BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 582 HEARING: 3/19/14
AUTHOR: Levine FISCAL: No
VERSION: 2/24/14 TAX LEVY: No
CONSULTANT: Weinberger
PALM DRIVE HEALTH CARE DISTRICT'S
CERTIFICATES OF PARTICIPATION (URGENY)
Enacts a statutory lien to secure certificates of
participation issued by the Palm Drive Healthcare District.
Background and Existing Law
California's 80 local health care districts find themselves
pulled in two different directions. As operators of
hospitals, they must survive by competing with
profit-oriented companies. As public agencies, they must
adhere to the state laws which require them to follow
specific procedures and which impose limits on their
activities. The districts must be aggressive in securing
financing.
The California Constitution prevents counties and cities
from creating multi-year general obligation debt without
2/3-voter approval. School districts need 55% voter
approval. Because the constitutional ban doesn't mention
special districts, the Legislature has allowed special
districts to use a variety of debt financing tools without
voter approval. Certificates of participation (COPs) are a
type of debt instrument that cities, counties, and special
districts can issue without voter approval. A certificate
of participation entitles the holder to a share of a
pledged revenue stream, which typically comes from lease
payments made by the issuer.
In 2000, to prevent the closure of the Palm Drive Hospital
in Sebastopol (Sonoma County), voters approved the
formation of the Palm Drive Health Care District (PDHCD).
The District owns and operates Palm Drive Hospital, which
provides essential inpatient, outpatient, and emergency
services to residents in western Sonoma County. In
November, 2004, more than 69% of district voters approved
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Measure W, allowing PDHCD to impose a parcel tax that
generates nearly $4 million in annual revenues. In 2005,
PDHCD issued revenue bonds secured by the parcel tax. In
2007, the District filed for bankruptcy protection. The
bankruptcy court subsequently approved a plan of adjustment
that required the District to sell COPs and use the
proceeds to satisfy its obligations under the plan and
finance other specified expenses. PDHCD issued $11 million
in COPs in 2010, allowing it to exit from bankruptcy.
However, the District continues to confront significant
fiscal challenges.
Federal bankruptcy law defines a "lien" as a charge against
or interest in property to secure payment of a debt or
performance of an obligation. A "statutory lien" is a
distinct type of lien that arises solely by force of
statute, without any prior consent between the parties or
judicial action. Unlike other types of liens, a statutory
lien remains enforceable even after a bankruptcy filing.
After Orange County filed for bankruptcy protection, the
Legislature enacted a statutory lien that used vehicle
license fee revenues to secure debt issued by the county
(SB 18x2, Craven, 1995). More recently, the Legislature
authorized the West Contra Costa Health Care District to
sell COPs secured by a statutory lien on the district's
voter-approved property tax revenues (SB 644, Hancock,
2011).
To help PDHCD reduce its debt service costs by refinancing
approximately $19 million in debt from its 2005 revenue
bonds and 2010 certificates of participation, District
officials want the Legislature enact a statutory lien to
secure COPs backed by the District's parcel tax revenues.
Proposed Law
Assembly Bill 582 requires that the Palm Drive Health Care
District's obligations in connection with certificates of
participation executed and delivered, or revenue bonds
issued, by or on behalf of PDHCD between January 1, 2005,
and December 31, 2014 must be secured by a statutory lien
on all of the revenues generated from parcel taxes approved
by voters in 2004. AB 582 specifies that certificates of
participation executed and delivered or revenue bonds
AB 582 -- 2/24/14 -- Page 3
issued before 2035 to refund the District's revenue bonds
or certificates of participation must be secured by a
statutory lien on all of the revenues generated from parcel
taxes approved by voters in 2004.
AB 582 requires this statutory lien to arise automatically
without the need for any action or authorization by the
district or its board of directors. The bill declares that
the lien will be valid and binding from the time the
certificates of participation are executed and delivered or
the revenue bonds are issued.
AB 582 requires that the parcel tax revenue must
immediately be subject to this lien, and that the lien must
immediately attach to the parcel tax revenue and be
effective, binding, and enforceable against the district,
its successors, purchasers of those revenues, creditors,
and all others asserting rights therein, irrespective of
whether those parties have notice of the lien and without
the need for any physical delivery, recordation, filing, or
further act.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . To help keep PDHCD solvent,
district officials need to refinance PDHCD's existing debt.
