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HomeMy WebLinkAboutAgenda Statement 1986/08/28 Item 1 COUNCIL AGENDA STATEMENT Item 1 Meeting Date 8/28/86 ITEM TITLE: Report on Scripps Memorial Hospital 's Request to the City of Chula Vista for a Defeasance of the First Mortgage Hospital Revenue Refunding Bonds, Series 1977, and Acquisition of the City's Reversionary Interest as Part of Scripps Proposed Acquisition of Bay Hospital Medical Center SUBMITTED BY: City Manager 4/5 Vote: Yes No X In July 1986, City staff had preliminary meetings with representatives of Scripps Memorial Hospitals regarding Scripp's purchase of the City's reversionary interest in Bay Hospital Medical Center. On August 1 , 1986, Scripps submitted a proposal to the City for defeasance of the First Mortgage Revenue Refunding Bonds, Series 1977, as "an integral part of Scripps proposed acquisition of Bay Hospital Medical Center ( 'BHMC' )." (See Attachment 1 ) . In this offer, Scripps also requested that upon defeasance of the bonds, Scripps would "enter into an agreement with the City to purchase the hospital property, and the City would convey fee title to Scripps by grant deed, with no reversionary interest in the City". Subsequent to this proposal , at the direction of the City Council , City staff has had several meetings with representatives of Scripps in order to get some idea of Scripps' future plans for BHMC, their level of commitment to the community, and to try and arrive at some mutually agreeable value of the City's reversionary interest in BHMC. The purpose of this report is to: 1 . Provide Council with an historical background of the process that has occurred to date regarding the sale of BHMC. 2. Outline the differences between the Scripps proposal and the initial offer by National Medical Enterprises (NME) . 3. Suggest a value for the City's reversionary interest in Bay Hospital Medical Center, and 4. Outline various options and recommendations to the City Council regarding the value of the City's reversionary interest in the Bay Hospital Medical Center. RECOMMENDATION That the City Council approve a conceptual agreement for the sale of the City's reversionary interest in BHMC to Scripps and direct staff to prepare a resolution approving the actual agreement with Scripps. Page 2, Item 1 Meeting Date 8/28/86 BOARDS/COMMISSIONS RECOMMENDATION: N.A. DISCUSSION In 1975 and again in 1977 (refinancing at a more favorable rate) the City sponsored Mortgage Revenue Bonds for Bay Hospital in the amount of approximately $8,500,000. The 1975 transaction enabled a new non-profit entity to purchase the hospital from a group of investor doctors. A stipulation of City sponsorship as required by the Internal Revenue Service known as Rule 6320 required that the City receive title to the hospital facilities upon an event of default, defeasance, or retirement of the bonds. In 1983, unsecured notes valued at approximately $8,300,000 were sponsored by the City for a 3 year period for the purpose of providing working capital to the hospital during a difficult financing period of high interest rates. A stipulation of the note issue was that the hospital (1 ) seek ways to extricate itself from the tenuous cash flow conditions it was experiencing, and (2) employ new auditors from a Big 8 accounting firm. (The second item was met by BHMC through their employment of Arthur Young and Company which now performs the auditing functions for the hospital . BHMC is attempting to meet condition one through its sale to Scripps Memorial Hospital ) . The 1983 notes are due in November 1986 and a technical default has now occurred inasmuch as the trustee, per their agreement, has not received funds to pay off the notes in November. Bay was required as part of the Bond Indenture Agreement to deposit, by August 16, 1986, sufficient funds to defease the 1983 notes. LEASE TO NATIONAL MEDICAL ENTERPRISES In July 1985, Bay Hospital Medical Center entered into a preliminary lease agreement with National Medical Enterprises to operate Bay Hospital health care activities. In November 1985, Bay Hospital Medical Center requested that the City of Chula Vista approve an ordinance and appropriate resolutions authorizing the City to enter into transactions which would pay off the City-issued 1983 notes, defease the hospital-issued 1977 bonds, and enable the fee title to the hospital to pass from the City to BHMC following a ninety (90) day holding period required by IRS regulations. These actions would have enabled BHMC to fully execute the 1585 lease agreement with National Medical Enterprises. Due to the fact that a long term lease was proposed, the City's bond counsel stated that the City would need to be involved in the transaction because of NME's for-profit status. On January 28, 1986, by Ordinance No. 2139, the City Council established a procedure whereby the City could defease outstanding bonds and buy, lease, or sell the medical facility. The ordinance became effective thirty days after the second reading on March 7, 1986. During the deliberations of the ordinance, the City Council discussed the following deal points as a requirement prior to approval of the lease to a for profit entity (NME) : -2- Page 3, Item 1 Meeting Date 8/28/86 1 . An indigent care program would be established and provide at least $1 .1 million in medical care during its first ten years of operation. An annual report would be submitted to the City and membership on the indigent care committee would include at least one City representative. 2. Bay Hospital Medical Center would pay the City $237,828 upon execution of the lease; this was for property taxes not collected during the ten-year period of the Hospital ' s non-profit status. BHMC was to reimburse the City for services of any special consultants and any other costs associated with the transfer of BHMC from non-profit to a for profit operator. 3. The non-profit operation of a health care information service was to provide services to City residents for activities such as senior programs and City employee health education without cost. 4. BHMC agreed to limit membership on the owning board to two three-year terms and that two new members would be appointed within 90 days of execution of the lease. 