The Massachusetts Health and Educational Facilities Authority Thursday will create a merger committee to move forward with Gov. Deval Patrick's plans to combine the authority with the Massachusetts Development Finance Agency, although market participants worry the initiative may increase borrowing fees.
Having one conduit bonding authority for hospitals, higher educational institutions, cultural organizations, and other nonprofits would eliminate competition between the two agencies and potentially raise borrowing costs. HEFA's fee schedule is less expensive than MassDevelopment's, although both authorities negotiate with clients regarding fees.
For colleges and universities, HEFA charges five basis points, with a minimum fee of $15,000 and a limit of $95,000. MassDevelopment charges higher educational institutions 50 basis points, according to fee schedules of the two agencies. By those guidelines, a $10 million HEFA deal would cost $15,000 - the minimum fee - in comparison to MassDevelopment's $50,000. A $100 million deal would cost borrowers $50,000 at HEFA and $500,000 at MassDevelopment.
An administration spokeswoman and MassDevelopment declined to address the cost differences. A HEFA spokesman did not respond to messages.
HEFA worked on $2.86 billion of higher education debt in 2008 in 16 sales as conduit issuer while colleges and universities sold $1.17 billion of debt through MassDevelopment in 20 issues, according to Thomson Reuters.
Robert Ciolek, who served as HEFA's executive director from 1995 through 2002, said that while both bonding authorities work with clients and cut their costs to garner more business, folding HEFA into MassDevelopment would end competition between the authorities and increase borrowing costs for hospitals, colleges, and universities. Such institutions and other nonprofits save approximately $6 million combined each year by having the two different bonding authorities to choose from, he said.
"It's clearly an effort to end cost competition for doing financings for those nonprofits that both HEFA and MDFA can serve," Ciolek said. "And the existence of that competition on average, on annual basis saved about roughly $6 million; it would vary from year to year, but that's a pretty good average."
Patrick's administration believes combining the agencies would result in lower operating costs, according to Kofi Jones, spokeswoman for the executive office of housing and economic development. The agencies' operating expenses currently are paid from the fees they generate.
"We continue to examine the benefits this merger will offer, from millions of dollars in cost savings to the opportunity to more effectively leverage the expertise and resources of these two major bonding authorities," Jones said in an e-mail. "The merger would allow MDFA and HEFA to collaborate rather than compete, and would ultimately support our broader economic recovery initiatives."
Along with colleges and universities, the potential merger would affect health care institutions in the Bay State. Most hospitals issue through HEFA, which charges them 10 basis points, plus a $15,000 to $76,000 sliding scale based on a par amount. According to Ciolek, borrowing fees for hospitals would "skyrocket" if there were one bonding agency.
One hospital financing official, who asked to remain anonymous, said combining the two agencies would be a negative from a borrower's perspective.
"I think our preference would be to have a choice [of authorities]," the hospital official said. "So by virtue of a merger, we lose the right to make a choice, so that possesses a disadvantage to us as a borrower. On the other hand, I would also say we've enjoyed a very productive relationship with HEFA over many, many years. We've also issued bonds through MassDevelopment as well, although far less frequently."
Ciolek, who is now a consultant and practices law, said he plans to attend HEFA's board meeting on Thursday. A board member told Ciolek that the authority may prohibit him and others from speaking at the meeting. Ciolek declined to name the board member.
"They can rule to not take testimony from the public, which strikes me as technically correct and politically dumb," Ciolek said.
Ciolek last week sent state Attorney General Martha Coakley a letter about his concerns, including the potential increase in borrowing costs, the future of a roughly $12 million HEFA Charitable Institutional Trust, and his belief that the board's vote last month to evaluate a potential merger was beyond the panel's powers. Ciolek said any plan to merge the two agencies requires legislative approval.
Coakley spokeswoman Jill Butterworth said the office received the letter and is reviewing the matter.
Last week, MassDevelopment formed a three-member subcommittee to begin preliminary discussions with HEFA and the administration "to explore possible cost savings tied to the elimination of redundancies and streamlined operations," said MassDevelopment spokesman Adam Bickelman via e-mail.
