BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2180
                                                                  Page  1

          Date of Hearing:  August 22, 2012

                       ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
                                Cameron Smyth, Chair
                     AB 2180 (Alejo) - As Amended:  June 20, 2012
           
          SUBJECT  :  Local health care districts: employment contracts.
           
          SUMMARY  :  Requires, if a health care district and hospital 
          administrator enter into a written employment agreement, that 
          the written agreement include specified information regarding 
          compensation, severance, and other benefits, as specified.  

           The Senate amendments  delete the Assembly version of this bill, 
          and instead, require a written employment agreement, if a health 
          care district and a hospital administrator enter into one, to 
          include all material terms and conditions as follows: 

          1)Compensation.

          2)Deferred compensation.

          3)Retirement benefits.

          4)Severance or continuing compensation after termination of the 
            agreement.

          5)Vacation pay.

          6)Other paid time off for illness or personal reasons.

          7)Other employment benefits that differ from those available to 
            other full-time employees.

           EXISTING LAW  :

          1)Establishes the Local Health Care District Law.

          2)Allows a local health care district to be organized, 
            incorporated and managed, as specified under the Local Health 
            Care District Law.

          3)Allows a health care district to include incorporated or 
            unincorporated territory, or both, or territory in any one or 
            more counties, and allows the territory comprising the 








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            district to not be contiguous, as specified.

          4)Enumerates the powers and duties of health care districts.

          5)Allows a local hospital district to enter into a contract of 
            employment with a hospital administrator, the duration of 
            which shall not exceed four years, but which may periodically 
            be renewed upon expiration for not more than four years.  

          6)Requires, at least once each year, the board of the health 
            care district to engage the services of a qualified accountant 
            of accepted reputation to conduct an audit of the books of the 
            hospital and prepare a report, as specified.

          7)Specifies that any reference to "hospital administrator" 
            includes a chief executive officer, for purposes of the Local 
            Health Care District Law.  
           
          AS PASSED BY THE ASSEMBLY  , this bill limited specified benefits 
          for health care district employees unless the employer made the 
          same options available to all officers and employees.

           FISCAL EFFECT  :  According to the Senate Appropriations 
          Committee, pursuant to Senate Rule 28.8, negligible state costs. 
           

           COMMENTS  :  

          1)Near the end of World War II, California faced a severe 
            shortage of hospital beds.  To respond to the inadequacy of 
            acute care services in the non-urban areas of the state, the 
            Legislature enacted the Local Hospital District Law, with the 
            intent to give rural, low income areas without ready access to 
            hospital facilities a source of tax dollars that could be used 
            to construct and operate community hospitals and health care 
            institutions, and, in medically underserved areas, to recruit 
            physicians and support their practices.

          2)The Local Hospital District Law (now called the Local Health 
            Care District Law) allowed communities to create a new 
            governmental entity - independent of local and county 
            jurisdictions - that had the power to impose property taxes, 
            enter into contracts, purchase property, exercise the power of 
            eminent domain, issue debt, and hire staff.  In general, the 
            process of creating a hospital district started with citizens 








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            in a community identifying the need for improved access to 
            medical care.  The hospital district's boundaries were usually 
            based on the distance between communities and the closest 
            available acute care hospital services.  A petition for 
            formation was then filed by the community to the county board 
            of supervisors, and then residents of the proposed district 
            were needed to vote in favor of the measure to create the 
            hospital district.  In 1963, the Knox Nisbet Act was passed, 
            which created local agency formation commissions (LAFCOs) and 
            clarified and formalized the process for establishing a 
            district.

          3)According to the Association of California Healthcare 
            Districts, there are currently 74 districts, of which 30 are 
            rural, 20 are critical access, five have stand-alone clinics, 
            and three have stand-alone skilled nursing facilities.  These 
            institutions provide a significant portion of the medical care 
            to minority populations and the uninsured in medically 
            underserved regions of the state and are mainly funded by 
            Medicare, Medi-Cal, and district tax dollars.

          4)According to the author this bill, "would allow the public and 
            board members to have a reference point for information 
            regarding executive compensation and would increase 
            transparency in the process by which compensation packages for 
            CEOs and hospital administrators are determined."  This bill 
            is author-sponsored.

