An Acute Authority

June 4, 2007
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GRAND RAPIDS — Those outside of the hospital industry may not know that Kent County and the city of Grand Rapids directly impact the acute care given to patients here, and the influence both exert has nothing to do with employee coverage or retiree benefits.

The county and the city have made it possible for local hospitals to sell tax-exempt bonds to bankroll capital improvement projects and equipment purchases. Providers are able to do that via the Kent Hospital Finance Authority, a creation of the county and city, and do it for less than they could by going through the state.

"The Hospital Finance Authority exists for the benefit of the hospitals by giving them access to the tax-exempt-interest rate market. The authority issues the bonds and then enters into a contract with the hospital, whereby the hospital uses the money for the construction of facilities to benefit the community," said Robert White, County Fiscal Services director.

So when county commissioners recently authorized the authority to issue a bond package worth up to $470 million to Spectrum Health, they actually set in motion the construction of the new children's hospital planned for Michigan Street. Bond sales may also fund up to 11 other projects, purchases and refinancing goals the health care system has on its list.

"The county and the city have no financial risk in this, but they do have the risk of their good names," said White.

Even though the authority is the actual issuer of the bonds, it makes sure that taxpayers are held harmless should there be a default. It only offers the names of the county and city to let a hospital borrow money from buyers that favor tax-exempt securities.

Unlike the city and county building authorities, which are also issuing agents but use tax receipts to secure payments to bondholders, the hospital finance authority does not capture taxes, does not have access to tax dollars, and offers no collateral.

"It's declared right in the bond package that the city and the county pledge no resources to the bondholders. Bondholders only have cause of action against the Hospital Finance Authority, which essentially has no assets, and ultimately to the hospital," said White, who also directed finances at the city before he joined the county.

The authority has two revenue sources: the annual fee it charges hospitals for the service it provides, and the interest income it earns from those fees. The fees the authority collects are based on the amount of debt it is carrying for the hospitals.

The authority only collected $6,700 in fees in 2004. In 2005, though, the authority's fees totaled $108,192. But it spent almost all of that revenue on legal, audit and publication fees that were associated with packages it issued for Spectrum Health and Metro Health that year.

"In a year there is a bond issued; then the Kent Hospital Finance Authority retains an attorney to conduct the due diligence necessary on the part of the authority to authorize signing the document," said White.

More than $600 million worth of long-term debt remained outstanding last year from bonds the authority had issued since 1991. (See related chart.)

Local hospitals don't have to use the local authority to enter the tax-exempt bond market because the state also has one. But the Michigan State Hospital Finance Authority charges providers an additional fee the local authority doesn't. So it's less expensive for hospitals in the county to use the local body.

The latest package for Spectrum Health will likely have a 30-year term and is expected to go to market within the next 60 days. Proceeds will be directed to a variety of projects that include the new DeVos Children's Hospital, renovations and equipment for the Butterworth and Blodgett campuses, and the refinancing of two earlier packages. 

One is the $152 million 2005 Series A bonds that helped build the Fred and Lena Meijer Heart Center and paid for the expansion and renovation of United Memorial Hospital in Greenville. The other is the $27 million 1998 Series C bonds.

Because the authority will also issue the most recent bonds on behalf of United Memorial Hospital, which is part of the Spectrum Health system, commissioners in Montcalm County also have to authorize the securities. They held a public hearing on the matter last week..

Although the city and the county don't have a financial stake in the bonds the hospital finance authority issues, both carry some risk. A default would damage both because their good names in the fiscal marketplace are worth something to buyers.

"When retail bondholders see the name Kent Hospital Finance Authority, they're familiar with Kent County, at least to an extent. They know it's a conservative community that has sound finances that can be relied on to pay its debt. If any of those bonds went into default, we'd lose our good name," said White.

That good name has been around for 30 years, as the city and the county established the Kent Hospital Finance Authority in 1977. Each names four members to the authority, and county commissioners have to approve every action the board takes.

"It's another joint venture — a collaboration between the city and the county," said White of the authority. "We do work together quite often."


Outstanding Bond Aid

According to the latest audited financial statements from the Kent Hospital Finance Authority, the authority had $623 million in outstanding principal left on the tax-free bonds it has issued that haven't been refunded in advance.

Here are those bonds. 

Year

Hospital

  Issued Amount

Amount
   Outstanding 

  Bond Type 

2005   

Spectrum

$152,100,000

$152,100,000

Refunding

2005

Spectrum

$90,000,000

$90,000,000

Refunding

2005

Metropolitan   

$153,000,000

$153,000,000

Revenue

2005

Metropolitan

$30,000,000

$30,000,000

Revenue

2001

Spectrum

$100,000,000

$12,155,000

Revenue

2001

Spectrum

$45,000,000

$42,300,000

Revenue

2001

Pine Rest

$9,860,000

$5,945,000

Refunding

1998

Spectrum

$34,140,000

$20,605,000

Refunding

1998

Spectrum

$67,200,000

$67,200,000

Refunding

1998

Spectrum

$26,800,000

$26,800,000

Refunding

1993

Butterworth

$44,415,000

$22,900,000

Refunding

$752,515,000

$623,005,000

Note: Amount outstanding is as of Dec. 31, 2005.

Source: Michigan Department of Treasury, Kent Hospital Finance Authority, audited financial statement, 2006

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