FISCAL NOTE [Second Reprint] SENATE, No 2063 STATE OF NEW JERSEY 215th LEGISLATURE DATED: JUNE 26, 2012 SUMMARY Synopsis: “New Jersey Medical and Health Sciences Education Restructuring Act.” Type of Impact: Indeterminate Agencies Affected: State; Certain public institutions of higher education Executive Estimate Fiscal Impact Year State Certain Public Institutions of Higher Education Year Year No impact on State revenues or expenditures Specific costs and savings not identified - See comments below Office of Legislative Services Estimate Fiscal Impact State Certain Public Institutions of Higher Education Year Year Year Indeterminate – See comments below Indeterminate – See comments below Neither the Executive nor the Office of Legislative Services (OLS) has obtained sufficient information to make a comprehensive analysis of the fiscal impact of Senate Bill No 2063 (2R), the “New Jersey Medical and Health Sciences Education Restructuring Act.” While the Executive and Rutgers University have independently estimated the impact of certain aspects of the bill, the OLS neither concurs nor disagrees with these estimates, since it has no access to the information on which those estimates are based Rutgers University estimates that the bill will necessitate the defeasance of its outstanding bonded indebtedness at a cost of $155 million The Executive offers no estimate of the impact of Rutgers University’s refunding of the outstanding bonds because it assumes the bill Office of Legislative Services State House Annex P.O Box 068 Trenton, New Jersey 08625 Legislative Budget and Finance Office Phone (609) 292-8030 Fax (609) 777-2442 www.njleg.state.nj.us SCS for S2063 [2R] will not violate any bond covenants The OLS acknowledges the possibility, but not the certainty, that the bill would require defeasance of the debt, and has no information upon which to base an estimate of such costs In addition, Rutgers University may be required to refund $494.3 million of outstanding debt transferred from the University of Medicine and Dentistry of New Jersey (UMDNJ) The Executive estimates a net present value savings of approximately $43.6 million, due to lower interest rates, if the debt were refunded The OLS cannot estimate the potential for restructuring the debt obligations at a lower interest rate, nor any costs or savings that could result University Hospital has $110.0 million in outstanding bond debt and $101.2 million in liabilities from the various units of UMDNJ The Executive assumes that University Hospital can refund the bonds with bonds backed by the credit of the State and that doing so could result in net present value savings of $8.5 million The Executive does not consider the $101.2 million as a liability owed by University Hospital to UMDNJ The OLS neither concurs nor disagrees with these assessments, but notes that University Hospital may need additional State appropriations to maintain its current level of operations and to refund University Hospital debt Rutgers University estimates $20-$40 million for transition costs associated with acquiring and integrating UMDNJ, except for the School of Osteopathic Medicine and University Hospital Rowan University has not provided an estimate for transition costs associated with acquiring and integrating the School of Osteopathic Medicine The Executive anticipates one-time expenditures borne by Rutgers University and Rowan University for their respective acquisitions, but does not identify any specific costs The OLS neither concurs nor disagrees with these assessments, since it has no access to the information on which those assessments are based The Executive makes no analysis about the liabilities arising from claims against University Hospital The OLS notes that the bill does not include University Hospital in the SelfInsurance Reserve Fund and that University Hospital may be required to obtain its own insurance, the size and costs of which cannot be determined BILL DESCRIPTION Senate Bill No 2063 (2R) of 2012, the “New Jersey Medical and Health Sciences Education Restructuring Act,” implements numerous changes to the State’s public system of higher education The key provisions of the bill: transfer all schools, institutes, and centers of the University of Medicine and Dentistry of New Jersey (UMDNJ), except for the School of Osteopathic Medicine and University Hospital, to Rutgers University, along with the associated debts; transfer the School of Osteopathic Medicine of UMDNJ to Rowan University, along with the debts of UMDNJ incurred in the operation and administration of the School of Osteopathic Medicine and related real and personal property; designate University Hospital as a separate legal entity from Rutgers University and prohibits its assets, liabilities, and funds from being consolidated or commingled with those of Rutgers University The hospital’s board of directors is reconstituted and empowered to enter into a contract with a nonprofit corporation for the management or SCS for S2063 [2R] operation of University Hospital, subject to the