TheBurg citymap Non Profit Problem: About half the property in Harrisburg is nontaxable. Can anything be done about it?

Non-profits in downtown Harrisburg.

Forum Place. Harrisburg Hospital. The Farm Show complex. The state Capitol.

Four places, four very different businesses, one thing in common—all are regarded as nonprofit entities, so pay no property taxes to their host city, Harrisburg.

According to the city treasurer’s office, Harrisburg is home to 716 parcels that are tax-exempt due to their non-profit status. Making the situation even more difficult: more than 75 percent of those parcels belong to either the government or government-related entities, which by law cannot be taxed, according to the Harrisburg receiver’s office.

So, what’s a city to do?

For years, the answer was “not much,” as the state did with Harrisburg pretty much what it wanted. Condemn and raze entire neighborhoods? Sure. Turn local streets into forbidding, perilous highways to accommodate suburban workers? Why not? Expand and take more properties off the tax roles? OK.

During the past century, the city has toggled between actively participating in its own destruction by facilitating the state’s unquenchable thirst for more land and, more recently, lamely complaining in City Council meetings and mayoral press conferences that the state does not pay its fair share for the services it consumes.

Last month, the situation changed somewhat. The state passed a 2013-14 budget that gave Harrisburg $5 million in “fire protection” funds, representing the largest-ever direct infusion of cash from the state as part of a regular budget process.

However, as it stands right now, that level of funding is a one-shot, one-year deal. Meanwhile, there are numerous other issues emerging that could affect the capital city’s relationship with the many nonprofit entities that call Harrisburg home.

State of the State Funding

To say that John Campbell was surprised would be an understatement.

“I’ll be honest with you—I was shocked,” said Campbell, Harrisburg’s treasurer.

Campbell was speaking of the $5 million the state coughed up to the city, double the amount allocated in the 2012-13 budget. His surprise was heightened by the fact that House Republicans, in their budget plan, had already slashed the allocation to $496,000.

Most city officials, including Mayor Linda Thompson, expected the amount to increase once the budget bill was finalized. In the end, however, it surpassed nearly everyone’s expectations.

“It’s a figure we’ve never received before,” Campbell said.

State Sen. Rob Teplitz said he and Rep. Patty Kim had worked hard to get funding restored, hoping to reach $4 million, a figure most city officials had set their eyes on. Receiver William Lynch lobbied Gov. Tom Corbett and Republican legislative leaders for another $1 million, which is how Harrisburg ended up with $5 million for this fiscal year, said Teplitz.

“It really is a windfall,” he said. “But we’re not asking for extra payment. We’re only asking for fair compensation.”

That fair compensation is, technically speaking, for protecting state buildings from fire, thus the money is accounted for in the state budget’s line item for fire protection. In fact, according to Teplitz, the city had to pledge the money would go only for that purpose.

However, it’s a stretch to believe that 60 percent of the city Fire Bureau’s $8.4 million budget goes to safeguarding the 40 buildings that constitute the Capitol complex. The money, in fact, flows to the city’s general fund, which does include the Fire Bureau, but also includes most other parts of the city government. So, money that goes into the Fire Bureau budget simply frees up funds elsewhere for the financially strapped, indebted city.

In the end, the state uses fire protection as a politically expedient way to compensate Harrisburg. It’s simply easier to fund a single, existing line item for a specific use than to transfer money into the general fund of the much-criticized and ostracized city. Besides, firefighters have hero clout lacking in, let’s say, the city’s IT department.

Harrisburg is happy to go along with this process because the state has habitually underfunded the city for services rendered: use of its roads, its emergency services, its public works and sanitation staff. Each weekday, the population of Harrisburg doubles, largely due to the presence of the state government, with the small population of the largely poor city left to pick up the tab of this white-collar invasion.

Until this year, the state has never owned up to its obligation as, by far, the largest employer and landowner in Harrisburg. Exempt from having to pay property taxes, the legislature allocated whatever it wanted, with the amount bouncing around from year to year. So, under the Reed administration, the state often provided just over $1 million. In 2010, that amount was cut to $987,000 and then to $496,000 in 2011. After the city’s financial crisis hit full-on, the state used the line item to assist the city to the tune of $2.5 million for 2012 and now $5 million.

City officials seem satisfied with that level—that $5 million finally compensates the city fairly. The problem, however, is that the funding level is not guaranteed going forward. It’s subject to the legislature’s annual horse-trading extravaganza known as the budget process. So, will the state reduce funding again once the city’s finances stabilize or when Corbett is no longer governor or Lynch is no longer receiver? No one knows.

