Joseph Krist

Publisher

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ISSUE OF THE WEEK

$366,250,000

California Statewide Communities Development Authority

Revenue Bonds

Loma Linda University Medical Center

The Medical Center comes to market fresh on the heels of a rating downgrade from Fitch to BB from BB+. The bonds are secured by a gross receivables pledge and mortgage pledge of the obligated group (OG). There are also debt service reserve funds. The OG includes LLUMC, LLU Children’s Hospital, LLUMC – Murrieta, and Loma Linda University Behavioral Medicine Center. The OG accounted for almost all of the consolidated system assets and revenues.  The increasing leverage being added to the Medical Center’s already highly leveraged balance sheet is the primary basis for the downgrade.

The capital program began over a year ago. The project includes two new patient towers on a shared platform (16-story adult tower and 9-story children’s tower) with all private rooms, expanded and separate emergency rooms, expanded neonatal intensive care unit and birthing center, 16 new operating rooms (five additional), enhanced diagnostic imaging services and cardiovascular labs. The project will result in 983,000 square feet of new space with a total capacity of 693 licensed beds (320 adult and 377 children’s) once the shelled space is built out for the additional 60 beds.

LLUMC is located 60 miles east of Los Angeles in Loma Linda, CA. It operates a total of 1,077 licensed beds: University Hospital (371), East Campus Hospital (134), Surgical Hospital (28 bed) (all three share a license and are located on the main campus), Children’s Hospital (343 beds), Behavioral Medicine Center (89-bed facility in Redlands) and LLUMC- Murrieta Hospital (112 beds in Murrieta). LLUMC offers quaternary and tertiary series and has the only level I trauma center and level IV neonatal intensive care unit in the service area of the Inland Empire (San Bernardino and Riverside counties). University Hospital and Children’s Hospital are undergoing a capital intensive campus transformation project which will also address state-mandated seismic requirements that go into effect on Jan. 1, 2020, although the project is a year behind schedule and will require an extension from the state legislators.

LLUMC’s market share in its service area, the Inland Empire, was stable in 2016 after slight growth between 2012 and 2015. While not leading the service area market share, LLUMC offers a greater depth and breadth of quaternary and tertiary services with the only level-I trauma center and level-IV neonatal intensive care unit in the service area. Its role as a major provider of children’s services is a double edged sword. It drives utilization but increases its dependence upon Medicaid. Medicaid currently represents approximately 41% of gross revenues and 32% of net revenues. LLUMC is a major beneficiary of California’s HQAF program. HQAF provides supplemental Medi-Cal payments to hospitals that are net recipients of the hospital provider fee program; however, there is a lag in payment receipts after the pertaining services are provided.

The service area is competitive. LLUMC’s market share in the Inland Empire was 11% in 2016 and the next closest competitor, Kaiser-Fontana, had a 7.2% market share. However, Kaiser has several facilities in the area and Kaiser’s combined market share in the region was 12%. Other leading competitors in this service area include UHS (8.1%), Tenet (7%), and Dignity Health (6%).

LLUMC reported a 10.9% operating margin and 16.1% operating EBITDA margin in the nine-month statements of fiscal 2018 (ended March 31) partly due to the recording of additional net program benefits. Operating improvement in fiscal 2018 has been driven largely by initiatives to reduce length of stay and cost management.

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SAN DIEGO GETS BAD NEWS ON PENSION REFORM

The six year old pension reform program undertaken by the City of San Diego was overturned by the California Supreme Court last week. The court ruled that the plan was not legally placed on the ballot because city officials failed to negotiate with labor unions before pursuing the measure. The court ordered the appeals court to take the case back and evaluate the state labor board’s conclusion that 4,000 employees hired since pensions were eliminated must receive compensation that would make them financially whole.

The ruling sends the case back to  the appeals court and directs that court to enact “an appropriate judicial remedy” for the city’s failure to follow the legally required steps before placing the measure on the ballot. The city has said that the only way to do that would be to invalidate the ballot measure and nullify the pension cuts. The measure was approved by more than 65% of city voters. It replaced guaranteed pensions with 401(k)-style retirement plans for all newly hired city employees except police officers.

At the time of the vote, the then mayor of the City took a leading role in promoting support for the initiative. The fact that the mayor took such a public role in supporting it became a key factor in the court’s decision. The mayor maintained that he supported the measure only as a citizen, not as mayor, and as a result negotiations with unions were not required. The Court found that his interpretation of his role was incorrect and that he was obligated to meet with the unions before placing the measure on the ballot because he used his power and influence as mayor to support the measure.

The mayor relied on legal advice he received but acknowledged he should have handled things differently. The ruling reinstates a 2015 decision by the state labor board that concluded the city was legally required to conduct labor negotiations before placing Proposition B on the ballot. The board then ordered San Diego to make employees hired since 2012 whole by compensating them for the loss of pensions and paying them interest penalties of 7%. Estimates of how much that would cost the city have ranged from $20 million to $100 million.

