INTER-OFFICECORRESPOIIDENCE

DATE:

TO:

THROUGH:

FROM:

March16,2016

::".J:::;il:JJffiWLinda Cramer, Assistant County ManaOer;l_Lf

SUBJECT: Requested White Paper on Chatham County HospitalAuthority,Memorial Health, Inc. and the proposed Novant transaction

The Board has requested a White Paper explaining the relationship between theChatham County Hospital Authority, the County and Memorial Health as well as somehistory on the 2012 bond issue. This White Paper is attached.

Please note that county staff are still working out details on the proposedMemorial/Novant transaction. Final information wil l be presented to the Board onceavailable, as well as any documents requiring the Board's approval,

Attachment

Memorial / Novant Transaction White PaperPrepared for Chatham County Board of Commissioners

March 9,201"6

In December 2015 Memorial Health Inc. announced its desire to enter, into a "strategicpartnership" with Novant Health, Inc., a non-profi t health care system based in Winston-Salemand Charlotte, North Carolina. This announcement pulled Chatham County back intodiscussions with both Memorial Health and the Chatham County Hospital Authority (the"Authority") because the County had provided a f inancial guarantee on refunding bonds issuedby the Authority in 2012 for Memorial with a par value of 5163.88 mil l ion. Since theannouncement, the Board of Commissioners has asked staff to explain the relationshipbetween the County and the Authority, describe the upcoming transaction, and determine theimpact of the transaction on the Authority's Series l}TzAAuthority Bonds as well as theCounty's f inancial guarantee. *

As to i ts history, the Authority was established by Chatham County in October 1952 asauthorized bythe Georgia Hospital Authorit ies Law. The Authority is a public body, corporateand poli t ic, with broad powers to acquire, construct, improve, alter and repair hospitals, cl inics,nurs ing homes, extended care fac i l i t ies, medica lof f ice bui ld ings and other publ ic heal thfaci l i t ies, The Authority may issue revenue bonds and refund outstanding bonds, may establishrates and charges for the services and use of i ts faci l i t ies, and may mortgage, pledge, refund orassign any revenue or income it receives as security for i ts revenue bonds, The Authority mayissue bonds wi thout a publ ic re ferendum,

The business activit ies and affairs of the Authority are managed and conducted by anine member board who serve six-year staggered terms. All members of the Authority's Boardare appointed by the Board of Commissioners of Chatham County. A l ist ing of current Authoritymembers is attached. Mr. Don L. Waters serves as Chair of the Authority. Legal counsel isprovided by Scheer & Montgomery P.C.

Principal faci l i t ies consist ing of the general acute care hospital are owned by theAuthor i ty and are leased and operated by Memor ia l ( the "Hospi ta l " ) . The Hospi ta l has beenleasing the hospital faci l i ty from the Authority since Octob er 22,1984 when it agreed to assumeall assets, l iabi l i t ies, obl igations and rights of the Authority. Prior to entering into the leaseagreement with the Hospital, the Authority had owned and operated the hospital faci l i ty. Thecurrent lease agreement is t i t led the Amended and Restated Lease Agreement (May 1, zOAq,and it ref lects the terms under which the Authority agrees to the Hospital 's operation of thefaci l i t ies.

The Lease Agreement is a signif icant document as i t defines the relationship and serviceterms between Memorial and the Authority; therefore, the term "lease agreement" should notbe viewed narrowly. ln 2012 a First Amendment was added to the 2004 lease agreement toreflect elements specif ic to the Series 2AI2A bond transaction including the restructuring ofMemorlal 's Board of Directors. Provisions of the current lease also include that, upontermination of the Lease for any reason, the Hospital is obligated to automatical ly andirrevocable transfer the hospital faci l i ty, any interests of the Hospital relating to the hospitalfaci l i ty, and interest of the Hospital in any revenue fund as wellas al l of i ts assets to theAuthority. The Authority then would assume all debts, l iabi l i t ies and obligations of the hospitalfaci l i ty and other hospital assets so transferred, the Revenue fund, and the Hospital 's obligationfor the Series 20I2A Bonds as well as related documents and obligations associated with thebond issue.

