The financial connection between ECMC and Erie County government — Updated

The Erie County Medical Center (ECMC) has been around for a long time. It originally opened in 1905 as the Municipal Hospital, then was called Buffalo City Hospital and in 1939 the facility was re-named E.J. Meyer Memorial Hospital. Ownership was later transferred to Erie County government. Operated as a department of the county for many years, the institution in the 1980’s morphed into the Erie County Medical Center. In 2004 it received a degree of independence.

In 1978 Buffalo General Hospital was in need of new facilities. The then County Executive Ned Regan proposed selling the newly constructed but not yet opened new Erie County hospital to Buffalo General. The plan was shot down after a protracted political battle.

Because of its role as a major Western New York health care facility and as the community’s prime provider of trauma care, the county hospital has usually had substantial financial losses from the care of indigent patients. The county has covered that expense in various ways.

The sale of ECMC

In 2004 the Erie County Medical Center Healthcare Network, consisting of the hospital and the county home and infirmary in Alden (since relocated to Buffalo), became an autonomous health system as a public benefit corporation. The name was changed to the Erie County Medical Center Corporation (ECMCC). In effect, the hospital bought itself from the County government for $85 million. The county agreed to retain various financial responsibilities for the corporation.

While there was a political spin about the sale freeing the hospital from county interference in its operations, the sale was primarily driven by Joel Giambra administration’s need for money to balance the annual budget. Substantial cuts in the county property tax levy following Giambra’s election in 1999, without comparable reductions in spending, led to the depletion of the county’s financial reserves. The sale of the hospital provided tens of millions of dollars in one-time revenues to the county, although in the end the cash infusion proved insufficient to stem the county’s financial problems. The ensuing crisis led to the creation of the Erie County Fiscal Stability Authority in 2005.

The creation of the ECMCC left the hospital with a degree of independence from the county government, but also with a substantial debt in the form of bonds that were sold to pay the county for the purchase.

Medicaid and indigent patient funding issues

For many years ECMC has been the beneficiary of Medicaid payments made to the hospital by the federal government for indigent care. The program is known as Intergovernmental Transfer or IGT. The county is also obligated to make indigent care adjustment payments to the hospital.

The amount of the county’s annual obligations to ECMC has increased over the past few years. The total amount owed by the county is not generally known until later in the year, long after the budget number is determined.  In September 2016 the costs for the year exploded to $38 million. County Executive Poloncarz responded by using positive variances and less spending in other areas of the budget to fill the gap.  The 2017 county budget projected a total expense of $23 million in IGT and indigent care adjustment payments, but the total costs are expected to be $34 million.

Projections for out-years of the indigent patient expenses show continuing substantial growth. The County Executive’s 2017 Budget Message projected the annual indigent care adjustment costs growing from $6.81 million this year to $15.05 million in 2020, an increase of 120 percent in just three years. The numbers could grow bigger. The potential negative impact of ending the federal Affordable Care Act is another wildcard in the projections of this spending.

The hospital’s need for renovations

The current ECMC facility was built in the 1970’s. Over the years the number of beds authorized by the state for use at the facility decreased substantially. The hospital’s preeminence in trauma care, however, has grown. It has also developed other medical niches as it fit itself into the Western New York health care structure. While renovations have occurred from time-to-time over the past forty years, the improvements now proposed for the facility, centering around the remodeling and expansion of the emergency room, are the most significant since the building was opened. ECMC has proposed $100 million in total projects.

The Poloncarz plan for funding hospital renovations and how it would impact county government

Since the County of Erie is still financially responsible for some of the hospital’s costs through IGT and the indigent care adjustment, the growing costs have had a direct impact on county government finances. The growing and not always predictable amounts pose a serious financial threat to the county as it strives to keep property taxes low and to continue supporting its other obligations. The state property tax cap also restricts budgetary options.

The county executive’s Budget Message in October 2016 indicated that the county had an unrestricted fund balance of approximately $101.9 million at the end of 2015. Those funds are available for any county government purpose, but County Charter restrictions make it more difficult to access those funds than was previously possible. The county is required by the Charter to maintain a fund balance equal to at least five percent of the annual general fund.

The financial arrangement proposed by County Executive Mark Poloncarz to finance the $100 million in renovations at ECMC would involve the county government selling the bonds for the hospital. The county has a better credit rating than the hospital and can therefor borrow at a lower cost, producing estimated savings of $23 million in bond repayment costs.

Poloncarz has requested that the hospital administration return the savings from the lower bond costs to the county, which then could use such funds to pay for some of the county’s ECMC obligations. With those charges already high and expected to continue increasing, even the $23 million would not go far or last very long.

A county bond issue requires the affirmative vote of two-thirds of the members of the County Legislature. An attempt to approve the $100 million ECMC bond issue failed recently, falling one short of the required eight votes. Four members of the Legislature’s Republican caucus opposed the vote. Majority Leader Joseph Lorigo is leading the opposition. He has suggested that Poloncarz wants to use the savings from a county sale of the hospital bonds to fill a hole in the county budget. He describes the situation as a “self-created budget crisis” that can be “solved with leadership and proper management.” Lorigo goes on to say that the County Executive “has declared a budget crisis because he has spent beyond our means.”

