Lakeland Regional Health will no longer be saddled with $14 million and higher annual payments to lease its campus from the city but must make a lump sum prepayment of $215 million to cover the lease through 2040 and then will pay $10 annually in perpetuity.
The City Commission agreed to change the terms of the lease by a 6-1 vote on Monday afternoon, with Commissioner Bill Read voting no.
The city has long relied on the lease payments to boost its public improvement fund to pay for such things as parks, libraries, cemeteries and police and fire department facilities.
However, for more than a decade hospital administrators have complained that the multi-million-dollar lease payments are out of line with annual $1-to-$100 payments other not-for-profit hospitals pay to lease land and facilities from cities, counties and public hospital districts. And, they say, the lease amount is so high it causes issues with the hospital’s bond rating and impacts the hospital’s ability to compete in the increasingly competitive health care market.
In voting with the majority, Commissioner Sara Roberts McCarley said, “As a city, the onus is on us to look for other ways to budget that are not on the backs of our sick.”
The change will force the city to become more creative in finding ways to budget for capital improvements, she said.
City Finance Director Mike Brossart said city staff will recommend that the $215 million payment, which is due on or before Oct. 1, be invested into a capital improvement fund overseen by a local board similar to how the city’s pension funds are operated.
According to City Manager Shawn Sherrouse, the $215 million investment would meet most but not all of the planned capital improvement needs through 2030 and thereafter would provide a maintenance-level budget with three provisos:
- There is a 6% rate of return on the investment
- Future city commissions do not draw down on on the principal
- The costs in the public improvement fund do not grow by more than 1.75% per year through 2029-2030 fiscal year.
The current City Commission cannot restrict future commissions from drawing down the fund, Sherrouse said.
To make the figures work, the city will have to trim back some long-range plans, he said. While there would be enough money to buy land for a planned fire station north of Interstate 4, there would not be enough for design and construction of the project. And the city will have to find other sources of revenue to build a regional park in southwest Lakeland, Sherrouse said.
City Commissioner Don Selvage recalled a conversation a few years ago with former Lakeland Regional CEO Elaine Thompson, who asked if he felt comfortable taking millions of dollars from the community hospital and investing it in parks.
“Maybe that is an oversimplification but that stuck with me. I decided somehow we need to get out of this. It is not right to be hitting up our hospital with a 14-to-15-million-dollar bill,” Selvage said.
In a statement released following the vote, Lakeland Regional said it will “pursue funding for the $215 million in a low-interest rate environment that will ensure long-term cash-flow savings compared to the current lease payment obligations.”
The agreement provides “a higher level of certainty” for the hospital’s bond holders and credit agencies about the future of the lease and its financial impact on the hospital, the statement said.
In December, Moody’s Investors Services gave Lakeland Regional an A2 bond rating with a stable outlook “that specifically identified the annual lease obligation and its uncertain future beyond 2040 as an ongoing credit challenge until an alternative solution is determined,” the statement said.
Mayor Bill Mutz said that the design of the formula set up in the original 1986 agreement “did not anticipate the type of revenue that would create this kind of outcome” and it has become onerous for the hospital with the bond rating agency Moody’s questioning why it would have this type of lease arrangement.
City Finance Director Mike Brossart said that in a recent conversation with Gene Strickland, who was city manager in 1986, the original lease formula provided about $1.5 million, most of which was designated for parks.
In 1986, the city decided to hand over management of the city-owned hospital to the newly created not-for-profit hospital corporation and entered into the lease agreement. This was the ninth time the lease agreement has been modified and the third time since 2015,
Currently licensed for 864 beds, the safety-net hospital is the sixth largest in the state and serves as a regional Level II trauma center.
Danielle Drummond, CEO and president of Lakeland Regional, said that eliminating the annual lease payments allows Lakeland Regional to continue with its plans to open a behavioral health facility in the summer of 2022 and to continue to pursue efforts to become a teaching hospital, which would help fill the area’s shortage of physicians and other health-care providers.
Before casting his no vote, Commissioner Read cited statistics about the national unemployment rate, pending home foreclosures and said some forecasters are predicting a market crash this summer. He questioned whether the city will be able to earn a 6 percent or higher interest rate over the long term.
Commissioner Stephanie Madden agreed with Read that “this is one of the biggest decisions we will make” and said she understands his concerns about the volatility of the market.
But she praised the negotiation between the hospital administration and the city staff and said that it is bringing a degree of certainty for both the hospital and the city.
“We cannot be one side against the other. We need to make concessions on both sides. This is how we are going to move ahead as a community for the sake of all involved,” Madden said.
City Attorney Palmer Davis said that if the city refused the latest deal, it would have had three options come 2040:
- Renew the lease for 25 years at a rate “consistent with payments then being made by other acute care not-for-profit hospitals in Florida which lease their facilities from governmental entities such as counties, municipalities and hospital districts.” Currently, those rates are nominal, in the range of $1 to $100 annually.
- Sell the hospital to Lakeland Regional at a purchase price determined by a nationally recognized health care appraisal firm. The hospital would be entitled to a credit against the purchase price for the amount it has made in lease and other payments since 1986.
- The city take over operation of the hospital or sell or lease the hospital to another health care system, however the net proceeds would not go to the city but, under state law, would be split with 50 percent going to indigent health care and 50 percent promoting job creation and education in the health care sector.