[December 15, 2014]

Fitch Affirms Mayers Memorial Hospital District, CA's GO Bonds at 'BBB-'; Outlook Negative

Fitch Ratings takes the following rating action on Mayers Memorial Hospital District, CA (News - Alert) (the district):

--$4.5 million general obligation (GO) bonds, 2010 election, 2011 series A affirmed at 'BBB-'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are general obligations of the district, supported by an unlimited ad valorem tax pledge on all taxable property in the district.

KEY RATING DRIVERS

WEAKENED FINANCIAL POSITION: The Negative Outlook reflects the district's weakened financial position due to increased operating losses and decreased liquidity in fiscal years 2013 and 2014. The hospital benefits from its status as a critical access hospital, providing favorable Medicare reimbursement, but continues to be challenged by weak profitability and low cash levels.

NARROW TAX BASE: The district is geographically large but sparsely populated, with economic concentration in natural resources including timber and energy production, food processing and other land-based enterprises.

STRONG MARKET SHARE AND VOTER SUPPORT: Mayers Memorial Hospital maintains strong market share and its nearest competitor is 70 miles away. Overall community support for the hospital is strong as demonstrated by the 72% approval for the November 2010 bond authorization.

ADDITIONAL DEBT PLANS: Direct debt levels have risen sharply since 2010 with the issuance of both GO and non-GO debt. State-mandated seismic improvements are likely to be funded with substantial new borrowing now expected in 2015, increasing debt burdens further.

RATING SENSITIVITIES

OPERATING STABILITY: Continued declines in the district's operating performance or liquidity would likely result in downward rating action.

CREDIT PROFILE:

Mayers Memorial Hospital District spans the upper northeast corner of Shasta County, approximately 70 miles northeast of Redding, with portions in adjoining Modoc and Lassen Counties. The district has a population of approximately 14,000 and encompasses 8,000 square miles, an area larger than several states. The district operates a 22-bed acute care hospital and a long-term care facility with 99 skilled nursing beds.

WEAKENED FINANCIAL POSITION

The Negative Outlook reflects continued operating losses in fiscals 2013 and 2014 (unaudited) that have reduced the district's already limited financial flexibility. Unrestricted net assets fell sharply in 2013 and appear likely to turn negative for 2014 as operating margins have worsened. Management cited declines in utilization due to difficulties in recruiting new physicians as a contributing factor in these results.

Liquidity has decreased due to higher capital spending and lower cash collections with the implementation of an electronic medical records system. The district reported 10.9 days of cash on and at the end of fiscal 2013 as compared to 22.6 days in 2012. Unaudited results show a further decline to 5.2 days of cash at the end of fiscal 2014 and 3.5 days as of September 2014.

The district's challenging financial circumstances are partially offset by its status as a federally-designated critical access hospital, which provides for favorable Medicare reimbursement including recovery of capital costs. Medicare accounted for approximately 39% of gross revenues in 2014. The next closest hospital is 70 miles away, which results in solid market share.

INCREASED BORROWING PLANNED

Overall debt levels are currently moderate at $1,549 per capita and 2.5% of AV, but would more than double with a $38 million U.S. Department of Agriculture loan planned for 2015. As a critical access hospital, the district anticipates it would be eligible for federal reimbursement of approximately two-thirds of principal and interest on the loan. The new debt would allow the district to meet state mandates for seismic strengthening of acute care facilities prior to a 2020 deadline.

The district has no pension or other post-employment benefit liabilities. Debt service payments and defined contributions towards employee pensions accounted for a low 6.7% of expenditures in 2013, but appear likely to double following the district's planned 2015 borrowing.

LIMITED ECONOMY

The district's tax base is largely rural and agricultural in nature, with most of the top taxpayers in the timber, food processing, agricultural and recreational industries. Assessed valuation (AV) declines in 2010 and 2011 were offset by strong growth in 2012, and a modest increase in 2013. Annual TAV growth has averaged a healthy 2.5% since 2007. A proposed expansion of the district's boundaries to better match its service area could increase AV by up to 20% if approved, but would not impact the district's property tax revenues.

Employment statistics for the hospital district are not available. For Shasta County as a whole, unemployment levels have historically exceeded state and national averages. County employment levels have increased modestly since 2011 but are well below pre-recession peaks. Unemployment rates for 2014 remain elevated at 9.4%, as compared to 7.7% and 6.3%, respectively, for the state and nation. Median household incomes for Fall River Mills, where the district's hospital is located, were 66% of the U.S. average in 2012.

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.

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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=951495

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