Fitch Affirms Dallas County Hospital District, TX's GO Bonds at 'AA+'; Outlook Stable
--$9.5 million limited tax bonds tax-exempt series 2009A;
--$222.5 million limited tax bonds taxable series 2009B (Build America Bonds - Direct Payment);
--$457.7 million limited tax bonds taxable series 2009C (Build America Bonds - Direct Payment);
--$38.3 million limited tax bonds series 2013;
The Rating Outlook is Stable.
The bonds are secured by property tax levy limited to $0.75 per $100 taxable assessed valuation (TAV) on all taxable property within the county for all purposes.
KEY RATING DRIVERS
LARGE, DIVERSE TAX BASE: The district's tax base, which is coterminous with Dallas County, is very large and expansive. Its economic diversity, based on manufacturing, healthcare, telecom, banking and financial services, and trade, aided the tax base's return to growth and will allow the district to fund its debt with very modest taxing effort.
KEY ROLE AS SAFETY NET HOSPITAL: The district fulfills an essential role in providing health care services to Dallas County's Medicaid and indigent care population, both of which have been growing. Parkland Memorial Hospital, the district's primary operating platform, serves as the region's leading obstetrics and trauma facility and has the largest civilian burn unit in Texas.
PRESSURED OPERATIONS: The district's Fitch-adjusted operating margins have been modestly positive despite the additional costs associated with its extensive Medicare and Medicaid compliance efforts. Fitch expects the district's new hospital will pressure its operating margin over the next one to two years as increased operating costs are absorbed.
MIXED LIQUIDITY: The district's liquidity position declined as expected over the last two years. The decline was the result of the planned use of board-designated cash for equipping the new hospital. Liquidity metrics in fiscal 2015 were mixed. Fitch expects incremental liquidity growth as the district is at the end of its substantial capital investment cycle.
PROPERTY TAX SUBSIDY: Property tax revenues comprise a sizable 24% of operating revenues, providing a stable revenue source with ample taxing margin below the maximum rate.
MODERATE DEBT AND LOW CARRYING COSTS: The overall debt burden has declined to a moderate level due to the steady expansion of TAV. The pay-out rate remains slow but there are no further debt plans and pension costs are modest. Consequently, total carrying costs are very low.
LIQUIDITY PRESSURE: Failure to make gradual progress towards its liquidity goal may result in negative rating action.
NEW HOSPITAL OPERATIONS: Fitch's rating assumes stable operational performance in the new hospital, pointing to restored operating margins and a smooth transition to a new reimbursement landscape. Deviation from this expectation could result in a rating change.
SAFETY NET HOSPITAL
Dallas County Hospital District is the largest county hospital district in Texas based on 2014 discharges from its main operating platform, Parkland Memorial Hospital. The district serves as the safety net health care provider to uninsured residents of Dallas County. It also provides trauma, burn, & other tertiary care to residents of north central Texas and beyond. The district operates the largest Level I trauma center in the region and one of the largest civilian burn centers in the U.S. It also operates one of the largest obstetrics programs in the U.S., delivering 33% of all newborns in the county. The district also operates the Dallas County jail health system, providing medical care to 7,000 inmates.
REPLACEMENT CAMPUS ON TIME AND BUDGET
The replacement campus commenced operations in August 2015 and includes a new hospital ($1.1 billion project cost) with 862 beds (a 28% increase over previous capacity), clinic buildings ($105 million), a logistics building ($50 million), and both surface and garage parking ($42 million). Management reports that construction was completed on time and within budget. Funding sources include the $747 million 2008 bond program, $350 million in cash reserves, and $150 million in philanthropic donations.
