessment with Assessment Office. 2. Appellant submits documents supporting the appeal. Requirements vary by county. 3. Hearing notice sent to all interested parties 15

16 3. Advocacy Before the Board of Assessment Appeals STEPS TO TAKE BEFORE THE HEARING 1. Talk to Assessment Office Obtain details regarding the property (age, square footage, type of building). Ask Assessor s opinion regarding value. 2. Talk to Taxpayer or its attorney What relief is being sought? Has an appraisal been commissioned? Request advance copies of appraisal or other supporting documentation if available. 3. Review the Appraisal 3. Advocacy Before the Board of Assessment Appeals APPRAISALS The purpose of an Appraisal is to render an opinion regarding the market value of the subject property. Market Value the price a purchaser, who is willing, but not obligated to buy, would pay an owner, willing, but not obligated to sell, taking into consideration all uses to which the property is adapted and might in reason be applied. To establish market value the appraisal should discuss not only the current use, but all of the uses, including the highest and most profitable use to which the land is adoptable and available. Whitcomb v. Philadelphia, 264 Pa. 227 (1919). 16

17 3. Advocacy Before the Board of Assessment Appeals WHAT TO LOOK FOR IN THE APPRAISAL ( AMMO ) 1. Inconsistencies 2. Unsupported adjustments 3. Failure to apply law 4. Compare to other appraisals for the property 5. Compare to other appraisals by the appraiser 3. Advocacy Before the Board of Assessment Appeals EXAMPLES OF AMMO FOUND IN APPRAISAL Look at the location (County/City) of the comparable sales. Are the out of county sales disproportionately lower than the in county properties? One lower out of county comparable reduced the average price per square foot by $2. 17

18 3. Advocacy Before the Board of Assessment Appeals EXAMPLES OF AMMO FOUND IN APPRAISAL Look at the comparable sale dates. If older sales are used (sometimes necessary for unique properties), has the appropriate adjustment been made for the market differences? One very old sale with a lower sale price can significantly impact the opinion of value. 3. Advocacy Before the Board of Assessment Appeals EXAMPLES OF AMMO FOUND IN APPRAISAL Look for a failure to apply the law. If a property is encumbered by a long term lease, the actual rents should be used in the income approach regardless of market rents. Economic realities of the property control. 18

19 3. Advocacy Before the Board of Assessment Appeals AT THE HEARING: Usually an informal setting, but will vary by county Appraiser or other representative of taxpayer will provide information supporting appeal Some Boards review appraisal beforehand, others do not Board Members may ask questions Use the hearing to question appraiser, point out ammo and make arguments to the Board 3. Advocacy Before the Board of Assessment Appeals AFTER THE HEARING: Promptly review any new documents received at the hearing Provide written comments to the Board regarding appraisals if necessary (and if permitted) Follow up with Assessment Office o Do they plan to inspect the property? o What do the assessors think of the appraisal/request value/merits of the appeal? 19

20 3. Advocacy Before the Board of Assessment Appeals WHEN TO EXPECT A DECISION First Class County: Appeals must be disposed of as promptly as possible. Second Class County: Decision must be made within 10 days of the hearing. For all other counties, per the Consolidated County Assessment Law, 53 Pa. C.S. 8844(e), hearings must be completed by October 31 st and decisions issued by November 15 th. 3. Advocacy Before the Board of Assessment Appeals APPEALS OF DECISION BY THE ASSESSMENT BOARD 30 days from date of decision to appeal to the County Court of Common Pleas. Further appeal of trial court decision is available by any party to the Commonwealth Court. 20

