|[August 25, 2014]
Fitch Downgrades El Paso County Hospital District, TX GOs to 'AA-'; Rating Outlook Negative
AUSTIN, Texas --(Business Wire)--
Fitch Ratings has downgraded the following El Paso County Hospital
District, TX (the district or UMC) bonds to 'AA-'from 'AA'.
--$134.3 million combination tax and revenue certificates of obligation
(CO) series 2013;
--$110.4 million general obligation (GO) refunding bonds series 2013
--$7.2 million GO refunding bonds series 2009;
--$116.3 million GO bonds series 2008A; and
--$1.5 million combination tax and revenue certificates of obligation
The Outlook has been revised to Negative from Stable.
The bonds are direct obligations of the district and are payable from an
annual ad valorem tax, levied within the limits described by law. The
property tax rate cannot exceed 75 cents per $100 taxable assessed
valuation (TAV) for both operations and maintenance (O&M) and debt
KEY RATING DRIVERS
REDUCED LIQUIDITY AND MARGINS: The downgrade reflects a decline in the
University Medical Center (UMC) margins and liquidity due primarily to
the inability of the Children's Hospital (EPCH) to make expected
payments under various agreements to UMC, as well as below-budget
Medicaid supplement payments.
EPCH EXHIBITS DISTRESSED PROFILE: EPCH is a separate 501c organization
that entered into various agreements with UMC including a facility lease
agreement and administrative services agreement. The Negative Outlook
indicates concern over EPCH's going concern disclosure in its 2013 audit
and the financial impact of its distressed credit profile on the
District. It is Fitch's understanding that EPCH is actively seeking a
relationship to enter into a partnership with a third-party provider.
ESSENTIALITY OF SERVICE: UMC provides an essential service to a growing
population. The district's capital plan positions UMC to benefit from
increased volumes and Medicaid waiver payments. There are two competing
for-profit hospital systems in the service area.
GROWING DIVERSIFIED ECONOMY: The economy of El Paso County includes
international trade, manufacturing and distribution, Fort Bliss, the
U.S. Army's second largest installation, and the stabilizing presence of
education and government sectors. Growth prospects are strong. The tax
base has realized solid growth and is without concentration.
TAXING CAPACITY; COMMUNITY SUPPORT: The district's fiscal 2015 budget
maintains a strong 70% margin under the tax limitation. Community
support is evidenced by voter support for the district's general
obligation bond programs.
STABILIZED FINANCES: Removal of the Negative Outlook is dependent on
stabilization of the district's finances, either through EPCH's ability
to secure a strategic partner or UMC's demonstrated ability to absorb
the costs associated with EPCH's operations within its own budget.
The District covers a very large area, totaling 1,058 square miles, and
operates the only public hospital located in its primary service area.
The University Medical Center (UMC) is a 394-bed acute care facility
owned by the district with the legal responsibility to provide medical
and hospital care to all El Paso County residents regardless of their
ability to pay.
The hospital also serves as the primary teaching hospital for the Texas
Tech University Health Sciences Center in El Paso. The university's
medical school is adjacent to the hospital as is the region's first
children's hospital, located within the UMC facilities. The El Paso
Children's Hospital opened in February 2012 and was constructed with
series 2008 bond proceeds. The district owns the facility and leases it
to the separately licensed non-profit EPCH, which has an independent
board of governors.
UMC FINANCIAL PRESSURE DUE TO EPCH CONTRACT DEFAULT TO UMC
EPCH's 2013 audit reported that its ability to continue as an ongoing
entity is dependent on arriving at a 'mutually acceptable agreement with
UMC' and improved operating results. As a new operation, EPCH has been
challenged with reductions in reimbursement rates, a lack of
participation in the state Medicaid Waiver program, increased overhead
and operating expenses, poor accounts receivable management and lower
than anticipated inpatient volumes. EPCH officials report that EPCH is
currently in negotiation with potntial strategic partners which should
provide a cash infusion, management expertise and improved operations.
Fitch will monitor the ability of UMC to stabilize finances to the
extent that a strategic partner is not identified.
