Municipal Hospitals; Authority to Lend Hospital Revenues

STATEMENT OF THE FACTS

Cumberland County Hospital System, Inc., d/b/a Cape Fear Valley Health System (“the Hospital System”), is a nonprofit, tax-exempt corporation organized under North Carolina law. The Hospital System, whose trustees are all appointed by the Cumberland County Board of Commissioners and include all seven Cumberland County Commissioners, operates hospital facilities leased from Cumberland County under the Restated Management Lease Agreement dated April 30, 1999. The Hospital System operates Cape Fear Valley Medical Center and Highsmith-Rainey Memorial Hospital pursuant to this lease.

The Hospital System has applied to the North Carolina Department of Health and Human Services, Division of Facility Services, for a certificate of need authorizing it to establish a separately licensed 35-bed long-term acute care hospital (“LTACH”) within Highsmith-Rainey Memorial Hospital. LTACHs provide inpatient treatment to patients with chronic diseases or complex medical conditions whose aggregate length of stay is 25 days or more. Medicare regulations exempt LTACHs from Medicare’s prospective payment system and reimburse them instead on a cost basis, subject to federally mandated limits set by the Balanced Budget Act of 1997. LTACHs may be developed as free-standing facilities or as “hospitals within hospitals.” Federal regulations require that an LTACH operated as a “hospital within a hospital” must be governed independently of the host hospital. See 42 CFR 412.22(e). No LTACH currently exists anywhere within the Hospital System’s six-county service area. The nearest LTACH is located more than 100 miles from Fayetteville. Space exists within Highsmith-Rainey for the development of the LTACH because Highsmith-Rainey is operating at only 30.9% of is licensed capacity.

The Hospital System has incorporated a separate nonprofit, tax-exempt corporation, Highsmith-Rainey Long Term Acute Care Hospital, Inc. (“HR-LTACH”), to operate the proposed LTACH. This action was reviewed and approved by the Hospital System’s Board of Trustees. The Hospital System has retained authority to appoint only three of the seven members of the LTACH’s board. Consequently, in compliance with Medicare regulations, the Hospital System will not control HR-LTACH.

The Hospital System projects that HR-LTACH will need approximately $1,825,000 to cover its start-up and initial operating expenses. The Hospital System proposes to loan this amount to HR-LTACH. The loan would be negotiated at arms-length and would be made at a fair market rate on commercially reasonable terms. It would be documented by a promissory note and secured by a security agreement. Any funds loaned by the Hospital System would be derived from its operating revenues.

ANALYSIS

A. THE PROPOSED LOAN IS AUTHORIZED BY THE NORTH CAROLINA GENERAL STATUTES.

1. The Proposed Loan is Authorized by the Municipal Hospital Act.

The Municipal Hospital Act provides that “a public hospital may contract with or enter into any arrangement with . . . any person, private organization, or nonprofit corporation or association for the provision of health care” and that a public hospital may use its health care revenues to meet its obligations under these contracts or arrangements. N.C. Gen. Stat. § 131E-7 (b). It is well established that "[w]hen the language of a statute is clear and unambiguous, there is no room for judicial construction, and the courts must give [the statute] its plain and definite meaning." Smith Chapel Baptist Church v. City of Durham, 350 N.C. 805, 811, 517 S.E.2d 874, 878 (1999), quoting Lemons v. Old Hickory Council, BSA, 322 N.C. 271, 276, 367 S.E.2d 655, 658 (1988). The language of N.C. Gen. Stat. § 131E-7 (b) could not be clearer. The Hospital System’s proposal fits squarely within this grant of authority. Cape Fear Valley Medical Center and Hospital Highsmith-Rainey Memorial Hospital are public hospitals, as defined in N.C. Gen. Stat. § 159-39 (a). The proposed promissory note and security agreement are undoubtedly contracts. HR-LTACH is a nonprofit corporation. The proposed loan will enable HR-LTACH to provide health care in the form of a new long-term acute care hospital. The loan proceeds will come from health care revenues generated at Cape Fear Valley Medical Center and Highsmith-Rainey Hospital. Consequently, the Hospital System’s proposal to loan $1,825,000 to HR-LTACH is plainly and expressly authorized by the Municipal Hospital Act.

