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The state's top fiscal watchdog has blasted the controversial transaction that gave Erie County Medical Center more financial independence.

In a scathing review issued Thursday, Comptroller Alan G. Hevesi described the $101 million in borrowing to make the hospital more self-sufficient as a "fiscal gimmick."

He said the deal did more to help Erie County support its own operations when it was running out of cash than to get the new hospital corporation off to a good start. He also criticized borrowing the money -- at total of $214 million, with interest -- without first devising a long-term strategy to show how the hospital planned to reduce costs and increase revenues.

"The county forced the hospital to borrow and took the proceeds to pay for the county's operating expenses. That's irresponsible," Hevesi said.

County and hospital officials reacted angrily, calling the audit full of inaccuracies and politically motivated.

"This is political theater," said Bruce L. Fisher, chief of staff for County Executive Joel A. Giambra. "(Hevesi) is not a fiscal watchdog. He is causing fiscal chaos in this state."

Fisher noted that Giambra, a Republican, has criticized the rising burden on counties of state-mandated employee pension costs, while Hevesi, a Democrat, is trustee of the pension system.

For years, the county sought to transform the medical center and its nursing home, the Erie County Home in Alden, from a government operation into a more independent entity that might lessen reliance on taxpayer support.

As a public benefit corporation, the medical center is now free of state rules that prevented it from partnering with physician groups and other businesses in moneymaking initiatives.

But the change drew much criticism, starting with the county requirement that the new nonprofit entity borrow $101 million to buy the hospital network.

The county agreed to pay off the $101 million loan over 30 years through its annual subsidy to the medical center, which was about $29 million last year.

The county planned to use $22 million of the money to retire the hospital's long-term debt. The county also planned to take $53.7 million, which it claimed the hospital had owed the county for loans to the facility over the years, to make up shortfalls in daily operating expenses.

The deal also resolved short-term cash problems for the county and reassured bond-rating agencies that were threatening to downgrade the county's credit rating, an action that would have increased the county's cost for borrowing money.

But Hevesi claimed the county forced the hospital to borrow, took the proceeds to pay the county's operating expenses and left the hospital with nothing to show for the extra debt.

He also criticized the medical center's slowness in developing a business plan, even though formation of the new hospital corporation, under discussion for several years, was approved last year.

A key criticism in the audit focused on the $53.7 million.

In addition to an annual subsidy, the county routinely loaned the hospital money for daily operations, paying the difference between what the hospital spent and what it earned.

The county often appropriated less than what the medical center needed, according to Hevesi. When the county made up the difference, he said, it would call the additional amount a "loan." Over the years, the amount grew to $53.7 million.

"This is no more a true loan than if the county had to make up shortfalls in its parks department," Hevesi said.

County officials disagreed, saying that, unlike a typical government department, the hospital was a complex entity affiliated with the county but not under its direct control.

"What we did was essentially like refinancing a home mortgage at a lower interest rate," Fisher said. "As for the $53.7 million, we extended credit to the hospital. We couldn't just write that off."

Fisher characterized the transaction as good public policy for which the Giambra administration should receive praise.

He also criticized Hevesi for complaining about the deal after the comptroller's office approved the $101 million borrowing earlier this year. Hevesi said the comptroller rules only on technical issues related to such loans and he couldn't have blocked it.

Hospital officials acknowledged they have yet to complete a long-term business strategy but attributed some of the delay to management changes. They also said they gave the comptroller details of a one-year "transition" plan to improve operations.

"(We) met with the comptroller's office as recently as (Wednesday) to clarify these issues, but officials hid the fact that the report was already drafted and that a press conference was scheduled," spokesman Tom Quatroche said.


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