Craven County Board of Commissioners and CarolinaEast Health System issue statements two weeks after signing a lease agreement.
Dispute arises after the Craven County Commissioners and CarolinaEast Health System sign a new lease agreement on Nov. 4, 2024.
Craven County Commissioner Jason Jones said he was taking chairman’s privilege to “update our citizens on recent events surrounding the relationship between the Craven County and CarolinaEast Health System” during the meeting of the Board of Commissioners on Nov. 18, 2024 in New Bern, NC.
His statement came after Michael Smith, the CarolinaEast Health System president/chief operating officer, sent a letter to employees that referred to recent lease negotiations with the Craven County Commissioners.
Letter from CarolinaEast president to hospital team
CarolinaEast President Michael Smith said, “While we will continue to navigate broad changes to the healthcare environment, we should not have to overcome unnecessary roadblocks at home.”
“During recent lease negotiations with the Craven County Board of Commissioners, it became clear that not everyone understands the value you and our system provide to the community each day…,” he said.
Smith said, for 35 years, the county and hospital have had a lease agreement “that charged no rent in exchange for the hospital providing county-obligated critical services, such as EMS, at no cost to the taxpayers, not to mention millions of dollars in annual charitable care and community support. In addition to the considerable expense of providing these valuable services, the county now requires us to pay hundreds of thousands of dollars in annual rent.”
“As the second largest employer in Craven County, CarolinaEast is critical not only to the physical health of our community but also to its economic well-being. And, while we will continue to be a model corporate citizen, we will have fewer dollars to share with the many worthwhile organizations who have come to rely on us,” he said.
Read Michael Smith’s letter in its entirety here.
During Monday’s meeting, Chairman Jones said the hospital is owned by Craven County citizens and much of the hospital was built and developed with county taxpayer dollars. The hospital was operated by the county until 1988 when the Craven County created the hospital authority. The hospital authority was created “to provide a more modern management structure for what had been known as Craven County Hospital.” The county leased a 300 plus bed facility to the hospital authority for $1 per year.
The old lease was effective through Oct. 1, 2024.
He said, Craven County agreed to commit any funds that it derived from the “hospital’s property to bond payments that the hospital authority owed, should the hospital fail. Thankfully, that did not happen.”
Jones said, in the 1990’s the county paid debt that the hospital incurred through a bond. The Craven County citizens “essentially gave a modern, fully functioning hospital to the hospital authority and took the further step of paying the hospital’s debt for some years. The citizens of Craven County entrusted their hospital and their health care to this new hospital authority with the expectation that the hospital would always serve the interest of all citizens of the county and surrounding areas.”
He said the hospital fulfilled its obligations by providing excellent health care and “by providing various forms of community support, the hospital has financially supported various nonprofit organizations which address public health and similar health related issues.”
“The hospital has also been active in financing and in financially supporting community economic development efforts for MCAS Cherry Point and our military community. According to information provided by the hospital to the county…the value of this community support is around $1 million per year,” Jones said. He expressed gratitude for the hospital’s efforts.
New lease terms
The new lease agreement shows the county leased the “land and the 350-bed/room hospital, including surgical, cancer, emergency, administrative, and all other related facilities (collectively, the “Building”) and other improvements” at 2000 Neuse Blvd. in New Bern to CarolinaEast Health System for $1 a year.
The lease also shows both entities agreed to additional considerations that include continuing to perform the EMS related services as well as making an annual payment of $450,000. The components of the additional compensation are:
-Two hundred thousand dollars “shall be provided in the form of a credit given to the landlord (Craven County) by the tenant (CarolinaEast) annually to offset the costs incurred by tenant for any inmate health services provided by tenant.”
-One hundred fifty thousand shall be distributed from the hospital to the county annually to offset the costs that the county pays to purchase bed space at the regional IVC and medical detox facilities.
-One hundred thousand dollars of the additional consideration shall be distributed by CarolinaEast to Craven County annually to offset the costs the county incurs “to operate the Craven County Clinic, which supports uninsured, underinsured and Medicaid patients.”
Chairman questions management decisions
Jones said, “The new lease has also allowed the hospital to avoid a potential financial disaster.”
He said CarolinaEast borrowed $52 million through a bond issuance, “which essentially constitutes a loan by a bank to the hospital.” He said a condition of the bond was that the hospital give the lender a new lease with Craven County, or a lease extension, no later than Dec. 31, 2023; otherwise, the lender could demand immediate repayment of the bond amount.
He said, “For some reason unknown to your commissioners, that deadline passed without any effort by the hospital to get a new lease in place. In fact, the county commissioners did not know about the critical need for a new lease until September 2024,” just before the old lease expired.
