HomeMy WebLinkAbout05/06/1997, 3 - REQUEST FROM VISTA HOSPITAL SYSTEMS FOR CONSIDERATION OF CONDUIT FINANCING council s
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CITY O F SAN LU IS O B I S P O
FROM: Bill Statler, Director of Finance
SUBJECT: REQUEST FROM VISTA HOSPITAL SYSTEMS
FOR CONSIDERATION OF CONDUIT FINANCING
CAO RECOMMENDATION
Provide direction whether staff should proceed with evaluating Vista Hospital Systems' request
for"conduit" financing in assisting them in their purchase of French Hospital.
REPORT-IN-BRIEF
Vista Hospital Systems, a non-profit corporation, is currently pursuing the purchase of French
Hospital. To assist them in financing this purchase, they are requesting that the City issue
conduit bonds on their behalf. Under federal and state tax laws, the City is allowed to do this on
behalf of any "501c(3)"non-profit organization in our City. While there is no financial obligation
or liability to the City in doing this (the operating organization is responsible for all debt service
payments), it allows non-profit organizations to borrow funds at favorable, tax-exempt rates.
This action is clearly discretionary on the City's part. As such, before proceeding with this
request, we believe that three key questions need to be addressed about this specific financing:
■ Is the City adequately protected from any liability?
■ Is there a clear public purpose in assisting a non-profit organization with this purchase?
■ Is the applicant capable of achieving this public purpose?
Answering these questions will require a commitment of City and consultant resources;
accordingly, Council direction to do so is requested before proceeding with this request. As
discussed further below, these efforts should be fully reimbursed by the applicant, and Vista has
agreed to do so.
DISCUSSION
Background
Tenet Healthcare Systems, which owns Sierra Vista Hospital, recently acquired OrNda
HealthCorp, which previously owned French Hospital. Due to market-place competition
concerns, the Federal Trade Commission (FTC) has ordered Tenet to sell French Hospital as a
condition of their purchase of OrNda. An offer by Vista Hospital.Systems to purchase French
Hospital has been accepted by Tenet; however, this purchase is subject.to FTC approval.
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Council Agenda Report- Conduit Financing Request from Vista Hospital Systems
Page 2
Conduit Financing Principles
As set forth in Exhibit A, Vista is requesting that the City assist them in financing their proposed
purchase of French Hospital by issuing conduit bonds on their behalf. Because the interest on
these bonds will be exempt from state and federal taxes, debt service costs will be lower than if
conventional, taxable financing was used. Vista has indicated that this savings will be about $1
million annually in interest costs.
It is common for a non-profit hospital to make this kind of request from a city. In fact, it would
be highly unusual if a non-profit organization did not request the use of tax-exempt financing in
building or acquiring a hospital: it would simply not be good stewardship of their resources to
use a more expensive form of financing when a less costly method might be available.
It should be emphasized that conduit financings are structured in such a way that there is no
liability to the issuing agency; all obligations for repayment lie strictly with the benefiting
organization, and bond holders fully understand this. Accordingly, conduit bonds are purchased
solely on the financial ability of the benefiting organization, and as discussed below, there will
be significant due diligence efforts by the underwriter (the firm that will initially purchase and
market the bonds), the financial feasibility consultant, and the institutional investors who will
purchase the bonds through the underwriter, to ensure that Vista has the ability to successfully
operate a hospital and make debt service payments.
Nonetheless, even though there may be no liability to the City in issuing conduit bonds, this is a
discretionary act on the City's part, and as such, we should be sure of the public purpose in doing
this, and confident of the applicant's ability to achieve this public purpose.
City Experience with Conduit Financing
The City has previously used conduit financing for two projects:
■ Commercial Revenue Bonds- Gottschalks. The City issued $5.5 million in commercial
revenue bonds on behalf of Gottschalks in 1985. The proceeds from the bonds assisted
them in building their store at Central Coast Mall. This issue was for ten years, and the
final payment was made in December of 1995; as such, these bonds are no longer
outstanding.
■ Note with Heritage Oaks Bank- Cal Poly Foundation. The City issued a ten year note
on behalf of the Cal Poly Foundation in the amount of$1 million in 1996 to assist them
with the purchase of equipment for the performing arts center.
While both private for-profit and non-profit organizations are eligible for tax-exempt conduit
financing, the rules for doing so are significantly different. For this reason, the City joined the
California Statewide Communities Development Authority ("bonds for industry" program) in
1994 as the best way of providing conduit financing for private sector, for-profit activities.
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Council Agenda Report- Conduit Financing Request from [lista Hospital Systems
Page 3
While we initially joined this group to assist San Luis Sourdough in remaining in the community
(they subsequently chose not to use this approach for business reasons), our longer-term purpose
was to have a conduit financing vehicle in place to assist other companies with their expansion or
development plans as part of our economic development program.
Future Plans to Use Conduit Financing
While the specific financing vehicle will be different from a true conduit financing, the proposal to
form an assessment district to assist private property owners in making seismic and fire sprinkler
improvements (if there is sufficient interest in doing so) is similar in concept to what is being
proposed in this case, which is for the City to use our capital-raising ability to assist a private
organization in making improvements that will benefit the community.
Additionally, as part of a more pro-active economic development program, we can expect conduit
financing requests from the private sector at some point in the future. As discussed above, we
have already positioned ourselves to accommodate these kinds of requests if they should occur
through the "bonds for industry" program.
Policy Issue
The key policy issue before the Council is not whether the City should consider providing conduit
financing on behalf of others — we have done this is the past, and we are likely to do so in the
future; rather, the key policy issue is: when should we consider doing so?
