Spectrum likely going to bond market
This week, Kent County Commissioners are expected to give the Kent Hospital Finance Authority permission to issue, sell and deliver up to $250 million worth of bonds on behalf of Spectrum Health. The county’s Finance Committee recommended last week that the board give the finance authority the green light to proceed after the authority approved the hospital’s request a week earlier.
The region’s largest health care provider plans to use $61.3 million from the bond proceeds to pay for its expansion of Blodgett Hospital at 1840 Wealthy St. SE, another $20 million to refinance the acquisition of a medical office building at 221 Michigan St. NE, and the rest to refund bonds from 2005 and 2008. A hospital spokeswoman told the Finance Committee that the two bonds have $160 million in outstanding debt coming due in July.
“To refund those bonds, we have to have the approval of this county and Montcalm County. There are no obligations to the county,” said Peter Lozicki, an attorney with Rhoades McKee PC, which represents Spectrum Health in the matter. He added that the hospital would be responsible if it defaulted on the bond payments.
Lozicki told the Business Journal that the issuance is a series of bonds with different terms. Some carry fixed-rate interest payments, while some have a variable rate.
County Commissioner Jim Saalfeld, who chairs the finance authority, said he was impressed with the presentation made by the hospital on its bond request.
According to the finance authority, Spectrum Health had outstanding bond debt from 1998, 2001, 2005 and 2008 as of Dec. 31. Three series were sold in 2008. In all, the bonds were initially valued at $637.8 million.
In year-ending financial statements, Spectrum Health Executive Vice President and CFO Michael Freed reported the hospital’s long-term debt was $798.6 million at the end of the last fiscal year, which came to a close June 30. Freed also said the long-term debt-to-capitalization ratio for the system that year was 44.2 percent, which was above Moody’s Investors Service’s Aa median of 2009 and consistent with the hospital’s financial plan. He said the Spectrum Health system had about $2.9 billion in total assets, which was up by $115.4 million from 2009. The hospital had an operating surplus of $41.2 million for the 2010 fiscal year.
Hospitals normally have two ways to pay for outstanding debt. One is to use depreciation charges that accumulate over a number of years and not incur financing costs and interest payments. The second method is to borrow to pay off previous debt, which is the route Spectrum has chosen. The advantage to borrowing now is that rates are low and, by going through the finance authority, the bonds are tax exempt.
“Spectrum has been able to fund its depreciation, so they do have reserves set aside that could be used to replace what they have rather than borrowing. But borrowing is a way of allowing them to get very low-cost money, which if they would use the interest on their reserves to help subsidize rates, (that) would be great,” said Lody Zwarensteyn, president of the Alliance for Health. “And our board policy says if you’re going to do that, please identify what it is you’re subsidizing so we can see how that’s working. That part has never been done — not that I know of — by Spectrum.”
Although the Alliance for Health helped establish the hospital finance authority, matters that come before the finance authority don’t go to the Alliance board, which wasn’t asked for an opinion on the bond request. “When we set it up, we set it up with the notion that sometimes hospitals have a hard time getting money and they need to get some low-cost money,” said Zwarensteyn.
The county’s Finance Committee also agreed last week to allocate up to $2 million of the fund balance to cover a shortfall that might pop up in the upcoming 2012 general operating budget.
“I think we need to avoid dipping into the reserves at all, if possible,” said Saalfeld.
County Administrator and Controller Daryl Delabbio said only a bit more than $13,000 was needed from the fund to balance the 2010 budget. The preliminary 2012 budget has a $6 million deficit.
The committee also approved funding the capital improvements budget at 0.2 mills after two years of funding it at 0.15 mills. The change should give the CIP budget a total of $4 million for 2012, or about $1 million more than the 2010 and 2011 budgets.
A designation of 0.2 mills is part of the county’s budgeting policy, but the commission decided not to follow it for the past two fiscal years.
“I think we need to keep this at 0.2 mills,” said Commissioner Roger Morgan. “My point is, we have an established policy and we need to stick to that policy.”