IRS limits, municipal competition for revenue impact bond fee negotiations

Questions have been raised about how the fees paid by corporate entities to municipal economic development authorities for bonds issued to help stimulate economic development locally are determined.

At issue has been how the agreed-upon fee of $240,000 that will be paid to the EDA was arrived at; and how that number correlates to the money entities like Valley Health stand to save through issuance of tax-exempt municipal bonds to support construction projects.

Royal Examiner reached out to Sands Anderson Marks & Miller attorney Dan Siegel, who has served as a bond counsel to both Warren County and the local Economic Development Authority, for some insight into the process.  Siegel summarized the rationale and parameters of the proposed bond issue of “up-to $60 million” for construction of a new Valley Health-owned Warren Memorial Hospital prior to the EDA board of directors 6-0 vote of May 25 endorsing the Industrial Revenue Bond’s issuance through the EDA.

Dan Siegel, standing, explains the Industrial Revenue Bond process prior to the EDA board’s 6-0 vote of approval, including collection of a $240,000 fee from Valley Health. File Photos/Roger Bianchini

High among those parameters are no financial obligation to the Town, County or EDA for repayment of the bond; nor any liability or penalty were the bond not to be issued “for any reason”.

And there are both direct and indirect positive economic impacts on the community claimed from the construction project designed to create a modern, 175,000 square-foot, 36-bed, private room hospital and medical office building to Valley Health’s 150-acre campus off Leach Run Parkway.

The direct-benefit claims in Valley Health’s bond application relate to an increased number of jobs and higher salaries at the new hospital; the indirect benefit cited notes a trend toward adjacent residential and business development in the vicinity of new hospital construction.  See detail on those cited economic impacts and counterpoints in below subsection “Politics and economic development”.

But politics aside, how was the EDA’s fee of $240,000 arrived at – and was that a viable number related to Valley Health’s savings from the issuance of an Industrial Revenue Bond?

While bond counsel Siegel noted that he had not been involved in negotiating the EDA fee amount, he was helpful in understanding the criteria and laws involved in the process.  As for that negotiation, EDA Executive Director Jennifer McDonald explained that the entire EDA Board of Directors, minus Valley Health Vice President of Facilities Management and Safety Mark Baker, was involved in negotiating the fee.  McDonald noted that Baker was not even copied on any emails relating to the negotiation.

The EDA also kept the town and county governments abreast of the negotiation in order to get both municipalities required approval of the bond issue, and its agreed upon parameters, including the fee.

Ceilings and limits

Siegel agreed that Valley Health stands to save millions of dollars as a result of the issuing of a tax-exempt Industrial Revenue Bond through the municipalities and their EDA.  As for the likely total of the bond issue approved as “up to $60 million” Siegel estimated it might actually come in at about $50 million, rather than the agreed-upon ceiling amount.

As for establishing a fee, Siegel explained there are Internal Revenue Service (IRS) regulations that set a maximum allowable fee on such bond issues.  That maximum fee is one-eighth (1/8) of one percent (1%) of the bond issue annually.

Siegel saved this reporter the aggravation of having to take his shoes and socks off to do some calculating by pointing out that, that the 1/8 of 1% maximum equates to $1,250 per each $1 million of a bond issue; or $12,500 per every $10 million.

Those numbers in tow, we calculated that on his estimate of a $50 million bond, that would be a maximum fee of $62,500 that could be collected in the first year of the bond payment period, cited in this case as likely being a 30-year term.  I know for you mathematicians out there a quick 30 years times $62,500 = $1.875 million looks a lot better than $240,000.

However, other variables come into play Siegel points out, including: early payoffs of the bond decreasing the number of years a fee is collected; a decreasing annual total the maximum fee is calculated on due to the steadily decreasing total of the unpaid portion of the bond; and a final wildcard – municipal competition to issue such bonds in order to collect a fee for essentially being a non-liable middleman in the process.

Also, collecting a maximum fee annually stretches out the payback process over the life of the bond.  The EDA payment of $240,000 on the Valley Health bond is an up front payment, received in its entirety on the front end of the bond process.

For comparison, the Richmond-based Siegel pointed to a similar-sized hospital financed with a similar Industrial Revenue Bond in Goochland County, west of Richmond – the fee collected by Goochland was $250,000.

So while not in the upper six figures to a million or so, it would seem our EDA was right in the ballpark on its negotiated Industrial Revenue Bond fee of $240,000.

The EDA board signs off on an ‘up to $60 million’ bond issue to help finance construction of the new Warren Memorial Hospital.

Politics and economic development

As for economic benefit to the community, Valley Health’s justifications for the bond issue for the projected $97.7-million new Warren Memorial Hospital (WMH) construction project cited an increase in both the number of jobs and wages for those jobs tied to the new Valley Health facility.  It predicted 501.7 full-time jobs in 2021, the projected first year the new WMH will be open, compared to 313.8 full-time jobs at the existing WMH in 2016.  As for salaries, an average hospital-associated wage of $76,623 is projected for 2021, compared to $62,443 in 2016.

And while one economic benefit that will not be realized is any increase in tax revenues to the community from the new hospital because as a “charitable, 501 © 3 organization” Valley Health is tax exempt, other benefits of a social and “non-monetary” nature to the community are claimed.

“A new (hospital) facility will be alluring as new businesses are recruited to the area,” the VH/WMH bond application states, adding that, “In most new hospital settings, adjacent economic development is typically triggered, increasing the vitality of the area.”

And while opponents of the Valley Health decision to eliminate some services at its new hospital have claimed an opposite result as far as indirect socio-economic benefits resulting from the absence of a birthing-maternity unit, the lure of a modern hospital facility in the community has carried the day with the Warren County Board of Supervisors (June 5), the Front Royal Town Council (June 11), and those municipalities’ EDA (May 25).

Only one dissenting vote – Town Councilman John Connolly due to Valley Health’s maternity unit decision – of a total of 15 votes by three boards was cast.  Those votes were 6-0 by the EDA, Baker absent; a 5-0 clean sweep by the county supervisors; and 3-1 by the town council, Connolly dissenting, Morrison and Gillespie absent.

A depleted council (2 absent) prepares to vote the final necessary approval of a bond issue to help finance a new hospital. ‘Birth Local’ supporter Katie Kerns and others pleas for a delay in approval managed only one vote of support, John Connolly’s.

And while polled by media after a subsequent work session, both Morrison and Gillespie indicated they would have joined Connolly to create a 3-3 council deadlock on the bond issue, Morrison observed there was little doubt that Mayor Hollis Tharpe would have broken that tie in favor of the bond issue; rather than risk the ire of the community’s primary health care provider at being forced back to the table on the maternity unit issue.

For his part Tharpe was coy, refusing to say how he might have voted had there been a 3-3 tie thrown his way on June 11 – though the “smart money” is on Morrison’s perspective.