St. Francis Hospital, Inc. Columbus, GA Section 242 Mortgage Insurance Program for Hospitals Office of Audit, Region 4 Audit Report Number: 2015-AT-1009 Atlanta, GA September 3, 2015 To: Roger Miller, Deputy Assistant Secretary for Healthcare Programs, HP Dane Narode, Associate General Counsel for Enforcement, CACC Craig T. Clemmensen, Director, Departmental Enforcement Center, CACB //signed// From: Nikita Irons, Regional Inspector General for Audit, 4AGA Subject: St. Francis Hospital, Inc., Did Not Comply With the Executed Regulatory Agreement and Federal Regulations for the HUD Section 242 Program Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) final results of our review of St. Francis Hospital’s Section 242 program. HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on recommended corrective actions. For each recommendation without a management decision, please respond and provide status reports in accordance with the HUD Handbook. Please furnish us copies of any correspondence or directives issued because of the audit. The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its publicly available reports on the OIG Web site. Accordingly, this report will be posted at http://www.hudoig.gov. If you have any questions or comments about this report, please do not hesitate to call me at 404-331-3369. Audit Report Number: 2015-AT-1009 Date: September 3, 2015 St. Francis Hospital, Inc. Did Not Comply With the Executed Regulatory Agreement and Federal Regulations for the HUD Section 242 Program Highlights What We Audited and Why We audited St. Francis Hospital, Inc. because the U.S. Department of Housing and Urban Development (HUD), Office of Hospital Facilities, requested immediate assistance from HUD’s Office of Inspector General (OIG) to review suspected violations of the hospital’s regulatory agreement and rider (including covenants). Our objective was to determine whether the hospital complied with the executed regulatory agreement and HUD requirements for its Section 242 program. The review was also consistent with our mission to prevent and detect fraud in HUD programs under OIG’s strategic plan. What We Found The hospital did not comply with the regulatory agreement and Federal regulations. Specifically, it submitted inaccurate financial information, improperly disbursed mortgage proceeds, incurred an unauthorized liability, and subjected mortgage funds to bank sweeps. This condition occurred because hospital management did not implement adequate controls and lacked internal controls and written policies and procedures to ensure that the HUD-insured mortgage was administered according to its executed regulatory agreement and HUD requirements for its Section 242 program. Additionally, members of the hospital’s board of trustees, including its chairman, had potential conflicts of interest through employment with and serving on the board of the bank from which the hospital obtained a line of credit. As a result, $21.4 million in proceeds from the HUD-insured mortgage and HUD’s collateralized properties were not disbursed properly and the multifamily insurance portfolio was subjected to increased risk. Also, HUD depended on inaccurate financial information to approve the $29.8 million mortgage increase. What We Recommend We recommend that HUD’s Office of Healthcare Programs require the hospital to (1) repay $21.4 million in improperly disbursed mortgage funds, (2) resolve the apparent conflicts of interest between its board of trustees members and the bank, and (3) improve its internal controls and implement policies and procedures to provide accurate and complete reporting of financial information to ensure compliance with Federal regulations and HUD requirements. We also recommend that the Departmental Enforcement Center pursue administrative actions, as appropriate, against the responsible parties for the regulatory violations cited in this report. Additionally, we recommend that HUD’s Office of General Counsel for Program Enforcement pursue civil remedies, if legally sufficient, against responsible parties. Table of Contents Background and Objective......................................................................................3 Results of Audit ........................................................................................................4 Finding: St. Francis Hospital, Inc., Did Not Comply With Its Executed Regulatory Agreement and Federal Regulations for the HUD Section 242 Program .................... 4 Scope and Methodology ...........................................................................................9 Internal Controls ....................................................................................................11 Appendixes ..............................................................................................................13 A. Schedule of Questioned Costs ............................................................................ 13 B. Auditee Comments and OIG’s Evaluation ........................................................ 