21 4. Negotiating Settlements Key negotiating factors: Often no disputed legal issues, simply a question of what the property is worth a battle of experts over FMV of the property. Leads to a lot of poker playing strategy and negotiation tactics. If district evaluates taxpayer s appraisal and concludes it is reasonable, sometimes is best to save costs of an independent appraisal, and negotiate a deal perhaps splitting the difference between taxpayer s appraiser and implied value based on the assessment. 4. Negotiating Settlements Key negotiating factors: As part of evaluating taxpayer s appraisal, the district might engage an appraiser not to prepare an independent appraisal, but (for a much lower cost) to simply evaluate and provide feedback on the taxpayer s appraisal good appraisers will do this if they have a working relationship with the district or its legal counsel. Settlement must cover every year included in the appeal, not just the first year for appeals that have been marinating in the court must decide how to address CLR. Assessment Board cannot agree to settle future tax years, but districts can enter side deals with taxpayers for neither to file appeals for a set number of years. 21

22 5. District Initiated Assessment Appeals Rationale Legal and Political Background Process Outcomes 5. District Initiated Assessment Appeals Rationale Creative way to enhance district revenues at a minimal cost Increases equity between taxpayers 22

23 5. District Initiated Assessment Appeals Rationale Easier to utilize after a recent arm s length sales transaction. Market value is determined by the price a buyer is willing to pay. May be a politically charged process so Board buy in is critical 5. District Initiated Assessment Appeals Legal Background Myth: A district initiated assessment appeal is considered a spot assessment and is not legal. Reality: Commonwealth Court recently confirmed the right of taxing bodies to initiate appeals of assessments on properties. Weissenberger v. Chester County Board of Assessment Appeals, 62 A.3d 501 (Pa. Cmwlth. 2013) 23

24 5. District Initiated Assessment Appeals Political Background Several legislative attempts to restrict a district s ability to initiate an appeal Gov. Rendell had vetoed one Act passed by the General Assembly. Such attempts remain ongoing. 5. District Initiated Assessment Appeals Preliminary Decision Points Board must philosophically support appeal concept. Board may decide revenue increase is not worth the potential fallout. Board may provide appeal parameters. 24

25 5. District Initiated Assessment Appeals Process (Recent Sales) Examine the monthly report from county Recorder of Deeds Office which lists monthly sales transactions. For properties selling for more than threshold, compare assessed value to sales price. 5. District Initiated Assessment Appeals Process (Recent Sales) Seek large (% or $) discrepancies between the assessed value and sales price. Employ an appraiser to provide an appraisal report for those properties with large discrepancies. 25

26 5. District Initiated Assessment Appeals Process (Recent Sales) File appeal with county board of assessment. Obtain Board approval for properties subject to appeal. 5. District Initiated Assessment Appeals Process (Recent Sales) Send a letter to property owners informing them of appeal. Submit material to legal counsel. Attend assessment appeal hearing. 26

27 5. District Initiated Assessment Appeals Process (Recent Sales) Review results with Board after appeal board renders a decision. Determine if additional appeal is necessary. Reap the benefits of additional revenue due to increased assessments. 5. District Initiated Assessment Appeals Outcomes Penn Manor School District in Lancaster County initiated well over 100 assessment appeals over a 13 year period. Cumulative new revenue over $1M. 27

28 Legal Developments and Best Practices in Tax Exemption Appeals Start by distinguishing between concepts of tax immunity and tax exemption. Immunity from taxes applies to the Commonwealth including agencies and instrumentalities of the Commonwealth such as municipalities, municipal authorities and school districts. Property owned by sovereign entity is presumed to be immune burden of proof is on locality seeking to demonstrate property is taxable. City of Philadelphia v. Cumberland County Board of Assessment Appeals, 81 A.3d 24 (Pa. 2012). Legal Developments and Best Practices in Tax Exemption Appeals Immunity not lost simply because sovereign entity holds real estate as a buffer around its own use. Delaware County Solid Waste Authority v. Berks County Board of Assessment Appeals, 626 A.2d 528 (Pa. 1993). But immunity is lost if sovereign entity leases property to rent paying private interest. SEPTA v. Board of Revision of Taxes, 833 A.2d 710 (Pa. 2003). 28

