HomeMy WebLinkAbout1997-09-22 97-400 ORDERItem No.i97-4001
Date: MMM
Item/Subject: ORDER: Adopting Continuum of Care Proposal for Bangor City Nursing
Facility
Responsible Department City Connell
Commentary:
This Order wouldprovide for the adopting ofthe Continuum of Care Proposal regarding the Bangor City
Nursing Facility as presented in a Motor submitted to the City by Baker, Newman, and Noyes. The
proposal involves the recnnfiguratior, rmpvatioq and expansion of the existing facility to allow for both
subacute and residential cue. It is estimated that the work would cost approximately $400,000.
A detailed analysis of the benefits and limitations of Us option as well as a discussion of an alternative
which would entail selling the license has been prepared by the City Manager. His report was the subject
of Council Workshop on September 9th which also provided a forum for questions, comments, and
input form other interested pasties.
Should the Council not wish an proceed with this course of action, a companion Order has been prepared
that would dhcet staff to begin a Request for Proposal process concerning the sale of the Facility's license.
Department Head
Manager's Comments:
OEfDMI
ACity Manager
Associated Information:
Order, City Manager's Report
Budget Approval:
Finger Director
Legal Approval: 9��� q'��/(�J�
V wYV'
CitySOBcibr
Introduced for
A Passage Page—of
First Reading
_Referral -
9]-400
Auignedb Cawcilw Woodcock September 22, 1997
CITY OF BANGOR
Adopting Contin11 uum ofCare Proposal for Bangor City Nursing
11
Facility
By his My Couveil of City ofBanyon
ORDERED,
TWT the City Council hereby accepts the Continuum of Care Proposal
developed by Baker, Newman, and Noyes and staff oftbe City Nursing Facility and directs staff
to begin the process of implementation. Specifically, staff is directed to prepare and issue
request for proposal for lease space for the Health and Welfwe Department and to prepare and
present to Council for a public hewing a bond order b fwd this proposal; and
BE IT FCBTHbytOM AED, TFIAT City staff shall also develop proposals for the
Transfer of the City Nursing Facility to a non-profit corpmation. Theintmtafthistrwvsferism
provide the facility with a sepamte governance sWcture b allow it to adapt mare rapidly to the
rapid changes occurring in health care. These proposals shall include m analysis of the
advantages end disadvantages ofaltemative orgwtizational structures including on-going
relationships, if my, with the City; and a fia racial analysis outlining proposed allocations of
assets and liabilities between the Coy and the new cmporaaon, capitalization needs, and
estimates of future operating support, if my, which will be required by this maty.
IN CITY COUNCIL
i
September 22, 1997 -
Motion for .passage made andseconded
9]_400
John dunned, member of the City
0 R D E R'
Nursing Facility Advisory Committee,
urged the Council to pass this order,
Dr. Robert Campbell, relative of regi-
Title, Adopting Continuum of Cate
dent of L.N.F., expressed appreciation
Proposal for Bangor City Nursing Facility
er
for high level of care given at this
facRoes Farrell,
ion Rep. of
lity.
d .............
employees at C.N.C., also utged pas-
al o urged
saga of
sage of [M1is order.
......... 7�////.././�/.� ..........
Passe
Cote:
Vote: 8 yes. 1 absent
'V^sY "• N'Wp✓
Councilors voting yea: -
nn dto
As'g e
Aube, m,, Blanchette,
Farnham,, Leen, Soucy. Tyles
-'
andwoodcock
............ ................unci
Councilor absent: Sullivan
Councilmen
Cl-_ e'.
To: Honorable Council Chair and Members of the City Council
From: Edward A. Barrett, City Manager
Subject: City Nursing Faciliry
Date: September 4,1997
Recently, the City Council was presented with a report from Baker, Newman, and Noyes
which analyzed the impact of expanding the range of services provided by the City
Nursing Facility. The report discussed the possible expenditure of approximately
$400,000 to reconfigure, renovate, and expand the facility to allow it to provide both sub-
acute and residential care.