approval of the Department of Health and Senior Services; designate University Hospital as the principal teaching hospital of New Jersey Medical School and New Jersey Dental School and any other Newark-based medical education program; establish the board of trustees at Rutgers University – Camden, which will have authority similar to the board of governors of Rutgers University, such as setting tuition and fees, disbursing funds appropriated, preparing an annual budget, planning for capital projects, and entering into contracts for the construction of such projects; authorize Rutgers University – Camden to lease the property and assets located on the campus from Rutgers University for $1 per year Rutgers University will retain title to the property and assets on the campus, but have no responsibility or control Rutgers University – Camden will be required to pay any debt service directly related to the facilities and properties located on the campus, with the option to purchase the property from Rutgers University at fair market value at the end of the lease Rutgers University – Camden will also enter into an agreement for utilizing central administrative services and systems provided by Rutgers University, such as the library system and information technology systems; establish the Rowan University – Rutgers Camden Board of Governors that is authorized to: approve or disapprove any decision of the board of trustees of Rowan University or the board of trustees of Rutgers University – Camden; determine policies for the organization, administration, and development of curriculum of Rowan University and Rutgers University – Camden; make joint faculty appointments to either university; determine policies for shared utilization of resources; provide curricular oversight; and develop plans and policies for the operation and governance of health science facilities; provide protections for all employees of University Hospital and the institutions of higher education that may be impacted by the bill, with regard to pension rights, health benefits, collective bargaining, and civil service status, as well as the tenure, rank, or academic track of any person holding a faculty position; establish Rowan University as a public research university; create a Labor Management Committee within 60 days of the bill’s effective date to review all proposed restructuring and reorganization plans and make recommendations to the Board of Governors of Rutgers University regarding personnel and labor relations related to the proposed plans; and create the University Hospital Community Oversight Board to ensure that the mission of the hospital and the intent of the “Newark Agreements” are upheld The bill has an effective date of July 1, 2013 and provides that the provisions will first apply to the 2013-2014 academic year FISCAL ANALYSIS EXECUTIVE BRANCH The Executive does not expect Senate Bill No 2063 (2R) will impose any substantial impact on the State in FY 2012-2013, and suggests that any fiscal impact to the State will start in FY 2013-2014, when the bill becomes effective on July 1, 2013 The Executive’s analysis SCS for S2063 [2R] anticipates costs and savings to be significantly less than might be expected for the establishment of a new or separate institution The Executive expects the merger of UMDNJ with Rutgers University to produce one-time savings Combining similar functions and services should result in administrative overhead savings, though the specific amount of savings is unidentified The Executive notes that a percent level of annual operating savings would equal $4.3 million The institutions’ current Federal Indirect Cost Recovery Rate for on-site research is 58 percent for UMDNJ and 55 percent for Rutgers The Executive notes that if the post-merger rate becomes 58 percent, that would result in additional funds that would help overcome one-time merger expenses The Executive states that one-time expenses will arise from the restructuring, in the areas of human resources administration, information technology, accreditation, and other areas However, no specific costs are identified and the Executive states that the universities, not the State, will bear these expenses The Executive notes that these expenses will not be borne by the State, but instead be absorbed by the universities over several fiscal years It further observes that the bill’s impacts will not, by themselves, trigger a significant change in the level of State aid to higher education The Executive believes that the transfer of debt to Rutgers University from UMDNJ and the subsequent refunding of that debt by Rutgers University would produce an estimated net present value savings1 of $43.6 million due to low interest rates The Executive expects Rutgers University to retain its current bond rating after the assumption of UMDNJ debt The Executive believes that the transfer of debt to Rowan University from the School of Osteopathic Medicine at UMDNJ and the subsequent refunding of that debt by Rowan University would produce an estimated net