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24 Hartford Business Journal • April 20, 2015 www.HartfordBusiness.com OPINION & COMMENTARY EDITORIAL Hospital property tax debate requires compromise T he General Assembly and Connecticut hospitals are engaged in a nasty tug-of-war on a myriad of important issues. Whether its Medicaid reimbursement levels, the provider tax, or other state fund- ing cuts, policymakers and hospital executives don't see eye-to-eye on much these days. One issue particularly galvanizing both sides is the controversial debate over the tax-exempt status of nonprofit healthcare providers. Gov. Dannel P. Malloy and key leg- islative leaders want to chip away at the exemption, while hospitals say their ability to skirt property taxes should be sacrosanct. We think there is a reasonable middle ground. The Finance, Revenue & Bonding Committee recently held a public hearing on a bill that would allow cities and towns to charge property taxes to off-campus proper- ties owned by hospitals. The bill is in response to hospitals aggressively opening new outpatient centers and acquiring private physician practices, which previously paid property taxes but were taken off the tax rolls once owned by nonprofit care providers. The bill was introduced to safeguard property tax revenues at a time when munici- palities and the state are facing major budget constraints. Malloy's budget chief Ben Barnes argues that the property tax exemption and the state's PILOT program, which reimburses municipalities for some tax-exempt property, weren't designed to shield hospitals that continually remove non-emergency care medical properties from local tax rolls, which imposes additional costs on state taxpayers. Hospitals argue their nonprofit mission would be jeopardized if they had to bear property taxes in addition to funding cuts and other tax increases already being con- sidered by the legislature. Here's a fair compromise: Allow hospitals to maintain their tax exemption on exist- ing properties and on any new buildings they erect in the future; but force them to continue paying taxes on properties owned by private physician groups they acquire. This won't add substantial costs to hospitals, and will safeguard some property taxes that serve as the financial lifeblood of cities and towns. Removing the exemption on all properties outside a hospital's main campus is too risky and would demonstrate policymakers' lack of understanding of the changing healthcare landscape. Hospitals are facing pressure to provide care in lower-cost set- tings, which means moving patients away from the emergency room to outpatient cen- ters. That's why hospitals are investing millions of dollars in ambulatory care facilities. Taxing those properties would provide a major disincentive for hospitals to continue investing in lower-cost centers that could ultimately bend the healthcare cost curve. At the same time, policymakers must draw a line in the sand somewhere; the state can't continue to allow the largest nonprofit organizations gobble up property and take it off the tax rolls. We've seen firsthand the negative effects significant amounts of tax-exempt property can have on a municipality. More than 50 percent of property in Hartford, for example, is tax exempt, creating significant budget constraints on the Capital City, which is saddled with the highest commercial mill rate in the state. According to a recent CT Mirror analysis, the statewide tax liability reported by nonprofits is more than $500 million per year. That's a lot of lost tax revenues that must be shouldered by the state. Hospital's frustrations, however, are understandable. They seem to be under attack by the Malloy administration, which has proposed funding cuts and higher taxes that could cost hospitals more than $750 million in annual revenue, according to the Con- necticut Hospital Association. Although hospitals' financials improved last year they still face significant fiscal uncertainty. Policymakers must refrain from adding too many additional financial burdens on hos- pitals, which are being asked to cut costs and transform their operations. n RULE OF LAW CT unfairly underpays human services nonprofits By John Horak I n one form or another we will always need a safety net for people struggling with intel- lectual or physical disabilities, addiction, mental illness, or a personal crisis of some sort. While a compelling moral case can be made for the safety net, an equally persuasive case can be based on the risk to social order its absence would present. Consequently, the only debatable issue is how to structure a fair and effective human services delivery system. Un for t u n a t ely, Connecticut's sys- tem is sorely in need of repair. Here's why: The American safety net was origi- nally created by civic- minded volunteers who formed nonprofit associations to under- take tasks that were communal in nature (orphanages, poor houses and many others), and