STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Board Meeting July 27, 2004 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 Tuesday, July 27, 2004. The meeting was called to order by Barbara Rubin, 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 Biancamano William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Catherine S. Boone (Rep. Denise L. Nappier) Barbara Rubin, Chair Laurence R. Smith, Jr. Dori Taylor Sullivan, Ph.D. Michael J. Cicchetti (Rep. Marc S. Ryan) Richard D. Gray, Executive Director, Jeffrey A. Asher, Managing Director/CFO, David A. Williams, Managing Director, Eileen MacDonald, Manager, Administrative Services, JoAnne Mackewicz, Manager, Client Financial Services, Michael Morris, Manager, New Business, Cynthia Peoples Hobson, Manager Systems and Financial Analysis, and Jennifer P. Smyth, Document Analyst, of the Connecticut Health and Educational Facilities Authority John D. Yarbrough, Esq., of Carmody & Torrance LLP Peter Wilson, Esq., of Day, Berry & Howard LLP Jeannette Weldon, Vice President, of P.G. Corbin and Company Stephanie Gibson, Managing Director, of Public Financial Management Edward J. Samorajczyk, Jr., Esq., of Robinson & Cole LLP Coleman H. Casey, Esq., of Shipman & Goodwin LLP 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 July 27, 2004 The Meeting was called to order by Barbara Rubin, Chair, at 2:00 p.m. MINUTES Mr. Cohn moved approval of the Minutes of the Regular Meeting of the Board of Directors of June 22, 2004, which motion was seconded by Dr. Cibes. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None Dori Taylor Sullivan 1 William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Barbara Rubin, Chair Laurence R. Smith, Jr. CURRENT AND PENDING BOND ISSUES Mr. Morris reviewed the Financing Forecast which shows the closing for the Eastern Connecticut Health Network Issue, Series B on July 21. The Hospital of St. Raphael s Series L&M issues are scheduled to be presented for Board approval at the September meeting, provided that acceptable credit enhancement is obtained. The closing for the $25 million Trinity College Issue, Series I was expected to close this week, but was delayed due to a structure change being considered by the College. Ms. Boone entered the meeting at this time. The Greenwich and Kent School issues will be presented for Board Amended Approval today. A $22 million issue for the Greenwich Family YMCA is expected to be presented to the Board for preliminary review in October, with an anticipated request for approval in December. Bradley Memorial Hospital expects to close an EasyLease in December, depending on the time of delivery of the MRI equipment. Mr. Morris updated Members on issues which staff has been working with clients, but which are not formalized yet. The Backus Hospital is planning a $40 million transaction for renovations to the Hospital s outpatient medical surgical unit and Emergency Room, as well as the inpatient surgical unit. Staff expects to present preliminary information on the Backus transaction in October or December, with a request for final approval in 1 Ms. Sullivan abstained from voting as she was not present at the June 22, 2004 meeting. 1
January 2005. Backus anticipates submitting the Certificate of Need approval in October. Griffin Hospital met with Staff last week about a potential bond issue, for which Mr. Williams will present preliminary information at today s meeting. Ridgefield Academy met with Staff regarding an $11 million issue to acquire and renovate a neighboring convent. The Ridgefield issue is expected next spring. Mr. Gray updated Members on the status of 3030 Park Fairfield s proposed financing. The transaction is on hold at the moment, due to the fact that the rating agencies did not want to rate it as a health care transaction. A variety of alternatives for financing or leasing the Southport Manor have been proposed by 3030 Park to the courts and DSS, but nothing has been finalized to date. Regarding the Summary of Financings, Mr. Morris noted the following closings: Lawrence & Memorial Hospital, Series E; Greenwich Academy, Series C; and Norwich Free Academy, Series A in June; and Trinity College, Series H and Eastern Connecticut Health Network, Series B, which closed in July. The reports were accepted as information. INTEREST RATE REPORT Mr. Williams reported on interest rates, stating that rates have come down slowly in the last month. As an example, the 30-year Treasury rate dropped from 5.37% at the June meeting, to 5.17% Friday, but rose again today to 5.30%. Today s change may be due to the report on U.S. positive consumer confidence, which is at a two-year high. Overall, long-term rates returned last week to levels seen in April, with the Revenue Bond