OREANDA-NEWS. November 11, 2015. Fitch Ratings has taken the following rating action on Snohomish County Public Hospital District #1's (the district) limited tax general obligation (LTGO) bonds:

--\\$1.9 million series 2004 affirmed at 'B'.

The Rating Outlook is revised to Stable from Negative.

SECURITY
The bonds are backed by a full faith and credit general obligation pledge of the district. The district also irrevocably pledges to annually levy and collect property taxes within the constitutional and statutory limits to pay debt service on the bonds.

KEY RATING DRIVERS

WEAK BUT STABILIZING FINANCES: The district continues to face financial strains, but operations have stabilized following its affiliation with a neighboring public hospital district. In addition, the 2014 approval by local voters of an increased tax levy has helped reduce liquidity pressures.

STRONG TAX BASE; LIMITED BENEFIT: The strong tax base provides only limited rating impact because property tax revenues are not available for operations. The current rating closely reflects the district's financial condition.

LIMITED LONG-TERM LIABILITIES: The district has few long-term liabilities apart from tax-supported debt. Overall debt levels are moderate.

RATING SENSITIVITIES

REDUCED FINANCIAL FLEXIBILITY: An increase in operating losses or reduction in liquidity could increase insolvency risks for the district and would pressure the current rating. Improving financial flexibility would create upward pressure on the rating.

CREDIT PROFILE

Snohomish County Public Hospital District No. 1 is located in eastern Snohomish County, Washington, about 30 miles northeast of Seattle on the outskirts of the Puget Sound region. The district owns and operates Valley General Hospital in Monroe and the Valley General Chemical Dependency Treatment Center. In 2012 the district executed an affiliation agreement with Evergreen Health Services, a neighboring public hospital district based in Kirkland, Washington, and has subsequently re-branded its services as EvergreenHealth-Monroe.

WEAK BUT STABILIZING FINANCES

The district's financial position remains weak but has begun to show signs of improvement. Operating losses decreased in fiscal 2014 for the first time in six years. Unrestricted net assets continue to be negative but reversed a five-year downward trajectory.

Cash levels were weak at the end of fiscal 2014 but showed gains relative to 2013. Interim results as of August 2015 also reflect weak liquidity, with about eight days of cash on hand (approximately \\$751,000) but were slightly above cash levels from one year earlier. The district retains a \\$500,000 credit line but had no draws upon it as of Aug. 31, 2015.

AFFILIATION AND TAX MEASURE KEY

The district executed an affiliation agreement with Evergreen Health Services, a neighboring public hospital district based in Kirkland, Washington, in December 2012 following several years of efforts to forge new partnerships. Evergreen now manages the district's hospital and clinics under the agreement, and has established a new board to oversee district operations. The district's board retains legal and financial responsibility for the district but no longer oversees operations directly.

Increased integration of the district's services with Evergreen has begun to impact financial results, but the small size of its operations and a competitive regional market will likely contribute to ongoing volatility. The temporary loss of an orthopedic surgeon in late 2015, for example, has reduced surgical volumes and net patient revenues, reducing overall profitability below previously projected levels. Fitch expects the district's financial position to continue to strengthen over the next several years.

The district's finances have been bolstered by local voters' 2013 approval of an increased property tax levy. The additional levy provides the district with about \\$2.4 million per year, or approximately 7% of 2014 operating revenues. Most of the district's property tax levy prior to 2013 was utilized for debt service; the recent increase provides new support for the district's operations.

STRONG UNDERLYING TAX BASE OF LIMITED RATING BENEFIT

The district's underlying tax base is large and diverse but was severely impacted by the recession. Taxable assessed values (TAV) fell by one-third between 2008 and 2013 before a 21% cumulative increase in 2014 and 2015. Tax revenues, however, have been stable due to Washington's automatic adjustment of tax rates to allow for 1% annual increases in the tax levy.

The district's tax levy is subject to a constitutional cap on overlapping tax rates of \\$5.90/\\$1,000 TAV. Certain tax rate areas within the district began to approach this limit following TAV declines during the last recession, but renewed tax base growth over the past two years appears to have alleviated this risk.

LIMITED LONG-TERM LIABILITIES

Overall debt levels for the district are moderate at approximately \\$3,635 per capita and 3.1% of TAV. Amortization is below average as a result of the district's 2009 issuance of additional GO debt, with 39% of outstanding principal due for payment within 10 years. Debt service requirements for the district are small relative to the size of its operations and accounted for approximately 3.4% of expenditures in 2014. The district does not provide a defined benefit pension or other-post employment benefits to its employees.