Debt covenant compliance was an issue of concern pointed out during a recent meeting of the Ector County Hospital District audit committee.
BKD audit partner Chris Clark presented the audit for Fiscal Year 2017 to the committee, Medical Center Hospital administration and other board members in attendance.
The district must generate enough EBIDA, or earnings before interest, depreciation and amortization, to cover 110 percent of their debt service, which totals to about $5.2 million of EBIDA, as well as have 50 days cash on hand at the end of Fiscal Year 2018 or the district will be in default, Clark said.
“Through January, I think your EBIDA is at like $1.1 million, so you’ve got some ground to make up by the end of September,” he added.
Financial statements for the month ended Jan. 31, show EBIDA was shy of $1 million, totaling $983,851. MCH CFO Robert Abernethy said their goal and expectation is to meet that requirement at the end of FY 2018.
As of January, Abernethy said they are down to 55 days cash on hand and expects that to go up with changes that the district is putting in place.
The audit is something the bond rating agencies will be reviewing to look at the hospital’s strengths and weaknesses, as well as what their plans are to resolve those weaknesses and their overall improvement plan going forward, Abernethy said.
“We will have a bond rating call later next week so until we do that, I hesitate to say what it’s going to do. We could remain with our existing rating or it could come down a little bit with our loss,” he said, adding it depends on what the bond raters feel when looking at the future with the recent leadership change, the actions being taken to correct the issue and the improvement shown.
Should the district go into default, Clark said they would likely have to go back to the bond holders and ask for a waiver, which would cost the district money should bond holders choose to grant it.
ECHD’s bond rating was downgraded by Fitch Ratings in March 2017 from A- to BBB with the rating outlook negative. The district was then required to pay for an outside company to review the hospital’s operations and offer opportunities for improvement in certain areas, which several board members said administration at the time was slow to implement after former President and CEO Bill Webster announced his retirement.
The district failed their debt service coverage ratio requirements at the end of 2016. Clark said included in that debt service last year was payments on some bank notes (related to Cerner) but after working with the lender on those notes to subordinate that debt to the bonds, they were able to exclude that from the debt service coverage calculation.
“That improved the likelihood you would meet your debt service requirement,” Clark said.
Then the GASB 68 actuary report came in. Clark said the district basically had a $9 million paper expense that hit the district’s bottom line and through the district back into a situation where they were not going to meet the 110 percent requirement.
After going back to the bond holders, that’s when an amendment was made that resulted in the additional requirement to have 50 days cash on hand, which allowed the district to meet their debt service coverage ratio for 2017, he said.
Ector County Hospital District, in comparison to other mid-size districts like Midland, Lubbock and El Paso, was below average for total days cash on hand in 2017, Clark said.
“You had just over 120 days cash on hand back in 2013 and you were down to just over 40 days in 2017 and if you look at your peers in the industry, you dropped lower than the average in 2017,” he said.
Clark said the district has made some investments in their capital assets and has had a large expenditure associated with Cerner, but another thing that sticks out is the district’s decline in overall cash investments over a five-year period, from 2013 to 2017.
“You had about $98 million of noncurrent cash investments and then your current cash equivalents back in 2013 and that’s down to $51 million in 2017. So you can see that steady decline over that five-year period,” he said.
Clark also pointed out a steady decline in net position over the last five years from $237 million in 2013 to just shy of $200 million in 2017.
Overall, Clark said areas of high risk they identified through the financial statements were consistent with prior years and consistent with what they would expect to see.
“There is nothing in our risk assessment process that generated an unexpected significant risk area,” he said.
The district reported operating losses of about $77 million in 2017 and about $59 million in 2016. BKD noted in the audit documents some of the primary components of the increased operating loss, including:
- A decrease in net patient service revenue of about $7 million, or 2.91 percent, primarily due to the Cerner system conversion in April 2017 which impacted timely billing efforts and led to an increase in accounts receivable reserves.
- An increase in supplemental Medicaid funding revenue of about $3.1 million, or 8.37 percent, due to an increase in the district’s allocation of the uncompensated pool.
- An increase in salary and related expenses for the district’s employees of about $5.8 million, or 3.12 percent, due to higher staffing associated with growth and expansion and the district’s recruitment and retention efforts.
- A decrease in supply and other costs of about $2.4 million, or 2.8 percent, and an increase in purchased services and professional fees of about $6.4 million, or 14.87 percent, primarily due to growth in service lines and use of consultants and third-parties in connection with the revenue cycle system conversion.