City releases details of proposed Memorial Health System lease

City officials describe the proposed Memorial Health System lease with University of Colorado Health as a “blockbuster” deal.

“We spent hours negotiating this lease, and I really believe it’s better than anything we expected,” said Merv Bennett, one of the city council members who served on the negotiating team, which Bennett  said  team met for hours each week.

The lease, finalized andmade public this afternoon, will give the city $74 million up front with payments of $5.6 million annually during the first 30 years of the 40-year lease. It will also give $185 million in a single, up-front payment that will allow the city to resolve the issues surrounding the Public Employees Retirement Association, which calculated it will cost Memorial $246 million to exit the program.

But City Attorney Chris Melcher believes that the city has no obligation to PERA.

“It’s our stance that we have no obligation to additional payments to PERA, any more than we would have if we laid off park employees or police officers,” he said. “We can see no reason we owe an accrued unfunded liability with regard to Memorial Health System employees.”

Melcher’s office will be responsible for dealing with PERA officials, and he says that the issue should be resolved within 12-18 months.

Other terms of the lease agreement include allowing the city to keep the $330 million in  cash and investments. That money will be used to pay off Memorial’s debt. Currently, Memorial owes between $324 million and $359 million in debt, depending on whether the bonds have an early pay-out penalty, he said.

“The city will be dealing with the bonds,” he said. “And we believe we can defease the bonds for much less than the $330 million.”

And still, the city stands to gain even more money. Currently, Memorial’s earnings before interest, taxes, depreciation and amortization, essentially its profit margin,  is about 8 percent.

UCH’s EBITDA is between 20 and 21 percent, and the third partner, Poudre Valley Health System has an EBITDA of about 18 percent.

“Any improvement to the EBITDA margin, the city gets a share of that,” Melcher said. “The city is entitled to 5 percent share of any margin above the 8 percent. That could total $2 million to $2-and-a-half million per year.”

The extra money – the lease payments, the single $74 million and whatever’s left after paying off the bonds and dealing with PERA – will be used to create a foundation. The details of the foundation are still being worked out, Bennett said.

“We have time to work out the details of the foundation, we still have work with PERA and the bonds,” he said. “We have also agreed to hold $50 million in a ‘lockbox’ to handle any unforeseen issue that might come up. We’ll hold that money for three years, then hold $25 million for two years. After that, we’re not responsible for unforeseen issues.”

Colorado Springs isn’t required to create a health and wellness foundation, Bennett said.

The hospital transfer act only requires money from a hospital transaction form a foundation when it’s a nonprofit sale or lease to a for-profit. Leasing to another nonprofit – as in this case – doesn’t place any obligation on the money, Melcher said.

“But the council and the mayor are committed to the foundation,” Bennett said. “What form that will take is still being worked out.”

UCH also agreed to spend $1 billion in capital improvements at Memorial. While that works out to about $28 million a year, the lease allows them to spend more in the early years.

“We didn’t want to hold them to only $28 million,” Melcher said. “We believe they plan to spend between $100 and $200 million on capital improvements in the first five years, so they can then spend less in later years.”

Finally, UCH has agreed to pay $3 million a year for the 40-year lease term to the University of Colorado School of Medicine, to be used to create a branch medical campus in Colorado Springs. CU and the University of Colorado at Colorado Springs will be responsible for getting the branch medical campus accredited, Melcher said. None of the money will come through City Council.

Although lease details  have been worked out – there’s still other work to be done. The next step is a presentation at City Council’s informal  meeting Monday, followed by a public hearing at the formal council meeting at 3:30 p.m. Tuesday.

At the June 26 City Council meeting, the Council will vote on the lease, and if it passes, it will be sent to the attorney general for approval. John Suthers will then have 60 days to approve the lease, a deadline that’s a mere two days before the Aug. 28 election.

“We are confident that it will be approved by the attorney general,” Melcher said. “Ours is a fairly straightforward transaction.”

If voters approve the agreement, then UCH will take over at 12:01 a.m. Oct. 1, Bennett said.

Jan Martin, who will lead a campaign to educate voters about the terms of the lease agreement, said that the Council and task force members listened to the public every step of the way.

“We have been transparent and open,” she said. “And we listened. People really wanted an RFP process, they felt like the nonprofit option was giving away the hospital. And we ended up with this agreement that is more than we ever really thought we could receive.”

To read the lease document, click here. 

 Mayor Steve Bach issued this statement regarding the Memorial lease:

“The proposed lease of Memorial Health System to the University of Colorado Health System, as summarized by our City Attorney’s Office today, is a grand slam opportunity for our community.  The agreement offers a combination of benefits including receiving a higher level of quality care and fair compensation for our investment and tenure with the hospital.  Also, current Memorial Health System employee jobs will be maintained and our obligations to patients in need will be fulfilled.

“The additional opportunity of having a branch of the University of Colorado Medical Center at the UCCS campus, as well as having local control with seven of the eleven seats of the new board being residents of El Paso County, are pluses.

“The one remaining key element will be finalization of a plan to segregate and carefully manage the lease proceeds from this transaction.  It will be important that there is joint City Council/Mayor oversight of this plan.  There are discussions ongoing between the City Council Task Force and me on how to best do that.  I look forward to these discussions resulting, in the very near future, in a formal agreement between City Council and myself that we will then present to the public.”

One Response to City releases details of proposed Memorial Health System lease

  1. “Colorado Springs isn’t required to create a health and wellness foundation, Bennett said. The hospital transfer act only requires money from a hospital transaction form a foundation when it’s a nonprofit sale or lease to a for-profit. Leasing to another nonprofit – as in this case – doesn’t place any obligation on the money”, Melcher said.

    Of course I want that money obligated to a Health and Wellness Foundation, not treated like a tax dumped into the General Fund or its surrogate, the Fund Balance.

    Ray Krueger
    June 12, 2012 at 9:09 am