SECTION 33.505. Financial Condition

(a) The purpose of this rule is to enumerate conditions which the commissioner may consider to determine whether a provider or facility is financially unsound and which may be a basis for the commissioner to initiate an action against a facility or provider under the Health and Safety Code, §246.091. In evaluating any of these factors, all circumstances concerning the provider's or facility's operations must be evaluated in making an ultimate conclusion that a facility or provider is financially unsound.

(b) In order to determine whether a facility or provider is financially unsound, the commissioner may consider the following factors.

(1) Adequate fund balance.

(A) An adequate fund balance is maintained if resources that are available for the facility's current residents (including the actuarial present value of periodic fees expected to be paid in the future by current residents) are reasonably equivalent to or greater than the actuarial present value of the expected costs of performing all remaining obligations to such residents under their contracts, as evidenced by a fund balance on the actuarial balance sheet which is acceptable to the commissioner or by an actuarial funded status ratio acceptable to the commissioner.

(B) Facilities which are not required to obtain actuarial balance sheets under §33.506 of this title (relating to Actuarial Review Requirements) may show an adequate fund balance by:

(i) maintaining a fund balance on audited financial statements prepared under generally accepted accounting principles which is acceptable to the commissioner; or

(ii) voluntarily obtaining an actuarial report to show a satisfactory actuarial balance as described in §33.506(c); or

(iii) providing evidence of adequate funding by showing guarantees of liabilities and obligations to residents by a parent or other supporting organization, and providing audited financial statements of such parent or supporting organization showing its capacity to provide such guarantees.

(2) Ability to meet current financial obligations. The facility's or provider's ability to meet its current financial obligations, as shown on its most recently audited financial statements can be measured by comparing current assets, including current portions of restricted funds, to current liabilities.

(3) Ability to meet projections. The facility's or provider's ability to meet its projected occupancy goals or cash projections can be measured by comparing the projections filed with the department as part of the annual disclosure statement, CCRC Form Number 6 to actual results. The comparison of projections to actual results, including occupancy figures, shall be included with the disclosure statement and the financial statements, together with an explanation of variances greater than plus or minus 10% in a line item, and an explanation of variances which are greater in dollar amount than the net cash flow, positive or negative.

(4) Cash Flow. The facility's or provider's ability to maintain a level of cash flow acceptable to the commissioner can be measured by analyzing the cash flow statement included in the audited financial statements.

(5) Operating ratio. The facility's or provider's ability to maintain an operating ratio acceptable to the commissioner and within industry guidelines can be measured by taking cash operating revenues and dividing it by cash operating expenses. In determining if an operating ratio is acceptable, the commissioner may consider guarantees of operating support by a parent or other supporting organization, and audited financial statements of such parent or organization showing its capacity to provide such guarantees.

(6) Debt service ratio. The facility's or provider's ability to maintain a debt service ratio acceptable to the commissioner and within industry guidelines can be measured by using the following calculation: Total Excess (Deficit) of Revenues and Gains in excess of Expenses and Losses plus Interest Expense plus Depreciation Expense plus Amortization Expense minus Amortization of Deferred Revenues from Entry Fees plus Net Proceeds from Entry Fees, divided by Annual Debt Service (annual principal and interest payment or maximum annual debt service).

(7) Occupancy ratio. The facility's or provider's ability to maintain an occupancy ratio acceptable to the commissioner and within industry guidelines can be measured by taking the total number of occupied units in a facility and dividing it by the total number of units in that facility. Occupancy may be tracked by each level of care, including independent living units, nursing beds, or other levels of care available.

(c) Additional financial information.

(1) The commissioner may require information or reports in addition to those contained in the disclosure statement to monitor the financial condition of the facility and administer and enforce the Act. The reports may include, but are not limited to, quarterly financial statements, statements prepared for reporting to bond issuers or underwriters, and audited financial statements of the facility's parent or other supporting organization.

(2) The commissioner may consider the trends in a facility's operation and on its financial statements, and may consider the effect that any unusual, extraordinary, or non-recurring occurrence may have on the outcomes of any calculations made to determine trends or to financial condition of the facility as contemplated in subsection (b) of this section.

(3) If a facility is a start-up facility, the commissioner may consider that such a facility may meet standards which differ from those required of an established facility for at least the first 36 months of operation, beginning with occupancy by the first resident.

(4) Before making a final determination that a facility is financially unsound, the commissioner will provide the facility with the opportunity to submit additional financial information to demonstrate its ability to meet its financial obligations and obligations to its residents.

