Fitch Affirms Indy Local Pub Improv Bond Bank (Health & Hosp Corp), IN ULTGOS & Lease Rev. Bonds

Fitch Ratings has taken the following rating action on Indianapolis Local Public Improvement Bond Bank (Health and Hospital Corp. of Marion County),(the corporation) IN:

--Approximately $216.9 million unlimited tax general obligation bonds (ULTGOs), series 2005D, 2010A-1 and 2010A-2 affirmed at 'AA+';

--Approximately $500 million lease revenue bonds, series 2013A, 2010B-1 and 2010B-2 affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the Indianapolis Local Public Improvement Bond Bank (the bond bank) which under Indiana law is empowered to buy and sell securities of 'qualified entities'. The bond bank itself has no taxing power.

Pursuant to Indiana Code, the Indianapolis-Marion County Building Authority (the authority) and the Health and Hospital Corporation of Marion County (HHC) are qualified entities that can issue 'qualified obligations' to be purchased by the bond bank. Each series of bonds is secured by the trust estates established under the bond bank indentures.

The series 2005D, 2010A-1 and 2010A-2 bonds are secured by an ULTGO pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County. The series 2010A-1 and series 2010A-2 bonds are also secured by a cash-funded debt service reserve fund (DSRF) funded to MADS.

The series 2010B-1, series 2010B-2 and series 2013A lease revenue bonds are payable from fixed rental payments (due 15 days prior to debt service payments) made by HHC through a master lease under which the authority is the lessor and HHC is the lessee. Lease payments are supported by an unlimited property tax pledge, not subject to the Circuit Breaker Tax Credit or annual appropriation. The lease payments are subject to abatement if the leased premises are not available for use. Abatement risk is offset by the requirement that the authority or HHC obtain property and casualty insurance in an amount equal to the greater of the cost of defeasing the then-outstanding series 2010B and 2013A bonds, or 100% of the replacement cost of the leased premises. Additionally, the authority or HHC must obtain rental interruption insurance equal to full rental value for 2 1/2 years.

The series 2010B-1, series 2010B-2 and series 2013A bonds are also secured by a common cash-funded DSRF funded to maximum annual debt service.

KEY RATING DRIVERS

SAFETY NET DESIGNATION: As the only public hospital in Marion County, Wishard Hospital (which has been renamed the Sidney and Lois Eskenazi Hospital) fulfills an essential role in the service area, providing safety net healthcare services to Marion County's Medicaid and indigent population.

REPLACEMENT FACILITY COMPLETE: The new replacement facility, whose financing was approved by a high percentage of voters, should increase efficiency and effectiveness of healthcare delivery as the prior hospital was more than 100 years old.

STRONG QUALITATIVE INDICATORS: Several of the hospital's qualitative measures (including quality, cost effectiveness of care, relationship to Indiana University School of Medicine) are positive credit factors.

WEAK HOSPITAL FINANCIAL OPERATIONS: Financial operations of the hospital are weak and leave the facility vulnerable to changes in state and federal funding given the large number of Medicaid, Medicare and indigent patients.

DIVERSE TAX BASE AND ECONOMY: The service area has a large and diverse tax and economic base and continues to experience growth through new commercial development.

STRONG SECURITY: Debt service on the GO bonds is secured by an unlimited ad valorem tax pledge of HHC, a component unit of the consolidated city of Indianapolis-Marion County. Lease payments are supported by an unlimited property tax pledge, not subject to annual appropriation.

RATING SENSITIVITIES

STRENGTH OF THE SERVICE AREA ECONOMY: The rating is sensitive to shifts in fundamental credit characteristics including the strong service area economy and tax base. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

HHC is co-terminus with Marion County and Indianapolis (Fitch GO rating of 'AAA' with a Stable Outlook). The county is the most populous in the state with an estimated 2012 population of 903,393, a 6.8% increase from 2000. The city, the state capital, is the largest in the state.

On Feb. 18, 2013, HHC agreed to enter into a Joint Management Services Agreement (JMSA) with Community Health Network (CHS; revenue bonds rated 'A+'; Stable Outlook by Fitch). The agreement was to expire Dec. 31, 2013, but has been extended for six months as the boards of both organizations continue to negotiate the terms. The agreement is intended to allow the organizations to create and enter a JMSA to implement various parts of federal healthcare reform (Patient Protection and Affordable Care Act), while expanding care access throughout each of their service areas. The JMSA is neither an acquisition of one party of the other nor a full asset merger. Each entity will remain obligated on its own outstanding debt. The JMSA is viewed positively by Fitch as it better positions both systems for health care reform by improving access and quality care.

SERVICES AND GOVERNANCE

HHC provides health services including preventive, acute care, and long-term care to county residents through three main departments: Eskenazi Health Services which operates the 327-bed Sidney and Lois Eskenazi Hospital; Marion County Health Department; and the Division of Long-Term Care which operates over 59 nursing home facilities. The hospital is Marion County's only public, general acute care facility, providing 65%-75% of all uncompensated care in the county.

HHC is governed by a seven-member Board, three of whom are appointed by the mayor of the city, two by the Board of Commissioners of the County, and two by the City-County Council. The Board levies its own taxes, adopts its own ordinances and issues its own general obligation bonds through the bond bank, subject to approval of the Indiana Department of Local Government Finance.