Under the proposal 17 beds would be licensed for sub -acute care, 39 for nursing care, and
17 for residential care, an increase of 12 beds in the Facility. If implemented, it is
projected that this change could significantly improve the facilitys bottom line over the
next five years.
The following chart compares Nursing Facility operations over this live -year period with
and without these proposed changes.
CITYNTR WGFAC]l[=PROM(=)
OPERAI GDEFICITS
FY98-1rY03
(in thousands of dollars)
28 99 00 41 02
Without Changes - (391) (424) (477) (543) (612)
With Changes (391) (147) ( 56) ( 21) ( 15)
A number of assumptions underlie these figures and should be noted. These include
1. Areconfimmed facility is opened as Of MY 1, 1998.
2. Renovation costs will be approximately %395,000.
3. A reconfigured facility will operate at approximately 96% occupancy as opposed
to the current rate of 85%
4. patient acuity estimates are achieved. (The higher the acuity, the higher the
reimbursement).
5. The reimbursement system does not change.
6: The average salary and wage increase will be 3J% for this period, and
7. Non -wage expenses will increase by no mom than an4.0%for this period.
oau_caasldYnn
The other major factor which most be considered in evaluating this proposal is the
requirement to relocate all or aportion of the City's Health and Welfare Department in
order to accommodate this expansion. At the present time, Health and Welfare occupies
construction costs of $70 per square foot, a 12,000 sq. f. building could be built for about
$840,000. With other costs (architecture, parking, permitting, sitework, etc.) a reasonable
estimate might be 51 =0,000. Depending on how we Choose to finance this, annual costs
would be:
Debt Service $100,000
Operating/Ivtaintcname 48 Do
TOTAL $148,000
This option would produce a space cost increase of 576,172. Again using the 50/50
allocation, general fund costs would increase by 338,086.
Given these figures, we can anticipate that the General Fund's share of Health and
Welfare space costs will increase Sy at least $38,000 per year and may increase as much
as $96,000 per year.
It should be noted that opting to build space has several short-temr negative factors which
must also be considered First, construction would require the issuance of additional
General Fund debt. Second, it would take longer to implement this option than leasing
space may take, thus delaying the implementation of the relocation of Health and Welfare
and the Nursing Facility proposal.
Finally, one-fime moving costs of zpprozimately $10,000 would also be incurred.
Of these options, leasing, while slightly more expensive, may provide the most immediate
solution to the problem in light of our need to move quickly.
Given these factors, and taking into account estimated on-going and one-time costs, the
overall impact of the City Nursing proposal on the City's General Fund can be estimated
as follows:
For purposes of this analysis, certain simplifying assumptions are made. These include:
1. Both the lease and build options would be implemented on July 1, 1998.
48
49
Off
-
01
-
422
Nursing Facility Deficit
(391)
(147)
(56)
(21)
(li)
H&W Space (Lease)
(92)
(72)
(72)
(72)
H&W Space (Build)
(77)
(67)
(67)
(67)
General Fwd Impart
Lease
(391)
(239)
(128)
(93)
(87)
Build
(391)
(224)
(123)
(88)
(82)
For purposes of this analysis, certain simplifying assumptions are made. These include:
1. Both the lease and build options would be implemented on July 1, 1998.
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2. Actual additional Health and Welfare space costs are presented as the average of
the worst and but one scenarios presented above.
Overall, therefore, while the CNF resnomuring proposal clearly improves the General
Funds position, the space costs associated with relocating Health and Welfare reduce this
benefit by between $67,000 and $92000 per year.
SALE OF LICENSE
A second available option is to sell our existing license to a new operator.
Under this option, the City would issue a request for proposals for the purchase of our
existing license. The format of rhe proposal would be similar to that issued in 1995 and
would include:
1. Background on the Facility;
2. Bid price for license and other assets;
3. Proposal for assuming operation and patient care responsibilities;
4. Future plans for licensed beds;
5. Lease payments for current space and anticipated length of occupancy of that
space;
6. Qualifications of proposer:
a. History
b. Listing and description of facilities
C. Information on quality of care provided at current facilities
d. Ability to finance plans for the future
C. Background and resume of key personnel.
The proposals would Nen be evaluated based on a number of factors including financial
payments to be made to the City, tuna plans for the beds to be purchased, financial
capability, current quality of care; etc.
