Is 50-year contract legal?

San Juan County Hospital District #1's 50-year contract with PeaceHealth is worth about $80 million. The length and dollar amount are being questioned in light of state law (RCW 39.36.020) which limits indebtedness by hospital districts to 30 years and  .75% of the total property value in the district.

Without a 60% approval by voters, the hospital district is limited to incurring roughly $20.5 million of debt. With voter approval, hospital districts can have debt up to 2.5 percent of the total property value. The hospital district commission approved the contract without a vote of the people.

Under the contract, Peace Island Medical Center, the critical access hospital on San Juan Island, receives 97 percent of the property tax revenue collected each year by the hospital district. In 2015 that amount is $1,605,259 (97% of $1,654,906).  $1.6 million over 50 years equals $80 million. 

At the March 25, 2015 hospital district commission meeting, Monica Harrington of San Juan Island asked the board members, "My question for the board is whether or not you have any documentation or anything that shows that you received an opinion from a governing authority such as the state auditor, on whether you had the authority to enter into a 50-year contract of that indebtedness." 

Hospital District Chair Dr. Michael Edwards said, "I'm sure we did, Monica. It is distant history. I was a participant in that process. We cleared it with authorities I can assure you that,  as well as a certificate of need. As far as discrete documentation we would just have to look for it."

Harrington asked about the 30-year limit and the dollar amount. 

"We did have the most expert counsel in the state of Washington, Mr. Brad Berg of Foster Pepper attorneys out of Seattle. He knew each and every step as well as the state Attorney Generals and the Auditors.  As far as documentation we'll look for that," Edwards said.   

The sections relating to hospital districts are posted below. The entire RCW 39.36.020 can be read here.

RCW 39.36.020 - Limitation of indebtedness prescribed.

(1) Except as otherwise expressly provided by law or in subsections (2), (3) and (4) of this section, no taxing district shall for any purpose become indebted in any manner to an amount exceeding three-eighths of one percent of the value of the taxable property in such taxing district without the assent of three-fifths of the voters therein voting at an election to be held for that purpose, nor in cases requiring such assent shall the total indebtedness incurred at any time exceed one and one-fourth percent on the value of the taxable property therein.

(2)(a)(i) Public hospital districts are limited to an indebtedness amount not exceeding three-fourths of one percent of the value of the taxable property in such public hospital districts without the assent of three-fifths of the voters therein voting at an election held for that purpose.

(b) In cases requiring such assent counties, cities, towns, and public hospital districts are limited to a total indebtedness of two and one-half percent of the value of the taxable property therein.  

RCW 70.44.110 Plan to construct or improve — General obligation bonds.

Whenever the commission deems it advisable that the district acquire or construct a public hospital, or other health care facilities, or make additions or betterments thereto, or extensions thereof, it shall provide therefor by resolution, which shall specify and adopt the plan proposed, declare the estimated cost thereof, and specify the amount of indebtedness to be incurred therefor. General indebtedness may be incurred by the issuance of general obligation bonds or short-term obligations in anticipation of such bonds. General obligation bonds shall mature in not to exceed thirty years. The incurring of such indebtedness shall be subject to the applicable limitations and requirements provided in section 1, chapter 143, Laws of 1917, as last amended by section 4, chapter 107, Laws of 1967, and RCW 39.36.020, as now or hereafter amended. Such general obligation bonds shall be issued and sold in accordance with chapter 39.46 RCW.

From the Public Hospital District Commission Guide

D. Limitations on Borrowing There are three types of special limitations which must be taken into account in analyzing the borrowing powers of public hospital districts: debt, levy and 101% limits.

Debt Limits

Debt limits relate to aggregate indebtedness. Limitations are placed by the Constitution and statutes of the State of Washington upon the maximum amount of “debt” or “indebtedness” that public hospital districts can have outstanding at any one time.

A debt limitation is expressed as a percentage of the value of the taxable property within the public hospital district. Debt, moreover, is divided into two categories: non-voted (authorized solely by the public hospital district’s governing body) and voted (authorized by a vote of the qualified voters residing in the public hospital district).

There are constitutional and statutory limits on non-voted indebtedness as well as the cumulative total of non-voted and voted indebtedness. Since the statutory limitation is more restrictive than the Constitution, limiting both non-voted and total indebtedness to lower amounts than the Constitution will permit, it is of greater practical concern.