ln 2012 Chatham County agreed to provide a f inancial guarantee for the Authority'sSeries 2At2A bond issue in the amount of S163,880,000 through an Intergovernmental Contractbetween the County and the Authority. During this transaction there were a number of legaldocuments executed between the County and the Authority, the County and the Hospital, theAuthor i ty and the Hospi ta l as wel l as U.S. Bank, the holder of the bond indenture. Of note arethe fo l lowing points :

The Loan Agreement between the Authority and the Hospital defined the use offunds from the Authority's Series 70I2A bond issue as i) repayment of theoutstanding Series 1996A Bonds, Series 20014 Bonds and Series 20044 Bondsissued by the Authority for the Hospital, i i ) providing funds for specif iedequipment and fac i l i t ies inc lud ing the Chi ldren 's Hospi ta l improvements andoperating rooms (524,453,874), and i i i ) paying the costs of issuing the bonds($2.1 mil l ion). The l-996A, 20014 and 20044 bonds al l carried a higher interestrate than the newly issued bonds. This transaction freed up cash for the Hospitalby providing lower interest rates and a restructured payment schedule, similar torefinancing a home mortgage at a lower interest rate.

The Authority agreed to provide indigent care faci l i t ies and services in exchangefor the County's guarantee or payment of the bond's debt service in theIntergovernmental Contract between the County and the Authority. The term ofthis contract is through the earl ier of forty years or the repayment of the Series2OL2A bonds,

The County is authorized to impose an ad valorem tax levy within a seven mil ll imitation to produce revenue for payment of the Authority's debt service

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requirement. However, this transaction was never represented as one where theCounty would assume responsibi l i ty for the Bond's annual debt servicepayments. Various contracts were executed to ensure this such as the LoanAgreement.

The Loan Agreement between the Hospital and the Authority specif ies themethods and t imel ines wherebythe Hospi ta lwi l l make requi red lease payments

to be used for the bond's debt service requirements. Funding for the leasepayments wil l be derived from the gross operating revenues of the Hospital. Inaddit ion the Hospital gave the County a security interest in an investmentaccount ho ld ing approx imate ly 5t+ mi l l ion, which is equiva lent to the maximumannual debt service (MADS) on the Series 20LZA Bonds. The investment accountcould be used to make the debt service payment in the event of a default by theHospital on its contractual obl igation.

To ensure the Hospital 's l iquidity and provide security' for the County, theHospi ta l and County entered in to a Covenant Agreement which out l ined anumber of commitments made by the Hospi ta l inc lud ing i ) establ ishment of af inancial review committee to meet quarterly to review the Hospital 'sper formance and compl iance, i i ) a requi rement for min imum unrest r ic ted cashon hand ( l iqu id funds)equal to at least 65 days of to ta loperat ing expenses,which would be ver i f ied by the Hospi ta l 's external audi tor annual ly l , i i i ) aHistorical Maximum Annual Debt Service Coverage Ratio of at least 1..20:1" foreach f isca lyear of the Obl igated Group (Memor ia l Heal th & Memor ia l Hospi ta l )a lso ver i f ied by the external audi tor annual ly , iv ) t imel ines for prov id ingquar ter ly unaudi ted and annual audi ted f inancia l in format ion to the County, andv) remedies i f the agreement is not fol lowed.

The Series 2AnABonds were structured to provide the Hospital with addit ionalunrestr icted cash / added cash f low for operating and capital needs. At that t ime

I Days of Unrestr ic ted Cash on Hand is ca lculated as Unrestr ic ted L iquid Funds for each calendar quar ter andcalendar year, respectively, divided by the Obligated Group's Total Operating Expenses for the most recent period

of four consecutive calendar quarters divided by 365. Unrestricted Liquid Funds means unrestricted l iquid cash orcash equivalents { inc luding the funded depreciat ion account) , unrestr ic ted marketable secur i t ies and funds held infirst security interest held by the Bank and Deposit Control Agreement but excluding i) any funds held by a trusteeand restricted to use by the Obligated Group for purposes other than paying operating expenses and debt servicegeneral ly , and i i ) borrowed moneys repayable upon demand or held by the lender as secur i ty for loan or pending

disbursement upon compl iance wi th cer ta in precondi t ions.

