Hospital sale could cost millions

The hefty cost to pay down Union County’s $579 million debt early by selling Carolinas Medical Center-Union could be a bad bargain, according to Union County Financial Director Kai Nelson. Union County would incur more than $16 million in early-payment penalties if it used the money from a hospital sale to reduce the debt.

County commissioners are considering selling the hospital property, 600 Hospital Drive in Monroe, to pay down the county’s debt. It’s unclear exactly how much the county could get from the sale because there’s 10 years left on the 1993 lease and any buyer would have to either keep the current lease or negotiate with leaseholder Carolinas HealthCare System to break it. Estimates have ranged from $178 million to $280 million.

“The bottom line (is) any transaction that involves the cash from hospital ­proceeds must be analyzed within the context of other uses for that same cash,” Nelson said in a Jan. 19 memo to County Manager Al Greene. “Given the size of the county’s (­capital improvement plan) that the commission is currently reviewing, paying down existing debt with rather large penalties, to only then issue new, replacement debt to fund the CIP would be financially imprudent.”

CHS pays the county either $1.4 million or 7.5 percent of the hospital’s investment earnings and 10 percent of its operating income annually, whichever is greater. The payment has varied between the two in recent years.

County could lose another $34 million

On Jan. 27 the county owed $391 million in fixed-rate debt, paying 4.4 percent annual interest, and $188 million in variable-rate debt. The variable-rate debt carries a $16.5 million termination penalty, Nelson said. While the hospital sale would pay off some of the $579 million debt, the penalty would just be lost money, he explained.

The fixed-rate debt, meanwhile, can’t be paid off even with penalties until 2016 at the earliest. There’s a 10-year waiting period for bonds sold by municipalities and counties before the debt can be paid, Nelson said. The oldest bonds were sold in 2006, making 2016 the earliest payment opportunity.

If commissioners earmarked funds from a hospital sale to eventually pay the fixed-rate debt, the money would be escrowed until 2016. Nelson said the escrow fund would likely generate only 1.5 to 2.75 percent interest. The bonds, however, charge 4.53 percent interest annually, so the county would lose 10 cents on every dollar of bonds it owns in those six years – ­essentially up to another $34 million penalty.

Board of Commissioners Chairwoman Kim Rogers said she understands the problem, but wants staffers to be “thinking outside the box, looking at ways to restructure the debt so we can pay it down.”

She questioned whether the county could refinance some of the debt at a better interest rate and negotiate away the penalties. But Nelson said that’s not possible, at least on the fixed-rate debt, because the 10-year waiting period also prohibits ­refinancing.

Rogers suggested funds from selling the hospital also could be used to pay for future needs, instead of adding additional debt. The county’s current proposed five-year CIP includes $279 million for schools, parks, multiple libraries and infrastructure, among other items.

“Our county is growing and we’ve got things to take care of,” she pointed out.

Rogers also said she’d like to reconsider some county staffing, indicating the Union County Sheriff’s Office needs more officers. Because the money from the sale wouldn’t be designated specifically for capital improvements, it could be used to hire additional employees, she said.

“Last year when we had to make budget cuts, I think we cut too deep,” she said.

As for the hospital sale, Rogers emphasized that it’s not a given. County commissioners are just gathering information from Illinois consultants Kaufman Hall, who they’re paying $830,000, to learn all of their options.

“That’s part of our job,” Rogers said. “We haven’t authorized a hospital sale. If the current study comes back and says it wouldn’t benefit the county, then we can just walk away from the deal.”