29 Legal Developments and Best Practices in Tax Exemption Appeals In contrast, a tax exemption is not presumed to apply. It is a carve out from property presumed to be taxable. Burden of proof is on party seeking tax exemption. Lehigh Northampton Airport Authority v. Lehigh County Board of Assessment Appeals, 889 A.2d 1168 (Pa. 2005). This presentation will focus on exemptions, not immunity issues. Legal Developments and Best Practices in Tax Exemption Appeals For exemptions, start by looking at the Pennsylvania Constitution, Article VIII, entitled Taxation and Finance. As an initial premise, under the uniformity clause, the Constitution requires that taxes shall be uniform upon the same class of subjects, within the territorial limits of the authority levying the tax. Article VIII, Section 1. 29

30 Exemptions to Uniformity Clause However, Article VIII, Section 2(a) of the Constitution then provides that uniformity is not required in all instances, by authorizing the General Assembly to adopt laws exempting the following from taxes: o places of worship o non profit cemeteries o public property used for public purposes o property owned and used by veterans for charitable or patriotic purposes o institutions of purely public charity General Assembly Actions In response to this invitation in the Constitution, the General Assembly has adopted legislation approving tax exemptions for a number of different classifications, including for real estate owned and used by purely public charities. 30

31 Purely Public Charities For instance, the Consolidated County Assessment Law provides the following tax exemptions for purely public charities : 53 P.S. 8812(a)(3) provides a tax exemption for hospitals, universities, colleges, seminaries, academies, associations and institutions of learning, benevolence, or charity, including fire and rescue stations... founded, endowed and maintained by public or private charity. 31

32 53 P.S. 8812(a)(11) provides a tax exemption for real estate owned and occupied by institutions of purely public charity that is necessary for the occupancy and enjoyment of such institutions so using it. Important point: Simply because a non profit organization qualifies for a federal tax exemption as a Section 501(c)(3) charitable organization, it is not automatically entitled to a real estate tax exemption as a purely public charity under Pennsylvania law. 32

33 Rather, the entity must meet the tests to qualify as a purely public charity under both (1) the Pennsylvania Constitution, and (2) a state law adopted by the General Assembly as Act 55 of 1997, called the Institutions of Purely Public Charity Act. Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa. 2012) Constitutional Test for Purely Public Charity Under the Supreme Court s HUP Decision The test for whether an institution qualifies as a purely public charity under the Pennsylvania Constitution has been established by the Pennsylvania Supreme Court, through what is known as the HUP Test, named after Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985). 33

34 HUP Test Under the HUP Test, for an entity to qualify as a purely public charity it must possess all of the following five characteristics: 1. Advances a charitable purpose; 2. Donates or renders gratuitously a substantial portion of its services; 3. Benefits a substantial and indefinite class of persons who are legitimate subjects of charity; 4. Relieves the government of some of its burden; and 5. Operates entirely free from private profit motive. Supreme Court HUP Test for Retirement Communities In re St. Margaret Seneca Place, 640 A.2d 380 (Pa. 1994). 156 bed nursing home no independent living or assisted living component. Almost 60% of patients were on Medicare or Medicaid. 48% were on Medicaid, which covered only 2/3 of the cost of services provided. 34

35 St. Margaret Seneca Place Commonwealth Court had rejected tax exemption in St. Margaret Seneca Place, finding that accepting Medicare/Medicaid payments for services does not count as providing charity care. Analogized to an airline selling seats at different rates in order to fill the plane. St. Margaret Seneca Place Supreme Court reversed, finding that accepting Medicare/Medicaid patients at reimbursement substantially below the full cost of providing service constitutes charitable care, which relieves the government of its burden of caring for the elderly in public nursing homes. 35