14 2 Background and Objective Section 242 of the National Housing Act enables the affordable financing of hospital projects by reducing the cost of capital and significantly enhancing the credit of hospitals that qualify for mortgage insurance. The program improves access to quality health care, reduces the cost of hospital care, supports the U.S. Department of Housing and Urban Development’s (HUD) community development mission, and contributes revenues to the General Insurance Fund. The Office of Hospital Facilities is an office within HUD’s Office of Healthcare Programs that handles the national operations of the Section 242 mortgage insurance program for hospitals. The Office of Hospital Facilities typically works to determine need and financial feasibility of large, complex hospital projects, while also monitoring the financial performance of hospitals in HUD’s portfolio to prevent loan defaults and claims. In June 2011, St. Francis Hospital, Inc., a nonprofit, community hospital based in Columbus, GA, applied for a Federal Housing Administration loan under Section 242 mortgage insurance to renovate and expand its hospital facility. The hospital’s project involved renovating the existing buildings and building a new clinical services tower, medical office building, and central energy plant. HUD approved the mortgage insurance application in September 2011 and executed the assignment of commitment in November 2011 for $210 million. On June 23, 2014, the hospital received an additional $29.8 million mortgage increase, 1 which HUD supported in the original project scope, for an obstetric project that the hospital started in 2013. According to the Office of Hospital Facilities, the final inspection report from HUD’s Office of Architecture and Engineering showed that the project was completed on June 24, 2014. The HUD-insured mortgage had not received final endorsement during the audit. On November 4, 2014, the hospital notified HUD of accounting irregularities and later publicly announced $30 million in financial misstatements involving overstated revenues and understated expenses. Based on this issue, in December 2014, the Office of Housing Facilities requested our assistance to review the hospital for possible violations of the regulatory agreement and Section 242 program requirements. Our audit objective was to determine whether the hospital complied with its executed regulatory agreement and HUD requirements for its Section 242 program. Specifically, we wanted to determine whether (1) the hospital submitted accurate financial information to HUD to obtain the Section 242 mortgage increase and (2) used mortgage proceeds in compliance with the regulatory agreement and HUD requirements. 1 The original mortgage amount, $210 million, plus the mortgage increase of $29.8 million resulted in a total mortgage of approximately $240 million for the hospital. 3 Results of Audit Finding: St. Francis Hospital, Inc., Did Not Comply With Its Executed Regulatory Agreement and Federal Regulations for the HUD Section 242 Program St. Francis Hospital, Inc., did not comply with the regulatory agreement and Federal regulations for the Section 242 program. Specifically, it submitted inaccurate financial information to HUD, improperly incurred a liability and disbursed mortgage proceeds to an affiliated party, executed an improper addendum for a line of credit, and subjected mortgage funds to bank sweeps. This condition occurred because hospital management did not implement adequate controls and lacked internal controls and written policies and procedures to ensure that the HUD-insured mortgage was administered according to its executed regulatory agreement and HUD requirements for the Section 242 program. Additionally, members of the hospital’s board of trustees, including its chairman, had potential conflicts of interest through employment with and serving on the board of the bank from which the hospital obtained a line of credit. As a result, proceeds from the HUD-insured mortgage were not used for their intended purposes, and the multifamily insurance portfolio was subjected to increased risk due to $21.4 million in improper disbursements. Also, HUD depended on inaccurate financial information to approve the $29.8 million mortgage increase. The Hospital Submitted Inaccurate Information to HUD The hospital did not comply with its executed regulatory agreement and Federal regulations for the HUD Section 242 program when it submitted inaccurate information to HUD. The hospital misstated several financial statement accounts in 2012 and 2013, which concealed its true financial condition, when it applied for the $29.8 million mortgage increase in December 2013. In November 2014, the hospital notified HUD that it had identified accounting irregularities and restated the financials for 2012 through September 2014. For example, in 2013, the operating loss was understated by $9.6 million and restated at $9.9 million and patients’ accounts receivable was overstated by $16.7 million and restated as $39.7 million. Because of the misstatements, the hospital replaced its chief financial officer. The former chief financial officer’s signature on those misstated financials provided to HUD represented an improper certification. The hospital’s accounting officials stated that the hospital lacked internal controls and written financial policies and procedures. This allowed inaccurate financial information to be provided to executive management, board members, external auditors, and HUD. The amendment to the regulatory agreement and 24 CFR (Code of Federal Regulations) 242.58(d) state that the annual audited financial statements must identify any changes in accounting policies and their financial effect on the balance sheet and the income statement. HUD Handbook 4370.2, paragraph 2- 3(B), requires that books and accounts be complete and accurate and the books of original entry be kept current at all times for HUD-insured projects. 