As we approach the new fiscal year that begins Oct. 1, I would like to update our stakeholders on ABHOW’s financial position. Through the third quarter, the operating performance of the corporation continued to generate the margin necessary to sustain our mission.
Two significant measures of financial performance are debt coverage ratio and working capital. Bank loan covenants and bond instruments dictate minimum targets for each of these measures and, as of June 30, ABHOW was well above the mandatory targets.
Each year we approach budgeting guided by our primary objective: to keep rates at reasonable levels while maintaining high quality services and overall solid financial performance. As always, we strive to make our budget process inclusive and transparent. With advice from residents and local team members, our community executive directors have developed budgets for the coming year. This month our board will review a consolidated budget for the entire enterprise.
As we plan for our financial future, residents and the corporation face several challenges this year. The biggest is the likely expansion of California’s provider tax on skilled nursing facilities to include continuing care retirement communities, which have been exempt so far. When the tax was first put in place, the state used revenues to increase Medicaid (MediCal) reimbursement rates, and ABHOW’s financial performance was greatly enhanced by the higher rates. In return, the state required CCRCs to hire additional staff and invest in systems to improve care, all of which ABHOW has done.
Now California’s governor has proposed eliminating the exemption effective July 1, 2011, a move that would cost our eight California CCRCs around $13 per skilled nursing bed per day. This translates to about $2.5 million a year. That would place enormous pressure on rates at all levels of operation and demand additional savings be identified to offset at least some of the expense.
We also continue to keep a close watch on occupancy, which affects both our operating revenue and the flow of entrance fees that fund most capital expenditures. Although new sales and move-ins have been strong, occupancy in all levels of care at our CCRCs remains below budget because a high number of residents have passed away or transferred to higher levels of care. Consequently, we are increasing our marketing efforts and offering incentives to new residents in select markets. Using funds set aside some time ago for this purpose, we also continue to make progress on campus redevelopments, an effort that will ultimately attract additional residents.
As we move forward with our financial planning, we aim to demonstrate to rating agencies and lenders that ABHOW intends to stay financially strong while being sensitive to how our actions — and the general economy — affect our residents.