Jones said the hospital informed the county that they were technically in violation of the bond terms and a new lease was immediately and necessary to avoid having to repay the loan balance of $50 million.
He said the county was informed that some people at the hospital may “intend to use the terms of the new lease as an opportunity to stop or limit the hospital’s support for the many community and charitable organizations the hospital has supported for many, many years.”
He said it appears that the action is intended to indirectly punish the county for the terms of the new lease.
“Rather than use the new lease as an opportunity to renew and improve the relationship between the county and the hospital, apparently some at the hospital desire to live in the past, attempting to resurrect disputes. perceived slights and disagreements which should be relegated to history. If true, the hospital’s removal or reduction of its $1 million in annual community support will have devastating consequences for those organizations supporting public health, indigent care, MCAS Cherry Point and our military community,” Jones said.
He referred to the hospital’s financial statements for the most recent fiscal year and said the hospital received $1.7 billion in revenue from operations.
“After expenses, the hospital received $46.5 million in profit during the same period.” Jones said.
He said the hospital has $418 million in investments and cash on hand.
He said, “…The hospital’s financial support of a number of community causes and organizations, although greatly appreciated and important, represents a very small fraction of the hospital’s revenues, profit and cash/investments on hand.”
Based on the financial statements and audits, “there appears to be no legitimate financial reason for the hospital to punish community organizations in order to send some sort of message to this Board of Commissioners,” Jones said.
He said, “…the potential financial crisis created by the inaction of the hospital’s leadership cannot be repeated. Similarly, the risk to our community organizations posed by a full or partial defunding of the hospital’s financial support cannot go unaddressed.”
Chairman Jones called upon the CarolinaEast Medical Center’s Board of Directors to meet in an emergency or special session to provide the county’s Board of Commissioners and citizens with a plan to a investigate “the internal failures that put the hospital at risk of being in default on a $50 million debt” by Nov. 21 at 5 p.m.
Jones also asked that they announce if the hospital intends to reduce or eliminate funding for community organizations and causes. If so, he asked if they could identify the causes and organizations that will be impacted with the amount.
He said if the directors do not take the requested actions, “I believe each and every hospital board member is very likely engaging in breach of duty and inefficiency, and quite possibly misconduct in office.”
Jones said if the hospital board doesn’t take meaningful and immediate action, he will consider “using each and every authority at my disposal to address these issues.”
“Likewise, I am disappointed for the citizens of Craven County and those organizations and efforts the hospital has historically supported that some at the hospital may choose to engage in petty politics and vindictiveness over a lease mutually agreed to by the hospital and the County after extensive negotiations. I do not believe anyone would knowingly choose to defund military support, or public health support, or indigent health care, or mental health and substance abuse care, particularly when there is no legitimate financial or other reason to do so,” Jones said.
He said that the county is very proud of the healthcare that the hospital provides.
“To the employees of the hospital, I express my gratitude for the jobs you do every day. The hospital employs many wonderful, kind and skilled employees. many of whom put the best interests of their patients and community before their own. Craven County sees your daily efforts, and we are appreciative of them. Rest assured that Craven County supports you unconditionally, and Craven County will do anything within its power to make sure you have the support and tools you need to continue providing the excellent health care you have provided for many, many years,” Jones said.
The Craven County Board of Commissioners voted to enter Jones’s statement into the record with Chadwick Howard, Ettienne “ET” Mitchell, Dennis “Denny” Bucher, Jason Jones, Thomas Mark, Shevel “Sherry” Hunt and Beatrice Smith voting yes.
Vice Chairman Bucher and Commissioner Mark are also on the CarolinaEast Medical Center Board of Directors.
At the end of Jones’s statement, CarolinaEast President Smith asked if he could address the board and Jones said, “no sir, you may not.” Smith asked again and Jones hit the gavel and said he was out of order. He said he could come back during the Petition of Citizens, which is held during the first meeting of the month.
The meeting video is posted below, and the chairman’s statement can be found here.
Attorney issues statement on behalf of CarolinaEast
Lee Whitman, an attorney with Wyrick Robbins Yates & Ponton LLP, responded to Jones’s statement on behalf of CarolinaEast Health System in a statement to County Attorney Arey Grady, III on Nov. 21.
He said, “CarolinaEast has never been at risk of not meeting its debt obligations, and any suggestion to the contrary is both unwarranted and misleading. The vague allegations of ‘internal failures’ made by Mr. Jones are similarly unsupported and unfounded. CarolinaEast also has no desire or intention to eliminate charitable giving to worthy community organizations and will honor all pledges or other financial commitments it has made. However, Mr. Jones’s demands for information about the operational and/or charitable strategic planning initiatives of a hospital authority duly created and independently operated pursuant to the North Carolina General Statutes, and threatening to punish its Board of Directors if they do not comply with his demands, is an over-reaching and unlawful abuse of process.”