Any sale would have to be coordinated with and approved by State regulatory agencies.
A proposed timeframe for flus process would be as follows: -
Afj= DME-(Addifixe)
Preparation of Request for Proposal 2'weeks
Responses received 4 weeks
Evaluation of responses 2weeks
Selection of successful response 3weeks .
Negotiation of agreement 2weeks
State approval unknown
Contingencies and delays 2 weeks
99-409
Overall, the process would most likely take 4 to 6 months. Assuming a decision to
proceed in this direction is made on or about October 1, 1997, the process could be
completed prior to the start of the next fiscal year.
FINANCIAL IMPLICATIONS
For purposes of evaluating this option, the fmancial implications of such a step should be
considered. Sale of this asset would be sirttilar to what happens in the private sector when
a portion of a business is sold, spun -off, or closed. A number of one-time transactions
must occur.
In the case of a sale, certain revenues would be derived and various liabilities must be
covered. The following chart presents an estimate of these items. Since all of them
cannot be projected with extreme accuracy, a best and worst case option is presented:
UTi ATFra (E3eENUS
Worst
Best
Sale of License
5100,000
$125,000
Receivables, net
295,000
337,286
Sale of Inventory
_ 8 651
17 309
Subtotal
5403,655
5479,595
ECTTYIATED-L[A BJ1IM
Wars
Best
Owed to General Fund
5689,217
$ 68,922
Workers' Compensation
235,000
75,000
Payables
43,254
43,254
Accrued Leave
41,361
41,361
Long -Term Debt
42673
42,613
Subtotal
$1,051,505
$271,210
NET TOTAL
(647,851)
208,385
Please note the following:
1. The amounts shown above are as of 6-30-97 and will change by the time a
transaction is completed.
2. Under the "best" scenario, the amount owed to the General Fund is amortized over
a ten year period. In. addition, the Workers' Compensation liability which is shown
represents our best estimate of actual payments which would be made during the
first you after sale. Additional payments would be made in subsequent years as
they are incurred.
Several different approaches can be taken to liquidating the liabilities associated with the
Nursing Facility. The most direct approach is to fund the "worst" case net of ($647,851)
by use of the existing reserve for Enterprise Funds. This reserve correctly stands at
X92 -4q0?
-97-4100-
S900,000. With this approach, the only remaining outstanding liability is the Facility's
long-term debt which would be assumedby the General Fund. Total current outstanding
debt will be $325,000 after the next bond payment is made in November.
Alternatively, portions of these liabilicies could be amortized over time. This could
include the repayment to the General Fund, Workers' Compensation, and long-term debt.
Such a potential amortization schedule, for the same five-year period, would be:
b7
9 99 44 al 02
General Fond Repayment 68,922 68,922 68,92 68,922
workers Compe,.sadon 75,000 56250 47,000 2iS00
Lang -Tem, Deb, ALM5 30.(1$5 iLM -=a5
Total 185,307 165,257 153,707 129907
Actual cash received from the sale of the license, inventory, and receivables could be
applied to liquidate liabilities. Any excess could be used to offset future year's expenses.
As can be seen, there are expenses associated with the sale of our license, At the same
time, these liabilities are correct ones which are also associated with continued operation.
Under the restructuring proposal, these liabilities will remain, could potentially grow, and
must, at some point, be funded.
OTHER CONSIDERATIONS
Several other considerations should also be kept in mind. Upon sale, the City may be
responsible for unemployment benefits associated with those current employees, if any.
who are laid off and are not employed by the successful proposer or who do not find other
employment. These costs cannot be reliably estimated an time and would potentially
depend upon the a nstagements negotiated with the successful proposer. -
In addition, should the license be sold, there is no guarantee that a new operator will
continue to lease the premises for any extended period of time. The new operator may
wish, for example, to transfer the beds to other locations. Should this occur, the cost of
operating and maintaining the building would become the responsibility of the General
Fund to the extent that these costs are not covered through rent payments Rom other
current tenants or future new tenants.
