STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY. Minutes of Authority Board Meeting December 10, 2002

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1 STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Board Meeting December 10, 2002 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, December 10, The meeting was called to order by Barbara Rubin, Chair, of the Board of Directors of the Authority, and upon roll call, those present and absent were as follows: PRESENT: ABSENT: ALSO PRESENT: Lorraine M. Aronson John Biancamano Julie Cammarata (Rep. Marc S. Ryan) William J. Cibes, Jr., Ph.D. Benson R. Cohn Patrick A. Colangelo, Vice Chair Barbara Rubin, Chair Howard G. Rifkin (Rep. Denise L. Nappier) Laurence R. Smith, Jr. Dori Taylor Sullivan, Ph.D. None Richard D. Gray, Executive Director, Jeffrey A. Asher, Managing Director/CFO, David A. Williams, Managing Director, Kimberley A. Fontaine, Administrative Assistant, Dawn Fuller, Administrative Assistant, Diana Hughes, Accounting Manager, John Limberger, Accountant, JoAnne Mackewicz, Manager, Client Financial Services, Eileen MacDonald, Manager, Administrative Services, Michael Morris, Manager, New Business, Erin Pellici, Financial Analyst, Cynthia D. Peoples Hobson, Manager, Systems and Financial Analyst, Jennifer P. Smyth, Document Analyst, and Felicia Tam, Financial Analyst, of Connecticut Health and Educational Facilities Authority Minutes of the Board of Directors Meeting December 10, 2002

2 STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Board Meeting December 10, 2002 Silvestre Fontes and Kevin Kelcourse, of the Securities and Exchange Commission J. Hanson Guest, Esq., of Brown Rudnick Berlack Israels John D. Yarbrough, Esq., of Carmody & Torrance Peter Wilson, Esq., of Day, Berry & Howard Jean E. Winn, Esq., of Hawkins, Delafield & Wood Bernadette M. Puleo, Vice President, of P.G. Corbin & Company, Inc. Edward J. Samorajczyk, Jr., Esq., of Robinson & Cole LLP Coleman H. Casey, Esq., of Shipman & Goodwin LLP Eric P. Taylor, Esq., of Winston & Strawn The Notice of Regular Meeting was read and ordered spread upon the Minutes of this Meeting and filed for the record. Minutes of the Board of Directors Meeting December 10, 2002

3 BOARD OF DIRECTORS MEETING December 10, 2002 The Meeting was called to order by Barbara Rubin, Chair, at 2:00 p.m. MINUTES Upon motion duly moved and seconded, Minutes of the Regular Meeting of the Board of Directors Meeting of October 29, 2002 were unanimously approved. Presentation on Secondary Bond Markets The Chair introduced Silvestre Fontes and Kevin Kelcourse of the Securities and Exchange Commission. Mr. Fontes began the presentation by advising that he and Mr. Kelcourse were from the Division of Enforcement in the Boston Office and that the information presented today were their personal views and not necessarily the views of the SEC. Mr. Fontes then referenced the Securities Acts of 1933 and The Securities Act of 1933 requires that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities. With the Securities Act of 1934, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. Mr. Fontes stated that CHEFA provides good service and generally gets it right and referred to the University of Connecticut, Salisbury School and Backus Hospital bond issues. There are 56,000 bond issuers in the municipal market, compared to 7,200 equity companies in the Wilshire 5000 Index. The Municipal Market has $10.4 billion traded daily on average and $1.9 trillion in outstanding securities that the SEC is responsible for. Retail makes up approximately one-third of municipal bond purchasers, mutual funds make up another one-third of purchasers, and institutional purchasers the remaining onethird. Default rates in the municipal bond world are low. However, every decade has resulted in a major default. In the 1970s the City of New York defaulted, in the 1980s Washington Public Power defaulted, and in the 1990s there was the Orange County, California default. Copies of the Commission report on the Orange County, California default were left for Board Members to read. Rule 15c2-12 regulates brokers or dealers and prohibits them from purchasing or selling municipal bonds unless Obligors agree to provide the annual continuing disclosure. In the municipal secondary markets, the Enron and WorldCom scandals have not yet occurred. However, when such a disaster occurs, it will most likely result in new and similar regulations. Minutes of the Board of Directors Meeting December 10,

