North Kansas City may sell its hospital in wake of financial woes

Kansas City StarJuly 25, 2012 

As a tough economy wrecked municipal budgets across the country, North Kansas City seemed to be above it all, able to afford well-kept parks, a modern community center and even a community fiberoptic network.

Now, that cash-rich reputation is history. Despite a gusher of gaming revenues from Harrah’s Casino, a spending spree has created a string of budget deficits. The city is even looking into selling its hospital.

North Kansas City in the current fiscal year is budgeted to spend $51.1 million while taking in just $40.5 million in revenues, and it’s shifting funds and dipping into dwindling reserves to cover the difference. It’s also offering employee buyouts, tweaking services and reining in ambitious plans.

“It is heart-wrenching what has happened to our city,” said former mayor Elizabeth Short.

City officials stirred things up further last month when they hired Merrill Lynch to study a possible sale of North Kansas City Hospital, founded in 1958. That move upset many of the town’s 4,200 residents and blindsided hospital officials, who have since sued to stop any sale.

Elton Smith, a North Kansas City resident, said: “There’s no question they’re in financial difficulty. That’s why they want to sell the hospital.”

The nonprofit hospital’s finances are kept separate, so its revenues don’t help the city budget. But hospital officials speculate that if sold it could bring in $500 million.

City Administrator Matt Shatto, who was hired last year in part to help fix the city’s finances, says it is absolutely not true that budget woes are behind the city’s wanting to sell.

He points out that the City Council is making strides on the budget, and that the city doesn’t need anything close to the cash a sale would provide.

“It has nothing to do with it,” he said.

A sale, Shatto insists, is being considered only to ensure the that hospital will continue to offer excellent health care.

But hospital officials say that explanation makes little sense because the hospital’s finances are sound, along with the quality of care. It’s also in good shape to deal with future changes in health care.

Regardless, a big payday from a sale has been on the minds of city officials, who at times have been miffed about not receiving any financial benefit from what has become a nearly $1 billion health care enterprise.

“We expect any potential proceeds to be very significant,” Shatto wrote in an email response to an inquiry from a North Kansas City resident. The email was provided as part of an open-records request by The Kansas City Star.

In a study and at a recent meeting with the hospital’s board of trustees, the city said it wanted to sell the hospital to a for-profit company and expected to control the disbursement of the proceeds.

According to the hospital’s executives, city officials in that meeting said they would use the money to help with pension obligations, infrastructure costs, economic development and reducing residents and business taxes.

“It suggests they want the money,” said Michael Montgomery, a physician and chairman of the board of trustees.

Hospital officials claim the city has limited authority — basically appointing the board and issuing bonds — and none that would allow a sale.

Times have changed

Not in dispute is that the days when the city seemed to have more money than it knew what to do with are over.

When Shatto got the city administrator job last year, colleagues congratulated him on how fortunate he was to work for a municipality with no money worries. But even then he knew that was no longer true and that the City Council was determined to get the city living within its means.

“It really is a different time,” he said.

An example of that is the city’s “holiday” that forgave the payment of taxes on personal property. It was supposed to last just that year — 1995. Instead, for reasons that are unclear, it stayed in effect for a decade and a half.

But those taxes are back in force because the city needs the $300,000 in annual revenue they bring. To make up for the taxes that weren’t collected all those years, the city is tapping $5.9 million from the city’s gaming fund, which most of the casino revenues go into.

That fund has received more than $170 million since 1994 — $1 for each admission for a gambling session, and a percentage of the casino’s revenue from slot machines and table games. The city also gets annual rent money from the casino, currently $3.5 million, which goes into general city funds.

The gaming fund, designed mainly for capital spending, is in danger of hitting bottom in a couple of years, and then having more demands made on it than continuing revenue will support.

The city is also doing some budget juggling: $4.5 million in the past year was given back to the gaming fund from the city library’s reserve. The money was originally given to the library to cover extra operating costs of a new building but was no longer needed, city officials said.

Ups and downs

North Kansas City was founded in 1912, and soon it had the railroads and highways that along with the Missouri River made it a commercial powerhouse. Its daytime population would swell with workers who at times outnumbered residents as much as seven to one. The businesses that hired them also fed the city’s coffers.

But by the 1990s a shift was clear. The city’s population had declined by 20 percent over the previous three decades, and some of its best corporate taxpayers had moved or closed. City officials from that era say they were paying the bills but reserve funds were too small.

State voters came to the rescue when they approved riverboat casino gambling. North Kansas City owned riverfront land to woo a casino, and it eventually signed a contract with Harrah’s Casino that would give the city a new sources of revenue.

At its peak, the revenue going into the gaming fund hit $11.5 million per year.

After a few years, the windfall’s benefits from the casino money could clearly be seen. New police cars and fire trucks were on the road. Brick-paved sidewalks were laid and parks were renovated. By 2000, there was a major residential development started with city funds, and the community center, thought to be the largest in the area, had opened.

