STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY. Minutes of Authority Board Meeting March 24, 2009

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1 STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Board Meeting March 24, 2009 The State of Connecticut Health and Educational Facilities Authority met in session at the Authority s office at 10 Columbus Boulevard, Hartford, Connecticut at 2:00 p.m. on Tuesday, March 24, The meeting was called to order at 2:00 p.m. by Barbara Rubin, Chair of the Board of Directors of the Authority. Upon roll call those present and absent were as follows: PRESENT: ABSENT: ALSO PRESENT: John Biancamano* William Cibes, Jr., Ph.D. Benson Cohn Patrick Colangelo, Vice Chair John Mengacci (Rep. Secretary Robert Genuario) Barbara Rubin, Chair Sarah Sanders* (Rep. Honorable Denise Nappier) Bryan Pollard, Esq. Jeffrey A. Asher, Executive Director Paula L. Herman, General Counsel Tara Keating, Administrative Assistant Eileen MacDonald, Manager, New Business/EasyLoan Program JoAnne Mackewicz, Controller Michael Morris, Assistant Director Cynthia Peoples, Assistant Director Debra Pinney, Manager, Administrative Services Norberto Ramirez, Compliance/Internal Audit Jennifer Smyth, Manager, Legal Services David Wasch, Manager, Child Care Programs Jeanette Weldon, Managing Director of the Connecticut Health and Educational Facilities Authority * Present via telephone. APPROVED Minutes March 24, 2009 Page 1 of 10

2 GUESTS: Julie A. Balerna, Vice President, The Bank of New York Mellon Jeremy Bass, Sr. Managing Consultant, Public Financial Management Coleman Casey, Esq., Shipman & Goodwin LLP Edward S. Jason, Jr., CPA, Partner, Whittlesey & Hadley, PC Stephen B. Faber, Managing Director, PFM Asset Management, LLC D. Scott Gibson, Director, RBC Capital Markets Kevin P. Norton, Managing Director, The Bank of New York Mellon Nedine Peluso Sutton, Vice President, Wells Fargo Bank, N.A. Edward Samorajczyk, Jr., Esq., Robinson & Cole LLP Christopher Valentino, Associate, Lamont Financial Services Corp. Richard J. Wasserman, Esq., Day Pitney LLP John Yarbrough, Esq., Carmody & Torrance LLP Ms. Rubin welcomed Ms. Jeanette Weldon who has now joined CHEFA as the Managing Director. She also reiterated her thanks to those staff and board members who devoted their time in attending the last Board Meeting held on Saturday, March 7, MINUTES Ms. Rubin requested a motion for approval of the minutes of the February 24, 2009 Board of Directors meeting. Mr. Cohn moved for approval of the minutes, which was seconded by Dr. Cibes. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None William Cibes Benson Cohn Patrick Colangelo John Mengacci Barbara Rubin Sarah Sanders Ms. Rubin also requested a motion for approval of the minutes of the March 7, 2009 Board of Directors meeting. Dr. Cibes moved for approval of the minutes, which was seconded by Mr. Colangelo. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None William Cibes Benson Cohn Patrick Colangelo APPROVED Minutes March 24, 2009 Page 2 of 10

3 John Mengacci Barbara Rubin Sarah Sanders CURRENT AND PENDING BOND ISSUES Financing Forecast Ms. MacDonald reported that for the Financing Forecast there are two issues: Eastern Connecticut Health Network, Series D, which will be presented today for approval and the TJH Senior Living LLC, Series A Issue which will be presented on a preliminary basis today. The TJH issue proceeds will be used by TJH Senior Living LLC, a subsidiary of the Jewish Home for the Elderly to acquire the Edgehill Continuing Care Retirement Community from Stamford Hospital. Summary of CHEFA Financings Ms. MacDonald reported that there are no new closings at this time. Interest Rate Update Ms. Peoples presented the interest rate market update, noting that Treasuries are still an important safe haven for investors. The 30-year Treasury increased 18 basis points since last reported, and is currently 3.69%. As of Friday, oil closed over $50 for the first time since January; gold also increased; and the dollar decreased 4%. The Revenue Bond Index increased approximately 11 basis points since last reported; the one-month LIBOR increased approximately 5 basis points; and the SIFMA Index is down approximately 9 basis points. PRELIMINARY STAFF MEMO TJH Senior Living LLC Issue, Series A & B Mr. Morris presented the Preliminary Staff Memo for the TJH Senior Living LLC Issue, Series A & B. As Ms. MacDonald mentioned earlier, the proceeds will be used for the acquisition by TJH Senior Living LLC, a subsidiary of the Jewish Home for the Elderly of the Edgehill facility. TJH Senior Living LLC is a not-for-profit limited liability entity that was created for the purposes of owning and operating Edgehill. It is a single member LLC and is owned by the Jewish Home of Fairfield County, a 501(c)(3) entity. The LLC is considered exempt for Federal income tax purposes as a disregarded entity. The Jewish Home of Fairfield County is licensed for 360 skilled nursing beds and offers a variety of services to the elderly. The acquisition sales price is $69.3 million. Edgehill currently has $18.8 million of CHEFA debt outstanding, which will be paid off at the closing of the acquisition. Taxable debt will be used for a portion of the acquisition cost. The reason for the taxable portion of the issue is that IRS Regulations do not permit tax-exempt bonds to fund the acquisition of independent living units which accounts for over 72% of the total beds. APPROVED Minutes March 24, 2009 Page 3 of 10