MODERATE OVERALL LONG-TERM LIABILITIES AND MODEST TOTAL CARRYING COSTS
The district's overall debt levels are moderate relative to market value at 4.5% but elevated on a per capita basis at $4,434. Principal amortization is slow as expected given the absence any outstanding debt prior to 2009 - only 24% of outstanding principal matures within ten years. Based on assumptions of modestly growing TAV, which Fitch considers reasonable, district officials project a total debt service tax levy of $0.022 per $100 TAV for the entire 2008 authorization, slightly less than the $0.025 per $100 TAV levy authorized by voters. Combined with the current O&M rate, the resulting total tax rate of $0.286 per $100 TAV is well below the tax cap of $0.75 per $100 TAV. Based on maximum annual debt service ($43 million in 2020), total carrying costs for debt service, pension, and OPEB are low at only 4.1% of fiscal 2014 spending.
The district maintains a single-employer defined benefit pension plan for its full-time employees. As of Jan. 1, 2014, the plan's published funded position is 82.5%. However, adjusted for Fitch's 7% rate of return assumption, the funded position declines to 74.4%. Other post-employment benefits (OPEB) are funded on a pay-go basis. Effective Jan. 1, 2013, employees and retirees are no longer eligible for OPEB, reducing the annual OPEB cost to negligible amounts.
PRESSURED BUT BALANCED OPERATIONS
The district's fiscal 2014 audit and unaudited fiscal 2015 results point to modestly positive operating margins of 1.6% and 0.9% (as calculated by Fitch), respectively. As expected, the planned use of $350 million of board-designated cash to equip the new hospital reduced the district's liquidity. Fiscal 2015 liquity metrics are mixed and consistent with Fitch's expectations. Days cash on hand is projected at 68 days for fiscal 2015, down from 121 days in the prior year. Fiscal-year end is a low point in cashflow as the bulk of property taxes are collected in January and February. The district's goal is to maintain 160 days cash on hand, progress toward which Fitch believes is reasonable over the longer term given expectations of lower capital spending and steady operating EBITDA (inclusive of tax-support). Cash-to-debt was adequate at 49.3% in fiscal 2015.
The district's fiscal 2016 budget is balanced and includes a notable $535 million in property taxes that comprise 25% of consolidated district revenues. Fitch expects the district's new hospital will pressure its operating margin over the next one to two years as increased operating costs are absorbed.
Like other large public safety net hospitals in Texas, Parkland's reliance on Medicaid funding is susceptible to revenue pressure as reimbursement levels and methodologies have undergone major changes in response to the Affordable Care Act (ACA). In 2012 Texas hospitals transitioned from the Upper Payment Limit (UPL) program to the 1115 Waiver program which will gradually phase in a new methodology that balances uncompensated care payments and incentive payments based on the quality and efficiency of healthcare delivery.
Parkland Memorial Hospital remains in full compliance with all of Medicare's requirements. Previous non-compliance in 2011 threatened the hospital's federal funding. In addition, the district received positive initial feedback on its recent inspection by the Joint Commission on Accreditaion of Healthcare Organizations.
DIVERSE ECONOMIC BASE
The district's tax base is coterminous with Dallas County, providing ample taxing resources. Taxable values declined by a modest cumulative 7.3% in fiscal years 2010 - 2012 before rebounding with solid annual gains, including a 7.8% increase in fiscal 2016, due to renewed construction activity and healthy reappraisals. The district benefits from a diverse economy based on manufacturing, healthcare, telecom, banking and financial services, and trade (warehousing).
For the 12 months ending August 2015, the county added 23,130 jobs, a 1.9% increase. Such job gains fueled a decline in the unemployment rate to 4.1% from 5.6% the year prior and remains below the state (4.4%) and national (4.9%) averages. Global Insights expects the region's low business costs, highly educated workforce, favorable tax environment, and solid transportation infrastructure will support growth over the medium term.
HIGH COMMUNITY SUPPORT
Overwhelming community support enabled passage of a large $747 million GO authorization in 2008 with a high 82% of voters in favor of a replacement campus. Concurrently, voters approved a $0.01 per $100 TAV levy increase for operation of the replacement hospital, equivalent to $15 million annually based on current values.