(The following statement was released by the rating agency)SAN FRANCISCO, December 10 (Fitch) Fitch Ratings has affirmed the following Skagit County Public Hospital District No. 2 (the district), Washington, limited tax general obligation (GO) bonds:--$9.2 million series 2005 at 'A-'.The Rating Outlook is Stable.SECURITYThe bonds are limited general obligations of the district, secured by its full faith and credit pledge, including an irrevocable pledge of a property tax levy subject to constitutional and statutory limitations.KEY RATING DRIVERSLIMITED BUT IMPROVING FINANCES: The rating recognizes the pressure the district experiences as a small community hospital operating in a rapidly evolving healthcare environment; nevertheless, the district benefits from adequate liquidity, improving profitability, and initiatives to continue to grow volume and revenue.ESSENTIAL SERVICES: The district's most recent GO bond authorization had exceptionally strong voter support and the community is very involved in the district's future planning. However, the district's market share is variable across its territory,MANAGEABLE DEBT PROFILE: The district's debt burden is low as a percentage of taxable assessed valuation (TAV), conservatively structured, with limited future debt plans. Annual debt service and retiree costs are affordable.EXCESS TAX REVENUE SUPPORT AVAILABLE: The bonds are secured by a full faith and credit pledge, including an irrevocable pledge of a property tax levy within constitutional and statutory limits, which generates revenues in excess of debt service requirements. While these excess revenues are typically used for capital purposes, they are available to support operations if necessary.SOMEWHAT LIMITED LOCAL ECONOMY: The district has mixed socioeconomic characteristics, a small population base, and a slowly recovering tax base that is highly concentrated. There are some prospects for new development.RATING SENSITIVITIESThe rating is sensitive to shifts in fundamental credit characteristics including the district's manageable debt profile and excess tax revenue support. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. The rating is unlikely to increase given the district's size, location, and currently unaffiliated status.CREDIT PROFILEThe district is based in western Skagit County, WA and operates Island Hospital (a 43-bed acute care community hospital in Anacortes), four primary care clinics, and six specialty clinics spread across Skagit and San Juan counties. Island Hospital is the smallest hospital in Washington providing Level III trauma care. The city of Anacortes is the district's retail and population center and the major gateway for traffic to the San Juan Islands tourist area 80 miles northeast of Seattle. The district also encompasses Fidalgo, Guemes, Sinclair, and Cypress Islands, and serves five other islands.LIMITED BUT IMPROVING FINANCESThe district's finances are inherently limited by its small revenue base, which exposes it to volatility especially in a rapidly evolving healthcare environment. Nevertheless, the district has adequate liquidity, improving profitability, and a business strategy focused on enhancing its referral base and primary care clinic network in order to drive revenue growth and increased patient volume. After extensive consideration of affiliating itself with a larger entity, the district has decided to step back from the significant amount of market consolidation currently underway in the state, so that it can better assess its options when market activity settles down.ESSENTIAL SERVICESThe closest competitor hospital is 20 miles to the east (Skagit Valley Hospital). Community support for the district manifested itself in exceptionally strong 78% voter support for a GO bond authorization in 2004. In addition, during recent affiliation discussions, the community showed a preference for the district to maintain its public sector nature.MANAGEABLE DEBT PROFILEThe district's estimated overall net debt is a high $4,271 per capita, reflecting the district's limited population size, but a low 1.9% of TAV, benefiting from the value of the local commercial/industrial tax base. Ten-year amortization of principal debt is above average at 70%. The district's future debt plans are limited to an anticipated $10 million purchase in 2014 of a medical office building located on Island Hospital's campus. This additional debt would not greatly alter the district's current debt profile.Retiree costs are manageable; the district contributes between 6.1%-6.5% of eligible employees' compensation to a qualified retirement plan which is fully funded. The district does not offer OPEBs. Annual debt service and pension contribution costs represented a low 5.6% of its total operating expenses in 2012.EXCESS TAX REVENUE SUPPORT AVAILABLEIn 2013, bond debt service was $738,219, payable out of the district's expense fund levy revenues of $845,116, thereby generating excess cash of $106,897 which is currently unused for debt service. While surplus tax levy revenues can be used for operations, the district prefers to designate them for capital improvement projects and property purchases. Although in 2008-2010 a portion of the levy revenues were used to absorb operating losses, it has not been necessary to do that since. The district board invests unused designated funds with the county treasurer in an informal bond reserve which is expected to total $379,000 at 2013 year end.The district expects to continue generating excess expense fund levy revenues as the board has routinely approved the maximum allowable annual levy increase for the last 12 years. The maximum allowable levy increase without voter approval is constitutionally limited to the lesser of 1% or the inflation rate plus adjustments for new construction and improvements, and state-assessed utilities, irrespective of overall TAV increase or decrease. Increases above that require a simple majority of voters to approve a levy lid lift. The district might consider requesting such voter approval in 2016 to cover costs outside of normal operations (for example, information technology system upgrades).SOMEWHAT LIMITED LOCAL ECONOMY AND TAX BASEThe district economy relies on petroleum refining, seafood processing, a shipbuilding company, and tourism. The district also has a large retiree population, with half its residents being Medicare eligible. The county's July 2013 unemployment rate was moderately elevated at 8.4%, compared to the Washington State rate of 6.8% and the national rate of 7.7%, reflecting stagnating employment opportunities. The county performs somewhat worse than the state in terms of per capita money income and median household income, but is comparable in terms of its individual poverty rate. The county performs better than the national averages for median household income and the individual poverty rate.After a significant TAV decline of 13.2% during 2010-2012, the local tax base remained flat in 2013 and will grow slightly by 1.2% in 2014. While new development remains somewhat limited, recent elections of a new mayor and city council member in Anacortes might indicate a shift toward more rapid development going forward.Taxpayer concentration is high as the top 10 taxpayers accounted for 18.7% of total 2012 TAV. Moreover, the top two taxpayers are oil refineries (Equilon Enterprises and Tesoro Corporation), whose TAVs are highly vulnerable to economic fluctuation, jointly account for 15.7% of TAV. Nevertheless, property tax revenue collections were strong at approximately 98.5% in 2013.Contact:Primary AnalystAlan GibsonDirector+1-415-732-7577Fitch Ratings, Inc.650 California Street, 4th FloorSan Francisco, CA 94108Secondary AnalystEmily WongSenior Director+1-415-732-5620Committee ChairpersonKaren KropSenior Director+1-212-908-0661Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@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, S&P/Case-Shiller Home Price Index, IHS Global Insight, 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=811261
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