FirstSouthwest Services:  Financial Advisory

 

Dallas County Hospital District which oversees the Parkland Health and Hospital System is the largest county hospital district in the State of Texas based on the number of 2008 discharges. The district operates North Texas’ largest Level I trauma center, a network of community-oriented primary care centers, Parkland Community Health Plan, Parkland Foundation, and healthcare programs at Dallas County’s correctional facilities. A seven-member board appointed by the Dallas County Commissioners Court manages the district.

 

For more than five years, the district’s management, board, and a “Blue Ribbon Committee” appointed by the county commissioners developed a Master Facility Plan to replace the current hospital and on-campus clinics to be financed through cash reserves, philanthropy and debt issuance. The Master Facility Plan assumptions included: 1) $705 million of tax supported bonds, 2) $42 million of combination tax and parking revenue bonds, 3) an annual tax base growth factor of 3 percent, and 4) a borrowing rate for the bonds of 4.5 percent. 

 

As part of the financing plan and proposition to the voters, the district projected an interest and sinking tax rate increase of $0.02 per $100 assessed valuation for two years and a rate of not more than $0.025 cents per year thereafter. The district also projected an increase of $0.01 per $100 assessed valuation to its annual operating tax rate. Dallas County voters approved the $1.2 billion Master Facility Plan and $747 million of combination tax and revenue bonds by more than an 82 percent affirmative vote on November 4, 2008. 

 

Between the election on November 4, 2008 and the delivery of the bonds on September 17, 2009, the bond market experienced extreme turbulence. Premium credit quality was in high demand. However, interest rates on all municipal bonds rose sharply. Further, when the district received its preliminary tax base estimate, the tax base had decreased by approximately 3.3 percent. Both of these factors led to concern that the district could not meet its projected tax impact targets and that the debt funding component of the Master Facility Plan would have to be reduced accordingly. Any reduction to the debt component of the plan would have to be offset by either increased fundraising or an increase to the district’s “equity” contribution. Otherwise, the district was faced with scaling back its capital investment by an amount equal to its reduction in debt capacity.

 

As part of the Federal Stimulus Package, a new debt structure called Build America Bonds was created for governmental capital projects. Governmental hospitals are unique in that they are among the only healthcare issuers to qualify for BABs. As the capital markets and bond market slowly improved, it became apparent that the district could meet its benchmark goal of 4.5 percent cost of debt. However, also clear was that the district would need the highest bond ratings possible to achieve the full benefit that the BAB market offered. 

 

While Dallas County enjoyed Aaa/AAA bond ratings on its tax supported debt, no precedent was set with any of the three rating agencies for a public health system to achieve a “parity” rating with its "parent's" overlapping debt. Indeed, the rating agencies all tend to rate public health systems at least one-half of a rating category lower. FirstSouthwest worked with the district more than a year in advance of the bond issue to identify the specific concerns of all three agencies. Based upon the results of this work and the district's desire to secure a AAA rating outcome, the district approached only two of the three agencies with a strong argument for parity, AAA ratings with the county’s bonds.

 

By highlighting its conservative fiscal management, solid tax base, substantial cash reserves, strong legal structure including a trust indenture for taxes pledged to the bonds and overwhelming voter and county support, the district was able to secure AAA ratings from both S&P and Fitch. Parkland Health & Hospital System is the only AAA rated hospital in the nation. In addition, the district is one of only two public hospitals in Texas to receive parity ratings with the general obligation ratings of “the parent” county.

 

With the highest credit ratings available in hand, the district took advantage of the BAB program provided by the Federal Stimulus Package. The district issued three series of bonds to achieve the lowest cost of funds with the most flexibility. Tax-exempt bonds offered the lowest yield on the front end of the curve, thus the district sold tax-exempt maturities from 2014 to 2016. BABs were more advantageous for the remaining maturities. 

 

To attract the greatest investor interest and to provide the lowest cost of funds, the district structured make-whole call, term bonds for the majority of its debt structure. To maintain some call flexibility, the district sold $222 million of higher yielding, 10-year par call BABs.  Further, special care was taken to ensure that in excess of $250 million of par value was built into the long term maturity. This sizing of the term bond allowed it to be included in the Barclays Capital Aggregate Bond Index, a qualifier that many institutional, taxable bond investors view as providing additional liquidity and price transparency to a bond issue and that the underwriters indicated would maximize investor demand for the offering.

 

The bond sale closed in just three days. The overall structure resulted in an all in TIC of 3.71 percent, well below the targeted 4.50 percent. Because of the extraordinarily low cost of funds, the district’s board and the county commissioners were willing to move forward with fully funding the entire tax-supported debt portion of the Master Facility Plan. This ensured that the community would benefit from the full scope of the replacement facility. Additionally, the utilization of BABs as compared to a structure of only tax-exempt bonds is estimated to have resulted in a net present value savings to Dallas County taxpayers of more than $119 million.