HUD says it will not back UMC’s bonds

11th July 2011   ·   0 Comments

By Christopher Tidmore
Contributing Writer

Did Mid-City die in vain?

A 19th-century, predominantly African-American neighborhood has been wiped from New Orleans’ Mid-City over the past six months, but with the promise that in its place the state would build a 424-bed, “state of the art” academic medical center.

Pledges came from LSU and the Jindal Administration that this teaching hospital, in cooperation with the new VA hospital currently under construction, would provide the core of a Biomedical District that would employ thousands and make the Crescent City into a medical treatment destination once more.

However, the revelation on Thursday that the Federal Department of Housing and Urban Development will not act as guarantor of the new UMC’s bonds could leave the University Medical Center Corporation nearly $400 million short of the $1.2 billion in financing needed to build the new LSU Teaching Hospital, argued critics of the proposed UMC.

Defenders of the project, who championed the bulldozing of the Mid-City neighborhood for the hospital’s creation, argued that HUD withdrawing its insurance of the bonds would actually help accelerate the construction of the new hospital. They maintained that the Feds put too many strings on borrowing the $400 million, and LSU just opted not to take the proposed loan instruments.

Regardless, one question remains in the wake of HUD abandoning the project: Will the UMC ever be built, and did a large portion of Mid-City die in vain, only to be a cleared wasteland for years to come?

That’s the position of Dana Roye, a longtime skeptic of whether LSU actually had the money to build the proposed 70-acre hospital complex. She and many of her colleagues had openly questioned if HUD would guarantee the $400 million in bonds. HUD not insuring the bonds on the financial markets, she explained in an interview with The Louisiana Weekly, “will severely impact taxpayers and the fate of the new UMC Hospital.”

“The HUD request,” she continued, “was one of the main sources of funding that would guarantee mortgage backed financing for bonds for the $400 million the UMC board needs to round off the $1.2 billion design for the new UMC hospital — and it just disappeared.”

The Jindal Administration argued to the legislature as recently as last month that the UMC District was independent of the state, and therefore, could issue its own bonds. However, without HUD backing those bonds, Roye outlined, “This will force the UMC Board to find other means of financing. If they choose to go to the bond market, they will have to rely on junk bonds.”

Or the state would have to use its borrowing potential to back the UMC Corporation, otherwise the interest that would be levied against the Medical Corporation would be exorbitant on the bond markets.

Properly speaking, defenders of LSU are correct that HUD did not actively back out of the UMC project in Mid-City. The Wall Street firm that would issue the bonds for HUD dropped out.

Whereas critics of the UMC have explained that from a practical standpoint, that distinction makes little difference; the hospital still is $400 million short, LSU officials argue that it constitutes a world of difference.

In a July 7, 2011 letter to James E. Bolinger, Director of Office of Hospital Facilities, Office of Healthcare Programs at the U.S. Department of Housing & Urban Development, Jay M. Shah, M.D., Vice President of JPMorgan Healthcare and Housing Funding Corporation writes in reference to the University Medical Center Management Corporation, “On Oct. 15, 2010, some eight months ago, we filed with your Office a Pre-Application on behalf of the above reference proposed mortgagor. With the passage of time several issues have arisen that have not at this time been resolved favorably. We further anticipate future project changes which are beyond our control or prediction.”

“Accordingly, we hereby withdraw from consideration without prejudice the Pre-Application for University Medical Center Man­age­ment Corporation, a Major Affiliate of Louisiana State Univ­er­sity. Should circumstances change or issues currently under consideration be resolved, we may submit a revised Pre-Application.”

Opponents of the UMC project as currently constituted maintain that the wholly owned subsidiary of JPMorgan Chase Bank acted so because their critiques that the UMC lacks a viable business plan have resonated on Wall Street, and at HUD headquarters in Washing­ton. JP Morgan backed out, in their words, because HUD planned to drop out.

Not so, argued LSU’s Dr. Fred Cerise: “You may hear on the news tonight and in the newspapers in the morning that the board of the new LSU-affiliated academic medical center in New Orleans has withdrawn its pre-application for mortgage insurance from HUD. This withdrawal is not a surprise to LSU; in fact, it is wholly voluntary and largely due to alternative scenarios of construction and financing that LSU has developed and proposed to the state’s administration.”

“Over the past several months we have asked the state’s Office of Facility Planning to evaluate alternative scenarios which involve developing the land, building the first parking deck, and building the hospital at the scale it has been planned and which is necessary to support the academic enterprise. It is likely that the combination of phasing the construction — and thereby deferring the ambulatory clinic building in the initial phase and relying upon a third party to build the energy plant – and realizing over $100 million in additional funds anticipated from FEMA for the hospitals contents that were destroyed, that this project may be done not only without HUD mortgage insurance but without bond financing at all.”

