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Out of Reach: Will amendment to state constitution help keep nonprofits' money out of taxpayers' hands? 

"I think the public needs to have greater input in this debate"

Thad Turner has no illusions about what will happen to the Warren County YMCA if the nonprofit organization is told to start paying more than $170,000 in property taxes.

"It will destroy us," says Turner, the group's executive director. "We'd be able to struggle along for awhile, but we don't have the ability to make up $171,000, and this town will lose its Y."

But under current rules set forth by the Pennsylvania Supreme Court, local governments have the right to challenge tax-exempt status. Some Harrisburg legislators say they should be the ones that decide the criteria for what is or isn't a purely public charity, and have introduced a measure to start the process of amending the state constitution to that effect. Senate Bill 4 passed a Senate committee last week and is headed to the full Senate for a vote. The bill passed by a 9-2 vote with Matt Smith (D-Mount Lebanon) and John Blake (D-Scranton) voting with the Republican majority, and Rob Teplitz (D-Harrisburg) and John Wozniak (D-Johnstown) voting against. 

"Our goal ... is simple: To give the legislature the sole authority to establish criteria for a tax exemption, thereby providing a clear avenue to protecting our charities which serve the interests of our communities," said the bill's sponsor, state Sen. Mike Brubaker (R-Lancaster), in a statement, in which he specifically mentioned the Warren County YMCA. 

Other lawmakers, however, say the goal goes beyond that. They say the legislature is being lobbied to protect large property-owning multi-million- and billion-dollar nonprofits like UPMC and the University of Pittsburgh, which have for years taken advantage of protections from Harrisburg to remove billions of dollars worth of properties from county tax rolls. The intent with the amendment, opponents say, is to limit the abilities of local governments to challenge that tax-exempt status.

 "I think this comes down to a very basic issue of fairness," says Allegheny County Controller Chelsa Wagner. "Is this really something that rises to the level of needing a constitutional amendment?"

Even if the bill passes the full Senate, it has a long road ahead. After failing to pass the legislature last year, it must be approved by both chambers this year, and again in the next legislative session. Voters would then decide its fate in a referendum.

Still, the measure is already generating controversy, largely because there were no public hearings or input prior to the committee vote. 

"There is a real effort to keep this behind closed doors, and I think this shows the nefarious intent here," says Wagner. 

To Wagner, the move is just another way the state has hamstrung cash-strapped local governments. Recent state budget cuts, she says, have left local governments picking up the bill for government services — and now state officials "prohibit them from doing the work they need to balance the budget," she says. "The state must get out of the way and allow them to govern."

In December, Allegheny County Council held a public hearing on whether UPMC should lose its tax-exempt status. It came after calls by Wagner and other public officials to start challenging the tax-exempt status of nonprofits. UPMC is the county's largest property owner: Wagner's office estimates that its tax-exempt holdings alone mean the county is missing out on nearly $7.4 million annually. The total loss of revenue from all nonprofits is $95 million, according to the controller.

"I think the concept that all nonprofits should be tax-exempt is outdated, and residents are bearing the burden of having to support more of the tax base then they should," Wagner says.

County Executive Rich Fitzgerald agrees — a rare break from his frequent squabbles with Wagner. "My biggest concern with Senate Bill 4 is that I think the public needs to have greater input in this debate," he says, "because they're the ones facing the higher tax burden because of all of this tax-exempt property."

"We're not questioning the tax-exempt status of every institution out there," says Amy Sturges, director of governmental affairs for the Pennsylvania Municipal League. The league, which represents local governments, opposes measures that would make it harder to challenge nonprofits. "These tax-exempt entities use municipal services but don't contribute for those services, and that puts a lot of stress on taxpayers who are forced to pay more."

State Sen. Jay Costa (D-Forest Hills) says he agrees that some nonprofits should have their tax-exempt holdings reviewed. But he also plans to vote in favor of SB 4.

 "There are a lot of misconceptions out there about what this does. It's just the first step in a process," says Costa. "What a constitutional amendment would do is say that it's the legislature, not the courts, who will define what a purely public charity is."