4 HUD relied on the inaccurate financial information to approve the $29.8 million mortgage increase in June 2014. According to one HUD official from the Office of Hospital Facilities, HUD would not have approved the mortgage increase if HUD officials had known about the hospital’s financial problems. The Hospital Improperly Incurred a Liability and Disbursed Mortgage Proceeds The hospital did not comply with its executed regulatory agreement and Federal regulations for the HUD Section 242 program when it improperly incurred a liability and disbursed mortgage proceeds to an affiliated party. It inappropriately incurred a $15 million liability from a line of credit loan that was executed under St. Francis Hospital Foundation, Inc., without HUD’s knowledge or approval. On October 18, 2013, the Foundation executed the line of credit agreement for general medical and surgical care purposes. The Foundation is an affiliate of the hospital but it is not a party to the HUD-insured mortgage under the regulatory agreement. The hospital transferred the $15 million received from the line of credit to its operating account and posted the debt in its general ledger as due to the Foundation. Regulations at 24 CFR 242.63 state that the borrower must not enter into any long-term debt, short-term debt (including receivables or line of credit financing), equipment leases, or derivative-type transactions that do not comply with policies and procedures established by HUD. In addition, the hospital inappropriately disbursed $11.8 million of the $29.8 million mortgage proceeds to the Foundation before the final endorsement of the HUD-insured mortgage without HUD authorization. Specifically, it improperly used $7.5 million of the mortgage proceeds to make a payment on the Foundation’s $15 million line of credit and inappropriately transferred $4.3 million of the mortgage proceeds to the Foundation’s investment account. Provisions of the regulatory agreement in section 23(d)(i) required HUD approval to distribute assets to excluded affiliates prior to final endorsement. According to HUD officials, the hospital did not inform them of the unauthorized $7.5 million payment to the Foundation’s credit line until after the payment was made and after the hospital announced its financial misstatements in November 2014. Further, HUD officials stated they had no knowledge of the $4.3 million transfer. Therefore, the hospital violated its regulatory agreement when it improperly disbursed $11.8 million in mortgage proceeds. The Hospital Executed an Improper Addendum for Its Line of Credit The Hospital executed an addendum to the promissory note for its line of credit with Columbus Bank and Trust Company, a Division of Synovus Bank, which exceeded the limit set by the regulatory agreement. The hospital executed the addendum on March 11, 2014, and increased its line of credit from $8 million to $13 million, which exceeded its 15-day adjusted operating expenses, without HUD’s approval. Based on the 2013 audited financial statements, the hospital’s 15-day adjusted operating expenses was approximately $10.5 million. Regulations at 24 CFR 242.63 state that the borrower must not enter into any long-term debt, short-term debt (including receivables or line of credit financing), equipment leases, or derivative-type transactions that do not comply with policies and procedures established by HUD. According to the regulatory agreement (rider 1), section 29(B)(2), the short term line of credit may not exceed 15 days of adjusted operating expenses, as reflected on the most recent audited financial statements. 5 The Hospital Improperly Transferred Proceeds from HUD-insured Mortgage and HUD Collateral The hospital transferred $10.5 million from proceeds of the mortgage increase and the sale of HUD’s collateralized properties 2 to its operating account, which allowed Columbus Bank and Trust to sweep more than $9.6 million in hospital funds. The funds were swept from August 7 through November 10, 2014, to repay the hospital’s $13 million line of credit. The bank generally swept the funds on the same day the hospital made the fund transfers (see table). Transfer from Transfer from Ending balance: Beginning balance: hospital investment hospital operating hospital operating Date hospital operating account to hospital account to loan account account operating account system (bank swept) 08/07/2014 $ 88,569 $3,000,000 ($2,417,100) $ 85,242 09/04/2014 $155,468 $1,000,000 ($ 928,400) $142,449 10/02/2014 $ 35,039 $1,500,000 ($1,774,600) $190,756 10/03/2014 $190,756 $1,500,000 ($ 909,600) $102,324 10/30/2014 $ 77,369 $1,000,000 ($ 911,100) $295,407 11/06/2014 $239,843 $2,500,000 $64,885 11/10/2014 $183,916 ($2,697,900) $390,662 Totals $10,500,000 ($9,638,700) The hospital’s daily balances from the operating bank statements showed that the hospital did not have adequate funds to sweep from its operating account without the transferred funds from the proceeds of the mortgage and sale of HUD’s collateralized properties. The regulatory agreement, section 19, states that the hospital and St. Francis Hospital Affiliated Services, Inc. will not execute any agreement with provisions contradicting the provisions of the regulatory agreement. Thus, the execution of the sweep addendum violated this section and section 4, which does not allow the transfer of mortgaged property without HUD’s approval. Therefore, $9.6 million was swept improperly and was not used according