SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on Snohomish County Public Hospital District #1's (the district) limited tax general obligation (LTGO) bonds:

--$2.3 million series 2004 affirmed at 'B'.

The Rating Outlook is 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

PERSISTENT FINANCIAL WEAKNESS: The district continues to face severe financial strains due to declining utilization and recurring operating losses that have weakened cash and reserve levels. The Negative Outlook reflects the district's vulnerability to insolvency over the near-to-medium term. The district has had a going concern opinion in its three most recent audits.

TURNAROUND EFFORTS CONTINUE: The district has executed an operating agreement with EvergreenHealth, a public hospital district based in Kirkland, Washington, to become effective in early 2015. The agreement expands upon an affiliation with Evergreen begun at the end of 2012 and is intended to help improve the district's operating performance and competitive position.

STRONG TAX BASE; LIMITED BENEFIT: Given the weak financial position the benefits of the district's GO pledge and the strength of its underlying tax base are diminished. The current rating more closely reflects the district's financial operations.

RATING SENSITIVITIES

CONTINUED PRECARIOUS FINANCIAL POSITION: Despite recent improvements in cash flow, largely due to a voter approved increase in the tax levy, the Rating Outlook remains Negative given the very low liquidity position. A further decline in liquidity could result in insolvency and further rating downgrades. However, the ability to meet its 2015 budget, which reflects an improved cash position, could result in a revision in the Rating Outlook to Stable.

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, the only acute care facility in the district, and the Valley General Chemical Dependency Treatment Center.

ONGOING FINANCIAL CHALLENGES

The district's financial position remains weak due to recurring operating losses. Unrestricted net assets fell to a negative $1.5 million in 2013, down from $5.2 million in 2008, while the district has experienced seven consecutive years of operating losses. However, the district had positive cash flow through the 10 months ended Oct. 31, 2014 due largely to additional tax revenue from a voter approved tax levy increase in 2013.

Despite this positive development, cash levels are precariously low with $45,000 of unrestricted cash and investments at Oct. 31, 2014 compared to $1.1 million at fiscal year end Dec. 31, 2013. The district has secured a $1.5 million line of credit from a local bank (backed by expected property tax revenue), which Fitch believes is necessary given its current cash position. The district projects to end 2015 with an improved cash position.

TURNAROUND EFFORTS CONTINUE

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. The district now plans to expand upon this relationship with an operating agreement to be implemented in March 2015. Evergreen will manage the district's hospital and clinics under the agreement, and a new board will be established to oversee district operations. The district's board will retain legal and financial responsibility for the district, but will no longer oversee operations directly.

Management expects that increased integration of the district's services with Evergreen will improve financial results, but much uncertainty remains regarding the outcome of these changes. In addition, the April 2013 approval by district voters of an increased operating levy is now generating approximately $2.4 million per year in additional revenue, equal to approximately 7% of 2013 operating revenues. Although Fitch views this positively, the district remains vulnerable due to its challenged position in a competitive market with no financial flexibility.

STRONG UNDERLYING TAX BASE OF LIMITED 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 9.2% increase in 2014. The district's tax revenues are protected by a levy that adjusts automatically to compensate for changes in TAV, and have been relatively stable. However, given the district's weak financial position, the strong underlying tax base and GO pledge is of limited benefit due to the potential disruption of debt service payments in an insolvency situation.

TAV declines since 2008, in combination with voters' 2013 approval of a levy increase, have pushed overlapping tax rates closer to the constitutional limit of $5.90/$1,000 TAV. In 2009 the highest levy among the district's tax rate areas was $4.01/$1,000 but by 2014 the highest levy had risen to $5.52/$1,000. As a junior taxing entity, the district could be required to reduce its levy if overlapping tax rates exceeded the $5.90/$1,000 limit.

Direct and overlapping debt levels for the district are moderate at approximately $3,644 per capita and 3.7% of TAV. Amortization is below average as a result of the district's 2009 issuance of additional GO debt, with 37% 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 2013.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=940155

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