Municipal Bonds and Nonprofit Hospitals

Municipal Bonds and Nonprofit Hospitals

By Tara Fugate

Tara Fugate
Tara Fugate
MNA Strategic Researcher

MNA Strategic Researcher

A common misconception about nonprofit hospital finance is that, unlike publicly traded corporations, they are not responsible to shareholders or investors. In fact, many hospital expansion and construction projects are funded by investors through the use of municipal bonds. Municipal bonds are not unlike loans from the public. Hospitals work through municipal entities such as cities and counties to issue bonds for public purchase.

A bond is a type of debt investment. This means that an investor or bondholder loans money to an entity (typically corporate or governmental) for a defined period of time at a variable or fixed interest rate. The amount loaned by the investor, known as, the principal is repaid in full when the bond reaches its date of maturity (end of the defined period). Bonds are used by companies, municipalities, and states to raise money and finance a variety of projects and activities.

Hospitals most frequently use municipal bonds via cities and counties for financing projects. In the case of municipal bonds, the state, city, political subdivision, or authority that borrows money through the sale of bonds is known as the issuer. The public entity is the issuer even in cases where the borrower is an entity other than the issuer. For example, the City of Minneapolis can issue municipal bonds on behalf of Allina or other nonprofit healthcare corporations.

There are two main types of Municipal Bonds:

  • General Obligation Bond:
    • A municipal bond secured by the pledge of the issuer’s full faith, credit, and taxing power (not typically used by hospitals).

 

  • Municipal Revenue Bonds[i]:
    • Are repaid only from the revenue generated by the operation of the project being financed or from other nontax sources. E. g. a bond is issued to build a new emergency department in a hospital; bondholders are paid back from the hospital’s revenue.
    • A simple way to understand these bonds is the government borrowing money from the public (bondholders) for projects and repaying them with interest.
    • In the context of nonprofit hospitals, cities and counties issue bonds on behalf private entities such as hospitals. The city or county acts as the middleman. For example, the City of Minneapolis has issued bonds on behalf of Allina Health for capital projects such as new construction. Allina then repays the City of Minneapolis, which would handle paying the interest and principal on the bonds to the bondholders.

 

If a nonprofit hospital uses municipal bonds to finance new construction and development, it indicates that, much like publicly traded corporations are accountable to shareholders, they are beholden to their bondholders. Bondholders can range from individuals, to mutual funds, to large commercial banks.

 

In the years since the financial crisis, U.S. banks have greatly increased their holdings in municipal bonds and securities, because (like any bondholder) they can collect the interest tax-free. This increase should concern all of us. If big banks are invested in the financial success of hospitals through their ability to repay bonds, how is this impacting the quality of patient care in our hospitals? Are hospitals prioritizing paying interest to their corporate bondholders over providing safe patient care?[i]

[i] https://www.stlouisfed.org/publications/central-banker/fall-2013/could-rising-municipal-securities-holdings-increase-community-banks-risk-profiles

[i] https://investor.gov/introduction-investing/basics/investment-products/municipal-bonds

[ii] Ohara, N., & Temel, J. W. (2012). The Fundamentals of Municipal Bonds: Securities Industry and Financial Markets Association (Sixth ed.). Hoboken, NJ: Wiley.

 

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