STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Meeting March 27, 2000 The State of Connecticut Health and Educational Facilities Authority met in session at the Authority s office at 10 Columbus Boulevard, Hartford, Connecticut at 2:00 p.m. on Monday, March 27, 2000. The meeting was called to order by John A. Barone, Vice-Chair of the Board of Directors of the Authority, and, upon roll call, those present and absent were as follows: PRESENT: ABSENT: ALSO PRESENT: John A. Barone, Vice-Chairman William J. Cibes, Jr. Benson R. Cohn (Rep. Marc S. Ryan) Patrick A. Colangelo H. Bart Price Leslie O Brien (Rep. Denise L. Nappier) James R. Birle Phyllis C. DeLeo Barbara Rubin Laurence R. Smith, Jr. Richard D. Gray, Executive Director, David A. Williams, Managing Director, Diana Hughes, Accounting Manager, Eileen MacDonald, Manager, Administrative Services, Michael Morris, Manager, New Business, Andrea Howell, Administrative Assistant, Cynthia D. Peoples H., Financial Analyst, and Jennifer P. Smyth, Document Analyst, of the Connecticut Health and Educational Facilities Authority John D. Yarbrough, Esq., of Carmody & Torrance Namita Shah, of Day, Berry & Howard J. Hanson Guest, Esq., of Guest & Savage Laurie Hall, Esq., of Hawkins, Delafield & Wood Robert Lamb, President, of Lamont Financial Services Corp. Bernadette M. Puleo, Managing Director, of P.G. Corbin & Company, Inc. Stephanie Gibson, Managing Director, of Public Financial Management David M. Panico, Esq., of Robinson & Cole LLP Coleman H. Casey, Esq., of Shipman & Goodwin LLP Eric P. Taylor, Esq., of Whitman Breed Abbott & Morgan The Notice of Regular Meeting was read and ordered spread upon the Minutes of this Meeting and filed for the record.
BOARD OF DIRECTORS MEETING March 27, 2000 The Meeting was called to order by Dr. Barone, Vice-Chair, at 2:00 p.m. MINUTES Upon motion duly moved and seconded, the Minutes of the Regular Meeting of February 28, 2000 were unanimously approved. CURRENT AND PENDING BOND ISSUES Mr. Morris reported on the Financing Forecast. Hartford Hospital will be presented today for a reapproval. Waveny Care Center has withdrawn their application, stating that the costs of issuance were greater than other alternatives they have reviewed. They are financing their project through the New Canaan housing authority. Waveny has also received $7 million in donations, which exceeded their expectation of $3 million. A new application has been received from the Academy of Our Lady of Mercy for a $3.5 million deal for construction of an athletic facility. Allied Irish Bank will provide a letter of credit, and the Sisters of Mercy will provide a guaranty to the Bank. Kingswood-Oxford School has come forward for an additional $10 million for construction of a new middle school and science and technology center. This new issue will be insured or backed by a letter of credit. A preliminary memo for the Rectory School issue will be presented at today s meeting. A preliminary memo for the third child care pool will be presented at the April Board meeting for approximately $8 million and including 5 facilities. There are 2 new EasyLease financings for Charlotte Hungerford Hospital ($1.1 million, and the University of Bridgeport ($2.7 million). The report was accepted as information. INTEREST RATE UPDATE Mr. Williams presented a report on current interest rates. Long-term rates are down approximately 20 basis points since the last report at the February 28 meeting. Short term rates are up one-quarter, with the Prime Rate now at nine percent. This increase coincides with the fifth increase from the Fed, of which the last two increases are indication of the current state of the economy. Connecticut General Obligation taxexempt 10 and 30-year rates are down 20 basis points each, but one-year rates are up. The 30-day visible supply rationally is in the middle range, indicating fairly stable conditions. Minutes of the Board of Directors Meeting March 27, 2000 1
