This Eastern Kentucky county's credit rating was just downgraded to junk status

A hill towers above a busy highway just outside Pikeville in September.
A hill towers above a busy highway just outside Pikeville in September. The GroundTruth Project

The bond rating for a key Eastern Kentucky county was downgraded to junk status this month by analysts who cited its "very weak" management practices, a high unemployment rate and rising pension costs.

According to S&P Global's review of Pike County, officials have failed to develop meaningful, long-term financial strategies despite evidence of major hurdles ahead, including a decline in population and tax revenue.

Pike County's credit rating on its $9.4 million of general obligation bonds dropped seven notches, from A+ to BB. That rating will make it more difficult and costly for the county to sell bonds in the future, though Pike County Treasurer Johnda Billiter said the county has no immediate plans to pursue new bonds.

In a less-scathing analysis by Moody's, the credit rating for Pikeville Medical Center was dropped by two notches, putting its rating near the bottom for investment-grade bonds.

It cited the hospital's increased labor costs, and difficulties attracting and retaining physicians, as reasons for the credit downgrade, but said the hospital has seen significant growth in recent years and will benefit from a lack of regional competition.

The Medical Center dropped two notches, from A3 to Baa2.

Pike County

S&P's review of the county focused on two major issues: the struggling economy and weak financial management.

"What really sticks out for the county, compared to other counties nationwide, is the high unemployment," said Caroline West, S&P's primary credit analyst for the report.

While Pike County's unemployment rate improved from 10.8 percent in 2016 to 7.2 percent in 2017, "this rate is still above both national and state levels during the same period," according to the report.

The unemployment rate is one reason people are moving out of Pike County, according to the report.

Over the last decade, the county has seen a 9 percent drop in population. The report cited the decline of the coal industry as a major factor in that outward migration, and predicted the trend to continue.

"With the coal industry having declined as rapidly and quickly as it did, that’s what hurt us with unemployment and people moving away," Billiter said. "It’s just the sign of the times."

A declining tax base, coupled with declining revenue from unmined coal reserves, could make it difficult for the county to meet its future financial obligations, according to the report.

Some regional leaders, though, have expressed hope in economic development projects that could provide well-paying jobs to out-of-work coal miners and curb the ongoing population decline.

One of those projects is Enerblu, a technology company that plans to open a battery plant in Pikeville. If the project works as planned, the plant could employ 875 people by 2024.

S&P's report, though, cast doubt on the project's regional impact.

"While this development is positive for local residents, we believe the overall economic indicators are likely to remain very weak," the report said.

S&P's report also cited a critical state audit released in March, which revealed that Billiter had not completed bank reconciliations for the fiscal year ending June 30, 2016, until October 2017.

Billiter also sent an inaccurate financial report to Kentucky's Department of Local Government that included incorrect cash balances and overstated the county's expenditures by $5.48 million, according to the audit.

"The county relies heavily on a single person, the county treasurer, with responsibility for a wide range of duties," S&P's report said. "Evidence suggests that the treasurer may not be fully completing those job duties."

Another financial hurdle will be the county's rising pension costs, the report said.

In fiscal year 2019, the county's pension costs are set to increase by 12 percent, or about $168,000, and those increases are expected to continue in coming years.

County officials did not provide analysts with any plan for how the county will cover that expense, according to the report.

Billiter said the county has made all its bond payments, and that if the county releases a financial statement for fiscal year 2017 in the next 90 days, the credit agency could give the county a more favorable rating.

The county has taken some cost-saving measures, including changing its governmental structure from six magistrates to three commissioners, which Billiter said will save the county about $200,000.

The county also increased property tax rates and instituted a 1 percent occupational tax on residents. The occupational tax was expected to generate about $3.4 million in fiscal year 2017, according to the report.

Pikeville Medical Center

The Pikeville Medical Center serves as the primary hospital for much of Eastern Kentucky.

According to the report by Moody's, the hospital saw about 15,600 inpatient admissions in fiscal year 2017 and generated $531 million in revenue.

"Unlike many rural hospitals, Pikeville's volumes have shown very favorable growth," according to the report. "The closest sizable competition is located almost 2 hours away."

But increased labor costs and unexpected turnover of physicians led to a significant decline in the hospital's operating cash flow margin — a figure used by financial analysts to determine the financial efficiency and health of businesses — from 11.7 percent in fiscal year 2016 to 3.1 percent in fiscal year 2017.

The hospital also has seen a decline in cash on-hand, from $174 million to $158 million, and hospital officials told analysts they expect that level to drop to $140 million by the end of the year, according to the report.

"The financial downturn was really self-inflicted," said Pikeville Medical Center CEO Donovan Blackburn. "There’s a lot of things that we’ve done that will help us turn the financials around."

Blackburn said the hospital administration three years ago hired hundreds more employees than it should have, leading to massive increases in payroll expenses.

Since then, the hospital has cut some of those expenses by not replacing certain employees who quit or retire, and has made other cost-cutting efforts.

Blackburn said the lower credit rating should be reversed in about a year, and that, in the meantime, it will not have any impact on the hospital's trajectory.

"In the next six to eight months, we will have turned the corner," he said. "The rating will end up back where it was, if not better."

EnerBlu announces plans to bring jobs, battery manufacturing plant to Eastern Kentucky. The company, currently based in Riverside, Calif., plans to build a $372 million plant in Pikeville.