“It remains critical to us that the hospital is of sufficient size to allow us to change from the traditional Charity Hospital model to that of a true academic medical center and support LSU’s patient care, education and research missions. That is not being compromised in this analysis. This latest news is not a new idea at all; in fact when the bankers were engaged many months ago, their charge was to pursue both HUD insured and other means of financing. This phased approach could give us the flexibility needed for us to proceed in an expeditious fashion avoiding costly delays and allowing LSU to resume its full range of critical patient care services, education and research programs.”

“While many will want to portray this as a sign of failure, the truth is quite the opposite. The fact is that we are close enough to consider not floating bonds at all. Under that scenario, the state has more flexibility to proceed with construction, not less.”

“I hope this is helpful in interpreting whatever media coverage is likely to result from this notification sent to HUD. In no way does that notice preclude the board’s ability to seek bonds in the future, whether they are insured by HUD or not.”

Of course, Dr. Cerise had specifically rejected a phased approach as recently as six months ago when Mid-City neighborhood activists pointed out that if the bonds were rejected, parts of the hospital might not be built for years, if ever. They begged to delay demolitions of houses, and allow construction on a phased basis, only ripping down the final blocks of houses when all of the financing was in place.

Cerise argued that the bond financing was already “in place” and HUD insurance and Wall Street investors had already been secured. So, the houses had to come down, or else construction would be delayed.

Now the LSU Health Care Brahmin has cited a phased ap­proach for the hospital as the way to go, roughly two months to late for the residents of the plot of land dedicated to the proposed parking structure or the ambulatory clinic.

Moreover, Cerise specifically avoids the fact that bond costs would rise sharply without HUD (or Louisiana State) backing, at least two points higher than on the open market, initially equivalent to $8 million in annual debt service on $400 million. Perhaps, higher in the long term given the recent volatility in the financial markets.

And, it was Cerise who called HUD’s back of the bonds “critical” components of the hospital financing plan as recently as two months ago.

Regardless, the decision by HUD will drive up costs for the new hospital if it keeps to the proposed 70-acre footprint. And, if it does not, many legislators will begin to wonder if LSU could not have built a smaller hospital inside of the old “Big Charity” complex—as the Foundation for Historical Louisiana proposed, at a savings of $250 million.

The architect of that proposal, Sandra Stokes, also noted to the Weekly, that the UMC might have withdrawn the application “to avoid a verdict that could damage the project in the future”. At a previous UMCMC board meeting, their advisors said that only one of four HUD 242 pre-applications are approved. Of those that are not approved — none are built.”

She also noted that the University Medical Center Management Corporation (UMCMC) was theoretically set up as is a private corporation, not a public division of the state government. As such, the Cerise plan to use private operators brings into question the constitutional prohibition (post-New London) of using eminent domain for private purposes. It is unclear whether LSU might be able to bring in the private contractors to build and/or operate the ambulatory care and parking garages on expropriated property, in order to make up the $400 million difference as Cerise has proposed.

Stokes explained in an interview. “We have heard the same rhetoric for the last four years, ignoring reality. This was a pre-Katrina, pre-national economic downturn, pre-national healthcare reform plan. We now have the state’s own Department of Health and Hospital and the UMCMC commissioned studies that both say this project is not feasible.

Yet they keep bulldozing ahead — literally and figuratively. The philosophy that if you say the words long enough and loud enough, people will believe it; just doesn’t work anymore. This does not make the money appear, or make the plan fiscally responsible or sustainable. Right now the emperor has no clothes, and the officials are still all saying how marvelous he looks.”

Cerise had consistently said the new UMC has to be “state-of-the-art,” offering every reasonable medical service under one roof. However, if LSU decides to scale back, many, including Roye, have asked, “Why did you not just rebuild Charity then, if a smaller hospital was all that you needed?”

On Thursday, both Gov. Bobby Jindal and Mayor Mitch Landrieu, firmly pledged, that even without HUD backing on the new hospital, construction will not slow. Their comments left many wondering if state support for UMC bonds was looming. Guaranteeing $400 million in bonds has previously been rejected as it would nearly exhaust the state’s borrowing capacity for an entire year, and mire the state’s credit rating in large debt commitments.

“I’ll keep saying this until we’re standing in front of the new hospital. We continue to move forward with the development of this hospital,” Jindal declared.

At the same event in downtown New Orleans, Landrieu added, “What happened today was not consequential.”

However, one of the leading opponents of the UMC project, U.S. Senator David Vitter, said in a public statement, “The state’s HUD application was withdrawn to avoid having HUD reject it. I think HUD was clearly reaching the same conclusion as (the) experts: The original mega-Charity plan is unsustainable.”

This article was originally published in the July 11, 2011 print edition of The Louisiana Weekly newspaper