5. The City was to receive annual reports submitted by the owning board to the Attorney General of the State of California for the non-profit charitable trust as mandated. Furthermore the City was to receive the annual budget each year for the owning board to review and comment upon. 6. The operator of the hospital (NME) community service program was to be reviewed by the City. The lease concept (as proposed by Bay) would have enabled Bay Hospital Medical Center to conduct a "short term" sale of the hospital to the City. In effect the sale was to include the termination of all indebtedness of Bay Hospital by NME, the new subleasee operator of the hospital , a 35-year lease to Bay who would then sublease the operation of the hospital to NME for 30 years. The lease provided for the sale of the hospital after 90 days back to Bay Hospital Medical Center. This was required by Federal statutes only because the sale was back to the previous owner. The lease also provided assurances that the City would be freed from any and all costs and liability resulting from the series of transactions. At the time of the NME offer, the BHMC owning board would have continued to operate but involvement in the Hospital 's day-to-day affairs would not be under their purview. Instead the owning board would have performed other medical related services and functions such as laboratory services, maintenance, out patient care, durable medical equipment rental , etc. Income from these services would have assisted in the management and operation of an indigent care program and support of the Binational Committee. It should be noted that while the above deal points and lease proposals were tentatively agreed upon, the question of the City's reversionary interest and compensation for that interest was never fully resolved. There was a possibility that agreement would have been reached on the above points and the City would retain its reversionary interest. -3- Page 4, Item 1 Meeting Date 8/28/86 SCRIPPS STEPS IN In April 1986, NME informed Bay Hospital Medical Center that it no longer believed that the lease agreement between BHMC and NME was valid and binding on either party. Since that time, various legal and/or administrative remedies have been examined by BHMC, the bond underwriters and the City to avoid default and ensure the successful operation of Bay Hospital . In early June following the withdrawal of NME from the Bay Hospital transaction and facing possible bankruptcy, Bay attempted to determine if Scripps and other area medical institutions were interested in taking over Bay. After a quick evaluation and negotiations, an agreement was reached with Scripps whereby they infused $879,000 into BHMC in order to meet payroll costs, provide backup funds to meet operating needs, and to generally relieve the immediate financial crisis. In exchange for the infusion of capital , an agreement was entered into on June 19, 1986 whereby BHMC grants Scripps an option to acquire BHMC by one of the following methods: 1 . Becoming a sole member of BHMC, or 2. Acquiring all of BHMC's assets subject to certain liabilities, or 3. Becoming a sole member of new non-profit corporation reorganization from BHMC, following a bankruptcy proceeding. Scripps must exercise its option on or before September 18, 1986. In the meantime, Scripps is providing a line of credit to BHMC for operating funds to assist it through its immediate financial crisis and Scripps has assumed management of the Hospital and its subsidiary corporations. In consideration of exercising option 2 above, Scripps has concluded that the defeasance of the 1977 Bonds is prerequisite to its proceeding to acquire BHMC. Defeasance of the bonds will trigger the reversionary clause whereby the City of Chula Vista acquires title to BhNC. Since Scripps has indicated that they will exercise the option only if they can obtain title to the facility, the purpose of the recent discussions between Scripps and the City has been to determine what the value of the reversionary interest is, and what consideration would be provided for the City releasing that interest. Staff recognizes the outstanding reputation of the Scripps Memorial Hospitals organization and sincerely believes that Scripps would be an asset to the City of Chula Vista. Scripps has demonstrated a serious interest in BHMC by recently providing it with management expertise and money to address Bay's immediate financial and operational problems. Scripps has also entered into an option agreement for the possible acquisition of BHMC. This was done by Scripps even with the realization that a number of significant problems must be overcome before the hospital can regain a solid financial footing. Specific BHMC problems include: -4- Page 5, Item 1 Meeting Date 8/28/86 - Liabilities exceeding assets by several million dollars, producing a negative net worth - A poor cash flow position - A high debt service per bed - A high amount of aiscounted business whereby the hospital gets a flat fee per patient - A relatively large percentage of medi-cal patients compared to other medical facilities and a medi-cal contract that some may view as having a low fee reimbursement schedule - Considerable deferred building maintenance (although the basic building plant apparently is in pretty good shape) Although the above-mentioned problems are significant, they are certainly not insurmountable given the proper management and financial resources such as can be provided by Scripps. In fact, Bay Hospital provides an excellent base, as has been recognized by Scripps, from which Scripps hopes to regain a more positive position in the health care market. Some of its assets include: - One of the highest bed occupancy rates in the County - A good work force - Qualified medical staff - Excellent location - Up-to-date medical equipment Recognizing there are both positives and negatives to the existing facility, Scripps also has some strong long-term planning and organizational reasons for wanting to acquire BHMC at this time: 1 . Scripps has the resources, the size and the management experience to make BHMC financially successful in a few years subject to the restraints of medi-cal payments. 2. Acquiring BHMC will give Scripps a three hospital system to support management staff and resources that are necessary for success in the changing health care arena. 3. Provide a competitive geographic advantage to Scripps for their Preferred Provider Organization contracts. This provides Scripps with an excellent opportunity to capture a larger market share of the current health care market. -5- Page 6, Item 1 Meeting Date 8/28/86 Based upon what has happened in the "market place" in similar circumstances, and based upon the advice of outside consultants, staff concluded that the City's reversionary interest in Bay has value. This was reinforced by the interest Scripps and other have expressed in Bay. It was reasoned that Scripps would not be acquiring BHMC unless it felt that the long-term advantages of the purchase outweighed Bay's problems and liabilities. Also, in determining this value, staff asked its consultants whether special consideration should be placed on the non-profit status of Scripps when placing a value on the City's reversionary interest. The consultants indicated that other than minor differences for taxes and reporting non-profit and for-profit hospitals operated in the same business manner and charged rates that reflected the current hospital care market. Valuation of the Reversionary Interest Arriving at a value for the City's reversionary interest is difficult. There is not a standard formula that can be looked up in a statistical handbook and there are a multitude of opinions as to how to approach such a valuation. Staff has sought outside assistance in an attempt to develop an acceptable methodology for valuing the reversionary interest. Last year in connection with the NME negotiations, the City received a report from Mr. Joseph Dyson of Health Care Capital Corporation regarding possible approaches to this issue. Most recently, the City has enlisted the services of an attorney, Mr. Knox Bell , who has extensive experience in the area of hospital acquisitions. To learn the background of similar