32.02.01.20

.20 Operating Reserve Requirements.

A. Definitions.

(1) In this regulation, the following terms have the meanings indicated.

(2) Terms Defined.

(a) "Binding agreement" means an unconditional, irrevocable letter of credit or line of credit agreement entered into by a provider and a financial institution.

(b) "Debt service fund" means one or more special loan funds, established under requirements imposed by a financial institution or under applicable financing documents, into which the provider is required to deposit moneys during the provider's fiscal year to pay the current portion of the principal due and the interest accruing in that year on the provider's debt.

(c) "Debt service reserve fund" means moneys required by a financial institution or under applicable financing documents to be deposited in a special loan fund, which are to be used to pay principal and interest payments due on the provider's debt if the provider is unable to pay when due the principal and interest from operating income or other sources.

(d) "Market value" means readily determinable fair value.

(e) Net Operating Expenses.

(i) "Net operating expenses" means a provider's total operating expenses at each facility of the provider, less depreciation, amortization, unusual and infrequent expenses, and changes in the obligation to provide future services.

(ii) "Net operating expenses" does not include interest expense if the provider has funded a debt service fund or other interest reserve under requirements imposed by a financial institution or under applicable financing documents, to the extent and in the amount the fund or reserve includes amounts to cover interest for the year in question.

(f) "Other interest reserve" means one or more special loan funds other than debt service funds or debt service reserve funds:

(i) Established under requirements imposed by a financial institution or under applicable financing documents; and

(ii) Into which the provider is required to deposit moneys during the provider's fiscal year to pay interest accruing in that year on the provider's debt.

B. Computation of Operating Reserve Requirement.

(1) Except as otherwise provided in this regulation, a provider shall set aside for each facility subject to this chapter operating reserves equal to 15 percent of the facility's net operating expenses for the most recent fiscal year for which a certified financial statement is available. The reserves shall be maintained in reasonably liquid form in the judgment of the provider and in accordance with the provider's investment policies.

(2) A provider shall compute operating reserves for each facility as of the end of the facility's most recent fiscal year and shall indicate compliance by setting forth the amount actually set aside in a letter to the Department from the provider's certified public accountant or by disclosing the amount in the provider's most recent certified financial statement. The letter or certified financial statements shall be submitted with the provider's application for a renewal certificate.

(3) A provider may apply toward the reserve required by this regulation any reserves, other than debt service reserve funds, maintained under applicable financing document requirements if the reserves are available to the provider to meet the facility's operating expenses.

(4) For the purpose of calculating the provider's operating reserves, investments held to the credit of the reserves shall be calculated at their market value as of the end of the provider's most recent fiscal year for which a certified financial statement is available.

(5) A provider at a community that has not been the subject of a conversion and in which some residents are not parties to continuing care agreements shall set aside as its operating reserves an amount equal to at least 15 percent of the pro rata proportion of the net operating expenses for the community. The pro rata proportion of the net operating expenses shall equal the number of units in the community certified by the Department divided by the total number of accommodations in the community, with the resulting figure multiplied by the net operating expenses for the community for the most recent fiscal year for which a certified financial statement is available.

(6) In calculating the community's operating expenses, the provider may deduct depreciation, amortization, unusual and infrequent expenses, and changes in the obligation to provide future services. Interest expense may also be excluded from the calculation of operating expenses if the provider has funded a debt service fund or other interest reserve under requirements imposed by a financial institution or under applicable financing documents, to the extent and in the amount the fund or reserve includes amounts to cover interest for the year in question.

C. Use of Operating Reserves.

(1) A provider shall notify the Department in writing simultaneously with drawing any amount from the funds available to satisfy the operating reserve that is required by §B of this regulation.

(2) Within 30 days of any draw, the provider shall submit to the Department a written plan for restoring the funds in the reserve to the level required by §B of this regulation.

D. Phase-In Period of Operating Reserve Requirement.

(1) A provider shall have up to 10 full fiscal years after the later of October 1, 1996, or the date of its first initial certificate of registration for the community, to meet the requirement of §B of this regulation.

(2) A provider shall meet the requirement of §B of this regulation at a minimum rate of 10 percent per year as of the end of each fiscal year after the later of October 1, 1996, or the date of its first initial certificate of registration for the community, up to a total of 100 percent as of the end of the tenth fiscal year.

(3) The Department may allow a provider to modify the minimum rate or authorize an additional amount of time to meet the requirement of §B of this regulation if the modification is necessary to maintain the financial viability of the facility.