OREANDA-NEWS. Fitch Ratings has affirmed the following North Sonoma County Hospital District (the district), California's certificates of participation (COPs):

--$6.3 million COPs (2008 parcel tax secured financing program) at 'A'.

The Rating Outlook is Stable.

SECURITY

The COPs are payable from lease payments made by the district not subject to annual appropriation. The lease payments have a first and prior lien on the parcel tax revenues, although the lease payments are payable from any available funds of the district.

KEY RATING DRIVERS

SOUND, STABLE COVERAGE: Parcel tax revenues provide over three times coverage for annual debt service. The parcel tax is insulated from valuation fluctuations but unable to be increased unilaterally above the maximum amount.

LIMITED ECONOMY: The area economy is somewhat rural and agriculture, particularly viniculture, remains significant. The economy maintains a healthy tourism segment with below average unemployment rates and above-average income levels.

STRONG VOTER SUPPORT: Voter approval for the establishment of the district and two subsequent parcel tax increases demonstrates strong community commitment.

OPERATING VOLATILITY: While the hospital's financial profile improved through the nine months ended Sept. 30, 2015, performance has historically been volatile, in part due to management turnover. The relatively new management team is experienced, and is focused on operating improvement and growth initiatives.

RATING SENSITIVITIES

WEAKENED FINANCES: A material reduction in debt service coverage or weakening of the district's operating performance could result in negative rating action.

CREDIT PROFILE

The district covers about 530 square miles in northern Sonoma County, including the cities of Windsor, Healdsburg and Cloverdale, and the town of Geyserville and the surrounding unincorporated areas. The total population of the district is approximately 70,000. The hospital, licensed for 43 beds, currently operates 38 beds (21 medical/surgical, 17 distinct part skilled nursing beds) and has critical access designation.

SOMEWHAT LIMITED ECONOMIC BASE

The county is known for its agriculture (wine grapes) and tourism. The economy remains healthy, reflected in a September 2015 unemployment rate of 3.8%, well below the state and national rates of 5.7% and 4.8%, respectively. Wealth indices are healthy, with the median household income at 112% and 126% of the state and national rates, respectively.

The district's tax base included about 22,569 taxable parcels in 2013. As a fixed per parcel tax, revenue concentration is inherently limited. Furthermore, the COP security is insulated from any valuation declines.

ROBUST, STABLE COVERAGE

The COPs were issued to refinance county loans (originally issued to fund the acquisition of and improvements to the hospital, as well as to provide working capital) and to finance various hospital projects and equipment purchases. Overall amortization is rapid, with 72% of principal retired within 10 years.

Bondholder protection includes an additional bonds test requiring parcel tax revenues to cover maximum annual debt service (MADS) at least 1.5x. The parcel tax is currently levied at the maximum rate of $150 per parcel which results in fiscal 2014 tax revenues of $3.5 million covering MADS of approximately $1 million by 3.43x. The surplus revenue subsidizes hospital operations.

Management has indicated there are no plans to issue additional parcel tax debt in the near future. The district took out a bank loan of approximately $2.9 million to fund its electronic health record. The district has $1.7 million outstanding under this loan, with plans to borrow up to the full $2.9 million approved by the end of 2015. This loan, and the outstanding COPs, comprises all of the district's outstanding debt.

STRONG COMMUNITY SUPPORT

The district was established by the voters in 2001 to acquire Healdsburg District Hospital (the hospital), which otherwise would have closed. Strong community support was demonstrated with the 2001 vote, which also established an $85 per parcel tax, and again in 2004 when a replacement parcel tax of $150 was approved. The parcel tax does not expire. Given the hospital's heavy reliance on parcel tax revenues to support ongoing operations, Fitch does not anticipate any reduction in the parcel tax rate.

The voter-approved purposes of the parcel tax are to ensure local access to emergency and acute care, repay outstanding indebtedness, and provide for operations and capital improvement expenses of the district. Community members also established a foundation to assist with capital needs.

OPERATING VOLATILITY

The hospital benefits from its critical access hospital (CAH) status, but remains susceptible to operating volatility given its small revenue base as reimbursement, volume, and competitive activity shift within its operating environment. There is evidence of some recovery in 2015 from several years of very poor performance.

Year-to-date operating revenues for the nine-months ended Sept. 30, 2015 totaled $29.5 million, up from $25.2 million in the same period in 2014. This is a positive budgetary variance of approximately $2.7 million. Factors influencing this result were improvement in clinical volume, lower bad debt, and better expense controls. Improved profitability bolstered liquidity to 40.4 days of cash on hand (DCOH), up from 22.5 DCOH at fiscal 2014. The fiscal 2016 budget is not yet available.

The hospital's entire senior management team is relatively new, with the CEO starting with the district in 2013, and a new CFO and controller who began in late 2015. Going forward, the hospital's main challenge will be maintaining sufficient and steady operating performance in a competitive service area with a relatively limited operating platform. A new three year strategic plan will be introduced to the board in December 2015 and includes key strategies around workforce development/retention/recruitment, improving clinical quality, and longer-term financial goals (including a 2% to 4% improvement in operating margin annually and reach 90 DCOH).