4 Beyond complying with Rule 15c2-12, recommendations for the Authority Board include: awareness of whether or not buyers make annual disclosure filing which reduces the possibility of insider trading; consider putting continuing disclosure undertakings in agreements with underlying borrowers; make a failure to file a disclosure an event of default with a cure period ; revised SEC coversheet, including CUSIP numbers, could be used for filing purposes; ensure proper labeling of filings of disclosures to encourage voluntary disclosure, and discuss management and underlying borrower s finances; encourage electronic disclosure; and set reasonable voluntary deadlines for clients. Mr. Kelcourse and Mr. Fontes invited the Board to visit the SEC website at SEC.gov, and peruse different speeches and public statements issued by the SEC. This section of the website may provide more specific information to any issues the Authority may have. Additionally, copies of the 1994 SEC interpretation of the Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others was provided for interested Board Members to peruse. This interpretation provides voluntary disclosure guidelines for those companies or organizations involved in the offering of municipal securities. Ms. Rubin thanked the speakers for an informative presentation. Mr. Kelcourse and Mr. Fontes left the meeting at this time. NINE MONTH ASSISTED LIVING, CONTINUING CARE AND BEHAVIORAL HEALTH FACILITIES REVIEW Mr. Williams referred the Board to the detailed written report on the four Continuing Care Retirement Communities (CCRC s), three Assisted Living Facilities (ALF s), and one Behavioral Health Facility. CCRC s include Covenant Village of Cromwell ( the Village ), Edgehill Retirement Community ( Edgehill ), Masonicare, and The McAuley Center ( The McAuley ). Mr. Williams reported that the national Covenant Retirement Communities, Inc. credit rating had been downgraded by Fitch from A- to BBB+ in November The Village itself reported a $671,000 loss in January 2002 and an additional loss of $309,000 in the first six months ending July 31, Edgehill is performing extraordinarily well in its independent living functions. Edgehill s one weak side is an oversized nursing unit which has been unable to maintain maximum occupancy. Masonicare has maintained a strong credit rating despite operational challenges caused by a substantial Medicaid recoupement. This is due to its cash and investments that still equal $173 million after large declines in stock market values. However, the DSCR for Masonicare has dropped below 1.0 times. For the McAuley Center, Mr. Williams reported that their financial situation has stabilized in the last few years. Additionally, the occupancy rate is near 100%. The McAuley is a part of Catholic Health East. Minutes of the Board of Directors Meeting December 10,

5 Mr. Williams then discussed the status of the three assisted living facilities. Middlesex Health Services is doing very well and the facility has been close to capacity for the 21 months ending June 30, The Orchards at Southington, a co-obligor with Southington Health Care, has achieved a small surplus and a DSCR above 1.25x for the first time, in FYTD SummerWood at University Park is maintaining but not increasing its occupancy. There is concern that SummerWood will not achieve a 1.25x DSCR requirement for some time. However, debt payments are protected by a $2.5 million liquidity reserve fund. Hall-Brooke Foundation, the only stand-alone behavioral health facility financed by the Authority, is expected to recover despite a fair amount of recent financial losses. Zoning issues have recently been resolved which will allow for the release of a $15 million letter of credit which protected investors from an adverse ruling in a zoning suit. Hall-Brooke is part of the national Ascension Health credit. Mr. Williams concluded his presentation by stating that today s newspaper reports that Ascension Health is settling a matter with the IRS pertaining to the acquisition of St. Joseph s Health System. Mr. Williams then thanked Erin Pellici, John Limberger, Felicia Tam and JoAnne Mackewicz for their assistance with this project. Ms. Aronson asked if the financial stabilization issue for assisted living facilities was due to the current state of the real estate market. Mr. Williams responded that the status of the facilities and the market were based on the economic conditions in each community. For example, Edgehill, located in Stamford, should perform well regardless of the housing real estate market, based on the higher level of income and assets in that area. However, the McAuley, located in West Hartford, may be affected by the real-estate market. Ms. Rubin commented that if the facility itself is not doing well, the facilities have strong obligors which is of some comfort to investors. The Chair thanked Staff for the presentation and information. CURRENT AND PENDING BOND ISSUES Mr. Morris reviewed the Financing Forecast, noting two new additions, Yale University and Brunswick School, both of which will be discussed today. Klingberg Family Centers closed on December 6, Closed issues appearing on the Summary of Financings include Middlesex Hospital and Village for Families and Children, both of which are included in the Sales Reports. INTEREST RATE REPORT Mr. Williams provided an update on interest rates which have fallen since the October 29, 2002, Board meeting. The 30-year Treasury rates were shown on the Lehman Brothers graph as down to 4.95% from 5.11%; however, the majority of the drop occurred the day of the October 29 Board meeting due to a decline in the Consumer Confidence Index. Minutes of the Board of Directors Meeting December 10,