2. The Proposed Loan is Not Prohibited by the Local Government Budget and Fiscal Control Act.

The General Assembly enacted the Local Government Budget and Fiscal Control Act (the “Budget Act”) in order to prescribe a uniform system of budget adoption and administration and fiscal control for local governments and public authorities. N.C. Gen. Stat. § 159-7 (c). The Budget Act applies to public hospitals only to the limited extent specified in N.C. Gen. Stat. § 159-39, which provides, among other things, that “[a] public hospital may deposit or invest at interest all or part of its cash balance pursuant to G.S. 159-30.” N.C. Gen. Stat. § 159-39 (g). The referenced provision, entitled “Investment of Idle Funds,” provides that a local government or public authority may deposit the cash balance of any fund in any bank, savings and loan association, or trust company in the State. N.C. Gen. Stat. § 159-30 (b). It also provides that a local government or public authority may invest the cash balance of any fund in certain specified classes of securities. N.C. Gen. Stat. § 159-30 (c). No other deposits or investments are permitted. N.C. Gen. Stat. § 159-30.

The deposit and investment limitations specified in N.C. Gen. Stat. § 159-30 apply to the Hospital System because Cape Fear Valley Medical Center and Highsmith-Rainey Memorial Hospital are public hospitals, as that term is defined in the Budget Act. N.C. Gen. Stat. § 159-39 (a) (2). However, they have no bearing on the Hospital System’s proposed loan because a loan is neither a deposit nor an investment. Furthermore, a statute that plainly and clearly regulates deposits and loans cannot be construed to regulate loans as well. See Union Carbide Corp. v. Offerman, 351 N.C. 310, 314, 526 S.E.2d 167, 170 (2000) (the courts have no power to interpolate or superimpose provisions and limitations not contained in a statute when the statute is clear and unambiguous). Consequently, N.C. Gen. Stat. §§ 159-30 and -39 do not prohibit the Hospital System from lending $1,825,000 to HR-LTACH.

3. The Proposed Loan is Authorized by the Nonprofit Corporation Act.

The Nonprofit Corporation Act provides that a nonprofit corporation may engage “in any lawful activity unless a more limited purpose is set forth in its articles of incorporation.” N.C. Gen. Stat. § 55A-3-01 (a). Furthermore, unless its articles of incorporation provide otherwise, a nonprofit corporation has the power “[t]o lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment” and “[t]o do all things necessary or convenient, not inconsistent with law, to further the activities and affairs of the corporation.” N.C. Gen. Stat. § 55A-3-02 (a) (8) and (19). The Hospital System’s proposal to loan $1,825,000 to HR-LTACH is authorized by the Nonprofit Corporation Act, absent some limitation in the Hospital System’s articles of incorporation. We offer no opinion about whether the proposed loan is or is not authorized by the Hospital System’s articles of incorporation.

B. THE PROPOSED LOAN IS AUTHORIZED BY THE NORTH CAROLINA CONSTITUTION.

1. The Proposed Loan Meets the Public Purpose Requirements of N.C. Const. Art. V, Section 2 (1) and (7).

The North Carolina Constitution provides that “[t]he power of taxation shall be exercised in a just and equitable manner, for public purposes only . . . .” N.C. Const. Art. V, Section 2 (1) (emphasis added). It provides further that:

The General Assembly may enact laws whereby the State, any county, city, or town, and any other public corporation may contract with and appropriate money to any person, association, or corporation for the accomplishment of public purposes only.

N.C. Const. Art. V, Section 2 (7) (emphasis added). Pursuant to this provision, the General Assembly has authorized public hospitals to contract with any nonprofit corporation for the provision of health care. N.C. Gen. Stat. § 131E-7 (b). The General Assembly has expressly determined that the use of this power accomplishes a public purpose. N.C. Gen. Stat. § 131E-12. Although this determination is given great weight by the courts, it is not conclusive. Foster v. Medical Care Comm’n, 283 N.C. 110, 125, 195 S.E.2d 517, 527 (1973). The judicial branch has the ultimate authority to decide whether any particular activity serves a public purpose. Id. Nevertheless, for the reasons given below, we agree with the General Assembly that N.C. Gen. Stat. § 131E-7 (b) serves a public purpose.