We recommend considering conduit financings on a case-by-case basis using the following
criteria.-
0
riteria:■ The City's bond counsel will review the terms of the financing, and render an opinion that
there will be no liability to the City in issuing the bonds on behalf on the applicant.
■ There is a clearly articulated public purpose in providing the conduit financing.
■ The applicant is capable of achieving this public purpose.
This means that the review of requests for conduit financings will generally be a two-step process:
first.asking the Council if they are interested in considering the request, and establishing the
groundrules for evaluating it; and then returning with the results of this evaluation, and
recommending approval of appropriate financing documents if warranted. This two-step
approach ensures that the issues are clear for both the City and applicant, and that key policy
questions are answered.
The workscope necessary to address these issues will vary from request to request, and will have
to be determined on a case-by-case basis. Additionally, we should generally expect to be fully
reimbursed for our costs in evaluating the request; however, this.should also be determined on a
case-by-case basis.
33
Council Agenda Report- Conduit Financing Request from Vista Hospital Systems
Page 4
In responding to conduit financing requests we may receive in the future, we plan to formalize
these criteria as part of the 1997-99 Financial Plan policies.
Proposed Workscope for this Request
Consistent with these criteria, we propose the following work program in responding to Vista's
request:
■ Legal review. We have requested a proposal from our bond counsel — Jones Hall Hill &
White — to review the proposed financing and to render an opinion on its impact on the
City. As set forth in Exhibit B, the cost of this review is projected to be $7,500. As with
all costs in this evaluation process, we expect the applicant to fully reimburse this cost.
■ Public purpose. This is perhaps the most critical policy question in our review of conduit
financing requests, and is not one that can be answered through technical analysis alone.
In this case, the public purpose may be this: it is in the community's best interest to have a
viable competitor to Sierra Vista, and this interest will be further advanced by having a
non-profit competitor. The need for a competitive.non-profit hospital may be even greater
in the future if General Hospital closes, as it is currently the only non-profit hospital in the
City.
■ Applicant's ability to achieve the public purpose, Even though we may have assured
ourselves that there is no liability to the City, and we have identified a clear public purpose
in using conduit financing,we need to also assure ourselves that the applicant is capable of
achieving this public purpose.
Under this third criteria, in addition to Vista's own internal analysis, their ability to successfully
operate French Hospital will be comprehensively evaluated under four separate review processes:
■ Financial feasibility consultant review. Coopers & Lybrand, a "big six" accounting and
management consulting firm, has been hired by Vista to perform a study of the market
demand for health care services in French Hospital's service area and to prepare a financial
forecast for French Hospital through 2001. These two studies will be available to the City
in our consideration of this conduit financing request.
■ Underwriter review, Cain Brothers, the underwriter for the offering, will conduct its own
due diligence to ensure that Vista can successfully operate French Hospital. As the initial
purchaser of the bonds, and marketer of these to institutional investors, they have a direct
business interest in the ability of French Hospital to operate successfully and meet debt
service obligations.
■ Institutional investors. They have the most direct interest in the successful operation of
French Hospital, as it is their investment in the bonds that is at risk. They will be making a
commitment to purchase the bonds before the sale is finalized, and as part of their
investment decision, they will perform their own extensive due diligence to ensure the
Council Agenda Report- Conduit Financing Request from Vista Hospital Systems
Page S
likelihood of financial success. While the exact composition of institutional investors has
not been finalized at this time, the following is a summary of investors and approximate
holdings in current Vista debt obligations; based on information provided by Vista, some
or all of these are likely investors in the proposed financing of French Hospital:
Approxinune
Holdin,_)s Pei-cent
Franklin Fund $69,325,000 54%
The Putnam Companies 36,075,000 28%
Prudential Funds 12,000,000 9%
Dean Witter Intercapital 6,000,000 5%
Van Kampen American Capital 5,000,000 4%
Other Investors 100,000 __
Total $128,500,000 100%
Source: Primus Management
■ FTC Review. Based on materials provided to us by the FTC, their review will be very
detailed, and address a wide variety of issues. Of special interest to the City will be the
FTC's review of"competitive effects" and "viability", which will consider the following
factors as outlined in Exhibit C:
• Vista's financial ability; this includes financing in place to pay for the acquisition and
fund working capital requirements, and ability to meet other fiscal needs associated
with successfully operating an ongoing business.
• Technical and management skills.
• Business plans and other evidence of Vista's intention and ability to compete.
• In summary, the FTC will not approve an acquisition that does not restore the
competition that previously existed, or that involves an acquirer who is unlikely to
succeed with the divested business.
To the degree that the FTC's review — in conjunction with the due diligence efforts by the
financial feasibility consultant (Cooper's & Lybrand), the underwriter (Cain Brothers) and the
institutional investors — address the Council's concerns regarding Vista's ability to achieve a
clearly articulated public purpose, we may be able to address this third issue by simply
conditioning the sale of bonds on approval by the FTC, which will not occur unless the
underwriter and institutional investors are also satisfied with Vista's ability to successfully operate
French Hospital.
However, the Council may desire additional third party review of these issues, or may have other
specific issues it wants to address before the FTC completes its review of this sale. In this event,
we recommend contracting with another"big six" accounting and management firm specializing in
the health care industry to provide this added review. As discussed below, if desired by the
3—�
Council Agenda Report- Conduit Financing Request from Vata Hospital Systems
Page 6
Council, we recommend that this work be performed by Ernst& Young. Again, we would expect
to be fully reimbursed for this work,which might include reviews of:
■ Vista's past financial performance compared with industry standards.
