CARES Act update may extend loans to public hospital districts

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Pending federal legislation to pump more money into the depleted loan program created to help small businesses weather the economic shock of the coronavirus will give public hospital districts a bite at the apple.

Language in the bill to provide new funding for the Paycheck Protection Program, passed by the U.S. Senate Tuesday and slated to be approved by the House Thursday, should solve the eligibility problem for smaller hospitals that were created as political subdivisions.

"We also welcome the increased funding for the Paycheck Protection Program, which will help some smaller hospitals meet payroll and other operating costs," American Hospital Association President Richard Pollack said.

The new rules should be welcomed in Louisiana, where some small district hospitals have been trying to take advantage of the program.

The State Bond Commission approved 10 hospital districts’ applications on April 16 even though it wasn't clear at the time if they were eligible for the Small Business Administration's $349 billion stimulus loan program, which allows the loans to be forgiven if employees are kept on the payroll.

By then, the loan money was gone, leaving many applicants empty handed.

In response to the Senate vote Tuesday night for another $484 million in pandemic relief, American Hospital Association President Rick Pollack thanked Congress for boosting emergency relief funds for hospitals and other providers on the front lines.

"We also welcome the increased funding for the Paycheck Protection Program, which will help some smaller hospitals meet payroll and other operating costs through forgivable loans," Pollack said.

The AHA on April 8 sent a letter to the Small Business Administration urging the agency to "ensure that small- and mid-size public hospitals, including those that have both nonprofit and public designations, are allowed to apply for and receive loans" in the PPP.

In the first $350 million round of funding in the $2 trillion CARES Act, political subdivisions weren't among the entities eligible for the program.

"The PPP is geared to small businesses and nonprofits," said George Huang, director of Municipal Healthcare Research for Wells Fargo Securities. "I would not have thought [political subdivisions would] be eligible for this type of program. Moreover, there's a separate pot of money for hospitals specifically."

Based on the program's initial criteria, he said it appears that smaller not-for-profit hospitals with fewer than 500 employees could technically qualify for the funding.

"Given the extreme stress they are facing, it would be prudent for hospital management to pursue as many options for aid that are available to them," Huang said.

In Louisiana, which is among the hardest hit states with nearly 25,000 reported novel coronavirus cases and 1,405 deaths to date, hospitals and local governments are struggling.

State bond director Lela Folse told the bond commission April 16 that applications from hospitals for the PPP and from local governments for emergency cash flow borrowing have been increasing in recent weeks because revenue collections have been interrupted or expenses have increased because of the need to respond to the pandemic.

Folse said the SBC created an emergency financing application to accommodate local governments and a separate application for hospital districts interested in the SBA's Payroll Protection Program, though she said it wasn't certain if hospital service districts were eligible for it.

The first round of emergency applications were considered as required by state law, said Louisiana state Treasurer John Schroder, who also chairs the SBC.

"The constitution requires any political subdivision to have approval from the State Bond Commission even if it's a crisis, which is why we have in place right now an emergency declaration which will allow for emergency applications" to be considered, Schroder said.

Two hospital districts also sought approval to apply for debt financing as an alternative to the PPP.

The commission gave Franklin Parish's Hospital Service District No. 1 approval to issue up to $3 million in certificates of indebtedness and gave Vermilion Parish's Hospital Service District No. 2 authorization to issue up to $5.2 million in revenue anticipation notes.

Eight other hospital service districts received approval to apply for a combined $25.2 million from the SBA's forgivable payroll protection program.

The State Bond Commission has also scheduled a special meeting for April 30 to consider additional applications for emergency borrowing due to the impact of increased spending required to respond to COVID-19.

"The constitution requires any political subdivision to have approval from the State Bond Commission even if it's a crisis," said Louisiana state Treasurer John Schroder.

In Louisiana, most hospital service districts are political subdivisions created using the governmental authority of parishes, said an attorney familiar with the structure who asked not to be identified.

In the first round of funding for the CARES Act, qualified PPP applicants were businesses, most with fewer than 500 employees with some exceptions, as well as "nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals and independent contractors," according to a fact sheet released by the U.S. Treasury.

While a Louisiana hospital service district is tax exempt as a political subdivision, it's not a nonprofit like charitable, religious, or educational entities organized under section 501(c)(3) of the Internal Revenue Code.

When asked why Louisiana hospital districts were encouraged to apply for the SBA loan forgiveness program, the attorney who asked not to be named said they were told that the state's senators in Congress were negotiating to include them in the new stimulus bill.

Senators John Kennedy and Bill Cassidy didn't immediately return requests for comment.

The problem encountered by Louisiana hospital districts underscored similar difficulties for healthcare institutions across the country.

Many smaller hospitals owned by municipalities and counties tend to be political subdivisions, which allows them to have property taxing authority, according to Wells Fargo's Huang.

"Lots of times they are county owned, and tend to be very small hospitals that otherwise would struggle without a backstop or struggle with the cost of capital," Huang said. "Some have a limited GO backstop to help access the capital markets at a cheaper cost."

On Tuesday, the Senate approved $484 billion of spending in the new Paycheck Protection Program and Health Care Enhancement Act, which provides $310 billion in additional funding for the PPP, $75 billion for hospitals, $25 billion for testing, and $60 billion for emergency disaster loans and grants.

Competition for the new PPP funding may be tough.

The original Coronavirus Aid, Relief and Economic Security Act that passed March 30 provided $350 billion to seed the payroll protection program. After a rocky start as banks figured out the application process, the funding was quickly depleted due to the great need for it.

"Hospitals in general are hurting because of all the disruption, so the challenge would be of course moving up in the line," Huang said. "They cleared depletion of the original PPP in less than two weeks, so it’s possible we may see that again."

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