NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Culberson County Hospital District (the district), TX's ratings as follows:
--$5.8 million of limited tax general obligation (LTGO) bonds, series 2009, at 'BBB-';
--Implied unlimited tax general obligation (ULTGO) rating at 'BBB'.
The Rating Outlook is Stable.
SECURITY
The LTGO bonds are payable from an ad valorem tax levied against all taxable property in Culberson County, limited to $0.75 per $100 of taxable assessed value (TAV).
KEY RATING DRIVERS
LIMITED, CONCENTRATED ECONOMY: The local area is sparsely populated and characterized by low income levels and a tax base heavily concentrated in oil and gas. Taxable assessed values (TAV) are volatile and subject to changes in oil and gas prices.
MIXED FINANCIAL PROFILE: District operations are limited to paying indigent care costs incurred by Culberson County Hospital (the hospital), debt service, and nominal administrative costs. Hospital operations are weak and commensurate with a facility of limited size and scope; the revenue base is very small and liquidity is low although improved.
LOW TO MODERATE DEBT: Debt levels are low to moderate, amortization is average, and capital needs are manageable.
ESSENTIAL HOSPITAL: The hospital is designated as a critical access hospital (CAH), reflecting its essentiality to the community. Its small size makes it vulnerable to changes in reimbursement, physician turnover, and pressures imposed by healthcare reform.
LEASE TERMINATION: The lease between the district and hospital operator terminates prior to bond maturity, which Fitch views as a notable risk, but allows for automatic 10 year renewals.
RATING SENSITIVITIES
HOSPITAL OPERATING RISK: The rating is sensitive to the operating risks associated with the hospital.
TAX BASE VOLATILITY: The rating is sensitive to tax base volatility due to high concentration in oil and gas. A declining TAV trend could erode the taxing margin under the cap and potentially district tax revenues if the decline was severe.
CREDIT PROFILE
Culberson County Hospital District is the taxing district established to support the provision of health care services for Culberson County (the county). The district's boundaries are coterminous with the county's, which is an expansive, remote county located about 120 miles southeast of El Paso.
The district owns the Culberson County Hospital, a 25-bed (14 staffed) CAH in Van Horn, Texas, and leases the facility to Preferred Management Corporation, Inc. (who operates the hospital). The closest hospital facility is located about 85 miles away.
CONCENTRATED AND VOLATILE TAX BASE
The district's TAV has experienced double-digit growth in each of the past three fiscal years, likely reaching its peak at $568 million in fiscal 2015. The recent TAV trend demonstrates the volatility associated with the taxing of mineral resources, oil and gas exploration/production firms, and pipelines passing through the district, which make up 80% of the district's TAV. High taxpayer concentration is also evidenced by the top 10 payers, which comprise nearly 70% of the fiscal 2014 tax base.
Wealth levels of county residents are low, with per capita income and median household income well below state and national averages. Unemployment has been historically lower than the state and nation, evidenced by the low rate of 4.3% in March 2015.
IMPROVED FINANCIAL REPORTING
The fiscal 2014 audit was dated March 5, 2015 (Sept. 30 fiscal year), reversing a trend of late financial reporting practices. District management attributes the improvement to a recent switch in auditors. A continuation of this trend would reestablish confidence in the financial reporting capabilities of the district.
SINGLE-PURPOSE DISTRICT SUPPORTS HOSPITAL OPERATIONS
The district collects property taxes to pay debt service, indigent care costs at the hospital, and nominal administrative costs. Property taxes comprised almost 90% of fiscal 2014 revenues. District operating expenditures are modest at about $1 million annually and are primarily for indigent care. Increases in the indigent care cost are limited to annual health care inflation.
The district's operating profile remains stable. Fiscal 2014 results marked the fifth consecutive year of positive results, adding $545,000 to unrestricted fund balance and bringing its total in excess of 200% of spending, which is available for debt service if needed. The fiscal 2015 budget is balanced and there are no material variances in year-to-date results. Fitch expects the district's financial operations to remain stable given its limited purpose and recent track record.
WEAK HOSPITAL FINANCES
Hospitals designated as CAH are reimbursed by Medicare at cost plus 1%, so that rural hospitals can survive financially at very low patient volumes. Approximately 46.5% of the hospital's patients were Medicare-eligible in 2015, a declining portion of overall payor mix. The hospital is leased to and operated by Preferred Management Corporation, and the district's property taxes pay for the indigent care costs on behalf of the hospital under an indigent care agreement.
Property taxes constituted approximately 16% of total hospital revenues in 2014. The hospital's liquidity as of Dec 31, 2014 (nine-month interim) was weak at 35 days cash on hand or $485,000 but have improved from 13 days in fiscal 2010. Fitch does not expect significant changes in liquidity levels. Operating income and operating EBITDA margins (inclusive of property tax receipts) are volatile but positive, reflecting the sensitivity of hospital operations to medical staffing levels. The hospital reports two active physicians in 2015. The hospital has limited financial flexibility, and Fitch believes it is challenged to adapt to the changing healthcare environment, with no plans to meet Affordable Care Act information technology meaningful use standards.
AFFORDABLE DEBT BURDEN; MANAGEABLE CAPITAL NEEDS
The district's overall debt levels are low to moderate at 1.3% of estimated full value and $4,447 per capita, reflecting the small population. Management is planning to rebuild the rural health clinic, yet a firm timeline for construction has not been determined. Project costs could be up to $2 million and will be funded through a bank loan supported by property taxes. Hospital post-employment benefits do not represent a credit risk. The district's debt service made up a very high 41% of 2014 expenditures, which is typical for single-purpose entities.
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 additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Underwriter, Bond Counsel, Underwriter Counsel, Trustee, US Federal Government (non-public information), and the Municipal Advisory Council of Texas.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985819
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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