Kern Valley Healthcare District Revenue Bonds History and Analysis

By Kathryn "Kay" Knight

The debt service on the 1991 Revenue Bond Issue has been in default since its inception. There were only a few years that we were able to satisy all the bond requirements.

In 1986 the Kern Valley Healthcare District sold $12,985,000 in Revenue bonds to fund the expansion of the hospital to 41 beds and construct a 74 bed Skilled Nursing Facility as phase one. Phase two was to be the addition of another 74 beds to the Skilled Nursing Facility. The 1986 Revenue Bond was also to fund the debt service reserve in the amount of $1,157,650 to make the appropriate deposit to fund interest expense during construction and to pay the cost of issuance, including the underwriter's discount. Due to delays in the construction project, primarily changes in the seismic safety codes, the project was not able to be completed on schedule or within the budget.

In 1989 the District proposed the sale of additional Revenue Bonds in the amount of $4,585,000 and downsized the project in an effort to complete the project. The project was cut to NO additional acute care beds, and the Skilled Nursing Facility was cut to 74 beds, total. This basically, cut the project in half, at twice the cost.

The financial analysis of the project was completed by Laventhol & Horwath, a nationally recognized accounting firm. The results of that analysis clearly shows the INABILITY of the District to service the additional debt required to complete the project. In September of 1989, Cal Mortgage denied the insurance application the District requested for the 1989 Bond Issue, even though they were providing the insurance on the 1986 issue.

In 1990, Cal-Mortgage exercized its option under the 1986 insurance agreement, as the District was in technical default at that time, to force the District to hire Delta- One Management, Inc., (a little known firm with no track record), to manage the District and complete the construction project. Immediately upon assuming control of the District, Delta-One Management, Inc., proposed a $20,590,000 Revenue Bond Sale for the purpose of refunding the 1986 Revenue Bonds and providing funds to complete the project. Cal-Mortgage immediately approved the insurance for these bonds. I have not yet been able to find any evidence of a feasibility study relating to the 1991 Issue.

To analyze the effect of the District refunding the 1986 bond issue and providing the additional funds needed to complete the project, we did not comply with the analysis/recommendations of Laventhol & howarth to only sell revenue bonds in an amount necessary to complete the project.

Since 1991, Cal-Mortgage has been in control of KVHD. We have paid consultants brought in by Cal Mortgage at District expense, over $1,500,000.

Since 1991, several Management Firms have been brought in by Cal Mortgage:

From 1991 to 1997, the District paid Delta-One $447,000.

February 2000, the District paid William Casey 66,700.

August 2000 - August 2004, Brim Management 1,000,000.

August 2010 - HFS Consulting 75,000.

August 2003 - The District Re-Financed the Bonds to save interest expense. This cost us $1,270,000 to be added to the Principal. Cal-Mortgage insisted we do this.

When we were not able to make the bond payment in 2000, Cal Mortgage guaranteed a $2,000,000 Loan.

When we could not pay back the Loan, I think in 2002, Cal Mortgage guaranteed a Line of Credit for $1,000,000.

When we could not pay back the LOC, Cal Mortgage guaranteed another LOC to cover the old LOC. We now have a $2,000,000 LOC that we, again, cannot pay back.

Since then, I think we have rolled-over at least two $1,000,000 Lines of Credit that we cannot pay back. This whole scenario is a nightmare.

Now, at Cal Mortgage's request, KVHD is asking the taxpayers to bail us out. The new emergency room is the incentive the taxpayers need in order to pay down the old debt.

Who is at fault here???

In summary, it is obvious that Cal-Mortgage's practice of "absentee management" of the entities they insure, through the management firms and consultants, does not allow the Boards of Directors for those facilities to perform their duties as designated by law. It is impossible for a management firm or consultant to act in the best interest of its clients if they are influenced by sources other than the facility's Board of Directors, or appropriate laws and regulations. The management firm and/or the consultant becomes more a tool of Cal-Mortgage (in this case)rather than a servant of the entity that is paying for their expertise.

The Kern Valley Healthcare District has been and continues to be a victim "absentee management" by Cal Mortgage. The above analysis of our 1986 and 1991 revenue bond issues along with the District's continuing borrowing millions of dollars to pay back the long-term debt retirement obligations and the ongoing financial jeopardy that our healthcare district is in, should be ample evidence of our being victimized by management firms and consultants anxious to keep on the "good side" of Cal Mortgage.

It is my fervent prayer that someone, someone out there, will read this and help me to help our District to survive these unscrupulous clutches that are going to kill our Healthcare District.

I have pleaded over and over again -- "This IS NOT OUR (THE DISTRICT'S) FAULT!!!!"

These are very complex and complicated issues. That is why I believe it is crucial to remain truthful to the voters on this issue, and not cloud the REAL issues with promises that may not be possible to deliver.

Thank you, sincerely, Kay Knight