28 Tex. Admin. Code § 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.
Notes
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