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HomeMy WebLinkAbout~Master - Special Meeting of the Ames City Council 05/31/1994MINUTES OF THE SPECIAL MEETING OF THE AMES CITY COUNCIL AMES, IOWA MAY 31, 1994 The Ames City Council met in special session at 7:00 p.m., May 31, l994, in the City Council Chambers in the City Hall, 5l5 Clark Avenue, pursuant to law with Mayor Curtis presiding and the following Council Members present: Campbell, Brown, Tedesco, Wirth, Hoffman. Council Member Parks was absent. CEBA APPLICATION: Moved by Campbell, seconded by Tedesco to approve RESOLUTION NO. 94-218 approving the Submission of a CEBA Application on Behalf of Engineering Animation, Inc. (EAI) to the Iowa Department of Economic Development (IDED). Mark Reinig, requested the City of Ames to submit a CEBA application for $600,000 on their behalf to IDED. EAI is connected with Iowa State University and has a license with ISU to utilize core technology with the computer visualization laboratory at ISU. EAI is requesting a forgivable loan from IDED. EAI is creating/retaining 150 positions, have a 28,000 square foot building, furniture, fixtures and computer equipment. Mr. Schainker explained that EAI is asking for approval to submit an application. The request for the revolving loan will be reviewed at a later date. Roll Call Vote: 5-0. Resolution declared adopted unanimously, signed by the Mayor, and hereby made a portion of these minutes. FOURTH MEETING ON THE FUTURE OF THE OWNERSHIP OF MARY GREELEY MEDICAL CENTER: Mayor Curtis introduced Mr. Steve Schainker, City Manager and Mr. John Klaus, City Attorney, who will present the Community For-Profit Option. Mayor Curtis announced that there will be a public input meeting held on Thursday, June 2, beginning at 7:00 p.m. in the City Auditorium. PRESENTATION: Mr. Schainker stated that he and Mr. Klaus wanted to clarify the presentation by stating that enough interest was shown in the Community For-Profit option that it needed to be presented. This option did not have a sponsor so they are presenting the option on a totally non-biased basis. Mr. Klaus stated that a community-based for-profit option is one thing the City could do to privatize the hospital. A review of the history of Mary Greeley Hospital was presented. In 1972 Mr. Klaus was asked if the City had to have elected trustees. A statute passed in 1970 called the Home Rule Bill said that if a hospital is established by a city it shall be governed by an elected board of trustees and in 1973 an ordinance was prepared creating the elected Board. In December of 1992 discussions surfaced, once again, about changing the method of organization and governance for MGMC. Mr. Schainker stated the community goal in Ames is high level health care at a competitive cost. The important factors people would like to retain in discussing health care are: a non-City hospital; payment for City property; service area based governance; retention of services; provider integration and local ownership. The reason for considering a non-City hospital is for confidential strategic planning, as well as, transactions free from competitor scrutiny, not being subject to open meetings and public record laws, and not being subject to a dual-tier decision making process. Mr. Klaus related that to reconcile with State law regarding transactions of debt or real estate it invoked a second tier and the City Council had to become involved. Mr. Klaus stated that under Section 364.75 of the Code of Iowa a City may not dispose of real property, like gifts, except to a governmental body for a purpose. Article 3, Section 31, of the Iowa Constitution says that no public money or property shall be appropriated for private purposes. It is this issue that gave rise to a for-profit operation. The City should receive adequate compensation for a valuable asset. Mr. Schainker related that from Citizen's forums, letters, phone calls, etc. that a service area based governance is an important issue. The governingbody representation should include physicians, citizens from wider service area than the City of Ames, and people with special health care expertise, and a fully autonomous governing board. Retention of services is also a key issue. Commitment to continue current services and to establish to constraints against reduction of current services needs to be upheld. Mr. Klaus spoke regarding provider integration. There are two types of integration. Horizontal integration is the process of creating networks, alliances or groupings of physicians, and hospitals to serve larger groups of patients. Vertical integration is recognizing that medicine is changing and what was being done in hospitals is now being done in physician offices. Employers and insurance companies like to make arrangements for all health care services they need for a particular group or area from one source at one negotiated rate. Mr. Schainker stated a major concern consistently heard was local ownership - keep the City Hospital, preserve the City's proprietary interest in the Hospital enterprise, and establish restraints against the sale of the Hospital enterprise. Mr. Klaus explained the hospital is brick and mortar, equipment, etc. All those things combined are an enterprise. The goal of local ownership could be achieved by transforming the brick and mortar into something owned by the City. That is where the idea of an equity position in a for-profit organization emerges as an option. Mr. Schainker related that if you are not going to keep the hospital and are not going to do the for-profit, then restraints need to be made against the sale of the enterprise. There are four business models (a business corporation, general partnership, limited partnership, and a limited liability company) possible for creating a local or community for-profit entity which is different than a for-profit which is sold to an outside entity. Before reviewing these options, Mr. Klaus wanted to make it clear that if the City is to act alone without a partner, it is the business corporation that would have to be employed. A business corporation is a legal person separate and distinct from the party or parties that own it. It has limited liability, i.e., the owner of shares is not liable, generally, for the debts, obligations, and acts of the corporation. The corporation can buy and sell property; enter into partnerships; buy stock