Tax exempt bonds are a tool that enables government entities, including hospital authorities, to fund much-needed projects. Without access to tax-exempt bond markets, these projects would have to be funded through other, more expensive options such as higher interest loans. Having a county government “back” (i.e. guarantee) bonds issued by a hospital authority is beneficial to both the authority and the county. It saves money that otherwise would be lost if the only financing alternative is higher interest rate loans. Bonds also can result in additional revenue for the counties that back bonds. In the specific case of community hospitals, county-backed bonds help the government actively support health care without a tax allocation or budget outlay.
Tax exempt bonds serve two purposes. Bond issuers sell bonds to investors and use the proceeds to fund projects. Bond purchasers make an investment in these bonds and earn tax-exempt interest for themselves.
The Georgia Hospital Authorities Act, the law that governs hospital authorities, gives authorities the power to raise money by issuing tax-exempt bonds. The proceeds from the sale of these bonds can be used to acquire medical equipment, construct new medical facilities or make improvements to a hospital authority’s existing medical facilities.
Because the purchasers of these bonds do not pay income tax on the interest payments they receive, the interest rates paid by the authorities to the bondholders are typically much lower than those that would be paid if the funds were borrowed from a bank or other conventional lender.
Another advantage these bonds have over a bank loan is that the Hospital Authorities Act allows the local county government to guarantee, or back, the bonds by guaranteeing payment to the bondholders. Under this arrangement, the county promises to pay the principle and interest on the bonds in the unlikely event that the issuing authority is unable to make the payments from its own revenues and resources.
Finally, county-backed bonds result in savings that can be shared between the issuing authority and the guaranteeing county.
Relevance to Floyd
Over the past 50 years the Hospital Authority of Floyd County has issued tax-exempt bonds on numerous occasions for the purpose of funding expansions and improvements of the facilities that comprise Floyd Medical Center and to purchase equipment for Floyd facilities.
The two most recent hospital authority bond issuances have been backed by Floyd County through this kind of payment guarantee. This is a good policy for Floyd County because it provides the county the ability to financially support its local public hospital in a significant way without any outlay of funds. For many years Floyd County contributed a significant annual subsidy to help offset Floyd Medical Center’s indigent care burden. At one point this annual subsidy was as much as $1 million per year, but in recent years the subsidy amount was decreased due to budgetary constraints until it was eventually eliminated altogether. Currently, the Floyd County government does not subsidize any of the operations of Floyd Medical Center.
Backing the authority’s bonds with a payment guarantee is an excellent way for Floyd County to support Floyd Medical Center without making any payment. And, the risk to Floyd County is minimal because Floyd Medical Center’s revenues, reserve accounts and other assets are the primary security for the payment of the bonds. Floyd County can only be asked to fulfill its payment guarantee in the unlikely event that Floyd Medical Center becomes unable to do so from its own resources.
With Floyd County’s payment guarantee, the risk of nonpayment to the bondholders is so minimal that the interest rate paid on the bonds is even further reduced. The resulting savings to Floyd in the case of a large bond issuance are substantial, amounting to multiple millions of dollars over the life of the bonds. This savings results in available funds that can be used by Floyd Medical Center to make even greater improvements to its facilities. This benefits all Floyd County citizens through enhanced health care services right here at home and by helping to keep their public hospital, the largest employer in Floyd County, financially strong and viable.
Additionally, county-guaranteed bonds can result in additional funds for the county government. This is what happened with the two most recent Hospital Authority of Floyd County bond issues in 2012 and 2016. By agreement, approximately $800,000 was paid by Floyd Medical Center(FMC) to Floyd County in a lump sum at the time the 2012 bonds were issued, and approximately $900,000 will be paid by FMC to Floyd County in a lump sum at the time the 2016 bonds are issued. The parties arrived at this dollar amount by calculating what it would have cost the authority to purchase a payment guarantee from a commercial bond insurance company, a step that would have been necessary if Floyd County had not agreed to give its guarantee.