Editors note: This article was updated at 3:00 Friday, 2/17/2023
This week, the Kaweah Delta Health Care District notified the bank overseeing bond series issued beginning in 1999 that the district failed to maintain adequate cash reserves through the last six months, apparently triggering a requirement that forces the district to deposit around $17 million within 30 days to protect its investors.
The news comes as Kaweah Health rolls out millions of dollars in budget cuts and faces accusations of withheld bonuses and unfounded rumors of closure from upset employees.
Net Income Loss of $36.7 Million
In a letter dated February 13 and sent to the U.S. National Bank Association – popularly known as US Bank – Kaweah reported it suffered a net income loss of $36,691,000 from July 1 to December 31 of last year. The period represents the first half of fiscal year 2023 (FY23).
Additionally, the district reported a negative general obligation bond revenue of $1,757,000 for the same period. The losses were offset by more than $19.5 million in depreciation, amortization and interest, resulting in a deficit of $18,763,000 in income available to service its bond debt.
The enormous funding gap pushed Kaweah’s long-term debt service coverage ratio well outside the required range of 1.35:1.00, triggering an apparently very expensive clause in its bond contract.
“Therefore, within 30 days of the filing of this report, the District will deposit the Reserve Fund Requirement (equal to the Maximum Annual Bond Service) into the Reserve Fund held by the Trustee,” Malinda Tupper, Kaweah Health CFO wrote on the district’s behalf.
In the same letter, Tupper reported the maximum annual bond service as $9,068,197. In its reporting on the debt service failure, Becker’s Hospital Review said “the system is now required to set aside approximately $17 million into a debt service reserve fund.”
Millions in Budget Cuts
This latest ominous announcement from Kaweah comes as the district continues rolling out a series of cost-cutting measures – including hundreds of employee layoffs and closed positions – intended to trim $47.8 million from its budget for the remainder of fiscal year 2023. In June 2022, Kaweah announced it would approve a deficit budget with an $11.2 million operating loss for FY23.
In an update of the district’s cost-cutting measures presented to the district’s board of directors at their January 25 meeting, Kaweah Health reportedly has already laid off 106 workers. Another 90 positions have been frozen, and 94 additional layoffs were scheduled for January and February. The district expects to save $12.8 million as a result of the cuts to staffing in FY23.
The district is also eliminating contract employees, such as traveling nurses, from its workforce. The goal appears to be to have just 40 contract employees remaining by year’s end. The district has already reduced full-time contract employees from 229 to 76, and reduced payment rates. The projected savings is $24 million.
Further, the district said it will reduce overtime hours, reduce extra shift bonuses and restructure pay practices, such as eliminating 401(k) matching contributions and at-risk compensation.
Additionally, the district is pushing transportation providers to pick the lowest-cost options for patient transport, putting transport costs back onto patients and their families, and replacing taxi vouchers for patients with Uber rides.
The district is also working to get patients out of the hospital faster, as well as discharging and transfering long-stay patients. The district is juggling its case managers’ schedules with the intent of getting patients discharged more quickly. The Long Stay Committee will “continue to work with our complex Case Management team along with Risk, Finance, Patient Accounting and Mental Health to look at long-term patients and develop strategies to expedite discharges,” the district said of its plans to reduce its most expensive patient load.
Kaweah Health calls its cost-cutting efforts Operation Back in Black, referencing an early 1980s music album issued by the rock group AC/DC following the alcohol-related death of lead singer Bon Scott.
Employees Report Suspicion, Mistrust
Meanwhile, members of the staff have accused Kaweah Health of withholding state-funded employee retention bonuses, whispering in anonymous emails that the district will shutter its facilities within 60 days. The rumors appear largely unfounded. An official response from Kaweah is pending, but could not be included by the Valley Voice’s publication deadline. This story will be updated when Kaweah’s response is available.
A Kaweah Health staff member who asked for anonymity to prevent retaliation from supervisors said employees were told in October of last year hospital administrators expected the state to provide funding for retention bonuses for part- and full-time employees. That employee said they and fellow employees suspect the district has received the funds, but does not intend to distribute them.
“The state gave enough for the hospital to give us $1,000 each for full-timers. Then the hospital out of their pockets was to give us $500. So a $1,500 taxed bonus was due in February to all who qualified with certain hours by October 30th,” the staffer wrote. “Kaweah came back and said we didn’t qualify for the $500. But they’d give us the money when the state gave it to them. Apparently they have the bonus money but won’t give it out. We think they are gonna keep it then close the doors.”