          5)The author notes that "in recent years, local health care 
            districts have come into public scrutiny with allegations of 
            administrative waste, wrongdoing, and lack of appropriate 

          spending priorities."  The author sites the recent Bureau of 
            State Audits (BSA) examination of Salinas Valley Memorial 
            Health Care System as one of the reasons for the justification 
            for the bill.

          6)The BSA audit, released in, March 2012, concluded the 
            following in the opening letter to the Governor and 
            Legislative Leaders:

          "This report concludes that the ÝSalinas Valley Memorial] 
            Health Care System's board of directors, when making 
            decisions regarding executive compensation, violated the 
            Ralph M. Brown Act, which requires legislative bodies of 








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            local public agencies to conduct their meetings in an 
            open manner.  In an environment characterized by a lack 
            of an executive compensation policy and limited 
            transparency, the Health Care System granted compensation 
            for its executives at the upper end of the range for the 
            health care industry.  In addition, the former chief 
            executive officer (CEO) received generous retirement and 
            severance benefits totaling $4.9 million between 2008 and 
            2011, most of which were paid to him before he retired.

          Our review also noted weaknesses in controls in several 
            areas.  We audited instances in which the Health Care 
            System had business relationships between 2006 and 2010 
            with entities in which its executives or board members 
            had economic interests.  In the two relationships we 
            reviewed, the former CEO may have violated 
            conflict-of-interest laws in one instance, and the board 
            may have violated conflict-of-interest laws in the other 
            instance.  Also, the Health Care System did not ensure 
            that many of the individuals its conflict-of-interest 
            code identified as needing to submit statements of 
            economic interests did so.  Further, it does not have 
            written policy and procedures to demonstrate that its 
            community funding furthers its public purposes, thereby 
            risking questions about whether this funding violates the 
            constitutional prohibition against public agencies making 
            gifts of public funds.  Additionally, for contracts we 
            reviewed for which it was not required by state law to 
            use a competitive process, the Health Care System 
            generally did not document how it selected contractors in 
            a way that demonstrated that it obtained the best value 
            when procuring goods and services."

          7)The BSA audit also provides several recommendations as 
            part of the report to increase transparency and 
            accountability. The recommendations to the Health Care 
            System includes developing a formal policy that 
            establishes a process for determining executive 
            compensation, including retirement benefits, that clearly 
            documents all executive compensation decisions.

          8)Current law allows local hospital districts to enter into 
            a contract of employment with a hospital administrator.  
            Another bill that is similar in nature, AB 2115 (Alejo) 
            would require a written employment agreement if a local 








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            health care district employs or contracts with a hospital 
            administrator or chief executive officer (CEO).  AB 2115 
            passed out of the Legislature and is currently awaiting 
            the Governor's signature.

          9)Building on the provisions of AB 2115 (Alejo), this bill 
            would require that a written employment agreement include 
            specific terms and conditions.  This bill will bring 
            further transparency to the compensation practices of 
            local health care districts by requiring that written 
            agreements include the compensation, deferred 
            compensation, retirement benefits, severance or 
            continuing compensation after termination of the 
            agreement, vacation pay, other paid time off for illness 
            or personal reasons, and other employment benefits that 
            differ from those available to other full-time employees.

          10)Support arguments:  Supporters argue that this will 
            bring sunshine and transparency to district hospitals 
            where executive compensation is often at shocking levels, 
            and is a good response to issues recently brought up in 
            the BSA audit of Salinas Valley Memorial Health Care 
            System.

          Opposition arguments:  None

          11)The Assembly-approved provisions of this bill were 
            deleted in the Senate. However, the subject matter of 
            this bill, as amended in the Senate, is substantially 
            similar to another measure heard by this Committee in 
            this legislative session.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Conference of Machinists
          California Conference Board of the Amalgamated Transit Union
          California Labor Federation
          California Nurses Association
          Engineers and Scientists of California
          International Longshore & Warehouse Union
          Professional & Technical 
          UNITE HERE
          United Food and Commercial Workers Union, Western States Council








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          Utility Workers Union of America, Local 132

           Opposition 
           
          None on file


           Analysis Prepared by  :    Misa Yokoi-Shelton / L. GOV. / (916) 
          319-3958