Cascade Healthcare Chief Financial Officer Michael McGinnis appeared before the Deschutes County Board of Commissioners to receive approval for the refunding of the 2005 Series A bonds it issued that year in order to refinance a new series of 2008 bonds, which will be for sale to local investors the week of September 8.
McGinnis said CHC was requesting an amount not to exceed $90 million that will be used specifically to refund the 2005 Series A bonds, provide funding for a debt reserve fund, fund the cost of terminating an interest rate exchange agreement and fund the cost of issuing the 2008 Series A bonds.
McGinnis broke down how the $90 million would be used:
- $71.5 million to retire the 2005 Series A bonds
- $7.7 million for a debt service reserve fund
- $2.5-$3 million for the interest rate exchange transaction
- $1-$1.1 million to issue the bonds
In order for CHC to issue tax exempt debt it has to provide a vital community service like charity care, emergency department services or community education. McGinnis said that in this instance the public service provided by CHC is refinancing the bonds, because if it didn’t the interest costs would go even higher, putting the organization in financial dire straits.
“That’s why we have to bite the bullet and now and borrow enough money to pay those off — that’s the whole purpose of the reissue we are doing,’ McGinnis told CBN. “We’re not getting any new money out of this.”
Reissuing the bonds will allow CHC try to obtain a predictable fixed rate.
The 2005 Series A bonds floated by CHC are variable rate demand bonds, and just like what has happened with variable rate mortgages in recent months, the nonprofit’s payments increased as the federal interest rates went up. CHC just came off a series where it was running at 6.5 percent, but recently interest payments ran as high as 9 percent.
“We just can’t afford that,” McGinnis said.
The 2005 Series A issuance was worth $ 72.3 million, and the money raised from those bonds was primarily used to finance construction costs for expansions on the Bend and Redmond hospitals.
The 2005 series was also guaranteed by bond insurer Ambac, which has run into some significant credit issues fueled by the subprime market crisis over the last several months. Ambac lost its AAA rating, and as a result bonds that it insures, included CHCs, are not trading very efficiently. The Ambac insurance premium that once raised the authority’s credit rating now deters investors, according to published reports.
“There are an awful lot of hospitals doing what we doing that either have auction rate securities or variable rate demand bonds,” McGinnis said. “Both of those vehicles have become inefficient ways of managing long term debt because of the fact that the bond insurance rating has gone down. We had two bond series, and we refinanced our auction rate securities in May, and wanted to see what happened with the variable rate demand bond. We thought the market would stabilize but it did not so we are forced into refinancing this time around.”
Oregon office of Health Policy and Research said in Oregon, 28 percent of hospitals lost money in operations in fiscal year 2006. According to CHC’s 2007 financial statement audited by Simmons Evans & Co. in Portland, total operating expenses for the nonprofit were $365.6 million, with $135.2 million dedicated to salaries, and another $40.9 million to employee benefits. Net assets totaled $277 million with current liabilities of $53.1 million and long-term debt obligations of $151.7 million. CHC recorded operating income of $1.5 million in 2007 compared to $17.1 million in 2006.
McGinnis said some of the biggest challenges of running a large health care organization today are increases in the number of uninsured patients leading to bad debt expenses, and free health care expenses going up quite a bit. And because there is a continued shortage of health care workers the cost of attracting those workers, mainly salaries, continues to rise.
“We are also seeing increased pressure from the payers, like Medicare and Medicaid,” McGinnis said. “We continue to see increased rates, but they are usually significantly less than the increase in costs.”
He added that many hospitals have come to rely on investment income, sinking a lot of money into the stock market, and CHC is no exception.
“When the market goes down there is added pressure as well,” he said. “Those are all major issues hospitals deal with now.”
