TEXT - Fitch affirms Washington's Snohomish Cty Public Hospital District #1

Wed Dec 19, 2012 2:39pm EST

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Dec 19 - Fitch Ratings has taken the following rating action on Snohomish County Public Hospital District's (PHD) limited tax general obligation (LTGO) bonds: --$2.9 million series 2004 affirmed at 'B'. The Rating Watch Negative is removed and the bonds are assigned a Negative Rating Outlook. SECURITY The bonds are secured by a full faith and credit general obligation pledge of the district. The district also irrevocably pledges to annually levy and collect property taxes within the constitutional and statutory limits, to pay debt service principal and interest on the bonds. KEY RATING DRIVERS AFFILIATION AGREEMENT REACHED: The removal of the Negative Watch follows the district's completion of an affiliation agreement with EvergreenHealth, a public hospital district based in Kirkland, Washington. The affiliation with EvergreenHealth became effective in December 2012 and is intended to help stabilize district operations and provide short-term cash-flow relief. SEVERE FINANCIAL CHALLENGES REMAIN: The Negative Outlook reflects the district's continued financial deterioration as a result of declining utilization, growing losses and poor liquidity. Fitch believes such weaknesses leave the district vulnerable to insolvency over the near-to-medium term. FISCAL IMPROVEMENTS DELAYED: Uncertainty related to the district's ongoing operations has contributed to the loss of clinical staff and senior management turnover, impeding efforts to stabilize the district's finances. Management proposes to ask district voters to authorize a new operating levy in April 2013, but the prospects for approval are unclear. STRONG TAX BASE; LIMITED BENEFIT: Given the weak financial position, the benefits of the district's GO pledge and the strength of its underlying tax base are diminished. The current rating more closely reflects the district's financial operations. WHAT COULD TRIGGER A RATING ACTION CONTINUED FINANCIAL DETERIORATION: The district's inability to stabilize its finances could result in insolvency and further rating downgrades. CREDIT PROFILE: Snohomish County Public Hospital District No. 1 is located in eastern Snohomish County, Washington, about 30 miles northeast of Seattle on the outskirts of the Puget Sound region. The district owns and operates Valley General Hospital, the only acute care facility in the district, and the Valley General Chemical Dependency Treatment Center. AFFILIATION AGREEMENT REACHED Following several years of efforts to forge new partnerships, the district executed an affiliation agreement with EvergreenHealth, a public hospital district based in Kirkland, Washington, in December 2012. The agreement provides for a multi-year partnership that is intended to increase utilization and revenues for both entities, and help stabilize the district's finances. In addition, EvergreenHealth will pre-pay the district approximately $1 million for four years of sub-lease expenses under the agreement, reducing immediate cash-flow pressures. Fitch believes that these arrangements reduce the district's risk of insolvency in the short term, but its longer-term prospects remain uncertain. SEVERE FINANCIAL CHALLENGES REMAIN Audited results for fiscal 2011 and interim financials for fiscal 2012 show continued deterioration in the district's financial position, with net assets down 68% (to $3.7 million) since the end of fiscal 2010. Operating losses also continue to grow and liquidity has fallen to 13 days of cash on hand as of September 2012. The district's financial position reflects growing weakness and threatens its long-term viability. The district expects to ask voters to authorize a new operating levy in April 2013 which could add raise approximately $2.4 million in annual revenue if approved. Passage of this measure would improve the district's finances but significant challenges remain given operating losses that reached $4.5 million in fiscal 2011. STRONG UNDERLYING TAX BASE OF LIMITED BENEFIT The district's underlying tax base is large and diverse, and property tax receipts have been stable. However, given the district's weak financial position, the strong underlying tax base and GO pledge is of limited benefit due to the potential disruption of debt service payments in an insolvency situation. Direct and overlapping debt levels for the district are moderate at approximately $4,000 per capita and 2.9% of assessed value. Amortization is slow as a result of the district's 2009 issuance of additional GO debt, with 27% of outstanding principal due for payment within 10 years. Debt service requirements for the district are small relative to the size of its operations, and accounted for approximately 3% of expenditures in fiscal 2011.

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