transactions to the one now being considered, the following information regarding negotiated settlements by cities with health care facilities for reversionary interests was provided by Mr. Dyson, supplemented and updated by information obtained by Mr. Bell and staff. Comparable Hospital Sales In his report, excerpts of which are attached, Mr. Dyson provides information on cases similar to the one being negotiated with Scripps. Specifically, the following settlements have been reached with regard to reversionary interest. • VillaView Community Hospital (99 beds) : In this case, the City of San Diego accepted approximately $750,000 in free services to City residents. No cash was received. The value established for the services was based primarily on the value of land only with no consideration given for value of building improvements. The transaction was with a non-profit entity, Phoenix Baptist Hospital . . Madera Community Hospital (78 beds): Madera Community Hospital has negotiated an agreement with the County of Madera to reacquire title to the hospital in exchange for the hospital dropping certain claims against the County and associated legal costs. Unfortunately, Mr. Dyson was unable to determine a specific dollar amount for this transaction. -6- Page 7, Item 1 Meeting Date 8/28/86 Loma Linda Community Hospital (120 beds) : In 1982, Loma Linda • Community Hospital , owned by Loma Linda University Medical Center, was formed and through a $17.5 million bond issue by the City of Loma Linda, acquired a hospital also known as Loma Linda Community Hospital ; defeased a 6320 bond issue having an unpaid balance of approximately $7.7 million; as well as finance new construction and provided working capital . The City of Loma Linda, through the 6320 issue, had a reversionary interest in the original hospital facilities. The City gave title to the newly-formed corporation and received the sum of $1 .5 million ($750,000 immediately and the balance in five $150,000 annual installments with an interest at 10% per annum) as a settlement. This transaction was with Loma Linda University Medical Center, a non-profit corporation. Long Beach Hospitals: In the mid-1950' s, a $29.2 million general obligation bond issued by the City of Long Beach occurred which financed construction, etc. for the Long Beach Memorial Hospital (848 beds) , the Community Hospital of Long Beach (248 beds) and the Pacific Hospital (171 beds). This bond issue was eventually repaid from tax revenues derived by the City. In the last four to five years, Long Beach Memorial and Community Hospital of Long Beach, in conjunction with proposed revenue bond financings, agreed to pay the City back for the principal amounts retired by the City (i .e. , $6.65 million and $2.57 million, respectively) . In order to obtain clear title and to satisfy all obligations to the City, the two hospitals agreed to pay the City their proportionate amount of the $29.2 million general obligation bona. From inception of the $29.2 million issue described above, debt service thereon was paid primarily from oil revenues and not from hospital operations. The $29.2 million issue described above was not a "6320 issue". Novato (75 beds) : The City of Novato, California and the local hospital there was reportedly exploring a method of settlement relative to a 6320 reversionary interest at the time of the memo prepared by Mr. Dyson. Staff updated this information and was informed by Novato City staff that, through their consultant, they had placed a $2 million value on the reversionary interest. The Novato City Council entered into an agreement with the new hospital to allow the $2 million to be reinvested in the City in lieu of cash. This transaction was with Sutter Hospital , the only for-profit entity among the cities surveyed by Mr. Dyson. From the above, it was concluded there is not a "right way" to value a reversionary interest. In each of the situations reviewed, there were circumstances unique to that situation which determined the value placed on the amount paid or to be paid for the reacquisition or clearance of title from the various cities involved. In each case, no special formula appears to prevail . Rather, a range of value was determined and negotiations determined the amounts to be paid. -7- Page 8, Item 1 Meeting Date 8/28/86 From Scripps' point of view, the reversion does not have value under BHMC's current financial condition, but the hospital could have value over a period of time. In discussions with Scripps representatives, they made it abundantly clear that Bay has a negative net worth, including over $3 million in accounts payable. Their view was that Scripps management expertise would pull Bay out of its economic straits and that was the real value being infused into Bay by Scripps. Staff, in conferring with Knox Bell who also conferred with a firm which has expertise in evaluating hospitals and hospital transactions, concluded that the value of the reversionary interest ranged from $500,000 to $5 million depending upon what assumptions were used. Because each 6320 transaction is different and because of the circumstances of the Bay Hospital situation as described by Scripps, staff concluded that the value of the reversionary interest should be in the lower part of the range just described. In negotiations with Scripps, an approach was used which focuses on what the value of the land and/or the buildings will be in the year 2010 when the present bond issue has been paid off and then calculating the "present value" of such property by using a discount rate. This approach results in a very wide range of values depending on the variables used in the calculation such as : - Value of buildings, if any, and calculation of depreciation - Present value discount rate - Assumptions regarding capital expenditures to be made over next 24 years to improve the property - Rate of appreciation of land. In using the above factors, and in consultation with the City's consultant, it was determined that the City's reversionary interest had a value ranging from $736,000 to $2,146,000. The higher end of this range includes value being attributed to both land and buildings. It assumes that land would increase in value at 5% a year because of its location for a 24 year period, with "present value" determined by the application of an 8-10% discount rate. This would make the present land value worth between $736,000 and $1 ,146,000, depending upon the discount rate used. It assumes that the buildings, now worth $10 million, would be worth $10 million in 24 years, assuming that depreciation would be equally offset by inflation and improvements made through 2010. The buildings' "present value" would be worth $1 .5 million using an 8% discount rate. The total land and building values, less an additional discount because of Bay's financial condition, would set an upper end value of $2.1 million. The City was advised, however, by the outside appraiser through Mr. Bell that one could argue just as vigorously that the buildings would be worth zero in 24 years, as $10 million. It was determined, then, that the focus of value of the reversionary right should be on the land value of $736,000 to $1 .146 million. This is very similar to San