to the regulatory agreement. The above conditions occurred because hospital management did not implement adequate controls to ensure that the HUD-insured mortgaged property was administered according to the executed regulatory agreement and HUD requirements for the Section 242 program. The hospital’s accounting officials stated that the hospital lacked internal controls and written 2 On October 17, 2014, the hospital received a wire transfer of $3,016,639.67 for the sale proceeds of HUD’s collateralized properties on William Road in Columbus, GA. 6 policies and procedures. As a result, proceeds from the HUD-insured mortgage and HUD’s collateralized properties were not properly disbursed, and the multifamily insurance portfolio was subjected to increased risk due to $21.4 million 3 in improper disbursements. Hence, HUD did not have an accurate picture of the hospital’s financial position and its ability to pay the $240 million HUD-insured mortgage, which put HUD at risk of having to pay a potential mortgage insurance claim. Hospital Board Members Had Potential Conflicts of Interest with an Affiliated Bank Three members of the hospital’s board of trustees, including the chairman, had potential conflicts of interest through employment with and serving on the boards of the Synovus Bank and Columbus Bank and Trust, from which the hospital obtained the revolving $13 million working capital line of credit. The hospital requested that HUD acknowledge and waive the potential conflicts of interest for two of the board members. However, HUD did not waive the conflicts. The hospital board’s former finance committee chairman, who was replaced in March 2015, was employed by Synovus Financial Corporation as its executive vice president-chief risk officer; and the other hospital board member was also a board member of Synovus Financial Corporation. HUD officials also identified the hospital board chairman as an investor in Synovus Financial Corporation stock in 2012. Our review confirmed that he was also a board member of Synovus Financial Corporation from May 1999 to April 2012 and was on the board of directors at Columbus Bank and Trust from 2004 to 2008. He was appointed to the hospital board in 2004 and appointed chairman on January 1, 2014. The Internal Revenue Service conflict of interest guidance for tax-exempt organizations in the instructions for completing Form 1023 (the Application for Exemption under Section 501(c)(3)), provides that after disclosure of the financial interest and all material facts, board or committee members shall decide if a conflict of interest exists. It also defines an interested person as any director, principal officer, or member of a committee with governing board delegated powers, who has a direct or indirect financial interest through business or investment. The hospital executed an unauthorized addendum to the promissory note with Columbus Bank and Trust and also transferred $10.5 million of the mortgage proceeds and sale of HUD’s collateralized properties to its operating account, which subjected more than $9.6 million in hospital funds to sweeps by the bank. The conflict of interest may have influenced the hospital’s execution of the addendum to the promissory note and decision to transfer the $10.5 million into the operating account. Conclusion The hospital (1) submitted inaccurate financial information (2) improperly incurred a liability and disbursed mortgage proceeds to an affiliated party, (3) executed an improper addendum for a line of credit, and (4) subjected mortgage funds to bank sweeps. These conditions occurred because hospital management did not implement adequate controls and lacked internal controls and written policies and procedures to ensure that the HUD-insured mortgaged property was administered according to its executed regulatory agreement and HUD requirements for the Section 242 program. The hospital also allowed members with potential conflicts of interest to 3 The $21.4 million is composed of the $7.5 million used to pay the line of credit, $4.3 million transferred to the Foundation, and the $9.6 million subjected to bank sweeps. 7 serve on its board of trustees. As a result, proceeds from the HUD-insured mortgage were not used for their intended purposes, and the multifamily insurance portfolio was subjected to increased risk due to $21.4 million in improper disbursements. Also, HUD depended on the inaccurate financial information to approve the $29.8 million mortgage increase. Recommendations We recommend that HUD’s Office of Healthcare Programs require the hospital to 1A. Repay to its investment account from non-project funds $11,800,000 of the mortgage increase that was not disbursed according to its executed regulatory agreement and HUD requirements for its Section 242 program. 1B. Repay to its investment account from non-project funds $9,638,700 of the mortgage increase and the sale of HUD’s collateralized properties that was not disbursed according to its executed regulatory agreement and HUD requirements for its Section 242 program. 1C. Discontinue and avoid incurring current or future debts associated with the HUD Section 242 mortgage that do not comply with policies and procedures established by HUD. 1D. Resolve the apparent conflicts of interest between its board of trustees members and the bank to eliminate questionable connections. 