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Loan default is just the latest sign of mismanagement in county health system

Sean McCarthy

Sean McCarthy

Maricopa County taxpayers have a ticking time bomb on their hands. MIHS, the county hospital system, is an antiquated model in financial disarray. It’s exactly why county officials dumped it and turned it into a special health care district a decade ago. The Capitol Times recently broke the story of MIHS defaulting on a 10 year, $15.4 million note Maricopa County taxpayers loaned the district; they have yet to create a repayment plan.

The loan default is just the latest indicator. The manner in which the district is spending their recently approved bond money is worse. They did not disclose to voters their operating budget turmoil during last year’s election. MIHS’ first bond sale includes taking bond proceeds designed for capital to spend as cash in the operating budget in order to “compensate for past projects.” This is not to be confused with refinancing old debt. It is roughly the equivalent of taking a home mortgage loan and using the cash to pay for day-to-day expenses because one previously remodeled a kitchen.

The district is “paying itself back” for all capital costs incurred over $100,000 since January 2013, a rather arbitrary litmus test. This amounts to a $36 million download to the General Fund. Selling bonds for cash is a temporary stop gap and reflects the desperate situation the district has been in for years; it certainly does not provide a long term solution.

In the spring, former MIHS board member Bil Bruno warned Arizona Republic readers of the district’s accelerating financial crisis. The district now estimates a massive structural deficit – $26.5 million in FY 2016, which presumably accounts for the one-time “bonds-for-cash” infusion.

Unbelievably, MIHS readily admits that $25 million of the $36 million in “bonds-for-cash” is to repay itself for projects or items which can’t be transferred to the new hospital it plans to build. Roughly 20% of the remaining $70 million in the first bond series is for equipment which also won’t be transferred. Paying with interest for items destined for the dumpster is the height of mismanagement. Unsurprisingly, the bond sale was conducted privately which avoids the high-profile scrutiny of a public bond rating and incurs higher interest costs because the bonds are not sold tax-free.

If the county truly needed a level one trauma hospital for the poor, private hospitals would support their endeavors – they aren’t. Hospitals are extraordinarily expensive to operate and without a robust payer mix, MIHS will require massive infusions of taxpayer funds to remain afloat. In an era where Medicaid, Medicare and Affordable Care Act insurance affords citizens the ability choose from a variety of private providers, government’s role in the delivery of health care is increasingly questionable. A public-private partnership could run the burn center – it certainly wouldn’t close. St. Luke’s has a burn center just down the street. There are other providers who compete for the same behavioral health contracts MIHS currently executes. The county may have a need for primary care outpatient clinics in underserved areas. Such a niche role would be far more affordable for taxpayers who are only beginning to witness increased costs associated with the payment of health care.

MIHS publicly promised none of the bonds would be sold until they had a sustainable fiscal horizon. They didn’t explain “bonds-for-cash” was the plan. Using capital monies to float the operating budget and for short life-cycle items such as computers and furniture is poor policy. That combined with defaulting on the county loan are ominous harbingers. MIHS should fulfill its promise to not put taxpayers on the line with more debt until it demonstrates long-term viability in an evolving health care market.

—  Sean McCarthy is senior research analyst for the Arizona Tax Research Association.

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