Diego' s transaction involving the VillaView Community Hospital . This is the range of value utilized by staff in the negotiations with Scripps. -8- Page 9, Item 1 Meeting Date 8/28/86 In negotiating and reaching a "general terms" accord with Scripps negotiators on the defeasance of the bonds and the "turning over" of the City 's reversionary rights to Scripps, it was recognized that in other 6320 cases, the transaction had either been in the form of cash, or services, or a combination of both. The structure of the negotiated settlement with Scripps which is recommended to you involves a combination of services and cash. Negotiated Settlement with Scripps As mentioned previously, Scripps representatives argue that the reversionary interest of the City has no value, but that Bay's value will increase over time. City staff, on the other hand, concludes that the reversionary interest over time will have value but in the lower end of the range of value because of Bay's adverse economic circumstances. Taking into account these two positions, representatives of Scripps and the City have reached a recommended agreement in concept for passing on the City's reversionary interest to Scripps in exchange for cash and services. In addition, Scripps has agreed to certain general operating covenants pertaining to the acquisition of the reversionary interest. These are designed to express Scripps' intent in operating the hospital as well as to protect the community for a period of time that the hospital will be operated in a certain manner in order that quality medical care will continue to be provided to the community. The proposed provisions of the recommended settlement in concept with Scripps, requiring approval by both the Scripps Board of Directors as well as the City Council , are as follows: 1 . Operating Covenants Operating covenants to which Scripps Memorial Hospitals would agree for the operation of Bay would be as follows: a. Scripps will continue to operate BHMC as a general acute care hospital for 5 years with an automatic 5 year renewal , or a total of 10 years. At the end of the initial 5 years, Scripps may petition the Council for waiver of the automatic renewal provision if conditions do not warrant the continuation, which waiver shall not be unreasonably withheld. The purpose of this covenant is to commit Scripps to continue to operate Bay Hospital as an acute care hospital in the immediate term. Because of the uncertainty of the medical field, this provision gives them needed flexibility after 5-10 years to ensure that BHMC is devoted to the best health care use. b. Scripps would covenant to provide high quality care in all of its facilities. Throughout the period of time that it owns BHMC, it will devote its expertise to maintain this goal at that facility. Scripps also will commit to maintain the facility in good condition and repair with proper equipment and qualified staff. -9- Page 10, Item 1 Meeting Date 8/28/86 c. Scripps estimates that it will spend an average of $400,000 per year for maintenance facility enhancement and equipment replacement at BHMC for the initial 5 years. As part of the average expenditure of $400,000 per year, Scripps makes a commitment to accomplish deferred maintenance at the hospital generally in accordance with a 2-3 year schedule which is attached as Attachment 2. d. Another covenant is that Scripps will use all revenues in excess of expenses generated from operation of BHMC to operate and enhance the services of the facilities of Bay. Scripps' independent audit firm will certify to Chula Vista each year that Scripps is in compliance with this covenant. This covenant would run for 5 years and would be a commitment that any funds from any excess revenues generated by Bay would be spent at Bay and not elsewhere in the Scripps system. e. Scripps commits to establish a community advisory board at BHMC composed of residents in the area with varied backgrounds and interest, if there is a demonstrated community interest in such an activity. The City Council has the option to recommend three individuals, with Scripps picking one of them as a member of such board. This is not a governing board for Bay, since Scripps' corporate structure has only one governing board for its total corporate operations, with advisory boards at each of its outlying medical facilities. The board at Bay, like the boards Scripps has at its other outlying facilities, would regularly meet to discuss issues and developments at BHMC, receive and hear presentations on progress reports concerning activities at Bay, have input solicited from them by Scripps representatives, and generally act as a sounding board for BHMC operations. 2. Economic Terms a. First Right of Refusal . Scripps would agree that the City would have the first right of refusal for the purchase of Bay Hospital in the event that Scripps sold the hospital prior to the year 2010. The first right of refusal would be based on a bona fide offer and the City matching that offer. b. Profit on Sale. In case Scripps sells Bay prior to the year 2010, and the City did not exercise its first right of refusal , the City would receive 10% of the net profit with net profit defined as net proceeds of sale which exceeds Bay's depreciated book value. -10- Page 11, Item 1 Meeting Date 8/28/86 c. Reversionary Interest Offset. Any cash which the City receives through the sale of its reversionary interest would be an offset to the 10% of net profit if the hospital is sold by Scripps prior to the year 2010. d. Sale of Reversionary Interest. The sale of the reversionary interest would include the following components valued at slightly less than $750,000. (1 ) Cash Scripps would pay the City $100,000 upon close of the transaction, with a payment of an additional $20,000 per year for 6 years beginning six monthgs after the close of the transaction with no Consumer Price Index (CPI) escalator. It is estimated that the "present value" of this part of the offer is slightly less than $200,000. While these funds could be used by the City for any general municipal purpose, the City Council may wish to identify one or more health-related programs for the use of this money such as expanding the County's Home Hazardous Waste Education and Disposal Program and implementing it in the City of Chula Vista. There are undoubtedly other ways in which these funds could support the health and safety needs of the Chula Vista community. (2) Services. The services component of this offer is for $550,000 to be spread over a 6-year period, with the unused portion subject to a CPI inflationary factor not to exceed to 5% per year. The CPI used would be the San Diego CPI for all urban consumers. The $550,000 would be spread equally over 6 years, with any unused portion transferred on to the following year with a sunset at the end of 6 years. This would amount to services averaging $92,500 per year. The service would be provided through what staff has termed "a focused line of credit." What this means is that the City would have a line of credit for the use of specific services provided by Scripps as enumerated in this agreement. It is felt that these services would be of value to the City both for its operations and for the community as a