MuniLand

I write about cities and states doing all kinds of unsound things with their money, but I am shocked as I watch my own very small community get bamboozled by a local developer. Here is the story from our exceptional local paper The Observer:

The developer of a three-story addition to Northern Dutchess Hospital in Rhinebeck is seeking to make the expansion tax-exempt for its first seven years.

Developer Jeff Kane of Kirchhoff Medical Properties explained during a public workshop with village officials Feb. 13 that his company will lease part of the hospital campus from HealthQuest, which owns the hospital, while building the 75,000-square-foot, $30 million addition.

Once completed, Kirchoff plans to lease the second and third floors back to the hospital and lease the first floor to individual medical groups.

Because the hospital itself is structured as non-profit (it provides a minimal amount of charity care) the portion that it leases from a private developer would be tax-exempt. The remaining floor of the building would be retained as a taxable property, but the developer wants a payment (a PILOT) in lieu of taxes for it.

This is a guest post from Joseph Rosenblum, the Director of Municipal Credit Research at AllianceBernstein.

To stay solvent, hospitals run a numbers game, charging high prices to patients with private insurance to offset lower payments from Medicare, Medicaid and the uninsured. Some hospitals make a nice profit; others struggle. Now hospitals are facing a game changer – the Affordable Care Act, which expands Americans’ access to medical insurance, but changes the reimbursement rules to care providers.

How will this affect hospitals’ bottom lines and their ability to pay off debt?

In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual “charity care” hospitals are providing.

The immediate implication is that hospitals’ property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.

Becker’s Hospital Review has the specifics:

[T]he Illinois Department of Revenue’s crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.