Who should make that decision has been debated for nearly three decades. 

In 1985, the state Supreme Court established a test called the "HUP" test, which set five conditions for a nonprofit organization to enjoy tax-exempt status. Under the test, the nonprofit must: advance a charitable purpose; donate or "render gratuitously" a substantial portion of its services; benefit a substantial and indefinite class of persons who are legitimate subjects of charity; relieve the government of some of its burden; and operate entirely free from private profit motive.

In 1997, the legislature passed a measure, Act 55, which made it much harder for municipalities to challenge a nonprofit's tax-exempt status. Opponents say the legislature softened the guidelines to make it easier for nonprofits to meet the criteria for tax-exempt status. One example allows the nonprofit to have tax-exempt status for property tax if the Department of Revenue rules it is a "Purely Public Charity for state sales and use tax."

But last year, the pendulum swung the other way, with the Supreme Court again ruling that the HUP test, not the guidelines set forth in Act 55, was in effect. Suddenly, municipal officials saw a chance to extract more revenue from nonprofit property owners.

Some local governments are already doing so. Warren County, for example, challenged the tax-exempt status of the YMCA and five other entities, including a cemetery, a regional hospital, a nursing home and the county's Habitat for Humanity chapter. Only Habitat for Humanity was able to hold on to its status.

"We give back $300,000 in goods and services to the community every year, so we were surprised to be challenged," says Turner, of the county's YMCA. The agency failed to convince the county's Board of Assessments to retain the tax-exempt designation, and is now preparing to fight in court. "While we're confident we will win in the courts, we have to spend tens of thousands of dollars challenging this and the county will spend tens of thousands of dollars defending it. That's a lot of money that we could all spend on things that are whole lot more worthwhile than this." Even if the county does prevail, he says, "eventually this YMCA will close and that's a loss for the entire community." 

SB 4's champions say they are trying to avoid such divisive battles — or at least set clear ground rules for them. 

Costa says the legislator's Act 55 was "too generous" to nonprofits: "I think a lot of these nonprofits have lost sight of what a purely public charity is, and the public has lost confidence in the process." But he also says the court standard may be too strict, and that the ideal standard would lie "somewhere between the HUP test and Act 55." In any case, he says, "I think to some degree this is about who has the right to define" what the standards should be. "I believe it should be left to the legislature."

The battle has become "a fight over separation of powers," says state Sen. Jim Ferlo (D-Lawrenceville), who opposes the Senate measure. But "frankly, I view the court as more progressive on this issue." 

Even if SB 4 passes, the legal landscape won't change for years: Even without roadblocks, the earliest an amendment could be added to the constitution would be 2016. In the meantime Fitzgerald, the county executive, says the county is proceeding with plans to review the status of tax-exempt parcels. 

He says the county is finishing up mailers to be sent to the owners of about 5,000 tax-exempt parcels in the county, requiring them to justify the exemption on each parcel. The county's office of property assessment will then review the responses and decided whether the land should be tax-exempt or not. Nonprofits can appeal that decision. 

"We are moving forward with this, there's nothing in that Senate bill that changes that," says Fitzgerald. "The county has in the past done a poor job of record-keeping and review of these properties, and there are properties in this county that are tax-exempt and shouldn't be."

But while the legal landscape may not change any time soon, Wagner says SB 4 can change the political landscape in a hurry. If it seems the legislation is being pushed through, she says, local governments may wonder if it's even worth beginning a challenge, only to see it struck down under a state-required standard. 

 "These larger nonprofits have much deeper pockets and have legal teams that dwarf those of local governments and municipalities," Wagner says. "It's an attempt to scare them away from even challenging it in the first place."

And while the decision to amend the constitution is ultimately in the hands of voters, Wagner points out that big nonprofits have plenty of money for advertising.

 "They're going to target groups who vote regularly, like seniors on a fixed income," she says. "I think we're really going to be barraged with scare tactics from groups that have deep pockets and the ability to control the message.

"So the safeguard of knowing that it would go to a vote isn't reassuring to me."

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