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Monday, August 18, 2008

Pittsburgh's Poster Child For Bad Debt?

Posted By on Mon, Aug 18, 2008 at 8:01 AM

Sometimes it seems like a Pittsburgher can barely renovate the basement without The New York Times writing about our transformation "from a down-and-out smokestack to a gleaming cultural oasis." (See, for example, here and here.) Whenever one of these pieces gets published, the locals e-mail and dissect it, trying to discern what it says about Pittsburgh's attempts to reinvent itself, and whether the national press understand us at all.

I suspect this story, in the Times business section, won't get the same kind of attention. Which is too bad, because it may end up having a much greater impact.

In it, business reporter Gretchen Morgenson cites the West Penn Allegheny Health System as "Exhibit A" in how shoddy financial reporting can "leave ... investors decidedly in the dark about" the health of non-profit and government entities.

For a dissection of the intricacies of municipal debt, you'll have to turn to better minds than mine. The bottom line is this: Shortly after West Penn issued $750 million in debt in May 2007, serious financial problems at the healthcare provider began surfacing. Among them: The hospital simply hadn't disclosed several months' worth of financial results prior the bond sale. As a result of this surprising news, bonds that originally sold for more than $1,000 are now selling for $830.  

Much of the fallout -- like downgrades in West Penn's credit rating, and the fact that the hospital barred journalists from a conference call with investors early this month -- had been reported locally, albeit in a piecemeal fashion. But the Times piece is worth a look.

First, it concerns the health of a vital Pittsburgh employer -- the only real rival to the UPMC behemoth. Second, the story suggests that even after the nationwide economic fiascos of recent months, we're still not even close to understanding how screwed up America's financial system is.

While much of the business world's focus has been on the creditworthiness of banks and other for-profit companies, Morgenson reveals a huge problem in the non-profit market too. Very little scrutiny has been paid to "municipal securities," she says -- bonds issued by governments, hospitals, and other not-for-profit agencies.

"If we have learned anything from this unrelenting credit mess, it is that greater disclosure is needed if investors are to regain their trust in the financial system," Morgenson writes. "Nowhere is this disclosure more urgent than in the $2.6 trillion municipal securities market, ... where information is scant." 

What makes this all especially ironic is that West Penn was born out of the bankruptcy of AHERF, the now-notorious hospital chain that went belly up in the late 1990s. You may recall that AHERF CEO Sherif Abdelhak spent a few months in the county jail as a result of the chain's financial problems.  

Now here we are a decade later, and it's not clear that anyone has really learned their lesson from the collapse of AHERF -- still the largest bankruptcy ever among healthcare nonprofits. Ironically enough, in fact, just last month, the Moody's rating agency issued a post-mortem on the AHERF bankrupty, which led to the creation of the West Penn system -- and to the issuance of the troubled bonds. Summarized in this Post-Gazette story, the report offers a largely sunny perspective on life post-AHERF.

The AHERF bankruptcy, a Moody's exec told the P-G, "has stimulated greater transparency and greater disclosure from hospitals.... The marketplace has demanded greater disclosure."

Or not.  

"[H]ospitals that have learned from AHERF's missteps are in a better position to ... preserve credit quality and bond ratings," the Moody's report concludes.

Too bad West Penn isn't one of them. Just a week after issuing this report, Moody's downgraded West Penn's credit rating. 

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