City Ponders $215 Million Deal to Let Lakeland Regional Health Prepay Its Lease

The Lakeland City Commission is considering permanently changing its financial agreement with Lakeland Regional Health, which leases its hospital campus from the city.

Under a proposal city commissioners will consider on Monday, the hospital system would pay a lump sum of $215 million by Oct. 1 to cover the lease period through 2040 and thereafter would pay $10 a year.

The city would invest the $215 million into a capital improvement fund and would draw upon the interest to keep up with needed improvements, such as replacing fire trucks and maintaining city-owned facilities, City Manager Shawn Sherrouse explained to commissioners during an agenda study meeting on Friday.

Sherrouse, City Attorney Palmer Davis and City Finance Director Mike Brossart outlined what a months-long negotiation with the hospital board and its representatives came up with. Their aim was for the city to maintain its capital improvement fund without having to increase residents’ property taxes while the hospital continues to provide indigent and safety-net health care and maintains or improves its financial ratings to obtain loans.

The city has long relied on the lease payments as a way to expand and improve city parks, police, fire and other facilities and equipment.

The interest from the lump-sum $215 million payment would provide little more than maintenance-level funding for capital improvements so after the 2029/2030 fiscal year, the city likely would need to find different revenue streams, other than increasing property taxes, to pay for new projects, Brossart said.

This is the ninth time the 35-year-old lease agreement has been renegotiated and the third time since 2015 as Lakeland Regional Health and its hospital, Lakeland Regional Medical Center, have faced increasing competitive pressure and decreasing federal and state revenue streams.

See the proposed updated agreement here or at the end of this article. ALSO: Ledger coverage

“This provides certainty for both entities,” said Danielle Drummond, CEO and president of Lakeland Regional Health.

She described Lakeland Regional, which is licensed for 864 beds, as the sixth-largest hospital in the state with responsibilities to serve as a regional Level II trauma center and a safety-net facility for indigent care.

Eliminating the annual lease payments allows Lakeland Regional to continue with its plans to build a behavioral health facility, which is “much-needed but a financial drain on us,” and to continue to pursue efforts to become a teaching hospital, which would help fill the area’s physician shortage.

Lakeland Regional held a foundation-pouring ceremony for behavioral health center on Thursday.

Background

Lakeland’s hospital was operated by the city for decades. In 1986, the city agreed to turn over hospital management to the not-for-profit Lakeland Regional Medical Center but maintain ownership of the facilities and land.

As Lakeland Medical Center has evolved and grown over the years, one thing has remained constant for the city: a guaranteed revenue stream from the lease payments.

The city of Lakeland has continued to require millions of dollars in annual lease payments, an anomaly among cities and counties that started hospitals, then later leased them to not-for-profit hospital corporations to manage. Typically leases are nominal, $1 to $100 a year.

Under Lakeland’s current lease agreement, the hospital system is to pay $14.38 million a year through 2024, after which the amount would increase by 2.75% annually until 2040, when a new lease agreement would be negotiated. When the latest lease agreement was worked out in 2019, the city made numerous adjustments to its budget and eliminated some long-term planned projects.

The proposal being considered Monday would require the city to eliminate or delay several items in the 10-year plan for capital improvements, Brossart said. Those include delaying the construction of a fire station north of I-4 and the purchase of land for a park in southwest Lakeland.

Lakeland Regional is facing increasing competitive pressure. In the two-and-a-half years since the state eliminated certificate of need requirements for acute-care hospitals, three hospital systems have either opened or confirmed they have plans to open facilities in Lakeland Regional’s traditional territory.

The largest planned project is by the not-for profit Orlando Regional Health System, which will begin with an emergency department and gradually build out over 20 to 25 years to include a 360-bed hospital on a nearly 80-acre campus in southeast Lakeland.

Drummond said she expects the other hospitals to emphasize providing more-profitable lines of service while directing other services, such as behavioral health, toward Lakeland Regional as a safety-net hospital.

”There would be erosion of our margin,” Drummond said of the hospital’s finance picture.

