UPMC holds the cards in county bond refinancing

Sunday, December 13, 2009


Allegheny County Council will vote Tuesday on the University of Pittsburgh Medical Center's request to refinance more than $1 billion in bonds through the county's hospital authority.

But even as the hospital system is seeking the county's help to cut its borrowing costs, UPMC has spurned county Chief Executive Dan Onorato's entreaties to keep open its Braddock facility -- a focal point for redevelopment in a distressed community and a boon for local patients.

At first glance, the county might appear to wield some sort of leverage over the medical juggernaut in the battle of Braddock by making the low-interest bond issue dependent on keeping the hospital open.

But in reality, it is UPMC that holds all the sway in this relationship, a point that Mr. Onorato begrudgingly acknowledges.

"I can't say that I am happy [with UPMC] right now. Do we have a good, solid relationship? I can't say that. But they are the largest employer in this region and that is a reality I have to deal with," said Mr. Onorato.

And the pending closure of UPMC Braddock on Jan. 31, is yet another reality facing Mr. Onorato, he said, adding that he cannot afford "to burn all possible bridges with UPMC," by insisting on a quid pro quo.

"When they close that hospital, I am going to be the one who goes back to them to ask for a list of things that they can do to help the community deal with this devastation," he said.

The behind-the-scenes logistics of the UPMC bond issue highlight an unbalanced power relationship between Allegheny County and the region's largest employer.

"There's no doubt -- we have no say," said Dennis M. Davin, director of Allegheny County Economic Development.

In short, UPMC has nothing to lose if the county rejects its bond issue, while the county has everything to lose.

The county knows that if it refuses to float new bonds through the Allegheny County Hospital Development Authority, not only will the move engender ill will, but the hospital system will simply go elsewhere to refinance its debt.

One option is the Pennsylvania Higher Educational Facilities Authority, a state entity that floats bonds for universities and nonprofit hospitals related to universities. UPMC spokesman Paul Wood said there are about 10 other authorities in the state that UPMC could tap.

With that in mind, UPMC makes a conscious decision to do the lion's share of its bond business with Allegheny County, Mr. Wood said.

"... The fees across all of these are all about comparable. So it is a choice, and the reason we do it is to allow the county to redeploy the dollars as they see fit throughout the county," Mr. Wood said.

The bottom line is that even if the county wanted to attach strings to its approval of a bond issue, it is not negotiating from a position of strength. All the county can do is ask UPMC for concessions; it cannot demand them.

"Our job isn't to have leverage," Mr. Davin said. "Our job is to assist businesses, to create jobs, to help to stabilize communities, to put money into communities that are struggling, like Braddock, which we've done."

What's more, roughly 10 percent of the $3.5 million annual budget for Mr. Davin's agency comes from revenue generated by fees assessed on UPMC for its bonds.

If the new bond issue is approved, that contribution will climb by $40,000 a year.

"The folks in Braddock would look at that and say, 'Look, don't help them. Don't do anything to help them,' " Mr. Davin said.

"The reality is ... the fees that are coming in help our department and in essence will help our department work better in Braddock on the eventual reuse of Braddock hospital and all the other economic development activities we're doing in Braddock."

David Hughes, executive director of the group Citizen Power and one of many residents of the Mon Valley involved in a public relations battle with UPMC over closing the hospital, agrees with Mr. Davin's sentiment about how people in Braddock feel.

Mr. Onorato and his economic development team, said Mr. Hughes, "claim that he will do whatever he can to try to keep that hospital open. This is one clear place where he has leverage. And instead of sponsoring this legislation, he should be encouraging the council to hold up on it until UPMC decides to negotiate in good faith on [keeping Braddock hospital open.]"

"There's got to be some quid pro quo here," said Mr. Hughes.

But Mr. Onorato's predecessor Jim Roddey -- who has dealt with UPMC on previous bond issues-- said it borders on economic development suicide for the county to set preconditions about any aspect of its relationship with the hospital system.

