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RPT-Fitch affirms Kalkaska Co. Hospital Auth, MI's $4MM ULT bonds at 'A-'; outlook stable
November 26, 2013 / 8:40 PM / 4 years ago

RPT-Fitch affirms Kalkaska Co. Hospital Auth, MI's $4MM ULT bonds at 'A-'; outlook stable

NEW YORK, November 26 (Fitch) Fitch Ratings has taken the following actions on 
Kalkaska County Hospital Authority (the authority), Michigan's unlimited tax 
(ULT) bonds:

--$4 million series 2007 hospital authority bonds affirmed at 'A-'.

The Rating Outlook is Stable.

SECURITY 

The bonds are secured by a voter-approved 10 year unlimited property tax levied 
by member townships and villages (participants) upon all taxable property within
their respective jurisdictions.  The authority has a lien upon the taxes to be 
levied equal to the annual debt service requirement for the year succeeding the 
tax levy year.

KEY RATING DRIVERS

CRUCIAL SERVICE: Kalkaska Memorial Health Center (KMHC or the hospital) provides
critical emergency and outpatient services to Kalkaska County (county) residents
and, through its affiliation with Munson Healthcare, affords access to a wider 
network of doctors and medical services.  The hospital is designated as a 
Critical Access Hospital (CAH), which allows it to recover enhanced Medicare 
reimbursement.

UNLIMITED TAX OBLIGATION: The authority does not have taxing power; however, 
each participant is obligated to levy unlimited property taxes sufficient to pay
debt service. Fitch believes the hospital's essentiality provides sufficient 
incentive for this levy.

WEAK ECONOMY: The rural economy is dependent upon limited manufacturing activity
and natural gas production. Energy concerns have led to a concentrated taxbase. 
The authority and county have a co-terminus tax base, which is showing signs of 
stabilization after a moderate decline.

RECOVERING ECONOMIC METRICS BELOW AVERAGE: Employment has begun to grow but the 
unemployment rates remains above the national levels. Income levels are 
well-below those of the nation.

ACCEPTABLE HOSPITAL OPERATIONS: Operating profitability has recovered recently 
yet is inherently subject to market and reimbursement volatility due to its 
small revenue base. These concerns are somewhat offset by diverse revenue 
sources and critical access designation. Liquidity levels are steady and 
adequate.

MANAGEABLE DEBT LOAD: County-wide debt levels are moderate while the authority's
tax-supported bonds fully mature within four years.

RATING SENSITIVITIES

ECONOMIC CHANGES: The narrow economic base and its reliance upon volatile 
industries limit the rating to its current level. 

HOSPITAL OPERATIONS: Fitch would view negatively deterioration of the hospital's
earnings or liquidity, weakening of the relationship with Munson Healthcare or 
the removal of the CAH designation.

CREDIT PROFILE

The authority is composed of 12 townships and one village which together 
encompass the entire population (17,099) and tax base of the county.  The 
Township of Kalkaska is the largest participant, comprising nearly 20% of the 
tax base.

LIMITED ECONOMY BASED IN ENERGY PRODUCTION

The sparsely populated county encompasses an area of 829 square miles in the 
northwest part of Michigan's Lower Peninsula.  State forests constitute a 
majority of the land area.  Energy production and transmission are key economic 
activities as many of the county's leading employers are involved in natural gas
exploration or related services.  Another leading employer produces wire cloth 
components for the automobile industry although area manufacturing employment 
has declined in recent years. Spending on recreational sports is also a source 
of income and jobs to county residents.  

County employment levels have risen 3.8% over the past two years, after dropping
by 13.4% since 2006 due to the recession and problems of the automobile 
industry.  Unemployment metrics consistently trend above the state and national 
averages.  Unemployment rates have gradually declined from 14% in 2009 to the 
current 8% range, although the drop was primarily due to labor force shrinkage 
rather than growth in jobs.  Wealth indices are well under the state and 
national benchmarks.