SALES REPORT Ms. Puleo presented the sales report for the Gaylord Hospital Series A financing that sold on February 18. The $13 million issue was structured as a 20-year, variable rate transaction, with weekly rate resets. The Series A bonds were rated A+/A1 based on the letter of credit provider, BankBoston. Initial rate set for the bonds was 3.70%, and True Interest Cost achieved was 3.55%. At the time of the pre-pricing, the industry benchmark index ( BMA ) for weekly floaters was set at 3.84%. The underwriters considered the current rate set for another CHEFA issue, reset at 3.75%, when determining the initial pricing level set at 3.70% for Gaylord. Investor interest exceeded the supply of bonds for this issue, which indicates the good credit of the Hospital. The result of this aggressive pricing was an overall lower cost of borrowing for the institution. PRELIMINARY STAFF MEMORANDUM The Rectory School, Series A Mr. Morris presented the preliminary memo for the Rectory School, which is a private boarding school for boys, and day school for boys and girls in grades five through nine. This $7.2 million project is the School s first CHEFA issue; the School currently has no long-term debt. The transaction will have a variable rate structure, and will be supported by a direct pay letter of credit from Allied Irish Bank for a term of five years at 75 basis points. The bonds will carry the ratings of Allied Irish, which are Aa3/A+ from Moody s and S&P, respectively (short-term ratings are P-1/A-1). Security provisions include a negative pledge and a gross tuition pledge. Staff will seek Board approval at the May 22 meeting. Projects financed with the Series A funds include $3.3 million for renovations to the Arts Center; $2.2 million for construction of a new dining hall; $0.9 million for renovations to the library; and $0.7 million for a new maintenance facility and boiler. The dining hall and maintenance facility are in the initial planning stages, and may not be included in the financing. Rectory, located in Pomfret, was founded in 1920 and serves a student population with learning disabilities, including those with specific needs. Total enrollment for the 1999 2000 school year is 190, 126 boarding students, 64 day. The School s focus is individualized instruction, and student to faculty ratio is four to one. Approximately 70% of students receive one-on-one instruction. Ninety per cent of students are accepted to the secondary school of their first choice. Student demand has increased over the last for years as shown in application received. Geographic distribution is good, derived from 29 states and 11 countries. Rectory has shown bottom line surpluses for the past four years, and expendable resources to debt is 133%; expendable resources to operations is 244%. Net tuition for FY 1999 is favorable at 53%. Endowment has increased 43%, from $6.0 million to $8.5 million, with $3.7 million of funds unrestricted. Minutes of the Board of Directors Meeting March 27, 2000 2
A brief discussion followed the presentation, with a request for additional information on Allied Irish Bank. Mr. Morris stated that he will include this information, and possibly a report of the success with the Ethel Walker School which also carries a letter of credit from Allied. The Bank is active in small schools in Rhode Island and New York, usually with a religious affiliation. CONSENT AND BOND ISSUE AUTHORIZATION RESOLUTIONS Taft School Issue, Series E The staff memo for the Taft School Series E Issue was presented by Mr. Morris. There have been no material changes from the preliminary information presented at last month s meeting. The $12 million issue will be a variable rate issue backed by a letter of credit from First Union at a rate of 35 basis points. First Union is rated Aa3 and A+. Taft currently has a rating of AA- by Standard & Poor s and A1 from Moody s; both will issue new ratings with the issuance of the Series E bonds. There being no questions from members, the Vice-Chair then introduced Resolution 2000-05 (The Taft School Issue, Series E, Authorizing), which Resolution was read and considered. Dr. Cibes moved adoption of Resolution No. 2000-05, which motion was seconded by Mr. Cohn. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John A. Barone None None William J. Cibes, Jr. Benson R. Cohn Patrick A. Colangelo Leslie O Brien H. Bart Price The Vice-Chair then declared Resolution 2000-05 adopted (see Appendix A, Resolution 2000-05). Hartford Hospital Issue, Series B Re-Approval Mr. Morris gave the presentation for the Hartford Hospital staff memo. The Series B issue was previously approved in July 1999, but the components of the project have changed. Staff is therefore seeking reapproval for the change in projects and increase in the transaction from $30.0 million to $33.0 million. Midstate Medical Center (Veterans Memorial) will be included as a borrower in the pooled bond issue. Fleet Bank will provide the a 7-year letter of credit at 30 basis points, and a remarketing fee of 7.5 basis points. Hartford Hospital will be the only obligor to the Reimbursement Agreement and Fleet is relying solely on the credit the credit of Hartford Hospital. Minutes of the Board of Directors Meeting March 27, 2000 3
