Hospital looking at financing options for expansion project

GVH hopes to start construction by late spring

By this time next year, Gunnison Valley Hospital CEO Randy Phelps hopes parkas won’t be a prerequisite for an MRI, and patients visiting the emergency room don’t need to travel for an x-ray.

But that is all contingent on finding the right way of financing an 8,000-square-foot addition to the hospital in the next six months.
Members of the hospital’s administration and Wells Fargo investment banker William Douglas met with the Board of Gunnison County Commissioners on Tuesday, November 24 to discuss a couple of ways the hospital might go about getting the $9.3 million it needs for the expansion.
The expansion to the hospital will house the hospital’s MRI machine—which is currently parked outside the building in a semi-trailer—and a digital CT scan machine and other imaging technology that, hospital administrators say, will help the hospital remain competitive.
The project would also include space for meetings or visiting doctors and would also renovate parts of the existing building to better meet patients’ needs.
Despite struggling to get the hospital’s finances out of the red last year, GVH chief financial officer Tim Cashman said the time is right for the hospital to find the financing and start the expansion.
“We had a ‘not so great’ year last year, and that was the only time we’ve had a ‘not so great’ year in my 13 years here, and we’re having a pretty good year this year. So we feel that we can afford it,” he said. “It’s not really a whole lot of money to do what we’re trying to do, to incorporate and move the radiology department closer to the emergency department.”
One option the hospital has, as a county enterprise fund that maintains its finances internally, is a conventional fixed-rate revenue bond just like any public entity would issue to raise funds for a large project.
One of the advantages the hospital might realize by going that route is the speed of the process. A conventional bond can sell as soon as the paperwork is completed and someone buys the bond being offered.
The process of selling a conventional bond would also be a little cheaper for the hospital on the front end than the alternative, but would be made up over time with a higher interest rate. There is also the unpredictability in the bond market that might make a conventional sale less desirable to the hospital.
Another option for financing the project is going with a bond through the U.S. Department of Housing and Urban Development (HUD) which provides a bond rating of AA, where the hospital currently would have no rating or a low rating for a conventional bond. The lower a borrower’s rating, the more investors charge to lend them money.
Due to the security investors get from the federal government when buying HUD-backed bonds, there is also a more stable market for them, Douglas said.
But there are downsides to the HUD-backed bond, he said. There is a sizeable up-front cost to the hospital for a feasibility study that is required for the bond, as well as a financing process that can take more than six months.
The commissioners and hospital board member Malte vonMattheissen raised some concerns about the possibility that the hospital could default on the bond and lose some of the control over how GVH affairs are managed.
Under state law, Douglas said there are certain protections for the hospital because it is ultimately an element of the county government.
He also pointed out that a conventional bond might not be easy to sell because of the circumstances of the hospital.
“It is difficult sometimes to sell hospital revenue bonds because there is no mortgage, so some of the institutional investors simply won’t buy without that protection,” Douglas said.
He also said in the case of a default, the hospital’s administration and finances might be taken over by a third party, regardless of the financing option chosen, but it would be quite unlikely that the doors would be closed.
Cashman agreed, saying, “The deal is that nobody wants to run a hospital. Unlike homes and businesses where they’ll walk in and take it, they won’t do that here. They’ll come to the county and try to figure out a corrective plan of action.”
County Attorney David Baumgarten asked Douglas if he could provide a flow chart mapping the risk accrued by the county in each of the alternatives, whether financing came through HUD or a conventional bond.
Another decision that the hospital faces is how to go about the design and construction of the expansion. While the hospital administration discusses financing options, they will also consider the benefits of paying one firm to design and build the facility or paying two firms to specialize in each role.
 Commissioner Jim Starr said, “To me it is all about jobs, jobs, jobs—and anything you can do to use local labor in this project would be huge.”
Cashman says the preliminary review for the pre-application has been with HUD for two months, and he regularly hears that it will be any day now that the hospital finds out if they qualify to submit a pre-application.
“That’s the federal government; we had to apply for an application to apply for the HUD bond and the pre-application is the bulk of the deal. So I can’t really give a timeline,” Cashman said. “But we hope to be digging in the dirt and going to task by late spring.”
Phelps said he would return to the commission with a more detailed update on where the hospital’s board of directors stands with its financing option in June.