It seems unlikely Kaweah Health would purposefully misuse state funds, and local health care institutions Adventist Health and Sierra View Health Care District report they have not received the state funding for employee retention bonuses. Both groups expect payments to be forthcoming.
Staffers, however, appear to have lost trust in the district’s administration, believing the turmoil reaches far further than the public is aware. The employees claim Medi-Cal payment providers are reluctant to renew their contracts with Kaweah Health, resulting in cutting staff “almost in half” at the district’s urgent care facilities.
Other facilities and services appear to have been shuttered.
“They closed neurology, the skilled nursing on court, leaving families to find homes to put their loved ones in, closed Ambrosia, the coffee shop in the hospital, claimed it needs repairs, but that isn’t the case there,” a staffer wrote.
And there are more subtle signs of financial strain.
“They beg their employees to donate portions of their pay to the foundation, and when employees call HR or payroll to cancel, they give them the runaround about it,” the staffer wrote. “At my orientation, the lady from the foundation was unpleasant and upset with me because I declined to give a portion or any of my pay for that matter to the foundation. Told me it wasn’t a good idea to not donate.”
More Hits to Kaweah Budget Coming
Meanwhile, the COVID-19 national emergency and the resulting public health emergency will come to an end on May 11. The resulting reduction in funding could cost Kaweah Health up to $16.7 million. Part of the funding loss – $5 to $6 million – will be offset by the elimination of the supplemental COVID pay requirement and staff reductions for COVID screening and lab testing.
Those pending cuts were announced at a meeting of the district’s Finance, Property, Services and Acquisition Committee in a report from the CFO on Tuesday, February 14.
With this new round of cuts coming, Kaweah Health CEO has issued an open letter to the state’s governor calling for assistance to close the unusual budget holes many of the state’s smaller hospital districts are experiencing and cannot close.
“It’s during this time of unprecedented need we are asking Governor Newsom to dedicate one-time funding to help district hospitals while they attempt to recover from financial losses due to COVID-19,” Herbst wrote.
He also singled out the state’s repayment scheme for Medi-Cal services as a cause of undue financial burden, especially for Kaweah Health. The district’s population relies on public health assistance at a much higher rate than the state average.
“Perhaps even more critical is the need to reform outdated Medi-Cal reimbursements to adequately compensate hospitals for the services they provide and avoid disparities in the care of the poorest Californians,” Herbst wrote. “Better Medi-Cal rates would help sustain district hospitals indefinitely.”
In his letter, Herbst said the district suffered a cumulative operating loss of $133 million from the start of the pandemic through October 31. Those losses were partially offset by federal support of $61 million in relief funding.
Kaweah Health has asked district residents to add their signature to the letter to Governor Gavin Newsom. Details of the mail-in campaign are available at kaweahhealth.org/about-us/take-action/.
In a video address, Herbst explained why he’s petitioning the governor for help and why he’s turning to the public at large for support.
“So you got all these California hospitals, including Kaweah, that are really suffering substantially in an unprecedented fashion,” Herbst said. “And I said we have to speak up.”
Kaweah Health Responds
Following the original publication of this story, Kaweah Health provided a statement about the status of state-funded employee retention bonus payments and the nature of the bonds affected by the lack of cash reserves, as well as the impact of correcting that funding lack on the district.
The statement from spokesperson Laura Florez-McCusker emphasized the organization’s ongoing commitment to providing care for district residents and its immediate plans to continue expanding patient services:
While this is a challenging time for the healthcare industry, we are executing a turnaround plan and using our strong financial base to get us back to break-even. We continue to improve access to care and bring new capabilities and services to the Valley that will produce revenue and support the financial operations of our health care district. Those include the continued development of mental health services in our area, a new outpatient clinic in Visalia’s industrial park, a new urology clinic in affiliation with Keck Medicine of USC, and a new partnership with Stanford’s cardiothoracic program to bring their faculty cardiothoracic surgeons to live and work in Visalia.
No Withheld Bonuses, More Layoffs Possible
The statement makes clear Kaweah Health has yet to receive financing from the state to fund the employee retention bonuses.
“The deadline to apply was Dec. 28, 2022, which we met,” Florez-McCusker wrote. “No news on timing has been sent to us; no monies have been distributed.”
The additional 90 layoffs may also be avoided.