Teplitz said he’s introducing legislation in the fall that would stabilize Harrisburg’s state funding, ensuring the city fair compensation in the fire protection line item that also would allow it to plan financially from year to year.

“The legislation would require the actual cost to get reimbursed,” he said.

Teplitz acknowledged passing such legislation would be an uphill climb, but vowed to put in a strong effort.

“Then we wouldn’t have to go begging every year,” he said.

PILOT Programs

In Harrisburg, after the state government, the next largest block of tax-exempt properties in the city belongs to PinnacleHealth System, one of the area’s largest healthcare providers, which is listed as a non-profit 501(3), the IRS’s designation for a tax-exempt organization. In the city, healthcare providers alone account for 11 percent of the non-taxable properties. If taxed, the PinnacleHealth parcels alone would bring in more than $1.13 million in property tax revenue, according to the receiver’s report.

But Pinnacle, like many other non-profits, instead makes Payments In Lieu of Taxes (PILOTs) to the city, amounting to more than $120,000 a year. Pinnacle spokeswoman Kelly McCall said in an e-mail that a 1998 court settlement prevented her from discussing specifics.

“Our PILOT was established through the Settlement Agreement, and the Agreement contains a confidentiality provision. We do make PILOT payments to the City of Harrisburg, Harrisburg School District and Dauphin County,” McCall’s e-mail said.

“PinnacleHealth provided more than $14.8 million in community benefits and reached more than 2.1 million people through programs and services, such as free screenings, community health education and chronic disease management in fiscal year 2012.

In addition, PinnacleHealth has supported numerous initiatives within Harrisburg, including increasing access to healthcare for the underserved through the Keystone Continuum, donating to maintain extracurricular activities and athletic programs in the Harrisburg School District and providing nutrition and physical activity education and meals to Harrisburg School District students,” she continued.

Overall, Harrisburg received a total of more than $420,000 in PILOTs in 2009, $410,244 in 2010 and $420,286 in 2011. According to city records, Harrisburg anticipates, in its 2013 budget, receiving about $425,000 in PILOTs. Next to Pinnacle, PHEAA, the Pennsylvania Higher Education Assistance Agency, state is the second biggest PILOT contributor, sending in $107,444.79 each year for properties in the city.

“Under the Purely Public Charities Act, (Act 55), any PILOT payments are totally voluntary on the part of the non-profit,” said Cory Angell, a spokesperson for city receiver Lynch.

While a noteworthy addition to any municipal budget, PILOTs rarely constitute more than 1 percent of any total budget, according to an exhaustive 2010 nationwide study of the issue conducted by the Lincoln Institute for Land Policy. In Harrisburg, PILOTs account for about three-quarters of 1 percent of the budget, a figure largely unchanged for the past decade.

Tony Ross, president of the United Way of Pennsylvania, which has members who partner with more than 5,000 not-for-profit social service agencies statewide, said that standardizing a definition of what is and what is not a non-profit in Pennsylvania would help eliminate the fear that smaller non-profits—which have fewer assets and resources than the healthcare behemoths—end up bearing an undue share of the tax burden if stripped of their tax-exempt statuses. It would also help clear up the issue of just what qualifies as a non-profit from county to county.

“We’re concerned that non-profits are getting lumped into one group,” Ross said.

Ross explained that many of his affiliates, which tend to be smaller, community-based organizations, lack the assets and resources of the healthcare giants. What is a PILOT to PinnacleHealth could be a life or death situation to a smaller organization, he said.

“From what I can tell, those sorts of distinctions aren’t being made,” Ross said.  “Whatever is done, it needs to be uniform across the state.”

“This tension has been going on for a long time,” said Joe Geiger, who until recently was the long-time director of the Pennsylvania Association of Non-Profit Organizations. “It wouldn’t even be close to enough money to offset the deficit. And there are some unintended consequences that could occur where some non-profits who are currently operating in Harrisburg may decide they need to find a more favorable environment in which to operate.” 

“Poor decisions like that are what happened with the incinerator. That’s where the problem is. It’s not the fact that non-profits aren’t paying taxes,” Geiger said. 

“Very few non-profits are property tax-exempt,” Geiger explained.  “Most of them rent their properties and pay their taxes through the rent that they pay. So, when you look at the amount of debt that Harrisburg is in and you look at the amount of money that they could leverage out of charities, it’s not going to come anywhere close to the solution.” 

“Non-profits and the local government ought to be working together to look at solutions, not taking each other to court,” he said.

Baseball & Bathrooms

After the state and PinnacleHealth, a host of smaller nonprofits dot the Harrisburg landscape (see map). In fact, you can walk through much of downtown and Midtown and hit one after another.

