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Fitch Affirms Kalkaska Co. Hospital Auth, MI's $2.1MM ULT Bonds at 'A-'; Outlook Stable

Fitch Ratings has affirmed the following Kalkaska County Hospital Authority (the authority), Michigan unlimited tax (ULT) bonds:

--$2.1 million series 2007 hospital authority bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from 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 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 tax base. The authority and county have a co-terminus tax base, which is showing signs of stabilization after a moderate decline.

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.

ADEQUATE 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 currently solid but subject to some variability. .

MANAGEABLE DEBT LOAD: County-wide debt levels are moderate and the authority's tax-supported bonds fully mature within two 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 (17,394) 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. Recreational sports also generate economic activity.

County employment levels have risen 6% from 2012 to 2014, after dropping by 13.4% from 2006 to 2011 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 16% in 2010 to the current 8% range. Wealth indices are well under the state and national benchmarks.

The county's tax base has been relatively steady. Growth over the last two years was limited, and fiscal 2014 total assessed value is 4% below 2009 peak. 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) of voters 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.

Property tax revenues traditionally slightly exceed debt service, with only a minimal amount supporting operations. Despite recent fluctuations 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. Most of the municipalities are seeing rebounding TAVs. The county historically has fully compensated its localities for property tax delinquencies although there is no legal requirement to do so. The authority receives full bond levy as long as the county continues to utilize its delinquency fund. 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 over 50,000 outpatients per year. KMHC also owns and manages an assisted living facility with an attached 84-bed long-term care unit, expected to grow to 104 beds in early 2016.

KMHC's long-standing affiliation and management service agreement with Munson Healthcare ('AA-', Outlook Stable), 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 $35 million (as of fiscal 2015) 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 to heavy reliance upon Medicare and Medicaid funding. Additionally, the hospital is benefitting from the state's passage of Medicaid expansion due to the high Medicaid population.

Fiscal 2015 profitability improved to about $3.7 million including tax revenues (10% operating margin), a historical high, which management attributes to solid reimbursement from the diverse service lines. Positively, the acquisition of a local physicians group has augmented volumes.

The operating margin excluding the dedicated property tax levy was 7% in fiscal 2015. This represented an improvement from negative and very low margins in previous years.

For fiscal 2016, the hospital has budgeted for a similar operating surplus as in fiscal 2015. However, Fitch believes that operating volatility is characteristic of the financial profile.

MINIMAL LONG-TERM OBLIGATIONS

The district plans to go back to the voters after the current tax levy expires in 2017 to finance additional facilities. The county's overall debt levels are low to moderate at $1,285 per capita and 3% of market value.

The authority provides a modest 401(K) contribution for its employees, accounting for 1.4% of operating expenses in fiscal 2014. The authority does not provide other post-employment benefits to its employees.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995182

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995182

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings, Inc.
Primary Analyst
Yueping Liu
Associate Director
+1-415-732-5629
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com


Source: Business Wire (November 23, 2015 - 1:08 PM EST)

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