First, the North Carolina Constitution itself provides that:

Notwithstanding any other provisions of this Constitution, the General Assembly may enact general laws to authorize the State, counties, cities or towns . . . to issue revenue bonds to finance or refinance for any such governmental entity or any nonprofit private corporation . . . the cost of acquiring, constructing, and financing health care facility projects to be operated to serve and benefit the public . . . .

N.C.

Const. Art. V, Section 8 (emphasis added). This provision of the constitution makes the public financing of private nonprofit hospitals a public purpose. We believe that a loan that finances the initial operation of a hospital serves the same public purpose as does a loan that finances the construction or acquisition of a hospital.

N.C.

708, 722, 467 S.E.2d 615, 624 (1996). The first prong of the test asks whether there is a

Second, the North Carolina Supreme Court has created a two-pronged test for determining whether a particular undertaking is for a public purpose. Maready v. City of Winston-Salem, 342 reasonable connection between the undertaking and the convenience and necessity of the particular municipality. Id. This first prong “may be evaluated by determining how similar the activity is to others which [the Supreme] Court has held to be within the permissible realm of governmental action.” Id.

The North Carolina Supreme Court concluded more than fifty years ago that “[t]he construction, maintenance, and operation of a public hospital by a county is a public purpose for which funds may be provided by taxation under . . . the [North Carolina] Constitution. Trustees of Watts Hospital v. Board of Comm’rs, 231 N.C. 604, 616, 58 S.E.2d 696, 705 (1950); accord, Trustees of Rex Hospital v. Board of Comm’rs, 239 N.C. 312, 329, 79 S.E.2d 892, 904 (1954). Yet in 1973, the Supreme Court declared the North Carolina Medical Care Commission Hospital Facilities Finance Act unconstitutional, holding that the expenditure of public funds to finance the construction of privately operated, managed and controlled hospitals is not an expenditure for a public purpose and is prohibited by Article V, § 2(1), of the North Carolina Constitution. Foster, at 127, 195 S.E.2d at 528-29. In late 1973, we would have been compelled to conclude that the proposed loan could not pass the first prong of the Supreme Court’s two-pronged test.

However, in 1976, the people of the State responded to Foster by adding Article V, Section 8 to the North Carolina Constitution. That provision, quoted above, gave the General Assembly the authority it needed to enact the Health Care Facilities Finance Act. N.C. Gen. Stat. § 131A-1, et seq. Since the enactment of that act, the North Carolina Medical Care Commission has loaned hundreds of millions of dollars to finance the construction and renovation of private hospitals. We are confident that the Health Care Facilities Finance Act would survive any constitutional challenge today, notwithstanding the Court’s ruling in Foster. Furthermore, as noted above, we believe that a loan that finances the initial operation of a hospital serves the same public purpose as does a loan that finances the construction or acquisition of a hospital. Consequently, we believe the proposed loan passes the first prong of the Supreme Court’s public purpose test.

The second prong of the Supreme Court’s test asks whether the expenditure benefits the public generally, as opposed to special interests or persons. Maready, at 722, 467 S.E.2d at 624. The Maready court said that:

“It is not necessary, in order that a use may be regarded as public, that it should be for the use and benefit of every citizen in the community.” Briggs v. City of Raleigh, 195 N.C. 223, 226, 141 S.E. 597, 599-600. Moreover, an expenditure does not lose its public purpose merely because it involves a private actor. Generally, if an act will promote the welfare of a state or a local government and its citizens, it is for a public purpose.

Maready, at 724, 467 S.E.2d at 625. The proposed loan will confer a benefit upon HR-LTACH, a private actor. However, the loan will also unquestionably promote the welfare of the citizens of Cumberland County. When HR-LTACH is opened, Cumberland County residents with chronic diseases or complex medical conditions will be able to receive acute inpatient care long after they would have been discharged from a regular acute care bed in Cape Fear Valley Medical Center or Highsmith-Rainey Hospital. Most importantly, they will receive this care within their own community, in close proximity to their homes, families, and friends, rather than at some other LTACH more than 100 miles away. Higher occupancy rates at Highsmith-Rainey will help contain the cost of health care in Cumberland County. Consequently, we believe the proposed loan passes the second prong of the Supreme Court’s public purpose test. Because it passes both prongs of the Supreme Court’s two-pronged test, we conclude that the Health System’s proposal to loan $1,825,000 to HR-LTACH meets the public purpose requirements of N.C. Const. Art. V, Section 2 (1) and (7).