whole. There are three areas in which this "line of credit" would be used. These are: -11- Page 12, Item 1 Meeting Date 8/28/86 (a) Using the Master Fee Schedule in determining value, Bay would provide for physical examinations, drug screening and intervention for City employees. The physical exams would be used principally for Police, Fire, and certain Public Works personnel . Pre-employment physical examinations could also be used in this "line of credit." Components of the complete physical examination would be from a 45 to 60-minute physical examination by a physician, including dictation, a routine EKG, chest x-ray, CBC, chemical panel , urinalysis, drug compliance panel , and, when indicated, a stress treadmill . Drug screening and intervention would, of course, be in accordance with general policies which have either been agreed to or will be developed, with the City' s employee organizations. The intervention program would be coordinated with the City's Employee Assistance Program. (b) Scripps will provide health education for City employees and the City's senior citizen clients at Norman Park and Lauderbach Community Centers. This would include both publicity and promotion including personal appearances and flyers. Health education programs could include such subjects as stress, weight loss, job burn-out, cancer, AIDS, assertiveness training, smoking sensation, alcohol and drug abuse, etc. Staff views this as an opportunity to provide a wellness program for City employees, which should not only benefit them individually, but should also enhance their productivity with the City and service to the community. It also would extend Scripps' valuable programs to the senior citizen community, at least that part which participates at the City 's Norman Park Center and will be participating at the Lauderbach Community Center. (c) Scripps will provide community screening clinics based on actual cost. These clinics could include screening for blood pressure, glaucoma, eye exam, etc. This could prove to be an extremely valuable outreach program, which the community currently does not have. Scripps is willing to offer this service to the extent allowed by law and with the cooperation and participation of the Bay medical staff. In summary, the preceding paragraphs state the operating covenants and economic conditions for the City selling its reversionary interest in Bay Hospital Medical Center to Scripps. The value of cash and services offered by Scripps totals nearly $750,000, which is within the range of Bay's "present value", as estimated by the City's consultants. In addition, the conditions regarding the first right of refusal and profit on sale are designed to -12- Page 13, Item 1 Meeting Date 8/28/86 protect the City's interest in case the hospital is sold prior to the year 2010. It is concluded that there is value in the services offered by Scripps, as well as the cash being offered, which will result in additional services both to the City and the community. This should greatly assist the City 's and the community's health care needs. Staff would strongly recommend the approval of this agreement in concept so that Scripps can move forward in obtaining the City's reversionary rights to Bay and conclude its transaction in acquiring Bay. Options in the event of default are outlined below. Should the City Council not find the staff recommendation acceptable and BHMC goes into default, the following options are available: 1 . Miller and Schroeder Bail Out: Miller and Schroeder, as underwriters of the bonds, have a vested interest in seeing that the hospital does not go into default. There is some potential for Miller and Schroeder either finding another operator for the hospital , or assisting Bay in their finances and putting in a new manager to protect the bond holder's interest. 2. Bankruptcy or Default: If Bay receives no assistance and defaults or goes into bankruptcy, there would be an attempt by the trustee to find a new operator. Staff has received some expressions of interest from other agencies if this were to occur. If it (bankruptcy) does happen, the City's reversionary interest is lost. 3. City Intervention: The City could unilaterally or in league with an interested operator step in and pay off the debts and take over the hospital . It would be very inadvisable for us to do this unless we had an operator willing to buy us out. Staff has spoken to one operator who may have an interest, but has told us that it will not do anything as long as Scripps in in the picture. This is a risky alternative because before we even know how deep the interest runs, Scripps would have to drop out of the picture. 4. Staff has been informed that there are some corporations which are in the business of buying up distressed urban hospitals. This option is considered a long shot and it is speculative as to whether it would want to acquire a "stand alone" hospital in this area. If the Scripps Hospital proposal is not consummated, then under the aegis of the underwriter and trustee, steps would be taken in an attempt to ward off actual default. Miller and Schroeder, the underwriter, report that they have standing by an auditing firm to prepare "due diligence" research in order to prepare for a taxable bond sale. They would then attempt to sell the notes -13- Page 14, Item 1 Meeting Date 8/28/86 without City sponsorship so as to refund the 1983 outstanding notes. In addition, they would attempt to find another operator. If the hospital went into default, then a trustee would most likely attempt to accomplish the same objective. The City's reversionary interest remaining in the case of a default is not yet clearly defined. It is known that several hospitals are interested in the operation of Bay but not under the conditions that existed in June when Scripps assumed their 90-day option. Thus, if there was a default, a new operator would most likely be found but the condition of the hospital during the interim period of default appears to be uncertain. Initial 1975 and 1977 Council Meetings for Sponsorship of Mortgage Revenue Bonds As indicated earlier in this section, the initial Council meetings regarding sponsorship of the Mortgage Revenue Bonds for Bay Hospital were held in 1975 and 1977. For Council ' s information, the minutes from these meetings have been attached (see Attachment 3). WPC 1146A • v Chula Vista, G.,, fornia Dated .I_' 1At -14- ATTACHMENT 1 Office of the President 9888 Genesee Avenue Post Office Box 28 Scripps Memorial Hospitals La Joiia,California 92038-0028 (6191457-6111 August 1, 1986 Mayor Greg Cox CITY OF CHULA VISTA 176 Fourth Avenue Chula Vista, California 92010 Dear Mayor Cox: Scripps Memorial Hospitals ("Scripps") is submitting this request to the City of Chula Vista for a defeasance of the First Mortgage Hospital Revenue Refunding Bonds, Series 1977, as an integral part of Scripps' proposed acquisition of Bay Hospital Medical Center ("BHMC") . I. BACKGROUND Bay Hospital Medical Center: BHMC, a California nonprofit public benefit corporation, owns and operates a general acute care hospital with 159 beds in Chula Vista. It also is the owner of three subsidiary entities - Bay View Health Consortium, a California nonprofit public benefit corporation; Bay Community Services, a California corporation; and Bay View Health Resources, a California corporation. (Bay Hospital Medical Centers and its subsidiaries will be referred to collectively as "BHMC". ) BHMC' s bed complement consists of 94 medical/surgical beds, 20 perinatal beds, 10 pediatric beds, 20 intensive care beds, and 15 rehabilitation beds to be converted to medical/surgical . In addition, it provides ancil- lary support services for all of these types of patients. The general financial situation of BHMC on Friday, June 20, 1986, when Scripps infused capital , was as follows: 1. BHMC had no cash on hand and needed $500,000 to meet its Friday payroll . 