(d) Balance sheet with net fund deficit. If any audited generally accepted accounting principles (GAAP) balance sheet filed with the disclosure statement shows a net fund deficit and reflects an unfunded future service obligation, the commissioner may require the provider or management of the facility to submit an actuarial balance sheet demonstrating that the facility is in satisfactory actuarial balance, or to submit a plan delineating action to be taken to remove such deficit. The plan shall include, but not be limited to, the items listed in paragraphs (1)-(3) of this subsection:

(1) The reasons or causes of the deficit balance;

(2) Conditions or circumstances that exist which may require unusual accounting treatment, but are not regularly recurring conditions that will cause increasing deficits in subsequent periods;

(3) Projections of the following:

(A) cash flow from operations of the facility for the next 18 months or for whatever other period of time the department deems appropriate;

(B) overall financial conditions, as projected in pro forma calendar quarterly balance sheets and income statements, for the next 18 months or for whatever period of time the department deems appropriate;

(C) debt service for the next 18 months; and

(D) specific actions to be taken by management during the next 18 months to minimize any operating factors that are contributing to the deficit balance, or to reduce the deficit balance.

(e) Requirements for basic financial statements. A provider or facility shall file the basic financial statements with the disclosure statement which satisfy the requirements in paragraphs (1)-(3) of this subsection.

(1) The balance sheet on a comparative basis shall reflect at least the liabilities listed in subparagraphs (A)-(D) of this paragraph.

(A) A continuing care provider which is financed through a financing authority by the issuance of bonds or other long-term obligations shall establish those obligations which are issued for its benefit as liabilities. The provider is responsible for repayment of the obligations. The notes accompanying the financial statements shall disclose the debt service ratio, and shall disclose any guarantees of bond obligations made by parent or other supporting organizations.

(B) Liability to provide future services is the excess of the present value of the facility's obligations to provide future services to current residents over and above the present value of related future revenue. No accounting entry is required if the present value of future related revenues exceeds the present value of the obligations for future services. If the present value of related future revenue is less than the present value of the obligation, no accounting entry is required unless the liability is greater than the unamortized entrance fees, in which case a liability is recognized and an expense recorded. If the facility does not maintain a satisfactory actuarial balance as described in §33.506(c) of this title, the commissioner may require the facility to disclose these items in notes accompanying the financial statements, even if an accounting entry is not required to be made.

(C) The nonrefundable entrance fees paid by a resident upon entering into a continuing care contract shall be treated as deferred revenue to be amortized over each group of residents' estimated remaining lives using a method that properly matches revenues with expenses.

(D) The refundable portion of the entrance fee shall be recorded as a liability.

(2) The basic audited financial statements filed with the disclosure statement shall include at least the items listed in subparagraphs (A)-(D) of this subsection:

(A) a statement of activity (a statement of support, revenue, expense);

(B) a statement of changes in fund balances;

(C) a statement of changes in financial position prepared on a cash flow basis; and

(D) notes to accompany the financial statements considered necessary to full disclosure or adequate understanding of the financial statements, financial condition, and operation.

(3) Accompanying the basic financial statements described in paragraphs (1) and (2) of this subsection shall be a reconciliation of the cash flow statement to the statement of revenue and expenses, and a comparison of pro-forma projections for the period to actual results, including an explanation of variances greater than plus or minus 10% in a line item, and an explanation of variances which are greater in dollar amount than total net income or loss. The comparison shall also include actual beginning and ending occupancy rates for living units, and actual number of occupied bed-days for nursing care units. The reconciliation and comparisons required by this paragraph are not required to be included within the audit of the financial statements, and may be prepared by the management of the facility or by the preparers of the audited financial statements.

(f) Continuing Care Contract Liens. To secure the obligations of the provider under any continuing care contract, a lien attaches on the date a resident first occupies a facility. The lien covers the real and personal property of the provider located at the facility. The provider shall submit to the department a written notice sworn to by an officer of the provider for each county where the provider has a facility on CCRC Form Number 13 (Notice of Lien). The provider shall file the notice of the lien with the department before the date of the execution of the first continuing care contract related to the facility.

Source Note: The provisions of this §33.505 adopted to be effective March 9, 1989, 14 TexReg 991; amended to be effective March 1, 1990, 15 TexReg 880; amended to be effective March 14, 1996, 21 TexReg 1771.