The current years budget for operating the building is 5357,765. Rental revenues are
$88460. We estimate that operating and maintenance costs, without the Nursing Facility,
can be reduced to approximately 51 n2500. The excess costs of about $44,000 would,
again, fall to the General Fund. Identified building capital needs of approximately
$125,000 would also have to be addressed over the next several years.
97-4001
.Over time, additional tenants can potentially be found for this space to close this gap. It
must be remembered, however, that these tenants must meet Ne requirements of our
agreement with the federal government which remain in effect until the year 2001. These
requirements basically relate to the purposes of winch the City indicated the Facility
would be used as set forth in our original application. That application indicated that the
City would operate a "complex containing a 50 bed extended care facility and multi -
agency health center, the latter of which will provide services to augment and improve the
care and patterns of rehabilitation for the patients therein."
In discussing this requirement with our legal Department, we believe that we would be
allowed to lease the Facility to a private operator. In addition. should the operator chose
not to continue at that location, it is likely that the City could receive approval from the
appropriate federal agency to leas, space to other agencies providing health or welfare
services. A change in use would, bow ever, involve a request for approval from such
agency.
At worst, the City could opt to simoly pay to the federal government the remaining public
benefit allowance. The original value of the building was set, at time of transfer, as
$1,475,000. This value is depreciated by 3.33% per year of use. As of May 10, 1998, the
outstanding value would be 3147,500. All restrictions could be removed by paying that
amount at that time.
It should also be kept in mind that the requirements of any new tenants may lead to
renovation needs.
CONCLUSIONS AND DISCUSSION
Based on the information presented by Baker, Newman, and Noyes, it is clear that v e
cannot continue to operate the City \ursing Facility as we do today. If we do, subsidies
to the Facility will soon exceed those provided to other Enterprise Fwds by a sianificaut
margin white the Facility is both underutilized and serves a relatively small number of
Individuals. This is simply not a tenable option.
The Continuum of Care Proposal offers a clearly better alternative if the underlying
assumptions upon which the financial projections are based remain valid. In addition.
this option raises issues related to the relocation of our Health and Welfare Department
which present timing difficulties and which also appear to reduce the financial
improvement which is promised due to additional space related casts. Further, future
financial risks and uncertainties remain if this option is chosen. At a minimum, it appears
uNikely that financial performance will improve to the point where outstanding facility
liabilities will be reduced or eliminated.
The option of license sale offers both its own challenges and issues. Liabilities, net of
sale proceeds, would have to be liquidated either immediately orover time. Building
operation and maintenance costs in excess of rental income would have to be assumed.
Fumreuses for the building would have to be found within the continuing restrictions we
. 9]__QOgy
face on its use. And, at its most basic level, an interested and acceptable operator most be
found.
From a strictly business perspective, this is the clear choice. Financially, liabilities
associated with operating the Nursing Facility are capped at a time in which we have the
Financial strength to liquidate them. We would choose to leave a business is which we
have limited expertise, which lies outside of am core service missions, and in which -
demand for service falls short of supply.
At the same time, there are countervailing considerations. We offer a quality product
which emphasizes quality service. We have been "in the business" for a long time. We
have responsibilities to bath our emolovees and our clients. ]here are strong and
emotional supporters for continuing ;lie Facility. These considerations must be evaluated
by the Council as we approach the necessary policy decision.
From the point of view of operating and managing this City govemment's daily
operations, I must give a strong weight to financial and operational issues. My preferred
option would be to proceed to request proposals for the sale of our license, to cap and
liquidate our liabilities, and to pris'arize a service where the private sector currently can
meet the demand and is able to more rapidly adjust to dramatic changes in the health care
arena
Should other considerations lead the Council to decide to continue operations, however,
we should then move quickly to implement the Continuum of Care proposal to address
the ongoing financial deterioration of this enterprise operation.
I would urge the Council to move forward quickly with the necessary policy direction so
that staff can take the needed implementing steps.
Edward A. Barrett
City Manager
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