■ Reputation of Vista-owned hospitals in their communities and in the medical profession.
■ Vista's articulated mission and goals, and demonstrated success in achieving them.
■ Reasonableness of Vista's business plan for successfully operating French Hospital and of
the amount requested by them to be financed through the City.
Based on our past work experience with KPMG Peat Marwick, we initially contacted them
regarding the feasibility of this approach, and their interest in doing this work. While they
confirmed the feasibility of the workscope, Peat Marwick responded that they would be unable to
do this work as they currently have a client relationship with Tenet, and this would pose a clear
conflict of interest for them.
However, they recommended that we contact Ernst & Young as a possible proposer for this
work. Based on this recommendation and the City's past favorable work experience with Ernst&
Young (they assisted us in preparing our solid waste rate review program), we requested a
proposal from them. Provided in Exhibit D is their proposal letter to perform this review at an
estimated cost of between $38,800 and $47,300.
If the Council chooses this approach, and there are other areas that the Council would like
addressed in addition to those outlined above and identified in the attached proposal, we should
Mow that before proceeding with this step, and modify the workscope with Ernst & Young
accordingly.
Timeframe
To accommodate the time restrictions for divestiture of French Hospital as mandated by the FTC,
Vista has requested that the City complete its review in time for Council approval at their June 3,
1997 meeting.
While we will process this request in as timely a manner as possible, should the Council require an
additional third party review of this transaction, it is unlikely that this work would be completed in
time for the June 3 Council meeting. The June 17 meeting is likely to be the soonest possible date
for subsequent Council action, although no guarantees can be made that all of the needed
materials will be completed by this date. We do not know how a delay to the June 17 meeting
would affect the Vista/Tenet sale or the FTC approval time table.
FISCAL IMPACT
We anticipate review costs of at least $14,000 for bond counsel services by Jones Hall Hill &
White ($7,500) and staff time ($6,500 for administrative, legal and financial review). This cost
would be increased by at least $38,800 to a total of$52,800 if the Council decides to include the
added third party review by Ernst& Young to the workscope.
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Council Agenda Report- Conduit Financing Request from crista Hospital Systems
Page 7
As discussed above, we recommend full recovery of these costs; and if approved by the Council,
we would not begin work until we have received an initial deposit for this amount from Vista;
Vista has agreed to both of these conditions.
ALTERNATIVES
■ Do not consider the request further. This would be the most appropriate action under
the following circumstances:
• The Council concludes that there would be no public purpose in assisting a non-profit
in purchasing French Hospital.
• The Council concludes that there is a clear public purpose, but they are concerned
with the applicant's ability to achieve it, and they do not believe that further analysis
will change this conclusion.
■ Rely upon financial feasibility consultant, underwriter, investor and FTC review
procedures. In considering the applicant's ability to achieve public purpose goals, the
review procedures by the feasibility consultant, underwriter, investors, and particularly by
the FTC, may be sufficient to address our concerns in this area. In this case, supplemental
review by Ernst & Young would not be needed, but review by the City's bond counsel
should be undertaken.
■ Perform added third party review. In addition to the reviews noted above, this would
include the scope of review outlined by staff and included in Ernst & Young's proposal. If
this option is selected, it is essential that the Council clearly identify any changes they may
want in this workscope before we begin this task.
■ Approve the conduit financing request without further backgrounding. We believe it
is important to fully address liability and public purpose issues before approving any
request for conduit financing.
■ Do not fully recover City costs. Since this is a discretionary action on the part of the
City, we believe that full recovery of our review costs is appropriate in this circumstance.
EXHIBITS
A. Request by Vista Hospital Systems for conduit financing in purchasing French Hospital
B. Proposal letter from Jones Hall Hill & White for issuer's bond counsel services
C. Excerpt from FTC guidelines on anti-trust compliance issues
D. Proposal letter from Ernst& Young for review of Vista's operations and business plans
H:vntaPLud,eseAgeuaaReport
3-7
PRIMUS NT,INC. ExhA
ibit
April 8, 1997
Honorable Mayor Allen Settle
CITY OF SAN LUIS OBISPO
990 Palm Street
San Luis Obispo, CA 93401
RE: Vista Hospital Systems,Inc.Acquisition Financing of French Hospital Medical Center
Honorable Mayor Allen Settle:
Vista Hospital Systems, Inc. ("Vista"), a California nonprofit,public benefit corporation formally
requests the assistance of the City of San Luis Obispo (the "City") with the issuance of tax-exempt
certificates of participation("COPs')for the acquisition by Vista of French Hospital Medical Center
("French Hospital"). As you are aware, COPS must be issued through a local conduit, such as the
City,as a technical step to create the tax exemption for the COPs. Such assistance in no way creates
or results in any financial obligation of the City at any time. Of course,Vista will cover all expenses
of the City associated with this transaction and the City's participation therein, and at the City
Manager's request, will deposit funds with the City in advance for legal and other expenses.
The citizens of San Luis Obispo seem to prefer that the new owner of French Hospital be a nonprofit
corporation, such as Vista. They are obviously aware of the significant public and community
benefits of a nonprofit,tax exempt,community hospital. In addition to providing the citizens of San
Luis Obispo with a choice between a for-profit and nonprofit hospital, the conversion of French
Hospital to a community nonprofit hospital with a charitable purpose will benefit San Luis Obispo
in the following ways:
• services provided to patients regardless of their ability to pay; no "wallet biopsies" before
care is rendered
• full range of services for women and families involving human reproduction needs ranging
from assisting in the successful birth and care of healthy children and the after care needed
in problem pregnancies
• community outreach in the form of health education to aid in the prevention of disease and
injury and to maintain good health
• free or low cost health screenings where early detection is essential, such as blood pressure
testing,diagnostic screening for cancer and heart disease,childhood immunizations,flu shots
and pap smears, etc.
