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 AB 2180 Page 2 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 AB 2180 Page 3 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 AB 2180 Page 4 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 AB 2180 Page 5 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 AB 2180 Page 6 Utility Workers Union of America, Local 132 Opposition None on file Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916) 319-3958