Pa. Supreme Court will weigh in on Pottstown Hospital property tax exemption

The Pennsylvania Supreme Court said Monday it will weigh in on to what extent nonprofit hospitals can reward executives for profits and still qualify for local property tax exemptions.

The issue rose out of a Commonwealth Court decision that denied a property tax exemption at Tower Health’s Pottstown Hospital because too much executive compensation was tied to financial performance.

The Supreme Court’s decision to take Tower Health’s appeal sets up an opportunity for the state’s top court to clarify a vague, nearly 40-year-old precedent that has governed how Pennsylvania nonprofits are allowed to financially incentivize executives while continuing to qualify for property tax exemptions.

In its petition to the high court, Tower Health said bonus plans are common in the nonprofit sector and described the practical effect of Commonwealth Court’s February decision as “a ban on all bonus plans that have any relation to an entity’s financial performance.”

Tower Health said in statement that it was pleased that its appeal will be heard. “We firmly believe that Pottstown Hospital’s commitment to its nonprofit mission is evident through charity care and the substantial community benefits it provides across the region it serves,” Tower said.

At stake for the school district and Pottstown Borough is a little over $1 million. “We anticipated that this might happen and are looking forward to a decision from the court that will get us close to a final resolution,” Pottstown School District spokesperson John Armato said in an interview.

It is significant that the top court accepted the appeal, said Carl S. Primavera, a senior partner at Philadelphia law firm Klehr Harrison Harvey Branzburg LLP who specializes in real estate but is not involved in this case.

“The Supreme Court must want to clarify the issue, so nonprofits are not confused or at risk of losing exemptions,” he said. “Look for some real clarity from the Supreme Court, regardless on how it actually rules on the merits of the appeal.”

» READ MORE: Do Philly-area hospitals give enough charity care? There’s no simple answer.

In health care, nonprofits say they need to make money in order to maintain their facilities, invest in technological advances, and expand services.

What’s not clear is how much emphasis nonprofit boards are allowed to put on profitability and other financial measures when crafting pay packages for their CEOs and other executives.

Commonwealth Court’s February decision overturned a ruling by Montgomery County Court Judge Jeffrey S. Saltz that Pottstown Hospital qualified for the exemptions, even as he described the pay of former CEO Clint Matthews ($2.25 million in 2018 and $2.4 million in 2019) as “eye-popping.” Saltz bemoaned the vague guidance offered by appeals courts.

» READ MORE: How CHOP paid its CEO a record $7.7 million in 2021.

Commonwealth Court Judge Christine Fizzano Cannon wrote in the February decision that Tower’s policy of tying 40% of the executives’ bonuses to the nonprofit hospitals’ financial performance was overly oriented toward profits.

That level of emphasis on financial results violated a Pennsylvania Supreme Court precedent established in 1985 that says a nonprofit must “operate entirely free from private profit motive” to qualify as a charity that is entitled to exemption from real estate taxes, Commonwealth Court found.

In granting Tower’s appeal, the Supreme Court said it will consider whether the lower court was wrong in its finding that “Pottstown Hospital LLC offered substantial executive compensation based upon the financial performance of the institution.”

The Pottstown case is significant because the last time the state Supreme Court heard a case involving nonprofit executive compensation was in 2000, according to a filing involving Tower Health facilities in Chester County. Commonwealth Court upheld a Chester County judge’s decision that Phoenixville Hospital did not qualify for a property tax exemption.

The Supreme Court has not yet said whether it will also accept Tower’s petition for appeal in that case.

A second question for the Supreme Court is whether Commonwealth Court erred in finding that executive pay and other financial factors at Tower Health, Pottstown Hospital’s corporate parent, disqualified the hospital from the exemption.

Tower said in its petition that Commonwealth Court’s focus on the corporate parent, as opposed to considering only financial incentives at the local hospital, violated standards in Pennsylvania case law that date to 1998. Since then, the state’s hospital industry has undergone a massive consolidation that has put most hospitals under control of corporate parents.