"The county doesn't have any leverage at all. UPMC can do pretty much what they want to and that is why in this Braddock case, they have exhibited a certain arrogance in the way they handled their decision," said Mr. Roddey.

Asked about the dynamic between UPMC and the county, Mr. Wood declined comment.

However, he said, "It's instructive to look back and look at the myriad of what we do for the city of Pittsburgh, Allegheny County and the entire region of Western Pennsylvania."

Mr. Wood noted the tax base provided by UPMC's 50,000 employees; the $500 million the system provides in charity care and donations to other nonprofits; the new Children's Hospital of Pittsburgh of UPMC; and its contribution to the Pittsburgh Promise program that provides tuition aid to public school graduates.

Despite a long-standing working relationship between the county and UPMC, Mr. Onorato said he was notified only six hours before UPMC's official Oct. 16 announcement of the decision to close the hospital in Braddock.

On Nov. 6, UPMC filed its application with the county Hospital Development Authority to refinance $1.175 billion in bonds.

The application stated that clients and patients of UPMC would benefit from the low-interest bonds because a "reduced interest expense will provide more funds for patient-focused programs."

Mr. Davin acknowledged that the timing of the bond request was less than perfect, but said it reflected nothing more than an analysis by UPMC of market conditions.

"It was incredibly bad timing. But again, it is what it is. Their financial people looked at this and said, 'Now's the time to do this.' What can we do?"

Formed in 1971, the obscure but powerful authority floats low-interest, tax-exempt bonds on behalf of nonprofit hospitals.

Since 2005, the authority has issued almost $3.2 billion in bonds for UPMC, Allegheny General Hospital, Jefferson Regional Medical Center and others. Of that amount, nearly $2.2 billion was floated for UPMC.

By comparison, the state has conducted three bond issues for UPMC totaling $605 million.

Hospitals can use the authority to either refinance other bond issues at lower costs or to embark on capital projects, such as construction.

Under federal tax law, the only way such entities can float tax-exempt bonds -- which carry a lower cost to the borrower -- is through an authority, which acts as nothing more than a conduit.

Although the bonds are actually issued by the authority, the borrower -- in this case UPMC -- bears all the risk. If UPMC can't make its payments, it is supposed to be ultimately responsible, not the county.

The first step in the approval process for a bond issue is the authority's board, which currently has eight members.

Mr. Davin and his assistant, Darnell Moses, said they could not recall the board rejecting a bond issue or approving it by anything other than a unanimous vote in at least the past seven years.

Mr. Davin praised the board and said members ask "some pretty hard questions."

The board chairman is James M. Edwards, who is also chairman of the McCune Foundation and has been an authority board member since the early 1990s.

Mr. Edwards said the board had never rejected a UPMC bond issue but had "tailored them." He declined to elaborate.

Enabling UPMC to access tax-exempt bonds provides broad benefits, according to Mr. Edwards.

"We view that as in the interests of the people that the institutions have an avenue for tax-exempt financing" because it lowers UPMC's costs, Mr. Edwards said.

"And I think that's a good thing," Mr. Edwards said. "It makes the services rendered in the interests of the public cheaper."

The final step before bonds are issued is approval from County Council.

Council President Rich Fitzgerald, D-Squirrel Hill, said there was discussion during another UPMC bond issue last year among members of his body about whether they could pressure the hospital system as part of a strategy to tax nonprofits.

"UPMC did one about a year ago and people had that question: 'What if we said, 'No?' Or 'Can we get more fees?' People were wondering if there was leverage on the bond issue."

Council sought the opinion of Mr. Davin, who explained the reality of the situation.

"What they've said is that if we can't get approval from Allegheny County Council they're gonna go somewhere else. Yes, they said that because they have to go somewhere else, OK? And that's a problem for us because we don't get the revenue. If it happens, it happens. We've got to deal with it," Mr. Davin said.

"UPMC is saying, 'Could you please do this just like you've always done this?' And we're saying, 'Yeah, we're going to try.' We're gonna put it through council like we've always done it. There's nothing different right now.

"The only difference right now is UPMC ... is closing Braddock hospital."