BILL ANALYSIS Ó
AB 975
Page A
Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 975 (Wieckowski) - As Amended: April 8, 2013
Majority vote. Fiscal committee.
SUBJECT : Health facilities community benefits: property tax
welfare exemption.
SUMMARY : Revises California's nonprofit community benefits
requirements, creates a definition of charity care, requires the
Office of Statewide Health Planning and Development (OSHPD) to
develop a standardized methodology for calculating community
benefits, and clarifies the scope of the property tax exemption
for hospitals, among other things. Specifically, the
tax-related provisions of this bill :
1)Create a rebuttable presumption that a hospital is organized
or is operated for profit if, during the immediately preceding
fiscal year (FY), the hospital's operating revenues, as
defined, exceed 10% of its operating expenses.
2)Define "operating expenses" to include depreciation based on
cost of replacement and amortization of, and interest on,
indebtedness.
3)State that the provision creating the rebuttable presumption
does not constitute a change in, and is declaratory of,
existing law.
EXISTING LAW :
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law and
limits the maximum amount of any ad valorem tax on real
property to 1% of full cash value.
2)Provides an exemption from taxation for property that is
irrevocably dedicated to religious, hospital, scientific, or
charitable purposes, if the property is (a) used for the
actual operation of the exempt activity, and (b) owned by a
AB 975
Page B
nonprofit entity qualified as an exempt organization by the
Internal Revenue Service (IRS), the Franchise Tax Board (FTB),
or both (the so-called 'welfare exemption') [Article XIII,
Section 4, of the California Constitution; Revenue and
Taxation Code (RT&C) Section 214]. The entity that owns the
property is prohibited from having any earnings that inure to
the benefit of any private shareholder or individual. This
welfare exemption has been expanded over the years to add
certain specific types of property that do not otherwise
qualify under the general exemption.
3)Contains, in statute, specific provisions enacted to apply the
requirement that the owner be nonprofit in the case of
hospitals. A conditional statement set forth in the negative
created a "safe harbor" for nonprofit hospitals concerned that
the operating expenses might not always equal or exceed
operating revenues, exclusive of gifts, endowments, and
grants-in-aid.
FISCAL EFFECT : According to the State Board of Equalization
(BOE) staff, this bill will have no impact on the General Fund
revenues because it is declaratory of existing law. However,
this bill would impact the BOE administrative practices and
would essentially require an annual review of certain nonprofit
hospitals. Thus, it may result in an unknown property tax
revenue increase if some hospitals find themselves unable to
show that they are nonprofit entities.
COMMENTS :
1)Author's Statement . The author provided the following
statement in support of this bill:
"In exchange for providing various community benefits, such as
charity case, California's private nonprofit hospitals are
eligible for certain tax exemptions due to their nonprofit
status. AB 975 will create a standard definition of charity
care that includes a refined definition of community benefits
for nonprofits hospitals. This bill will clarify California
law stating that hospitals and multispecialty clinics with
operating revenues that exceed 10% of operating expenses are
for-profit entities. The bill will clearly define what
constitutes charity care, which must be a direct provision of
care, not promotional activities or cost containment, as
currently provided within the guidelines of "community
benefit." Additionally, charity care obligation, with
AB 975
Page C
rigorous financial penalties for hospitals that fail to meet
reporting requirements.
"This bill aims to improve the accountability and transparency
of California's non-profit hospitals to make sure the level of
charity care claimed is matched by the services provided. Our
underinsured and uninsured families need access to this care
in their communities. These minimum standards and greater
community input will advance health care services where they
are most needed among the underserved."
2)Arguments in Support . The sponsor states that this bill seeks
to define charity care for nonprofit hospitals and refine what
is considered "community benefits" to ensure that California's
nonprofit hospitals are fulfilling their mission statements
and providing community benefits in exchange for their
tax-exempt status. According to the sponsor, many of
California's non-profit hospitals generate huge profits, in
part by exploiting their tax exempt status at public expense.
The goal of AB 975 is "to end the questionable
characterization of certain expenditures as charity care and
community benefits." The sponsor states that, during the most
recent year for which complete data is available, half of
California nonprofit hospitals provided a mere 2.46% or less
of their operating expenses on charity care, well below the
one time federal standard of 5% needed to maintain tax exempt
status. The proponents add that AB 975 "seeks to ensure that
nonprofit hospitals are fulfilling their mission by defining
charity care? and by creating a rebuttable presumption that
hospitals and multispecialty clinics with revenue over 10% of
their operating expenses during the preceding fiscal year are
for-profit entities."