• CPR, first aid, poison detection and injury prevention training for public employees and
private citizens
• specialized support services for senior citizens such as `Breathers Groups" for seniors with
One Eleven Sutter Street, Suite.2150 • San Francisco, CA 94104
415.627.0755 • FAX 415.627.0766
Honorable Mayor Allen Settle
April 8, 1997
Page 2
respiratory problems, continuum of care such as home health services, and diabetes and
cataract screening
• education regarding family planning,birthcontrol,and child development as well as sexually
transmitted disease prevention for individuals and their families who request these services
• disaster planning and other public safety assistance to public safety departments, emergency
medical services and other public agencies
Vista determines these needs with the guidance of its local Governing Board and through a
Community Needs Assessment required by law. For all Vista facilities, a local Governing Board
is delegated the responsibility and authority to evaluate the communities needs and allocate resources
to support such needs. Vista will fund these services by reinvesting its net income ("profits' and
excess cash flow in the hospital and the community. This reinvestment is not only the foundation
of Vista's mission, it is required by law to maintain Vista's tax exemption.
Vista hereby specifically requests that the City:
• authorize City management, financial and legal staff to immediately being working with
Vista on document review and due diligence as necessary for the City to complete its role
in this transaction
• schedule the following review and approval dates with the City Council as required to
comply with the Federal Trade Commission("FTC") mandated deadline.
Preliminary Authorization May 6 City Council authorize City Staff and legal
counsel to proceed with due diligence
TEFRA Notice May 19 Required for the issuance of tax exempt COPS
Public Hearing/Approval June 3 City Council review and approve substantially
final documents and COPS issuance
Please note that,due to timing constraints,the City's actions cannot wait for the FTC review process
to be completed. If the City delays its decision until after the FTC approval of Vista,there will not
be sufficient time to issue the COPs and close the transaction within the FTC mandated time frame.
Please be assured that if the City authorizes the issuance of the COPs and the FTC does not approve
Vista as the buyer of French Hospital, the transaction must be terminated and no COPS will be
issued.
Vista is aware that some citizens of San Luis Obispo are opposing the sale of French Hospital to
Vista. Vista believes that this opposition is uninformed of the facts regarding Vista, its financial
3-9
Honorable Mayor Allen Settle
April 8, 1997
Page 3
strength and track record in other communities. Through an intensive education and information
effort directed at the citizens, elected leaders, civic leaders and medical community of the City, as
well as other stakeholders and interested parties, an accurate picture of Vista will emerge and its
ability to maintain and improve the important place of French Hospital in the community will be
clearly established.
Your prompt approval of these requests will be appreciated. You, other City Council members,and
City staff should contact us for further information or discussion at (415) 627-0755 or at French
Hospital Administration at(805) 542-6300.
Sincerely,
F. Scott ross
President& CEO
On Behalf Of Vista Hospital Systems, Inc.
cc: Mr. Bill Roalman
Mr. Dave Romero
Ms. Kathy Smith
Ms. Dodie Williams
Mr. John Dunn
Mr. William Statler
Mr. Charles Adams
Ms. Becky B. Serafmi
3 '/0
APR 18 '97 09 Z7 AT&T FF" 9035FX P.Zip
Exhibit-5
JONES HALL HILL &WHTrE,
A PROFESSIONALL&W CORPORATION
ATTORNEYS ArlAw
caAmerF.ADAMS FOUREMBARCADEROMMM
STEPBENi&CASALBGGIO NndErEEN'IHPIAOB
THOMAS A.DOWNHY
ANDRSWGHAI.L.JR. sANF"NC�,CA 94131
COURTNEY L JONRS (415)391-15780
CERNTOPHERMLYNCH FsI-_SDI x
WnA"X LX&V=ON (s WW1-87es
DAApril 18, 1997 Ii1MTP7EPH LJONBS
DAv�A WALTON
SHARONSTANTON WWM
808BRT S I131.L llaes'riPB9)
HOD�PAGIr LmpJ/vww.ptlw,mm
William C.Statler e-mail:cadams@jhhw.com
Director of Finance
City of San Luis Obispo
990 Palm Street
P.O. Box 8100
San Luis Obispo, California 93403-8100
Re: bnRg ed Tax-E&i=t Lhwg ng for Vista Hospital Systems Inc
Dear Bill:
This will confrmi our willingness to act as special legal counsel to the City in connection
with the proposed Certificate of Participation financing for the purchase of the French Hospital
Medical Center by Vista Hospital Systems,Inc. The scope of our engagement will be to review
all of the financing documents to which the City is a party,for the purpose of assuring that the
City does not assume any financial liability or obligations in connection with the financing,and
to advise the City on the nature of the transaction. Other law firms have been engaged to act as
bond counsel and disclosure counsel on the financing,and we will not undertake to perform the
services to be rendered by such firms. At this time,it is not clear whether the underwriter of the
financing will request us to render a legal opinion,although we are willing to do so to the extent
it is consistent with our role in the proceedings.
