OREANDA-NEWS. Fitch Ratings affirms the 'AAA' on the following debt of the Bexar County Hospital District, Texas dba University Health System (district):

--$695.6 million aggregate COs, series 2008, 2009A, 2009B, and 2010B.

The Rating Outlook is Stable.

SECURITY
The COs are payable from a limited property tax levy and a pledge of surplus revenues of the district's hospital system. The district's property tax rate is limited to a maximum rate of $0.75 per $100 of taxable assessed valuation (TAV) for all purposes.

KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The financial profile of the district is solid with consistently sound operating margins, good liquidity indicators and adequate debt service coverage.

PAYOR MIX VULNERABILITY: University Health System is vulnerable to changes to state and federal funding given the large number of Medicaid, Medicare and indigent patients. However, management is strong and has consistently demonstrated its ability to make prompt budget adjustments in response to changes in these revenue streams.

SAFETY NET DESIGNATION: The district fulfills an essential role in providing safety-net health care services to Bexar County's large and growing Medicaid and indigent care population. The district's primary operating platform, University Hospital, serves as south Texas' leading trauma facility.

HIGH DEBT; LOW CARRYING COSTS: The district's high overall debt burden and slow principal amortization is balanced against low carrying costs, limited debt plans, and full funding of its annual pension and other post-employment benefit (OPEB) costs.

BROAD TAXING MARGIN: The district is authorized to levy up to $0.75 per $100 of TAV for all purposes. Currently, the district levies just under $0.28 per $100 TAV, of which only four cents are designated for debt service.

GROWING TAX-BASE: Recent strong tax base growth has been aided by the area's healthy housing market, ample developable land, and previously surging oil and gas activity at the nearby Eagle Ford Shale. Contraction of the county's emerging energy sector may dampen future tax base gains.

STABLE ECONOMY: Population growth remains rapid. The military remains a major economic factor, although the local economy has diversified notably. The local economy is benefitting from rapid employment gains, enabling the unemployment rate to remain well below state and national averages despite the contraction of the energy sector.

RATING SENSITIVITIES
NEW REIMBURSEMENT METHODOLOGY: Fitch's rating assumes stable operational performance as the district transitions to a new reimbursement landscape. Deviation from this expectation could result in a rating change.

CREDIT PROFILE
The district is coterminous with Bexar County. Created in 1955, it is governed by a seven-member board selected by the Bexar County commissioners to serve two-year staggered terms.

The district's facilities include University Hospital (a 716 -bed acute care facility), six outpatient primary/specialty care clinics, three dialysis centers and nine preventive health clinics. Since 1968, the district has been affiliated with the University of Texas Health Science Center (UT), whereby the district's facilities serve as the major teaching sites for many of the UT health care programs, including the graduate medical education program.

SOUND FINANCIAL PROFILE

Fitch considers the district's operating history a credit strength. With the aid of property tax revenues, the district has reported positive operating margins each of the past five years. The district's current property tax rate is $0.276 per $100 of TAV, well below the statutory ceiling. Liquidity is good (178 days cash on hand for fiscal 2014), despite the use of $160 million for a new trauma tower. The district has some financial exposure given the large number of Medicaid and indigent patients, a function of its status as a public healthcare provider. This reliance creates vulnerability to changes in reimbursement rates for federal and state programs.

CAPITAL PLAN

The district recently completed its $899 million capital plan, which primarily consisted of construction of the new trauma tower at University Hospital, as well as other smaller projects. Funding was derived from approximately $778 million in tax-supported debt and the remainder in available cash and other sources. The new trauma tower was completed on time and within budget and opened in April 2014. Given the size of the tax base - $133 billion for 2016 - the tax rate impact for the debt issuance is modest at less than $0.04 per $100 of TAV. The district reports no remaining major capital needs.

TAX BASE STABILIZED

The county's tax base has returned to a steady growth mode after declining modestly in fiscal 2011 due to the steep building downturn and falling base values of the last recession. TAV grew by 7.6% and 13.5% in fiscal years 2015 and 2016, respectively, mostly due to reappraisal gains.

HIGH OVERALL DEBT BURDEN

The district's overall debt burden is high at $5,979 per capita and 7.7 % of market value. Overall debt levels have climbed mostly from substantial debt issuances by the large number of overlapping jurisdictions, which include 15 school districts. The pace of direct debt principal amortization remains well below average at 36% in 10 years. The district does not have any future debt plans, reporting that any capital needs will be funded with current resources.

PENSION/OPEB ADEQUATELY FUNDED; LOW CARRYING COSTS

The district's employees participate in a single-employer defined benefit (DB) pension plan. The plan's annual pension costs are typically full funded, and its Jan. 1, 2014 funded position is adequate at approximately 71.7% (adjusted to reflect Fitch's assumption of a 7% rate or return). The DB pension plan was closed to employees hired after July 1, 2012.

OPEBs are also provided through a single-employer defined benefit plan. The plan is adequately funded at 71% (adjusted for a 7% rate of return), and management makes the required contribution annually. The program's unfunded actuarially accrued liability is negligible at $8.6 million. Total carrying costs for debt service, pension, and OPEB liabilities were modest at 5% of fiscal 2014 governmental spending.

SERVICE AREA

The district's primary service area is Bexar County (general obligation debt rated 'AAA', Stable Outlook by Fitch). Its secondary service area comprises the surrounding seven counties, and the district's University Hospital serves as the lead level-one trauma center for 22 counties in south and central Texas, reaching a population of roughly 2 million. The county's 2015 estimated population is more than 1.8 million, up nearly 10% from the 2010 census and a reflection of the continued growth of the San Antonio metropolitan area.

Military and government sectors are prominent, with four large military installations located within the county. Fitch views such military reliance cautiously, although the county has benefitted substantially from recent realignment and base closure decisions. Other leading employment sectors include domestic and international trade, convention and tourism, medical and health care, financial services, and telecommunications.

The strong recovery from the last recession was aided by employment hikes in the trade/transportation/utilities, leisure/hospitality and construction/mining sectors, fueled in part by surging oil and gas exploration activity in the nearby Eagle Ford Shale formation. Such activity has contracted substantially due to the decline in oil prices--as evidenced by a large 65% drop in the Eagle Ford Shale active rig count over the last 12 months. The impact to the county's overall employment base has been muted so far by its diverse mix of employment sectors.

Notably, the county's unemployment rate declined to a low 3.8% in October 2015, down from the 4.2% rate posted a year prior and comparing favorably to state and national averages of 4.5% and 5.5%, respectively, for the same period. Nevertheless, the inherent volatility of oil and gas prices remains a source of some uncertainty for the local economy.