UMC operating revenues include contract revenues from EPCH representing
service, equipment and facility leases provided to them by UMC. By
contract, these revenues total about $28 million annually (about 6% of
the district's consolidated fiscal 2013 total revenues). EPCH has failed
to meet its contractual obligations to UMC, which has placed financial
pressure on UMC. Interim June 30, 2014 UMC financial statements report a
total contract receivable balance from the Children's Hospital of $73.8
million. By fiscal year end 2014, the total receivable will be fully
In contrast to recent results, the district projects a change in net
position of $<64.5> million and <$16> million for 2014 and 2015
respectively. Despite cost cutting initiatives, including a recent
reduction in force, the projections reflect a 100% loss reserve of EPCH
contract receivables and the uncertainty of future collections. Fitch
anticipates that in 2015, the receivables will be fully reserved if EPCH
does not receive a cash infusion from a strategic partner and may be
collectable in the alternative. The district realized modest
profitability during fiscal 2010 through 2012 (prior to the opening of
EPCH), not atypical for a large county hospital district that serves as
a primary safety net provider.
DELAYED MEDICAID SUPPLEMENT PAYMENTS COMPOUND LIQUIDITY PRESSURE
As a Texas public hospital, UMC's operations and profitability rely
heavily on receipt of annual Uncompensated Care/UPL revenues. These
revenues totaled $70.4 and $73.6 million in fiscal 2013 and fiscal 2012,
representing about 20 percent of total operating revenues. Adverse
changes to State and Federal program funding pose operational challenges
to the district and are of concern.
The state has experienced delays in timely Medicaid supplemental
payments during fiscal 2012 and fiscal 2013. Despite the district's cash
conservation plan, these delayed Medicaid supplement payments have
contributed to the district's low liquidity position of 57.9 days and
40.9 days as of Sept. 30, 2013 and projected June 30, 2014 respectively.
As a regional hub for region 15 of the state Medicaid Waiver program,
UMC funds payments to participating providers prior to receipt of funds
from the state. The district plans to seek approval from El Paso County
for approximately $20 million in a 2014 tax anticipation note to
alleviate the Medicaid supplement timing mismatch.
STABLE TAX BASE; BROAD TAXING MARGIN
The district's taxable assessed valuation (TAV) has grown an average of
2.5% annually between fiscal 2009 and 2014, without realizing a single
reduction during the recession. The top 10 taxpayers are represented by
refining, utility, healthcare, and retail interests and comprise a low
4.6% of fiscal 2014 TAV.
Officials have a strong history of managing growth while maintaining a
low tax rate. The district's fiscal 2015 effective total tax rate equals
just over 22 cents per $100 TAV, well below the tax cap of 75 cents per
DIVERSIFIED ECONOMIC GROWTH
El Paso County and Juarez, Mexico comprise the largest Mexican
bi-national metroplex, with a combined population of more than 2.5
million. The county includes the City of El Paso (GO bonds rated 'AA' by
Fitch), the sixth largest city in Texas. The county's median household
income represents 74.8 percent of the U.S. average and the unemployment
rate remains elevated at 7.6% (compared to 6.3% for the U.S. rate) as of
June 2014, although improved from 9.7% a year earlier.
The county's location midway between the U.S. coasts has made it a
significant gateway between the U.S. and Mexico. The county currently
has four ports of entry and the soon-to-be-completed Tornillo-Guadalupe
International Port is widely anticipated to further boost trade by
easing downtown congestion and improving east-bound commercial traffic
Ongoing expansion of Fort Bliss' military facilities continues to boost
the local economy. Subsequent to the federal government's $5 billion
investment over the recent past, the full economic impact of the
expansion is still unfolding as evidenced by the recent announcement of
an 8,000 to 10,000 member air force deployment to the base for annual
Fitch believes that trends in the county's trade and military sectors,
combined with new downtown redevelopment and wide spread commercial and
retail development, bode well for near- term gains in the county's
population and employment base.
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 (News - Alert) Global Insight, National
Association of Realtors.
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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