36 St. Margaret Seneca Place The Supreme Court s definition of the HUP Test in the context of retirement communities in St. Margaret Seneca Place substantially eased the burden for non profit retirement communities to qualify as a purely public charity. After St. Margaret Seneca Place In retirement community cases after St. Margaret Seneca Place, courts began to look closely at the percentage of patients or residents served on Medicaid or Medicare, analyzing the amount of the actual cost of care not covered by these government sources. The courts then determined if uncovered costs met the subjective test under HUP of donating a substantial portion of services. 36

37 After St. Margaret Seneca Place There is no objective measure under the Constitution for meeting this requirement: [T]the determination as to whether the services donated are substantial under the HUP test is to be made based on the totality of the circumstances; there is no bright line test, based on a certain percentage of donated services, for resolving this question. Lehighton Area School District v. Carbon County Board of Assessment, 708 A.2d 1297, 1303 (Pa. Cmwlth. 1998) (citations omitted, emphasis added). Statutory Test Under Act 55 In response to criticism that the Supreme Court s HUP test was too subjective and under significant lobbying pressure seeking liberalization of the exemption the General Assembly passed Act 55 in Act 55 essentially retains the same five factors for courts to evaluate from the HUP test, but with objective fiscal guidelines for obtaining exempt status. 37

38 Statutory Test Under Act 55 Although the stated purpose of Act 55 was to supplant the more subjective HUP test, the Supreme Court ruled in 2012 in Mesivtah that as a threshold matter before considering the statutory exemption test under Act 55, an entity must first pass the Supreme Court s traditional exemption test under HUP. Thus, to obtain tax exempt status as a purely public charity, an institution must qualify under both the HUP test and Act 55. Statutory Test Under Act 55 As with the HUP test, under Act 55 often the most significant of the five qualifying factors is whether the institution donates or renders gratuitously a substantial portion of its services. 10 P.S. 375(d)(1). Act 55 lists seven different ways an institution can meet this requirement; the institution needs to meet only one of the following financial criteria to donate or render gratuitously a substantial portion of its services. These are very specific tests, which require very detailed analysis to evaluate. 38

39 Statutory Test Under Act 55 One of the seven ways to meet the substantial donations test: Provide financial assistance or uncompensated goods or services to at least 20% of those receiving similar goods or services from the institution if at least 10% of the individuals receiving goods or services from the institution either paid no fees or fees which were 90% or less of the cost of the goods or services provided to them, after consideration of any financial assistance provided to them by the institution. Statutory Test Under Act 55 Under this approach, meet the substantial donations test if: 10% of residents receive 1% donated services; and another 10% of residents receive 10% donated services Compared to 40% Medicaid in St. Margaret Seneca Place! 39

40 Statutory Test Under Act 55 Another of the seven ways to meet the substantial donations test: Provide uncompensated goods or services that in the aggregate are equal to at least 5% of the institution's costs of providing goods or services. Statutory Test Under Act 55 Notably, for purposes of calculating the amount of their donated services under the foregoing standards, Act 55 permits institutions to include the financial value of volunteer hours contributed by students and other community members. 40

41 Menno Haven Decision: Some Good News On March 7, 2007, the Commonwealth Court decided Menno Haven, Inc. v. Franklin County Board of Assessment and Revision of Taxes, 919 A.2d 333 (Pa. Cmwlth. 2007), appeal denied, 940 A.2d 367 (Pa. 2007). Menno Haven operated a nursing home, an assisted living facility and an independent living center. Only the nursing home component was tax exempt. Chambersburg Area School District joined with the other taxing authorities in seeking to revoke the exempt status of the nursing home. The assessment board and the trial court agreed with the taxing authorities, and ruled that the nursing home no longer qualified for a tax exemption. Menno Haven appealed to the Commonwealth Court, which affirmed the trial court s decision to revoke the tax exemption from the nursing home. Commonwealth Court concluded that Menno Haven failed the second and third components of the HUP Test: o Does not donate or render gratuitously a substantial portion of its services. o Does not benefit a substantial and indefinite class of persons who are legitimate objects of charity. 41

