oversight

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)

                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.

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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.


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Any supporting documentation the hospital has should be provided to HUD
during the resolution of recommendation 1D of the report.




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