The District's financial advisor and legal counsel have
opined that the capital markets may not accept an offering
to refinance the District's debt without any strengthening
of the security for the debt. AB 582's statutory lien will
provide investors with additional security that parcel
taxes will remain subject to a lien and pledged to the
repayment of COPs, even in the event of a bankruptcy. As a
result, COPs issued pursuant to AB 582 will receive a
higher rating, which will, in turn, decrease the District's
debt service costs and improve its fiscal condition. The
bill does not create a new tax or increase existing taxes.
AB 582 simply pledges the PDHCD's existing parcel tax
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revenues to allow the District to continue providing vital
medical services to residents in western Sonoma County.
2. Winners and losers . By protecting investors holding
COPs from becoming creditors if PDHCD files for bankruptcy
protection, AB 582 may increase the risks borne by vendors,
employees, and other potential creditors in a municipal
bankruptcy proceeding. Given PDHCD's ongoing fiscal
problems and the broader economic challenges posed by rapid
changes in the health care marketplace, there remains some
chance that the District may have to file for bankruptcy
protection again. It is unclear whether state law should
shield some potential creditors in another bankruptcy
proceeding, leaving a smaller pool of remaining creditors
to bear the costs of restructuring.
3. Other winners . AB 582 also potentially benefits
investors holding the District's current revenue bonds and
COPs, by retroactively applying the statutory lien to those
debts. To comply with parity requirements that apply to
the current revenue bonds and COPs, and because of the
complexity of drafting statutory lien language that applies
only prospectively, the District has chosen to apply the
lien retroactively, mirroring language that the Legislature
enacted in SB 644 (Hancock, 2011). However, in the event
that PDHCD fails to refund its current debt, investors
holding the revenue bonds and COPs would receive returns
that are higher than what the market would otherwise
provide for debt instruments backed by a statutory lien.
4. Next in line ? AB 582 contains language that is
substantially the same as language enacted for the West
Contra Costa Health Care District by SB 644 (Hancock,
2011). As with SB 644, enacting AB 582 could invite
similar requests for statutory liens from other financially
struggling local governments. In anticipation of future
proposals to enact statutory liens backed by voter-approved
parcel tax revenues, legislators may want to consider
whether any general criteria should guide their decisions
on those proposals. For example, should the Legislature
enact statutory liens backed by voter-approved parcel tax
revenues only for public agencies that have recently
emerged from bankruptcy or that lack the ability to obtain
municipal financing without the lien? Legislators may wish
to consider asking the State Treasurer's Office to review
future proposals to enact statutory liens on local taxes to
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evaluate:
The local agency's ability to obtain financing
through the capital markets with, and without, the
enactment of a statutory lien.
The expected net cost savings that the local agency
can expect to obtain through a proposed financing, or
refinancing, that relies on the enactment of a
statutory lien.
Whether a proposed financing, or refinancing, that
relies on the enactment of a statutory lien is
necessary to either avoid insolvency or restore a
local agency's solvency following a recent bankruptcy.
5. Special legislation . The California Constitution
prohibits special legislation when a general law can apply
(Article IV, §16). AB 582 contains findings and
declarations explaining the need for legislation that
applies only to the Palm Drive Health Care District.
6. Urgency . Regular statutes take effect on January 1
following their enactment; bills passed in 2014 take effect
on January 1, 2015. The California Constitution allows
bills with urgency clauses to take effect immediately if
they're needed for the public peace, health, and safety. AB
582 contains an urgency clause declaring that it is
necessary for its provisions to go into effect immediately
to enable the Palm Drive Health Care District to complete
its financing, and meet its obligations to employees,
vendors, and other creditors in a timely manner.
7. Gut-and-amend . As introduced, AB 582 would have enacted
language related to Medi-Cal program benefits for complex
rehabilitation technology. The Committee never heard that
version of the bill. The February 24, 2014 amendments
deleted the bill's contents and inserted the language
relating to the Palm Drive Health Care District.
Assembly Actions
Not relevant to the February 24 version of the bill.
Support and Opposition (3/13/14)
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Support : Palm Drive Health Care District.
Opposition : Unknown.