1E. Improve its internal controls and implement policies and procedures to ensure compliance with its executed regulatory agreement, Federal regulations, and HUD requirements for (1) properly administering the HUD-insured mortgage proceeds and (2) providing accurate and complete reporting of financial information. We also recommend that the Director of HUD’s Departmental Enforcement Center 1F. Pursue administrative actions, as appropriate, against the responsible parties for the regulatory agreement violations cited in this report. We further recommend that HUD’s Associate General Counsel for Program Enforcement 1G. Determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act against the hospital’s former chief financial officer for incorrectly certifying to the accuracy of the financial information submitted to obtain the Section 242 program mortgage increase. 8 Scope and Methodology We performed our review from January through June 2015 at St. Francis Hospital located at 2122 Manchester Expressway, Columbus, GA. Our review covered the period January 1, 2010, through December 31, 2014. To accomplish our objectives, we • Reviewed Federal regulations and HUD handbooks; • Reviewed the executed regulatory agreement and rider (including covenants); • Reviewed applicable hospital policies and procedures; • Reviewed HUD correspondence and independent audit reports on the hospital; • Reviewed hospital operating licenses, tax returns, and mortgage and financial records; • Reviewed hospital board members’ relationships with an affiliated bank; • Interviewed HUD’s Office of Healthcare Programs officials; and • Interviewed current and former hospital officials and staff. During the review period, in September 2011, the hospital obtained a $210 million loan under Section 242 mortgage insurance to renovate and expand its hospital facility. In June 2014, the hospital received a $29.8 million HUD-insured mortgage increase for an obstetric project that it started in 2013. We reviewed financial and bank records for the $29.8 million and found that the hospital inappropriately transferred $11.8 million of the mortgage proceeds in July and September 2014. From August through November 2014, the hospital made six fund transfers totaling $10.5 million from its investment account to its operating account, from which we determined that funds totaling more than $9.6 million were improperly swept. We used the general ledger information from the hospital’s financial system to determine how funds from the Foundation’s line of credit and the mortgage increase proceeds were posted. However, we did not rely on the general ledger information for our conclusions or assess the reliability of the computer-processed data. The conclusions were based on additional reviews performed during the audit. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit 9 objective(s). We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 10 Internal Controls Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about the achievement of the organization’s mission, goals, and objectives with regard to • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls comprise the plans, policies, methods, and procedures used to meet the organization’s mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objective: • Reliability of financial data – Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. • Compliance with laws and regulations – Policies and procedures that management has implemented to reasonably ensure that the use of resources is consistent with laws and regulations. We assessed the relevant controls identified above. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, the reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws and regulations on a timely basis. Significant Deficiencies Based on our review, we believe that the following items are significant deficiencies: • The hospital did not have adequate controls over the reliability of financial reporting when it disclosed financial misstatements and improperly used $21.4 million in mortgage proceeds (see finding). 11 • The hospital did not implement adequate controls to ensure compliance with the executed regulatory agreement and requirements of the Section 242 program (see finding). 12 Appendixes Appendix A Schedule of Questioned Costs Recommendation number Ineligible 1/ 1A $11,800,000 1B $ 9,638,700 Totals $21,438,700 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. 13 Appendix B Auditee Comments and OIG’s Evaluation Ref to OIG Evaluation Comment 1 14 Comment 1 Comment 1 Comment 2 Comment 3 15 Comment 4 Comment 5 16 Comment 5 Comment 6 Comment 6 17 Comment 7 Comment 8 Comment 9 18 Comments 3 and 4 Comment 9 19 OIG Evaluation of Auditee Comments Comment 1 The hospital acknowledged that its former chief financial officer and individuals acting under his direction took various actions to cause its financial statements to be misstated. The hospital also commented that its board of trustees had no knowledge of the misstatements and was entitled to rely on those financials, which were audited by an independent accounting firm and reported as accurate. The hospital further commented that the board did not submit inaccurate information to obtain the mortgage increase. It also suggested changing the sub- section title and second sentence. The accuracy of financial information is the responsibility of the board and hospital management through a system of checks and balances between themselves and external auditors. The finding discussed the lack of internal controls, policies, and procedures in this area that should have provided those checks and