The True State of our Hospital’s Financial Health

The bottom line, as it were, to any discussion or review of the health of our community hospital isn’t number of surgeries, cash on hand, popularity polls, quality of service rankings, or – as we have come to find - even year-end profit/loss statements. It is the hospital’s long-term financial condition. I believe the best, and most unbiased, way to assess that condition is to look at WH’s bond rating history and current status. 

Note: For those who don’t wish to go through all the gory details of bond ratings, please skip down to the “Summary” heading.

I’ve consulted Moody’s Investors Service, a bond ratings agency. Standard and Poor’s, Fitch, and DBRS are other well-known bond raters. I presume they would all have fairly similar opinions as to the state of WH’s financial well-being. I’m far from a financial expert – I’d love to get some comments on the subject from readers with more knowledge about bonds. But here goes.

WH (formerly Whidbey General Hospital, AKA “Whidbey Island Public Hospital District, WA”) has issued municipal bonds at various times, and these are tracked by bond-rating agencies. WH has issued both limited and unlimited tax general obligation bonds (GOLT and GOULT). Moody’s has seven ratings that begin with an A, which are termed investment grade. Once you get down into the B grades, these are called “speculative.”

Here are the ratings Moody’s has initially assigned these bonds over the years:

·         GOULT – New Issue, 1993 – A2

·         GOLT – New Issue, 1994 – A3

·         GOULT – New Issue, 2000 – A2

·         GOLT – New Issue, 2009 – A3

·         GOLT – New Issue, 2012 – A2

·         GOULT – New Issue, 2013 – A2

Here are Moody’s changes in rating or outlook since these bonds were issued:

·         On 4/2/15, Moody’s downgraded WH’s rating to Baa3

·         On 2/23/16 Moony’s upgraded WH’s bond status to Aaa2, and revised the outlook to “positive.”

·         On 2/14/18 Moony’s affirmed WH’s rating, but upgraded the outlook to “stable.”

·         On 3/26/19 Moony’s affirmed the GOULT (2013 issuance of $47.5M) rating at Baa2, but downgraded the GOLT (series 2009 and 2012, of $13.3M in debt) rating to Ba1.

·         Also on 3/26/19, Moony’s issued a “Credit Opinion” of “Outlook Negative” for both the GOULT and GOLT bonds.

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Moody’s categorizes bonds rated Baa2 as lower-medium investment grade. Its Ba1 rating is categorized as speculative, AKA high-yield, AKA junk bonds.

Analysis of WhidbeyHealth’s Current Financial State

Beyond the information provided above, Moony’s provides an extensive rationale for current WH bond ratings, and for its current outlooks being negative for both bonds.

Here’s their rationale for its current rating for the big $47.5M issuance of 2013:

“(The Baa2 rating) reflects continued weak financial performance of the hospital, failure to achieve financial goals of raising liquidity, as well as continued pressure from competitive hospital enterprise risks. The rating and negative outlook additionally reflect narrow liquidity, high capital needs, and the district's expectation that it will issue $44 million in revenue bonds, including $22.5 million in new funding and $21.5 million refunding existing debt. Positively, the rating is supported by a large tax base and healthy socioeconomic metrics, with Naval Air Station Whidbey Island providing institutional presence. Additionally, debt liabilities are modest for a local government and the GOULT bonds benefit from a separate and unlimited tax levy that is collected and remitted directly to the trustee for repayment of the bonds.”

Here’s Moody’s rationale for the change in the GOLT bond ($13.3M) ratings:

“(The downgrade to Ba1 from Baa3) reflects the continued weak financial performance of the hospital, and the lack of levy growth due to limited new construction in the tax base. . .The two-notch rating distinction between the GOULT and GOLT bond reflects that the operating tax levy will not be sufficient to cover GOLT debt service in future years unless new construction far exceeds previous trends. While not dedicated to the bonds, the small operating property tax levy is used to pay debt service on the GOLT bonds, and it provides just above 1-times coverage of annual debt service, which escalates at a rate faster than expected levy growth. The hospital's other revenues available for debt service are constrained by the notable enterprise risk and our expectation of variable operating performance, including weak or negative cash flow. 

Moody’s added this bit of information: “The district's GOLT bonds are planned to be refunded completely by the issuance of new USDA revenue bonds, though the bonds have not been approved.”

Summary

Moody’s is one of the agencies that assesses and gives ratings for municipal bonds such as those that our hospital has issued over the years – which include both limited tax (GOLT) and unlimited tax (GOULT) general obligation bonds. The primary one, issued in 2013 to finance the construction of the new inpatient wing, was for $47.5 million.

The hospital issued its first muni bonds in 1993. Up until 2015, Moody’s rated its bonds as mostly A2, and sometimes A3 - indications of strong financial health. In April 2015, the rating slipped (to Baa3), but quickly rebounded somewhat (to Aaa2). As recently as February 2018, Moody’s still considered WH’s outlook as “favorable.”

On March 26, 2019, however, Moody’s precipitously lowered the ratings of both categories of bonds (to Baa2 and Ba1). On that same date, Moody’s also issued a credit opinion of “Outlook Negative” for both types.

           

In giving its rationale for the downgrades, Moody’s cited WH’s weak financial performance, WH’s failure to achieve financial goals of raising liquidity, as well as continued pressure from competitive hospital enterprise risks. 

Moody’s added that WH’s operating tax levy will likely be insufficient to cover future debt service, and that other revenues available for debt service are constrained by the notable enterprise risk and an expectation of weak or negative cash flow.

Back in March 2018, then CFO (now interim CEO) Ron Telles reported that WH has deferred maintenance needs that will cost approximately $35 million. He presented three financing options: revenue bonds, GOLT bonds, or (preferably) a USDA Loan.

Moody’s confirmed last month that WH plan is to have the GOLT bonds be refunded completely by the issuance of new USDA revenue bonds – but ominously adds that those bonds have not been approved.

The USDA loan remains unapproved after more than a year, and Moody’s paints a gloomy picture concerning WH’s existing bonds.

Let’s for a moment be optimistic that WhidbeyHealth can obtain funding to temporarily alleviate its immediate problems. If so, it appears it will involve payment back with undesirable interest rates, which bodes poorly for the future.

Can we all, at long last, agree that WhidbeyHealth is in a financial crisis – and one that threatens its very existence? Once we acknowledge that realization, then maybe we can focus on the daunting task of reversing these unfortunate financial numbers.

In his brief but on-point remarks upon being named interim CEO last Tuesday, Ron Telles stated: “We are in a little bit of perilous times, but I look out and I see an incredibly passionate focus here.” Though a bit understated, that’s the truth.