2. The Note in the sum of $740,000 held by Pacific Commerce Bank of Chula Vista was in default and $309,000 in a BHMC account at Pacific Commerce Bank had been set off against the amount due. 3. BHMC was ninety (90) days in arrears in accounts payable and on a C.O.D. basis for most supply items. These past due accounts were in the sum of Three Million Dollars ($3,000,000) . Mayor Greg Cox August 1, 1986 Page 2 4. BHMC was obligated on First Mortgage Revenue Refunding Bonds, Series 1977, issued by the City of Chula Vista in the principal sum of $9 million, with a present balance of approximately $7.6 million. These Bonds were and continue to be in default. Pursuant to this financing transaction, the City has a reversionary interest in BHMC' s facility. 5. BHMC was also obligated on Hospital Revenue Notes issued by the City of Chula Vista in 1983 in the principal amount of $8,450,000, with a balance due of approximately $8.0 million. The Notes, which are due on November 1, 1986, were and continue to be in default. Although the loan from Scripps relieved the financial crisis that existed on June 20, 1986, with regard to meeting the payroll , and Scripps has provided backup funds to meet any immediate operating needs, BHMC' s under- lying financial situation has not changed. Scripps Memorial Hospitals: Scripps, a California nonprofit public benefit corporation, owns and operates a health care system which includes two general acute care hospi- tals, a skilled nursing facility, three medical office buildings and other supporting health care activities. The following is a description of certain of these facilities: Scripps Memorial Hospital-La Jolla is a 451-bed hospital which in- cludes 286 medical/surgical beds, 37 perinatal beds, 19 pediatric beds, 17 intensive care beds, 4 coronary care beds, and 88 chemical dependency recovery beds. In addition, it provides cardiovascular surgery, radiation therapy, Trauma Center and basic emergency ser- vices, and an extensive variety of other specialized hospital services and community health education services. Scripps Memorial Hospital-Encinitas is a 93-bed hospital . A Certificate of Need has been obtained for the expansion of the hospi- tal to 150 beds, and that project will be commenced in the near future. Scripps has been granted a Certificate of Need to construct a 114-bed hospital in Carlsbad. Land acquisition and planning is presently underway for that facility. Torrey Pines Convalescent Hospital is a 161-bed skilled nursing facility. Scripps is governed by a Board of Trustees consisting of eight trustees. In addition, there is a foundation with a board of twenty- five directors which provides a variety of support to the hospitals and their activities. • ry Mayor Greg Cox August 1, 1986 Page 3 Among the purposes of Scripps Memorial Hospitals, as set forth in its Bylaws, are the following: To establish, support and manage and furnish facilities, personnel and services to provide diagnosis, medical , surgical and hospital care, extended care, outpatient care, home care and other hospital and medically related services to sick, injured or disabled persons without regard to race, creed, color, sex or national origin. To carry on such educational activities related to rendering care to the sick and injured or the promotion of health, which in the opinion of the Board of Trustees, hereinafter referred to as the 'Board, ' may be justified by the facili- ties, personnel , funds or other requirements that are, or can be made available. To manage, operate or participate, so far as hospital policy, circumstances and available funds may warrant, in any activity designed and carried on to promote the general health of the community. II. SCRIPPS-BHMC TRANSACTION Scripps involvement with BHMC commenced on Monday, June 16, 1986, when Scripps was notified by representatives of BHMC of the $309,000 set off by Pacific Commerce Bank and BHMC' s inability to meet its payroll . Also, because of BHMC' s otherwise precarious financial position, it was not in a position to obtain the funds elsewhere. In order to arrange for funds to meet the payroll by the deadline of Thursday afternoon, and to structure an arrangement which would lead to a permanent solution to BHMC' s financial problems, immediate negotia- tions were entered into. These were completed and the transaction dis- cussed below was entered which enabled Scripps to fund the payroll account one hour prior to the deadline. The agreement entered into on June 19, 1986 between BHMC and Scripps grants Scripps an option to acquire BHMC by one of the following methods: 1. Becoming the sole member of BHMC, or 2. Acquiring all of BHMC' s assets subject to certain liabilities , or 3. Becoming the sole member of a new nonprofit corporation reorganized from BHMC, following a bankruptcy proceeding. Mayor Greg Cox August 1, 1986 Page 4 The option must be exercised by Scripps on or before September 18, 1986. Pursuant to additional agreements, Scripps agreed to provide a line of credit to BHMC for operating funds to assist it through its immediate financial crisis, and Scripps assumed management of the hospital and the subsidiary corporations. Since June 19, 1986, Scripps has been managing the hospital and is assess- ing the feasibility of exercising its option in acquiring BHMC. Although a final decision has not been made, it is the preliminary conclusion of Scripps that the defeasance of the 1977 Bonds is a prerequisite to its proceeding to acquire BHMC. To consummate the acquisition, Scripps would provide sufficient funds to retire the 1977 Bonds and the 1983 Notes, a total of approximately $16 million. There is also an immediate need for capital for deferred maintenance which should be undertaken immediately, and further capital needs for certain improvement projects in the near future. Scripps would also provide sufficient working capital for the continued operation of BHMC. III. TIME REQUIREMENTS As previously mentioned, Scripps has until September 18, 1986, to exercise its option, and, therefore, any arrangements with the City will have to be resolved by then, subject to the project being finalized as set forth below. The 1983 Notes are due on November 1, 1986, and approximately $8. 