SECTION V - District Finances

Compiled from the PHD Legal Manual, Chapter Four

This section discusses the financial aspects of operating a hospital district. Specifically, it identifies the unique rules affecting a hospital district's ability to obtain money to support its health care service goals. This section begins by setting out the general administrative requirements which hospital districts should follow in managing their financial affairs. Next, it provides a description of the use of property taxes as a revenue source, (a major potential benefit of district status) and some of the many restrictions and complications affecting property taxes under Washington law. This section also describes some of the different ways that hospital districts may borrow funds. Finally, while hospital districts are generally authorized to expend funds on most anything consistent with their statutory powers, this section identifies and discusses a couple of unique issues relating to the flow of money out of a hospital district: restrictions on gifts and the payment of taxes by the district itself. This section should not serve as a substitute for a thorough study of the Hospital District Legal Manual, which provides more extensive discussion of these topics.

A. Administration of District Finances

In general, hospital districts are expected to exercise sound judgment in the exercise of their business affairs. Failure to do so would mean that the commissioners, superintendent, and other officers of the district were breaching their fiduciary obligations under common law standards. Failure to fulfill this obligation might subject these officers to liabilities or result in the voiding of actions taken by the district. To the extent that such sound judgment includes the use of specific administrative systems and practices, hospital districts are well advised to assure that these are part of their administrative routines. The bulk of these general fiduciary requirements are common to all hospitals and other health care institutions, and are beyond the scope of this manual. However, most, if not all, of these general procedural requirements should be identified in the process of conducting the audit described at the end of Chapter 4 in the Legal Manual.

Budgeting Requirements
While any prudent hospital district would use a budgeting process, a hospital district budget is also required under RCW 70.44.060(6). Each district must develop a proposed budget by November 1st of each year and file it in the records of the commission. Notice of the filing and the date of the hearing on the budget must be published once a week for two consecutive weeks in a newspaper printed and of general circulation in the county. A hearing on the budget must be held on or before the 15th day of November, and the commissioner board must adopt the final budget by resolution after this hearing. The clear purpose of this budget is to generate a document to be used in the development of tax needs and rates by county officers. The hearing must include consideration of possible increases in property tax revenues. [RCW 84.55.120]

Practical Consideration
The budget required by statute is essentially directed at generating the level of tax receipts required by public hospital districts. Because of the variation in other revenue sources for a PHD, and the fact that a budget used for management control should be much more detailed than this basic budget required by statute, hospital districts might wish to use two budget documents. While the totals and key sub-totals of the budget used at public hearing should match the more detailed management budget, this double budget approach provides a great deal more flexibility for district management.

Amendments
If a district under-estimates its expenditures for the budget required by statute, the PHD should amend it by resolution of the board to reflect the expenditures. The adoption of amendments by the board of commissioners should be of great value to the superintendent by showing, as a matter of public record, that commissioners are aware of the necessary changes and have acted to approve them.

Receipt, Disbursement, and Investment of Funds
Receipt and disbursement of funds is managed by the district treasurer. See Chapter 2 of the PHD Legal Manual for a complete discussion of responsibilities and issues.

B. District Revenues/Property Tax Overview

By far the largest component of the financial resources for hospital district operations comes from revenues generated from medical treatment. Payments for this patient care come from many sources, including private insurers, the state and federal government, and self-paying patients. For hospital districts, patient revenues typically make up over 95% of their total budget, with tax revenues making up the balance. This dependence by a local government on revenues associated with the service provided, rather than using a tax-dominant funding source, is a distinction hospital districts share with port, sewer, water, and public utility districts. For comparison, note that non-tax sources make up less than 10% of the revenues for cities and counties. Property taxes are particularly critical to counties, where roughly 70% of their funds come from this source. Cities, however, depend on property taxes for only 30% of their budgets.

Issues related to the collection of patient revenues by hospital districts are covered in Chapter 4 of the PHD Legal Manual. However, most of the issues related to treatment of patients and collection of revenues are common to all hospitals and beyond the scope of the PHD Legal Manual. The laws pertaining to the generation and collection of hospital district revenues associated with taxes are of unique concern to hospital districts and are covered below.

