NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following Indianapolis Local Public Improvement Bond Bank bonds (the bond bank):
-- $42,460,000 lease revenue bonds, series 2013A (the bonds).
The bonds are expected to be sold through negotiation on Jan. 17, 2013.
The bonds will be used to fund a portion of the Wishard Hospital Project (the project). The project entails the replacement of Wishard Hospital, an ambulatory clinic, an office building, parking garage and power plant.
In addition, Fitch affirms the following ratings:
--Approximately $216.9 million unlimited tax general obligation bonds (ULTGOs), series 2005D, 2010A-1 and 2010A-2 at 'AA+'
--Approximately $465 million lease revenue bonds, series 2010B-1 and 2010B-2, at 'AA'.
The Rating Outlook is Stable.
The bonds are limited obligations of the the bond bank, which under Indiana law is empowered to buy and sell securities of 'qualified entities'. The bond bank itself has no taxing power.
Pursuant to Indiana Code, the Indianapolis-Marion County Building Authority (the authority) and the Health and Hospital Corporation of Marion County (HHC) are qualified entities that can issue 'qualified obligations' to be purchased by the bond bank. Each series of bonds is secured by the trust estates established under the bond bank indentures.
The authority is being used as a conduit. HHC will lease the facilities to the authority, which will lease them back to HHC through a lease-leaseback arrangement. The bonds are payable from fixed rental payments (due 15 days prior to debt service payments) made by HHC through a master lease under which the authority is the lessor and HHC is the lessee.
Lease payments are supported by an unlimited property tax pledge, not subject to the Circuit Breaker Tax Credit or annual appropriation. The lease payments are subject to abatement if the leased premises are not available for use. Abatement risk is offset by the requirement that the authority or HHC obtain property and casualty insurance in an amount equal to the greater of the cost of defeasing the then-outstanding series 2010B and 2013A bonds, or 100% of the replacement cost of the leased premises. This requirement can be met with self-insurance, which Fitch believes weakens it. Additionally, the authority or HHC must obtain rental interruption insurance equal to full rental value for 2 1/2 years.
The bonds will also be secured by a common cash-funded debt service reserve fund (DSRF) with the series 2010B-1 and 2010B-2 lease revenue bonds sized at maximum annual debt service (MADS), reduced by the 35% interest subsidy to be received from the U.S. Treasury for the series 2010B-2 Build America Bonds.
The series 2005, 2010A-1 and 2010A-2 bonds are secured by an ULTGO pledge of HHC. The series 2010A-1 and A-2 bonds are also secured by a DSRF funded to MADS.
KEY RATING DRIVERS
SAFETY NET DESIGNATION: As the only public hospital in Marion County, Wishard Hospital fulfills an essential role in the service area, providing safety net healthcare services to Marion County's Medicaid and indigent care population.
NEW FACILITY TO IMPROVE EFFICIENCIES: The new facility, whose financing was approved by a high percent of voters, should increase efficiency and effectiveness of healthcare delivery as the exisiting hospital is more than 100 years old.
STRONG QUALITATIVE MEASURES: Several of Wishard's qualitative measures (including quality, cost effectiveness of care, relationship to Indiana University School of Medicine) are positive credit factors.
WEAK HOSPITAL FINANCIAL OPERATIONS: Financial operations of Wishard Hospital are weak and vulnerable to changes to state and federal funding given the large number of Medicaid, Medicare and indigent patients.
STRONG SECURITY: Debt service on the bonds is secured by an unlimited ad valorem tax pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County.
DIVERSE TAX BASE AND ECONOMY: The service area has a large and diverse tax and economic base and continues to experience growth through new commercial development.
HHC is co-terminus with Marion County and Indianapolis (Fitch GO rating of 'AAA' with a Stable Outlook). The county is the most populous in the state with a 2010 population of 903,393, a 5% increase from 2000. The city, the state capital, is the largest in the state.
SERVICES AND GOVERNANCE
HHC provides health services including preventive, acute care, and long-term care to county residents through three main departments: Wishard Health Services which operates the 340-bed Wishard Hospital; Marion County Health Department, and the Division of Long-Term Care which operates over 59 nursing home facilities. Wishard Hospital is Marion County's only public, general acute care facility, providing 65%-75% of all uncompensated care in the county.
HHC is governed by a seven-member Board, three of whom are appointed by the Mayor of the city, two by the Board of Commissioners of the County, and two by the City-County Council. The Board levies its own taxes, adopts its own ordinances and issues its own general obligation bonds through the bond bank, subject to approval of the Indiana Department of Local Government Finance.
STRONG COMMUNITY SUPPORT FOR REPLACEMENT FACILITY
In 2009 voters approved the issuance of up to $703 million in tax-supported debt for the replacement of HHC's Wishard Hospital. Fitch believes that the bonds' approval by a high 85% of voters indicates solid support for the project, although turnout was light and management conveyed its expectation to voters that a property tax increase would not be needed to fund the project.
