Building America: Minn. Medical Center Illustrates Value of Munis

When the University of Minnesota Health Clinics and Surgery Center in Minneapolis opens its doors in 2016, it will be a site for cutting-edge medical care for patients in the Twin Cities area. The 318,000-square-foot ambulatory care center will feature an outpatient surgery center, research labs and a world-class cancer center.

“Our vision for the ambulatory care center is clear: we will build a venue that reflects and enhances the incredible care we bring to patients every day,” Bobbie Daniels, CEO of University of Minnesota Physicians, explained at the center’s groundbreaking ceremony in December 2013. “Our goal is to provide the very best patient experience and the best patient outcomes.”

To achieve that laudable vision required years of planning and development — as well as a significant financing effort using municipal bonds that is making the project a reality.

At an estimated cost of $160 million, the University of Minnesota medical center construction costs would be out of the reach of most higher education institutions’ budgets. How do they intend to finance a large project of this scope? By turning to the municipal bond market, a key source of financing for states, municipalities and other non-profits looking to fund critical projects for public works.

A municipal bond, or “muni,” allows the project to move forward by providing a usually tax exempt long-term debt financing, which is paid back to investors over years with interest.

This source of funding means public works projects can move forward without placing a heavy burden on taxpayers. The university will issue $150.5 million in special purpose bonds for the project underwritten by RBC Capital Markets. The facility will be managed as a joint venture between the University of Minnesota Physicians organization and Fairview Health Services. The bondholders will be repaid over 30-years through leasing agreements and a parking facility agreement.

Meanwhile, individual investors like munis because they generally provide a steady, reliable return. In this case, an investor can expect to receive semiannual interest payments paid in January and July beginning in 2015, along with repayment of the principal amount at maturity. The University’s top-tier “AA/Aa1” credit rating indicates little risk of default.

What is access to municipal bonds accomplishing? It’s building roads, schools, hospitals, transit projects, water and sewer systems and other long-term infrastructure needs. Bond financing has left its mark on tens of thousands of U.S. communities.

It’s tough to overstate the importance of the muni market in building America. According to Thomson Reuters’ data in 2013, more than $330 billion in municipal debt was issued in the United States; in the first half of 2014, that number was $150 billion.

According to the National League of Cities, an estimated three-quarters of the nation’s infrastructure investment is achieved through tax-exempt bonds. In an era of tight budgets at the federal, state and local levels, municipal bonds are allowing infrastructure projects to move forward.

Of course, we take many of these infrastructure projects for granted, once construction is complete and they’ve become part of the everyday fabric of life. Once the Minnesota medical center is complete, patients probably won’t give much thought to how the project was financed and built. But that doesn’t change the fact that bond initiatives are being used every day to change our communities for the better.