For these services, we would propose being paid a fee based on the actual number of
hours spent working on the transaction,charged at our usual hourly rates. In the event we are
requested to render a legal opinion as to any of the proceedings,we would charge an additional
fee commensurate mn Ah the work and liability involved in doing so. Based on my estimate of the
total amount of work required, and assuming a routine opinion is requested of us, I would
expect the total fee to be approximately $7,500. Our fees are payable solely from amounts
payments made to the City by Vista Hospital Systems,Inc.in connection with the financing.
As always,it is a pleasure to be of service to the City,and I appreciate the opportunity
to work with you on this matter. Please let me know if you have any questions or comments
about this proposal
V yours,
c
xs F. Adams
APR. 18 ' 97 (FRI) 3027 COMMUNICATION No. 52 PAGE. 2 �//
• 04/03/97 16:19 '0310 ""' 7976 LOS ANGELES Exhibi �010/0:1
t
b. There are two general areas that the
Commission will consider in reviewing a
proposed divestiture: competitive
effects and viability; respondent should
address both areas, although frequently
only one Will be at issue.
c. Competitive effects
1) Respondent's application should
address the order's divestiture
provision, and the markets alleged in
the complaint or proven at trial, .and
demonstrate how the proposed
divestiture will adequately remedy'
the problem.
- We generally examine how much the
divestiture will ieconcentrate the
market..
if divesting to an entit�y .Already
in the market, the avi)l-icatlaa should
show how the decrease in
concentration is sufficient to
achieve the order',s purposes.
2) If the proposal raises competitive
concerns in a market that was not
alleged in the complaint, respondent
still must demonstrate that this is
not a problem. The Commission is not
regLired to approve a proposed
divestiture if is rises any
comDat' .tive P=Ctblems. West t Tax s
Transmission. L.P. v. Enron Corp. ,
1989-1 Trade Cases (CCE) 1 68,424
(W(.D. Texas 1988) , aff'd, 907 F.2d
1-554 (5th Cis. 1990) .
d. Viability
1) The application should demonstrate
that the acquire_ will be an
effective competitor after the
divestiture. Be prepared to show,
inter alfa:
- The acquirer's financial
capability; this includes the
financing in place both to pay for
the accuisition and to fund working
API 03 97 (T.=i:: t ^, 77 C7Vb'*TVT r-A^tnV V_ .ie
04/.03/97 16:20 '$3 ?35 7976 LOS ANGELES t0 011/021
capital and other needs associated
with an ongoing business.
- Technical and management skills.
- Business plans, and other evidence
of the acquirer's intention and
ability to compete. Intention to
compete may be shown by the contract:
although there is no minimum price. on
any divestiture, if the accqu.irer is
paying a -significant amount of money
for the assets, the Commission may
infer that it has the intention of
operating them. Similarly, if the
acquirer is paying less than the
liquidation value of the assets; the
Commission may be concerned that :t
does not intend to operate them.
2) If the divestiture involves less than
a aroing concern, then it is more
difficult to demonstrate a likelihood
of success. The sowing must
demonstrate how the acquirer will- be
able to overcome the barriers to
entry in the market. Although e
order lists the assets that :mist be
divested, it is up to respondent to
demonstrate that .the proposed
acquirer possesses whatever
additional equipment or skills ries
necessary zo compete.
e. In sama_Tv, the Co mission will not
likely approves any d_t*eszitu=e that does
not restore the comae-ition that was
lost /from the acquisition or that _
involves an acquirer who is unlike�v to
succeed with the divested assets or
businesses .
4. Trustee
a. Appointment of a trustee is separate
from and addi=ional to liability for
civil penalties7 not in lien of.
b. Tzrmstee provision_ does :+o= take effect
a_tomatically, but requires an
affirmative act of the Commission.
3 -/3
APR. 03 (7-17 17: 23 C OMMUN 1CA7:ON N: :46 ?ACP. : :
APR 25 '97 12:42 TO-918057817401 FROM-ERNST & YOUNG LLP T-851 P,02/04 F-595
AM ERNST&YOUNO LLP a Suite 80a ■ Phone: 714 252 2300
WOO von Kennan Avenue
:rvina,California 9271 5-1 551
Exhibit->
Apa124, 1997
Bill Stader
Director of Finance
City of San Luis Obispo
990 Palm Street
San Luis Obispo, CA 93401-3249
Dear Mr. Stader-
Thank
taderThank you for discussing with us the City's proposed process for evaluating Vista Health
Systems' request for"conduit"financing in connection with Vista's proposed acquisition of
French Hospital from Tenet. I am writing to con8nn our underswnding of the assistance the
City is seeking from Err at& Young as part of this process.
We understand the City is seelang to answer three key questions as part of its evaluation process.
These questions include:
1. Is the City adequately proteded from any liability?
• We understand this question will be addressed by counsel.
2. Is there a clearpsb 2; pw=e m assisting a non profit orgamrabon with this purchase?
• We understand&is questior will be addressed in part on advice froth counsel, public
discussion, and ongoing Cammil discussions..
3. Is vista the appkcw74 cgnable of achleving this public purpose.
We understand this question will be addressed by two distinct processes. The two reviews
would include an assessment by 1)the Underwriter assisted by Coopers&Lybrand and 2)
the Federal Trade Commission(FTC).
• We understand`l-e Council may have specific issues it would like to have addressed before
the FTC's review is complete and available. The City is seeping a proposal fmm Ernst&
Young to assist mith reviawing specific issues in the event the FTC review timetable is
outside the parameurs of the Council.
Ernst&Young LLP is a member of Emst&Young International,Ltd.