present value savings of $3.6 million The Executive also expects Rowan University to retain its current bond rating after the assumption of School of Osteopathic Medicine debt The Executive suggests, but does not conclude, that if Rowan University would be compelled to refund its debt immediately, because its current bond rating is higher than that of UMDNJ, a savings could result The Executive also believes that University Hospital can refund $110.0 million in outstanding debt to produce an estimated net present value savings of $8.5 million The Executive assumes that the bonds could be refunded by bonds backed by the credit of the State, an action that is neither permitted nor prohibited by the bill OFFICE OF LEGISLATIVE SERVICES The OLS cannot estimate the fiscal impact of Senate Bill No 2063 (2R) The OLS notes that the costs and savings will be borne primarily by the institutions impacted by the legislation, Rutgers University, Rowan University, and University Hospital The impact, if any, on State resources, is conjectural Debt Considerations Without access to analysis conducted by bond counsel, financial advisors, and other experts retained by Rutgers University and Rowan University, the OLS does not have the necessary information to make an accurate and complete assessment of the outstanding debt obligations, and of the bill’s impact on transferring those obligations and subsequent events necessitated by their transfer It should be noted that a net present value savings of $40 million is not the same as a budget savings of $40 million in a given fiscal year SCS for S2063 [2R] Rutgers University is assuming the debt obligations of UMDNJ, except for the School of Osteopathic Medicine and University Hospital According to UMDNJ, these debt obligations equal $494.3 million, which Rutgers University would need to refinance The OLS cannot estimate the cost of restructuring these debt obligations, including any issuance costs and early repayment Without further information that is currently unavailable, the OLS cannot estimate the potential for restructuring the debt obligations at a lower interest rate, nor any savings that could result Rowan University is assuming the debt obligations of the School of Osteopathic Medicine According to UMDNJ, these debt obligations total $58.2 million, with debt service payments of almost $2.0 million The OLS cannot determine if the entire debt obligation of $58.2 million transfers to Rowan University or some portion will become part of Rutgers University Additionally, the OLS is unable to determine whether Rowan University will be required to restructure its debt upon assuming any debt associated with the School of Osteopathic Medicine According to UMDNJ, University Hospital has $110.0 million in outstanding bond debt, with debt service costs of $6.7 million University Hospital may not be able to support such debt and may thus require additional State support In addition, the Executive assumes that the refunding of University Hospital debt can be achieved through bonds backed by the credit of the State While this is neither permitted nor prohibited under the bill, the OLS notes that such an action may have implications for the State’s credit rating and borrowing costs University Hospital also has $101.2 million in liabilities that represent the amount of funds the hospital borrowed from other institutions of UMDNJ, such as the New Jersey Medical School, to cover the cash flow of its operations Because the bill prohibits University Hospital assets, liabilities, and funds from being consolidated or commingled with those of Rutgers University, it is unclear where the ultimate responsibility for this portion of the hospital’s liabilities lies The State, given its history of supporting University Hospital operations, may need to repay all or a portion of the $101.2 million through additional State appropriations Rutgers University currently has an estimated $950 million in bond debt obligations, with some portion associated with Rutgers University – Camden Rutgers University will lease the property and assets to Rutgers University – Camden for $1 per year, and the lease agreement also provides that Rutgers University – Camden will pay Rutgers University any debt service associated with the campus According to Rutgers University, transferring control of the property and assets would require defeasance of their bonds Rutgers University estimates the cost of defeasing all of its bonds at $155 million, which includes repaying bondholders, early repayment penalties, transaction costs, and fees to underwriters, financial advisors, and attorneys Without access to further information and analyses, the OLS cannot conclude whether the transfer of the property and assets of the campus requires defeasance of the bonds nor can it estimate how this action would affect either Rutgers University or Rutgers University – Camden Additionally, Moody’s estimates that Rutgers University has “about $64 million in debt outstanding related to its Camden facilities and has another roughly $60 million that it has internally financed and expects to be reimbursed from the proceeds of a bond issue in early 2013.” The OLS cannot verify the debts associated with Rutgers University – Camden Bond Rating The Executive expects Rutgers University and Rowan University to retain their long-term ratings after the reorganization, which might reduce the cost of the UMDNJ debt those institutions are assuming However, Moody’s Investment Services has noted that the reorganization plan may likely have direct implications for both institutions Currently, Moody’s SCS for S2063 [2R] rates UMDNJ’s bonds “Baa1,” with a “negative” outlook Rutgers University has a higher bond rating of “Aa2” and a “stable” outlook With Rutgers University assuming the debt obligations of UMDNJ under the bill, this could have an impact on the credit rating of Rutgers University that may affect future borrowing costs In addition, the impact on Rutgers University’s bond rating is unclear when Rutgers University – Camden becomes responsible for some amount of Rutgers University’s current debts and is able to issue its own debt, and if it were to receive a separate line-item in the annual State appropriations act Rutgers University notes that this loss of control over the use of appropriations to its campus would mean less financial flexibility and lower revenues to support debt service payments for the entire university On June 1, 2012, Moody’s revised Rowan University’s outlook from stable to negative, to reflect the institution’s “high leverage relative to its balance sheet and operations, and the pressure that Rowan University has to continue to generate revenue and operating cash flow to provide adequate debt service coverage consistent with its rating level.” The OLS notes that the ability of Rowan University to absorb debt attributable to the School of Osteopathic Medicine may impact the university’s bond rating and borrowing costs Operational Expenditures Rutgers University/UMDNJ The Executive assumes the post-reorganization Rutgers University may have a 58 percent Federal Indirect Cost Recovery Rate, instead of the current 55 percent, for on-site research to offset some of the costs of the reorganization UMDNJ notes that while it is reasonable for Rutgers University to seek a higher rate in the next proposal, any rate revisions would require discussion and negotiation with the federal Department of Health and Human Services It is not clear whether Rutgers University will secure a higher reimbursement rate for all research grants, or whether only those grants that relate to former components of UMDNJ will secure the higher rate The OLS cannot determine whether the Federal Indirect Cost Recoveries will help overcome one-time merger expenses, discussed below, and provide additional long-term resources for the post-reorganization Rutgers University University Hospital The OLS notes that given University Hospital’s history, additional State support may be necessary to maintain operations University Hospital has incurred operating losses in the past several years, ranging as high as $57.1 million in FY 2007-2008 to a low of $2.5 million in FY 2010-2011 As a result, in FY 2009-2010, the State appropriated $30.9 million for “UMDNJ – Stabilization” to support University Hospital operations Due to the operating losses and University Hospital’s potential inability to continue operations without supplemental funds, the State may need to appropriate indeterminate additional funds to maintain University Hospital operations Under the bill, University Hospital is allowed to enter into an agreement with a non-profit corporation to operate and manage or assist in the operation and management of University Hospital, without a competitive bidding process The scope of the agreement has yet to be determined and therefore, the impact of the agreement is indeterminate Rutgers University – Camden According to Moody’s, a “negative” outlook indicates the possibility of a downgrade SCS for S2063 [2R] Under the bill, Rutgers University will continue to hold title to the property and assets located on Rutgers University – Camden but will relinquish responsibility and control over their maintenance, insurance, and development The OLS notes that the funds Rutgers University – Camden will need to expend to maintain, insure, and develop the property and assets on the campus for the duration of the 99-year lease, are indeterminate Rutgers University – Camden will be required to utilize the central administrative services and systems provided by Rutgers University, such as information technology systems and the library system, at a negotiated rate of reimbursement Currently, these services and systems are shared without an allocation of cost or usage per campus The rate of reimbursement has yet to be determined Rowan University The bill provides that Rowan University would be designated a “public research university,” making it only one of three public institutions of higher education in the State to have that status This change in designation has an