in other corporations; sell its shares to other corporations, profit or non- profit; and, it can buy its own shares. Ordinarily, shareholders select the board of directors; and shareholder approval is required for extraordinary actions such as sale of the entire assets, merger, or dissolution. However, the City as shareholders could lock itself out of control by transferring its voting rights to trustees under a voting trust agreement or by granting irrevocable proxies. A general partnership model would be two or more parties associated to carry on, as co-owners, a business for profit. Each partner is empowered to act for or bind the other. Each partner has the right and responsibility of direct participation in the management of the business. If the desire of the City Council is not to be directly involved in hospital business then this option would be inappropriate. Each partner has unlimited liability for the debts, obligations, and acts of the partnership. A governing body could be created and its powers defined by the terms of a partnership agreement. A limited partnership would consist of a partnership with a least one general and one limited partner. A limited partner takes no part in the management of the business. A limited partner's interest, in contrast to a general partner's interest, can be transferred without termination of the partnership. The limited partner's liability is limited, generally, to a stated amount of contribution to the business. If the City would commit its assets to a limited partnership arrangement, the liability of the City would be no greater than what it has at risk in its initial investment. The form of management and governance structure is determined by the partnership agreement. A limited liability company is a new concept within the last five years. It must have a least two members. The Articles of Organization must state some limited period of duration for the Limited Liability Company. The purpose of a Limited Liability Company is to do business and distribute profits. No member of the Limited Liability Company incurs liability for the debts, obligations, and acts of the company. Governance is by a group of "managers" established by an operating agreement and/or articles of organization. Transfer of full membership is not possible. Mr. Schainker and Mr. Klaus relayed a scenario for how a local for-profit model would meet the community factors. A non-City Hospital would be a private company, owned by the City, but is not the same as the City. Therefore, the community for-profit company is arguably not subject to the open meetings and public records law; and not subject to any statutory procedures pertaining to cities. The governing body of the community for-profit organization could be autonomous and fully empowered to make all operational decisions including issuance of debt, purchases, sales, leases, mortgages, and participation in joint venture transactions, without Council approval. In regard to payment for City property the shares to the City are arguably equal in value to property transferred to the business organization. Since no cash payment is made, no funds are diverted from health care. Business organizing documents could allow for broad representation on the governing body to 3 include physicians, citizens from the total service area, and individuals with special expertise. The governing body of the community for-profit organization could be autonomous and fully empowered to make all decisions without Council approval and that would cover the concerns regarding a service area based governance. Retention of services can be achieved in the contract for transfer of Hospital assets. It can require an affirmative commitment to existing services and specify constraints on service reductions. Articles of Incorporation or partnership agreements can be structured to limit the powers of the governing board to eliminate any existing services. The for-profit organization is well-suited for other health care providers to "buy in" with regard to provider integration. Individual physicians, for-profit/not-for-profit physician clinics, for- profit/not-for-profit hospitals, third party payers, nursing service organizations can buy-in. A non-governmental culture is attractive to physician groups seeking integration and the community for-profit entity can merge or partner with other for-profit or not-for-profit health care provider organizations. Regarding the local ownership the contract for transfer of the Hospital assets can specify constraints on any subsequent sale of the Hospital enterprise. Articles of Incorporation or partnership agreements could preclude the governing body from selling the Hospital enterprise. There are some negative aspects of the local for-profit entity. A business organization is subject to taxes and taxes will divert funds from health care. Property taxes, federal and state income taxes on profits would be applicable. Debt financing costs are higher as compared to municipal hospitals because the interest is taxable. The City Council will have a potential involvement as a share holders. If the City's equity position is known in the community and if hospital activities become controversial for any reason, it is predictable that people will still call and say "do something about this". Because of bond covenants, an IRS ruling would be necessary to preserve the tax exempt status of the existing bonds. The MGMC Foundation's mission would have to be redefined and new objectives for its benevolence would have to be identified. The same is true with Homeward not being able to maintain State funding. That issue needs to be looked into a little further. It is apparent that the community for-profit model is not favored by the Hospital/medical community and presumably would receive resistance during implementation. Council Member Brown asked if there was a source where she could obtain point by point information regarding the non-profit, for-profit positive and negative issues. Answer: Mr. Schainker replied that the same unresolved issues are the same for each. Whatever you can do for one you can do for the other in terms of composition, terms, etc. The new board will decide those issues. Mayor Curtis stated that the not-for-profit is an organization that will be totally devoid of City control or City involvement. They will self-determine their own membership. A for-profit organization that is owned by the City or if the City is a shareholder the City would elect the Board of Directors, which is a direct consequence of corporate governance, or establish a blind trust or a voting trust. 