4 The financing structure is composed of three components: (1) Senior Debt which is the taxable portion. It will either be a commercial bank loan or taxable bonds. The size of the issue will be $52 million. Mr. Morris explained that a number of banks submitted responses to an RFP, which were due yesterday, but we currently do not know the results. Earlier indications were that they would most likely proceed with a bank loan instead of taxable bonds, but that hasn t been confirmed as of yet. The bonds or the bank loan will be secured with a mortgage and a gross receipts pledge, along with a debt service reserve fund. (2) Subordinate Debt $20 million Private Placement sold to friends and family. This is a fixed-rate issue, 10-year maturity, interest only and all investors will be required to sign a Subscription Agreement. The minimum denomination is $25,000, requested by the underwriter in order to secure a broad base of investors for the issue. The underwriter agreed to have a traveling Investor Letter, as required by CHEFA, to allow for the smaller denominations. Initial and future investors will be required to sign a Subscription Agreement. (3) Junior Subordinate Note provided by the Jewish Home or the Jewish Home Foundation of $7.5 million which is interest only at 4% to be paid out of excess cash flow from operations. The interest rate tentatively scheduled for the Subordinate Debt Private Placement is 9%. Both the Subordinate Debt and Junior Subordinate Debt will be totally unsecured. Edgehill is a very attractive continuing care retirement community. The largest component is 207 independent living units. It also includes 60 skilled nursing beds and 20 assisted living units. The entrance fees for the independent living units range from $460,000 to $1.2 million. The monthly fees range from $3,400 to approximately $7,300. The occupancy rate has been fairly favorable averaging 98% over the past four years, before declining to 94% as of February 28. The assisted living units occupancy rate was 98%, before dropping to 90% in February which only accounts for two units. The skilled nursing component has seen an increase in occupancy over the past four and one half years. Financial Operations have been favorable over the past five years. Edgehill s operating ratio decreased from 104% to 95%, which is viewed as a positive. This is a Fitch measure for operations where the operating expenses are divided by total revenues, both excluding non-cash items, so anything under 100% is favorable. However, the operating ratio increased to approximately 99% as of the first quarter of 2009 due to a decline in investment and other income. On a GAAP basis, they had an $838,000 gain. Debt service coverage has been favorable. The pro forma debt for FY 2008 is at 1.16 times. Their days cash on hand has improved over the past five years from 62 days to 525 days. The financial projections were provided by RLS, a development consultant firm in Hartford. The projections show losses in the first four years. The FY 2014 forecast shows a slight gain on a GAAP basis but the operating ratio is 107% for that year. The losses are mainly attributed to the additional interest expense from the acquisition; however, the projections demonstrate debt service coverage for the five years and show their liquidity improving from 137 days cash on hand to 257 days. The Jewish Home intends to manage the facility but they have been in discussions with Greystone Management Services, LLC about retaining the same employees, although this has not been finalized as of yet. APPROVED Minutes March 24, 2009 Page 4 of 10