Washington Property Tax Structure, Generally
Property taxes are taxes assessed on the estimated value of real and personal property owned by individual citizens and businesses in the state. The value is assigned by county property tax assessors or the state department of revenue and typically represents some estimate of the market value of the property. Using this value as the base, local and state revenue officials determine the amount of taxes required to support government by adding up the tax resources identified in each government's budget document as well as any other special property tax funds approved by the voters separate from the budget. Once these are tallied, a tax rate or “levy” per dollar value of property is calculated based on the budget need and the overall value of property in the area.

This is, of course, a dramatically simplified version of how property taxes are determined. An enormously complex set of state laws has evolved which specifies how calculations are to be made, which classes of property and persons should be totally or partially exempt from taxes for public policy reasons, and how the public is to be afforded the opportunity to challenge government decisions with respect to its tax burden. While these issues could have some significance for hospital districts, neither this guide nor the PHD Legal Manual covers them in detail. The guide does, however, focus on a variety of laws, which set limits on the type, amount, and duration of property taxes in Washington.

Washington Tax Levies
Washington law establishes distinct types of property taxes, which may be levied by local governments depending on the specific grants of authority within each class of government's authorizing statute. These are: 1) regular or “maintenance and operations” levies, 2) special or excess levies, 3) bond levies and 4) emergency medical services (EMS) levies. Washington's PHDs are authorized to use each of these levy types, subject to the many rules set out below.

Regular property tax levies are those authorized to be applied year after year for each type of local government. These are normally thought of as supporting the day-to-day activities of the government, and for this reason are commonly described as “maintenance and operations” (M & O) levies. A maximum regular property tax rate is established by statute for each type of local government that has the authority to use these levies. The vast majority of complexity and confusion in Washington law relates to these levies.

Special levies are those authorized to be applied for a given year or years in “excess” of the regular property tax. The Washington State Constitution grants the general authority to local governments to obtain voter approval for one-year special levies. School districts are an exception, and are authorized to have voter approval for six years. Still, each local government class must also be granted the authority to run special levies in statute. Hospital district authority is found in RCW 70.44.060(6).

Bond levies are actually a type of special or excess levy. Simply put, bond levies are special levies authorized to retire voter-approved bonds and apply for the term of the bonds. Of course, the world of property taxes is never quite that simple, and the special rules for bonds and bond levies are numerous.

Emergency medical services levies can be levied by counties, emergency medical services districts, cities, towns, fire protection districts, or public hospital districts for emergency medical purposes. [RCW 84.52.069] If a county levies an EMS tax, another district qualified to levy an EMS tax may only levy for the balance between the amount of the countys EMS tax and the statutory maximum of the EMS tax.

C. Bond Financing

General Ability to Borrow
As is true of all municipal corporations, PHDs have no inherent authority to borrow money. Although they have broad, implied powers to make expenditures for PHD purposes, their powers to incur obligations for the future payment or repayment of money in order to accomplish the same purposes must be expressly conferred by statute. The statutory authorization, moreover, must conform to applicable constitutional restraints.

Obtaining a Legal Opinion
Because of the need for express authority, the practice has arisen of obtaining a legal opinion, usually from an independent law firm with special expertise in public finance and federal tax law, in connection with public financing arrangements. Before a lender will advance money to a PHD, before a contractor will accept a municipal debt instrument in payment for goods or services, before an underwriter or investor will purchase such an instrument, each may require assurance that the PHD is duly acting within its lawful authority. A legal opinion by a recognized municipal bond counsel serves this purpose. It is also customary for the opinion to state that the interest paid by the PHD will be exempt from federal income taxation, if this is the case.

Types of Borrowing Devices
Many of the common PHD borrowing devices discussed in this section are generally well understood. General obligation bonds are interest-bearing, fixed term obligations to the payment of which the issuer has pledged its “full faith and credit” - meaning that the issuer is bound to levy taxes and apply other available resources, to pay the principal and interest on the bonds when due or as soon thereafter as possible. There may be limitations, however, on the rate at which tax levies may be made and hence on the speed with which the bonds may be retired. Revenue bonds differ from general obligation bonds in that they are payable only out of a special fund, to which normally are pledged the revenues derived from the facility the bonds are issued to finance, and occasionally also other moneys (but not general property taxes). If such fund is insufficient, the bondholders have no recourse to other sources of payment. Other financing devices include warrants, notes, conditional sales contracts, and more recently credit cards.

