California Northstate University seeking access to tax-exempt bond financing through Elk Grove

The answer to questions on financing sources for a controversial hospital project in Elk Grove was seemingly addressed this morning when the City of Elk Grove announced a special city council meeting on Wednesday, August 21.

The meeting will hear a request from California Northstate University that seeks issuance of $900 million in tax-exempt bonds. The bonds, according to the meeting notice would "be used to finance and/or refinance the costs of: (a) land acquisition, construction, site improvements and the acquisition of furniture, fixtures and equipment for the use of Northern California Health Services and Research Foundation."

The estimated costs for the 400-bed project, which was initially announced in December 2019, by the for-profit California Northstate University was  $750 million. At the time of the announcement, the costs were based on 250-beds but later increased to the current 400-beds.

While Elk Grove Mayor Steve Ly and councilmember Darren Suen have advocated for the project, residents in the Stonelake neighborhood, have organized a citywide effort in opposition. The construction of the hospital would require the demolition of the Stonelake Landing shopping center, which is owned by CNU.

A master-planned community that started over 20 years ago, Stonelake is on Elk Grove's southwest corner and is adjacent to  Stonelake National Wildlife Refuge. Residents also object to the construction of a 12+ story structure in a residential area.

According to the information posted on the city's website and the hearing notice, the bonds would be issued by the California Public Finance Authority. If issued, the bond would not go to the for-profit CNU, but rather another organization described as "Northern California Health Services and Research Foundation f/k/a Pharmacy and Health Sciences Research Foundation, a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Code."

During a February 2019 community meeting hosted by Suen and attended by Alvin Cheung, CNU's president, and CEO, numerous questions on project's financing went unanswered. According to further information posted on the city website, "CNU is seeking to issue tax-exempt bonds because the interest rate they would pay to bondholders is much lower than with taxable bonds which would result in considerable project cost savings." 

The city also acknowledged "If the tax-exempt bonds are not approved, CNU would be unlikely to obtain tax-exempt bond financing for the hospital project. But, CNU may be able to access other types of bonds or financing to construct the project."

Although CNU currently operates for-profit medical and pharmacy schools, it would be required to form a non-profit to access the tax-exempt bond markets to manage the hospital. Although it noted a non-profit 501(c)(3) would be required, no information was mentioned on how the 'Northern California Health Services and Research Foundation f/k/a Pharmacy and Health Sciences Research Foundation" would be related to the for-profit medical school or future relations with Cheung.

Although the project faces questions about levee improvements and faces several hearings and requisite approvals, the city says construction could start in about one year from now, with an opening date of 2022.

Although Ly and Suen have faced criticism for their support of the project, councilmembers Steve Detrick, Pat Hume and Stephanie Nguyen have so-far been non-committal. Ly, Suen, and Detrick, if he seeks another term, will all be on the November 2020 ballot.

Kevin Dayton, a policy and political consultant based in Monterey with 22 years of experience dealing with issues in California related to construction and development, said the California Public Finance Authority is one of several state financing agencies that act as intermediaries for projects.

"It’s common to see local governments authorizing bonds to be issued for projects through a conduit agency," Dayton noted.

While Dayton noted Elk Grove taxpayers would not be liable for the bonds, he sounded caution.

"There are people who think these conduit agencies need more oversight," Dayton said. "Certainly very few people in California know about these agencies or understand what they do."

Copyright by Elk Grove News © 2019. All right reserved.

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