42 Key factor in the Commonwealth Court s decision is that fewer than 30% of Menno Haven s nursing home patients were eligible for Medicaid. Comparing this to the 48% of Medicaid eligible patients in the nursing home in St. Margaret Seneca Place, the Commonwealth Court concluded that 30% was not adequate to meet the requirement of donating a substantial portion of services. Another key factor was that although Menno Haven lost money through the operation of its nursing home, those losses were subsidized by the up front fees paid by residents moving into the independent living facility. Fee ranged between $45,000 and $225,000 depending on the unit chosen. Menno Haven provided continuing care for independent living residents into assisted living and nursing home care even if such residents ran out of money. 42

43 The Commonwealth Court noted that only 8% of nursing home residents who came from outside Menno Haven s independent living and assisted living community were Medicaid eligible. Thus, Menno Haven primarily caters to well to doelderly and to those already within their community. Menno Haven charges a hefty entrance fee and is caring for the Medicaid eligible residents that come from within the Menno Haven community because of an obligation to do so rather than a sense of charity or out of a bona fide effort to service those that cannot afford the per diem rate. Bottom line of Menno Haven: Evaluated solely as a nursing home residence. Serving 30% Medicaid patients is an insufficient donation to qualify as a purely public charity under the HUP Test even if the nursing home operates at a loss if the nursing home is subsidized by up front fees paid by residents of an independent living facility that is part of the same Continuing Care Retirement Community ( CCRC ). 43

44 Similar Result in In Re Appeal of Dunwoody Village 52 A.2d 408 (Pa. Cmwlth. 2012) Although the retirement community met the 5% rule under Act 55 (donating at least 5% of its cost to provide goods and services), it did not accept Medicaid residents and failed the totality of the circumstances test. Only 8 or 9 of 400 residents received donated care from Dunwoody Village. Found not to be a purely public charity. Alliance Home Decision 919 A.2d 206 (Pa. 2007) Alliance Home of Carlisle operates Chapel Pointe, a licensed CCRC that includes a 59 bed skilled nursing home, a 53 bed assisted living facility and an independent living facility with 93 apartments. The skilled nursing and assisted living facilities had already enjoyed tax exempt status, and Chapel Pointe sought a further tax exemption for its independent living facility. 44

45 This request was denied by the Cumberland County Board of Assessment Appeals, the Court of Common Pleas for Cumberland County and the Commonwealth Court. At all levels, the basis for denial was that Chapel Pointe s independent living facility did not donate or render gratuitously a substantial portion of its services and thus did not qualify by itself as a purely public charity under the HUP Test or Act 55, even though Chapel Pointe s nursing home/assisted living component qualified as a purely public charity. This parcel by parcel approach to evaluating tax exempt status of a retirement community had been previously approved by the Commonwealth Court in Appeal of Lutheran Social Services, 539 A.2d 895 (Pa. Cmwlth. 1988), and Appeal of Bethlen Home, 557 A.2d 828 (Pa. Cmwlth. 1989). The Supreme Court, though, determined that a parcel by parcel review of a CCRC is unlawful, and reversed the Commonwealth Court s decision. 45

46 Very importantly, the Supreme Court noted the parties all agreed that Chapel Pointe as an institution qualifies as a purely public charity under both HUP and Act 55. This removed from the Court s evaluation whether the entire institution (including the independent living facility) meets the HUP Test and the requirements of Act 55. The Court then concluded that because the independent living facility is actually and regularly used for the purposes of the institution and to advance the charitable purpose of the institution, it should be included as part of the tax exempt property. Id. at

