The political leadership in Upland is convulsing as it continues to assimilate the implication of a number of financing arrangements that involved entities within the city making use of the city’s tax-exempt bonding authority over the last dozen years.
The reverberations of those institutions or ventures experiencing financial setbacks and consequent difficulty in debt servicing those bonds has come to include the firing of the president and chief executive officer of San Antonio Regional Hospital together with pointed questions about conflicts of interest related to the issuing of those bonds involving Upland’s city attorney and his law firm.
At the time the bond issuances were made, city officials were given assurances the arrangements would have no impact on the city’s credit rating whatsoever. Now, however, with the poor performance of some of the entities benefited by that bond financing and the prospect that the bondholders will sustain losses on those investments, the city’s involvement in setting up financial instruments that fail, no matter how ostensibly insulated it is from the monetary impact, is bringing into question the soundness of city officials’ judgment and the reliability of the city’s word and endorsements.
Questions about those financing arrangements in which the city lent its status as a municipal corporation and nonprofit concern without full regard to the long term viability of the bonds recently came home to roost when the board for San Antonio Hospital on September 10 fired the hospital’s president and chief executive officer, Harris Koenig.
Having begun operations originally at the southeast corner of Arrow Highway and San Antonio Avenue in 1907 before moving to its current location just south of the eastern terminus of 11th Street and north of San Bernardino Road and west of Memorial Park, the institution for generations was known as San Antonio Community Hospital. In 2011 it embarked on a six-year long series of planned expansion stages intended to transform it into a regional hospital. Over that span, the number of beds at the institution increased from 271 to over 400. Included in that expansion was the $160 million four-story Vineyard Tower at 999 San Bernardino Road, which upped the number of stations in the hospital’s emergency room from 34 to 52, while creating and outfitting 12 more intensive care units.
In 2017, San Antonio Regional Hospital undertook a partnership with the City of Hope, entailing the erection of a $30 million, 60,000-square foot structure at 1100 San Bernardino Road to house an ambulatory care center as well as a City of Hope outpatient cancer center on the first floor.
The City of Hope-affiliated facilities entail ones offering chemotherapy, radiation, and surgical services, intended to be of benefit to local cancer patients undergoing chemotherapy, as the treatment regimen they are subjected to can greatly weaken and fatigue them. Having the outpatient center in Upland can reduce the traveling distance for many of those patients and their families by as much as 24 miles, the distance between San Antonio Hospital and the City of Hope in Duarte.
On November 27, 2017, the Upland City Council voted to authorize the undertaking of an installment sale for financing to benefit San Antonio Regional Hospital, making available a portion of the $125,000,000 in certificates of participation for San Antonio Hospital a previous city council had authorized in 2011.
What the city was engaged in vis-à-vis the certificates of participation and San Antonio Hospital is what is referred to as conduit financing in which the city allows its authority to be used so that the certificates of participation, a type of bond, can be marketed as tax-exempt instruments, making them more attractive to potential “participants,” that is, bond purchasers. Since the purchasing is done through the city, this financing allows San Antonio Regional Hospital to benefit from the tax-exempt status to receive a better interest rate on the certificates of participation.
Orrick, Herrington & Sutcliffe, the city’s bond counsel, prepared and reviewed the documents relevant to the sale, as did City Attorney James Markman with regard to documentation and procedure, to move the transaction forward.
San Antonio Hospital agreed to indemnify the city and its officers, agents and employees with respect to the financing and to reimburse the city for its costs incurred in the financing.
City officials were assured that there was no and would be no future direct or indirect impact on the city as a result of the financing, and that neither the faith or the credit nor the taxing authority of the city is pledged to the repayment of the certificates of participation.
The city has engaged in other conduit financing arrangements with various entities registered as nonprofits providing low income or senior citizen housing in the city.
According to Londa Bock-Helms, the city’s finance officer, the city has no risk whatsoever in lending its tax-exempt bonding authority to those entities it deems fit. Even though the purchasing of the bonds or certificates of participation is done through the city, the city is not responsible for servicing the debt those entities such as San Antonio Regional Hospital or the operators of senior citizen/low income housing projects take on when they obtain upfront financing from the proceeds from the bond sales or certificate sales, Bock-Helms said.
“The city has no obligation or liability in a conduit financing situation,” she said. “If one of those defaults or doesn’t make its bond payments, it doesn’t negatively affect the city. For the city there is no negative outcome with regard to what happens to those entities. If they fail or default, it’s all on them. It has nothing to do with the city.”
Bock-Helms said the entities issuing the bonds put strictures in place to ensure the integrity of the financial instruments in question, be they tax exempt bonds or certificates of participation. In the case of conduit financing for low income housing projects, she said, “The first priority for the use of the rent is to pay the debt service. The rents from the housing rentals are what is used to secure the debt. The first thing the rents received go to is to pay the debt service on the bond issuance.”
She said similar commitments existed in the arrangements for the issuance of the certificates of participation at the hospital, with a portion of the hospital’s operating revenue set aside to make monthly, quarterly or yearly payments to the certificate holders.
