Fitch Affirms Bexar County Hospital District, Texas' COs at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings takes the following rating action on Bexar County Hospital District, Texas dba University Health System (the district):

--$733.4 million aggregate certificates of obligation (COs), series 2008, 2009A, 2009B, and 2010B affirmed at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The COs are secured by a limited property tax levy and a pledge of surplus revenues of the district's hospital system. The district's property tax rate is limited to a maximum rate of $0.75 per $100 taxable assessed value (TAV) for all purposes.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The financial profile of the district is solid with consistently sound operating margins, good liquidity indicators and adequate debt service coverage.

PAYOR MIX VULNERABILITY: University Health System is vulnerable to changes in state and federal funding given the large number of Medicaid, Medicare and indigent patients. However, management is strong and has consistently demonstrated its ability to make prompt budget adjustments to changes in these revenue streams.

SAFETY NET DESIGNATION: The district fulfills an essential role in providing safety-net health care services to Bexar County's large and growing Medicaid and indigent care population. The district's primary operating platform, University Hospital, serves as south Texas' leading trauma facility.

HIGH OVERALL DEBT BURDEN: The district's debt profile is characterized by a high overall debt burden and slow principal amortization.

BROAD TAXING MARGIN: The district is authorized to levy up to $0.75 per $100 of TAV for all purposes. Currently, the district levies just under $0.28 per $100 TAV of which only four cents are designated for debt service.

TAX-BASE STABILIZED: Slower residential building activity and modest tax base declines stalled previously rapid tax base growth but have now stabilized. Fitch expects that the area's affordable home prices, ample developable land, and surging oil and gas activity at the nearby Eagle Ford Shale will aid the area's ongoing recovery.

STABLE ECONOMY: Population growth remains rapid. Although the local economy has diversified notably, the military remains a major economic factor which could be affected negatively by the unfolding sequestration of federal funds. The local economy is benefitting from rapid employment gains, enabling the county's unemployment rate to remain well below state and national averages despite robust labor force increases.

CREDIT PROFILE

The district is coterminous with Bexar County. Created in 1955, it is governed by a seven-member board selected by the Bexar County commissioners to serve two-year staggered terms.

The district's facilities include University Hospital (a 498-bed acute care facility), six outpatient primary/specialty care clinics, three dialysis centers and nine preventive health clinics. Since 1968, the district has been affiliated with the University of Texas Health Science Center (UT), whereby the district's facilities serve as the major teaching sites for many of the UT health care programs, including the graduate medical education program.

SOUND FINANCIAL PROFILE

Fitch considers the district's operating history to be sound. With the aid of property tax revenues, the district has reported positive operating margins each of the past five years. The district's current property tax rate is $0.276 per $100 of TAV, well below the statutory ceiling.

Liquidity is good (209 days cash on hand for fiscal 2012); however, the use of $160 million which is internally designated for the current capital plan will reduce cash levels to about 146 days in the near term. Fitch expects liquidity to remain satisfactory going forward. The district has some financial exposure given the large number of Medicaid and indigent patients, a function of its status as a public healthcare provider. This reliance creates vulnerability to changes in reimbursement rates for federal and state programs.

CAPITAL PLAN

The need for additional bed and clinic capacity and a decision to renovate some older facilities led district officials in 2008 to develop an $899 million capital plan. Funding for the capital plan, which primarily consists of construction of a new trauma tower at University Hospital, as well as other smaller projects, was derived from approximately $778 million in tax-supported debt and the remainder in available cash and other sources. The new trauma tower is under construction and expected to be completed by April 2014. Given the size of the tax base - $104.3 billion for 2014 - the tax rate impact for the debt issuance has been modest at roughly $0.04 per $100 of TAV.

TAX BASE STABILIZED

Tax base growth flattened in fiscal 2011 following numerous years of double-digit growth as a result of the steep building downturn and falling base values during the last recession. The modest 1.6% decline in fiscal 2012 was recovered in fiscal 2013. TAV growth of 5.5% in fiscal 2014 is attributed mostly to reappraisal gains (61% of fiscal 2014 growth), with the remainder comprised of $2.1 billion of new construction (39% of growth).

HIGH OVERALL DEBT BURDEN

Prior to embarking on the present capital plan, the district had no outstanding debt. Notably, the district cash funded approximately $140 million in capital improvements from fiscals 2004-2008. Moreover, the district established a cash reserve policy in fiscal 2000 and to date has built up $160 million to contribute to its capital plan.

The district's overall debt burden is high at $6,009 per capita and 8.9% of market value. Overall debt levels have risen mostly from substantial debt issuances by the large number of overlapping jurisdictions, which include 15 school districts. The principal amortization of direct debt remains well below-average at 23% in 10 years.

SERVICE AREA

The district's primary service area is Bexar County (general obligation debt rated 'AAA' by Fitch). Its secondary service area comprises the surrounding seven counties, and the district's University Hospital serves as the lead level-one trauma center for 22 counties in south and central Texas, reaching a population of roughly 2 million. The county's 2013 estimated population is more than 1.7 million, up roughly 23% from the 2000 census and a reflection of the continued growth of the San Antonio metropolitan area.

Military and government sectors are prominent with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from recent realignment and base closure decisions. Relative to the larger economy, the projected impact of federal sequestration on civilian military employment is modest. However, the impact of sequestration on military contracts with the area's defense industry is still unfolding. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

The ongoing recovery from the last recession has been aided by recent employment hikes in the leisure/hospitality and construction/mining sectors, fueled by surging oil and gas activity within the nearby Eagle Ford Shale. As a result, the county's August 2013 unemployment rate of 6% still compares favorably to state and national averages of 6.3% and 7.3%, respectively, for the same period.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in Fitch's 'Tax Supported Rating Criteria', this action was informed by information from Credit Scope and Texas Municipal Advisory Council.

Applicable Criteria and Related Research:

--'Tax Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812898

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Contacts

Fitch Ratings, Inc
Primary Analyst
Gabriela Gutierrez, +1-512-215-3731
Director
Fitch Ratings, Inc
111 N. Congress Avenue, Suite 2010
Austin, Texas 78701
or
Secondary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc
Primary Analyst
Gabriela Gutierrez, +1-512-215-3731
Director
Fitch Ratings, Inc
111 N. Congress Avenue, Suite 2010
Austin, Texas 78701
or
Secondary Analyst
Dana Sodikoff, +1-312-368-3215
Associate Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com