The Nov. 10 agreement between the town of Morristown, N.J., and Atlantic Health System on Morristown Medical Center property tax appeals could have a "ripple effect" for no-for-profit hospitals across the U.S., according to Moody's Investors Service.
AHS agreed to pay Morristown $15.5 million to settle outstanding tax appeals from 2006 to 2008, ending a longstanding dispute. In July, a New Jersey Tax Court ruled that most of the Morristown Medical Center campus did not qualify for local property tax exemption for the years 2006-2008 because its operations did not meet certain criteria established by state law. A key aspect for the violation was independent physicians in private practice utilizing the facility to earn income, according to the court ruling.
"The exemption from property tax payments and the provision of charity care and community benefits are foundational elements of a not-for-profit hospital's tax-exempt status," said Moody's analysts Kevin B. Connolly and David Strungis in a Nov. 18 report. "The Tax Court ruling and the medical center's agreement to pay historical and future property taxes may have a ripple effect for other not-for-profit organizations, some of which may not be able to afford such payment."
Moody's said the settlement is credit neutral for AHS since "it can easily absorb the costs given its size and liquidity." The system had $1.1 billion in cash and investments as of June 30, 2015 with a cash to debt ratio of 165%. AHS is rated A1 with a stable outlook by Moody's.
As part of the agreement, AHS will pay $10 million up front to Morristown and $5.5 million of penalties and interest in annual installments over the next 10 years. The health system will also pay annual taxes in 2016 through 2025 on roughly 24% of its property at an assessed value of $40 million.
The payments represent 41.5% of Morristown's 2015 general revenues and are a credit positive for the Aa3-rated town, according to Moody's. Annual tax payments will account for around $1.05 million or 2.6% of the town's 2015 budgeted revenues.
"The agreement establishes a payment framework for the medical center's taxability through 2025," said Connolly and Strungis. "This payment is substantial windfall for the town."