HHC is legally obligated to fund the annual debt service on the 2010 A and B bonds using a dedicated property tax if other revenues are not sufficient to fully repay the bonds in any given year; however, HHC currently funds 100% of the debt service for these bonds through operating revenues. In addition, HHC will contribute $150 million ($92 million to date) in accumulated reserves to the Wishard replacement project, leaving approximately $150 million in reserves, which Fitch considers an adequate operating cushion.
The project is on time and ahead of budget, with full completion and opening expected in December 2013. The new facility will be made up of a 327-bed inpatient hospital, an outpatient clinic with 200 exam rooms, a 2,700-car parking garage, a 90-bed treatment room emergency department, a new women's health clinic, a central energy plant and offices for faculty, research and administrative functions.
In June 2011, $40 million was donated towards the project. In recognition of the donation, the project will be named the Sidney and Lois Eskenazi Hospital and Eskenazi Health. Fundraising to date totals $74.6 million.
DEBT SERVICE CURRENTLY BEING PAID FROM OPERATIONS
HHC is legally obligated to fund the annual debt service on the series 2013A, 2010A, and 2010B bonds using a dedicated property tax if other revenues are not sufficient to fully pay the bonds in any given year; however, HHC currently funds 100% of debt service through operating revenues and plans to continue to do so. Property taxes represent 8.5% of total projected 2012 revenue of $1.1 billion with MADS on all debt, including the 2013A bonds, at a modest 4.0% of revenues. Additionally, HHC will contribute $150 million ($92 million to date) in accumulated reserves to the project, leaving approximately $150 million in reserves, which Fitch considers an adequate operating cushion.
STRONG QUALITATIVE FACTORS BUT WEAK FINANCIAL OPERATIONS
Hospital utilization has risen in recent years due to the recession; occupancy has been as high as 98%, compared to the 80% generally considered by Fitch to be full occupancy. Wishard's qualitative performance measures are strong, while weak financial operations reflect in part the very high 38% of patients with no form of insurance or government subsidy.
Management's goal is to maintain break-even operations (after interfund transfers). However, Wishard generates substantial operating losses due to poor payor mix. Management has implemented various collection and pre-qualification programs to maximize revenue collection and is strategically focused on providing low-cost care. Despite these measures, its operating performance continues to be weak and Fitch expects operating profitability to continue to be weak despite the above-mentioned modifications.
In 2011, the hospital incurred an operating loss of approximately $236 million. This was offset by the $195 million in transfers from the general fund and additional sources of revenues. The hospital ended the year with a negative $41 million from operations after transfers compared to a negative $35 million in 2010. Through September 2012, management reports $30 million in excess income, which is improved from an $11 million loss for the same period in 2011.
The general fund, which includes property and income tax support as well as intergovernmental payments, has experienced consistent operating surpluses, including a $95.7 million surplus in 2011. The surpluses are used to bolster hospital operations. After transfers, including $195 million in support of Wishard, the net deficit totalled $17.6 million in 2011. The unrestricted (sum of committed, assigned and unassigned) general fund balance totalled $135 million or a strong 44.2% of general fund spending. When proprietary expenditures are added, the unrestricted balance drops to an adequate 11.9%.
MANAGEABLE LONG-TERM LIABILITIES
Overall debt levels are mixed with overall debt per capita moderate at $1,849 and debt-to-full value at 4.7%. Approximately 29% reflects overlapping debt of Indianapolis and school districts within the county. Principal amortization is slow, with only 36% retired in 10 years, somewhat typical for hospital financing. Other than the Wishard replacement, HHC's capital needs are minimal.
HHC contributes to the Indiana Public Employees Retirement Fund (PERF), an agent multiple-employer retirement system. For 2010 and 2011 the corporation contributed $15.3 million and $19.3 million, or 92% and 81%, respectively, of the annual pension cost. For 2011 corporation pension costs represented a modest 1.7% of general and proprietary fund expenditures. Carrying cost including debt service and pension costs were manageable at 6.3%.
DIVERSE ECONOMY AND TAX BASE
The strength of the service area economy is an important factor in the 'AA' rating on the bonds.
The economy and tax base are strong and well diversified and includes pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional services companies which continue to lead the employment and city's industrial output. The unemployment rate for the city has historically been below state and national levels. For October 2012 the city recorded an unemployment rate of 7.1%, compared to 7.4% and 7.5% for the state and U.S., respectively.
Taxable assessed value has been fairly stable over the last few years, totalling $35.7 billion in 2012, a slight decrease from 2011. The top 10 taxpayers comprise a modest 6.7% of 2011 taxable value. Property tax collections, which have historically been strong, decreased in 2011 due to the application of the state's circuit breaker tax credit.
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 and IHS Global.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria