Description of development project for new medical facility.

1. COUNCIL PROCEEDINGS
CITY OF VIRGINIA, MINNESOTA, FEBRUARY 8, 2005
Special meeting of the City Council of the City of Virginia, Minnesota, and the Hospital
Commission was called to order by Mayor Luoma Gentilini at 4:00 P.M. in the Council Chambers, City
Hall.
Roll Call:
City Council:
Present: Councillors Raplinger, Lind, Baranzelli, Lindberg, Politano, Mayor Luoma Gentilini – 6
Absent: Councillor Peterson – 1
Hospital Commission:
Present: Commissioners Lindberg, Teasck, Smith, Grahek, Wallin - 5
Absent: Commissioners Beste, Brinkman – 2
Also Present: Gary Lishinski, SMDC; Bob Thistle, Springsted; Kennedy & Graven - Ben Johnson, Steve
Bubul; Jim Romsaas, Mesabi Daily News; John Gerzina, Damberg, Scott, Gerzina,
Wagner; Steve Trudeau, Kraus-Anderson Construction; Hank Tamminen, Iron Range
Rehab Center; Keith Harvey, VRMC; City of Virginia - John Tourville, Bill Hennis, Ron
Lackner, Tom Butorac, Lois Roskoski
Mayor Luoma Gentilini stated the purpose of the meeting was to discuss the 2004 Medical
Facilities Redevelopment Project, including the sublease agreement, bonding and parking lot. This
bonding of $1.4-$1.6 million will be split between the City Council and Hospital Commission.
Gary Lishinski, St. Mary’s/Duluth Clinic (SMDC), gave an overview of the project, which is to
replace the current Virginia clinic with an 80,773 sq. ft. four-level facility on the west end of the Virginia
Regional Medical Center (VRMC) campus. The facility will be connected to the VRMC with a 320’
tunnel. The new clinic will be built by the Housing and Redevelopment Authority, according to SMDC’s
specifications. A $16.5 million project fund will be established to cover the cost of the building,
equipment and fifty-percent of the tunnel. Kraus-Anderson will be the construction manager for the
project. The City of Virginia will award the contracts, based on the competitive bidding process. Upon
completion, the facility will be leased to the City of Virginia, with the City subletting the building to
SMDC. SMDC will enter into twenty-year operating lease to use the facility, tunnel and parking lot.
During the term of the lease, the SMDC lease payments will offset the debt service payments that become
due. The new facility will accommodate an additional eleven providers, who will join the twenty
physicians and ten mid-level providers currently based in Virginia by SMDC. Three physician contracts
have already been secured and one contract is pending, so SMDC is making progress toward meeting
their goal. SMDC has agreed to not compete with services currently provided on the VRMC campus,
including physical or occupational therapy, MRI or CT scans, or the Ambulatory Surgery Center. SMDC
will have an option to purchase the new clinic facility, but the City will always retain ownership of the
land. Construction is planned to begin in mid-March and SMDC is planning to occupy the new clinic by
May 22, 2006.
1