The proponents also argue that AB 975 creates "a transparent
process to evaluate the tax breaks given to private nonprofit
hospitals." The performance and reporting requirements in this
bill "provide a model for other tax breaks to make them more
transparent, effective, and accountable to the public and the
state." The proponents conclude that "the existing property
tax exemption for health facilities bear little relationship
to the level of charity care they provide," and that
"California's counties, cities, and special districts, like
fire districts, rely on tax revenue to fund critical public
services to the communities they serve."
AB 975
Page D
3)Arguments in Opposition . The opponents argue that this bill
would impose a new and unrealistic definition of charity care,
creating a "guilty until proven innocent" burden on hospitals
that report an operating margin over 10%. The opponents claim
this bill inappropriately changes the basis for a nonprofit
hospital's nonprofit status, and that the rebuttable
presumption will prove to be extremely unclear and will
subject non-profit hospitals to varying interpretations as to
whether the hospital has met its burden of proof. The
opponents point out that this bill is intended to challenge a
hospital's property tax exemption, if it has a healthy
operating margin, but it fails to recognize the fact that
current law requires that all of that margin must be
reinvested into the hospital's charitable and public service
activities. They believe that it is irrelevant whether "a
non-profit hospital's operating margin is 1% or 11% - as long
as all of those funds are used for the exempt activity."
Thus, existing law already holds nonprofit hospitals
accountable and requires full transparency by those hospitals.
Finally, the opponents question the need for AB 975 since
recent regulations promulgated by the IRS impose extensive
additional community benefit reporting requirements for
not-for-profit entities, as a result of the Affordable Care
Act.
4)The Welfare Exemption: Background . The California
Constitution provides that all property is taxable, unless
explicitly exempted by the Constitution or federal law. The
Constitution limits the maximum amount of any ad valorem tax
on real property to 1% of full cash value, plus any
locally-authorized bonded indebtedness. Assessors reappraise
property whenever it is purchased, newly constructed, or when
ownership changes.
The California Constitution allows the Legislature to establish
a property tax exemption for property (a) exclusively used for
religious, hospital, or charitable purposes, (b) owned by
nonprofit entities organized and operated for charitable
purposes, and (c) no part of whose net earnings inures to the
benefit of any private shareholder or individual. [California
Constitution, Article XIII, Section (4)(b)]. This exemption,
commonly known as the "welfare exemption," was adopted by the
voters as a constitutional amendment on November 7, 1944. The
Constitution also specifies that the exemption, if authorized,
must apply to buildings under construction, the land on which
AB 975
Page E
the buildings are situated, and equipment in the buildings if
their intended use is exclusively for exempt purposes.
(California Constitution, Article XIII, Section 5). In 1945,
the Legislature enacted the exemption, providing that a
qualifying nonprofit organization's property may be exempted
fully or partially from property taxes, depending on how much
of the property is used for qualified purposes and activities.
(R&TC Section 214). The rationale for the welfare exemption
is that "the exempt property is being used either to provide a
government-like service or to accomplish some desired social
objective." (Rideout Hospital Foundation, Inc. v. County of
Yuba (1992) 8 Cal.App.4th 214, 219, citing Ehrman & Flavin,
Taxing Cal. Property (3d ed. 1989) Exempt Property, §6.05, p.
9).
5)The Application of the Welfare Exemption to Nonprofit
Hospitals . Over the years, the scope of the welfare exemption
has been gradually expanded. In 1953, the Legislature
clarified the application of the welfare exemption to
non-profit hospitals. As originally enacted in 1945, the law
provided that, in order to qualify for the exemption, the
property could not be used or operated for profit regardless
of the purposes to which the profit is devoted. In
interpreting this provision, the California Supreme Court held
that a non-profit hospital was not eligible for the welfare
exemption because the hospital intentionally earned an 8%
income surplus over expenses, even if the surplus was used for
debt retirement and facility expansion. Sutter Hospital v.
City of Sacramento (1952) 39 Cal.2d 33.
In response to the court's decision in Sutter Hospital, the
Legislature expanded the scope of R&TC Section 214, which sets
forth numerous qualifying conditions for receiving the
exemption, to include a "safe harbor" provision for nonprofit
hospitals, authorizing a qualified nonprofit hospital to make
an annual profit of 10% or less. Specifically, the new
provision stated that, an otherwise qualified nonprofit
hospital is eligible for the welfare exemption if, during the
immediately preceding FY, its revenues did not exceed its
operating expenses by more than 10%. For purposes of
calculating the 10% threshold, gifts, endowments and
grants-in-aid are excluded from operating revenues, and
operating expenses include depreciation based on cost of
replacement and amortization of, and interest on, indebtedness
including (AB 1023, Chapter 730, Statutes of 1953).