APR- 25 ' 97 (FRI) 43:42 COMMUNICATION No :56 PAGE. 2 �y
APR 25 '97 12:42 TO-9180578174f FROM-ERNST & YOUNG LLP T-851 P.03/04 F-595
Mr.Bill Statler
Apn'124, 1997
Page Two
Preliminary List of Areas of Assistance by Ernst& Young
During our conversation, we discussed several area where Ernst& Young could provide
assistance to the City in connection with its review of Vista's ability to achieve the public purpose
as envisioned by the Council.
1) Preparation of an acecutive briefing document for the Council which would include:
• A summary or Vis"a's past and current financial and operating performance for
each of its acute care operating locations. This information would be compared
with industry nernis and organizations of similar size and scope..
• A review of Vista's and Primus Management's current strategic plans, prior
operating plans, and a comparison of performance against such plans.
2) Review of Vista and Primus Management's business plan for French Hospital and a
comparison of the finankng amount requested with similar size hospitals,and a
3) Review of Coc:r-s Le Lyhrand's feasibility analysis of the French Hospital business plan.
Our review of Coopers&T yorand's analysis would be necessarily limited in scope. We
would discuss the specifics of our proposed review scope prior to proceeding.
15ming and Professional Fees
We understand the Council will reach a decision on this scope of assistance no later than May 6,
1997. The Council would like Ernst&Young's report to be available for review no later than
three weeks$om May 6, 1997.
While we anticipate thez we shali be able to provide you with the foregoing deliverables on or
before the dates set forth above, we shell promptly advise you if unexpected circumstances arise
that would prevent our doing so. Our timetable and estimate of professional fees set forth below
established are dependent on receiving timely access and assistance from Vista, Primus, Coopers
&Lybrand and Cain Brothers.
APA 25 ' 97 (FRI) 13:42 COMMUNICATION No :56 PAGE. 3 /J�
APR 25 '97 12:43 TO-918057817401 FROM-ERNST 8 YOUNG LLP T-851 P.04/04 F-595
Mr. Bill Stader
April 24, 1997
Page Three
11ming and Professional Fees(continued)
Our estimated fees are based upon our understanding of the scope of assistance requested by the
City We would anticipate assigning a partner, manager and a senior consultant to this assistance
effort for approximately three weeks. Based on the scope of assistance outlined above, our
estimate of profession.91 fees is set forth below. Should the actual effort to complete this
assistance program for,"'he City be less then anticipated, our professional foes would be reduced
Proportionately. In addition to our professional fees, we are reimbursed for actual out of pocket
expetues.
1 Review of Vista&Prigs 0=%tMg Experience vs Industry Norms
and Acnial PerformE=Versus Strategic Plans $22,100 - $27,000
2 Review of Coopers&Iryormd Feasibility Study 10,700 - 13,000.
3 Preparation of Report and presentation Materials 67000 - 7,300
Total $38,800 $�i7,300
Should our amimptinno with respect to the scope of assistance desired or degree of cooperation
from Vista,Primus, Coopers&Lybrand and Cain Brothers, or other matters beyond our
reasonable control require additional commitments by us beyond those upon which our estimated
fees are based, we may adjust our fees and planned completion dates. We will promptly discuss all
such situations with you pr?or to proceeding.
If you would Itke to discuss any of these issues further, please feel free to contact me at any time.
Very truly yours,
Mehael S. Hamilton,P
Regional Director of Health Care ervices
APA. 25 ' S7 (FRI) 19:42 COMMUNICATION No :56 PAGE. 4 Jp_/ o
MEETING AGENDA 3
erty Of E 5-10_9 ITEM #
c-.79'6'toyo Otands -_— -- - P. O. Box 550
✓✓ 214 East Branch Street
Arroyo Grande, CA 93421
Phone (805)473-5404
Off ie& 01 as AnyFAX (805)473-0386
April 30, 1997
IAW(ORNE
NCIL ❑ C��DIRCITY COUNCIL IN DIR
CITY OF SAN LUIS OBISPO ❑ FIRE CHIEF
990 Palm Street v ❑ PWDIR
dERKIORIG ❑ POLICE CHF
San Luis Obispo, CA 93401 ❑ MGMT TEAM ❑ REC DIR
❑ C f1EAD FILE ❑ UTIL DIR
❑ PERS DIR
Dear Honorable City Council Members: -
It is my pleasure to offer my support for Vista Hospital Systems, Inc. as the new
owner of French Hospital Medical Center. I was a member of the City Council of
Arroyo Grande in 1991 when we supported the financing for Vista's acquisition of
Arroyo Grande Community Hospital. Within the last six years Vista has followed
through and met every commitment that was made to the City regarding the Hospital.
During that time period, there has been significant improvement in the quality of the
facility and equipment, the quality of care provided, and the access to care for all
South County residents regardless of their ability to pay.
Vista and its management have also been positive participants in South County
business and charitable activities. The Hospital is a member and active in the four
South County Chambers of Commerce. The Hospital provides free first aid services
and health information at the major community events held in the area. In addition,
each year the Hospital sponsors a communitywide Health Fair at the facility.
Vista takes its responsibilities to improve health care of the residents of the South
County very seriously. This is done through health education and investment in
services and equipment. Health education has been enhanced through the Hospital's
module at the Technology Plaza at Arroyo Grande High School. Through this
program, students are exposed to the latest developments in health care and health
career information. The Hospital has also developed a medical library open to the
community and conducted a community needs assessment that has identified the
need for improved health information in the community.
RECEWE
AY 11 iv"9/
CITY COUNCIL
REF: VISTA HOSPITAL SYSTEMS, INC.