47 The Court added that [a]lthough the independent living facility, if it were viewed in isolation or as a separate institution, might not on its own qualify as a purely public charity, its role in the comprehensive care scheme provided by appellant is consistent with, is tied to, and advances appellant s charitable purpose. Id. at 32. In reaching its decision, the Supreme Court rejected the argument that under the Pennsylvania Constitution, a property owner must demonstrate that the parcel in question independently serves a charitable purpose in order for the tax exemption to apply. The Court disagreed, stating that applying such a parcel by parcel evaluation to real estate owned by an institution of purely public charity cannot be squared with the constitutional language or Act 55 s language. 47

48 The Court also notes that its Alliance Home decision is strictly limited to components of CCRCs that serve the overriding purpose of the institution. The Court made clear that a side business venture on CCRC property that is wholly unrelated to a charitable purpose (for instance, a commercial movie theatre) would not be exempt from taxation. Id. at 33 n. 13. Legislative Efforts to Negate Judicial HUP Test in Response to Mesivtah Eitz Chaim of Bobov v. Pike Co. Brd. of Assessment App., 44 A.3d 3 (Pa. 2012) The Supreme Court had stated before Mesivtah, in nonbinding dicta (a statement in a court decision that is not part of the formal holding of the case), that the HUP test remains applicable notwithstanding the adoption of Act 55, and that both tests must be satisfied. Community Options, Inc. v. Board of Property Assessment, 813 A.2d 680 (Pa. 2002). Mesivtah, though, was the first time the Supreme Court expressly made such a ruling. In response, the General Assembly had expressed shock and dismay that the Supreme Court would dare to construe the Pennsylvania Constitution. 48

49 Legislative Efforts to Negate Judicial HUP Test in Response to Mesivtah Eitz Chaim of Bobov v. Pike Co. Brd. of Assessment App., 44 A.3d 3 (Pa. 2012) Senate Bill 161 in 2012 sought to amend the Constitution to provide that only the General Assembly may define a purely public charity did not come up for a vote. Retry: Senate Bill 4 in 2013 passed the General Assembly. Legislative Efforts to Negate Judicial HUP Test in Response to Mesivtah Eitz Chaim of Bobov v. Pike Co. Brd. of Assessment App., 44 A.3d 3 (Pa. 2012) Steps to amend the PA Constitution: Bill must be approved by the Senate and House in two consecutive legislative sessions. Voters must approve change in a statewide public referendum. Expect to see big dollars expended by hospitals and retirement communities in support of this effort! At request of PASBO, KKAL provided testimony on this issue before the Pa. House Finance Committee in August 2013 (attachment). 49

50 QUESTIONS? 50

51 Pennsylvania Association of School Business Officials Mailing Address: Office Location: P.O. Box Market Place Harrisburg, PA Harrisburg, PA Telephone (717) FAX (717) SUBMITTED REMARKS REGARDING ACT 55 PREPARED BY THE PENNSYLVANIA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS FOR THE HOUSE FINANCE COMMITTEE AUGUST 15, 2013

52 Perspective of the Pennsylvania Association of School Business Officials (PASBO) Regarding Act 55 of 2007, the Institutions of Purely Public Charity Act Testimony of Howard L. Kelin, Esq. 1 Submitted to the Pennsylvania House Finance Committee August 15, 2013 I. Introduction Mr. Chairman, and members of the House Finance Committee, on behalf of the Pennsylvania Association of School Business Officials (PASBO), thank you for the opportunity to present PASBO s perspective regarding Act 55 of 2007, the Institutions of Purely Public Charity Act, 10 P.S PASBO is an association of 3,000 members, two-thirds of which are K-12 noninstructional administrators who provide finance, accounting, operations, facilities, transportation, food service, technology, communication, human resources, purchasing and safety services to support classroom learning in schools in Pennsylvania. PASBO is very pleased the Committee is taking a hard look at Act 55. The Pennsylvania Supreme Court s decision in Mesivtah Eiz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa. 2012), confirmed the Supreme Court s statement from ten years previous in Community Options, Inc. v. Board of Property Assessment, 813 A.2d 680 (Pa. 2002), that Act 55 did not replace the HUP test in establishing qualifications for a purely public charity, but instead added a legislative test that supplements the constitutional HUP test. 1 Mr. Kelin is the Managing Partner of Kegel Kelin Almy & Lord LLP of Lancaster, Pennsylvania. The law firm is General Counsel to PASBO, and is also solicitor to 18 school districts and other public school entities in Pennsylvania. Mr. Kelin is a graduate of the University of Virginia School of Law, and is a former President of the Solicitors Association of the Pennsylvania School Boards Association. 2

