|[November 29, 2012]
Fitch Rates Nacogdoches County Hospital District, TX Sales Tax Revs 'A-'
AUSTIN, Texas --(Business Wire)--
Fitch Ratings assigns a rating of 'A-' to the following sales tax bonds
of Nacogdoches County Hospital District, Texas (the district):
--$47.44 million sales tax improvement and refunding bonds, series 2013.
The bonds are expected to price via negotiated sale the week of Dec 10,
2012, pending market conditions. Proceeds will be used to fund facility
expansion and to refund a portion of the district's outstanding
In addition, Fitch affirms the following ratings:
--$20.3 million (pre-refunding) in outstanding sales tax bonds at 'A-';
--Implied unlimited tax general obligation rating of the district at 'A'.
The Rating Outlook is revised to Negative from Stable.
The bonds are special limited obligations of the district, payable and
secured by the district's 1% sales and use tax.
KEY RATING DRIVERS
FINANCIAL PRESSURES: The Negative Outlook is based on financial stress
caused by declining patient volumes and supplemental funding. The
district reduced expenses over the past several years to address the
trend of thinning margins and reduced liquidity but financial
performance remained strained in fiscal 2011 and 2012. Although
management presented a balanced 2013 budget, which includes additional
cost savings, Fitch notes a continued dependency on uncertain
ADEQUATE DEBT SERVICE COVERAGE: Overall coverage of the district's
maximum annual debt service (MADS) remains solid. Sales taxes exhibit
economic sensitivity, but have demonstrated healthy growth over the past
10 years. Legal provisions include a standard cash-funded debt service
reserve fund, but a below-average additional bonds test.
ESSENTIAL SERVICE: The district's hospital provides essential safety-net
healthcare services to Nacogdoches County area residents. The resulting
payor mix is weighted heavily by charity care, Medicaid, and Medicare,
making the hospital vulnerable to federal and state budget cuts.
ADDITIONAL FLEXIBILITY: The district still retains the authority to
impose a property tax levy, the rate of which was lowered to zero for
fiscal 1993 due to approval of the currently active 1% sales and use
tax. Reinitiating a property tax levy would be politically difficult,
but would substantially increase the district's financial flexibility.
WHAT COULD TRIGGER A RATING ACTION
REDUCED COVERAGE: Reduced debt service coverage of the district's sales
tax obligations could put negative downward pressure on the rating.
EROSION OF FINANCIAL CONDITION: Further weakening of the district's
operating performance and liquidity could result in negative rating
The district, created in 1967, is coterminous with Nacogdoches County in
east Texas. With the city of Nacogdoches as its primary population
center, the service area's economy is based on agriculture, lumber,
manufacturing, and oil & gas. Manufacturing represents a large
employment sector, behind education and government, due to a sizeable
poultry processing plant.
RURAL EAST TEXAS ECONOMY
The county's employment base has been stable, with unemployment rates
that consistently trend below state and national averages. The county
unemployment rate of 5.9% as of September 2012 is improved from the year
prior and compares favorably to the state (6.3%) and national (7.6%)
averages for the same period. Below-average wealth levels reflect the
influence of the Stephen F. Austin University 12,000-student population.
ESSENTIAL SERVICE PROVIDER
The district owns and operates Memorial Hospital in Nacogdoches, a
general acute care facility (Licensed Level III Trauma Center) with 216
licensed beds, 122 of which are in use. The district competes with a
for-profit hospital, also located in Nacogdoches, for commercialy
insured and managed care patients.
The district has a relatively weak payor mix as a public hospital, with
a large percentage of Medicaid (12.6%), Medicare (44.4%) and self-pay
(14.2%) patients (measured as a percent of net revenues). While
providing essential services to the region, the area's lower-income
population and the district's reliance on third-party subsidies,
including Medicaid disproportionate share ($4.3 million in fiscal 2011)
and upper payment-limit funding ($4.5 million in fiscal 2011), make it
vulnerable to potential cuts in governmental funding.
ECONOMICALLY SENSITIVE SALES TAX REVENUES
The district's sales and use tax can be used for both operations and
debt service. After posting solid average annual growth of 8.9% from
fiscal years 2005-2009, sales and use tax revenues declined by 12.4% in
fiscal 2010 due to recessionary pressures, before rebounding nearly 30%
in fiscal 2011. The district attributed the fiscal 2011 increase largely
to a surge in oil & gas activity.
Fiscal 2012 collections of $8.5 million reflect a 13-month period,
pursuant to a change in accounting method; normalizing collections to a
12-month period, fiscal 2012 collections total $7.8 million,
representing a 4.6% decline from fiscal 2011. Management projects fairly
flat 2013 sales tax revenues at $7.9 million, which Fitch considers
prudent based on recent trends and historical volatility. Current sales
and use tax revenues provide minimal revenue diversity, comprising only
8.7% of total fiscal 2011 revenues.
SOUND DEBT SERVICE COVERAGE
Coverage of MADS remains solid at 2.2x by audited fiscal 2011 revenues
(2.06x based on normalized fiscal 2012 revenues), although down from
3.2x prior to the new issue and by fiscal 2010 revenues. The additional
bonds test is below average at 1.35x MADS. A standard debt service
reserve fund applies to the new and outstanding series.
MODERATE OVERALL DEBT; UNDERFUNDED PENSION
Overall debt is moderate at $2,468 per capita or 3.2% of market value,
after adjusting for state support of local school district debt;
amortization is below average at 22% within 10 years. The new issue will
fund construction of a new surgery unit, labor/delivery floor and
renovation of the emergency department.
The funded position of the district's pension plan is well below average
at 55% as of June 30, 2011 (49% using the more conservative 7%
investment rate-of-return assumption), although the district has
consistently funded the annual required contribution. The low funding
levels represent a credit concern. The county does not have any other
post-employment benefit obligations.
REDUCED OPERATING MARGINS
Flat patient volumes, growing operating costs, and reduced investment
income have thinned operating margins and caused liquidity levels to
trend downward from 89 days cash on hand in fiscal 2007 to 34 days in
fiscal 2011. The district imposed budget reductions over the past
several years including staff reductions (60 full-time equivalents), the
closure of its hospice and home health services, sale of its
hemodialysis unit, deferment of pay hikes, and various benefit
adjustments. A fiscal 2011 operating deficit of $5 million reflects
continued pressure on the district's operating margins as the
supplemental funding level fell back to normal levels from an abnormally
high payment level in the prior year.
Audited fiscal 2012 results reflect an additional deficit of $7.4
million, consistent with recent trends. The district expects break-even
fiscal 2013 results based on further cost reductions and increased
supplemental funding attributable to a new Medicaid state waiver
program. Fitch recognizes the uncertainty of these projected revenues as
the Medicaid waiver program has not yet been fully implemented. Fitch
also notes that with increased debt service beginning in fiscal 2014,
about $1 million less of sales tax revenues will remain to fund the
district's operations, placing yet another challenge on strained
ADDITIONAL FINANCIAL FLEXIBILITY
The district retains authority to levy a property tax of up to $0.75 per
$100 taxable assessed value (TAV) (although the rate was reduced to zero
effective with voter approval in January 1992) of the currently enacted
1% sales and use tax for operations, debt service, and economic
development. Based on current TAV, each incremental tax levy of $0.01
per $100 TAV would generate about $310,000 in property tax revenues.
Fitch views the ability to levy a property tax as a source of additional
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, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, Zillow.com,
National Association of Realtors, and the Municipal Advisory Council of
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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