NEW YORK, November 26 (Fitch) Fitch Ratings has taken the following actions on
Kalkaska County Hospital Authority (the authority), Michigan's unlimited tax
--$4 million series 2007 hospital authority bonds affirmed at 'A-'.
The Rating Outlook is Stable.
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
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
MANAGEABLE DEBT LOAD: County-wide debt levels are moderate while the authority's
tax-supported bonds fully mature within four years.
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.
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
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
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
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.
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
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
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