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.
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.
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 (17,394) 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.
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
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
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
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.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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