N.J. on the Hook for Bankrupt Hospital's Debt-Service Payment

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New Jersey's coffers will feel the effects of St. Mary's Hospital's bankruptcy proceedings, as the state will pay on Sept. 1 a $1.06 million debt service payment on $45.4 million of state contract bonds, with no reimbursement from the hospital on the horizon.

The Series 2007 bonds are part of New Jersey's Hospital Asset Transformation Program in which the state pays debt service costs if bond proceeds will facilitate the closing of an acute-care facility. The program is designed to reduce vacant hospital beds throughout the state.

To make the state whole, the health-care borrower makes monthly payments to the New Jersey Health Care Facilities Financing Authority, which issues the state-contract bonds.

A Newark bankruptcy court on July 1 granted St. Mary's a 90-day extension to file a reorganization plan, the next step in ironing out the health care provider's finances and payment obligations. St. Mary's, located in Passaic in northeastern New Jersey, filed for bankruptcy on March 9. The hospital is now five months behind in its average monthly payments of $308,000 to the HCFFA to compensate the state's coffers.

The 90-day postponement will extend through September, which leaves New Jersey footing the Sept. 1 debt service bill of $1.06 million without a reimbursement from St. Mary's in the near term, according to Mark Hopkins, HCFFA's executive director.

"It's designed to be revenue neutral, but with St. Mary's in bankruptcy, it's unlikely that that money will be collected from them, at this time," Hopkins said.

Hopkins and Stephen Fillebrown, the authority's deputy executive director and director of research, investor relations, and compliance, said any revenue remaining in St. Mary's debt service fund, which contains the monthly payments, is minimal and would not cover the Sept. 1 payment.

The state last made a $2.6 million debt service payment on March 1, with prior monthly hospital payments offsetting that debt service bill. The state is responsible for roughly $3.69 million annually through 2027 in principal and interest costs, for a total of $72.1 million, according to the official statement.

"If New Jersey does not receive reimbursement from St Mary's, the HCFFA and the state retain all of its rights and remedies, including a right to current and past due revenues under the loan agreement and master indenture, as well as its certain mortgage interests in the property," said Treasury spokesman Tom Vincz via e-mail.

The authority sold the bonds on behalf of St. Mary's on April 11, 2007. The deal includes $27.9 million of tax-exempt debt and $17.5 million of taxable bonds. The bond proceeds were used to refund prior debt and finance St. Mary's acquisition of the former Passaic Beth Israel Regional Medical Center.

While the Sept. 1 payment of $1.06 million is small in comparison to New Jersey's $28.6 billion fiscal 2010 budget, which began July 1, the Garden State will use nearly 10% of its operating budget this fiscal year for debt service costs. New Jersey has more than $32 billion of outstanding debt.

In addition, the state last month set up a cash-flow borrowing facility with JPMorgan that, if executed, would provide short-term liquidity until the state issues its annual tax and revenue anticipation note transaction in August or September.

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