The City Commission of Arkansas City met Wednesday afternoon in a study session to discuss hospital bond refinancing options.
Advisers with Ranson Financial Group and Gilmore & Bell discussed the construction bonds attached to South Central Kansas Medical Center.
Ranson Financial municipal adviser John Haas presented a report he created with five different options for the future refinancing of the bonds.
“I find it more important to emphasize that the refinancing of the Series 2009 bonds is not my biggest concern,” Haas wrote in a letter to the commissioners. “Without the authorization of a new sales tax, the current one-cent levy will expire in 2026.”
Starting in 2020, SCKMC’s outstanding debt service will total $35,835,050, according to the letter, which was passed out during the meeting.
Because this sales tax will drop off entirely near the end of 2026, an anticipated shortfall of $23,372,149 will have to be paid off.
“To make up the difference, the city would have to either increase property taxes or the hospital would have to generate excess cash flow, or a combination of both, for the repayment of the debt service,” Haas said.
The second option seems unlikely in the near term, given the medical center’s struggling finances, while the first option proved unpalatable to Arkansas City voters during the 2016 campaign for the one-cent sales tax.
“I do not know the additional mill levy requirement nor the profitability of the hospital,” he cautioned. City officials estimate it would take at least 29.5 mills of additional property taxes to replace the one-cent sales tax.
“There is no guarantee that the (bond) ratings would be improved … to a level sufficient to reduce interest rates (where) refinancing the Series 2009 bonds would create a material cash flow savings.”
Haas emphasized that while refinancing the bonds is a nice goal, the most important task facing the city is extending the sales tax to cover the entire life of the debt, not just the next eight years.
“I reiterate — instituting a new one-cent or half-cent sales tax is far more important than the possibility of refinancing the Series 2009 bonds,” he said. “Refinancing the 2009 bonds would just be an added benefit.”
City Manager Nick Hernandez indicated he and Haas have been in contact for a couple of years, after refinancing the Series 2009 bonds became a goal for the hospital.
The bonds issued to build SCKMC have repayment plans that currently reach into 2038. These bonds currently average 7-percent interest rates.
Haas was tasked with determining whether a non-sunsetting, one-cent sales tax would be enough to make the bonds able to be refinanced.
The bond rating recently went down again in April, according to Moody’s Investors Service.
Scenarios and assumptions
Haas projected five alternative scenarios — the first of which is to do nothing when the half-cent tax expires, which is the worst-case scenario.
But the last two options he outlined would provide the most future financial stability to hospital.
These options have the potential for significant savings, but all of the numbers Haas presented were based on some basic, rosy assumptions:
- the passage of a non-sunsetting, one-cent sales tax;
- interest rates not increasing significantly;
- the bonds being upgraded by Moody’s to a higher rating;
- sales tax collections remaining relatively steady or even increasing.
The last two scenarios Haas shared with the commissioners involved the passage of a one-cent general sales tax that does not sunset.
The first of these, based on the assumptions above, showed a revised average interest rate of 3.4 percent.
Estimated cash savings in this scenario could be more than $8.085 million, or 30 percent of the total amount currently left on the bonds.
Overall, this scenario has the potential to save taxpayers at least $2.65 million in sales taxes.
The second scenario involves extending the debt service out 10 years, until 2048.
Based on the above assumptions, this scenario showed a revised average interest rate of 3.95 percent.
Estimated cash savings in this scenario would be more than $1.525 million, or 23 percent of the total amount currently left on the bonds.
Overall, this scenario has the potential to save taxpayers $12.09 million.
Rating tied to sales tax
Without the passage of a one-cent, non-sunsetting tax, however, it is highly unlikely that the bond rating will improve, which by itself could prevent any of these hopeful scenarios from coming to pass.
Currently, the Series 2009 bonds are traded at “junk” status, according to Haas.
They are not rated in such a way that a local bank would be able to buy them, but that could be different should a new sales tax question pass.
Bond ratings are based on the entity tied to them that has the worst credit, so while the city is in much better shape financially than it was in 2009, the hospital’s credit has not improved at all.
“I have argued this issue for years (with rating agencies),” Haas said. “And I don’t win that argument because I don’t sign my name to the rating — they do.”
If a sales tax passes, the city could ask for the rating to be re-evaluated. This likely would have to occur in person, said Haas and Hernandez.
“Bond people are very evasive,” Haas said.
Also, when the Series 2009 bonds originally were issued, no underwriter was employed to help the city through the issuance of the bonds.
This time around, a bond underwriter would be employed to ensure the city’s interests are covered.
City counsel and changes
Gilmore & Bell, who cover the legal financial aspects, are not allowed by law to give any advice on the bonds, only what is legally allowed.
“I’m 100,000 percent comfortable with them,“ Hernandez said of retaining Gilmore & Bell.
“It’s hard to imagine refinancing at more than 7 (percent),” said Mayor Dan Jurkovich.
Haas also said that changes to certain structures and policies could weigh heavily on the bond rating.
“Rating agencies love policies and procedures,” he said.
One example given was the makeup of the hospital board of trustees — which was dissolved May 15 by the commissioners, who now will serve as the trustees themselves.
The plan moving forward after this meeting was for the bond counsel to finalize the wording for a sales tax question, which the citizens will vote on via mail-in ballot prior to November.
The bond rating companies may see the passage of a sales tax without a sunset as insurance for complete payment of the bonds, which in turn could help to improve the bond rating. A side benefit could be the early retirement of the half-cent tax, currently set to expire next April.
The city’s message? “We’re going to take it from 1 1/2 (percent sales tax) to one (percent), and we’re going to cover the (entire) debt, and we’re going to try to refinance (the bonds),” said Public Information Officer Andrew Lawson.