53 As a result of the General Assembly s adoption of Senate Bill 4 earlier this year, with the possible result of a Constitutional amendment authorizing the General Assembly to establish the sole criteria for institutions of purely public charity, it is vitally important to closely evaluate Act 55. Time constraints associated with this hearing preclude a thorough, comprehensive presentation on PASBO s views of Act 55. This testimony will provide a summary of PASBO s key perspectives regarding tax exemptions for purely public charities. PASBO would, of course, welcome further dialogue with the Committee on this critical issue. II. Background Before addressing Act 55, it is important to explain the fiscal context in which PASBO is providing this testimony. A. Heavy Reliance on Real Estate Taxes Thus, Impact of Exemptions is Acute To appreciate the impact of tax exemptions for purely public charities on school districts ability to fund educational programs, it is important to stress that the Commonwealth s funding scheme for public schools requires districts to rely heavily upon local real estate taxes. Notably, the General Assembly s practice of requiring school districts to depend heavily upon local real estate taxes to fund educational programs is increasing and shows no sign of abating. This trend is reflected through data from the website of the Pennsylvania Department of Education. During the school year, local real estate taxes comprised 39.4% of total school district revenues, and the state provided 42.3% of total school district revenues. In 3

54 contrast, in the school year (the most recent year for which PDE s website provides such data), local real estate taxes increased to 45.9% of total school district revenues, and state contributions decreased to 38.7% of total school district revenues. In sum, as the state s percentage of contributions toward total school district revenues has decreased over time, local real estate taxes have replaced state funding as the leading source of school district revenues. It is important to recognize that because reduced state contributions have increased the relative significance of real estate tax revenues to school districts, reductions in real estate taxes due to tax exemptions for purely public charities have had (and will continue to have) an increasingly severe impact on districts ability to fund educational programs. B. Act 1 of 2006 Amplifies Severe Impact of Real Estate Tax Exemptions Act 1 of 2006, the Taxpayer Relief Act, 53 P.S et seq., has increased even further the adverse financial impact of tax exemptions on school districts. Before Act 1, a school district had somewhat of a Hobson s Choice in addressing a tax exemption granted to one of its taxpayers. The district could either assimilate the lost revenue from the new tax exemption by cutting educational expenditures in its next annual budget, or pass along the lost revenue to its other taxpayers through a real estate tax increase. As a result of Act 1, though, school districts no longer have the former option. Any annual real estate tax increase is limited to the adjustment permitted by the Act 1 Index. A school district cannot increase its real estate tax rate beyond the Act 1 Index due to the loss of revenue resulting from a new tax exemption. As originally adopted in 2006, Act 1 had allowed an exception to the Act 1 Index for losses resulting from implementation of court orders 4