“Given the gravity of Mr. Jones’s remarks about CarolinaEast, including the many factual misrepresentations addressed below, CarolinaEast should have been allowed the opportunity to respond for the benefit of the public record,” Whitman said.
He said there wasn’t a legal basis for the county commissioners to demand that the hospital board meet or impose agenda items.
He referenced an email from another attorney that said a former chairman of the county commissioners said the hospital authority was created “to keep county commissioners and other politicians in the future from injecting politics and personal agendas into the sound operation of our hospital.”
“Craven County has no legal authority to call for board meetings, set agendas, or otherwise interfere in independent management and operation of the hospital,” Whitman said.
Whitman said, “The CarolinaEast Board of Directors is comprised of well-qualified, dedicated, and hardworking individuals who discharge their duties for the health and welfare of Craven County citizens and all patients served by the hospital.”
Whitman said the board has “several notable individuals from the community, including the Mayor of New Bern, a member of the North Carolina House of Representatives, and a former U.S. Marine Corps Major General, among others.”
The hospital’s Board of Directors include Chairman Keith Bennert, Vice Chairman Kathleen Gallman, Secretary Steve Tyson, Treasurer Thomas “Tom” Braaten, Assistant Secretary Jeffrey Odham, Tahira Copland, Seth Miller, Louis “Lou” Cannon, Mary Beth Fennell and Terry Morris, according to the hospital’s website. Representative Steve Tyson is leaving the hospital board in December 2024.
“To understand the effect of the positive stewardship of the CEHS Board of Directors, one need look no further than the attached list of public awards and accolades,” Whitman said.
He rebutted statements about the bond covenants, lease discussions and CarolinaEast’s finances.
Whitman said bonds were issued in 2016 to finance hospital improvements and CEHS refinanced them with new bonds in 2022. He said the hospital initiated talks with Craven County for a new lease at the same time. He said Truist, the lender, was aware of the hospital’s efforts relating to discussions for a new lease.
He said the lender committed to a ten-year extension of financing and Trust did not threaten to call or call the bonds.
Whitman said, “Mr. Jones also misled the public by stating that ‘the County Commissioners did not know about the critical need for a new lease until September of this year, just before expiration of the old lease.”
He said county and hospital representatives met between January and June of 2024 and also met in August to try to obtain a new lease.
He said the delay in obtaining a lease “was driven by Mr. Jones’s demand for hundreds of thousands of dollars in annual rent payments from the hospital, a concept that was shocking to CarolinaEast based on outstanding performance under the parties’ prior 35-year lease for no rent including its decades-long provision of EMS services – a statutorily imposed legal obligation of Craven County at no cost to the county and/or taxpayer.”
He said hospital’s financial numbers that Jones referred to didn’t account for “millions of dollars in charitable care the hospital provides to the citizens of Craven County and beyond every year.”
“CarolinaEast provided over $71 million in charitable care to the community” Lee Whitman said.
He said the numbers cited by Jones didn’t account for tens of millions of dollars the hospital authority has invested in facilities.
He said, “Jones failed to recognize that CarolinaEast is able to collect only about 30% of what it charges.”
“Given the volatility in the hospital industry, such down years are a near certainty from time to time. To further reinforce the strategic importance of CarolinaEast’s investments, it costs roughly $1.6 million per day to operate the hospital. Therefore, CarolinaEast’s $418 million reserves act as a responsible rainy-day fund that will ensure approximately 9 months of operations, including the jobs required to sustain those operations, in the event of a significant market disruption,” Whitman said.
“While the hospital may occasionally decide it is appropriate to tap into its reserves to donate money to charitable causes, it would be fiscally irresponsible to do so if its annual operations revenue is insufficient,” he said.
“CarolinaEast looks forward to continuing its partnership with the County Board of Commissioners, but it will not tolerate unfounded allegations or misleading statements about its Board or its operations,” he said.
He said they will not convene a board session as requested.
Craven County responds to statement issued on behalf of CarolinaEast
Chairman Jones and Vice Chairman Bucher responded to Lee Whitman’s statement in a letter on Nov. 22 that was published here.
They said they appreciated CEHS’s statements that “its financial commitments and donations to various charitable organizations and non-profit organizations will not be reduced.”