2. John Gerzina, Damberg, Scott, Gerzina, Wagner Architects, stated a study is in progress to locate
a permanent helipad on the existing hospital roof. A new two-tiered parking lot will be constructed West
of the SMDC clinic. The area between the VRMC and the new SMDC facility will be totally rebuilt and
reconfigured, which will add 77 additional parking spaces. An addition will also be built onto the 1938
portion of the VRMC building to house the Iron Range Rehab Center.
Tom Teasck, Hospital Commissioner, stated construction of the parking areas is estimated at $1.6
million, which is to be split equally between the City and VRMC. He does not feel the hospital should
commit funds for the parking, as the VRMC will only gain 77 new parking spaces. Also, the VRMC has
already put $530,000 into the project and the hospital is looking at a sizable loss of funds this year. If this
project goes forward, Mr. Teasck stated the City should fund the entire deal or the Hospital should pay
$154,000 ($2,000 for each parking space).
Mr. Gerzina stated there are areas on the site where a parking ramp could be built in the future to
accommodate additional parking needs, if necessary, and the ramp could possibly tie right into the tunnel.
Bob Thistle, Springsted, stated the City Council will be asked to approve the first financing
portion at their meeting to be held later in the day. The sale of the $2,455,000 G.O. Bonds would be used
to finance the parking lots and subterranean concourse for the clinic facility project, and refinance the
1997A bonds that were issued to relocate a portion of the golf course. The refinancing would have a
possible savings of $50,000 in future interest costs. The recommended bonds will be awarded on
February 22, 2005. $1,640,000 would be used to fund the parking, infrastructure, fifty-percent of the
subterranean concourse and bond issuance costs, with the remaining funds of $815,000 to be used to
refund the 1997A bonds.
Charlie Baribeau stated the City of Virginia should absorb the total costs of the bonds and set up
an agreement that would allow the VRMC to repay the City when the project generates revenue from the
project, due to the current financial deficits at the hospital. Ronald Lackner, City Clerk/Finance Director,
stated the documents include a fifty/fifty split between the City and VRMC and any changes in the
agreement at this time would delay the bond sale. Bond payments will not start until 2006 and the VRMC
feels their financial condition should improve during the second half of 2005. Mr. Thistle stated he is
anticipating the G.O. bond proceeds will be available in mid-March. The total bond issue will be
approximately $20,000,000, with $16,500,000 needed to fund the facility construction. The balance of
$3,500,000 will be used for a debt service fund (one year’s payments) for the revenue bonds, issuance
costs and capitalized interest for the first year of the bonds. The interest rate for the G.O. bonds is
estimated to be 3.7% and the lease revenue bonds will have a higher interest rate. The possibility of
purchasing bond insurance to take the risk out of the equation and to get a better interest rate will also be
looked at.
Tom Butorac, City Attorney, stated copies of the sublease were previously distributed to the
Hospital Commission and City Council. SMDC has reviewed the lease, but there are a few minor
outstanding items that still need to be addressed.
Ben Johnson, Kennedy and Graven, stated the operating sublease includes reimbursement of costs
and bond provisions. The sublease will be refined over the next three months, while going through the
financing issues. We are also waiting for final comments from SMDC’s independent auditor. If SMDC
decided to purchase the facility, they would be required to pay fair market value for the building. If the
building is worth less that the outstanding bonds, they would be required to pay off the bonds.
2

3. Steve Bubul, Kennedy and Graven, stated the bonds will be issued by the Housing and
Redevelopment Authority (HRA). The HRA will own the building and have a lease/purchase agreement
with the City of Virginia. Due to federal law, the City must fund the additional issuance costs above 2%,
which will amount between $250,000 and $300,000. The City will be repaid the additional costs with
rent payments from SMDC. Also, the City will make provisions to place approximately $150,000 per
year in a maintenance fund for a period of ten years beginning in year eleven, which would build up to
$1.5 million (one year’s debt service). The operation and maintenance fund would be held as additional
security, as the lease will end in 19-20 years, but the bonds will be over a twenty-five year period. This
money would be available to pay debt service on the bonds, if necessary, or to do improvements on the
building when the sublease expires. The fund would come back to the City is it is not utilized.
Mr. Johnson stated a non-compete clause is included in the agreement and SMDC will be
prohibited from providing services that are currently offered by the VRMC. If SMDC authorizes their
purchase option, there would still be a declaration of restrictive covenants and the City would continue to
own the land. The City is the only one that could agree to remove the restriction. City Attorney Butorac
stated the sublease will be brought back to the City Council once the agreement is finalized.
Keith Harvey, Administrator, Virginia Regional Medical Center, reviewed the term sheet for the
regional heart center. Cardiovascular disease is prevalent in the community and, currently, a limited
amount of care is provided at the VRMC. The proposed heart center would be a collaboration between
VRMC and SMDC. The heart center would be a department of VRMC and a management committee,
composed of VRMC and SMDC leadership, would oversee the center. The credentials would be
consistent with SMDC, which is a top one hundred heart hospital. The net income would be split between
VRMC and SMDC.
Hospital Commissioner Grahek stated he would like time lines established for the term sheet for
the heart center. Administrator Harvey agreed to identify timelines for the heart program.
Charlie Baribeau questioned who would be responsible for errors/omissions insurance and
Administrator Harvey stated this is being addressed in the agreement.
Shelly Lindberg, Hospital Commission President, presented a resolution approving the issuance of
the General Obligation Bonds to finance the infrastructure for the clinic project.
Moved by Lindberg and supported by Wallin to adopt Resolution No. 5460, approving the
issuance of approximately $2,455,000 General Obligation Public Improvement and Refunding Bonds,
Series 2005A Bonds, to finance the infrastructure for the medical clinic facility on the VRMC campus.
Ayes: Commissioners Lindberg, Wallin, Grahek, Smith – 4
Nays: Commissioner Teasck – 1
Resolution adopted.
3

4. Mr. Bubul stated the City Council will also consider the same resolution at the Council meeting to
be held later today and other project issues will be presented at a later date.
Moved by Lindberg and supported to adjourn the meeting at 5:20 P.M. Motion carried.
CAROLYN LUOMA GENTILINI
Mayor
(CORPORATE SEAL)
LOIS ROSKOSKI
Deputy City Clerk
4