General Obligation Bonds
PHDs are authorized to issue general obligation bonds [RCW 70.44.060(5)(b)]. The purpose of these bonds must be to acquire or to construct a public hospital or “other health care facilities” [as defined in RCW 70.44.007(1)], or to improve or to extend an existing facility. [RCW 70.44.110]

The bonds must be authorized by resolution of the hospital district commissioners. The resolution must describe the plan of acquisition or of construction, declare the estimated cost of the project and specify the amount of indebtedness to be incurred. The voters need not approve the bonds if the 0.75% debt limit has not or will not be exceeded. [RCW 39.36.020(2)] Approval of the voters by a 60 percent majority is required otherwise.

General obligation bonds issued by PHDs are payable from taxes levied upon all taxable property in the district in an amount sufficient, together with other revenues of the district that are available to pay the interest on and the principal of the bonds. [RCW 70.44.130] The amount of taxes is certified to, and collected by, the proper county officer in the county where the district is located. [RCW 70.44.060(6)]

The commission of the PHD is authorized to determine:

• The bond issue amount;
• Date or dates;
• The term (which may not exceed thirty years);
• Conditions;
• Bond denominations;
• Interest rate or rates (which may be fixed or variable);
• Interest payment dates;
• Maturity or maturities;
• Redemption rights;
• Registration privileges;
• Manner of execution;
• Price;
• Manner of sale;
• Covenants; and,
• Form.

Unlimited v. Limited General Obligation Bonds
If the general obligation bonds are payable solely from the district's regular property tax levy, the bonds are referred to as “limited tax” general obligation bonds. If the general obligation bonds are payable from a special levy in excess of the district's regular levy, the bonds are referred to as “unlimited tax” general obligation bonds. As discussed below, special bond levies in excess of a district's regular levy must be approved by a vote of the district's residents. In addition, the proceeds of unlimited tax general obligation bonds may only be used for capital purposes other than the replacement of equipment.

Revenue Bonds
The commissioners of PHDs are authorized to issue revenue bonds for district purposes. [RCW 70.44.060(5)(a)] Issuance of the bonds is covered by the Municipal Revenue Bond Act. [Chapter 35.41 RCW] Analogizing from the provisions of that chapter, the board may issue revenue bonds simply by resolution-voter approval is not required. [RCW 35.41.010; .030]

The bonds may be issued to finance the acquisition, construction, expansion, improvement or operation of hospitals or “other health care facilities”, as defined in RCW 70.44.007(1). See also RCW 35.41.100; 70.44.060. Planning, engineering, legal, interest and transaction costs may be included in determining the principal amount of bonds. [RCW 35.41.090]

Revenue bonds issued by PHDs are payable solely from a special fund or funds into which a fixed amount or a fixed proportion of revenues from the facility that the bonds financed are obligated. [RCW 35.41.010]

The rates or charges for the facility financed by the revenue bond should be sufficient to pay the principal and the interest on any bonds or warrants, the transaction costs, and the operating and maintenance expenses of the district. [RCW 35.41.080] The bonds are not considered a general indebtedness of the PHD for statutory debt limitation purposes. [RCW 35.41.030(8)]

The characteristics of revenue bonds are generally similar to the characteristics of general obligation bonds except that the bonds must state on their face that they are payable from a special fund and do not constitute a general indebtedness of the district.

Refunding Bonds
Public hospital districts are authorized by chapter 39.53 RCW to issue bonds, without an election, for the purpose of refunding previously issued bonds in three situations. The first situation is when all or part of an outstanding bond issue is in arrears or about to become due, and insufficient funds are available to retire or to redeem the bonds. The second situation is when it is either necessary or in the public hospital district's best interest to modify the debt service, reserve requirements or other terms under which the bond is being refunded. The third situation is when the public hospital district will save money, taking into account transaction costs, by refunding the bonds. [RCW 39.53.020] General obligation bonds may be issued to refund general obligation bonds, and revenue bonds may be issued to refund other revenue bonds. Under chapter 39.53 RCW, bonds also may be issued to refund warrants and other obligations, including other refunding bonds.

