STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Board Meeting June 23, 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, June 23, 2009. 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: William J. Cibes, Jr., Ph.D. John Mengacci (Rep. Secretary Robert Genuario) Bryan K. Pollard, Esq. Barbara Rubin, Chair Sarah K. Sanders (Rep. Honorable Denise Nappier) John Biancamano Patrick Colangelo, Vice Chair Jeffrey A. Asher, Executive Director Kimberley Fontaine, Manager, Grants and Grants Administration Paula L. Herman, General Counsel Tara Keating, Grants 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 Auditor Jennifer Smyth, Manager, Legal Services Katie Thiede, Compliance Analyst David Wasch, Manager, Child Care Programs Jeanette Weldon, Managing Director of the Connecticut Health and Educational Facilities Authority FINAL Page 1 of 8
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 Jason Krechko, Engineer, GZA GeoEnvironmental, Inc. Marie V. Phelan, Esq., Pullman and Comley LLC Edward J. Samorajczyk, Jr., Esq., Robinson & Cole LLC Namita Shah, Esq., Day Pitney LLP Tiffany Stevens, Esq., McCarter & English LLP Christopher Valentino, Lamont Financial Services Corp. Noreen White, Acacia Financial Group, Inc. John Yarbrough, Esq., Carmody & Torrance LLP MINUTES Ms. Rubin requested a motion for approval of the minutes of the May 26, 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 1 William J. Cibes None Bryan Pollard, Esq. John Mengacci Barbara Rubin, Chair Sarah K. Sanders CURRENT AND PENDING BOND ISSUES Financing Forecast Ms. MacDonald reported there are no new applications at this time. Hopkins School is planning to refinance their Series A issue, which currently has $8.1 million outstanding and is insured by AMBAC. The School is rated AA- by Standard & Poor's. Hopkins is currently waiting for their Board s approval of this transaction. This financing may be presented for approval at CHEFA's July Board meeting. 1 Board member abstained from voting as he was not present for the May 26 th meeting. FINAL Page 2 of 8
Summary of CHEFA Financings Ms. MacDonald reported that there are no new closings scheduled at this time, and there have been no closings since the May Board meeting. Interest Rate Update Ms. Peoples presented the interest rate market update, noting that the majority of the Guaranteed Investment Contract providers that the Authority utilizes were downgraded during 2009. The Authority has the bulk of its Guaranteed Investment Contracts with G.E. Trinity Funding Company. In March 2009 G.E. Trinity Funding Company was downgraded from AAA to Aa2 Stable by Standard & Poor s and AAA to AA2 Stable by Moody s. The Authority will continue to seek providers in order to obtain the highest yield when we have new funds to reinvest. The 30-year Treasury increased 5 basis points from 4.39% to 4.44% since last reported in May. The Revenue Bond Index increased approximately 36 basis points from 5.42% to 5.78% since last reported; the one-month LIBOR increased 1 basis point from 0.31% to 0.32%; and the SIFMA Index declined from 42 to 36 basis points since last reported. The STIF Fund as of June 22, 2009 is down to 0.53% and the Fidelity Fund 57 is down to 0.33%. FINAL STAFF MEMO TJH Senior Living Issue, Series A Mr. Morris stated that this item will be deferred until the July 28, 2009 Board meeting. The Investment Banker has advised the Authority that Bank of America will not be providing the senior debt, and that the Institution is now in discussion with another bank, and there may be additional changes to the structure of the financing. EXECUTIVE DIRECTOR S REPORT Dr. Cibes requested an overview of the current credit market. Mr. Asher responded that the market is not favorable at this time. Due to the downgrades of all of the bond insurers, there are essentially no municipal bond insurers writing new business in Connecticut. Berkshire Hathaway is not licensed to sell bond insurance in Connecticut and it does not insure healthcare credits. MBIA ability to operate its new bond insurance subsidiary is being affected by pending lawsuits, and AMBAC s has decided not to move forward at this point to create a new municipal bond insurance subsidiary. Letters of credit are now more difficult to obtain and pricing is expensive. Mr. Asher provided an example of Eastern Connecticut Health Network s (ECHN) letter of credit with Sovereign Bank which is set to expire on June 30, 2009. ECHN was informed last week by Sovereign Bank that it will be raising their pricing from 95 basis points to 300 basis points. This will essentially cost ECHN $350,000 a year. They do not have an alternative at this time, so they will have to pay those additional costs until they can find a substitute letter of credit. FINAL Page 3 of 8
Mr. Asher then reviewed efforts being made in Washington DC at the federal level to strengthen the municipal bond market and provide credit enhancement alternatives. There may be legislation passed in the near future which will assist the municipal bond insurance industry by providing re-insurance from the Federal government on municipal bond insurance. This will offer much needed liquidity and credit support for bond insurers and letter of credit providers. Mr. Asher added that he has been working in conjunction with the National Association of Health and Educational Finance Facilities Authority and the American Hospital Association pushing for action in Congress for changes in the Federal Housing Authority (FHA) financing process to include refinancing of existing and outstanding debt. Currently, FHA has only financed projects that were for new money and or refinancing for existing FHA clients. The FHA collateral requirements may affect the ability of many CHEFA clients to take advantage of the FHA insurance since FHA typically requires a first security mortgage