NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating actions on Indianapolis Local Public Improvement Bond Bank (Health and Hospital Corp. of Marion County), IN (corporation) as part of its review of tax supported debt of public enterprises:
--Approximately $218.8 million unlimited tax general obligation bonds (ULTGOs), series 2005, 2010A-1 and 2010A-2, downgraded to 'AA+' from 'AAA';
--Approximately $465 million lease revenue, series 2010B-1 and 2010B-2, downgraded to 'AA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations of the bond bank which, under Indiana law, is empowered to buy and sell securities of 'qualified entities'. The bond bank itself has no taxing power.
Pursuant to Indiana Code, the Health and Hospital Corporation of Marion County (HHC) and the Indianapolis-Marion County Building Authority (the authority) are municipal corporations and are qualified entities that can issue 'qualified obligations' to be purchased by the Indianapolis Local Public Improvement Bond Bank (the bond bank). Each series of bonds is secured by the trust estates established under the bond bank indentures.
The qualified obligations for the series 2005, 2010A-1 and, 2010A-2 bonds are secured by an unlimited tax general obligation (GO) pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County. The series 2010A-1 and A-2 bonds are also secured by a debt service reserve funded to maximum annual debt service.
The qualified obligations for the series 2010B-1 and 2010B-2 bonds are issued by the authority, a municipal corporation with no taxing power that is being used as a conduit. HHC will lease the facilities to the authority, who will lease them back to HHC through a lease-leaseback arrangement. The bonds are payable from fixed rental payments made by HHC through a master lease under which the authority is the lessor and HHC is the lessee. Lease payments are supported by an unlimited property tax pledge, not subject to annual appropriation, but subject to abatement if the leased premises are not available for use. Abatement risk is offset by the requirement that the authority or HHC obtain property and casualty insurance in an amount equal to the greater of the cost of defeasing the then-outstanding series 2010B bonds, or 100% of the replacement cost of the leased premises. This requirement can be met with self-insurance, which Fitch believes weakens it. In addition, the authority or HHC must obtain rental interruption insurance equal to full rental value for 2 1/2 years. The series 2010B-1 and B-2 bonds are also secured by a debt service reserve funded to maximum annual debt service.
KEY RATING DRIVERS
HOSPITAL OPERATIONS RISK: The rating downgrades reflects Fitch's increased focus on the financial risk related to the operation of the hospital as outlined in the July 15, 2011 press release 'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises', which is available at 'www.fitchratings.com'.
CHALLENGED HOSPITAL FINANCIAL PERFORMANCE: HHC's Wishard Hospital financial operations are weak and vulnerable to changes to state and federal funding given the large number of Medicaid, Medicare and indigent patients. However, qualitative factors are strong, including an experienced management team.
STRONG SECURITY: Debt service on the bonds is secured by an unlimited ad valorem tax pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County.
ESSENTIAL PROVIDER AND SAFETY NET DESIGNATION: As the only public hospital in Marion County, Wishard Hospital fulfills an essential role in the service area, providing safety net healthcare services to Marion County's Medicaid and indigent care population. In addition, several of Wishard's qualitative measures (including quality, cost effectiveness of care, relationship to Indiana University [IU] School of Medicine, proximity to IU Medical Center and Riley Children's Hospital) are positive credit factors.
STRONG VOTER SUPPORT: Replacement of Wishard Hospital was approved by a high percent of voters in a 2009 special election, and fundraising has been strong with Wishard increasing its goal from $50 million to $75 million, having already received pledges of $70 million, including $40 million from one family.
REPLACEMENT FACILITY ON TIME AND AHEAD OF BUDGET: Construction of the replacement hospital is presently on time and ahead of budget. The new facility should increase efficiency and effectiveness of healthcare delivery as the existing hospital is outdated and prone to service disruptions. The new hospital is scheduled for a December 2013 opening.
LARGE AND DIVERSE TAX BASE AND ECONOMY: The service area has a large and diverse tax and economic base and continues to experience growth through new commercial development.
CREDIT PROFILE
HEALTH AND HOSPITAL CORPORATION
The Marion County HHC, a municipal corporation, is co-terminus with the county and Indianapolis (Fitch GO rating of 'AAA' with a Stable Outlook). HHC provides health services including preventive, acute care, and long-term care to county residents. HHC owns and operates the public hospital division, Wishard Health Services. Wishard Hospital is Marion County's only public, general acute care facility, providing 65%-75% of all uncompensated care in the county.
HHC is governed by a seven-member Board appointed by elected officials. The Board levies its own taxes, adopts its own ordinances and issues its own general obligation bonds subject to approval of the Department of Local Government Finance.