Index at 5.26% Friday, down from 5.40% in June. The short-term LIBOR rate is up dramatically to 1.45% from 1.10% in April, reflecting the 25 basis point change in the federal rate, and the market anticipating additional Fed action on interest rates. The BMA index is currently holding at 1.04%. The 10-year Treasury has come down similarly to the 30-year Treasury, at 4.58% from 4.70% in June. SALES REPORT Eastern Connecticut Health Network Issue, Series B Ms. Weldon presented the Sales Report for the Eastern Connecticut Health Network Issue, Series B, which was structured as a variable rate issue, sold in a weekly mode. Advest was the sole underwriter for the issue. There was some confusion from investors about the confirming letter of credit for this issue, as to strength of the underlying credit of the hospital. Overall, the confirming LOC did not affect the sale, and the final price was one basis point above the BMA at 1.02%. Investor interest in the Series B issue was 2
good, and the underwriter did a good job of narrowing the spread when at times during the sale it was three or five basis points over BMA rate. Greenwich Academy Issue, Series C Mr. Morris reported that the Greenwich Academy Issue sold on June 24, with Citigroup serving as the underwriter. The bonds were sold to three institutional firms, with Fidelity Investments taking over 70% of the transaction. The Series C bonds were sold in a variable rate weekly reset mode, with an initial interest rate of 1.08%. The issue was rated Aa2, based on the rating of the letter of credit provider, Wachovia Bank; the School s underlying rating is A3. Since the date of the sale, the weekly reset rate has been tracking between the BMA rate and three basis points above that rate, similar to that of the Taft School, which also has a variable rate bond issue backed by a Wachovia letter of credit. Lawrence & Memorial Hospital Issue, Series E Ms. Gibson presented the Sales Report for the $22,990,000 Series E issue, which was underwritten by UBS Financial Services. Lawrence & Memorial s issue was structured with bond insurance by Radian, and a Bank of America liquidity facility. The initial rate set for the bonds was 1.12%, four basis points over the BMA index. There was limited investor interest due to the inability of some of those to purchase Radian-backed bonds. However, one order was placed by an institutional investor for $7 million of the bonds. UBS underwrote approximately $16 million of the remaining bonds at 1.12%. As the bonds are remarketed by the underwriter, the interest reset rates are expected to more closely match the rates of other issues backed by Bank of America liquidity. Ms. Rubin asked why there was so little activity for this issue, to which Ms. Gibson replied that at the end of the quarter, there is an outflow of funds as many investors liquidate holdings for tax payments. Ms. Gibson also stated that the Lawrence & Memorial Series E bonds have not yet recovered from the low sales, which is reflective of the initial lack of investors. When an issue has multiple buyers, it may be easier to remarket the bonds. PRELIMINARY STAFF MEMORANDUM Griffin Hospital Issue, Series B & C Mr. Williams called Members attention to a preliminary memo that had been added to today s agenda, resulting from a meeting with Griffin Hospital. Staff anticipates seeking Board approval at the September meeting for the refinancing portion, provided credit enhancement is obtained. An overall objective of the Authority is to refinance, when possible, any outstanding unenhanced issues with credit enhanced issuance. In 1993 when Series A was issued, the Board of the Authority required a large Working Capital fund, as an additional form of security enhancement in lieu of credit enhancement. 3
The first part, Series B, is a $25 30 million issue to refinance the $25.01 million Series A unenhanced issue with credit enhancement, primarily to provide savings to the Hospital. The Series A Debt Service Reserve Fund will provide an additional source of funds to Griffin, and Staff has encouraged the Hospital to include a $3.3 million possible new money portion for kitchen and cafeteria rebuilding for which it holds a CON approval. Griffin Hospital has identified over $20.8 million in major projects to be addressed over the next four years, $2 3 million of which include private activity use. Staff s recommendation is that the Hospital use equity or condominium sale proceeds to fund any private use projects. The largest of the proposed new projects for the Series C portion is $12 million for a cancer center, for which Griffin will apply for the CON approval in November. The building is expected to be three to four stories high, and will be connected to the Hospital s main