Comments Posted on Guidance re Financial Reserves

August 06, 2019

Today we posted the following as our comment on the Guidance Document re Requirements for Financial Reserves: Following are comments which represent the thoughts and concerns of the members of the Virginia Network of Private Providers about the Guidance Document proposed by the DBHDS Office of Licensing  “ Requirement for 90 Days of Operating Expenses.”  The statement which is the operational core of this document is at the end of the first paragraph: “Therefore, both applicants for licensure and licensed providers must be able to provide proof, at any time when requested by a representative from the department, that they have sufficient funds for 90 days of operating expenses, whether in cash or a line of credit.” This statement does not reflect the language of the regulation for which this document purports to provide guidance:

12VAC35-105-210 states “The provider shall document financial arrangements or a line of credit that are adequate to ensure maintenance of ongoing operations for at least 90 days on an ongoing basis.  The amount needed shall be based on a working budget showing projected revenue and expenses.”  

Note the words in bold – projected revenue.  The interpretation referenced above does not appear to include the consideration of projected revenue.  While there will be significant differences between the standards set for new applicants and existing providers, the blanket refusal to consider reliable revenue streams for existing providers seems to contradict the regulatory language quoted above. Providers should/must be good cash managers, and, in that vein, should maintain reserves to meet unforeseen circumstances.  However, the assumption of this guidance is that a provider will never utilize any of the specified reserves, but instead will have surplus reserves to meet unforeseen needs while also maintaining “untouched” 90 days of operating expenses. Given the difficulty in establishing a line of credit and/or a reserve of cash to begin with – requiring that a provider essentially sequester those funds and create an additional reserve as part of a good business practice is an extraordinary burden.  Lines of credit sufficient for three months of operating expense (without consideration of revenue) will be impossible to get without real assets to offer as security, and if not “used” and interest paid, will be extremely difficult to maintain. The concern above would be equally applicable to a sponsored residential home, or for a new provider who utilizes some of their reserve for the purpose for which it is intended, i.e., to provide working capital until revenue begins to cover expenses.  As soon as they use any of the reserve to cover expenses, they fall out of compliance and can be cited for such. While we do not condone providers failing to meet their legal or financial obligations and will work with the Office of Licensing to assist them to develop tools to use when conducting inspections which will identify problem areas, we can easily predict that a strict application of the rule as interpreted above will cause any number of providers both large and small to cease operations. The public comment period is open and can be accessed here until 4 September, 2019; as this is a critical issue and may, in fact, be virtually impossible for providers to comply, it is important that you take the time to express your views and/or support the comments made.