Poloncarz unwisely chose to bring a threat to cultural agencies funding into the discussion about what might happen with the county budget if the ECMC bonding plan he has proposed is not followed. It is not a good idea to hold any one particular portion of the budget, and in this case a rather small portion, as hostage for a budget crisis that hasn’t developed yet.

Unfortunately there have been several examples over the past fifty years that show how an Erie County budget crisis develops, deteriorates and is ultimately resolved. The continuing ECMC funding obligations should certainly encourage developing a plan for what can be done to maintain the county’s fiscal stability. The folks on the ship’s bridge can see that iceberg approaching, but there is time to steer clear.

Lorigo has attempted to lay the blame for a suggested fiscal crisis on Poloncarz, but if you look closely you will see Lorigo’s fingerprints on the budget, along with those of the other members of the Legislature. The most recently approved county budget for the year that began January 1, 2017 received a unanimous vote of the Legislature, including Lorigo and the members of his caucus. If fact, the Republican caucus offered only minor amendments to the budget originally proposed by Poloncarz last October. The Republican-led Legislature has unanimously approved three budgets proposed by Poloncarz since the Republican caucus took control, so there has been shared responsibility for the spending contained in the budgets. There is now a need for some shared responsibility in dealing with some serious budget issues before they become a real “crisis.”

How this might get resolved

The overriding issue here is the need for renovations at ECMC, particularly in the emergency room area. How to finance that work is the challenge.

Enter the Erie County Fiscal Stability Authority (aka, the Control Board). The Authority has previously sold millions of dollars of county bonds. Even though the county’s own bond rating is good and continues to improve, the Authority’s rating is still superior. Borrowing costs through an Authority bond issue can save more money than even the county itself could save. ECMC seems willing to return the savings to the county, which can help with the indigent patient payments.

Procedurally it will be easier for the Legislature to complete a Control Board deal rather than attempt to approve a county bond. The process requires a message from the county executive to the Legislature declaring the need for the Authority bonding. The Legislature can approve that arrangement with a simple six vote majority. Then on to the Authority to approve a bond sale.

There is an issue with the length of the bonds. The hospital would prefer a thirty-year bond, but the Authority only has twenty-two years left before its enabling legislation expires. A shorter term will require higher annual costs for ECMC, but the bonds will be retired sooner than originally planned, saving some interest charges in the long run. Those sorts of things can be worked out. If there is a concern about what the county will do with the revenues it will acquire through the Control Board borrowing, that can be negotiated and codified in a legislative resolution. One option might be to direct the funds into the county fund balance. County Charter procedures are already in place concerning how fund balance moneys can be accessed.

It is only March. The 2018 county budget will not get approved until December. Once the Fiscal Stability Authority approves the bond issue cooler heads should prevail in county government to plan out how the growing indigent patient costs will be handled. Sales tax revenues have been tracking lower than budget, so how to handle that revenue stream, the county budget’s largest, should also figure into the long-term planning. These are the things that the County Executive and the County Legislature are elected to do, together. Let’s get to it.

4 thoughts on “The financial connection between ECMC and Erie County government — Updated

  1. Thanks Ken for this very studied report on the county fiscal situation bound up as it is with ECMC. Behind this whole issue is the poverty of the inner city which no one in the employer community seems willing to tackle. Recently a study done by the Community Foundation explored the issue in depth. Still little is happening among employers to work with the Buffalo School District to develop the complex programming needed to educate students with the skills needed to become skilled employees. Unless the community attacks the county’s underlying poverty issue, neither the county nor ECMC will ever be viable long term.

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  2. History and current events combine in this excellent piece. And the closing admonition should be followed it the players want to govern effectively.
    The Donohue comment is also on point. Efforts in workforce development need to focus more heavily on the inner city with greater attention given to returning citizens (post incarceration) and 18 to 24 year olds who at present see no way out.

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  3. As I have told you repeatedly, your political bias continues to show. It is vital to note both the borrowing proposal by the County Executive and the use of the fund balance are one-time solutions to a continuing problem. Like the County Executive, you kick the can down the road.

    As usual, your writing style and the addition of history adds substantial credibility to your argument. You still make some confusing statements regarding the County Executive’s projected Inter-Governmental Transfer or IGT for 2017. At one point, you state the County Executive’s 2017 budget message projected the annual IGT growing from $6.81 million this year to $15.05 million in 2020. In the previous statement, you acknowledge that the 2017 County budget projected by the County Executive was a total expense of $23 million in IGT.

    While it is clear that the budget needs to be approved by the legislature, it is unfair not to point out that the budget is created by the County Executive, with his budget director, and reviewed and amended by the legislature.

    The County Executive has acknowledged a shortfall in this year’s budget of at least $18 million (which would amount to approximately a six percent increase in property taxes). Itappears this problem was at least evident to the County Executive’s office, who continued to assure the legislature that the budget was, in fact, affordable. One may speculate why his budget director left earlier this year to take a job in the Town of Tonawanda at a lesser pay.
    Now the shortfall is acknowledged and the proposed solution is to use ECMC’s need to fill the shortfall.