insurance they provide. For example, if a hospital has debt with a bond insurer or a letter of credit with a bank, FHA is not able to share in collateral on a parity basis with other lenders. The hospital would be required to refinance all of its existing debt with FHA or legislation would need to be introduced and passed that would allow FHA to modify its collateral requirements. Bank qualified debt is also now a financing option for many of CHEFA s clients. Bank qualified debt is financed as a private placement with a bank. Clients can also financing using the Federal Home Loan Bank of Boston (FHLBB) a wrap on a letter of credit provided by a local bank whose rating is not high enough to provide and LOC without a wrap. Mr. Asher pointed out that there are options available for some of the Authority s clients if they issue without credit enhancement based on a rating of at least BBB- from two of the nationally recognized rating agencies with no negative indications. Mr. Asher indicated that the Authority has met with the Treasurer s Office and a representative from OPM to discuss a proposed SCRF backed pooled bond issuance program. Due to the status of the approval of the state budget, any action or further discussion on this proposal will need to be delayed. Any action on this proposal will likely not occur until the next legislative session. Ms. Sanders concurred and stated that the Treasurer s Office will be focusing their attention on the budget deficit before considering new proposals. The Authority is hosting a meeting with representatives from many Connecticut hospitals on June 26, 2009 and a Senior Account Executive from FHA to discuss financing options using the HUD 242 federal insurance program. Dr. Cibes encouraged the Authority to look at the future of tax-exempt financing and consider the possible effects that it may have on the Authority. Ms. Rubin commented favorably on the Authority s responsiveness in adjustment quickly to the current economic conditions, including not leasing additional space, not incurring additional costs, cutting back on capital expenditures and not filling budgeted positions. CHEFA FINANCIAL OPERATIONS May 2009 Financial Statements Ms. Mackewicz reported that for the eleven months ending May 31, 2009, revenues over expenses are $3.1 million from operations; $1.4 million after traditional program expenses and a loss of $11.7 million after the reserve transfer to the State of Connecticut. Revenues are under budget by $279,000 and expenses are under budget by $446,000. The items which were notable this month were the accrual of the $900,000 as part of the recent Deficit Mitigation Plan. FINAL Page 4 of 8
The transfer was completed on June 4, 2009. In addition, the Authority reclassified its balance sheet, after discussion with Whittlesey & Hadley, CHEFA's new auditing firm, in an effort to clarify certain restrictions on CHEFA assets. The Restricted Investments are restricted by statutory requirements and outside partners, through such things as Memorandums of Understanding. Program Designated Investments are investments designated to specific program purposes. Board Designated Investments are available to be designated by the Board, and currently held as contingency and operating reserves. Escrow investments are not CHEFA funds; they are held on behalf of others, such as the FSA program and client application fees. APPROVAL OF PROPOSED FY 2010 OPERATING & CAPITAL BUDGET Ms. Rubin stated that the Board is proposing to move approval of the operating and capital budget to the next Board meeting and use today for discussion. Mr. Asher led the discussion stating that the Audit-Finance Committee approved the budget last month, after staff reduced the amount budgeted for compensation. He stated there was concern surrounding the Authority s compensation as compared to State employees. Mr. Asher provided background on State cuts made over the last few months such as salary freezes, furlough days, and lack of longevity bonuses. The State has reduced the budgets of many State agencies by more than 10% and it is still facing unprecedented funding gaps. The Authority, although not funded by the State, has made appropriate budget cuts and very substantial contributions to the State. An amount equal to 6.79 times the Authority s operating budget, $25.8 million, has been restricted by statute or taken by the State of Connecticut as follows: $4.5 million for School Readiness Program $1.5 million for Malpractice Grant Program $500 thousand for the Pharmacy Federally Qualified Health Center Grant Program $3.5 million for the Credit Union Student Loan Program $2.7 million Guaranteed Loan Fund Interest and Administrative Cost Subsidy Approximately $200 thousand for the Early Childhood Education Research and Policy Council $13.1 million in reserve funds transferred directly to the State The Authority employees, unlike other quasi-public agency employees, do not receive State benefits. The State s benefits are significantly higher than the Authority s. In addition, CHEFA has no post-retirement health insurance benefits, and it has provided its employees with a defined contribution plan instead of a defined benefit plan. Mr. Asher said that in the proposed budget for FY 2010, the merit and incentive increases are relatively small amounts in comparison to the total. Ms. Weldon stated that the merit increase budgeted is a 2.12% increase. The incentive bonus has a weighted average of 9.3%. The total of the two items is approximately $221,000 which is a relatively small amount in the context of the State s budget shortfall, yet potentially significant from the perspective of an individual staff member participating in that pool. Ms. Weldon indicated that the Authority solicited compensation information from a variety of sources. Based on that information, Staff considers the proposed increase to be within the appropriate range for incentive and merit increases. Ms. Rubin stated that there is essentially no increase in the aggregate and she supports the proposed budget. Ms. Rubin noted the need to retain talented FINAL Page 5 of 8