indeterminate fiscal impact because there is no State funding formula for the senior public institutions that appropriates additional funds to institutions with “public research university” status Rowan University may need significant infrastructure improvements, the extent and costs of which are currently indeterminate, to maintain the accreditation of the School of Osteopathic Medicine The American Osteopathic Association (AOA) raised concerns about Rowan University not having the infrastructure and systems in place, as UMDNJ already does, to train primary care physicians and deliver medical care to citizens of the State Additionally, the AOA is concerned that Rowan University has inadequate or non-existent research facilities that is needed to support the nationally and internationally recognized research programs at the School of Osteopathic Medicine The AOA indicated that these concerns may jeopardize the School of Osteopathic Medicine’s accreditation from the AOA Commission on Osteopathic College Accreditation Transition Savings/Expenses Rutgers University indicates that the transition costs associated with acquiring and integrating the University of Medicine and Dentistry of New Jersey (UMDNJ), except for the School of Osteopathic Medicine and University Hospital, range from $20 million to $40 million These costs may include, but are not limited to: hiring an outside transition team to facilitate the process; combining payroll and other human resource functions; integrating computer and information technology functions; identifying and reducing personnel redundancies; and ensuring Health Insurance Portability and Accountability Act (HIPAA) compliance The OLS acknowledges the likelihood of these transition costs, but cannot confirm Rutgers University’s estimates The transition costs to Rowan University of acquiring and integrating the School of Osteopathic Medicine from UMDNJ are undetermined The costs may include, but are not limited to: hiring an outside transition team to facilitate the process; combining payroll and other human resource functions; integrating computer systems and information technology functions; identifying and combining personnel staffing; and ensuring HIPAA compliance SCS for S2063 [2R] Self-Insurance Reserve Fund The OLS cannot estimate the cost that University Hospital will incur to obtain insurance to cover claims Currently, UMDNJ participates in the Self-Insurance Reserve Fund, which it maintains with the Department of the Treasury to pay claims related to professional and comprehensive general liability, directors’ and officers’ liability, auto liability, and insurance premiums UMDNJ also purchases commercial excess liability insurance coverage Monies in the Self-Insurance Reserve Fund, existing commercial excess liability insurance coverage, and coverage provided by the State’s Tort Claims Act are used to meet the cost of claims against UMDNJ, which currently totals $138.4 million The State has ultimate liability for any claims in excess of the fund’s assets Under the bill, Rowan University will participate in the SelfInsurance Reserve Fund, thereby ensuring coverage for the School of Osteopathic Medicine However, University Hospital will not be participating and may be required to obtain its own insurance for claims against its employees and the hospital The size and cost of obtaining sufficient insurance are indeterminate Furthermore, for reasons stated earlier, the State may be required to increase or supplement State appropriations to support these University Hospital expenses in order to maintain hospital operations The OLS concludes by noting the possibility, given the complexities of the bill and the entities to which it applies, and given the absence of significant information from which to assess the bill’s fiscal impact, that the bill could cause significant unanticipated costs to each or all of the respective institutions of higher education and University Hospital Should this occur and should such costs be significant in relation to the financial resources under the direct control of the entity, then the entity’s dependence upon State financial support for continued operations would also increase by the extent to which its own resources were insufficient Section: Education Analyst: Jonathan Tang Associate Fiscal Analyst Approved: David J Rosen Legislative Budget and Finance Officer This fiscal note has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.) ... system of higher education The key provisions of the bill: transfer all schools, institutes, and centers of the University of Medicine and Dentistry of New Jersey (UMDNJ), except for the School of. .. of which cannot be determined BILL DESCRIPTION Senate Bill No 2063 (2R) of 2012, the ? ?New Jersey Medical and Health Sciences Education Restructuring Act,” implements numerous changes to the State? ??s... estimate of such costs In addition, Rutgers University may be required to refund $494.3 million of outstanding debt transferred from the University of Medicine and Dentistry of New Jersey (UMDNJ)