DALLAS -Replacing large public hospital complexes built in Texas more than 50 years ago will require a commitment from the public for millions of dollars in debt.

Experts in health care financing told participants Monday at The Bond Buyer's 12th Annual Texas Public Finance Conference in Fort Worth that public hospitals provide emergency and specialized services that other facilities do not, and are the sole source of care for the large uninsured population in the state.

Christopher Janning, senior vice president at First Southwest Co., said the state is seeing the first major effort to replace and expand public hospitals since several were built under the provisions of the federal Hill-Burton Act in the late 1940s and 1950s.

Janning said building new or expanded hospitals is either planned or underway in San Antonio, Dallas, El Paso, Waco, and Seguin.

"This state is faced with an aging public health infrastructure," he said. "There is a lag between demand and capacity, and a growth in uninsured patients. In most cases, these public facilities are the sole provider of trauma care in the area."

Financing sources for public hospitals include revenue bonds, general obligation bonds, and certificates of obligation, Janning said. Texas law allows the creation of county hospital districts, with the power to levy a property tax of up to $0.75 per $100 of valuation, he said.

"There can be political issues with public financing using GO bonds," he said. "Property taxes provide a reliable source of revenue and liquidity, but taxpayers don't want to see hospitals develop large cash reserves. They ask, 'Why are you taxing me when you have millions of dollars in the bank?' "

John F. Dragovits, executive vice president and chief financing officer of the Parkland Health and Hospital System, said a GO issue of approximately $512 million for a new hospital will be presented to Dallas County voters in November. If approved, the bonds would be issued by the Dallas County Hospital District.

The district currently has no outstanding bonds. The last bond issue for Parkland was in 1980, when voters approved $80 million of G Os to expand its burn center, add intensive care facilities, and build an in-patient treatment wing.

"We determined that a GO bond issue would be more feasible than a revenue bond issue approved by the county commissioners and supported by hospital revenues," Dragovits said. "We feel that a commitment by the voters would be able to withstand changes proposed later. We want the public to buy into the project and want to see it carried through."

He said hospital managers considered financing the multimillion-dollar project through a public-private partnership, but could not make the numbers work.

"We spent a lot of time doing a rigorous analysis of a P3 project, but we can borrow money cheaper using tax dollars than they can through private sources," Dragovits said.

Repairing the hospital complex, built in 1954, was rejected in favor of replacing it, he said.

The biggest problem facing hospital construction projects is the rising cost of construction, according to Kevin Holloran, a director in Standard & Poor's Dallas office.

Holloran said that for years, the rule of thumb was $1 million per new patient bed capacity.

"That's now at $1.3 million to $1.5 million for a new bed, and in New York and California it is $2 million per bed," he said. "That's a 100% increase in construction costs in just a short period of time."

Others speaking throughout the conference indicated that while the economic slowdown in the U.S. might reduce the cost of construction labor somewhat this year, international demand for construction materials ensures that those prices will remain high. q

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