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AWPHD Legal Guide

 

 

 

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Section: A | B | C | D | E | F | G | H 

F. BORROWED FUNDS
Section Summary

This section details the legal and operational issues affecting the borrowing of funds by public hospital districts.

General Ability To Borrow

As is true of all municipal corporations, public hospital districts have no inherent authority to borrow money. Although they have broad, implied powers to make expenditures for public hospital district 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. This section identifies the express grants of borrowing authority.

Further Legal Background

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 public hospital district, 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 public hospital district 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 public hospital district will be exempt from federal income taxation, if this is the case.

Types Of Borrowing Devices

Many of the common public hospital district 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 monies (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

Public hospital districts are authorized to issue general obligation bonds [RCW 70.44.060(5)(b)].

The purpose of the 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 .75 percent debt limit has not or will not be exceeded [RCW 39.36.020(2)].

Approval of the voters by a 60 percent majority otherwise is required

General obligation bonds issued by public hospital districts 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 public hospital district 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;
  • 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 public hospital districts 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 Commission 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, the construction, the expansion, the improvement or the operation of hospitals or of “other health care facilities,” as defined in RCW 70.44.007(1). See also RCW 39.41.100 ; 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 public hospital districts 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 public hospital district 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 the 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)]

    1. 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]

    2. Tax Anticipation Warrents

    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)]

    3. 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. [RCW 39.58]

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 turn-out 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.

SWAP AGREEMENTS [RCW Chapter 39.96]

Some public hospital districts are authorized to enter into payment agreements that allow them to exchange fixed rate debt for variable rate debt and vice-versa. This exchange allows districts to lower the net cost of borrowing or reduce exposure to fluctuations in interest rates.


These written agreements, ("swap agreements") provide for an exchange of bonds and other obligations-on a current or forward basis-based on interest rates, ceilings and floors on payments, an option on payments, or any combination of these. [RCW 39.96.020(5)]


To be authorized to enter into a swap agreement, a public hospital district must meet at least one of the following conditions:


  • Had at least $100 million in gross revenues during the preceding calen-dar year; or


  • Has (or will have) outstanding obligations in an aggregate principal amount of at least $100 million as of the date a swap agreement is ex-ecuted or is scheduled by its terms to begin. [RCW 39.96.020(3)]

Before entering into a swap agreement, the district must:


  1. Adopt a resolution with a finding and determination “that the pay-ment agreement, if fully performed by all parties thereto,” will either “reduce the amount or duration of its exposure to changes in interest rates” or “result in a lower net cost of borrowing with respect to the related obligations.”


  2. Obtain—on or before the date of the swap agreement’s execution—a written certification from a financial advisor [as defined in RCW 39.96.020(1)] that: (a) the terms and conditions of the agreement or ancillary agreements (including interest rates and any amounts pay-able under the agreement) are “commercially reasonable in light of then existing market conditions”; and (b) the finding and determination in the district’s resolution is “reasonable.”


  3. Solicit and “give due consideration” to proposals for swap agreements from at least two entities that meet the criteria of RCW 39.96.40(2). These activities must be done before selecting the other party to the swap agreement. [RCW 39.96.030(2)-(3)]

Other terms and conditions for entering into a swap agreement are set out in RCW 39.96.040.


RCW 39.96.050 authorizes the source of funds for making swap agreement payments and also authorizes districts to enter into credit enhancement and other similar arrangements “in connection with or incidental to” the execution of a swap agreement. The treatment and status of the amounts payable under the swap agreement are addressed in RCW 39.96.060.


It should be noted that the powers conferred by RCW Chapter 39.96 are in addition to those conferred by other existing laws. Furthermore, the limitations imposed by this chapter do not “directly or indirectly modify, limit or affect” the powers conferred by other existing laws. [RCW 39.96.080]

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 and levy 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 district’s 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]

The second type of limitation that must be considered in connection with public hospital district finance are the 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.

A third and different 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 regular levies of public hospital districts must be set so that the 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, 84.55.030, 84.55.040]. Also, the 101% “lid” may be raised if a majority of the voters approve an increase of 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.

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" (i) 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 person other than the public hospital district) and (ii) 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.

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.