AB 975
Page F
In addition to revising RT&C Section 214, the Legislature has
expressly declared its intent that a Section 214 organization
"could rightfully use the income from the property devoted to
the exempt activity for the purposes of debt retirement,
expansion of plant and facilities or reserve for operating
contingencies without losing the tax exempt status of its
property." (AB 1023). However, the legislative intent was
included in an urgency clause language and was not codified.
Thus, under current law, a hospital whose operating income
doesn't exceed operating expenses by more than 10% is
automatically considered to be a non-profit organization,
assuming all other applicable requirements are satisfied. The
statute itself, however, is silent with respect to the
nonprofit status of hospitals whose revenues exceeded
operating expenses by more than 10%. The issue was resolved
by the Court of Appeal in 1992 Rideout Hospital Foundation,
Inc. v. County of Yuba (1992) 8 Cal.App.4th 214. The court
held that the hospital's failure to meet the statutory 10%
"safe harbor" threshold did not mean the hospital could not
qualify for the welfare exemption. In dicta, the court
stated, "This is not to say that a nonprofit can earn any
amount above 10 percent and still qualify for the welfare
exemption. The hospital must show that indeed it is not
organized or operated for profit and that it meets all of the
other conditions in section 214." The court explained that
the burden for the hospital to prove it is not organized for
profit when the operating revenues exceed the 10% safe harbor
is clearly within the intent of the current law. It further
stated, "Rather, the nonprofit hospital earning over 10
percent is outside the clear guideline offered by section
214(a)(1) and thereby subject to an increased scrutiny by tax
authorities and an increased burden in showing it is not
organized or operated for profit. Such a nonprofit hospital
is no longer "deemed" to meet the condition of section
214(a)(1). In short, the proviso of section 214(a)(1)
provides no protection for the nonprofit hospital earning over
10 percent; that hospital must prove it is not organized or
operated for profit under the general rule of section
214(a)(1). "
Therefore, according to case law, if a hospital's operating
income does exceed its operating expenses by more than 10%,
the hospital may still receive the property tax exemption,
AB 975
Page G
provided that the excess is used for debt retirement,
expansion of plant and facilities or as a reserve for
operating contingences. The hospital, however, has a burden
of showing it is not organized or operated for profit.
6)BOE Review of Tax-Exempt Hospitals . Both the State BOE and
county assessors administer the welfare exemption. The BOE is
charged with determining whether an organization is eligible
for the exemption and the county assessor must decide whether
the property of a qualifying organization is eligible for the
exemption based on the property's use. Once the BOE
determines that an organization qualifies for the exemption,
it issues an Organizational Clearance Certificate for Welfare
or Veterans' Organization Exemption (OCC). The OCC remains
valid until the BOE finds that the organization no longer
meets the applicable requirements and revokes the OCC. For FY
2010-11, the BOE reported that exempt assessed value of
hospitals was $30.9 billion statewide.
To verify that an organization continues to meet the
requirements outlined in R&TC Section 214, the BOE may require
the organization holding an OCC to file a periodic claim form.
In addition, BOE may examine the organization's formative
documents, verify current tax exemption status with the IRS
and FTB, review California Secretary of State information for
current status, and review activity information to ensure that
the organization's activities are consistent with the stated
purpose of the organization.
In 2005, in response to increased public inquiries and media
coverage, the BOE initiated a review of all hospital
organizations. (See Letter written by Ms. Betty Yee, BOE
Vice-Chairwoman to Mr. David Gau, BOE Deputy Director, 2008).
The BOE report released in May 2006 found that all hospital
organizations holding OCCs continued to meet the requirements
for the welfare exemption. The BOE staff discovered 15
hospitals with operating revenues exceeding their operating
expenses by 10% or more.<1> However, the BOE staff's analysis
of those organizations' surplus revenues disclosed that the
surplus was used for one or more allowable purposes, as
specified by the Court of Appeal in Rideout.
---------------------------
<1> Review of Hospital Organizations Holding Organizational
Clearance Certificates as to Qualification for the Welfare
Exemption, BOE report, May 26, 2006.
AB 975
Page H
Furthermore, in 2007, in response to the unfavorable report
released by the Bureau of State Audits<2>, the BOE decided to
incorporate additional steps in its review of county
assessment practices to ensure proper classification of
exempted property.