REPLACEMENT HOSPITAL FACILITY
In 2009 voters approved the issuance of up to $703 million in tax-supported debt for the replacement of HHC's Wishard Hospital, a 340-bed acute care hospital with ancillary facilities on the campus of the Indiana University School of Medicine. The facility is old and inefficient and is subject to service interruptions because of system failures. Fitch believes that the bonds' approval by a high 83% of voters indicates solid support for the project, although turnout was light and management conveyed its expectation to voters that a property tax increase would not be needed to fund the project as HHC expects to save $25 million annually in maintenance costs.
HHC is legally obligated to fund the annual debt service on the 2010 A and B bonds using a dedicated property tax if other revenues are not sufficient to fully pay the bonds in any given year; however, HHC currently funds 100% of the debt service for these bonds through operating revenues. In addition, HHC will contribute $150 million ($80 million to date) in accumulated reserves to the Wishard replacement project, leaving approximately $150 million in reserves, which Fitch considers an adequate operating cushion.
The project is on time and ahead of budget and is scheduled to open in the winter of 2013. The new facility will be comprised of a 327-bed inpatient hospital, an outpatient clinic with 200 exam rooms, a 2,700-car parking garage, a 90-bed treatment room emergency department, a new women's health clinic, a central energy plant and offices for faculty, research and administrative functions.
CHALLENGED HOSPITAL OPERATIONS
Hospital utilization has risen in recent years due to the recession; occupancy has been as high as 98%, compared to the 80% generally considered by Fitch to be full occupancy. Wishard's qualitative performance measures are strong, while weak financial operations reflect in part the very high 40% of patients with no form of insurance or government subsidy.
Wishard generates substantial operating fund losses due to this poor payor mix. Management has implemented various collection and pre-qualification programs to maximize revenue collection but despite these measures, its operating performance continues to be weak. In 2010, the hospital reported an operating loss of $34.5 million after general fund transfers of $180 million and $20.7 million of non-operating income. The hospital has since implemented $12 million in corrections. According to management the hospital is expected to end 2011 with a $15 million loss from operations and the 2012 budget shows breakeven results. However, Fitch expects operating profitability to continue to be challenged because of Wishard's weak payor mix.
The general fund, which includes property and income tax support as well as intergovernmental payments, has experienced consistent operating surpluses, including a $134.6 million surplus in 2010. The surpluses are used to bolster hospital operations. After transfers, including $180 million in support of Wishard, the net deficit totalled $8.4 million. The unreserved general fund balance totalled $149 million or a strong 55.9% of general fund spending. When proprietary expenditures are added, the unreserved balance drops to an adequate 16.3%.
HHC LONG-TERM LIABILITIES
Overall debt levels are mixed with overall debt per capita low at $1,723 and debt-to-full value moderate at 4.3%. Approximately one-third reflects overlapping debt of Indianapolis and school districts within the county. Principal amortization is slow, with only 27% retired in ten years, somewhat typical for hospital financing. Other than the Wishard replacement, HHC's capital needs are minimal.
HHC contributes to the Indiana Public Employees Retirement Fund (PERF), an agent multiple-employer retirement system. For 2008, 2009 and 2010 the corporation contributed $10.5 million, $12.6 million and $15.3 million, or 103%, 104% and 92%, respectively, of the annual pension cost. For 2010 corporation pension costs represented a modest 2.7% of general and proprietary fund expenditures.
STRONG ECONOMY AND TAX BASE
The strength of the service area economy is an important factor in the 'AA+' and 'AA' ratings on HHC's general obligation and authority lease bonds, respectively. The rating distinction between the two series reflects abatement risk for the series 2010-B bonds, which while supported by an unlimited property tax pledge are not GOs of HHC.
The economy is strong and well diversified and includes pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional services companies which continue to lead the employment and city's industrial output. For October 2011 the city recorded an unemployment rate of 9.4%, compared to 8.6% and 8.5% for the state and U.S., respectively.
Development in the county has been ongoing, increasing the city's ability to generate tax revenues and increase employment opportunities. The county's population has grown 5% since 2000, slightly below the state's increase of 6.6% for the same period. Wealth levels approximate state averages but represent just 88% of national averages. Metro area income levels continue to exceed national averages.
The tax base is diverse with the top 20 taxpayers comprising 12% of taxable assessed valuation. Property tax collections remain strong with total collections averaging 96% over the last three years. The compound annual growth rate for assessed valuation declined by 1.3% over the last five years and currently totals $37.1 billion. Assessed valuation is expected to increase in 2012 as the previous two years were affected by a change in assessment methodology for commercial properties which resulted in a large number of appeals.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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