building. An approximate $3 million for the cancer center expense includes radiation and other equipment for treatment services. One floor of the cancer center is expected to be used for physician s offices, which would be private use. Also included in the Series C projects is $2 million for expansion of the Hospital s emergency department, $1.5 million for relocation of laboratories, and up to $2 million for a cardiac unit, in partnership with another hospital providing such services, such as the Hospital of St. Raphael. The cardiac unit would require a separate CON approval. The Hospital hopes to do fundraising for $3 5 million of the $20.8 million of projects. In summary, Mr. Williams stated that the Series B and C issue would provide for approximately $25 million in refunding, and with the new money portion would address $15 million of the $21 million of projects identified by the Hospital. Ms. Rubin asked how Griffin would be able to obtain credit enhancement, and Mr. Williams replied that although it is difficult to find AAA rated insurance, Radian and similar AA rated providers, and bank letter of credit providers, have been in the market for health care issues and completed transactions. Other insurers in Radian s category are trying to enter the market to provide credit enhancement. Mr. Williams stated that the first goal was to set the structure for the fixed rate insured transaction, then approach bond insurers. In response to a further question from Ms. Rubin regarding a savings target for the refinancing, Mr. Williams replied that no specific savings level has been set at this time. Last week, the estimated savings was approximately 3.25%, assuming a bond insurance premium of 225 to 250 basis points. The savings are very much affected by the day-today volatility in the current market. STAFF MEMORANDUM Greenwich Academy Issue, Series D Mr. Morris presented the six-month shelf reapproval for Greenwich Academy. The Series D issue was originally approved for a six-month shelf period at the February 24, 2004 meeting, with the Series C $12.0 million new money portion. Series D will refinance the 4
School s 1996 Series A issue of $13.9 million, and will be structured as a fixed rate issue. FSA, the insurer for both Greenwich s previous issues A and B, will provide credit enhancement for the refinancing at a fee of 110 basis points. The Series C issue financed the acquisition of property owned by the Brunswick School, and renovations to the Greenwich Academy s dining hall. Currently, the estimated net present value savings for the refunding is two percent, which is down from last week s projection of four percent. Greenwich has set a minimum savings threshold of three percent in order to proceed with the refinancing. The School is rated A3 by Moody s with a positive outlook, which was an upgrade from a stable outlook on March 2004. Enrollment at Greenwich has increased to 777 students, from 755, mainly in grades nine and ten. The Academy estimates enrollment for fall 2004 to be around 800. There has been a 6% decline in applications, mostly in the Lower School. Greenwich s acceptance rate has increased from 21% last year to 32% currently. Matriculation is expected to decrease this year, from 85% to 77%. Geographic diversity is in line with last year s information, with the majority of students derived from Greenwich, 19% in surrounding Connecticut towns, and 13% commuting students from New York State. Similarly, minority students comprise the same level of diversity as last year, with 11.4% of students representing minorities. SAT scores are higher than last year, at 1,319. As a result of the new Series C debt, debt service to operations at Greenwich is high at more than 17%. The Academy projects an additional $500,000 in additional revenues from the expanding student enrollment. Debt service coverage is favorable at 2.5 times. Expendable resources to debt for FY 2003 is 1.10 times, which is in line with Moody s Baa median. Expendable resources to operations is favorable at 2.9 times, which exceeds Moody s A median. Fundraising efforts at the School are successful, having raised $49.2 million in gifts and pledges. Approximately 800 donors have pledged, with 13 gifts of $1 million or more, totaling $28 million, and 8 gifts in the $500,000 to $1 million range, totaling $4.7 million. Parent participation is strong, with over 90% of parents giving. Mr. Morris mentioned that there has been some talk of Brunswick School moving its high school campus which is adjacent to Greenwich s campus, in which the Academy has coed classes for the Upper School. The move may not occur for some time, or not at all, but may be a factor in attracting students. Greenwich Academy had requested issuing the Series D refinancing based on its own rating. The lowest rated independent school issue that was financed on the institution s own underlying credit was Loomis Chaffee, which had an A2 rating. Mr. Morris had informed the Academy that the Authority s internal credit committee did not approve of the Series D being issued on the Academy s rating. Ms. Rubin stated that the Board was in agreement with the credit committee s opinion. 5