    As you point out, ECMC is a public benefit corporation and is supported by the taxpayers in Erie County. It is my understanding that a Certificate of Need must first be obtained before ECMC can borrow money to do the requested renovation, and that a study should be done to properly establish the cost amount.

    Only yesterday, the Certificate of Need was obtained and if the cost amount was, in fact, properly established, it would seem fiscally responsible for ECMC to use the less expensive borrowing route from the Fiscal Control Board to borrow the exact amount it needed rather than the $100 million requested by the County Executive.

    Where your argument clearly falls short is that both the credit mechanism proposed by the County Executive and the use of the fund balance are one-time solutions to a continuing problem.

    Even the County Executive, in his own statements, argues that using the fund balance would be improper for that exact reason. He simply fails to acknowledge that borrowing money over 30 years to fill a gap over one or two years is the same thing, only worse.

    You acknowledge that our fund balance is over $100 million and in excess of the five percent of the annual general fund. Your suggestion that “one option might be to direct the funds (excess from the $100 million borrowing) into the county fund balance” is flawed. Why would someone borrow money, over 30 years and pay interest on the borrowed money when they have an excess of funds intheir savings account?

    Like most politicians, you kick the can down the road, when you write “those sort of things can be worked out” and “once the Fiscal Stability Authority approves the bond issue, cooler heads should prevail in county government to plan out how the growing indigent patient costs will be handled”.

    I applaud the four County legislators who had the courage to point out the problem and want to address it now. The Conservative Party of Erie County stands with them.

    Ralph Lorigo, Chairman
    Erie County Conservative Party

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  4. I generally do not respond to comments posted on the blog but the one from Erie Conservative Party Chairman Ralph Lorigo raises some points that I feel need a response. I welcome Ralph Lorigo’s comments. The whole point of doing this blog is to inform and to stimulate public discussion.
    While I didn’t get into this in the post, for those readers who are not familiar with my resume, I would just like to note that I served on the Legislature’s staff for seven years, with considerable work on budgets. I was county budget director for three years and a member of the Erie County Fiscal Stability Authority for five years. I also served as a member of the Charter Revision Commission that revised the financial procedures of the county following the 2005 budget meltdown. So I know a bit about what I wrote about in this post.
    I would also note that my “political bias” that Ralph comments on is no secret; in fact it was acknowledged in the very first post of the blog (see “About.) I’m a Democrat. I believe that being a Democrat is still legal in these United States.
    The ECMC borrowing is a one-time occurrence, as are all bond issues. The money saved by having the Fiscal Stability Authority do the borrowing does indeed create a one-time revenue. One-time revenues are not something unique to Erie County. The important thing is, how is the one-time revenue used? You can squander one-revenues on things like new jobs or programs, or you can use it judiciously to manage the ups and downs of annual budgets.
    The numbers I reported for the indigent patient adjustments projecting growth from $6.81 million in 2017 to $15.05 million in 2020 are out of the county’s four-year plan that was prepared last fall. The $6.81 million is, as provided in the adopted 2017 budget, part of the total $23 million that the adopted budget included for ECMC. As noted in the post, bad news about this account does not become known until after the annual budget in approved.
    Yes, the proposed budget is prepared by the county executive and the budget director. But the County Legislature gets more than two months each year to review, ask questions and revise the budget. The Legislature’s majority caucus has a staff of nine with an annual payroll of $569,467, plus benefits. (That’s an average salary of $63,274). In addition, the majority has access to assistance from the County Comptroller’s office. The Legislature, with three consecutive unanimously approved budgets that only tinkered at the fringes of the county executive’s proposed spending plans, means that the Legislature owns the budget as much as the executive.
    The Certificate of Need, which will allow the Legislature with a simple majority to pass the borrowing duties onto the Fiscal Authority, is set at exactly $100 million.
    The $100 million is of course a one-time solution, and the thing it is used to solve is the need to raise that amount of money for required hospital improvements while stretching the costs more manageably over a period of years – something done all the time by counties, towns, cities, villages and school districts.
    Once again the issue is, how are the available one-time proceeds developed by the lower borrowing costs used? Whether the money goes to pay for some hospital obligations, or cultural institutions, or roads, or youth services, or something else, that is a decision that the Legislature and the Executive will need to work out. My suggestion about sending the one-time revenues from this transaction to fund balance is only as a temporary parking place while county legislators and the executive decide on the best use of the money.
    Chairman Lorigo asks “why would someone borrow money, over 30 years and pay interest on the borrowed money when they have an excess of funds in their savings account?” The answer is simple: you don’t deplete your savings account to pay for a very large capital project with a long life span. I refer readers to Article 25, Section 2505.b of the Erie County Charter, which has the effect of locking up about $55 million or more in the fund balance as mandatory savings. Reading the history of Erie County government during the years when Joel Giambra was County Executive would also provide useful information.
    This is not a matter of kicking the can down the road. It is more a question of collectively sizing up a serious financial issue and doing what is best, both in the short and the long term, for the people of Erie County.
    Ken Kruly

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