Advance refunding bonds are also authorized by chapter 39.53 RCW. An advance refunding bond is issued for the purpose of refunding a bond first subject to redemption or maturing more than one year after the advance refunding bonds are issued. [RCWs 39.53.010(8) and 39.53.020]

Refunding bonds issued pursuant to chapter 39.53 RCW are payable generally from the same sources taxes and revenues as the bonds refunded. Special provisions apply to advance refunding bonds. During the interim period between the issuance of the bonds and the time when the bonds to be refunded mature or are first subject to redemption, the proceeds and investment income from the advance refunding bonds may be used to secure and to pay both the principal of and the interest on the advance refunding bonds themselves. [RCW 39.53.070]

Refunding bonds generally have the same characteristics as the bonds they refund [RCW 39.53.120]. The refunding bonds may be issued in a principal amount in excess of the principal amount of the bonds to be refunded. The excess is limited to an amount reasonably required to accomplish the refunding. The principal amount of the refunding bonds also may be less than the principal amount of the bonds to be refunded, if that sum is sufficient to accomplish the refunding [RCW 39.53.050]. If the bonds to be refunded were voter-approved general obligations bonds, the maturities of the refunding bonds may not extend over longer periods than the maturities of the bonds to be refunded. [RCW 39.53.050]

Warrants
Public hospital districts are authorized to issue three types of warrants: revenue, tax anticipation and general. [RCW 70.44.060(5)(a)]

Revenue Warrants

• Revenue warrants are payable either out of a special fund to which revenues of a public hospital facility are obligated, or are payable from the proceeds of the sale of revenue bonds. Revenue warrants issued against a special fund are not on indebtedness of the district, and constitute a claim by the warrant holder only against a special fund. [RCW 35.41.050]
  
• The commission is obligated to fix rates of district facilities that are sufficient, with other monies available, to provide for the payment of the warrants. [RCW 35.41.080]
  
• If a public hospital district fails to set aside and to pay revenue obligated to a special fund into that fund, then a warrant holder may bring suit against the district to compel compliance. [RCW 35.41.070]

Tax Anticipation Warrants

• The amount of tax anticipation warrants issued may not exceed the anticipated district revenues for one year.
  
• Tax anticipation warrants, in an amount not to exceed the anticipated tax revenues of one year, are payable from the first tax monies available from the levy of taxes against all taxable property in the district. [ RCW 70.44.060(6)]

General Warrants

• The treasurer of the district is authorized to disburse district funds upon warrants issued by an auditor appointed by the Commission upon orders or vouchers approved by the Commission. [RCW 70.44.171]
  
• Warrants issued by the public hospital district auditor are payable by the district treasurer from funds on deposit with the treasurer. [ RCW 70.44.171] If insufficient funds are on deposit with the treasurer when the warrants are presented for payment, the warrants become interest bearing warrants.

Other Types of Short-term Obligations
Public hospital districts may also borrow money and issue short-term obligations pursuant to Chapter 39.50 RCW. The proceeds of the short-term obligations may be used for any lawful purpose of the public hospital district. Short-term obligations may be issued in anticipation of the receipt of revenues, taxes, grants or the sale of (1) general obligation bonds, if the bonds may be issued without the assent of the voters, or, if previously ratified by the voters, and (2) revenue bonds, if the bonds have been authorized by resolution.

The short-term obligations are repayable out of money derived from the source or sources in anticipation of which they were issued or from any money otherwise legally available for this purpose.

Under certain limited circumstances, public hospital districts are also authorized to establish lines of credit with any qualified public depository.

Public hospital districts may now also use credit cards where appropriate for official government purchases and acquisitions. [Chapter 39.58 RCW]

A public hospital district may execute a conditional sales contract to purchase any real or personal property in connection with the exercise of any powers or duties of the district. The contract is considered a debt of the district for purposes of computing statutory debt limitations. [RCW 70.44.260]

If the contract causes a district to exceed its statutory debt limit, then the contract must be approved by a vote of sixty percent of the voters in an election where the voter turnout exceeds forty percent of the turn-out at the last preceding general election.