balances. Essentially, the board should have known about the misstatements and ensured corrections were made before the information was released. The board being unaware of the misstatements contributed to the condition; therefore, the board is ultimately responsible for the inaccurate financial information that was submitted to HUD. HUD relied on the financial information submitted to approve the $29.8 million mortgage increase. However, OIG considered the hospital’s request, and revised the sub-section title to read “The Hospital Submitted Inaccurate Information to HUD.” Comment 2 The hospital concurred that it received the proceeds from the Foundation’s line of credit as a loan, but specified that it was the Foundation and not the hospital that obtained the line of credit. The hospital stated that it used the proceeds from the Foundation’s line of credit to make payments to vendors and hospital operational costs. OIG agrees that it was the Foundation, and not the hospital, that executed the $15 million line of credit on October 18, 2013, and revised the sentence accordingly. OIG reviewed how the hospital disbursed the $28.2 million received from the mortgage increase and identified that $11.8 million of the mortgage proceeds were disbursed to the Foundation without HUD’s prior authorization as required by the executed regulatory agreement. OIG did not review the proceeds from the Foundation’s line of credit. Hospital’s management denied our request for the Foundation’s general ledger; therefore, we cannot determine whether funds from the Foundation’s line of credit were used for eligible project and hospital operating costs. Comment 3 The hospital disagreed that it improperly transferred the $4.3 million to the Foundation’s investment account because the account was subject to the deposit control agreement with HUD. 20 The deposit control agreement referenced by the hospital was made with the lender and not HUD. In addition, although the account is subject to the deposit control agreement, the $4.3 million disbursement was still subject to the disbursement requirements stipulated in the executed regulatory agreement, which states that the mortgagor may distribute assets without prior HUD approval to excluded-affiliates and/or stockholders if the final endorsement of the HUD- insured note has occurred. Final endorsement had not occurred; therefore, the hospital was not in compliance with the executed regulatory agreement when it transferred $4.3 million to the Foundation’s investment account without prior HUD approval. Comment 4 The hospital disagreed with our reference to improper use of the mortgage proceeds in the report and believed that all mortgage proceeds were used for project expenditures. In addition, the hospital stated that it has obtained two cost certification reports, which confirmed that all of the mortgage proceeds were used for the project. It also provided copies of the cost certification reports. OIG did not dispute the hospital’s project expenditures; we maintain that the hospital did not disburse $11.8 million of the mortgage increase proceeds according to the executed regulatory agreement. HUD rejected the first cost certification report the hospital obtained and the second report was still in draft form when we held the exit conference on July 22, 2015. The attachments provided by the hospital are not included in appendix B, but are available upon request. However, we considered the hospital’s request, and will replace references to the use of mortgage proceeds with disbursed or disbursement of mortgage proceeds. Comment 5 The hospital disagreed with the description and illustrations, and the financial analysis of the transfers of the mortgage proceeds outlined in the draft report. The hospital explained that the fund transfers and sweeps were part of its cash management systems, dating back to 2007. The hospital believed that the analysis of the transfers was inaccurate based upon its cash log, certification audits, vendor payments and net changes to the line of credit. OIG is aware of the line of credit draws and automated daily sweeps of the hospital’s operating account from the bank as a part of the hospital’s cash management systems. However, the hospital executed a line of credit that exceeded the regulatory agreement’s limitation without HUD’s approval. Further, the hospital financial officials authorized the transfers of the proceeds from the mortgage increase and the sale of HUD’s collateralized properties from the hospital investment account to the hospital operating account, which were subjected to the automated sweeps by the bank to repay the line of credit loan that was not executed according to the regulatory agreement. 