NEW REPLACEMENT FACILITY OPENED

In 2009 voters approved the issuance of up to $703 million in tax-supported debt for the replacement of HHC's Wishard Hospital. Fitch believes that the bonds' approval by a high 85% of voters indicates solid support for the project, although turnout was light and management conveyed its expectation to voters that a property tax increase would not be needed to fund the project.

The replacement project was completed on time and on budget and opened on Dec. 7, 2013. The new facility comprises an 11-story, 1.2 million square foot replacement hospital with 327-bed inpatient hospital, 17 operating rooms, 4 interventional labs and 12 labor delivery rooms, and an adjacent six-story, 175,000 square foot structure with 110 exam rooms which houses the outpatient clinic facilities. The replacement facilities also include a five-story administrative office building; a six-story, 2,700-car parking garage which was completed in January 2012; and a consolidated utility plant.

In recognition of a significant donation, the replacement facility was renamed the Sidney and Lois Eskenazi Hospital and Eskenazi Health.

DEBT SERVICE CURRENTLY BEING PAID FROM OPERATIONS

HHC is legally obligated to fund the annual debt service on the series 2013A, 2010A, and 2010B bonds using a dedicated property tax if other revenues are not sufficient to fully pay the bonds in any given year; however, HHC currently funds 100% of debt service through operating revenues and plans to continue to do so. Property taxes represent approximately 43% of total general fund operating revenues with MADS on all debt at a modest 4.0% of revenues. Additionally, HHC has contributed $140 million to date) in accumulated reserves to the project, with an additional $10 million contribution budgeted for in 2014.

STRONG QUALITATIVE FACTORS BUT WEAK FINANCIAL OPERATIONS

The hospital's qualitative performance measures are strong, while weak financial operations reflect in part the very high 38% of patients with no form of insurance or government subsidy.

Management's goal is to maintain break-even operations (after interfund transfers). However, the hospital generates substantial operating losses due to poor payor mix. Management has implemented various collection and pre-qualification programs to maximize revenue collection and is strategically focused on providing low-cost care. Despite these measures, its operating performance continues to be weak and Fitch expects operating profitability to continue to be weak despite the above-mentioned modifications.

In 2012, the hospital incurred an operating loss of approximately $118 million, compared to a $236 million loss in 2011. This was offset by a $111.5 million transfer from the general fund and capital contributions. The hospital ended the year with a $35.1 million surplus from operations after transfers compared to a deficit of $41 million in 2011. For 2013, management is projecting a $10 million deficit.

The general fund, which includes property and income tax support as well as intergovernmental payments, has experienced consistent operating surpluses, including a $167.9 million surplus in 2012. The surpluses are used to bolster hospital operations. After transfers, including $111.5 million in support of the hospital, the net surplus totalled $94.7 million in 2012 compared to a $17.6 million deficit in 2011. The unrestricted (sum of committed, assigned and unassigned) general fund balance totalled $229.8 million or a strong 88.3% of general fund spending. When proprietary expenditures are added, the unrestricted balance drops to a still satisfactory 17.8%.

MANAGEABLE LONG-TERM LIABILITIES

Overall debt levels are moderate with debt per capita at $1,281 and debt-to-full value at 3.0%. Debt levels should decline as there are no future borrowing plans and principal amortization is rapid.

HHC contributes to the Indiana Public Employees Retirement Fund (PERF), a state-run, multi-employer defined benefit pension plan. PERF is transitioning from an agent plan to a cost-sharing plan, which should be finalized for the fund's 2014 CAFR. As of June 30, 2012, PERF was 77% funded using a 6.75% return assumption, which Fitch considers adequate. For 2012 the corporation's statutory contribution totalled $20.6 million, or 100% of the required amount. Carrying costs including debt service and pension costs were manageable at 17.5% of governmental funds spending.

DIVERSE ECONOMY AND TAX BASE

The strength of the service area economy is an important factor in the 'AA+/AA' rating on the bonds.

The economy and tax base are strong and well diversified and include pharmaceutical production, health services, life and sciences companies, manufacturing and other business and professional services companies which continue to lead employment and the city's industrial output. The city experienced a 1.2% increase in employment from October 2012 to October 2013, higher than the state and U.S. levels. The October 2013 unemployment rate of 7.4%, while down from the October 2012 rate of 8.5%, remains elevated relative to the MSA (6.5%), state (7.0%) and nation (7.0%). Income levels in the city are comparable to state averages and slightly below those of the U.S.

Taxable assessed value has been fairly stable over the last few years, totalling $39.4 billion in 2012, a slight decrease from 2011. The top 10 taxpayers comprise a modest 5.7% of 2012 taxable value. Property tax collections, which have historically been strong, decreased in 2011 due to the application of the state's circuit breaker tax credit.

For information about Indianapolis' overall credit quality please see the Fitch release 'Fitch Rates Indianapolis Local Public Improvement Bond Bank, IN Refunding Bonds 'AAA'; Outlook Stable' dated June 18, 2013, available at www.fitchratings.com.

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, University Financial Associates, CoreLogic Case-Shiller Index, IHS Global Insight, Zillow.com and, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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=813352

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