Did you know that Metro Bank Park is still owned by the city, so is tax-exempt even though Harrisburg sold the Senators baseball team in 2007? The team now leases the ballpark from the city.

The restrooms at Sunshine Park on Herr Street are also tax exempt, as is the controversial Forum Place building on Walnut Street, even though it’s valued at more than $63 million.

Rep. Patty Kim, a first-year Democrat representing Harrisburg’s 103rd district, said she thinks it’s time for a public hearing as legislators have been getting lots of mail from the public. She also said she thinks that the non-profit designation should be made closer to home.

“I think it should be a municipal decision if it comes to that because, if the state does it, it’s going to be like a cookie-cutter formula that doesn’t fit with everybody’s unique situations in the city,” she said.

Kim said she was working with Rep. Robert L. Freeman, a Democrat from the 136th district representing Easton and Northampton County, as a future co-sponsor of a proposed bill that would ensure additional resources to cities like Harrisburg that have a disproportionate number of tax-exempt properties.

Speaking of legislation, a legislative solution is brewing that could expand the definition of a non-profit in Pennsylvania, which might further impact Harrisburg.

In June, the House Finance Committee stopped short of a vote on a proposed law that would amend the state constitution to give the General Assembly the power to define a tax-exempt non-profit statewide. The House was taking its look at the proposed new standards, known as Senate Bill No. 4, after the Senate approved it in March.

Pinnacle’s McCall said that Pinnacle is also closely watching the progress of the proposed constitutional amendment, which likely would lead to a more liberal definition of what qualifies to be a non-profit.

“PinnacleHealth supports the legislation, as it will provide clarity and uniform treatment of charities throughout Pennsylvania,” she said.

In Pinnacle’s case, its payments are made as a result of a 1998 settlement reached with the Dauphin County Board of Assessment Appeals after the hospital appealed the county’s decision stripping the hospital’s tax exempt status in 1993. The reason the tax board took the hospital off the tax-exempt rolls? The county was not satisfied that the hospital had continued to meet the five-prong “HUP test”—established by a 1985 court decision to help determine what is a non-profit—because it engaged in competitive practices with other local healthcare providers.

Dauphin County Judge Richard A. Lewis later agreed, ruling that Pinnacle’s acquisition of local private physician practices as part of its expansion of an integrated healthcare system evidenced a private profit motive on the part of the hospital.

“The taxing authorities argue that the physician practices compete with private physicians and that such competition is evidence of a private profit motive. This court finds that [Pinnacle] cannot compete while still maintaining its charitable mission and charitable nature,” Lewis wrote.

Eric Montarti, senior policy analyst with the Allegheny Institute for Public Policy, a Pittsburgh-based non-profit taxpayer interest research group, said that hospitals, in a sense, are placed in a vulnerable position since no one wants to be seen as wishing to start taxing churches and schools.

“Take away these things that you’re never going to tax. Take away these things that the politicians are never going to go after, and what are you left with?”

Pittsburgh, like Harrisburg, has an Act 47 problem, the legislative term used to describe when the state appoints an outsider to oversee a city’s finances because the municipality is so far in debt that it has been declared a financially “distressed” city. In 2004, Pittsburgh began grappling with a $34.3 million deficit.

“It obviously didn’t solve the city of Pittsburgh’s issue,” he said.

Harrisburg, a city with a $56.3 million budget, currently faces an operating deficit of about $12 million and a $350 million debt tied to its botched incinerator retrofit, which has pushed the city to the brink of bankruptcy.

Montarti said that trying to, in effect, indirectly tax tax-exempts is the wrong direction to take as nonprofits attract people who, for example, buy properties in the municipalities and therefore later end up paying property taxes. Montarti said that those same people also end up paying taxes on local services while otherwise helping to support the local economy. The city, instead of trying to tax non-profits, should first get its own fiscal house in order, he said.

“Our argument would have been, ‘Well, okay, the city of Pittsburgh really needs to look at what it’s spending and what it’s doing in terms of how many services it provides, how many people it employs, how much cooperation there is between it and the county on similar services,’” he said.

People have made the same point about Harrisburg. Over the past few years, however, Harrisburg has slashed and slashed and slashed. The once-bloated city government now is down to its bare bones, challenged to deliver even basic services.

After years of underfunding its obligations, the state government has finally stepped up—at least for one year. PinnacleHealth also has shown that it’s willing to be civic-minded. Will other nonprofits follow suit? Given the city’s vast financial needs, PILOT payments may never amount to too much. However, Harrisburg does provide these nonprofit organizations with vital services. Given its desperate shape, the city is searching for every penny it can find.

Reggie Sheffield is a freelance reporter in Harrisburg.  He may be reached at troylus@comcast.net.