3 million will have to be paid or refinanced by that date. Scripps believes that because of the deadlines, if the transaction with BHMC is completed, it should be done by September 30, 1986, to provide adequate time for any contingencies which may arise which could affect the ability to meet the November 1 payment date on the Notes. Therefore, it is proposed that the entire transaction, including the City' s defeasance of the 1977 Bonds, would be included in the September 30 closing. IV. BENEFITS FROM SCRIPPS' OWNERSHIP OF BHMC 1. Scripps' financial resources will assure the continued operation of BHMC and the availability of the hospital and health services it provides to the community. BHMC' s reputation for high quality services will be maintained by the addition of the Scripps management and its overall involvement. 2. In an era of increasing competition and reduced revenue in health care, Scripps, through economies of scale, will be able to provide management and other resources and expertise which probably will not be affordable to hospitals of this size. Mayor Greg Cox August 1, 1986 Page 5 3. Scripps has maintained a long presence as a preeminent provider of health care and charitable services in San Diego. Its interests and resources will be devoted solely to serving the people of the greater San Diego area. 4. BHMC is providing a broad range of health care activities to Chula Vista and the entire South Bay, and it is Scripps' intention to continue such public service. In addition to the type and scope of services now provided, Scripps will assess the needs of the com- munity, the availability of professional participation and the interest of the public to determine which of its educational and outreach programs can be initiated at BHMC. 5. Scripps is supported by a community advisory board at its Encinitas facility, which is composed of residents with a wide range of back- grounds, professions and interests. The purpose of the community advisory board is to provide input to Scripps management regarding community interests and health needs, and to be an active component of Scripps' fundraising efforts which in turn help support its community services. It is Scripps' intention to explore the feasibil- ity of a similar arrangement at BHMC to maintain and enhance the involvement of the community in the hospital . V. PROPOSAL Assuming Scripps will exercise its option to acquire BHMC, it will do so contingent upon Scripps receiving fee title to the real property under- lying the hospital . It is also preliminarily the intent of Scripps to structure the acquisition by purchasing BHMC' s assets and assuming certain of its liabilities. This would result in Scripps becoming the sole owner and licensee of the hospital and the Scripps Board of Trustees would become the governing body of the hospital . BHMC and its subsidiaries and its Board of Directors would have no further involvement with the hospital and presumably would remain in existence solely to wind up its affairs. The mechanics of acquiring fee title are proposed as follows. Scripps will incur debt or otherwise fund an escrow account held by the Trustee under the 1977 Bonds. Scripps will deposit in escrow an amount sufficient to pay all of the interest and principal of the 1977 Bonds, either to a redemption date or to the date of maturity of the Bonds. Under the terms of the 1977 Bonds, such a deposit in escrow will enable the 1977 Bonds to be defeased. Upon defeasance, title to the hospital property will be automatically conveyed to the City of Chula Vista , because the Trustee will forthwith record the grant deed to the City which was deposit- ed with the Trustee by BHMC when the 1975 Bonds were issued. Simultaneous- ly therewith, Scripps will enter into an agreement with the City to pur- chase the Hospital property, and the City will convey fee title to Scripps by grant deed, with no reversionary interest in the City. Mayor Greg Cox August 1, 1986 Page 6 VI. CONCLUSION Scripps desires to work with the City of Chula Vista and BHMC in an effort to make BHMC a permanently viable institution and an integral part of the Scripps health care system. We appreciate the courtesy and cooperation shown to us by your office and we respectfully request that you and the City Council proceed with the adoption of this proposal . Sincerely, A t! Ames S. Early President ASE:alh cc: John Goss, City Manager Thomas Herron, Esq. , City Attorney EXCERPTS FROM JOE DYSON'S REPORT Similar Cases In the recent past, several settlements have been made between California cities having reversionary interests in certain health care facilities as described below. VillaView Community Hospital In 1984 , the City of San Diego issued $6 , 895 , 000 in revenue bonds on behalf of VillaView Community Hospital. A portion of the proceeds of the 1984 issue were used to defease a $3 . 65 million issue by VillaView in 1973 whereupon the City of San Diego acquired title. If VillaView is able to produce evidence to the City of San Diego in a 4-bear option period that adjoining property is being developed by constructing facilities for the aged, the City of San Diego will transfer title back in return for VillaView giving free services to City residents, such services valued to aggregate the value determined by the City as that given up. Such value repre- sented primarily land value. In the case of VillaView, an appraisal was made and the present value approach described above was proposed by the Hospital. The City of San Diego accepted the fact as set forth in the VillaView proposal that the buildings would represent little value but insisted on a certain land value which was different from and somewhat higher than that reflected in the appraisal and subsequent calculations . Madera Community Hospital In 1978 , Madera Community Hospital issued $5 . 6 million in first mortgage revenue bonds due in 2006 . Under terms of this issue, when all of the bonds are paid , title to the Hospital ' s property is to be transferred to the County of Madera, California. The Hospital plans to defease the 1978 • Health Care Capital Corp. Mr. Paul G. Desrochers August 14, 1985 Page 4 issue with a new bond issue and has negotiated with the County of Madera to reacquire title in exchange for the Hospital dropping certain claims against the County and the legal costs incident thereto. It is apparently difficult, if not impossible, to determine the dollar amount connected with this negotiation. Loma Linda Community Hospital In 1982 , Loma Linda Community Hospital, a non-profit 501 (c) (3) corporation owned by Loma Linda University Medical Center was formed and, through a $17. 5 bond issue by the City of Loma Linda, acquired a hospital also known as Loma Linda Community Hospital; defeased a 63-20 bond issue having an unpaid balance of approximately $7. 7 million; as well as financed new construction and provided working capital. The City of Loma Linda, through the 63-20 issue which was defeased as described above, had a reversionary interest in the original hospital facilities. Once the defeasance occurred, the City acquired title. After the necessary holding period, the City gave title to the newly-formed corporation and received the sum of $1 , 500 , 000 ($750 , 000 immediately and the balance in five $150 , 000 annual install- ments with interest at 10% per annum) therefrom as a settlement. There was certain litigation surrounding the settlement, such litigation emanating from a management firm whose management contract terminated upon the above refer- enced sale. Long Beach Hospitals In the mid 1950 ' s, a $29 . 