It is important to note that the Court only ruled on the procedural issue. It noted that it was not ruling on the  pension cuts. “We are not called upon to decide, and express no opinion, on the merits of pension reform or any particular pension reform policy.”  San Diego is the only city in California to discontinue pensions for new hires. The ruling also bolsters the role of the employee union and is notable in that it follows fairly closely the US Supreme Court ruling in the Janus case which is seen as a negative for unions.

PUERTO RICO

The Financial Oversight and Management Board for Puerto Rico has published its second annual report to the U.S. president, Congress and the governor and legislature of Puerto Rico, as required by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). The review period includes the aftermath of Hurricane Maria.  “Immediately after Hurricanes Irma and Maria struck, the Oversight Board provided the Government with the flexibility to reapportion up to $1 billion in budgeted expenditures to cover disaster related expenses. The Oversight Board also worked with the Government to forecast the liquidity needs of the Government in the months ahead, which eventually led to Congress providing Puerto Rico with access to specialized forms of Community Disaster Loans to offset the projected revenue shortfalls caused by the hurricanes.”

The report documents the impasse with the government encountered by the Board.  “The Government initially rejected the most critical component of labor reform – changing the law of Puerto Rico to make it an at-will jurisdiction for private sector employees like 49 of the 50 states.”  “While this fiscal plan contains many of the fiscal measures necessary to rightsize the Government, it contains only those structural reforms that the Government agreed to implement, such as ease of doing business and energy reform, but not comprehensive labor reform because of the Legislature’s failure to pass the requisite legislation.

In addition, the report includes several recommendations from the Board. It requests federal support with Medicaid and Medicare by legislating a “long-term Medicaid program solution to mitigate the drastic reduction in federal funding for healthcare in Puerto Rico that will happen next year,” as well as providing “fair and equitable treatment to residents of Puerto Rico in all Medicare programs.” It also suggests special provisions be increased to enhance Puerto Rico’s attractiveness for investments in the U.S. Tax Code’s Opportunity Zone (OZ) rules, such as for property acquired from the Puerto Rico Government, extending the time in which an OZ fund must invest in Puerto Rico, providing “special basis rules for investors that invest in a Puerto Rico OZ Fund,” and reducing the holding period applicable to an investment in a Puerto Rico OZ Fund.”

The Board also reiterated “the long road ahead for Puerto Rico but is resolute in fulfilling its mission of helping Puerto Rico to achieve fiscal responsibility, regain access to capital markets, restructure its outstanding debt, and return to economic growth.”

MORE CHICAGOLAND CREDIT IMPROVEMENT

Moody’s continued its moves to improve the outlooks for ratings for a variety of credits in and around the City of Chicago. The latest beneficiaries are the Regional Transportation Authority (RTA) and the Chicago Transit Authority (CTA). Moody’s has revised the outlook on the Regional Transportation Authority’s (IL) sales tax revenue bonds to stable from negative, while affirming the bonds’ A2 rating. This affects $1.6 billion out of the Authority’s $2.2 billion outstanding debt. The outlook change is based on the recently stabilized credit positions of key related governments, Illinois and Chicago. With solid economic trends in Chicago and its surrounding suburbs, pledged regional sales tax collections will tend to increase, supporting RTA’s credit position for the next one to two years.

RTA’s debt is secured by liens on sales tax imposed by the RTA in its service area and on matching payments from the state’s Public Transportation Fund (PTF). The sales taxes are levied at various rates throughout the region. In Cook County (A2 stable), for example, the tax rate for general sales tax is 1%, while the tax on drugs and prepared food is 1.25%. Collar county general sales are subject to a 0.5% RTA tax. Unlike some state obligations supported by revenue collected by the state’s Department of Revenue, the RTA benefits from a primary source that is separated from the state government’s operations, flowing directly to a trust account held for RTA outside the state treasury. The payment of regional taxes has generally not been subjected to budgetary deliberations or to deferral, and it does not require legislative appropriation for payment. Fare-box collections of the RTA’s service boards are not available for payment of debt service.

Moody’s Investors Service has revised the outlook for bonds issued by the Chicago Transit Authority to stable from negative, while affirming the ratings at current levels (A3). The same factors justifying the improvement in the RTA rating outlook were cited to support the CTA outlook change. CTA’s sales tax revenue bonds are secured by CTA’s Sales Tax Receipts Fund (STRF), which receives transfers of RTA sales tax revenues and the state’s PTF matching payments. CTA’s sales tax and PTF revenues that exceed debt service requirements are released for operations. These revenues are allocated under a statutory formula and are transferred by RTA after it has satisfied debt-service requirements on its own sales-tax secured bonds. The CTA’s bonds therefore are in effect subordinate to the RTA bonds.

An exception to this subordination is that the CTA’s 2008 retirement benefit-funding bonds, the largest share of CTA’s outstanding sales-tax revenue bonds, are additionally secured by Chicago real estate transfer tax (RETT) payments. The RETT revenues are deposited in the Transfer Tax Receipts Fund. The CTA’s share of RETT is assessed at a rate equal to $1.50 per $500 under legislation passed in connection with the 2008 bonds. RETT revenues have averaged about $67 million in the past five fiscal years.

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