who financed them with private donations. However, in the 1960s federal and state gov- ernment stepped into this sphere in a robust manner supported by the steady flow of tax revenue. Government social service agencies were created, and a government-nonprofit "partnership" emerged across the country based on a contractual legal structure: govern- ment and nonprofits enter into contracts under which govern- ment provides funds and the nonprofits provide services. The Connecticut system followed the post-1960s trend, but with a twist that is the root of the cur- rent problem. On the one hand, Connecti- cut uses a contract system to hire non- profits. According to the Connecticut Non- profit Human Servic- es Alliance, in 2014, 10 Connecticut agencies entered into 1,585 Purchase of Service Agree- ments (POS Agreements) with nonprofits with payments totaling $1.38 billion. On the other hand, many Connecticut state agencies (in con- trast to a national trend) also provide services directly with their own employees. As a result, we have a two-track system in which both state and nonprofit employees do much of the same work. The two-track system worked well at first, but approximately 20 years ago (about the time the income tax was enacted to solve the fiscal crisis of that day) the rate of fund- ing under the POS Agreements began to slip. This trend has continued precipitously, and is now reflected in long waiting lists and aging facilities, but most significantly for our pur- poses, a massive disparity between the wage/ benefit scale of nonprofit employees and their equivalents working for the state. Human services is a labor intensive field and personnel costs account for the majority of non- profit providers' budgets. Moreover, the workers in question are not "flipping burgers." They have training and responsibility for the health and safety of people under their care (many of whom have complex medical conditions). The problem is severe. A February 2015 report prepared by the Connecticut Commu- nity Providers Association notes that nonprof- its are now paying direct care staff close to minimum wage with few or no benefits, and suggests that approximately 33 percent of non- profit workers qualify for Medicaid and other state benefits. Insiders have told me that 20 years ago the wage differential was about 15 cents per hour, and that nonprofit employees currently receive about half of what is paid to state counterparts. To make the problem worse, if not insulting, nonprofits regularly lose staff (trained at their expense) to direct state employment when jobs open up. So, in the context of the national debate about low wages and income inequality, and given the fact that the vast majority of non- profits are completely dependent on POS Agreement funding to operate, it is very fair to ask both how and why the state permits this "shadow payroll" system to exist. The "how question" is fairly simple to answer — the state has nonprofits in a legal vise caught between antitrust law and the "take it or leave it" one-sided terms of the POS Agreements. Nonprofits as a group have no power to bargain collectively for higher contract rates (which would allow them to increase wages) because of the risk of price fixing and other anti- trust law issues. Second, this complete lack of bargaining power is reflected in the POS Agreements, which are presented on a "take it or leave it basis," and are so one-sided that non - profits literally live at the mercy of state officials. For exam- ple, the POS Agree- ment allows the state to: reduce payments unilaterally at any time state money gets tight; cancel the entire agreement without prior notice if funding is no longer available; and be indemnified by the nonprofit if anything goes wrong (even if caused by inadequate funding). The "why question" must be answered by state policymakers. They should tell us why they take advantage of the nonprofits' lack of bargaining power to create a second class of low paid human service workers. Before responding they should review a bill pending before the Gen- eral Assembly that would impose a $ 1 per hour fine on "large employers" paying employees $15 or less an hour. The fine would be used to reim- burse the state for the cost of state social ben- efits low-paid employees are qualified to receive. One wonders if the backers of this bill realize that the state maintains a low paid "shadow pay- roll" of its own, but that it hides behind nonprof- its to keep it secret. n John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own. HARTFORDBUSINESS.COM POLL At what age do you plan to retire? ● 50-59 ● 60-69 ● 70+ ● Never To vote, go online to HartfordBusiness.com. Last week's poll results: Which coach has had a bigger impact on UConn sports? 39.2% Jim Calhoun 58.2% Geno Auriemma 2.5% Randy Edsall John Horak ▶ ▶ The state has nonprofits in a legal vise caught between antitrust law and the take it or leave it one-sided terms of the POS Agreements.