Massachusetts hospitals and higher educational institutions could face higher borrowing costs in the future as the state plans to fold the Massachusetts Health and Educational Facilities Authority into the Massachusetts Development Finance Agency.
The initiative is included in an economic development reorganization bill, S. 2582. Gov. Deval Patrick is set to siign the bill into law Thursday. The administration worked on the measure with the legislature. Patrick proposed merging the two bonding agencies last year.
“Merging these two quasi-public agencies will ensure greater transparency, efficiency, and equity in financing to a critically important sector of our economy,” Kofi Jones, spokeswoman for the executive office of housing and economic development, said in an e-mail.
Overall, S. 2582 aims to make the Bay State more competitive for business growth and to attract new businesses. The bill includes authorization of $75 million of general obligation bonds for economic development and tax initiatives.
It also establishes regional economic development organizations to assist the private sector, requires all governors to file an economic development plan by the end of his or her initial year in office, and facilitates more small business lending, among other initiatives.
The bill abolishes HEFA by Oct. 1 and blends its operations within MassDevelopment. Colleges and universities currently issue debt through HEFA or MassDevelopment while hospitals sell through HEFA.
Many borrowers are concerned that consolidating economic development, higher ed and health care borrowing under one bonding agency will increase the cost of borrowing.
HEFA charges its clients five basis points, with a minimum fee of $15,000 and a limit of $95,000.
By comparison, borrowers that issue through MassDevelopment pay 50 basis points, according to fee schedules the authorities released to The Bond Buyer in April 2009. HEFA declined to confirm its fee schedule.
MassDevelopment spokeswoman Kelsey Abbruzzese said the agency charges higher education and cultural institutions lower HEFA rates while other borrowers pay 50 basis points.
That means a $10 million HEFA hospital sale would cost $15,000 — the minimum fee — while MassDevelopment would charge, as of now, $50,000 for a hospital deal of the same size. For a $100 million transaction, borrowers would pay $50,000 at HEFA compared to $500,000 at MassDevelopment.
The legislation freezes, from now through fiscal 2013, current borrowing costs at HEFA and MassDevelopment’s fiscal 2010 levels.
After that, MassDevelopment would then hold a public hearing before establishing new bonding fees.
According to Sen. Karen Spilka, D-Middlesex, sponsor of S2582 and chair of the Joint Committee on Economic Development and Emerging Technologies, combining HEFA with MassDevelopment will make the borrowing process more open.
“We blended [the agencies] and we said by merging them that as MassDevelopment sets its fees, it has to do three things, it has a public hearing, it has to publish them so they’re transparent,” Spilka said. “And there has to be a three-year fee freeze because a lot of people were concerned that if we merged and if there wasn’t that competition, then fees would go up dramatically.”
It remains to be seen what MassDevelopment’s fees would look like after three years and whether they might resemble MassDevelopment’s current fee schedule.
“This is up to the board of MassDevelopment to figure out, not the legislature,” Spilka said. “We were concerned with transparency and fairness so suddenly fees won’t spike up.”
Health care borrowers said they are concerned that terminating HEFA will result in higher fees in the long run.
Ronald Bartlett, chief financial officer at Boston Medical Center, also pointed to HEFA’s ability to negotiate lower costs for outside professional services on borrowings.
“We thought they brought a lot of expertise and we thought their fees were very reasonable based on the work they did,” Bartlett said. “And additionally, they were very helpful in regard to getting the best fees from the consultants, whether it be the attorneys or investment bankers, etc.”
Others question if MassDevelopment will have the same capabilities to serve hospital clients as HEFA does. William Grigg, chief financial officer at Southcoast Health System, described HEFA as well run and highly organized. Southcoast oversees three hospitals in southeastern Massachusetts.
“Southcoast is concerned that MassDevelopment is not familiar with hospitals and the hospital bond market therefore there is a greater risk that they will not run as efficiently as HEFA did,” Grigg said in an e-mail. “Ultimately, a lack of efficiency could translate into higher costs.”
In addition, borrowers and HEFA point out that MassDevelopment uses fees that it collects from bond and note sales to help finance economic development projects. Current HEFA clients would then be paying for such developments.
“MassDevelopment, to our understanding, uses a portion of their fees for other economic development activities and that was obviously a concern for the hospital community,” said Michael Sroczynski, vice president, government advocacy at the Massachusetts Hospital Association.
MassDevelopment declined to discuss, before the governor signs the bill into law, how it plans to accommodate an increase in business, including serving hospitals, the potential impact of clients scaling back on capital programs due to higher borrowing costs, and the issue of fees that hospitals and higher education institutions pay being used for economic development projects.
The administration did not respond to questions on those issues.