Fitch Rates El Paso County Hospital District, Texas' $155MM GOs 'AA-'; Upgrades Outstanding.
The bonds are direct obligations of the district and are payable from an annual ad valorem tax, levied within limits described by law. Overall, the property tax rate cannot exceed 75.0 cents per $100 taxable assessed valuation (TAV) for both operations and maintenance (O&M) and debt service.
The upgrade to 'AA-' is based on the district's notably improved financial performance and management, expanding and diverse tax base, ample taxing margin, and very low direct debt burden with no future debt plans. Furthermore, the district is poised to become a major medical presence with the addition of Texas Tech University's new four year medical school and the district's own new children's hospital. Offsetting risks include the slow debt pay out rate, poor payor mix, below average wealth levels and operational risks of a new children's hospital (although evidence of a severely underserved pediatric population somewhat offsets this as a credit concern). A new executive team installed in 2005 moved quickly to remedy the district's past financial structural imbalance by adjusting staffing levels, controlling supply costs, and improving fee collection efforts. Medium term goals include improving the district's payor mix by improving facilities and expanding service lines which will be aided by the new medical school. Fitch believes the hospital will benefit from a potential windfall in new patients from the future influx of 27,000 additional troops at nearby Ft. Bliss.
The El Paso County Hospital District covers a very large area, totaling 1,058 square miles, and operates the only public hospital located in its primary service area. The R.E. Thomason General Hospital (the hospital) is a 327-bed acute care facility owned by the district with the legal responsibility to provide medical and hospital care to all the El Paso County's residents regardless of their ability to pay. As a result, the district's Medicaid and self-pay component are very large at about 25% and 26%, respectively, in fiscal 2007. The hospital also serves as the primary teaching hospital for 3rd and 4th year students of the Texas Tech University Health Sciences Center in El Paso which will become a four-year medical school in 2009. The university's $100 million medical school will be adjacent to the hospital and the university's $30 million medical research facility that opened in 2006.
The current offering will fund the construction of the region's first children's hospital. The district will build and own the physical structure and then lease it to a separately licensed non-profit children's hospital with an independent board of governors. Due in part to substantial pay-as-you-go capital outlays of $13 million - $15 million, the district's direct debt is very low at only $355 per capita and under 1% of TAV. Principal amortization is slow at 21% in ten years. Overall ratios are manageable after adjusting local school district debt for substantial amounts of state support due to the area's low wealth levels.
The debt service tax rate impact of the current offering is projected at a modest 2.0 cents per $100 TAV under reasonable TAV growth assumptions. The district's current total tax rate equals 17.2 cents per $100 TAV, therefore ample margin remains below the tax cap of 75 cents per $100 TAV. TAV has been growing notably by a compound average annual of 9% over the last five fiscal years, including double-digit increases in fiscal years 2007 and 2008. The district's tax base is diverse with its top ten taxpayers comprising less than 5% of total values.
After posting a large $13 million operating loss in fiscal 2004 due to state budget cuts to Medicaid and certain managed care eligibility changes, the district's finances have improved substantially. Staffing level adjustments and cost controls by the new leadership reduced an initial fiscal 2005 budget gap from $24 million to a $5.1 million loss. Subsequently, fiscal 2006 and 2007 posted large operating gains of nearly $16 million and $39 million, respectively. As a result, the district's cash position increased to a solid $135 million or 180 days of operating expenses in fiscal 2007, well in excess of management's liquidity goal to maintain 75-90 days cash on hand. Fiscal 2008 interims point to another operating gain. Operating revenues include O&M tax levies that comprise almost 15% of total revenues in fiscal 2007.
El Paso County includes the City of El Paso (GOs rated 'AA-'), the sixth largest city in Texas. The county's estimated 2007 population of 755,085 has grown by 11% from its 2000 census level. Along with the addition of 27,000 troops to Ft. Bliss, military family members are expected to total another 25,000-30,000. About two-thirds of the additional troops are expected to live off-base. To accommodate such rapid growth, one of the largest land owners in the county, the El Paso Public Services Board (PSB, revenue bonds rated 'AA'), has developed a 5,800 acre mixed-use project in northeast El in which 1,600 units of affordable housing will be developed in the first phase. Other higher value master planned developments are underway or in the planning stages. As a result, building permit values have continued to surge, reaching $1B in fiscal 2007.
The county's large $31 billion tax base is diverse and starting to grow beyond the typically modest rates of the past, increasing by over $3 billion in each of the last three fiscal years. Furthermore, the relocation of air cavalry and armored aviation units to Ft. Bliss is attracting high-technology companies for both services and research and development. As a result of increasing demand, the average market value of single family homes rose 16% in 2006, the highest rate in Texas and sixth highest in the country; notably, the average home price of $128,000 was still affordable compared to national averages. Recent unemployment rates in the county remain above the state average but have trended down to record lows, totaling 5.6% in December 2007. Major additions to the city's retail, commercial and healthcare sectors should maintain this favorable trend.