4 Mr. Klaus related that with a for-profit organization the City would be taking an equity position and is not completely out of involvement. If the goal is a complete and total separation of the City then you have to place, in the negative column, the residual responsibility of the shareholder. The City Council could, as shareholders, create a governing body and define the full range of powers except the absolute residual powers the shareholders could not renounce - merger, dissolution, sale of assets, etc. Mayor Curtis felt the biggest issue presented is picking the individuals who will be in ultimate control of the decision process. Mr. Klaus stated with the for-profit you have continuing potential involvement with appointing the directors, with a not-for-profit your involvement is with the creating of the initial process and then you lose control. Council Member Tedesco: Are we one of two remaining municipal hospitals in the State of Iowa? Answer: Mr. Klaus responded there may be three or four left. Council Member Tedesco: Are the statutes that control or create county hospitals different than those of municipals? Answer: Mr. Klaus stated yes. Council Member Tedesco: Would be it conceivable or possible to lobby the State Legislature to change the State's statutes or code whereby we could have one appointed board to offer complete governance with perhaps a few restrictions, and if we did that, would it preclude us from having to defease the current outstanding bonds? Answer: Mr. Klaus replied the answer was yes, yes, and no. Some of the issues articulated as concern can be obviated by changes in the statute. Council Member Tedesco: If we made those changes in the Statute and then operated under that scenario, would it require that we do anything with the bonds? Answer: Mr. Klaus: Probably not. Council Member Tedesco: Regarding the Board of Trustees at the Hospital - do they own anything? Answer: Mr. Klaus, no. Council Member Tedesco: There was discussion about the Board forming a not-for-profit and making payment to the City for the transfer of assets. If that is the case, would they have to obtain outside funds or would they be making payment with City money. Answer: Mr. Klaus said they would have to use the prospect of the City's money coming to them as collateral, for the basis of a credit rating, that would enable them to borrow money in anticipation of the transfer of assets. Council Member Tedesco: If we were to form a for-profit corporation, would that preclude that corporation of forming other entities or corporations that might be non-profit to run the operation of the hospital and the foundation could still work and give to that organization. Answer: Mr. Klaus, any person, including a business corporation, can form a non-profit organization. Council Member Tedesco: If we were to sell to an outside for-profit, form a for-profit, or form 5 a not-for-profit - can any give any more guarantees or less guarantees of continued services in the future? Answer: Mr. Klaus related it is all a matter of trying to make whatever guarantees that you can through the terms of the transaction. Council Member Tedesco: With regard to integration would it be easier in any one of these scenarios? Answer: Mr. Klaus stated there may be greater ease afforded in the for-profit model for physicians. The business organization with the ability to sell shares is probably the most facilitative. Council Member Campbell: Is it conceivable, in the taxation sense, that there is very little difference between the for-profit and not-for-profit. Answer: Mr Klaus responded that is a numbers game and it cannot be predicted. Council Member Campbell: Listed on the negative side of the presentation it is noted that the hospital or the community have shown little interest in this particular model. Are you finding serious reservations as you speak with the medical community about this option? Answer: Mr. Schainker, no-but the apparent preference is the not-for-profit. Council Member Wirth: Have you heard any specific negatives about this for-profit option? Answer: Mr. Schainker - we have not heard much opposition about the local for-profit option, it has just been the outside for-profit. Council Member Brown: If in a for-profit organization you buy shares in, how do you integrate it in a not-for-profit? Answer: Mr. Klaus related there is a "friendly hills model" where the IRS recently approved an integrated situation in which the physicians became employees of a non- profit foundation. The physicians donated things to the non-profit corporation and then became employees of the non-profit corporation. Discussion was held about for-profit multi-corporation organizations and the relationships of integration. Council Member Wirth: Can the City give up ownership? Answer: Mr. Klaus stated that in l958 when the issue came up, the then City Attorney said if they would deed it to a non-profit corporation that would violate the reversionary clause in the deed which said it would be governed by the Mayor and City Council. In 1967 Iowa passed a statute that a reversionary clause could only be enforced for a period of 21 years. The reversionary clause in the Greeley deed would be barred at this time. Mayor Curtis asked if there were any questions from the public. Mr. Sam Pritchard, 912 Kellogg, wanted to know where the not-for-profit board of directors would come from. Answer: Mayor Curtis replied it would be established by filing Articles of Incorporation in the State of Iowa with a list of the initial board of directors. The corporation, itself, internally establishes by-laws on how it will chose its board of directors. Mr. Schainker related that there was a scheduling problem with the June 7 meeting and wanted to know if they should continue advertising it. The Mayor said no. 6 Moved by Brown, seconded by Wirth to cancel the June 7, l994, meeting and stop publication of that meeting. Reschedule date to be announced as soon as possible. Vote on Motion: 5-0. Motion declared carried unanimously. ADJOURNMENT: The meeting adjourned at 8:42 p.m. Jill Ripperger, Acting City Clerk Larry R. Curtis, Mayor Ginger Jones, Recording Secretary 7