Audit 399704

CFDA #10.766 USDA Community Facilities Loans and Grants Continuing Compliance Requirement Finding 2025‐001 – Failure to Meet Required Loan Covenants Criteria: The USDA loan agreements require the Home to maintain a debt service coverage ratio of 1.25x and 65 days of unrestricted cash on hand, as of December 31, 2025. Condition: At December 31, 2025, the Home did not meet either covenant. The Home has 45 days of unrestricted cash on hand as of December 31, 2025. The debt service coverage ratio was 0.65x as of December 31, 2025. Cause: Due to current year net loss, as well as certain cash balances which are restricted to use, management was unable to meet the loan covenants. Effect: As a continuing compliance requirement, violation of a loan covenant could place the loan in default status, which could jeopardize future funding from the lender. Questioned Costs: There were no questioned costs. Context: The Home received multiple USDA loans which have ongoing continuing compliance requirements, including maintaining debt covenants. Repeat Finding: This is a repeat finding. Recommendation: We recommend management track cash flows monthly to ensure a minimum of 65 days cash on hand at the end of each six-month reporting period (every June 30th and December 31st). We further recommend expenses be managed in a way that will allow the Home to meet its debt service requirements. Views of Responsible Officials and Planned Corrective Action: Management agrees with the above finding and has implemented a plan to reduce expenses and increase cash flows going forward. Specifically, we have outlined the following steps that we are taking as an organization to get back on track:  Cash flow is monitored weekly and forecasted on a rolling 12-week basis.  Existing vendor contracts were reviewed and changes made to reduce expenses moving forward into the 2026 fiscal year. Contracts are continually evaluated and renegotiated, where possible, for potential cost savings.  We implemented a robust and detailed budget development process to continue cost-cutting measures into 2026 and beyond. Directors are accountable to their budget guidelines to ensure expenses are appropriately managed.  The 36-unit Independent Living expansion project remains a high priority. The model home construction was completed in November 2025, with showings and open houses now underway. New homes are expected to commence construction in 2026. The sale and occupancy of these units are expected to generate substantial future cash flows for the organization.  We continue to prioritize aggressive staff recruitment to eliminate agency staffing needs. The steady decline in contract staff utilization continued in 2025, with a decrease in contract nursing costs of $317,000 or 15.6% compared to prior year. It is our goal to fully eliminate agency staffing in 2026. Rising labor costs continue to challenge cost savings measures; however, the organization is committed to managing labor costs appropriately and reducing expenses where possible. For example, in 2026, incentive bonuses for nursing shift pick-ups have been eliminated.  Management enacted a progressive plan to increase census in each of its business lines to increase revenue through focused marketing efforts and referral partnerships. Average daily census improved from 133 beds or 79% occupancy in 2024 to 145 beds or 92% occupancy in 2025. Looking ahead to 2026, the organization is focusing its efforts on achieving a more favorable skilled nursing payer mix while maintaining a strong occupancy.