In 2009, the BOE again initiated a review of nonprofit hospital
organizations qualified for the welfare exemption. The report
was completed in 2012 and was released on March 30, 2012.<3>
The BOE staff reviewed 174 organizations from 2005 until 2008,
and found 24 organizations that had "surplus revenues."
However, all of the 24 organizations used the surplus for
allowable purposes, including debt retirement, expansion of
plant and facilities, and reserve for operating cost
contingencies.
7)IRS Regulations and Form 990 . Under federal law, a nonprofit
hospital may qualify for tax-exempt status under Internal
Revenue Code (IRC) Section 501(c)(3) if it is organized and
operated exclusively for charitable purposes. Prior to 1969,
nonprofit hospitals, as a condition of their tax-exempt
status, were expected to furnish uncompensated care to persons
unable to pay. In 1969, this obligation was expanded to
incorporate "community benefits." Examples of community
benefits include not only free or reduced-cost care, but also
maintaining an emergency room open to all persons regardless
of their ability to pay, health promotion activities,
research, and education and training.
In 2008, the IRS revised Form 990, which is used as the primary
compliance tool for tax-exempt organizations. The new form
includes additional schedules specific to the organization's
types of activities. Nonprofit hospitals are required to fill
out Schedule H to report the benefits they provide, such as
for example, charity care, means-tested government programs,
or other activities that promote the health of communities.
Nonprofit hospitals are also required to report their bad debt
---------------------------
<2>Nonprofit Hospitals: Inconsistent Data Obscure the Economic
Value of Their Benefit to Communities, and the Franchise Tax
Board Could More Closely Monitor Their Tax-Exempt Status,
2007-107, December 2007.
<3> Review of Organizational Clearance Certificate Holders -
Nonprofit Hospital Organizations, County-Assessed Properties
Division, Property and Special Taxes Department, BOE, March 30,
2012.
AB 975
Page I
expenses and Medicare shortfalls, which are not counted as
community benefits.
In 2010, Section 9007 of the Affordable Care Act (ACA) imposed
new obligations on hospitals as a condition of tax-exempt
status under §501(c)(3). The new provisions require nonprofit
hospitals to conduct a community health needs assessment at
least every three years, implement financial assistance
policies and comply with new federal standards related to
charges and billing and collection practices. The ACA also
include new reporting requirement for these hospitals.
8)Does This Bill Change the Current Interpretation of the
Welfare Exemption as It Applies to Non-profit Hospitals ? As
discussed, current law allows hospitals with "excess earning"
to continue claiming the property tax exemption, if the earnings
are used for certain specified purposes. This law is
comprised of the statute, uncodified language, and case law.
The statute, RT&C Section 214(a)(1), establishes a "safe
harbor" for hospitals earning 10% or less in surplus revenues.
It expressly provides a clear guideline by which otherwise
eligible nonprofit hospitals "can deliberately design surplus
revenues and not risk losing their tax exempt status."
Rideout, at p. 225. The uncodified section of the amending
statute (AB 1023, Chapter 730, Statutes of 1953) outlines
permissible uses of the excess earnings, such as debt
repayment, expansion of facilities or maintenance of
contingency reserves. Finally, the case law, based on the
uncodified legislation, allows a nonprofit hospital earning
over the 10% threshold an opportunity to affirmatively prove
that it is not organized or operating for profit under the
general rule of R&TC Section 214(a)(1). AB 975 codifies case
law by creating a rebuttable presumption that a nonprofit
hospital is deemed to be organized and operating for profit if
it does not fall within the "safe harbor" rule.
9)A Rebuttable Presumption. A presumption is "an assumption of
fact that the law requires to be made from another fact or
group of facts found or otherwise established in the action."
[Evidence Code (EC) Section 600). Put differently,
presumptions "are conclusions that the law requires to be
drawn (in the absence of a sufficient contrary showing) when
some other fact is proved or otherwise established in the
action." (Assembly Committee on Judiciary, com. on AB 333
(1965 Regular Session) [enacting EC] reprinted at 29B pt. 2,
AB 975
Page J
West's Annotated EC (1995 ed.) foll. § 600, p. 3.)
Generally, there are two distinct kinds of rebuttable
presumptions in California law: presumptions affecting the
burden of producing evidence and presumptions affecting the
burden of proof. [EC Section 601; Pellerin v. Kern County
Employees' Retirement Assn. (2006) 145 Cal.App.4th 1099,
1106]. As explained by the court in Farr v. County of Nevada,
"[a] rebuttable presumption affecting the burden of producing
evidence is merely a preliminary assumption in the absence of
contrary evidence, i.e., evidence sufficient to sustain a
finding of the nonexistence of the presumed fact." [Farr v.
