D.C. Hospital Foreclosure Has Raters Worried, CFO Warns

WASHINGTON — Rating agencies have expressed serious concerns about the District of Columbia’s financial status, particularly regarding its foreclosure this month on a troubled hospital, according to a letter the chief financial officer sent to city officials Wednesday.

District CFO Natwar Gandhi told city officials in a two-page letter that rating analysts are especially concerned with the district’s July 9 foreclosure on the United Medical Center. That foreclosure means the hospital relies on the district to meet some of its payroll and supply obligations, officials said Wednesday.

Rating analysts, who voiced their concerns in meetings with city officials earlier this month, also view the district’s declining general fund balance unfavorably, the letter said.

The rating agency concerns affect the district’s general obligation bonds and do not extend to its higher-rated income-tax secured revenue bonds, one analyst involved in the meetings said Wednesday. The income-tax secured bonds have a specific revenue pledge, and the hospital acquisition does not affect it, said Kenneth Weinstein, the lead analyst on the district for Fitch Ratings.

The district has not issued GOs for more than a year because its income-tax secured bonds are rated higher — AAA by Standard & Poor’s, Aa2 by Moody’s Investors Service and AA by Fitch.

“It is unlikely that the acquisition of UMC alone will result in an immediate downgrade,” Gandhi said in his letter, addressed to district Mayor Adrian Fenty and District Council chairman Vincent Gray.

District officials also met with bond investors this month to address the hospital acquisition.

The city has allocated $26 million from its contingency fund to support the hospital, Gandhi said in an interview Wednesday. He said the district will likely spend $1 million a month on hospital operations. It has loans in default to the hospital and has provided it with $100 million in total financing over the last three years.

Gandhi raised concerns about the hospital and its parent company, Specialty Hospitals of America LLC, in 2007. Despite its financial problems, the facility cannot be closed because it is the only medical provider serving the community on the district’s southeast edge, he said. So far, no private buyer has expressed an interest in the hospital.

“The effort needs to be made to find a buyer,” Gandhi said. “Cities do not know how to run hospitals.”

Bond investors who met with district officials asked about the cost of the hospital acquisition and if it will require the district to issue more debt, said Marcy Edwards, the senior financial policy adviser in Gandhi’s office. She said that for now, the city will pay for hospital expenses on a pay-as-you-go basis, and that there are no plans to issue more debt as a result of the hospital’s costs.

Credit analysts also raised concerns about the district’s dwindling general reserve balance. Its fiscal 2010 budget estimates a surplus of $60 million, but that could change, Gandhi said. In past fiscal years, the district has had to write off uncollectable revenue.

The district has prepared its fiscal 2011 budget with $75 million included for extended Federal Medical Assistance Percentages funds. However, Congress has failed to pass the six-month extension through June 30, 2011, as expected. The city’s fiscal year begins Oct. 1.

The district’s most recent debt offering came in March when it issued $709 million of income-tax secured revenue bonds. That deal included $695 million of refunding bonds to keep the city under its 12% debt-to-expenditures cap.

The next bond offering, scheduled for mid-August, will be a $54.8 million deed tax revenue deal for housing projects.

The hospital could become a campaign issue for Fenty and Gray, who are vying for the district’s Democratic mayoral nomination in a Sept. 14 primary contest.

Calls to the candidates’ offices were not immediately returned late Wednesday.

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