The amendment to the hospital lease agreement removes the annual 2.75% increase in rent through fiscal year 2024, freezing the price at $14.4 million. The annual rent increases had been set under a 25-year agreement between the city and the hospital signed in 2015.
Commissioner Bill Read opposed the amendment. He had posed an amendment that cut the city’s total loss in revenue by about half but he received no other support from his peers.
Read wasn’t the only critic at the commission meeting.
Paul Cunningham, a resident of the city, told commissioners that the health-care organization agreed to the contract with the city and should meet its obligations.
“The rent is due, it’s time to pay up,” Cunningham said. “It seems like lately the hospital has been more interest in their real estate speculation than to tending to patients.”
Cunningham referred to comments made by LRH CEO Elaine Thompson and Danielle Drummond, her replacement when Thompson steps down at the end of next year, that the organization would need to grow to stay above water. In recent years, LRH has seen its profit margins dwindle to nearly nothing, The Ledger reported in December.
Not-for-profit hospitals have reported some of their lowest profit margins (or revenue after expenses as it referred to in the not-for-profit sector) in recent years, Moody’s Investor Services reported in December. The financial outlook company expects the slide to continue.
Thompson responded to the criticism at the request of Commissioner Phillip Walker, saying the health-care organization remained dedicated to improving the health of the community.
“Our number one mission is that we provide health care to this community with the highest outcomes regardless of someone’s ability to pay,” she said.
She touted the organization’s addition of cancer care, a partnership with the Mayo Clinic network, a partnership with USF and expansion of care for women and children.
She also added that the 2015 agreement with the city came before state cuts to Medicaid, which has lowered revenues by more than $18 million a year since then, she said.
Filling the fiscal gap
Commissioners approved the amendment with little conversation on the dais Monday, and the approval came despite the impact it would have on the city’s budget. Earlier in the day, the commission tentatively approved a plan by the city’s staff to cut and shift by more than the $395,000 the lease amendment will cost the city in 2019-2020.
The savings to the hospital — that is, the cost to the city — will continue to compound through the life of the lease agreement, which expires in 2040.
So in 2024, the city is expected to receive $2.1 million less from the hospital than originally agreed. Because of the impact of compounded percentages through the end of the agreement in 2040, over the life of the contract the hospital will pay the city about $48.5 million less, a portion a little more than 10% of the agreed-to rents.
To close the immediate budget gap without raising taxes, the city staff proposed removing four to six positions from the organizational chart to save about $200,000 a year. No one would need to be fired to meet this goal, Finance Director Mike Brossart said.
Also nixed would be a plan to purchase land for a city park in the southwest part of town, removing it from a 10-year projects list.
And the staff also recommended transferring $500,000 from the city’s $2.5 million downtown growth “catalyst” fund, which originally came from Solid Waste division savings, into the city’s cash reserves. The city has a policy of keeping more than 45 days of “cash on hand” in reserve in case of emergencies.
The final measure drew some criticism. The city’s staff recommended delaying a payment to an investment fund intended to, by 2040, offset by some of the expected loss of hospital lease revenue when the 2015 agreement reaches its end. The investment fund was seeded with a one-time, $15 million payment by LRH to the city in 2016.
“I have heartburn with changing anything we had planned with that $15 million,” Troller said at the morning meeting. “We accepted that money as a foundation to build something.”
Brossart and City Manager Tony Delgado were less concerned about the delay, saying that the investment fund profits have always been speculation and subject to the whims of the marketplace.
But delaying payments to the investment fund could cost millions in the end, Troller said, adding sardonically that “none of us will be sitting here, so maybe it’s easier for us to kick it down the road.”
The amendment to the contract approved Monday was the eighth change since Lakeland Regional Health took over management of the city’s hospital, which until then had been managed as a city department.
Commissioners didn’t seem confident the 25-year agreement, despite this recent amendment, would last through 2040.
“I think it’s unrealistic in thinking we’re only going to be providing relief for five years,” Madden said.
Commissioner Phillip Walker added that “in 10 years this is probably my third conversation about the lease. I know we’re going to have that conversation again.”
The relationship between the city and Lakeland Regional Health remains rare if not unique: most former city hospitals now managed by not-for-profit groups pay only nominal fees to use the sites. Compare this to Lakeland, which derived an equivalent of 11% of its general fund budget from the lease payment.
But the size of the payment is a pair of golden handcuffs holding the organizations together — Lakeland couldn’t drop the contract without significantly downsizing the local government, which commissioners fear would tank the quality of life within the city.
“We really live on 15 mills and I think we need to know that,” Madden said, referring to a property tax rate equivalent to almost three times higher than the actual rate. ”We live on 15 mills to get this gold standard in our community.”