2 million General Obligation bond issue by the City of Long Beach occurred which financed construction, etc. in the following approximate amounts for the facilities listed below: Long Beach Memorial $6 . 65 million Community Hospital of Long Beach $2 . 57 million Pacific Hospital $1 . 3 million This bond issue was eventually repaid from tax revenues derived by the City. In the last 4-5 years , the above first two hospitals, in connection with proposed revenue bond financings , agreed to pay the City back for principal amounts retired by the City as shown above. In order to get clear title and to satisfy any obligation to the City resulting from the issue described above, the two Hospitals agreed to pay the City their proportionate amount of the $29 . 2 million issue as shown above. Long Beach Memorial in 1982, via proceeds from a revenue bond issue by the City on behalf of the Hospital, paid the entire amount back to the City in one payment. Long Beach Community, pursuant to a recent financ- ing, agreed to repay their $2. 5 million to the City via $.5 million down and the rest over 4 years with no interest. Pacific has not initiated any new financings and thus has not begun to repay their $1 .3 million to the City. From incep- tion of the $29. 2 million issue described above, debt service thereon was paid primarily from oil revenues and not from hospital operations . The $29 . 2 million issue described above was not a "63-20" issue. Novato The City of Novato, California and the local hospital there are reportedly currently exploring a method of settlement relative to a 63-20 reversionary interest but apparently have not yet arrived at any method or amount. Basis of the Above Information The above information was obtained from s reliable, i.e. , City officials, investment banking sourcesc, attorneys, official statements , etc. Observation In each of the above situations , circumstances unique to each situation no doubt determined the value placed on and the amount paid or to be paid for the reacquisition or clearance of title from the various cities named . In each case , no special formula appears to prevail . Rather, individual negotiations determined amounts paid. 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' / c ƒ %Ct§ \ a a I / \ / 2 ) 0 a) CA a) CK / U < Ce \ ± a. ƒ q 7 N N N m � m / W ATTACHMENT 3 rt +1 � £y,,� >ti 'Z w •< , ��,; r J 15:4'� ' .Z f Y� ij y E' .ct a �.w„ C E :t V'+'1 ,(f VV.': 'V,'; it 141. ' N. ` a S , °a t .- t C. F **,1--- ,s � 14.; , ,-...t w ,' ,;%,4'4,11441C:.1/4,6--- . .. Y tr r An h ?r •y g ,rY ` st•%^ ! yF� J F S .k'k . .,. „„ t` i y. .:F• .M t y Council'Meetin h yo C? s i � " H 3 r aS 1.9 1 f k' y '* } •� e, 4- 4, 1 i ,4 0{'S • t , s " ■ t y L7•Offered,by.Councilman Egdahl,'the.reading ' :y i Resolution offered of the text was waived by unanimous con "t,-,,,,e'.;;<.' sent, passed and adopted by the following t` , vote, to-wit:. t.e x4 AYES Councilmen Egdahl, Scott, Hobel; ^' '� Hamilton, Hyde ! r Noes: None Absent: None 4 xZ a;; Because of changed financial conditions, y.�r � ? RESOLUTION NO. 7893 it is snow necessary for the Hospital to ' ra APPROVING OF PLAN OF increase the first mortgage bonds by ._i. r,,n. ,. CIMMUNINY HF PAT GENERAL COF>NIUNITY HOSPITAL AND $250,000: Therefore, the City.Council f',�� NG THE ARTICLES AND must.'adopt a resolution amending the. ,� i , 1= BYLAWS original resolution of_approval . ti <, ; BYLAWS OF THE CORPORATION 44„ Offered by Councilman Egdahl,',the reading„ .1-.'k.„Fy Resolution offered of the text was waived by unanimous con ,y •� : sent, passed and adopted by,the following k� ., 1. uMg vote, to-wit: '11; AYES: Councilmen'Egdahl, • Scott, Hobel, -_•;%.,,,' Hyde • •'• ,.;,,.: Y' None s f: • Noes: , : • Absent: None ‹ Abstain: Mayor Hamilton (Due to conflict , of interest) ' RESOLUTION NO. 7894 - The Environmental.Review Committee found ors that this project would have no possible ,_i ;. FINDING NO SIGNIFICANT. significant impact on the environment i.4, ,..-.e.-,- .a' ENVIRONMENTAL IMPACT "; '- j may. DUE TO OUR HOUSE DRUG + ABUSE PREVENTION AND EARLY INTERVENTION r.. ` 'r i�, dt PROJECT . Offered by Councilman Egdahl,`the reading fs�,w Resolution offered of the text was waived by unanimous con .s4`r'.; sent, passed and adopted by the following te"'!,^r, vote, to-wit: AYES: Councilmen Egdahl, Scott, Hobel, r Hamilton; Hyde is Noes:- None : ,Absent`. Nona' r. RESOLUTION NO. 7895 -. At'the Council meeting of September 2,' APPROVING APPLICATION FOR 1975, minute action was taken to sponsor an Our House initiated LEAA grant pro- EARL ABUSE PREVENTION PROJECT AND posal for maintenance of a drop-in drug EARLY INTERVENTION PROJECT treatment/prevention center. 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Cl W 0 rf++7° 54 0 1 0 1 4 0 1r'0 0 0 0. n . 0 s O°S O Q -.4 •• 0>. 1 �!rr � •• ' r C • 3. • • • a I� • t • f • • • 1 ( i` 1` ION NO. 7893 - Because of changed financial conditions, 1G THE PLAN OF it is now necessary for the Hospital to 1G OF BAY GENERAL increase the first mortgage bonds by 'Y HOSPITAL AND $250,000. Therefore, the City Council 1G THE ARTICLES AND must adopt a resolution amending the j )F THE CORPORATION original resolution of approval . on offered Offered by Councilman Egdahl, the reading of the text was waived by unanimous con- / sent, passed and adopted by the following vote, to-wit: q ,/ AYES: Councilmen Egdahl, Scott, Hobel, Hyde Noes: None Absent: None Abstain: Mayor Hamilton (Due to conflict of interest) • / RESOLUTION No. 7720 - . Three years ago, the City Council adopted APPROVING BAY GENERAL - • resolution endorsing the Community Hospital "i• COMMUNITY HOSPITAL AND TAX- of Chula Vista project allowing them to EXEMPT BONDS AND NOTES TO finance their new construction with tax BE ISSUED THEREBY AND ACCEPTING free bonds, No financial obligation nor any THE GIFT OF A HOSPITAL FACILITY responsibility involving the operation of - • TO BE ACQUIRED THEREBY • - the hospital itself was made - only an :endorsement by the City plus an indication . . . of a willingness to accept the facility at . • the end of 30 years as a gift. • , . . • • ,_ • . V V V The presently doctor,owned Bay General Com, (017 1(75-7 . V munity Hospital now wishes to transfer that . interest to a nonprofit corporation under ; '• - ;. the same type of arrangement, . . . City Clerk Fulasz noted for the record that she has received seven letters in support - • V of Bay General ts plan to convert to a non - • profit hospital from the following: ; : • V V Baggett, Executive Director, Hospital•. • '"- - • Council of San Diego and Imperial Counties; •• • . V • ' Richard F. Jacobsen, Executive Director, • - V V . Comprehensive Health Planning Association; . - . John Day, Management Analyst, Bay General . • V • V • Hospital; Hellen M. Snortland, Administrator; Community Hospital of Chula Vista; Loretta V . Hamilton and Thomas Seagren employed by Bay • - , . , General Hospital and Jean Hall White, - -. Direc.tor of Volunteers, Bay General Hospital. Resolution offered • • • Offered by Councilman Hobel, the reading V • of the text was waived by unanimous con- ' • sent, passed and adopted by the following • AYES: Councilmen Hobel, Hyde, • , V • Egdahl , Scott • Absent: None Abstain: Mayor Hamilton ' •