APRIL 30, 1991
PAGE 2
Vista's investment in services and equipment has resulted in some of the finest
equipment on the Central Coast to meet the needs of our physicians and patients.
In addition, the Hospital has opened a new Urgent Care Center in Nipomo, an .
underserved and growing market. Finally, Vista has recently opened a Home Health
Agency to provide this much needed service for the residents of the South County.
In conclusion, Vista has met its commitments to the City of Arroyo Grande and the
South County communities it serves. It has represented the City well in all of Vista's
financing activities and truly improved health care in the community. I have every
confidence that the same benefits that we have experienced will accrue to the City
of San Luis Obispo and the San Luis Obispo community resulting from Vista's
successful acquisition of French Hospital Medical Center.
A
DOUG L
MAYOR
c: City Council
City Manager
City Administrative Officer - SLO
c\slo.councl\Neteletter
hiuGTING AGENDA
DATE5 697 ITEM #
cm-
FM1 u,ie,e
OFFICE OF:
815 WEST SIXTH STREET, P.O. BOX 940, CORONA, CALIFORNIA 91718-0940
April 24, 1997.
� UNCIL ❑ C DIR
O N DIR
City Council MemberstF"CLERKIORIG
AO ❑ FIRE CHIEF
Ci Hall RNEY ❑ PW DIR
ty ❑ POLICE CHF
990 Palm Street ❑ MGMT TEAM ❑ REC DIR
San Luis Obispo, CA 93401 ❑ A FILE 0U L
UL DIR
❑ PERS DIR
Dear City Council Members: V
It is my understanding that Vista Hospital Systems, Inc., the parent of Corona Regional
Medical Center, is proposing to acquire French Hospital Medical Center in San Luis Obispo,
California. As the Economic Development Director for the City of Corona, my experience with
Vista Hospital Systems leads me to wholeheartedly endorse them as not only expert healthcare
providers, but as active,caring members of the community.
In the past 6 years,Vista and its management have taken two hospitals with reputations for
poor care and service and combined and developed them into one of the finest hospitals in the
region. For this reason,I often use CRMC in my discussions in marketing the City of Corona to new
business.
The City of Corona is number one in California and number two in the nation in building
activity. I bring this to your attention because of the role CRMC has played in the vitality of this
community. It is my opinion that CRMC's services and programs are equal to or better than any
offered in Southern California.
Because of my feeling of trust in this hospital, I am pleased to say that I am a non-paid
volunteer. I have served on the local Governing Board for five years and the hospital's Foundation
Board for the past three years, and I plan to continue the association for many years to come.
Sincerely,
/Economic
ames A. Bradley
Development Director
R ECEW ED
APR j u lyyl
clTy COUNCIL
r-l SPO,CA
MEETING AGENDA --22
DATE 5"G-97 ITEM #
MAHESH C. GUPTA, M.D., P.C.
Intemal Medicine, Hematology and Medical Oncology
760 S.Washbum Ave.,Suite 7
Corona, California 91720
Telephone: (909)737-0640
April 24, 1997
C9k1NCIL T0. PF
D UIR
®/ FIN DIR
Ap ❑ FIRE CHIEF l
City Council Members ORNEY ❑ PW DIR
City Hall VCLERKIORIG ❑ POLICE CHF
990 Palm Street ❑ MGMTTEAM ❑ REC DIR
San Luis Obispo, CA 93401 � ❑ C ILE ❑ UTIL DIR
❑ PERS DIR
Dear City Council Members:
I am pleased to write this letter in support of Vista Hospital Systems,Inc.'s attempts to acquire
French Hospital Medical Center in San Luis Obispo.
I have been a physician in Corona since 1981,practicing Internal Medicine,Hematology and
Medical Oncology, and had the opportunity to work as a medical staff member in the former
Corona Community Hospital and former Circle City Hospital prior to their merger by Vista in
1992. During that period most hospital services were duplicated due to competition between the
two facilities.
Since Vista acquired both hospitals and consolidated them, I have observed significant
improvements in patient care, along with expansion and construction that have improved our
hospital facilities. Vista continues to invest in capital improvements while focusing staff on
improving the quality of patient care and involving the local community in Vista's development
of an integrated healthcare delivery system.
As Chief of Medical Staff in Corona since February 1996, I have accomplished a cordial and
respectable relationship between the medical staff and hospital administration. With the proper
communication, cooperation and caring, I am sure the community of San Luis Obispo will have
an effective healthcare system as we have here in Corona under Vista's ownership and
management of the hospital.
Sincerely,
Mahesh C. Gupta, M.D., P.C.; RECEIVED
AP-R Yj *w
c
ITr couNCo
CA
_LETTERS TO TIF :DITOR MEETING
ITEM ft --
Thursday, April 24, 1997 To• The Mayor.
W
San Luis Obispo County TeleP11- nbune City Council.
-- --- San Luis Obispo /J'�
New owner will uphold C-
Bill Stormm:
French's reputation From: 3057 S. Higuera St. #964,,
To the editor. San Luis Obispo, CA 93401 ,�/�
In early March,I was part of a 5 41 -8 8 2 2 w+'-
Panel that addressed the topic,
What's next for French Hospital."
0.
Other speakers were from:the My comments on action that may be taken
Federal Trade Commission,.Tenet this date, May 6 , 1997, in regard to
Healthcare Corporation(the �,
company that was under FTC the "pass through" of bonds to support
directive to sell French),the San the purchase of French Hospital from
Luis Obispo County Health Tenet Healthcare Corp. by Vista Systems .
Commission,and the California
Women's law Center.