Making it work

Brossart said that the $215 million lump sum lease payment will meet the city’s needs for projected capital and for future maintenance and repairs based on three assumptions:

  • A 6% rate of return on the investment
  • No drawdowns on the principal
  • The costs in the Public Improvement Fund will not grow by more than 1.75% per year through the 2029/2030 fiscal year

When city and hospital administrators started renegotiating the lease agreement, “we looked for way to prepay the current lease,” Brossart said. “What dollar amount did we need that we did not have to ask citizens to pay more to buy fire trucks and such things in the general fund. With these terms, those numbers do not run out for 100 years and at the end of 100 years we still do not have to increase property taxes.

“If we meet these assumptions, we do not have to go negative at all,” Brossart said.

To Commissioner Don Selvage’s question as to what would prevent future city commissions from drawing down on the principal, City Attorney Palmer said there is not much this commission can do to prevent that.

Mayor Bill Mutz interjected, however, “If we want to continue to make improvements to the city, there would be pressure on future city commissions to not draw down.”

Commissioner Phillip Walker asked what possible challenges would the city face as planned capital improvement projects are pushed back.

Sherrouse said that some projects in the 10-year capital improvement plan will have to be removed or reduced. For example, plans to build a fire station north of Interstate 4 are being reduced to include land acquisition but no funds for design and construction. And the amount of money for developing a regional park in southwest Lakeland would be further reduced, meaning “we would have to come up with another source of money.”

Options

City Attorney Davis said under the current lease agreement, the city has three options when negotiations reopen in 2036:

  • 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 agreed to by the city and Lakeland Regional. The hospital would be would be entitled to a credit against the purchase price for the amount it has made in lease payments since 1986.
  • If the city and Lakeland Regional cannot agree on a lease extension or a sale price, when the lease expires in 2040, the city could sell or lease the hospital to another health care system. In that event, the net proceeds would not go to the city but, under state law, would be split with 50 percent funding delivery of indigent care and 50 percent going to promote job creation in the health care sector of the economy through new or expanded health care business development, services and education programs or commercialization of local health care research.

Commissioner Bill Read asked if Lakeland Regional were to purchase the property, how much would its accumulated lease payments knock off the purchase price.

Brossart said through 2020, the hospital has paid $271,452,000, this year must pay $14,380,000, and the remaining lease payments through 2040 add up to $334,621,000.

Read also asked whether the city might be able to change state law so that if it chose to sell the property to a third party, all the proceeds would not have to go to health care.

“You would not go to this negotiation without good-faith agreements,” City Attorney Palmer responded. “This morning we are discussing a lease in perpetuity.”

How commissioners lean

Read, who was the sole commissioner to vote against a 2019 amendment to the lease agreement that gave the hospital numerous discounts, said, “There already is a discount in place.”

“This is going to be a major major financial commitment we are going to change for our citizens,” Read said. “After 2030 this is going to impact citizens forever and ever. You cannot go back.”

Selvage, who was appointed to the City Commission in January to fill a vacancy until a city election is held in April, said that he was on the commission in 2010 when he was first approached about the hospital lease issue.

“I have always supported we should get out of this lease,” Selvage said. “We should not be charging a not-for-profit hospital for our improvement fund.”

Commissioner Sara Roberts McCarley said that commissioners need to be cognizant that Lakeland Regional is a safety-net hospital for the city and the region.

“This is not a normal situation for a municipalities to have as a revenue stream,” McCarley said. “This is something the City Commission decided years and years ago because the city owned the hospital. Other municipalities that own not-for-profit hospital campuses may charge $1 or $100; they do not charge $15 million for an annual lease.”

McCarley said she favors the proposal, which the city and hospital have worked on for months, and it makes the city “a good and fair partner to the community health system.”

Commissioners Walker, Chad McLeod and Stephanie Madden indicated they see the proposal as a win-win for the city and the hospital.

Madden said since the state opened up hospital competition by removing the certificate of need requirement for acute care hospitals to build new facilities, “I have felt our revenue stream was in jeopardy.” Compounding that, the COVID pandemic has created more economic turmoil in the health care industry, she said.

“What is more important, firefighters and police or nurses and doctors?” Madden asked. “It is difficult to make potential cuts. This gives us some authority. I had thought it would be some sort of miracle to get a win-win.”

The City Commission meeting begins at 3 p.m. Monday at City Hall and is live streamed online and on cable: Spectrum Channel 643 or Fios Channel 43.