5 There are three regulatory approvals that are needed for this transaction: (1) Office of Health Care Access (OHCA) for the approval of the sale; (2) Department of Social Services (DSS) for the approval of the disclosure statement and residency agreement; and (3) Department of Pubic Health (DPH) for the transfer of the nursing home license. Staff recommends approval of the structure of this transaction today and will present it to the Board for final approval in May Ms. Rubin inquired if there were any questions. Mr. Colangelo inquired if the Junior Subordinate Note is basically equity. Mr. Morris responded affirmatively. Mr. Colangelo also inquired if the Board had any objection that Mr. Sims (the underwriter) was on the Board of the Jewish Home. The Board members responded that they had no objection. Mr. Asher pointed out that he believes that Herbert J. Sims initially represented the seller also. Mr. Colangelo inquired if Staff anticipates any problems with the regulatory approvals. Mr. Morris responded that at this time they do not anticipate any problems; the institution is in the process of submitting them now. Dr. Cibes pointed out, on another note, in terms of the need for nursing home beds, increasingly there is a movement to reduce the population of nursing homes and move those capable of it back to their homes because it saves money. He inquired if anyone has done any analysis on whether or not there is a need for more nursing home beds because of the increasing number of elderly, or fewer nursing beds because home care is considered more cost effective. Mr. Asher responded that he s not sure and he hasn t heard anything from the Department of Social Services. Further discussion ensued. Dr. Cibes noted that it appears that there has been a reduction in nursing home beds and he expects that someone in the State is researching the number of beds and the projection of actual need. Further discussion ensued. Mr. Mengacci suggested that possibly Orlando Rodriguez at the State Data Center from the University of Connecticut may be able to provide information. Dr. Cibes acknowledged that Mr. Rodriguez previously did so. FINAL STAFF MEMO Eastern Connecticut Health Network Issue, Series D Mr. Morris reported that this issue was originally approved in June 2008 as a variable rate transaction, secured by a Sovereign Bank letter of credit. It was delayed due to the need to obtain a confirming letter of credit and the acquisition of Sovereign Bank by Santander Bank. It was uncertain if the new bank was going to provide letters of credit. Consequently, the Institution is pursuing new money financing with TD Banknorth as a private placement, and had considered a refinancing of their Series B issue backed by Sovereign Bank for $13 million. The Sovereign letter of credit is due to expire in July and the renewal is uncertain at this time. One of the APPROVED Minutes March 24, 2009 Page 5 of 10

6 reasons ECHN didn t proceed with refunding of the Series B is that there is a $700,000 swap termination payment that they would incur if they refinanced at this time. Mr. Morris stated that ECHN wants to proceed with the private placement on an accelerated basis because they have basically completed the projects that are listed on Page 2 of the Final Staff Memo. ECHN obtained a bridge loan from TD Banknorth to start the construction and the current transaction will provide permanent financing. The Authority is still waiting for formal consent from Sovereign Bank and Radian on the Series A & C issues for the additional debt, which ECHN expects to obtain. In addition, it appears that ECHN is not going to meet their days cash on hand test as of March 31, 2009 of 75 days. Sovereign has agreed, in principle, to waive that and reduce it to 50 days. ECHN is also in discussion with Radian as well for the consent. Radian has a 65 days test on cash on hand which is tested in September, so the institution will need for them to waive that as well. The variable rate structure is one-month LIBOR plus 275 basis points. There is a five-year maturity with 30-year amortization. TD Banknorth will sign an Investor Letter but there will not be a traveling Investor Letter. The minimum denomination will be $100,000. These bonds will be secured on a parity basis with the outstanding Radian and Sovereign issues. The reason that the language on the cover of the Staff Memo is slightly different than Edgehill is to approve the structure, as well as the additional debt on a parity basis. ECHN s financial operations have shown improvement over the last five years. The system, as a whole, had an operating margin of 3.14% for FY 2008 and the Obligated Group, which consists of the two hospitals, Woodlake and the Foundation had an operating margin of 4.7%. Manchester Hospital alone was 5.6%. ECHN still has operating losses from its physician corporation of $3.6 million in FY 2008 and losses totaling $13.5 million over the past five years. For the first three months ending December 31, the obligated group had a $1.5 million loss. Debt service coverage has been adequate over the last five years with the pro forma debt service coverage of 1.92 times. This is still below Moody s Baa median. Mr. Morris pointed out their liquidity declined from 109 days cash on hand five years ago to 57 as of today. The institution s rating of BBB- was confirmed in August 2008; however, if the institution were to be rated currently, it most likely would fall below investment grade. The Board s approval today is contingent upon receiving the consents from both Sovereign and Radian for the additional debt. Mr. Asher inquired if Mr. Morris could explain what happened with Johnson Memorial Hospital. Mr. Morris stated that during ECHN s due diligence process, they discovered some items which caused them to not proceed with the merger but they don t want to rule out the possibility in the future of some type of acquisition. Mr. Morris stated he can provide a copy of the press release to anyone who wants a copy. Ms. Rubin inquired if there were any questions. Mr. Colangelo raised a question as to what were the net assets of the Foundation. Mr. Morris responded that the net assets of the Foundation are $10.6 million. There being no further questions, Ms. Rubin requested a motion to approve this transaction. Mr. Colangelo moved for approval and Mr. Cohn seconded his motion. All were in favor. APPROVED Minutes March 24, 2009 Page 6 of 10