6 Mr. Williams reported that the October 29 declines also are reflected in the Revenue Bond Index, which is down from 5.33% to 5.24%. The 10-Year Treasury is also down from 4.09% to 4.05%; at one point, the 10-Year Treasury had fallen to 3.94%. Short-term rates have dropped dramatically as well. The three-month LIBOR rate has dropped from 1.78% to 1.41%. The BMA Floating Index Rate is down from 1.83% to 1.04%, which also reflects a seasonal impact. Ms. Rubin asked when was the last time rates were this low, to which Mr. Williams responded that it was prior to the twenty (20) years shown in the Lehman chart, so he would research that information and report back to the Board at the next Board meeting. Mr. Williams added that a survey, sponsored by the Bond Buyer and MBIA, showed that a large majority of respondents expected shrinkage in municipal bond issuance in The survey also reflected a two-to-one majority that downgrades would exceed upgrades in 2003, perhaps including the State of Connecticut and City of New York. Respondents were most pessimistic, by a three to one margin, about the healthcare sector. Mr. Rifkin asserted that the State of Connecticut will be in the market this week with an economic recovery note issue and the current ratings were reaffirmed. Ms. Rubin asked why the healthcare sector would be further downgraded. Mr. Williams responded that HMOs have been providing significant rate relief to hospitals. This relief has allowed the hospitals to overcome the low Medicare and Medicaid increases, which are far below the rate of expense increase of Connecticut hospitals. Mr. Biancamano added that the high cost of malpractice insurance, upcoming pension funding requirements and the nursing shortage are adversely reflecting the healthcare sector as well. The report was accepted as information. SALES REPORTS Village for Families and Children Ms. Puleo reported that the Village for Families and Children issue is a $14 million fixedrate revenue bonds issue, which has both a tax-exempt portion, Series A at $13,660,000, and taxable portion, Series B at $340,000. This transaction was rated AAA/AAA by S&P s and Fitch Ratings, based upon bond insurance provided by Ambac. The maturity on the serial bonds ranged from 2004 to Ms. Puleo reported that there was a fair amount of interest from the retail sector for these bonds. The taxable portion repriced for a higher yield in the term bonds. The market was stable and interest in the bonds was high. The Village bonds priced 20 basis points better than similar issues during the same period. Minutes of the Board of Directors Meeting December 10,