Ms. Rubin asked what change in the market rates needed to be to effect the desired savings for Greenwich. Mr. Morris said that there would need to be a 15 to 20 basis point drop from the current rate to go forward with the refinancing. Mr. Biancamano asked about the level of financial aid per student at the School, which appears to be decreasing from approximately $21,000 per student to slightly over $13,000 for the upcoming academic year. Mr. Morris did not know of any specific reason for the increased tuition discounting, but will update the Board at the September meeting. There being no further questions from Members, the Chair introduced Resolution 2004-16 (Greenwich Academy Issue, Series D, Authorizing), which Resolution was read and considered. Dr. Cibes moved for adoption of Resolution No. 2004-16, which was seconded by Mr. Smith. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None Catherine S. Boone William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Barbara Rubin, Chair Laurence R. Smith, Jr. Dori Taylor Sullivan The Chair then declared Resolution 2004-16 adopted (see Appendix A, Resolution 2004-16). Kent School Issue, Series D Mr. Morris discussed the $23 million proposed refunding for Kent School. The current estimated net present value savings is approximately three percent, which has come down from six percent earlier this year. The School has set a minimum threshold savings level of five percent, increased from an earlier targeted level of four percent. MBIA will provide bond insurance for the transaction, at a premium of 125 basis points. Enrollment at Kent is currently 558 students, the highest level in the past seven years; approximately 91% are boarding students. Applications have increased 18.2% over the past five years to a high of 896 this year. Selectivity for fall 2005 is 57%, which is lower than last year at 68%, but higher than the average of previous years. Matriculation for fall 2004 at 41% is slightly higher than last year s level of 38%, but lower than in previous years (45.8% to 51.2% from FY 2000 to FY 2003). SAT scores are gradually improving, indicating an improving student quality. The School has good geographic representation, with the student body from 31 states and 19 foreign countries. Minority students comprise 13% of the student body. Attrition rates are still somewhat high at 12%, but are down from FY 2000 at 13.4%; attrition has averaged 12% over the past five years. 6
Kent School has had a balanced budget (excluding depreciation) for the past thirteen years. Following a rebound in the financial markets and gifts to the School s endowment, total net assets have increased from $74.7 million to $85.7 million from FYE 2003 to March 31, 2004. Based on FY 2003 financial resources, the School has adequate coverage for debt and operations at 1.44 times, which falls between Moody s A median of 2.4 times and Baa median of 0.8 times. Expendable resources to debt is slightly under 1.0 times at 0.93times, while expendable resources to operations is 1.51times; both compare to Moody s Baa medians. The School s capital campaign, which is scheduled to end next year, has raised $66.4 million of its $75 million goal, which should improve the School s financial resources to debt and operations in the future. Over one-third of the goal amount was pledged by Kent s Board members. However, annual giving has decreased over the past three years, with parent participation declining from 73% to 55%, and alumni from 30% to 26%. Despite the decline in giving, fundraising efforts fell just short of the $1.8 million goal for FY 2004. Debt service to operations will improve slightly to 10.7% as result of the refinancing, but still is on the high side. Mr. Morris reported that there is still pending litigation with the Schagticoke Tribal Nation, but there are no new developments in that matter. The bond insurer for the proposed Series D issue, MBIA, is aware of the litigation and comfortable with the financing. Ms. Rubin asked if Kent was a second choice school to students. Mr. Morris replied affirmatively, citing the historical low matriculation level as an indication of the School being a second choice. There being no further questions from Members, the Chair introduced Resolution 2004-17 (Kent School Issue, Series D, Authorizing), which Resolution was read and considered. Dr. Cibes moved for adoption of Resolution No. 2004-17, which was seconded by Mr. Smith. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None Catherine S. Boone William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Barbara Rubin, Chair Laurence R. Smith, Jr. Dori Taylor Sullivan The Chair then declared Resolution 2004-17 adopted (see Appendix A, Resolution 2004-17). 7