Projects for Hartford Hospital included a $10 million assisted living project located in Newington with 34 assisted living units and 44 independent living units; the balance of funds will be used as part of the recycle program. Midstate Medical Center will use $500,000 for expansion of the Emergency Department. Hartford Hospital currently has no long-term debt other than a contingent liability for the $70,000 Veterans Memorial Medical Center Series A issue. The $30 million of proposed projects is small in comparison to the Hospital s $250.0 million in board designated and unrestricted funds available. Cash and board designated funds have decreased from $256.2 million in FY 1998 to $234.8 million in FY 1999, and were at $220.7 million as of January 2000. The Hospital reported a loss from operations in FY 1999 of $6.8 million, and a loss of $4.5 million is expected for FY 2000. However, proforma debt service coverage averages forty-six times over the four years ended FY 1999. There being no questions from members, the Vice-Chair then introduced Resolution 2000-06 (Hartford Hospital Issue, Series B, Authorizing), which Resolution was read and considered. Dr. Cibes moved adoption of Resolution No. 2000-06, which motion was seconded by Mr. Cohn. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John A. Barone None None William J. Cibes, Jr. Benson R. Cohn Patrick A. Colangelo Leslie O Brien H. Bart Price The Vice-Chair then declared Resolution 2000-06 adopted (see Appendix A, Resolution 2000-06. OTHER REPORTS Summary Update of Twelve Month Nursing Home Report Mr. Williams provided a summary of the twelve month nursing home report, at the request of Dr. Barone. A full presentation will be made at the April Board meeting. Mr. Williams stated that the largest factor affecting the nursing home industry in FY 1999 was the Medicare Prospective Payment System ( PPS ), which has an all-inclusive fixed price per diem rate based on the severity of the case. This payment system has created major problems in some facilities and had a modest impact in others, depending in part on the importance of ancillary profits to the facility. The second important factor in Connecticut was the $75 million wage benefit and staff enhancement program which was implemented in June 1999, which added between $7 to $14 per patient day to the Minutes of the Board of Directors Meeting March 27, 2000 4
Medicaid rates, in addition to the 3% budgeted rate increase. Basic Medicaid rates increased by a maximum of 3% in 1999, and are scheduled to rise 2% in 2000. The Connecticut program allowed facilities that were experiencing a nursing shortage and pressures on the lower wage staff level to provide competitive salaries. There were also much union activity in FY1999, with at least 13 nursing homes involved in strike situations. Many facilities continue to experience a decline in private pay census, due to the development of alternative living options, such as assisted living, other forms of independent living and home care. Families caring for the elderly have become more proactive in seeking Medicaid coverage for those relatives needing assistance. Another issue affecting the industry was heavy debt loads, which DSS indicates was a factor in the bankruptcies shown in the report. Thirty-five Connecticut facilities with 4,541 beds are currently in bankruptcy. This is approximately 12.5% of the nursing home total bed count for the state. If the AHF facilities were added to this number, the percentage would be in the range of 14.7%. Most of the facilities listed in the bankruptcy section are from interstate operations, with high debt loads, and were also affected by the impact Medicare PPS on ancillary profits that supported the groups. A nursing home financial advisory committee was legislated in 1998, and has been activated by DSS this year. Rich Gray is a member, and Jeff Asher has been attending the meetings. The committee is developing recommendations to the legislature to address the problems facing the nursing home industry. Mr. Williams reviewed six facilities, four SCRF and two non-scrf facilities which face continuing challenges. Discussion followed the presentation, and staff was asked if there are any nursing home financings that will be coming up for Board review. Mr. Williams mentioned that the Tolland County health Care refinancing as part of ECHN had just closed. Tolland County had been the last unenhanced nursing home of CHEFA s portfolio. Mr. Gray stated that, in light of industry constraints, CHEFA is not actively seeking nursing home business. CHEFA s efforts in this line of business at present is compliance monitoring. If an