2. The Proposed Loan Does Not Violate the Constitutional Prohibition on the Lending of Credit.

The North Carolina Constitution provides that:

No county, city or town, special district, or other unit of local government shall give or lend its credit in aid of any person, association, or corporation, except for public purposes as authorized by general law, and unless approved by a majority of the qualified voters of the unit who vote thereon.

N.C.

Const. Art. V, § 4 (3) (emphasis added). The constitution provides further that:

A loan of credit . . . occurs when a county, city or town, special district, or other unit, authority, or agency of local government local government exchanges its obligations with or in any way guarantees the debts of an individual, association, or private corporation.

N.C.

Const. Art. V, § 4 (5). These provisions parallel similar restrictions on the use of the State’s credit. See N.C. Const. Art. V, § 3 (2) and (3). In construing the latter, the North Carolina Supreme Court has said that:

"The word ‘credit’ * * * implies the imposition of some new financial liability upon the State or a political subdivision which in effect results in the creation of a State or political subdivision debt for the benefit of private enterprises. In order to have a gift, loan or use of public credit, the public must be either directly or contingently liable to pay something to somebody."

Foster, at 121, 195 S.E.2d at 525 (emphasis added), quoting Nohrr v. Brevard Co. Educ. Facilities Auth., 247 So.2d 304 (1971). The Hospital System merely proposes to loan excess operating revenues to HR-LTACH. It does not propose to become either directly or contingently liable for HR-LTACH’s debts. Consequently, the Hospital System’s proposal to loan $1,825,000 to HR-LTACH does not violate the constitutional prohibition on the lending of credit.

3. The Proposed Loan Does Not Violate the Constitutional Ban on the Granting of Exclusive Emoluments and Privileges.

Article I, Section 32, of the North Carolina Constitution provides that “[n]o person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.” This provision prohibits the giving of gifts and gratuities of public money. Brown v Comm’rs of Richmond Co., 223 N.C. 744, 746, 28 S.E.2d 104, 105-06 (1943). A classification which favors a particular group of persons can also be an “exclusive or separate emolument or privilege” within the meaning of this constitutional prohibition. State ex rel. Utilities Comm’n v. Carolina Util. Customers Ass’n, 336 N.C. 657, 677, 446 S.E.2d 332, 344 (1994). However, the Supreme Court has said that:

“The prohibition against exclusive emoluments or privileges is not implicated when an enactment is intended for "the promotion of the general welfare, as distinguished from the benefit of the individual, and if there is reasonable basis for the Legislature to conclude that the granting of the [benefit] would be in the public interest." State

v. Knight, 269 N.C. 100, 108, 152 S.E.2d 179, 184 (1967).

Id.

The proposed loan does not violate the constitutional ban on the granting of exclusive emoluments and privileges for three reasons. First, the Hospital System does not propose to give HR-LTACH a gift or gratuity. Instead, it proposes to loan $1,825,000 to HR-LTACH at a fair market rate on commercially reasonable terms following arms-length negotiations. Second, the loan will be made in consideration of public services; i.e., the offering of long-term acute care hospital services to the citizens of Cumberland County. Third, the loan will promote the general welfare of the citizens of Cumberland County and is, undoubtedly, in the public interest. In short, the proposed loan is not prohibited by Article I, Section 32, of the North Carolina Constitution because the loan will be given in consideration of public services and will promote the general welfare of the citizens of Cumberland County.

CONCLUSION

For the reasons given above, we conclude that:

1. The proposed loan is authorized by the North Carolina General Statutes; and

2. The proposed loan does not violate the North Carolina Constitution.

Sincerely yours,

John R. Corne Special Deputy Attorney General

James A. Wellons Special Deputy Attorney General