“This fiscal year we have laid off more than 130 employees and will need to find additional expense cuts that equate to approximately 90 employees,” the statement said. “That need not come just from employee layoffs but could come from further cuts in other non-labor expense categories.”
Facility Closures, Reduces Services
The district has been forced to make some cuts to services as a result of the budget crisis.
“We have closed our 22-bed skilled nursing unit, outpatient neurosurgery clinic and diabetes education clinic,” Florez-McClusker wrote. “We are also planning to limit elective Medi-Cal surgeries and procedures.”
Kaweah Health will continue its cost-cutting measures while maintaining high standards of performance, the statement said:
We are making difficult, but necessary actions to cut our expenses without compromising or diminishing the quality and safety of the care we provide to our patients. Kaweah Health was recently named by Healthgrades as one of the Best 100 hospitals in the nation (out of 4,500 hospitals evaluated by Healthgrades) and it has received a grade of A by the Leapfrog Group for the last year and a half for patient safety and quality.
Kaweah Health Debt Obligation Explained
The statement provided the following breakdown of Kaweah Health’s revenue bond indebtedness and its history:
Kaweah Health has five different revenue bonds currently outstanding: 2022 Series S Revenue Bonds ($32,035,000); 2020 Series A and B Revenue Bonds ($13,290,000); 2017 Series C Revenue Bonds ($53,392,000); 2015 Series A Revenue Bonds ($13,438,000) and 2015 Series B Revenue Bonds ($98,425,000). All of these revenue bonds are controlled by a single master bond indenture first issued back in 1999 and amended with each subsequent revenue bond issue.
Information on when the bonds mature – through the end of fiscal year 2045 – was also provided:
The 2022 Series S Revenue Bonds matures on June 30, 2031; the 2020 Series A and B Revenue Bonds matures on June 30, 2035; the 2017 Series C Revenue Bonds mature on June 30, 2032; the 2015 Series A Revenue Bonds mature on June 30, 2028; and the 2015 Series B Revenue Bonds mature on June 30, 2045.
The statement from Kaweah Health also corrected a press misstatement – made by Becker’s Hospital Review – that described its letter to US Bank as a default. The district had made all payments related to its revenue bond issues:
We did not default on any of our revenue bonds. All required principal and interest payments have continued to be made in full and on time for all five bond issues. Because of the significant financial challenges we and most other hospitals across the country continue to face as a result of the pandemic, we did not generate enough net income in the six-month period July 1, 2022 through December 31, 2022 to meet the minimum debt service coverage ratio (a financial covenant) required by the bond indenture.
The funds to be placed in trust – $17 million – will continue to belong to Kaweah Health. It will not be available to the district.
As a result, the bond indenture now requires that we transfer approximately $17 million of our cash reserves into a trustee-controlled debt service reserve fund for the benefit of bondholders. This amount is equal to the maximum amount of principal and interest payments that will come due in any one year between now and the last maturity date of June 30, 2045. This reserve account is still owned by Kaweah Health and will appear as an asset on our balance sheet but it cannot be used for any operating or capital purpose.
FY23 Operating Budget Unaffected, Yet Record Losses
The $17 million transfer will be funded from the district’s cash and investment reserves, Florez-McClusker said.
“This money is already part of Kaweah Health’s cash and investment reserves and is essentially moving from one place to another on our balance sheet,” she wrote. “The year-to-date operating loss (revenues minus expenses) of $39.4 million for the seven months ended January 31, 2023 has already come out of cash and investment reserves and is no longer an asset on our balance sheet.”
She also described how Kaweah Health, like so many other hospitals, found itself in such dire financial condition and the extent of the crisis.
“We are currently experiencing unprecedented financial losses, as is the entire healthcare industry,” Florez-McCusker wrote. “When our fiscal year ends on June 30, 2023, it is going to be a record loss for that year. We have suffered a $136 million cumulative operating loss from March 2020 through December 2022, offset in part by $61 million in federal provider relief funds. These losses have been driven primarily by labor costs (including contract labor), inflationary operating costs, and reduced revenue due to closure of elective surgeries by state mandate.”
The loss of income resulted in a loss of status with the bond-rating agency Moody’s Investors Service.
“Moody’s has downgraded us from A3 to Ba1, which is non-investment grade,” the statement said.
The statement also reiterated Kaweah Health has not missed payments to its investors.
“We have no intention of not meeting our bond obligations and have taken significant steps to cut operating expenses to the extent necessary to make a full and successful financial recovery,” it reads.