institution with proper credit criteria approached CHEFA for financing, the issue would be appropriately reviewed. Discussion continued regarding the Authority s underwriting guidelines, and whether they are adequate. Mr. Gray stated that the more stringent underwriting criteria used for SCRF issues would be applied, should a new financing be considered at CHEFA. Also, the Debt Service Coverage ratios in the existing nursing home portfolio indicate that the established guidelines and criteria applied were adequate. Mr. Gray also stated that a major factor in the bankruptcies was the high level of debt load that had been allowed regarding the transfer of beds. The nursing home financing advisory committee has taken CHEFA s covenants for debt level reporting and other items, to be incorporated into the transfer regulations. Previously, when beds were transferred to new owners, debt level was not required to be reported. In response to a Board Member, Mr. Williams replied that CHEFA s current equity to debt requirement is 10% equity. Mr. Gray stated that the requirement for assisted living facilities is 25%. Minutes of the Board of Directors Meeting March 27, 2000 5
Mr. Williams added that, at the direction of the Board, any nursing home issues financed through CHEFA must have a form of credit enhancement. The Board requested a staff review of the nursing home underwriting guidelines and recommendations for changes. Mr. Gray stated that a review and recommendation will be made at a future date to the full Board. Dr. Barone asked if the nursing home advisory committee was considering whether the nursing home industry in the state is overbedded. Mr. Gray replied that is one issue under discussion. CHEFA has insisted that actual investigation into the problems facing this industry is undertaken, as the Authority will not add their name to a report to the legislature that does not address some of the fundamental issues. As a result of CHEFA s strong stand on this committee, several of the agencies involved have become more proactive in considering proper guidelines and debt loads. The Board requested staff to develop an advocacy position statement from CHEFA for the Board to consider. CHEFA FINANCIAL OPERATIONS Ms. Hughes reviewed the financial statements for February 2000. There are no unusual items, and most are in line with the budget. The report was accepted as information. Update on Access, Inc. Child Care Facility Mr. Gray reported that the federal and state governments has closed one of the child care centers financed by CHEFA due to mismanagement. Mr. Asher is at the facility at this time, helping to transition, and working with the Commissioner of DSS regarding a second facility that is in danger of losing its federal license. New management could be brought in to continue operating the facility, under the provisions of the CHEFA financing. The bonds for the child care issue are secured by Ambac. Bondholders are not at risk, but the state is at some risk due to the debt service commitment. Ms. Peoples reported that DSS indicated at a meeting earlier today, that they will continue to cover the debt service payments in some form of interim capacity. Working with the management company and CHEFA, DSS will replace management. The Commissioner is concerned about the stability of the management agency, because they provide several other social services in the region of the state. In reply to a question from a Member, Ms. Peoples replied that monthly debt service payments for this facility are approximately $14,000.00 per year. Mr. Gray stated that the total debt for this facility is under $1 million. Mr. Gray further reported that CHEFA s covenants in the child care program allowed for replacement of management, which will preserve the much-needed child care slots in the state. No criminal charges are expected from the investigation of this center, but there may be civil action. Minutes of the Board of Directors Meeting March 27, 2000 6
Dr. Barone asked for an update on the Unrated Private Placement Debt Financing program discussed at the February meeting. Mr. Gray reported that information is still being gathered, but staff is not prepared at this time to discuss the program. The Board will be given ample opportunity to review the program prior to staff seeking final approval. DATE OF NEXT MEETING Dr. Barone reminded members that the date of the next meeting is April 24. There being no further business, the Board unanimously agreed to adjourn at 2:50 p.m. Respectfully submitted, Richard D. Gray Executive Director Minutes of the Board of Directors Meeting March 27, 2000 7