7 Middlesex Hospital Ms. Ervin from Lamont Financial Services reported that the $15.5 million Middlesex Hospital Series K Issue was sold as variable rate demand bonds on November 14, 2002, with a weekly interest rate reset. The initial rate of the bonds was 1.30% which compares favorably to the BMA index of 1.38% for that week. The bonds traded well partially due to a volatile market at the time of the sale. The bonds were rated Aa3/VMIG1 from Moody s. PRELIMINARY STAFF MEMORANDUM Brunswick School Issue, Series B Mr. Morris presented information for the proposed $24 million issue, which will be structured as a fixed rate issue. MBIA has verbally agreed to insure this issue with an 87 basis point insurance premium, which is favorable compared to a 94 basis point premium for the Series A issue. Security for this transaction will be a negative pledge and tuition receipts pledge. MBIA will not require a mortgage on the facility. Projects to be funded with bond proceeds include construction of a new lower school and field house which will be located adjacent to the middle school campus, located 5 miles from the existing main campus, construction of faculty housing, and various renovations to the School s existing facilities. Demand in the Greenwich area is exceptionally strong. For Fall 2002, the School received a record number of applications, 635 which are up 35% over the past five years. Of the 635 applications received, the School accepted only 19.2%, and matriculated 93% of those accepted. Enrollment has increased to 832 students from 673 since the Series A bonds were issued in The School has a very low attrition rate of 4.4% and strong SAT scores of 1,305. Student body make-up for the class of FY 2002 consisted of 91% Caucasian, 3.6% African American, 3% Hispanic, and 2% Asian Pacific Rim. The School s balance sheet has shown significant improvement from June 30, 1997 to June 30, 2002-increasing unrestricted endowment from $4.7 million to $44.3 million. This is mainly due to the School s successful Capital Campaign, which began in 1998 with an original goal of $20 million, and then subsequently increased to $50 million, which the School reached in FY Annual giving at the School is also very strong, with over 90% of the parents contributing. Mr. Morris reviewed some of the School s financial ratios in comparison to Moody s as well as when the School issued its Series A bonds. One concern raised was the projected annual debt service of $4.5 million, which will be very high at 22% of operations. Mr. Morris noted that the School will probably need to increase the current endowment spending rate of 4% to cover debt service. Mr. Morris explained that Staff will most likely approach the Board for approval of this issue at the January 2003 meeting. Ms. Rubin thanked Mr. Morris for his presentation. Minutes of the Board of Directors Meeting December 10,

8 STAFF MEMOS Yale University, Series X Mr. Williams presented the $350 million Series X issue on behalf of Yale University. Yale has long-term ratings of Aaa/AAA by both Moody s and S&P, and short-term ratings of VMIG-1/A-1+, respectively. The security for this proposed Series X bond issue will be a General Obligation pledge of the University. Yale Corporation s Finance Committee, on December 6, approved Series X and preliminarily decided to issue $100 million of long maturity fixed rate and $250 million of variable rate bonds. The actual maturities will depend on the results of the tax questionnaire and tax analysis by Hawkins, Delafield & Wood on the projects. Variablerate issues are also limited by tax law to a maximum 35-year maturity. Yale is asking the Authority to agree to a longer maturity for the fixed-rate portion. CHEFA s Enabling Act limits final maturity on any bond issue to 50 years. Mr. Williams reminded the Board that the longest maturity the Board has previously approved was on a Hebrew Home issue in 1987, for 43 years. The bond proceeds will fund various capital improvement and renovation projects on the Yale University campuses, including residential colleges, arts, science, medical school, libraries, infrastructure and utilities, and administrative facilities. There was a TEFRA hearing on December 9, 2002, at which no individuals appeared to comment. Yale expects to borrow $1.2 billion over the next 10 years for capital projects, including the $350 million of Series X. Staff recommends approval of this Yale $350 million issue. Mr. Gray asserted that he strongly recommends the 48-year maximum maturity on this issue. Staff has assigned minority co-managers, Siebert Brandford Shank & Co. and Loop Capital Markets, at no added cost or time to the client; the assignment is fairly standard for a fixed-rate issue of this size. Yale has opposed the appointment of any co-managers. Both co-managers have performed extremely well on previous issues. Yale apparently has advised Staff that they plan to undertake due diligence on the firms which may cause a delay in the process. Mr. Gray wanted to caution the Board that Yale may contact Board Members directly about the assignment of co-managers. Mr. Rifkin declared that the State Treasurer wholeheartedly supports the decision of the Authority to assign co-managers to this project. There being no questions from Members, the Chair introduced Resolution (Yale University Issue, Series X, Authorizing), which Resolution was read and considered. Mr. Cohn moved for adoption of Resolution No with the stipulation that approval is based upon Yale s agreement of the above co-managers serving on the transaction. The motion was seconded by Mr. Rifkin. Minutes of the Board of Directors Meeting December 10,

