Alabama Supreme Court ruling sends a hospital's rating deep into junk

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The ratings on a rural Alabama hospital’s bonds plunged deep into junk territory after the Alabama Supreme Court ruled that a 2014 law approving the sole security for the debt didn't receive proper public notice by the state Legislature.

The Chilton County Healthcare Authority’s bonds were downgraded 11 notches, to B from AA-minus, because of the “heightened uncertainty” over the validity of a pledged sales tax that secures the debt, Fitch said Thursday.

The rating, which remains on negative watch, applies to $37.4 million of outstanding bonds issued in 2015.

The bonds helped finance a new, $44 million, 30-bed hospital in the rural county of 44,000 people.

“The negative watch reflects the expectation of a downgrade to C if the collection of the sales tax is enjoined or repealed, as in that event bondholders would effectively be left in an unsecured position,” said Fitch analyst Parker Montgomery.

There has been no payment default, and the sales tax continues to be collected, Montgomery said.

J. Hobson Presley, a shareholder at Maynard Cooper Gale representing the healthcare authority, said he could not comment on pending litigation, although he pointed to recent material event notices posted on the Municipal Securities Rulemaking Board’s EMMA filing system.

“The authority intends to take any reasonable remedial action necessary to confirm the legislative authority for the sales tax,” said a Sept. 5 notice. “No decision has been made on the remedy or remedies to be pursued, but the authority is actively considering all available options.”

If remedial action includes a request that the Legislature adopt a new act authorizing the sales tax, it could take a while. The notice said the next regular session of the Alabama Legislature does not begin until March although Alabama’s governor can call a special session before then.

Fitch said it believes that the Supreme Court ruling materially increases the risk that the sales tax will be repealed.

The St. Vincent's Chilton Hospital opened in October 2016 in Clanton, about 54 miles south of Birmingham.

The debt is backed by a 1% sales tax, authorized in a local bill by the Alabama Legislature, and overwhelmingly approved by 80% of local voters in a June 2014 referendum.

Even before the hospital opened, it faced a class-action lawsuit brought by Roy Burnett, a local accountant.

Four months before the ribbon was cut on the completed facility, Burnett filed a seven-count suit contending that the sales tax was illegally imposed because Alabama legislators improperly voted in March 2014 to approve the local bill authorizing the tax.

Burnett wants the tax repealed and refunds issued to those who paid it.

In July 2016, the Circuit Court of Chilton County ruled against Burnett and found that the Legislature voted properly for a bill that allowed the Chilton County Commission to hold the advisory referendum on implementing a sales tax to build a new hospital.

Burnett appealed.

On Aug. 31, the Alabama Supreme Court reversed a portion of the lower court ruling and said the final version of the bill authorizing the tax was a violation of the state’s constitution because it wasn't advertised properly.

State lawmakers initially passed the law and sent it to Gov. Robert Bentley, who refused to sign it due to language that he said needed to be repealed. Bentley asked lawmakers to correct the bill, and they did, without publishing a notice of the change.

“The trial court erred in concluding otherwise, and its judgment on the pleadings is reversed and the cause remanded,” according to the Supreme Court’s 7-1 decision.

A hospital authority notice on Sept. 7 said the high court’s ruling is not final, and that further proceedings before the lower court are possible. Presley said it’s not possible to predict when those proceedings might be concluded, and when or if an injunction against further collections of the tax might be entered.

Fitch said revenue collections reported by the authority remain solid.

Sales tax revenues in fiscal 2017 totaled $3.91 million or 1.65 times the maximum annual debt service. Collections through Aug. 31 totaled $3.8 million, or an increase of 5% year-over-year.

The authority reported balances of approximately $1.2 million in the debt service fund and $2.4 million in the debt service reserve fund as of Aug. 31. The funds are sufficient to cover the Nov. 1, 2018 principal and interest payment and the interest-only payment due May 1, 2019, according to Fitch.

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