The indebtedness that a public hospital district may incur without voter approval is limited by statute to .75 percent of the value of the taxable property in the district [RCW 39.36.020(2)]. With the assent of 60 percent of those voting at either a special or a general election, the district’s indebtedness may reach 2.5 percent of the value of the taxable property in the district. These limits are statutory. The Washington Constitution otherwise would permit a non-voted debt limit of 1.5 percent of the value of the taxable property in the district and a voter approved debt limit of 5 percent, for bonds issued for strictly capital purposes. [Washington Constitution, Article VIII, Section 6]

Levy Limitations

The second type of limitation that must be considered in connection with public hospital district finance is limitations on the rate of ad valorem property taxation that may be imposed on any particular piece of property. These limitations are referred to as “levy limitations.” Levy limitations do not affect the validity of the debt itself, as distinguished from debt limitations, but they may determine how soon it could be paid off.

Without an election, a public hospital district is authorized to levy an annual tax on all taxable property in the district up to $.75 per $1,000 of assessed valuation [RCW 70.44.060(6)]. Levies in excess of that amount must be authorized by 60 percent of those voting at either a general or special election. If the levy is for the sole purpose of making the required payments of principal and interest on general obligation bonds issued for capital purposes, then the number of voters voting at the election must exceed 40 percent of the number of voters who voted at the preceding general election. [Washington Constitution, Article VIII, Section 2(b), Amendment 59] With voter approval, public hospital districts are permitted by both statute and the Constitution to levy whatever rate is approved. The Constitution and statutes are identical in terms of excess levy election requirements; a certain minimum number of votes must be cast on the proposition and a 60 percent approving vote must be obtained.

For excess debt approval, by contrast, a minimum voter turn-out is not required by the Constitution.

Practical Consideration

Excess debt usually entails excess levies and hence the election requirements normally may be considered the same.

101% Lid

A third kind of limitation upon the issuance or repayment of public hospital district debt instruments is imposed by statute and is called the “101% lid,” which restricts the total dollar amount of taxes which can be raised by any given taxing district. The amount is related to that raised during prior years, with exception made for new improvements, and can be exceeded with voter approval. The purpose of the 101% lid is to restrict the tax increases which would otherwise result from applying regular levy rates to property whose assessed value is dramatically increasing; its rationale is that such increases in assessed value do not always reflect increased ability to pay taxes. This limitation was also discussed in an earlier section of this chapter.

Specific Provisions

The Legislature requires regular levies of public hospital districts be set so regular property taxes payable in the following year do not exceed 101% of the regular tax levies for the district in the highest of the three most recent years [Chapter 84.55 RCW]. The total amount that may be levied is adjusted to include a sum computed by applying the previous year’s regular levy rate to the increase in assessed value resulting from new construction and improvements in the district [RCW 84.55.010]. Special provisions are made for districts that have not levied in the three most recent years, districts that result from consolidation, districts that have annexed territory, and districts for which the levy limitations have changed [RCW 84.55.020, .030, .040]. Also, the 101% “lid” may be raised if a majority of the voters approve an increase in an election held not more than twelve months prior to the proposed increased levy, thereby creating a new base amount for establishing the “lid” applicable to regular non-voted levies in future years. [RCW 84.55.050]

Not all of the above limitations apply to all methods of financing. Debts payable only from certain funds, such as revenue bonds, usually do not constitute general indebtedness for purposes of the constitutional and statutory limitations applicable to municipalities unless they also are made payable from general taxes. The indebtedness and levy limitations and the 101% lid have no application to debt, which is not payable out of taxes.

Beyond these three kinds of special limitations upon public hospital district borrowing powers — indebtedness limitations, levy limitations, and the 101% lid — there are few other basic statutes affecting the manner in which public hospital districts borrow money. Chapters 39.44 and 39.46 RCW, may influence the form, manner of sale, registrability, and other characteristics of both general obligation bonds and revenue bonds issued by public hospital districts. Chapter 39.62 RCW applies to the manner of executing all public securities and instruments of payment. Chapter 39.53 RCW contains provisions permitting and limiting the funding, refunding or advance refunding of municipal bonds and other instruments of indebtedness.


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