21 Comment 6 The hospital commented that it maintains a conflict of interest policy for its board members and obtains financial disclosure statements from each board member on an annual basis. The hospital also stated that it provides continuous education to its board members and if there is a conflict of interest the board member recuses herself or himself from voting on a matter. It further commented that its policies and procedures were established to comply with the Internal Revenue Service ("IRS") guidance for tax-exempt organizations and are designed to avoid any improper influence on business decisions. The hospital had a conflict of interest policy and maintained the financial disclosure statements on file. The existence of the policy and maintaining the disclosure statements can help identify but does not alleviate conflicts of interest. In November 2014, HUD received written requests to waive potential conflicts of interest for two members of the hospital’s board of trustees, including one who was the board’s finance committee chairman at the time and employed by Synovus as an executive vice president and chief risk officer. Although HUD did not grant the waivers, the request letters identified that a potential conflict existed. The IRS published a suggested conflict of interest policy in the instructions for completing Form 1023 (the Application for Exemption under Section 501(c)(3)). In part, it provides that after disclosure of the financial interest and all material facts, board or committee members shall decide if a conflict of interest exists. If the hospital’s board followed these IRS procedures, the appropriate supporting information should be provided to HUD during the resolution of recommendation 1D of the report. Comment 7 The hospital commented that the draft report alleges that St. Francis' board chairman had a conflict of interest because he owned Synovus Corporation stock in 2012. It added that minority ownership in a public company does not create a conflict of interest as the chairman was not in a position to benefit personally, directly or indirectly, from St. Francis increasing its unsecured line of credit with the bank. The hospital further commented that the only time when the chairman of St. Francis was also on the bank board was several years prior to the mortgage increase in 2014, or any of the alleged transfers of payments to the bank in 2014. OIG maintains that the board chairman owned Synovus stock as recently as 2012 and no documentation has been provided to show the stock is no longer owned. The IRS conflict of interest guidance provides in part that an interested person is any director, principal officer, or member of a committee with governing board delegated powers, who has a direct or indirect financial interest through business or investment. Any supporting documentation the hospital has should be provided to HUD to clear the potential conflict of interest as discussed in recommendation 1D of the report. In addition, the transfers of mortgage proceeds and proceeds from sales were not alleged; we confirmed the improper transactions by reviewing the hospital’s bank statements and financial records. 22 Comment 8 The hospital commented that (1) the chairman was not simultaneously on both organizations’ boards when he was a bank board member, and (2) St. Francis' board chairman was never in a position to provide preferential treatment to St. Francis and did not make any decisions regarding credit or financing on behalf of the bank. The hospital further commented that any allegation that the chairman of the board had a conflict of interest that improperly influenced St. Francis to obtain an unsecured increase of $5 million from the bank or improperly transfer funds in 2014 is not supported by the undisputed evidence and should be deleted. OIG maintains that the hospital’s board chairman was in fact on both the hospital and Synovus boards simultaneously from 2004 to 2012. We confirmed that the chairman was appointed to the hospital’s board in 2004 and served on Synovus’ board from 1999 to 2012. Any supporting documentation the hospital has should be provided to HUD to resolve the potential conflict of interest as discussed in recommendation 1D of the report. Comment 9 The hospital stated that the additional board member that held simultaneous board member status for St. Francis and the bank did not have authority to make credit decisions on behalf of the bank. It further stated that individual St. Francis board members were not in a position to obtain preferential treatment for St. Francis and did not receive any personal or private gain from the bank's transactions with St. Francis. The hospital also commented that the chairman and additional board member did not have any influence over St. Francis' banking decisions and were not involved in negotiating terms from any financial institution. It further commented that the St. Francis banking relationships were handled by St. Francis executives, so the board members do not have a conflict of interest as defined by the HUD Handbook Chapter 6-2. The hospital’s board has the ultimate oversight and governance responsibilities over its executives and their functions, including banking and financial operations. Therefore, the potential conflict of interest continued to exist with Synovus. The IRS guidance for tax-exempt organizations provides that a person has a financial interest if the person has, directly or indirectly, through business, investment, or family: a. An ownership or investment interest in any entity with which the organization has a transaction or arrangement, b. A compensation arrangement with the organization or with any entity or individual with which the organization has a transaction or arrangement, or c. A potential ownership or investment interest in, or compensation arrangement with, any entity or individual with which the organization is negotiating a transaction or arrangement. 23 Any supporting documentation the hospital has should be provided to HUD during the resolution of recommendation 1D of the report. 24
St. Francis Hospital, Inc., Did Not Comply With the Executed Regulatory Agreement and Federal Regulations for the HUD Section 242 Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)