Loan pools funded with tax-exempt bonds, a common vehicle for financing small-scale healthcare projects, are coming under more scrutiny.
Florida Auditor General William Monroe is recommending additional state oversight of loan pools created by local government authorities after his office investigated eight pools and found that in all but one, the vast majority of bond proceeds were never loaned for public projects.
Four of the little-used pools investigated by his office were created for healthcare projects.
The Florida report echoes concerns of the Internal Revenue Service, which has been investigating loan pools nationwide. The IRS believes some pools have been established to take advantage of tax-exempt financing to generate professional fees, with no reasonable expectation that the money would be borrowed. Fees for investment banks, financial advisers, bond counsels, issuing authorities, insurers, administrators and others are paid from bond proceeds.
In many cases, state hospital associations have conducted demand surveys prior to bond issues and received fees to administer loan pools.
Loan pools are commonly used to provide financing for projects that are too small to merit bond issues of their own. Typically bonds are issued by a local financing authority to fund the pool and hospitals may borrow from the pool to finance construction projects or equipment purchases. To avoid abuse of tax-sheltered debt, federal tax law says issuers must "reasonably expect" that at least 95% of the proceeds from a bond issue will be loaned within three years.
But most of the capital in pools investi-gated by Monroe's office went unused. In the four healthcare pools, only 5% of more than $1 billion raised was borrowed while the costs of issuing bonds and administering the pools came to nearly $31.9 million (See chart).
The report said loan pools lacked such controls as competitive bidding for professional services, proper financial reporting and documentation to support payments for professional services. It recommended that the state Legislature transfer the power to issue bonds for loan pools from local authorities to a state agency.
"There's a problem here that extends beyond one individual pool issue," said Jim Dwyer, audit manager in Monroe's office. He said if the IRS finds abuses in the state's pool bond issues, investors could shirk future bond issues, making financing more difficult and expensive.
The audit report also criticized the pools for not benefiting Florida residents. One of the healthcare pools had just one borrower: Hutchinson (Kan.) Hospital. The issuer of the bonds, the Escambia County (Fla.) Health Facilities Authority, paid national hospital cooperative VHA, based in Irving, Texas, for "marketing and administering" the loan pool to its members, VHA spokeswoman Lisa O'Steen said.
The authority's attorney, Paula Drummond, did not return a call seeking comment last week. In a written response to the auditor's report, the authority blamed the "profound negative effect on the nation's economy" after the Sept. 11, 2001, terrorist attacks with hurting the credit standing of potential borrowers, as well as the ongoing IRS investigation of bond pools.
Reflecting the comments of some other issuers, the authority accused state auditors of lacking bond finance expertise and said the report "does not identify any illegality or errors" with its loan pool, which it said served as a "tool" for hospitals to negotiate better financing from other sources.
The Florida report "confirms the same concerns we have about pools," said Charles Anderson, IRS manager of tax-exempt field operations.
Anderson said last week that the IRS has been investigating about two dozen bond pool issues, nearly half in healthcare. He said the agency has reached settlements with "a couple" of nonhealthcare issuers, which agreed to pay monetary settlements in lieu of having the bonds declared taxable, and is negotiating with others.
Last year, state hospital associations in Kentucky and Ohio disclosed that bond pools they helped to establish were under IRS review (March 4, 2002, p. 6). Modern Healthcare reported that at least 16 healthcare bond pools have been created in 10 states, and in all but one pool, state hospital associations played an integral role, usually by conducting demand surveys and administering the pool through a for-profit subsidiary.
Criticized in the Florida audit was an untapped $330 million issue by the Orange County Health Facilities Authority.
The issue was sponsored by the Florida Hospital Association.
In its response letter, the Orange County authority defended its due diligence process and said demand for loans dried up because of the "unforeseen effects of Internal Revenue Service examinations of other pool bond issues."
Rich Rasmussen, a spokesman for the Florida Hospital Association, took issue with the report's conclusion that a state agency should assume the role of issuing bonds for loan pools. "We still believe that the local health facilities' authority knows best what the needs are of the communities," Rasmussen said. "We think there is a role for state oversight but not a state takeover." Hutchinson Hospital Vice President of Finance Gary Witham expressed surprise last week when informed by Modern Healthcare that his hospital had been the only one to tap the Escambia County loan pool. He said the hospital learned of the pool through VHA, and was attracted by its low interest rates. So far, he said, the hospital has borrowed $18 million of its total $30 million loan commitment to fund an expansion of its building and equipment purchases.
Witham called the lack of other borrowers "really rather odd."