One of Philly's worst tax deadbeats, SEPTA, to have $22M bill wiped from books

SEPTA owes the City of Philadelphia nearly $22 million in delinquent taxes on agency properties leased to private businesses, but the bad news for taxpayers: All that debt will soon be wiped from the books.

A new 30-year agreement between the transit agency and city goes into effect on July 1 and it absolves SEPTA of the requirement to make good on the delinquency, which came to light in data collected by an economist at Penn's Fels Institute of Government. Philly.com recently obtained the data.

Critics say the money could have been used to help not only city coffers, but also city schools.

Though SEPTA is generally tax-exempt because it's a nonprofit, the transit agency nonetheless built up the delinquencies in its role as a commercial landlord. According to a 2003 Pennsylvania Supreme Court ruling, SEPTA has been required to pay property taxes on the commercial portions of its real estate holdings. But records show it has not done so.

Most of the debt is centered on the underground concourses at Suburban Station, which houses several fast food restaurants and a thriving newsstand.

Asked last week why SEPTA had never paid the tax bill, Gerald Maier, SEPTA's real estate director, responded: "I thought we didn't have to."

It appears those funds will never be collected. On Tuesday, SEPTA's new agreement with the city will become permanent. The agreement, which took years to negotiate, stipulates that the city will forgive millions of dollars in back property taxes.

The new agreement also states that the city also will forgo all claims to future taxes.

In exchange, SEPTA will pay the city $100 and make improvements and upgrades to a number of Center City concourses, according to the agreement.

"If I ever get divorced, I want SEPTA's negotiator as my lawyer!" quipped Kevin C. Gillen, an economist and senior research consultant at the University of Pennsylvania's Fels Institute.

A spokeswoman for SEPTA said the deal was a good one for the city. The agency has promised to complete $53.5 million in renovations to the concourses, Jerri Williams said. SEPTA will replace two escalators at 15th Street and also take responsibility for cleaning the city-owned portions of the concourses, saving the city $1 million a year.

Gillen discovered tens of millions in uncollected money as he compiled a list of the city's biggest tax delinquents.

"We decided to take a look at just how concentrated all of the delinquencies might be," Gillen said. "After all, it's typically much easier to collect $10 million from one guy than $1 million from 10 guys."

He was surprised to find that some of the most delinquent real estate was owned by either SEPTA or the city itself.

Gillen said the city-owned delinquent properties were not concentrated with any one department or official, and that the problem was not the fault of any one mayoral administration.

"The primary mission of most of these agencies is something other than being a landlord," Gillen said. "As such, this appears to be a case of relatively benign bureaucratic oversight rather than one of deliberate mismanagement or corruption."

He also identified 40 delinquent properties that are owned by the city itself.

They include:

- A Chinatown parking lot that owes $2.5 million in delinquent taxes, according to the city's own records.

- The African American Museum that, according to the city, owes $971,000.

- A Wawa in the Northeast that owed $175,000 until it was paid off last week.

But by far, the largest deadbeat has been SEPTA.

Maier, the SEPTA real estate director, said previous owners of the transit agency's real estate empire, Amtrak and Conrail, were exempt from paying taxes to the City. He said an outside attorney for SEPTA rewrote a statute in 1993, adding a few words that inadvertently threw its full tax-exempt status in doubt.

"That has caused us nothing but grief ever since," Maier said.

At first, a Common Pleas judge in 1999 agreed that SEPTA should be exempt from real estate taxes. But the city appealed in 2000 to Commonwealth Court, which reversed the decision. The matter went all the way to the state Supreme Court where, in 2003, SEPTA lost again, Maier said.

Was the City supposed to be collecting taxes? In retrospect, Maier said, "I guess."

Could the City have demanded payment? "Probably," Maier said.

Officials gave conflicting opinions as to whether the city could collect.

"Those businesses are tenants and don't own real estate," said Rina Cutler, the veteran Deputy Mayor for Transportation and Utilities wrote in an email on Tuesday. "The owner is exempt from paying them. If someone wants to change the law, then that is a different question."

There is no need to write a new law, however. The Pa. Supreme Court's 2003 decision affirmed that SEPTA was required to collect and pay taxes on space it leased to private businesses.

"Very simply, SEPTA is acting as a commercial landlord, which is clearly distinct from acting as a 'metropolitan transportation authority,' " the Court opined. "Therefore, SEPTA property leased to commercial tenants is not immune from taxation."

According to SEPTA General Manager Joe Casey, SEPTA had a responsibility to taxpayers and riders to dispute the tax bill. He noted that the funds in dispute were used to maintain public transit services.

The deal stunned one of the top city school officials. By law, the lion's share of a city real estate tax -- 55 percent -- is supposed to go to the Philadelphia School District, which is financially distressed.

"They're waiving our right to [nearly] 60 percent of that money and that's problematic," said Bill Green, the former city councilman who currently heads the Philadelphia School Reform Commission.

If the city acted on the SEPTA delinquency, it would put $12 million into the school district's accounts.

"I'd be shocked if the city has the authority to waive the ability to collect," Green said.

"If there's money on the table that is collectible, [School District Superintendent] Dr. Hite could put it to good use."