CHEFA FINANCIAL OPERATIONS Financial Statements for the Month of June 2004 Mr. Asher reported the financial statements of the Authority for June 30, 2004, which is preliminary information for the fiscal year end, before the financial audit is completed. The excess of revenues over expenses before program related expenses was approximately $2.2 million, which was $151,878 over budget. After program related expenses, the excess of revenues over expenses was $311,189, or $719,807 under budget. Program related expenses for FY 2004 included $1.5 million in grants paid, $117,000 for the child care Guaranteed Loan Fund program administrative costs and $213,665 for the interest rate subsidy. The financials reflect changes in fund balances based on approval of the operating and capital budget by the Finance Committee and Board at the May and June meetings. These changes include the creation of the Focused Investment Reserve fund of $6 million, the Malpractice Captive insurance fund of $1.5 million, and the Pharmacy Revolving Loan program assigned by the legislature at $500,000. The level of the legal fee reserve was maintained at $1.25 million. The year-end operating reserves were reduced from $7 million to $2.2 million. Ms. Rubin asked where the grant program reserve was listed, and Mr. Asher indicated that that reserve was reduced through the payments made to the Client Grant program and the Open Grant program. Mr. Gray reported on the draft report of the Auditors of Public Accounts, which is conducted every other year. The report contained no material weaknesses, no recommendations, and no unmet recommendations from prior reports. If there are no changes in the final report, this is the sixth year that the Authority has received a completely clean audit of its operations. Mr. Gray stated that the results of that state audit are a credit to Ms. Mackewicz s and Mr. Asher s efforts during the year. The financial audit is in progress this week, being conducted by CHEFA s audit firm of Carlin, Charron & Rosen LLP. OTHER REPORTS Pharmacy Revolving Loan Program Mr. Gray reported that he has been working with the Department of Social Services to obtain a letter confirming that the pharmacy revolving loan program could be extinguished, due to lack of interest from the Federally Qualified Health Centers ( FQHCs ). Mr. Gray received a call last week from a representative FQHC who reported that those entities are now interested in revisiting the program for funding prescription medications at the centers. 8
Nursing Home Sprinkler Loan Program In conversation with DSS, Mr. Gray expressed concern that the Nursing Home Sprinkler Loan Program has not been implemented, in accordance with the schedule outlined in the legislation. This program can be funded through grants or payment intercept for loan repayments. Mr. Gray s opinion is that the program would operate more efficiently for DSS if it were established as a grant program. He is scheduled to meet with a State Representative from Norwalk on August 5 who had requested a meeting of all interested parties, including the Department of Public Safety. Ms. Rubin asked where the funds for the loans would originate, and Mr. Gray replied that his recommendation is that the grants be issued from the state. Ms. Boone added that the nursing home facilities that are in need of funds for this program have poor credit quality, and little financial means to repay any type of loan. Mr. Gray reported that he had spoken today to the Deputy Commissioner of DSS, Mike Starkowski, regarding this program. Malpractice Captive Reserve Fund Mr. Gray informed Members that he has received a number of calls regarding this program, with the callers providing many different viewpoints. The Connecticut Hospital Association s ( CHA ) focus was that CHEFA should fund the reserve monies to that organization to implement the malpractice captives. The CFO of one organization felt that this program is a waste of the Authority s time. One insurer, Marsh McLennan, discussed the possibility of establishing a malpractice captive company for reinsurance. Additionally, a separate malpractice captive was suggested solely for use by physicians. There is a workshop with CHA this week on medical malpractice which Mr. Gray will attend. Also, he would like to meet with Mr. Biancamano regarding the structure of this program at the