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Ravenstahl: Pittsburgh sues to remove UPMC's tax-exempt status

At the core of Pittsburgh's lawsuit challenging UPMC's tax-exempt status is a five-point test that Pennsylvania courts use to determine if a nonprofit qualifies as a “purely public charity” under state law.

Known as the “HUP test” because of the 1985 court case Hospital Utilization Project v. Commonwealth, the state Supreme Court has ruled that an organization must pass all five points of the test to be considered a charity worthy of tax-exempt status.

Under the HUP test, an organization must: Advance a charitable purpose; donate or give away a substantial portion of its services; help a substantial and indefinite class of people who are legitimate subjects of charity; relieve the government of some of its burden; and operate entirely free from private profit motive.

“It's an ‘and' test, not an ‘or test,' which means that if you don't meet one of them, you're disqualified,” said Nicholas Cafardi, a Duquesne University law professor. “It's meant to be difficult because the exemption from taxes is the exception and not the rule.”

Cafardi said part of the difficulty in interpreting the test is defining what each term means and whether it applies to the nonprofit in question. For example, he said, health care is arguably a worthy, charitable purpose, but it's difficult to determine what would qualify as “substantial” when donating such services.

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By Jeremy Boren and Bobby Kerlik
Wednesday, March 20, 2013, 11:42 a.m.

Pittsburgh Mayor Luke Ravenstahl said city taxpayers should not subsidize the $10 billion hospital system that has fueled UPMC's rise as Pennsylvania's largest employer and the region's richest nonprofit organization.

Ravenstahl on Wednesday filed a lawsuit seeking to eliminate UPMC's exemption from paying the city's payroll tax and separately challenged the tax-exempt status of UPMC's 150 properties in the city.

“We know that UPMC is no doubt prepared to spend a lot of those billions of dollars to fight what we're trying to do,” Ravenstahl said during a news conference, joined by fellow Democrats and Service Employees International Union members who urged him to challenge UPMC. “It's kind of David versus the Goliath.”

The filings in Common Pleas Court and the Allegheny County Board of Property Assessment, Appeals and Review brought a harsh rebuke from UPMC.

“We look forward to addressing this in a court of law rather than responding to partisan politics and union pandering,” said spokesman Paul Wood. “If UPMC listened to some unions and local government politicians on how to run our business, there wouldn't be a UPMC.”

With more than 55,000 employees, UPMC is Western Pennsylvania's largest health care system and largest employer.

Ravenstahl estimated that if UPMC paid the 0.55 percent payroll tax and property taxes on land that's exempt, Pittsburgh would net roughly $20 million a year. The value of UPMC's tax exemptions statewide could be as much as $200 million, Ravenstahl said.

Legal analysts say the lawsuit could seek to extract payments in lieu of taxes because it's unlikely Pittsburgh could win its case outright. UPMC's system is complex and filled with subsidiaries performing health care-related functions that can be tricky to label as for-profit or charitable.

Ravenstahl expects the legal battle to extend into the next mayoral administration. He dropped out of the mayor's race last month.

The mayor acknowledged that he supports the efforts of SEIU to unionize UPMC employees but said the move was not politically motivated. He started to prepare the challenge while he was still running for mayor.

Wood said UPMC pays property tax on 51 percent of its properties.

“The challenge to UPMC's tax-exempt status appears to be based on the mistaken impression that a nonprofit organization must conduct its affairs in a way that pleases certain labor unions, certain favored businesses or particular political constituencies — in other words, the way that some local governments are also run,” Wood said.

Executives with 7-figure salaries

Ravenstahl applauded UPMC's $100 million commitment to the Pittsburgh Promise college scholarship program and the system's record of delivering “world-class health care.”

But he criticized UPMC's decisions to shutter underperforming UPMC Braddock, scale back operations at UPMC South Side and open UPMC East in Monroeville as evidence that it cares more about profit than serving residents of economically depressed communities.

“Their actions have given us no choice but to do what we're doing today,” he said. “Enough is enough.”

State Sen. Jim Ferlo, D-Highland Park, who joined Ravenstahl, said UPMC lavishes more than 20 of its executives with seven-figure salaries, including President and CEO Jeffrey Romoff, who received nearly $6 million in compensation in 2011. He made $4 million in 2010.

The lawsuit alleges the system does not meet the state's requirements to qualify as a “purely public charity,” in part because UPMC does not operate free of profit motive.

Ravenstahl said the city examined the business practices of other large nonprofits in the city, including Highmark, West Penn Allegheny Health System and Pittsburgh's universities, but determined UPMC was the only one acting as a for-profit, international corporation with interests that extend far beyond its hometown.

“This isn't about the charities that are operating on the neighborhood level or the churches or the folks that do neighborhood, community work,” Ravenstahl said. “I have the list of countries that UPMC now has expanded to. Let me read it off to you, and you tell me if this is a charity that the taxpayers of Allegheny County and Pittsburgh should be supporting. ... Places like Ireland, Italy, Great Britain, Qatar, Kazakhstan, Singapore, China, Japan and Cyprus. UPMC is in all those places; no other local nonprofits are in all those places.”

Leverage to extract payments

Raymond N. Baum, a lawyer who represents nonprofits at the law firm Pepper Hamilton, said it's unlikely Pittsburgh could win its case against UPMC outright. Instead, a judge would probably evaluate the tax-exempt status of each property and UPMC-owned corporation individually.

“UPMC is an incredibly complicated system,” Baum said. “You have to look at it corporation-by-corporation. Some hospitals may qualify for tax-exempt status, and some empty buildings it has, that no one noticed, don't qualify.”

The lawsuit and challenge provide leverage to extract payments in lieu of taxes, said Nicholas Cafardi, a Duquesne University law professor.

Cafardi noted UPMC makes such payments to Erie and South Fayette, where it has facilities.

“Maybe all the city wants is the same kind of deal UPMC has given to other communities,” Cafardi said.

Ravenstahl said his goal is not necessarily to have UPMC declared as a for-profit entity.

“My goal is to get them to act like a purely public charity,” he said.

Council President Darlene Harris said she wants for the city to receive at least a portion of the $20 million in estimated tax revenue.

“I'd like to just get the money they spend on TV commercials,” Harris said.

Justifying property tax privilege

Councilman Bill Peduto, who like Harris is running for mayor this year, said he would continue the challenge of UPMC's tax-exempt status if elected and likely expand it to include other large nonprofits in the city.

He said the city should investigate the tax-exempt status of other large medical facilities, insurers and universities.

All nonprofits in Allegheny County are working to comply with County Executive Rich Fitzgerald's directive that they justify their property tax exemptions. The county mailed 2,800 letters this month to nonprofits asking them to fill out forms for the Office of Property Assessments.

The nonprofits must fill out a three-page application and explain why the property meets a 2012 state Supreme Court decision that qualifies them for tax exemptions as public charities. The city is challenging UPMC's tax-exempt status under the same ruling.

The lawsuit states that UPMC donates less than 2 percent of revenues to needy patients; runs many operations as for-profit entities; engages in expensive advertising campaigns; has closed hospitals in low-income areas; and rents the “most expensive office space” in Pittsburgh in the U.S. Steel building for Romoff, who has access to “a private chef and dining room, chauffeur and private jet.”

Jeremy Boren and Bobby Kerlik are staff writers for Trib Total Media. Reach Boren at 412-320-7395or Reach Kerlik at 412-320-7886 or writer Bob Bauder contributed to this report.



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