staff and stressed that the Authority has been well run and successful and has not received financial support from the State. She reiterated her support of the incentive and merit increases. Dr. Cibes added that he supported Ms. Rubin s view. He stated that compensation of Authority personnel needed to be distinguished from State personnel as the result of different benefit packages in order for the Authority to maintain quality staff. Mr. Cohn also supported the budget, in light of the Authority s contribution to the State. Ms. Sanders stated that after consulting with her office, she is not able to support any increase in compensation for the Authority employees when State employees are not getting increases. Mr. Pollard supported the budget as proposed. Mr. Pollard added that it is difficult to motivate people with a 2% increase and hopes in the future to be able to do more. Ms. Rubin asked Staff to provide calculations which include the amount of the incentive pool for existing employees plus the base amount for the existing employees. Mr. Mengacci stated he can support any increase which is equal or less than 2.5%. Dr. Cibes made a motion that the Authority be authorized to continue operating on the 2009 budget until the next Board meeting on July 28, 2009. Mr. Cohn seconded the motion; all were in favor. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS William J. Cibes None None John Mengacci Bryan K. Pollard Barbara Rubin Sarah K. Sanders APPROVAL OF CHEFA PROCEDURES Ms. Herman indicated that the Authority s written procedures needed to be updated. She indicated that the written procedures were adopted in 1988 in response to an amendment of the Authority s Enabling Statute requiring such procedures. The procedures have not been reviewed or modified since adoption, and are in need of updating at this point. Mr. Cohn moved to approve the draft modified CHEFA written procedures in the form presented as well as the publication in the Connecticut Law Journal of intent to adopt the modified written procedures. Dr. Cibes seconded his motion; all were in favor. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS William J. Cibes None None John Mengacci Bryan K. Pollard FINAL Page 6 of 8
Barbara Rubin Sarah K. Sanders DRAFT STRATEGIC BUSINESS PLAN FY 2010-2012 Mr. Asher reported that the Authority is currently updating the Strategic Business Plan (the Plan ). The updated draft has been prepared by the Strategic Business Plan Development Team which includes the Officers and two managers. The Plan follows the basic framework of the Kellogg Logic Model and Staff included goals, sub-goals, resources/barriers, activities, outputs and outcomes. Mr. Asher stated that the Authority s primary responsibility is to its clients. The four core goals are as follows: (1) Superior client Services; (2) Programs and Services that Meet the Demands of a Changing Market; (3) Partner in Public Policy; and (4) Sustainable and Ethical Organization. Mr. Asher provided a brief overview of the plan. Ms. Rubin suggested that Board members submit comments surrounding the plan after the meeting or by e-mail. Ms. Sanders suggested the plan should include CHEFA s role in seeking new ways of fulfilling its mission. Mr. Asher spoke of the Authority s current efforts to create new avenues of business and leadership within the State. Ms. Rubin asked that the Board focus on the mission statement at today s meeting. Further discussion ensued regarding the mission statement. The Board will continue the discussion at the July Board meeting. SEMI-ANNUAL COMPLIANCE REPORT Ms. Herman introduced Ms. Thiede, who is the Authority s new Compliance Analyst, and discussed the Authority s enhanced compliance function and Ms. Thiede s responsibilities. Prior to assuming the position of Compliance Analyst, Ms. Thiede was employed by the Authority as an Accountant. Ms. Thiede presented the March 31 st semi-annual compliance report which represents a snapshot of the compliance status of the Authority s clients, as of March 31, 2009. Mr. Mengacci inquired about the implications of a client who is noncompliant. Ms. Herman stated that any existing noncompliance is covenant noncompliance, not payment default. The covenants are intended to provide an early warning of any financial deterioration. The loan document may require the client to engage a consultant if they are noncompliant. Ms. Rubin asked if the Authority is obligated to disseminate information of the noncompliance to bondholders. Ms. Herman stated that under the Institution s continuing disclosure agreement, the Institution is obligated to provide notice of noncompliance that constitutes an Event of Default. In the case of enhanced issuances, any waiver or modification of loan agreement provisions by the Authority typically requires the consent of the credit enhancer. Ms. Rubin asked if the Authority is taking a proactive approach to covenant violations. Ms. Herman stated that the Authority does take a proactive approach to compliance, working with the Institutions and credit enhancers to bring Institutions into compliance, and documenting our efforts. FINAL Page 7 of 8
OTHER BUSINESS There being no further business, Ms. Rubin requested a motion to adjourn the meeting at 3:50p.m. Mr. Cohn moved to adjourn the meeting and Dr. Cibes seconded his motion; all were in favor. Upon roll call, the Ayes, Nays and Abstentions were as follows: AYES NAYS ABSTENTIONS William J. Cibes None None John Mengacci Bryan K. Pollard Barbara Rubin Sarah K. Sanders Respectfully submitted, Jeffrey A. Asher Executive Director FINAL Page 8 of 8