Hillsboro council authorizes bonds for hospital

Referenced as an ?historic moment,? the Hillsboro City Coun?cil approved during its Dec. 15 meeting the necessary resolutions and ordinances to authorize the sale of bonds in the amount of $1.305 million to provide infrastructure for the construction of a new hospital.

Of that amount, $1.25 million will be used for construction-related costs, and the rest to cover legal expenses and cost of issuance.

About a half-dozen staff members from Hills?boro Community Hospital attend?ed the meeting in quiet support of the initiative, but thanked the council once the decisions were finalized.

HMC/CAH Consolidated Inc., the company that owns HCH, has obligated itself to repay the city for what in essence is a ?construction loan.? The company?s overall loan is through the Bank of Hays and approved by the USDA.

Before approving the sale of the city?s bonds, the council met as the Public Build?ing Com?mission to approve three legal initiatives: an engagement agreement with the law firm of Triplett, Woolf & Garret?son to serve as bond counsel; a continuing disclosure compliance services agreement with Muni?Com, LLC, so bond holders can inspect transaction documents; and Resolu?tion PBC-2015-2, which authorizes the actual bond sale.

The council, which already has an agreement with Triplett, Woolf & Gar?rett, passed the other two initiatives without a dissenting vote.

Legal structure

Prior to those actions, J.T. Klaus, the city?s bond counsel, walked the council through the complicated legal structure that led to the final recommendations.

?Today we are issuing bonds that are effectively an obligation of the city, but we?re expecting someone else to pay them off,? Klaus said, referring to HMC/CAH. ?I think when you do that, it?s important to point it out.?

Klaus then described the structure of the agreement:

? ?We?re going to take the land that the hospital owns, subject to a mortgage?and they?re going to have a great big mortgage on it when they?re done and build a new hospital. We?re going to deed that to your Public Building Commission.?

? ?Your Public Building Commission is going to take title, subject to the mortgage, but you?re not signing the loan, you?re not agreeing to pay off the mortgage. But your ownership interest is behind the Bank of Hays, that has the mortgage on that property.?

? ?We?re then going to take our bond money that the Public Building Commission has issued, and we?re going to make the improvements that, really, the hospital needs to have made in order to get the loan (from Bank of Hays). We?re providing the equity for that, frankly, that they can?t provide.?

? ?Then we?re going to take that property with those improvements?the parking lot, the lights, the sewer, the water, the infrastructure?and we?re going to lease it to the city, who is going to agree to pay rent in an amount equal to make sure those bonds get paid off. The city is going to going to be the obligator on those bonds.?

? ?After the city is making the rent payments necessary to pay the principal and interest on the bond, the city is going to sublease that property back to the hospital to build, construct, own and operate a hospital. (The hospital) will agree to pay rent that magically equals the rent the city is obligated to pay.?

Klaus added that if HMC/CAH defaults on its rent obligation, ?the city is obligated to pay it from its existing mill levy in order to guarantee that those bonds ultimately get paid.?

Klaus said revenue from the bonds will be deposited in a Kansas City bank and then issued as construction expenses are submitted by the project contractor.

Contract safeguard

As a safeguard against a ?worst-case scenario,? Klaus said his firm has designated a 100-foot-wide strip of land along the south side of the property that the city will deed to the PBC. If the hospital defaults on its loan, leading to foreclosure, the PBC will still own the 100-foot strip but will be leasing it to the city.

?The city is going to be obligated to pay the same amount of rent in order to pay of the bonds…(but) we needed to make sure that rent went to the Public Building Commission to pay off the bond, not to the Bank of Hays to cover its toast on a default.

?It effectively is a 100-foot-wide strip where probably you would put a road or a street or anything else as you develop the rest of this property,? Klaus said. ?We didn?t want to tie up the rest of the 40 acres because we understand you have a vison for developing the remainder of that 40 acres.?

Unique arrangement

Asked by Councilor Brent Driggers if Klaus had ever developed an agreement like this one for anyone else, the attorney replied, ?Really, the only thing that?s unique here is the mortgage that?s in front of you. It?s that mortgage that makes it both unique and also presents all of the difficulties.?

Klaus added that because the bonds with the PBC are taxable, they do not count against the city?s statutory debt limit.

?It is not like a bond that you issued for a road that would count against an ability to borrow in the future,? he said. ?For real-life purposes, you?re kind of using a different credit card (to generate funds). You still borrowed the money, but for legal purposes it won?t prevent us from issuing debt in the future.?

Klaus also mentioned that the agreement gives the city authority to pay off the bonds ahead of schedule, if it so chooses.

Other business

In other business, the council:

? passed seven amendments to the 2015 city budget after receiving no feedback during a public hearing at the start of the meeting.

Budget amendments are a routine tool used to keep expenses lines in compliance with state statutes. The amendments cannot affect the city?s mill levy.

? approved malt beverage licenses for Hillsboro Golf Association, Wal-Mart, Casey?s General Store, Cooperative Grain & Supply (Ampride) and the El Lorito restaurant.

? authorized payment of $186,811 to Maguire Iron Inc. for work completed on the city?s smaller water tower. Once the payment is made, a Heritage Trust Fund grant will reimburse the city $105,000 because the tower is listed on the National Register of Historic Places.

The total cost of the project is projected to be $254,410.

City Administrator Larry Paine said Maguire Iron will be applying a second coat of paint to the renovated tank. To give the epoxy paint inside the tank time to cure, the tower will not be used until spring.