They said, “…we were greatly alarmed by statements to the contrary by the hospital’s leadership in its Nov. 8 letter to its staff, particularly when those statements were directly linked to the new lease.”
“The hospital is of course free to manage its charitable and philanthropic efforts as it sees fit, but to reduce such funding with reference to the new lease is contrary to statements made at the conclusion of the negotiations for the new lease,” they said.
The commissioners said, “Some of the statements of the hospital’s leadership to various media outlets this week imply, if not outright state, that the new lease is unfair to the hospital and will cause it financial difficulties.”
They said the hospital’s legal counsel wrote to the county’s counsel that the new lease terms were “a fair and reasonable resolution.”
“We do not understand why the hospital would negotiate a new lease, sign it, represent it as ‘fair and reasonable’ and then after the fact question the fairness of the agreement,” the commissioners said.
They said the parties agreed that the funds that CEHS pays to Craven County will be used to provide healthcare and support public health in the county. The funds will “serve to further the hospital’s mission by providing care to uninsured and underinsured citizens who might otherwise seek uncompensated care at the CarolinaEast emergency department.”
The commissioners said the largest line item will be used to purchase mental health and substance abuse treatment beds space that will be used by the hospital to move patients from their emergency department to a more appropriate and cost-effective setting. While the county could have sought to receive unrestricted rent payments from the hospital, it instead focused on using an important county asset to improve healthcare in the county. This has never been acknowledged by the hospital in any of its recent communications.”
They responded to Lee Whitman’s statement that CEHS “has never been at risk of not meeting its debt obligations, and any suggestion to the contrary is both unwarranted and misleading” and added that Whitman stated that it was reckless for Mr. Jones to ‘suggest that ‘internal failures’ at CarolinaEast put the bonds or medical services to the public in jeopardy’ and that such suggestion ‘is a complete fiction that is not supported by the evidentiary record’”
They said it was unclear why Whitman made the statement because the bond agreement states that the 2022 bond is ‘subject to extraordinary mandatory redemption’ in whole … in the event that the Authority has not provided to the Owner of the Series 2022 Bond by Dec. 31, 2023 a fully executed amendment or modification to the Lease that (i) extends the term of the Lease to a date no earlier than Oct. 1, 2032’. This was not done nor was the County ever informed prior to September of 2024 that the hospital was under such obligation.”
They said an attorney for the hospital wrote in an email in September, “In order to not be in default and not be subject to a mandatory refunding of the entirety of the bond amount, CarolinaEast has to give the bank a lease agreement with a term lasting at least through bond maturity. Based on the express language of the trust agreement(s), a one-year extension would not suffice to prevent the bank from calling the bond if we don’t present what is required by the agreement. This was actually a concession by the bank, since the existing lease did not extend through bond maturity when we closed. So, essentially, the expiration date on the lease is not the triggering event that we can just move. We have a date-certain in the trust agreement to provide a compliant document. It is my understanding that the bank has contacted the hospital multiple times about this. Even if a 60-day extension is agreed to by the local bank, the lender would require that to be memorialized in an amendment to the trust agreement(s), and it will take more than the time left on the lease for the lender get the amendments approved up the chain. That also doesn’t include getting it approved by the other lender holding the swap agreement.”
The attorney with the hospital added, “The timeline is more dire than I realized when you and I spoke. A situation where the bank calls these bonds has to be avoided. Having to refund $50 million would result in large cuts to existing service line items.”
The commissioners questioned a meeting date and said it didn’t happen. They also said the meeting dates that were noted in Whitman’s letter took place after CEHS “was supposed to have a new lease in place under its bond agreement.” It’s also clear the county had no knowledge until September of 2024 that CEHS “was in violation of a provision of its bond agreement or that failing to enter into a long-term lease, as opposed to a short-term extension, would place the hospital’s bond in further jeopardy.”
The commissioners said during the lease negotiations, they realized that several of the hospital board members were not aware that CEHS may have been in breach of the bond provision or that the situation was “dire.” The concerns Craven County and Chairman Jones’s request that the hospital authority’s board investigate the bond issue and “the failure to have a lease in place prior to Jan. 1, 2024 was based in part on those concerns. While we are disappointed that no such meeting has been called, as you noted in your letter, the commissioners have no statutory power to force the hospital’s board to take any action.”
They said the inconsistencies in statements made by the hospital and its leadership concern them and they will continue to monitor the issues.
The commissioners said, “…subject to the clarifications set forth above, we join the hospital in considering this matter closed.”
The CEMC Board of Directors meets at 9 a.m. on the second Tuesday of each month in the board room on the hospitals’ campus.
By Wendy Card, editor. Send an email with questions or comments.