55 including court orders granting real estate tax exemptions but that Index exception was eliminated through 2011 amendments to Act 1. Thus, under Act 1, new tax exemptions for a purely public charity impose a direct dollarto-dollar reduction on school district revenues, and thus can have a striking, adverse impact on the financial ability of districts to provide educational programs. III. Concerns with Act 55 There is no doubt that many non-profit organizations play instrumental and positive roles in Pennsylvania s local communities. Certainly, PASBO applauds the efforts of staff and volunteers associated with all non-profit organizations that enhance our society. At the same time, though, it is important to recognize Pennsylvania law has never awarded exemptions from real estate taxes to all beneficial, non-profit organizations. To the contrary, the Pennsylvania Constitution has reserved real estate tax exempt status for a very select group, such as non-profit institutions that qualify as purely public charities. PASBO s chief concern with Act 55 is that it substantially liberalizes the test to qualify as a purely public charity. It would allow tax exemptions to institutions that actually donate relatively little charitable care. Thus, if the constitutional test is removed as contemplated by the adoption of Senate Bill 4, and Act 55 becomes the only test necessary to qualify as a purely public charity, already scarce funding for public education will likely be further reduced. A. Constitutional Law on Purely Public Charities The Pennsylvania Constitution provides generally for uniformity in the treatment of Pennsylvania taxpayers. Pa. Const., Article VIII 1. As an exception to this general mandate of 5

56 uniformity, the Pennsylvania Constitution permits the General Assembly the option to adopt laws allowing tax exemptions for certain types of real estate, including property owned by and utilized by institutions of purely public charity. Pa. Const., Article VIII, 2(a)(v). In turn, the General Assembly has accepted this constitutional invitation and adopted laws providing for certain real estate tax exemptions, including for real estate owned and occupied by institutions of purely public charity that is necessary for the occupancy and enjoyment of such institutions so using it. Consolidated County Assessment Law, 53 P.S. 8812(a)(11). In deciding whether institutions qualify for a real estate tax exemption as a purely public charity, the Pennsylvania Supreme Court has developed and applied the HUP test, which provides that an institution is not a purely public charity unless it meets all of the following five criteria: 1. Advances a charitable purpose; 2. Donates or render gratuitously a substantial portion of its services; 3. Benefits a substantial and indefinite class of persons who are the legitimate subject of charity; 4. Relieves the government of some of its burden; and 5. Operates entirely free from a private profit motive. Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985). Although all five of these criteria have been subject to judicial evaluation and further acknowledging that these five criteria are all somewhat interrelated as a practical matter, whether an institution qualifies under the HUP test often comes down to whether the institution donates or renders gratuitously a substantial portion of its services. With regard to this substantial donated care component of the HUP test, Pennsylvania courts have refused to adopt a precise, objective formula on how much donated care is required to meet the test. Rather, as the Supreme Court stated as follows in HUP. there is no bright-line 6

57 test for what constitutes substantial donated care, and such evaluation must consider all circumstances relevant to whether a particular institution truly provides services to those in need: Whether or not the portion donated or rendered gratuitously is substantial is a determination to be made based on the totality of circumstances surrounding the organization. The word substantial does not imply a magical percentage. It must appear from the facts that the organization makes a bona fide effort to service primarily those who cannot afford the usual fee. HUP, 487 A.2d at 1316 n. 9. Pennsylvania courts have recognized the difficulty in establishing objective criteria that will fit a wide variety of institutions over a continuum of time, even by comparing facts of a case to prior court decisions, because of the continually changing nature of the concept of charity and the variable circumstances of time, place, and purpose. American Law Institute v. Commonwealth, 882 A.2d 1088, 1091 (Pa. Cmwlth. 2005). Among the leading Supreme Court decisions on the constitutional standard for purely public charities is St. Margaret Seneca Place v. Board of Property Assessment, Appeals and Review, 640 A.2d 380 (Pa. 1994). In St. Margaret, the Court held that accepting Medicare and Medicaid payments that do not cover the full cost of care for nursing home residents can satisfy the HUP requirement of donating a substantial portion of the nursing home s services. Specifically, 48% of the nursing home s residents in St. Margaret paid for services through Medicaid. The Medicaid payments only covered two-thirds of the cost of care. The Court held the remaining one-third of the cost of care constituted donated services for purposes of the HUP test, and concluded the nursing home was a purely public charity. Since St. Margaret, courts have continued to look closely at the percentage of hospital patients or nursing home residents served on Medicaid or Medicare, and have analyzed the actual cost of care not covered by these government sources. Again, the courts have not developed any 7