the Board expressed their concern about retaining the high service levels andemployment base within the community that was provided by the Hospital. Theterms outl ined in the Covenant Agreement for the Series 20I2A Bonds were lessrestr ict ive than those fol lowed by the Hospital under the prior bonds. Mostnotably the Days Cash on Hand requirement dropped from 85 to 65 days. Theaverage daily expense as of Sept. 30, 2015 was S1,285,000 based on unauditednumbers; 20 days cash therefore equals 525.7 mi l l ion. In addi t ion, the County 'sguarantee provided a bond rating of AaZ forthe bonds; the prior bonds had alower rating: Standard & Poor's rating of BB+ (Sept. 201,7) with a stable outlookand Moody's rating of Baa3. The County's higher bond rating meant a lowerinterest expense for the Hospital and Authority.

r One provision of the Series 20L2A Bond agreements was a revised structure tothe Board of Directors of Memorial Health University Medical Center whichrequired a Bylaw change. The revised Board consists gf up to L7 members andno less than 13, wi th 3 members being pract ic ing phys ic ians and 4 membersbeing part of the Authority, to include the Chair of the Authority. The revisedBoard s t ructure was inc luded in a Memorandum of Understanding between theCounty and Memor ia l Heal th Univers i ty Medica l Center . The MOU also l is tedother obligations of the Hospital to the County that the Board of Commissionershad requested in 2012, This inc luded the cont inued operat ions of the Level ITrauma Center and Level l l l neonata l in tens ive care uni ts at the 20l l operat ionallevels .

Pursuant to the proposed transaction between Memorial and Novant, County staff havemany of the same concerns as expressed in 2012. County staff remain protective of theCounty's interests and are disincl ined to add risk to the County's f inancial posit ion. The Countyis working with i ts f inancial advisor and legal counsel to understand how the transaction wouldchange the County's f inancial guarantee of the 2012 bonds and what documents from the bondtransaction need to be modif ied to add further protection to the County. Any such modif ieddocuments wi l l requi re the approval o f the Board of Commiss ioners, and only f ina l documentswil l be sent to the Board for approval. As represented the proposed transaction would addNovant in as a guarantor to the County for the 2012 bonds; however, County staff areconcerned about the impact of service level changes within the community that Novant couldmake in the fu ture.

The Author i ty has been tak ing the lead ro le in the negot ia t ions wi th the Hospi ta l andNovant since their approval is required to amend the Lease Agreement, County staff have met

with representatives of the Authority and Hospital to determine how the County's interests canbe incorporated into any future or amended documents. While there are many facets to thistransaction, the County is focusing on the fol lowing items:

Financial Liquidity needs - The County would l ike Memorial to continue to retaina solid cash posit ion on its balance sheet. Since Memorial 's corporate structurewil l survive the proposed transaction, the 2012 bond covenants for 55 Days Cashon Hand and MADS wil l st i l l stand as wil l the secured investment account. TheCounty is interested in also maintaining the funded depreciation account withinMemorial 's corporate structure. This account currently has a balance ofapprox imate ly Sf+O mi l l ion.

Service Levels * The County is discussing how the Authority could incorporateservice level terms into the Lease. The County is interested in maintaining thecurrent service levels for Trauma, Neonatal ICU and indigent care. The Authorityhas also expressed interest in maintaining medical edi lcation through theres idency programs at Memor ia l .

Lease Term - Novant has requested that the Lease term, which is now 40 years,be "evergreen" after ten years or the end of "Fulf i l lment" period so that i t wouldthen renew to 40 years, and then every 5 years be renewed again. The Authorityis discussing this provision of the lease.

o Detai ls of Unwind/Reversion - The transaction has many detai ls related to how itwould "unwind" in the event of a terminat ion of Novant 's membership inMemorial Health. These provisions are being reviewed and discussed to ensurethat the residual entity would be a solvent and functioning hospital. Thediscuss ion is a lso contemplat ing how and to whom any new assets would bedistr ibuted or offered for purchase. The County logical ly has a stronger interestin assets held within i ts local area including Chatham, Bryan, Liberty, Eff ingham

' and Bulloch counties and the Jasper/Beaufort County area in South Carolina,

County staff wil l continue to work with the Authority and al l part ies relevant to thistransaction to ensure that the County's interests are protected to the ful lest possible extent,