Public hospital districts are not currently authorized to mortgage, as mortgagor, land and improvements owned by the district.

D. Limitations on Borrowing

There are three types of special limitations which must be taken into account in analyzing the borrowing powers of public hospital districts: debt, levy and 101% limits.

Debt Limits
Debt limits relate to aggregate indebtedness. Limitations are placed by the Constitution and statutes of the State of Washington upon the maximum amount of “debt” or “indebtedness” that public hospital districts can have outstanding at any one time.

A debt limitation is expressed as a percentage of the value of the taxable property within the public hospital district. Debt, moreover, is divided into two categories: non-voted (authorized solely by the public hospital district's governing body) and voted (authorized by a vote of the qualified voters residing in the public hospital district).

There are constitutional and statutory limits on non-voted indebtedness as well as the cumulative total of non-voted and voted indebtedness. Since the statutory limitation is more restrictive than the Constitution, limiting both non-voted and total indebtedness to lower amounts than the Constitution will permit, it is of greater practical concern.

The indebtedness that a public hospital district may incur without voter approval is limited by statute to .75 percent of the value of the taxable property in the district [RCW 39.36.020(2)]. With the assent of 60 percent of those voting at either a special or a general election, the districts indebtedness may reach 2.5 percent of the value of the taxable property in the district. These limits are statutory. The Washington Constitution otherwise would permit a non-voted debt limit of 1.5 percent of the value of the taxable property in the district and a voter approved debt limit of 5 percent, for bonds issued for strictly capital purposes. [Washington Constitution, Article VIII, Section 6]

Levy Limitations
The second type of limitation that must be considered in connection with public hospital district finance is limitations on the rate of ad valorem property taxation that may be imposed on any particular piece of property. These limitations are referred to as “levy limitations”. Levy limitations do not affect the validity of the debt itself, as distinguished from debt limitations, but they may determine how soon it could be paid off.

Without an election, a public hospital district is authorized to levy an annual tax on all taxable property in the district up to $.75 per $1,000 of assessed valuation [RCW 70.44.060(6)]. Levies in excess of that amount must be authorized by 60 percent of those voting at either a general or special election. If the levy is for the sole purpose of making the required payments of principal and interest on general obligation bonds issued for capital purposes, then the number of voters voting at the election must exceed 40 percent of the number of voters who voted at the preceding general election. [Washington Constitution, Article VIII, Section 2(b), Amendment 59]

With voter approval, public hospital districts are permitted by both statute and the Constitution to levy whatever rate is approved. The Constitution and statutes are identical in terms of excess levy election requirements; a certain minimum number of votes must be cast on the proposition and a 60 percent approving vote must be obtained. For excess debt approval, by contrast, a minimum voter turn-out is not required by the Constitution.

Practical Consideration
Excess debt usually entails excess levies and hence the election requirements normally may be considered the same.

101% Lid
A third kind of limitation upon the issuance or repayment of public hospital district debt instruments is imposed by statute and is called the “101% lid”, which restricts the total dollar amount of taxes which can be raised by any given taxing district. The amount is related to that raised during prior years, with exception made for new improvements, and can be exceeded with voter approval. The purpose of the 101% lid is to restrict the tax increases which would otherwise result from applying regular levy rates to property whose assessed value is dramatically increasing; its rationale is that such increases in assessed value do not always reflect increased ability to pay taxes. This limitation was also discussed in an earlier section of this chapter.

Specific Provisions
The Legislature requires regular levies of public hospital districts be set so regular property taxes payable in the following year do not exceed 101% of the regular tax levies for the district in the highest of the three most recent years [Chapter 84.55 RCW]. The total amount that may be levied is adjusted to include a sum computed by applying the previous year's regular levy rate to the increase in assessed value resulting from new construction and improvements in the district [RCW 84.55.010]. Special provisions are made for districts that have not levied in the three most recent years, districts that result from consolidation, districts that have annexed territory, and districts for which the levy limitations have changed [RCW 84.55.020, .030, .040]. Also, the 101% “lid” may be raised if a majority of the voters approve an increase in an election held not more than twelve months prior to the proposed increased levy, thereby creating a new base amount for establishing the “lid” applicable to regular non-voted levies in future years. [RCW 84.55.050]

Not all of the above limitations apply to all methods of financing. Debts payable only from certain funds, such as revenue bonds, usually do not constitute general indebtedness for purposes of the constitutional and statutory limitations applicable to municipalities unless they also are made payable from general taxes. The indebtedness and levy limitations and the 101% lid have no application to debt, which is not payable out of taxes.