Authority, depending on there being sufficient data and background for such a meeting. Mr. Gray reported that he continues to poll CHEFA s health care clients regarding their needs or interest for the malpractice captive program legislated to the Authority. Mr. Gray also spoke to Representative Fritz to discuss CHEFA s progress toward this initiative, and to advise that the Authority would prefer to investigate the best way to provide a viable outcome, which may require more time than proposed in the legislation. SCRF-Backed Hospital Equipment Pool Stephanie Gibson of Public Financial Management met with Mr. Gray regarding the proposed structure for a pooled financing to utilize this program. Mr. Gray has received an OS from a State of Maine bond issue from CHEFA s bond counsel firm of Hawkins, Delafield and Wood for a similar financing, which will be reviewed by Staff. Child Care Loan Program Mr. Asher updated the Board on the many conversations he has had with child care providers regarding the potential for additional tax-exempt projects to be financed. Interest in the available funds is high, and approximately $18 million in bonds could be 9
issued based on the $1.0 million in debt service appropriated during the last legislative session. Demand for program funds could be as high as $30 40 million for projects identified by Mr. Asher s contact with interested child care providers and municipalities. Recently, Mr. Asher met with representatives of municipalities (Naugatuck, Manchester and Norwalk) for their projects which are allowed to be financed under the tax-exempt child care program, resulting from a change in CHEFA s enabling legislation during the last legislative session. Mr. Asher will give a presentation to the Connecticut Council of Municipalities and additional not-for-profit child care centers this week to discuss application requirements for the tax-exempt bond pool. There appears to be continued support by the legislative representatives who were instrumental in obtaining the additional debt service appropriation in the current state budget. Those representatives seem inclined to work for additional funding next year also. Grant Program Mr. Gray shared with Members the results of a recent meeting he and Kimberley Fontaine, the Grants Program administrator, attended at the Connecticut Council for Philanthropy ( CCP ). He conveyed the Internal Review Group s concerns regarding the quality of the applications received through the community foundations for the last round of Open Grants. CHEFA will continue discussions with CCP regarding methods to improve the quality of application submissions. Mr. Gray informed the Council and the attending community foundations that CHEFA s Open Grant program has been reduced to one cycle per year, which will occur next June. The Council felt this was appropriate at this time, and would allow time for the Authority to work with CCP and the foundations to refine the program and guidelines. Mr. Gray called Member s attention to the letters of appreciation and project reports from grant recipients that had been included in the meeting information. He showed a pictorial representation submitted by Mount Olive Child Care Center with its project report, showing the improvements made to the center s playground utilizing CHEFA grant funds. Compensatory Time In recent press, there has been an issue regarding compensatory time and requests for payment for that time worked upon termination of the President of the Connecticut Development Authority. Mr. Gray stated that CHEFA has no such policies about any form of compensation for time worked by salaried employees in excess of a normal work week. The only policy for compensation for time worked is CHEFA s recognition of employees involvement in volunteer activities, up to 30 hours per year, which is clearly outlined in the personnel manual. The volunteer policy allows an employee to earn additional vacation time for the volunteer time worked, but such time is never subject to any form of payment. 10
CHEFA s managers and officers often work above and beyond the required work hours, but do not seek any additional compensation, and there are no accruals to the Authority s financial information for any compensatory time. DATE OF NEXT MEETING The Chair reminded everyone present of the next meeting date, scheduled for Tuesday, September 14, 2004. There being no further business, at 2:47 p.m. Mr. Smith motioned to adjourn the meeting. Dr. Cibes seconded the motion. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None Catherine S. Boone William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Barbara Rubin, Chair Laurence R. Smith, Jr. Dori Taylor Sullivan Respectfully submitted, Richard D. Gray Executive Director 11