The county's tax base has been relatively steady. Fiscal 2012 saw a minimal 1% 
growth, after only two years of declines totaling a modest 5.5%. The base is 
relatively concentrated, as the top taxpayer represents 10.8% of assessed value 
and the next nine represent 8.1%. Nearly all of the top taxpayers are in the 
natural gas industry.

DEDICATED, UNLIMITED PROPERTY TAX 

The dedicated property tax to service the bonds was approved in 2007 by a strong
majority (71% support) with the tax rate initially set at $1.60 per $1,000 
taxable assessed value (TAV).  The authority is required by law to establish a 
tax rate without limit to the level necessary to pay debt service. Each 
participant is obligated to levy taxes at the rate set by the authority to cover
debt service.  Revenues are transferred to the authority by March 1 of each 
year, providing sufficient time to meet the May 1 bond payments. The authority's
lien upon the taxes to be levied for the year succeeding the levy strengthens 
the incentive for participants to enact the levy. 

Property tax revenues traditionally slightly exceed debt service, with only a 
minimal amount supporting operations. Despite recent declines in the tax base, 
the 1.6 mills still generates sufficient revenues. Amortization is rapid, with 
the final maturity in 2017 coinciding with the expiration of the dedicated tax 
levy.

Fitch believes that the essentiality of the hospital sufficiently induces 
participants to continue levying the taxes necessary for debt service. A survey 
of the participants indicates that all have low to average debt burdens and debt
service requirements and mostly strong financial operations. There are varying 
assessed valuation trends, although as a general rule most of the municipalities
had moderate declines over the past three years and for several there are signs 
of stabilization in fiscal 2012. The county historically has fully compensated 
its localities for property tax delinquencies although there is no legal 
requirement to do so. Additionally, each member has a seat on the authority's 20
person governing board.

ESSENTIAL PROVIDER 

The authority operates KMHC, a small community hospital providing critical 
primary and emergency services to county residents.  The hospital provides 
inpatient and 24 hour emergency services and sees 63,000 outpatients per year. 
KMHC also owns and manages an assisted living facility with an attached 88 bed 
long-term care unit. 

KMHC's long-standing affiliation and management service agreement with Munson 
Healthcare (rated 'AA-', Stable Outlook by Fitch), a network of seven hospitals 
in northern Michigan, expands the range of medical services available to the 
hospital's service area, access to information technology, billing services and 
group purchasing. Fitch views the strength and scope of this agreement as a 
credit strength. 

VOLATILE OPERATING RESULTS; SMALL, DIVERSE REVENUE BASE 

The hospital's small revenue base of approximately $29.8 million (as of fiscal 
2013) makes it inherently susceptible to minor operating disruptions, including 
physician turnover, utilization fluctuations, and reimbursement changes. Revenue
diversity, derived from inpatient, outpatient, long-term care, and assisted 
living units, somewhat tempers this concern. 

The hospital's designation as a CAH, which provides 101% reimbursement for 
Medicare, provides a critical boost to revenues and partially reduces the 
exposure attributable to heavy reliance upon Medicare and Medicaid funding. 
Additionally, the hospital expects to benefit from the state's passage of 
Medicaid expansion, due to the high Medicaid population.

Fiscal 2013 profitability rebounded to about $2.9 million including tax 
revenues, a historical high, which management attributes to solid reimbursement 
from the diverse service lines. Positively, management has controlled wage 
growth and believes that the Medicaid expansion will allow the collection of 
additional reimbursements and mitigate bad debt losses. 

The operating margin excluding the dedicated property tax levy was 5.5% in 
fiscal 2013. This represented an improvement from negative 2.6% of the previous 
year, although fiscal 2012 included a $933,000 payment to Michigan as a 
settlement for rate adjustments.U.S. Local Government Tax-Supported Rating CriteriaAdditional Disclosure 

Solicitation StatusALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
here. IN ADDITION, RATING 
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METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
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AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
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