The city has the ability to use bond financing and could use bond financing for its own efforts to create infrastructure or public improvements, but has not done so for some time, Bock-Helms said. She said the city’s last issuance of bonds for itself consisted of water bonds issued in 2011.
Bock-Helms said the city’s bond rating stands at a mediocre AA-. Its bond rating is not a major issue at present, she said, because the city is not looking to do any issuances to raise money.
“If we don’t have a bond issuance,” she said, “we don’t have a bond rating.”
Bock-Helms contradicted the information and documentation obtained by the Sentinel showing that San Antonio Regional Hospital’s bond rating had been downgraded this year.
Bock-Helms said, “With regard to their [San Antonio Regional Hospital’s] bond rating, it has not changed. When the certificates were issued, it was a triple b. It is still a triple b.”
According to a report from moodys.com dated May 8, 2019 obtained by the Sentinel, Moody’s Investors Services downgraded San Antonio Regional Hospital’s bond revenue rating from Baa3 to Baa2. Simultaneously, the hospital’s fiscal outlook was revised from stable to negative. That particular action immediately impacted $1.42 million of rated debt issued by the City of Upland.
Indications were that San Antonio Hospital had bitten off more than it could chew and it would have to spit some of what it had in its mouth out before swallowing or run the risk of choking.  According to Moody’s, the hospital was suffering from poor operating performance and its debt service coverage was out of whack. It had a marked decline in its liquidity and was facing increasing competitive pressures just as its affiliation with the City of Hope was diluting its income stream.
Bock-Helms did not reference Moody’s when addressing San Antonio Regional Hospital’s bond rating, instead citing Standard and Poor’s financial ratings company figures relating to the hospital. She did acknowledge that San Antonio Regional Hospital’s bond-rating outlook had been changed downward.
What is clear is that the San Antonio Regional Hospital’s board of directors is concerned about the hospital’s performance. According to Moody’s, the hospital had operating revenues in Fiscal Year 2017 of $323 million, but is carrying the liability of certificates of participation issued in 2017 and 2011 which are are secured by a gross receivable pledge of the hospital. Meanwhile, the hospital has no debt service reserve fund. Covenants impacting the hospital include an ongoing debt service coverage test of 1.1 times, and additional indebtedness tests.
Koenig became president and CEO of the hospital in June 2011. It was under his leadership and guidance that the hospital embarked on its expansion and the taking on of its now substantial debt. Though the board has made no official pronouncement, it apparently felt Koenig was in some measure responsible for the precarious position the hospital now finds itself in.
Upland’s relationship to the hospital is a complex and involved one, entailing several close community ties, financial interdependence and no small amount of community pride. The hospital is the city’s largest employer, larger than the Upland Unified School District and the City of Upland combined. It is also the city’s single largest provider of services to individuals living outside the city, thus representing a major draw of revenue into the city. It is the city’s largest major non-governmental institution.
The city has over the years made significant concessions to the hospital. On multiple occasions going back decades, as the hospital has expanded, the city has provided portions of adjacent Memorial Park to the hospital, primarily to expand its parking lot. Most recently, in 2018, the then-city council, composed of three members who have since been voted out of office or who chose not to run, agreed to sell to the hospital 4.631 acres of Memorial Park for the hospital to utilize as a parking structure. That move resulted in a firestorm of controversy and resistance on the part of the city’s residents, which was in some measure responsible for the changeover with the election cycle at the end of 2018 in three of the council’s members. Coincidental with that was the effort by City Attorney James Markman, who was also involved in vetting the 2017 certificates of participation issuance for the hospital, to obtain a validation order from the Superior Court precluding any of the city’s residents from taking legal action to block the sale of the 4.631 acres of parkland to the hospital. Citizens contested that validation action, resulting in the hold-up in the city’s provision of the land to the hospital for the parking structure and further resulting in the court denying the city’s validation action. At present, the sale of the park property to the hospital is up in the air, such that the hospital, following its recent expansion, is now in a crisis over the lack of adequate parking space.
The downturn in the hospital’s operational performance, the firing of Koenig, the prospect that the hospital could default on its bond funding arrangement through the city and the suggestion that the city is in some measure impacting the hospital’s performance because of its sudden unwillingness to turn park property over to the hospital has startled the members of the city council, which includes three who have been on the panel for less than a year. They are learning of the bond funding arrangements made through the city on behalf of the hospital, that the past members of the council had at best an imperfect understanding of that arrangement and at worst a complete misunderstanding of its implication. They are troubled by the involvement of the city’s advisors and the city attorney in recommending that those past city councils proceed with the bonding arrangements. They are equally anxious about the prospect that a default on those bonds, or certificates of participation as they are called, will result in, if not direct financial liability to the city, than a blow to the city’s reputation and a questioning of the quality of the city’s leaders prudence and judgment.
Asked about the difficulty the hospital was experiencing in staying current on its bonded indebtedness, Bock-Helms said, “That would be a question for hospital officials.”
-Mark Gutglueck