The message I received from the "If we lose this "not for profit"
members of the panel and the some hospital - if we lose the finest cardiac
150 haveanonsaandn led outstanding
unity- center in California - if we lose the
have an outstanding community.-
supported hospital that must be hospital staff that has the trust of
maintained by its new owner," many of our fellow citizens - and if
I had discussed with my this loss is because of the barriers
physician how he felt about all the
perspective buyers,and before the created by the Council, the Council
sale to Vista Systems Incorporated will have to answer : WHY?
was made public,he called me and
you."This
ot remark
bad
uotnews to or
your
My letter, published April 24, outlines
you. ThisremLyons,a and it
m involvement
reporter,Silas Lyons,and it Y , and the conclusions
appeared on the front page of your I had reached. I have not found reasons
March 22 Telegram-Tribune. that would cause me to change my
Since that time I have talked thinking.
with many persons;as president of
the San Luis Obispo Chapter of the
American Association of Retired
Persons,and as vice president of
the Central Coast Commission for
Senior Citizens.
I have also spoken to a member Bill
of the current French Hospital
board of directors,and Scott Gross,
president of the management
company for Vista Hospital
Systems.
Mr.Gross answered a long series
of questions to my complete
satisfaction.While I have a great
respect for my physician's ability
to care for my health,I cannot
accept his judgment as to who _
should'be the new owner of French CbUNC11
Hospital. B-et7,GIP
The study I have made indicates O"LAO ❑ FIN DIR
that we will gain a"not for profit' O-XCAO ❑ FIRE CHIEF
hospital with adequate capital that ❑�RNEY ❑ PW DIR
will allow them to build on the ❑ CLERK/ORIO
outstanding reputation that French O MGMf TEAM13 POLICE CHF
Hospital now enjoys. ❑ REC DIR
This will include services such :-I C ❑ UTIL DIR
❑ PERS D?4
as their nationally recognized
cardiac center.This will also
insure that we have in San Luis
Obispo a hospital that is
competitive with Tenet
Corporation,and its Sierra Vista
hospital.
Bin Storm
MEETING A"SNDA
DATE #
,F
County of San Luis Obispo .
COUNTY GOVERNMENT CENTER,RM.370■SAN LUIS OBISPO,CALIFORNIA 93408■(805)781-5011
OFFICE OF THE
COUNTY ADMINISTRATOR
May 6, 1997
Alan Settle, Mayor 15'000NCIL 0JCp�jjlp
City Council Members 'j W60 O-F N'DIR
City of San Luis Obispo 916AO ❑ FIRE CHIEF
990 Palm StreetB'I�STORNEY ❑ PW DIR
San Luis Obispo, California, 93401 CLERKORIG ❑ POLICE CHF
❑ MGMT TEAM ❑ REC DIR
RE: Conduit Financing for Vista Hospital Systems, INC. ❑ C READ FILE ❑ LIM DIR
`k_ ❑ PERS DIR
Dear Mayor Settle and Council Members:
We understand that the San Luis Obispo City Council will be taking a first look this evening at
the issue of providing conduit financing for Vista Hospital Systems, Inc., the intended buyer of
French Hospital.
As a current provider and prospective long-term purchaser of hospital services for indigents,
the County is very concerned about our continuing ability to assure access to hospital
services at reasonable rates. If your Council does decide to go forward with further evaluation
of the viability of the proposed conduit financing, we ask that you consider, as a condition of
securing this tax exempt financing, requiring Vista to offer some assurance of access. This
might take the form of requiring Vista Hospital Systems to serve as a °safety net" with respect
to providing indigent care for County patients, by providing such services at rates comparable
to Medi-CAI rates, or by entering into a contract with the County to participate in the County
Medical Services Program at reimbursement rates comparable to other local hospitals, for the
life of the bonds. Any of these options would go far to assure patient access and satisfy the
"public purpose" of the financing.
For years, the financial pressures on General Hospital have been increasing. All hospitals are
affected by the nationwide decrease in the use of hospitals. This is due to increased
emphasis on cost-effectiveness, manifested in lower reimbursement rates for hospitals,
restrictions on use of medical resources (managed care), shorter hospital stays, and
increased use of alternatives such as outpatient surgery and home health care. There is an
oversupply of hospital beds locally, with countywide occupancy rates well below 50% of the
number of licensed beds. The private hospitals have been aggressively competing for
patients who have private health coverage. As a result of all these factors, the census at
General Hospital has been falling steadily and it has become clear the County will not be able
to support operation of its General Hospital much longer. Recently, the County has been
attempting to negotiate contracts with the four.private hospitals in the County so that it can
close its inpatient unit and obtain all necessary inpatient care at the private hospitals.
LIAY
011r COUNCI{:y��
CITY OF SAN LUIS OBISPO
May 6, 1997
Page 2
The County currently has year-to-year contracts for CMSP services with all four private
hospitals. These contracts have been in effect since 1983 and are presently renewed
annually, providing cost-effective indigent hospital care services not available at our own
hospital. To assure the community continuing service access, the County has sought to
negotiate long-term contracts with the private hospitals.
It is requested that, should you consider going forward with the proposed financing, you
weigh this concept, and include it as a condition of the financing. Residents of the City and
the County remain concerned about our ability to assure access to needed hospitalization
within available taxpayer resources. We would appreciate your favorable consideration of this
request.
If you have any questions about this request, or would like supportive documentation, please
me at 781-5011 or Health Agency Director, Susan Zepeda, at 781-5519.
Sincerely,
ROBERT E. HENDRIX
County Administrator