Moody's Downgrades Two Texas Hospital Districts

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DALLAS – Two hospital districts in the oil producing Permian Basin of West Texas saw their credit downgraded by Moody's Investors Service due to declining tax bases and diminishing prospects of a rebound.

The Reagan Hospital District in Reagan County and the Iraan General Hospital District in nearby Pecos County benefitted from the oil boom years but are now seeing the trend reversed after oil prices began falling sharply in mid-2014, analysts said.

Reagan Hospital District's $31.4 million of outstanding debt fell three notches to a junk-bond level of Ba2 from Baa2. Moody's retained a negative outlook that "reflects the downside risk of the district's significant economic and tax base exposure to the weak oil and gas industry over the next 12-18 months while oil prices remain low," analyst Julie Meyer wrote.

Iraan General Hospital District managed to keep an investment grade rating of Baa3 after a four-notch downgrade from A2 but still has a negative outlook from Moody's. The district has about $10.8 million of debt outstanding.

Amid the risks, Texas hospitals got some good news as the federal government announced an extension of the state's Medicaid waiver.  The waiver allows hospitals in the state to continue receiving Medicaid reimbursements.  The exception was created when Texas refused to expand Medicaid under the 2010 Affordable Care Act.

Iraan General Hospital District was created in 2004 and serves a population of 15,507. The district operates a critical access public acute care hospital that provides in-patient, outpatient and emergency care services for residents.

The Iraan district's bonds are secured by a limited tax levy with a maximum of $7.50 for all purposes. In fiscal year 2016, the district levied a total rate of $3.73.

The debt service schedule is relatively flat, with a final maturity in 2036, Moody's noted. All of the district's debt is fixed rate.

The Reagan district's assessed value dropped 14% in fiscal 2016 and is expected to fall about 42.5% in fiscal 2017 to $1.5 billion according to estimates from the county assessor.

The district had an operating deficit of $750,298 in fiscal 2015, and net assets declined by $603,550, according to Moody's. Net patient service revenue fell $1.8 million, or 37% as fewer patients were treated. On the expense side, the district had to increase salaries 17% due to market wage pressure, Moody's said.

The interest and sinking tax rate for the Reagan District will need to increase from the $0.869 levied for fiscal 2016 to generate sufficient revenue to cover the debt service, Moody's said.

The combined maintenance and operations and interest and sinking rate for fiscal 2016 is $2.28.

"However, the tax base declines are eroding the district's tax rate flexibility," Meyer noted. "In order to maintain the same level of property tax revenue, the tax rate would need to increase to about $4.83."

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