Coal industry woes a factor in a Kentucky county's seven-notch downgrade
A Kentucky county and its sole hospital received multi-notch rating downgrades as they struggle in a region hit by the declining coal-mining industry's closures, bankruptcies and job losses.
Pike County’s general obligation bond rating was lowered seven notches to BB from A-plus by S&P Global Ratings, which cited the county’s “very weak” economy, budget performance and management.
The ratings are on CreditWatch with negative implications.
The May 21 downgrade affects $9.4 million of outstanding GOs as of June 30, 2016, the county’s most recent audit, which was posted March 27, 2018 on the Municipal Securities Rulemaking Board’s EMMA filing system.
The county had a total of $35.5 million of long-term debt, including $24.5 million of revenue bonds.
“The downgrade reflects the county's general fund cash reserves weakening to near zero in the most recent audit following very weak operating budgetary performance, which we believe is a function of the county's very weak economy, very weak management, and very weak debt and liability profile,” said S&P analyst Caroline West.
West said the rating also considers the county’s delayed disclosure of financial statements and lack of additional supporting information from county management, as well as the lack of relevant skills under S&P’s Financial Management Assessment methodology.
“In our view, the county faces major ongoing uncertainties, and exposure to adverse business, financial, or economic conditions could lead to inadequate capacity to meet its financial commitments,” West said.
Judge Executive William Deskins and Finance Commissioner Frankie Stacy were not available to comment on the downgrade Friday, a spokeswoman in Deskins’ office said.
The county is in eastern Kentucky, about 140 miles east of Lexington, in the coalfields of the Cumberland Mountains.
The U.S. Census Bureau estimated the county’s population in 2017 at 59,000, a 9.4% drop from the last official census estimate of 65,000 in 2010.
The county’s unemployment rate was 6.2% in March, according to the U.S. Bureau of Labor Statistics. Kentucky’s unemployment rate was 4.4% in March and 3.9% in April.
“Pike County has historically been a leading coal and natural gas producer in Kentucky, but as the coal industry has waned in the U.S., the economy has weakened,” S&P said.
A battery manufacturer recently announced plans to open a facility in Pikeville, the county seat, which would bring nearly 900 new jobs to the area.
“While this development is positive for local residents, we believe the overall economic indicators are likely to remain very weak,” West said.
While Pike County received a clean audit opinion in fiscal 2016, the fiscal court came under fire from auditors for procedures that were not performed accurately by the treasurer. Those included invoices that were not paid within 30 days, bank reconciliations that were not performed monthly, and an inaccurate fourth quarter report that was submitted to the state Department for Local Government.
“We believe the county's finances have suffered from a result of insufficient personnel with relevant management skills,” West said. “The county relies heavily on a single person, the county treasurer, with responsibility for a wide range of duties.”
Pikeville Medical Center’s bonds were also downgraded to Baa2 from A by Moody's Investors Service due to a “large and unexpected decline in operating performance in fiscal 2017” and the expectation that there will be similar performance in fiscal 2018. The outlook is negative.
The medical center had $184.3 million of outstanding long-term debt at the end of fiscal 2017. Moody's action Wednesday affected $74 million of outstanding debt issued through the city of Pikeville as conduit.
“We expect there will be headwinds to improving operations as performance weakened materially in fiscal 2017 and into 2018,” said Moody’s analyst Jennifer Barr.
Operating cash flow margin declined to 3.1% in fiscal 2017 from 11.7% in fiscal 2016. The decline in performance is due to increased labor expenses, unexpected physician turnover and the use of agency nurses and temporary physicians, Moody’s said.
Management will be evaluating expense reduction strategies over the next few months, Barr said. “We do not anticipate material savings will be achieved until 2019,” she said.
Pikeville Medical is a nonprofit, acute-care hospital with 300 licensed beds. Moody's cited its role as sole community provider as a key credit strength.