Beyond these three kinds of special limitations upon public hospital district borrowing powers indebtedness limitations, levy limitations, and the 101% lid there are few other basic statutes affecting the manner in which public hospital districts borrow money. Chapters 39.44 and 39.46 RCW, may influence the form, manner of sale, registrability, and other characteristics of both general obligation bonds and revenue bonds issued by public hospital districts. Chapter 39.62 RCW applies to the manner of executing all public securities and instruments of payment. Chapter 39.53 RCW contains provisions permitting and limiting the funding, refunding or advance refunding of municipal bonds and other instruments of indebtedness.

E. Federal Tax Issues

In general, interest on governmental bonds (i.e., state and local bonds that are not “private activity bonds”) is exempt from federal income tax so long as the bonds are registered and are not arbitrage bonds, are not federally guaranteed, do not (if they are advance refunding bonds) violate restrictions on advance refunding, and are covered by a Form 8038 information return filed with the Internal Revenue Service. On the other hand, interest on “private activity bonds” is taxable. Bonds will be “private activity bonds” (1) if more than ten percent of the bond proceeds is used for any private business use (i.e., used directly or indirectly in a trade or business carried on by any per son other than the public hospital district) and (2) if payment of the principal of, or interest on, more than ten percent of the proceeds of the issue is (under the terms of the issue or any underlying arrangement) directly or indirectly secured by any interest in property used or to be used for a private business use or by payments in respect of such property, or to be derived from payments (whether or not to the issuer) in respect to property used or to be used for a private business use.

F. Other Issues Relating to Borrowing

There are many other statutes and areas of law pertaining to public hospital district finance which are not covered in this section. This section does not deal with municipal spending powers, as opposed to borrowing powers. Although the statutes that authorize debt instruments to be issued sometimes state the purposes for which the proceeds may be used, often they simply authorize borrowing “for general municipal purposes”. This section describes the purposes stated in connection with the debt authorization but does not attempt to summarize all of the general powers of public hospital districts. There are, of course, other laws, ranging from environmental protection to securities and tax regulation, which must be considered in many public hospital district financing arrangements.

Practical Consideration
The purpose of this section is simply to provide preliminary information about the financial alternatives and requirements affecting borrowing by public hospital districts. Since the law is constantly changing, and statutes and even constitutional provisions are adopted, repealed, amended, or interpreted by the courts, there can be no assurance that the information contained in this section will remain current. For this reason, and because of the many other considerations involved in a municipal financing transaction, this section is antecedent to, but not a substitute for, competent legal advice from counsel specializing in public finance.

G. Hospital District Payment Issues

Taxation in General
In general, public hospital districts are subject to many different taxes as are private persons, corporations and private not-for-profit hospitals. On a state level, public hospital districts are taxed similarly to private not-for-profit hospitals, although some distinctions are made for governmental status. On a federal level, far more uniqueness exists due to the fact that hospital districts are subdivisions of the state. Taxation is covered much more extensively in the Public Hospital District Legal Manual Chapter 4. One item of note, however, is that a municipality (such as a public hospital district) may not levy a tax on another municipality without express authority. [AGO 1990 No. 3]

Gifting of Funds and Stock Ownership
While hospital districts are clearly authorizedlike all local governments, to pay those bills and claims which are related to their purposes and powers, hospital districts also must deal with an over-riding constitutional limit on the ability of governments to make “gifts” to or use funds to own stock in corporations.

The restriction is contained in Article VIII Section 7 of the State Constitution: “No county, city, town or other municipal corporation shall hereafter...become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.” Hospital districts must recognize the limits created by this provision. See the Legal Manual Chapter 4 for more information.