County of Nevada, 187 Cal.App.4th 669, citing Assembly
Committee on Judiciary, com., reprinted at 29B pt. 2 West's
Annotated EC (1995 ed.) foll. Section 604, p. 59]. In
contrast, a presumption affecting the burden of proof has "a
more substantial impact in determining the outcome of
litigation." (Ibid.). The effect of a presumption affecting
the burden of proof is to impose upon the party against whom
it operates the burden of proving the nonexistence of the
presumed fact. (EC Section 606). In other words, it imposes
"an affirmative obligation to prove it false by a
preponderance of the evidence, unless a different standard of
proof is required by law." (EC Sections 115 and 606; Pellerin
v. Kern County Employees' Retirement Assn., 145 Cal.App.4th
at p.1106). The burden of proof and the burden of producing
evidence initially coincide [EC Section 550(b)]; so "it may
fairly be said a presumption affecting the burden of proof
initially places on the same party the burden of producing
evidence." (Farr v. County of Nevada, 187 Cal.App.4th at p.
682). However, while the burden of producing evidence, once
met, may shift between the parties, the burden of proof
remains with the party on which it is placed by law. [Ibid.;
Tusher v. Garbielsen (1998) 68 Cal.App.4th 131, 145)].
It has long been established that an institution claiming an
exemption from property tax has the burden of demonstrating
its exempt status and proving its entitlement. [Chesney v.
Byram (1940) 15 Cal.2d 460, Attorney General Opinion 79-508
(1979)]. The Legislature relieved from this burden certain
eligible nonprofit hospitals that meet the 10% safe harbor
provision. However, consistent with the Rideout decision, all
other nonprofit hospitals still have the burden of
demonstrating they are not operating for profit. Thus, a
hospital claiming an exemption from property tax under the
AB 975
Page K
welfare exemption already must overcome a preliminary
assumption of not qualifying for the exemption, and must
introduces evidence "sufficient to sustain a finding of the
nonexistence of the presumed fact."
10)The Community Benefits and Charity Care Requirement . AB 975
states that nonprofit hospitals and multispecialty clinics
have a social obligation to provide community benefits and
charity care in exchange for favorable tax treatment by the
government. However, as pointed out by the BOE staff, there
is no requirement in current law or this bill for hospitals to
provide charity care or a certain level of community benefits
in order to receive the welfare exemption. If the intent of
this bill is to make provision of charity care and community
benefits a condition of qualifying for the welfare exemption,
the author may wish to amend AB 975to establish such a
requirement.
12)Does This Bill Jeopardize the Tax-Exempt Status of a
Nonprofit Hospital ? The welfare exemption under consideration
is granted on an annual basis, based in part upon on a
nonprofit hospital's ratio of its operating expenses to
operating revenues during the preceding year. This bill does
not create a permanent exclusion from the welfare exemption as
the result of one-year's results of operating revenues and
operating expenses. Nor does this bill have any impact on the
hospital's tax-exempt status for purposes of federal or state
income tax laws.
13)Would this Bill Change the BOE Administrative Practices ?
Under its administrative practices, the BOE does not annually
review organizations that hold a BOE-issued OCC. According to
BOE staff, AB 975 would change the BOE's review process
because it will require BOE to determine, on an annual basis,
whether nonprofit hospitals have surplus revenues and whether
they still qualify for the welfare exemption.
14)Related Legislation .
SB 610 (Alarcon), introduced in the 2005-06 legislative session,
would have established an identical rebuttable presumption and
would have deleted the safe harbor provision. SB 610 was
vetoed by Governor Schwarzenegger.
AB 1614 (Klehs), introduced in the 2005-06 legislative session,
AB 975
Page L
is similar to this bill. AB 1614 was gutted and amended.
15)Double-Referral . This bill is double-referred with the
Assembly on Health. AB 1422 passed out of that Committee on a
12-7 vote.
REGISTERED SUPPORT / OPPOSITION :
Support
California Nurses Association
California Labor Federation
California Professional Firefighters
California Federation of Teachers
California School Employees Association
Consumer Federation of California
Greenlining Institute
Health Access
Opposition
Adventist Health
California Chamber of Commerce
California Hospital Association
California Right to Life Committee, Inc.
Dignity Care
Kaiser Permanente
Loma Linda University Medical Center
Private Essential Access Community Hospitals
Providence Little Company of Mary Medical Center - Torrance
Stanford Hospital and Clinics
SEIU-UHW
Scripps Health
The Alliance of Catholic Health Care
The Torrance Area Chamber of Commerce
Torrance memorial Medical Center - Torrance
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098