Fitch Downgrades Culberson County Hospital District, TX LTGOs to 'BBB-'; Outlook Stable

Fitch Ratings has downgraded the following Culberson County Hospital District, TX bonds to 'BBB-' from 'BBB':

--$6.6 million of outstanding limited tax general obligation (LTGO) bonds, series 2008 and 2009.

In addition, Fitch has downgraded the implied unlimited tax general obligation rating to 'BBB' from 'BBB+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by a limited ad valorem tax pledge levied against all taxable property in Culberson County, limited to $0.75 per $100 of taxable assessed value (TAV).

KEY RATING DRIVERS

WEAK FINANCIAL REPORTING: The downgrade to 'BBB-' reflects the hospital district's inadequate financial reporting practices, evidenced by incomplete audits for fiscal years 2010 and 2011. Fitch believes the level of draft information provided is sufficient to assess the district's credit quality but views the poor financial reporting, together with the limited resource base and modest financial reserves, as commensurate with the 'BBB-' rating.

LIMITED ECONOMY: The local area resource base is characterized by low income levels and a tax base concentrated in energy-related companies. TAV has declined moderately in recent years but a return to growth is anticipated in fiscal 2013.

LOW DEBT: Debt levels are low, amortization is average, and the district currently has no new debt plans. The total tax rate has remained unchanged in recent years and sits slightly below the statutory tax rate cap.

ESSENTIAL TO COMMUNITY: Culberson County Hospital (the hospital) is a 'Critical Access Hospital' (CAH), highlighting its essentiality to the community, and receives a favorable Medicare reimbursement due to its designation.

HOSPITAL OPERATING RISK: Hospital operations are in line with a facility of limited size and scope; however, the revenue base is very small and there is minimal liquidity.

LEASE TERMINATION: The lease between the district and hospital operator terminates prior to bond maturity but allows for automatic 10-year renewals.

CREDIT PROFILE

REMOTE HOSPITAL IN RURAL WEST TEXAS

Culberson County Hospital is a 25-bed (14 staffed) critical access hospital in Van Horn, Texas. A recent expansion of the hospital facilities included a new emergency room and imaging center. The district's service area is predominantly rural and the taxing base is coterminous with Culberson County (estimated population of 2,300), which is located 120 miles southeast of El Paso. The closest hospital facility is located in Pecos, Texas (Reeves County Hospital), approximately 85 miles away.

CONCENTRATED TAX BASE; DECLINING ASSESSED VALUE

Tax base concentration is high with the top 10 taxpayers comprising 43% of the fiscal 2012 tax base; the largest taxpayers are oil and gas companies. Fitch believes that the concentration risk is mitigated by the importance of these particular pipelines, and the long-term contracts that are typically used to support the financing and operations of pipelines.

The district's TAV has lost a cumulative 8.4% from its peak in fiscal 2008, a decline Fitch considers moderate. The fiscal 2012 TAV of $284.9 million is down 2.1% from the prior year, but preliminary figures from the county appraiser are positive and suggest up to a 6% rebound in the fiscal 2013 TAV.

SUBPAR SOCIOECONOMIC MEASURES

Wealth levels of county residents are low, with per capita income and median household income at 59% and 68% of the national average, respectively. The area has seen a declining employment and labor force trend in recent years and this continued in the 12-month period ending April 2012; the resultant drop in the unemployment rate from 4.3% to 3.7% was due to contraction in the labor force exceeding modest employment losses.

DISTRICT MAINTAINS A MODEST BUDGET, SUFFICIENT RESERVES

The hospital district collects property taxes to pay debt service, indigent care costs at the hospital, and nominal district administrative costs. The district's total tax rate has remained unchanged at $0.59 per $100 of TAV in the past two fiscal years, of which $0.36 is for operations and $0.23 for GO debt service. Management expects to maintain the same tax rate structure in fiscal 2013 and see a climb in the levy with TAV gains.

District operating expenditures are modest at just above $1 million annually. The district's ending fiscal 2009 unreserved general fund balance represented a significant 36% of spending, although fund balance declined markedly (37%) in fiscal 2009 due to a non-recurring payoff of notes payable, a decrease in the operating tax rate, and an uptick in indigent care costs. Draft audit figures for fiscal 2010 suggest an operating surplus (after transfers) of $287,000 and corresponding improvement in the unreserved fund balance to $1 million, of which about $447,000 is designated as an emergency reserve. Liquidity remained good at over 10 months of operating costs.

Audit documents for fiscal year 2011 are not available, but unaudited cash ledgers provided by the district show $1 million of cash on hand - of which $490,000 is unrestricted - as of Sept. 30, 2011, which is in line with 2010 liquidity. In addition, year-to-date fiscal 2012 budget results are favorable; the $1.4 million expenditure budget forecasts an $85,000 surplus after transfers and management expects to realize roughly this margin at year-end. Fitch expects the district's financial operations to remain stable given its limited purpose and anticipated improvement in fiscal 2013 revenues.

INADEQUATE FINANCIAL REPORTING

The fiscal 2010 district audit remains incomplete and is now over one-year late. Management noted delays in the reconciliation of capitalized interest and deprecation within the audit as part of the reason for the severe delay, and expects the audit to be finalized shortly. The fiscal 2011 audit will also be at least several months late. Fitch views the subpar financial reporting practice as a heightened risk incorporated into the downgrade.

AFFORDABLE DEBT BURDEN

The district's overall debt levels are low to moderate at 1.8% of estimated market value and $2,784 per capita. The district recently completed the emergency room expansion project funded with 2009 bond proceeds and management has no current plans to issue additional GO or hospital revenue debt. Annual debt service consumes over 1/3 of the district's expenditures, but this high carrying cost is reasonable given its status as a single-purpose district. The district itself has no employees and therefore has no long-term liabilities related to pensions or other post-employment benefits.

HOSPITAL FINANCES

Hospitals designated as CAH are reimbursed by Medicare at cost plus 1%, so that rural hospitals can survive financially at very low patient volumes; approximately 80% of the hospital's patients are Medicare. The hospital is leased to and operated by Preferred Hospital Leasing Van Horn, Inc. and as such, district property tax revenues provide 13% of the hospital's total operating revenues. The hospital's liquidity levels are low at approximately 14 days of operating costs or $202,000 in unrestricted cash, in fiscal 2011 (March 31 fiscal year) but preliminary fiscal 2012 audit results suggest improvement in the hospital's cash position.

Operating income and operating EBITDA margins (inclusive of property tax receipts) have remained positive but narrowed in fiscal years 2011 and 2012 (unaudited) due to financial pressure associated with personnel turnover. The hospital lost a physical therapist and a radiologist, which resulted in depressed Medicare utilization and higher costs for contract labor. However, management reports the positions have been re-staffed and expects operational improvements in fiscal 2013.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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