7 Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS John Biancamano None None William Cibes Benson Cohn Patrick Colangelo John Mengacci Barbara Rubin Sarah Sanders CHEFA FINANCIAL OPERATIONS February 2009 Financial Statements Ms. Mackewicz reported that for the eight months ending February 28, 2009, revenues over expenses are $2.4 million before program expenses; $1.7 million after traditional program expenses and a loss of $10.6 million after the reserve transfer of $12,250,000 currently set up as a due to the State of Connecticut. Revenues are under budget by $88,000 and expenses are also under budget by $341,000. The only item notable this month was the $12,250,000 transfer to the State of Connecticut. Ms. Rubin inquired as to the Staff s projection of what the Authority will have to put back into reserves at year end. Ms. Mackewicz projected approximately $1.3 million in contingency, leaving all other reserves as is. OTHER BUSINESS Ms. Rubin reminded Board members that they will need to file their statement of financial interest for the preceding calendar year with the Office of State Ethics by May 1, She inquired if Board members can obtain a hard copy of the form. Mr. Asher stated that he will provide the Board members with a hard copy for those members who don t want to complete it online. Ms. Rubin turned the floor over to Mr. Asher for an update from the March 7 Board meeting. Update to the March 7, 2009 Board of Directors Meeting Mr. Asher stated that included in today s handouts was a follow up comprehensive to-do list for Staff after the March 7 Board Meeting. Mr. Asher turned the floor over to Ms. Herman to briefly provide an update on certain questions raised concerning the Authority s D & O insurance. Ms. Herman indicated that one of the questions discussed on March 7 was where the Authority stood in comparison to other quasi-public agencies. She indicated that Mr. Asher had followed up with the CDA, and they appear to be essentially in the same situation as the Authority in terms of indemnification and D & O insurance. A second question concerning whether former APPROVED Minutes March 24, 2009 Page 7 of 10

8 directors are covered under the Authority s D & O policy. The policy does define the Insured Party to include former directors. Ms. Herman stated that CHEFA s written procedures which are statutorily mandated were adopted originally in 1989 and they are in need of updating. The Authority has, for the most part, followed the broad outlines of the procedures, but there are some areas which need to be updated. Staff plans to present the proposed updated CHEFA procedures to the Board for consideration at the April meeting. If the Board approves them at that point, the Authority would publish a Notice of Intent to adopt and notice a public hearing. It is hoped that by the end of this fiscal year, the updated procedures would be officially in place. Mr. Asher recommended that the Authority make available to those that were interested, the Authority s updated underwriting guidelines. To recap, the Authority would require a minimum of a BBB/Baa with no negative indications from at least two rating agencies for any public offering with $5,000 denominations permitted. If it is in the BBB-/Baa3 category, (or split with one BBB- or Baa3 and the other rating higher), it would be issued as a limited public offering with minimum denominations of $100,000. Mr. Asher pointed out that if it is in the BBB/Baa or above category, it would be a traditional public offering and the Authority would negotiate and identify specific business covenants on a case-by-case basis and the Authority would address these on a case-by-case basis rather than locking us into specific criteria. Anything below investment grade would have to be done with credit enhancement or be done as a private placement. Mr. Asher added that Staff will provide the Board with an update to the Authority s Strategic Business Plan by no later than the June Board meeting. Mr. Asher pointed out that he has asked Mrs. Fontaine to research the development of a business plan for creating a subsidiary which may function like a foundation so the Authority can collaborate with other State agencies for a grant program. Mr. Biancamano left the meeting at this time. Mr. Asher turned the floor over to Ms. Weldon for a brief discussion on her research on the development of an insurance program similar to Cal Mortgage. Ms. Weldon explained that she has a conference call scheduled with Cal Mortgage staff on Thursday. Reviewing some of the basics of their program, she added Cal Mortgage bonds carry the State s rating, despite the presence of the insurance fund, which provides a first line of defense. They have a premium structure which is predetermined and tied to rating levels. Cal Mortgage has a large loan portfolio and they have a significant number of staff members dedicated to credit review and monitoring the portfolio, etc. Ms. Weldon will obtain further specifics from them and report back to the Board. Mr. Asher added that Staff is also looking at other ways to get access to the market for the Authority s clients. One of the things previously discussed was the Federal Home Loan Bank to provide credit enhancement on letters of credit on transactions to be done by local banks. On March 18, 2009, Staff met with staff from the Federal Home Loan Bank of Boston. They have an interest in getting involved in Connecticut, and they have been marketing their capability in APPROVED Minutes March 24, 2009 Page 8 of 10