9 Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS Lorraine M. Aronson none none John Biancamano Julie Cammarata William J. Cibes, Jr. Michael J. Cicchetti Benson R. Cohn Howard G. Rifkin Barbara Rubin, Chair Laurence R. Smith, Jr. Dori Taylor Sullivan The Chair then declared Resolution adopted (see Appendix A, Resolution ). CHEFA FINANCIAL OPERATIONS October 2002 Financial Statements Mr. Asher reported that the October financial statements reflect a modification where excess of revenue over expenses is reflected before program-related expenses. The Chair thanked Mr. Asher for the report. OTHER REPORTS Finance Committee Report Mr. Cohn advised Members that the Committee met earlier in the day to interview four firms as Auditor candidates which included BlumShapiro, Carlin Charron & Rosen, Scillia Dowling & Natarelli, and Kostin Ruffkess & Co. The Committee recommends that the Board appoint Carlin Charron & Rosen to provide audit services for the next three years. The recommendation was unanimously agreed upon by all members of the Board present. Ms. Aronson left the meeting at this time. Minutes of the Board of Directors Meeting December 10,

10 OTHER BUSINESS Malpractice Insurance Mr. Colangelo advised the Board that he found an article about malpractice insurance that he felt was timely and appropriate. Physicians are closing or changing their practices due to the high cost of malpractice insurance. Mr. Gray added that the Authority has been collecting insurance survey data from clients and has received approximately 20 responses to date. Those responses indicate substantial increases in premiums which range from 20% to 395%. For example, Middlesex Hospital has reported a 360% increase in their excess liability policy premiums despite their being a good credit risk. Mr. Biancamano affirmed that approximately one-half of an obstetrician s average salary goes toward malpractice insurance, based on current rates. Griffin Hospital Information Mr. Gray informed the Board of a matter with a 1993 Griffin Hospital $33 million bond issue. When Griffin Hospital s issue was financed, credit enhancement was not available. As a result, a $10 million Working Capital Reserve Fund was required by the CHEFA Board. The Hospital now wants the $10 million released, and it appears the Authority may now be legally required to comply. Day Berry & Howard is in the process of due diligence on this matter. The Authority is requiring the facility to complete and issue its annual audit to validate that all covenants have been met. Mr. Gray has been in negotiations with the Hospital to stipulate that if funds are released, the Hospital must redeposit the funds in a working capital account if the Hospital s financials ratios fall below agreed upon levels. Additionally, there is a court settlement involving the hospital affiliated HMO, but Hospital counsel asserts it should not affect this issue. Griffin Hospital currently has $26 million outstanding debt with the Authority. Ms. Rubin asked what other hospitals are financed without enhancement, to which Mr. Gray responded St. Mary s, Windham, and Hospital for Special Care. Mr. Rifkin advised that there is a proposal by the Governor to eliminate the General Assistance Program and put the $12.5 million from that program toward assisting the hospitals. Mr. Gray agreed to investigate the impact on Connecticut hospitals of the $12.5 million proposal. Mr. Gray added that Staff had met with Office of Health Care Access ( OHCA ) and plans to collaborate with that office on future hospital reviews Board Meeting Dates The 2003 Board Meeting schedule was distributed to all Members present. Other Ms. Rubin announced that Diana Hughes, Accounting Manager, is retiring on December 20; this is her last Board meeting. Ms. Rubin thanked Ms. Hughes for 11 years of service to the Authority and wished her good luck. Minutes of the Board of Directors Meeting December 10,

11 DATE OF NEXT MEETING The Chair reminded everyone present of the next meeting date, scheduled for Tuesday, January 28, There being no further business, the Board unanimously agreed to adjourn at 3:40 p.m. Respectfully submitted, Richard D. Gray Executive Director Minutes of the Board of Directors Meeting December 10,