“We are very blessed,” Councilman Merle Walker told The Star said when the center opened. “I always run into people who tell me how lucky Northtown is to have this” casino income.

But by the end of the decade, the luck was running out.

The casino still provides 43 percent of the city’s revenues when other taxes or fees for doing business in the city are included. But because of the economy and competition from other casinos, the city’s take from casino admission fees and the gambling revenue tax has declined 21 percent since 2001, to $9.1 million a year.

Just how far the city’s fortunes had fallen was discovered by Don Stielow, whose company provided North Kansas City’s trash service for more than 30 years. He was summoned a couple of years ago by the then-city administrator for a meeting that he figured would be a routine discussion about extending the trash contract. Instead, before he could sit down, he got a stunning description of the city’s finances that eventually would lead to putting the trash contract out to bid to cut costs.

“We’re broke,” the administrator told him.

“Broke” was a bit of a stretch, but the city’s financial picture was dimming. Since 2008, spending had outstripped revenue, and its reserves were being depleted.

A sluggish economy could be blamed it part. But a city flush with casino revenue had spent money freely, and some of the projects saddled it with operating losses.

For Short, the former mayor, it was disheartening but not unexpected. She left the mayor’s office in 1997 after deciding not to run again and turned over the keys to Gene Bruns, who had been elected the city’s new mayor.

“He told me, ‘You got the money and I get to spend it,’ ” she recalled.

Bruns was mayor until 2009, when he failed to win another re-election. By then he had put his stamp on the city ranging from Northgate, a new residential development that replaced blocks of rundown apartments, to luring a movie theater by having the city buy a building for it.

Beyond those projects, just a few of the other expenses included $10 million spent for properties near Armour Road and Interstate 35 for a mixed-use development the city still hopes to accomplish. Administrative offices were renovated for $433,000, and $126,000 was spent for furniture to put in them. The community center cost $14 million. The fiberoptic network was another $13.5 million.

Bruns did not respond to a message seeking comment. But he did speak at a gathering last month celebrating North Kansas City’s 100th birthday.

“If there was ever an opportunity to be the mayor of North Kansas City, I had it,” he said.

Speaking under a park shelter, paid for with gaming taxes, he told the crowd of 100 people that he helped rebuild North Kansas City thanks to millions from Harrah’s

“I had the blessing of casino money,” he said.

Shoring things up

The message now coming out of City Hall is more somber — not surprising when budgeted spending and revenue are more than $10 million apart.

City officials say those figures don’t include savings on capital projects in previous years, which would reduce that gap. And the shortfall would’ve been bigger if the City Council hadn’t made some moves last fall.

In a budget document last September, the council was told: “As the gravity of this situation has worsened we have continued to respond with restraint, looking for ways to both enhance revenues and reduce expenditures.”

The part of the budget that covers important services such as the police and fire departments was headed toward a $2.9 million deficit, so the council offered employee buyouts and imposed a pay freeze while looking for more revenue and cuts. Those moves brought that shortfall down to $300,000, and possibly less by the end of the year.

But there are separate budgets for other parts of the city government, including the community center and the fiberoptic network, that continue to have big operating losses.

The fiberoptic network, called LiNKCity, and the community center have become symbols for many North Kansas City residents of what has gone wrong.

LiNKCity was the first municipal-owned fiberoptics network in the state when it opened in 2006. Its mission was to promote economic development, education and employment opportunities.

But it has struggled, and earlier this year it had only 748 residential and business customers, with about a third of those paying low-usage rates of $24.95 or less a month. Rates that allow more data are higher than from a competitor like AT&T.

The network has lost more than $1 million over the last two years and was criticized in late 2011 by the Missouri state auditor for not being an effective use of the city’s money. It also referred to a report paid for by North Kansas City that stated there had been unrealistic expectations for LiNKCity and more money would need to be spent for upgrades.

City officials say they are making progress with LiNKCity by seeking partnerships with companies that can use its excess capacity.

The community center started as a planned 10,000-square-foot facility in 1990. Ambitions for the facility ballooned as casino money poured in. It opened in 2000 with 96,000 square feet of space that included private party rooms, a swimming pool, basketball courts, a sauna, fitness rooms and a rock wall for climbing.

City residents call it the Crystal Palace.

During its last fiscal year, the center had revenues of $1.1 million and operating expenses of $2.6 million. Only 9 percent to 10 percent of its members are North Kansas City residents, far less than had been expected. Family memberships for non-residents cost $72 per month to be competitive but would have to double to meet expenses.

The community center’s reserve fund, once brimming with $9 million in gaming money, is now expected to be gone as early as 2014. And there are no plans to replenish it.

“A policy decision will need to be made related to how best to move forward once this fund balance is exhausted,” stated a budget document signed by Shatto.

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