9 the six New England states. Mr. Asher used an example if St. Francis Hospital wanted to do a $30 million bond issue and they had a strong relationship with Farmington Savings Bank, normally Farmington Savings Bank would not be in a position to provide enhancement, but the Federal Home Loan Bank could provide a wrap on a Farmington Savings Bank letter of credit. Mr. Asher believes that the next step is to notify the Authority s institutions to let them know that this is a possibility and then our clients would need to begin to have conversations with some of the local banking institutions. Coupled with that would be a suggestion to the institutions that they might be able to use bank qualified debt as well. There is a two-year window on this and it expires in This is limited to $30 million per institution and would allow debt to be placed with a local bank, with that local bank getting a tax benefit by carrying it on their books. Staff also met yesterday with the new CEO of the former MBIA Insurance Corporation of Illinois, which has formed a company called National Public Finance Guaranty Corporation, and they are interested in providing credit enhancement through bond insurance. Mr. Asher added it will take them quite some time to develop a reputation and a rating in the market that is at an acceptable level. However, for an institution that has no other alternative and can t do a public offering on a fixed-rate basis and can t get a letter of credit, this may be an alternative. It will take some time for them to build up some level of confidence from the market so that people will begin to trust investing in municipal debt that is backed by this insurer. Mr. Asher reported that he has been working with Mintz Levin, which serves as Counsel to NAHEFFA, in addition to working with the Connecticut Hospital Association to reach out to members of Connecticut s congressional delegation, to encourage them to consider the creation of a Federal municipal bond insurance program. Mr. Asher indicated that Congressman Frank of Massachusetts and Congressman Connolly of Virginia and members of the Financial Services Committee are working on drafting legislation to try to create a Federal municipal bond insurance program to insure new deals, and reinsure existing insured transactions for debt issued on behalf of municipalities and states. Mr. Asher is going to Washington next week to meet with members of the congressional delegation to push for the inclusion of debt issued on behalf of 501(c)(3) institutions. Staff believes this would be a good alternative for our clients and it would improve the trading capabilities of the debt that exists. If the government reinsures the debt that is out there by Radian, Ambac and others, it would increase the value of that debt and possibly people would want to invest in municipal debt again. This would allow the Authority to also do some new bond issues for fixed-rate transactions. Many of the hospitals want to move away from variable rate debt because it is too risky. Mr. Asher included in today s handouts a one-page document which was presented to Congressman Jim Himes last Friday. He trusts that something will come out of this endeavor; but it may take some time. He believes that this presents a good opportunity if Larson and Dodd s support can also be obtained. Further discussion ensued. Mr. Colangelo inquired as to who drafted the original legislation. Mr. Asher stated that it came from Congressman Connolly and some others and is supported by the U.S. Conference of Municipalities. The higher education lobbying groups didn t seem to be interested in a federal APPROVED Minutes March 24, 2009 Page 9 of 10

10 bond insurance program. Mr. Asher added that the American Hospital Association is behind our proposal and they believe it will help many of the healthcare facilities. Mr. Colangelo inquired as to the percentage of the total tax-exempt market for 501(c)(3) organizations as compared to other governmental agencies. Mr. Bass indicated that he would estimate it would be less than 10%. Further discussion ensued. Mr. Asher announced that prior to the Board Meeting on April 28, there will be a joint Audit- Finance/Human Resources meeting scheduled for 12:00 p.m. to review the compensation and benefits budget and also a Consultant Committee meeting will be scheduled for 1:30 p.m. on that day to make a decision on the Financial Advisor and the Special Counsel RFPs. Staff will provide the Board with summaries/comparisons of all the firms who responded to the RFPs. Mr. Asher added that Staff s recommendation for both RFPs will be to reappoint the same firms that the Authority currently utilizes. There being no further business, at 2:54 p.m., Ms. Rubin requested a motion to adjourn the meeting. Mr. Cohn moved for approval and Mr. Colangelo seconded the motion. All were in favor. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS William Cibes Benson Cohn Patrick Colangelo John Mengacci Barbara Rubin Sarah Sanders Respectfully submitted, Jeffrey A. Asher Executive Director APPROVED Minutes March 24, 2009 Page 10 of 10