Okay, there was some deception in that headline. Parkland Health & Hospital System in Dallas is indeed the only AAA-rated hospital in the country, according to CFO John Dragovits, but he says the hospital owes much of this designation to the underlying credit worthiness and credit standing of Dallas County, as well as to the hospitals' strong operating performance.
Dallas County has been AAA rated for 30 years. The hospital, however, had to fight for its AAA rating from both Fitch Ratings and Standard & Poor's. Rating agencies have historically discounted hospital districts by a notch or so because they have the word hospital in their name, says Dragovits.
"The argument is we should have at least the same credit standing as Dallas County since they are the same tax base and the underlying support for the hospital district is the county," he says. "The real story was the fact that we were able to make strong cases to the rating agencies that that was actually the case."
Well, we all like a success story in these tough economic times and attaining a AAA rating is only part of Parkland's recent good news. With many public hospitals facing serious financial challenges, Parkland with 685-beds has been preparing over the last two years for a $1.27 billion construction project, which includes a 862-bed replacement hospital, an outpatient center, office center and parking.
The hospital project has not been without its challenges, though. Leaders have had to contend with gaining tax payer approval for the project during the collapse of the capital markets—a time when states and counties are broke and most hospitals are stalling capital projects. On top of that, leaders faced the prospect of higher than expected interest rates.
So how is a public hospital able to pull off such a feat? Dragovits says it has a lot to do with the Dallas spirit. "Dallas likes winners, and they like winners in everything." To that end, the community has rallied around its safety-net hospital. In November 2008, Dallas County voters approved $705 million general obligation bonds to help pay for the new hospital and agreed to increase property taxes up to 2 ½ cents per $100 of taxable value to pay for the debt service on the bonds. The vote passed by an overwhelming 82%.
Dragovits says $680 million of the $705 million will be in bonds issued through the Build America Bonds federal program, which came about as a result of the American Recovery and Reinvestment Act that President Barack Obama signed into law earlier this year. Under BAB, the federal government will subsidize 35% of the interest payment. "These bonds are taxable bonds and will have higher interest rates," says Dragovits. "The federal government subsidizes us for the difference." Dragovits estimates that the hospital will save $60 million to $80 million over the life of the bond.
The cost of borrowing under the BAB—less than 4%—is significantly less than what was originally projected even back when the credit markets were great, says Dragovits. "There was a time we targeted around 4.5% back in the good old days when the market went well and money was free." Once the markets froze and interest rates spiked, he says the hospital was looking at 5% to 6% in interest.
Because the project is in its early stages, Dragovits says that he has essentially been waiting to see if anything moved in the market or the government. "Well two things happened: The government came along with Build America Bonds and the markets have opened up, so the combination of both and the fact that we were successful in being highly rated has given us the opportunity to potentially save tax payers a couple million dollars a year in interest costs."
Now onto the hard part: building a new facility. Construction is due to start in early 2011.