BILL ANALYSIS Ó
AB 582
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Date of Hearing: May 7, 2014
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 582 (Levine) - As Amended: February 24, 2014
SUBJECT : Palm Drive Health Care District: certificates of
participation: lien.
SUMMARY : Enacts a statutory lien to secure certificates of
participation issued by the Palm Drive Healthcare District.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Require all certificates of participation (COPs) executed and
delivered by the Palm Drive Healthcare District (District)
between January 1, 2005, and December 31, 2014, including COPs
executed and delivered or revenue bonds issued before 2035 to
refund the revenue bonds or COPs, to be secured by a statutory
lien on all of the revenue generated from parcel taxes levied
pursuant to Measure W, approved by the voters on November 2,
2004.
2)Require the lien to arise automatically without the need for
any action or authorization by the District.
3)Specify that the lien shall be valid and binding from the time
the COPs are executed and delivered or the revenue bonds are
issued.
4)Require the parcel tax to be immediately subject to this lien.
5)Require the lien to immediately attach to the parcel tax
revenue to be effective, binding, and enforceable against the
District, its successors, purchasers of those revenues,
creditors, and all others asserting the rights therein,
irrespective of whether those parties have notice of the lien.
6)Contain an urgency clause.
7)Find and declare that a special statute is necessary because
of the unique circumstances applicable only to the District.
8)Find and declare that in order to enable the District to
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complete its financing, meet its obligations to employees,
vendors, and other creditors in a timely manner it is
necessary for this act to take effect immediately.
EXISTING LAW :
1)Defines "bonds" as any bonds, note, bond anticipation notes,
commercial paper, or other evidences of indebtedness, or
lease, installment purchase, or other agreements, or COPs
therein, that are not issued pursuant to a statutory authority
containing a provision governing the perfection and priority
of pledges of collateral unless the provision provides that
this chapter shall govern.
2)Defines "pledge" as, and as used in any pledge document shall
be deemed to create, a grant of a lien on and a security
interest in and pledge of the collateral referred to in a
pledge document.
3)Requires a pledge of collateral by any public body to secure,
directly or indirectly, the payment of the principal or
redemption price of, or interest on, any bonds, or any
reimbursement or similar agreement with any provider of credit
enhancement for bonds, which is issued by or entered into by a
public body, to be valid and binding in accordance with the
terms of the pledge document from the time the pledge is made
for the benefit of pledgees and successors thereto.
4)Requires the collateral to immediately be subject to the
pledge, and the pledges constitute a lien and security
interest which shall immediately attach to the collateral and
be effective, binding, and enforceable against the pledgor,
its successors, purchasers of the collateral, creditors, and
all others asserting the rights therein, to the extent set
forth, and in accordance with, the pledge document
irrespective of whether those parties have notice of the
pledge and without the need for any physical delivery,
recordation, filing, or further act.
FISCAL EFFECT : None
COMMENTS :
1)Purpose of this bill . This bill enacts a statutory lien to
secure COPs issued by the District. Under this bill the
District's obligations in connection with COPs executed and
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delivered, or revenue bonds issued, by or on behalf of the
District 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. This
bill specifies that COPs executed and delivered or revenue
bonds issued before 2035 to refund the District's revenue
bonds or COPs must be secured by a statutory lien on all of
the revenues generated from parcel taxes approved by voters in
2004.
This bill requires this statutory lien to arise automatically
without the need for any action or authorization by the
District or its board of directors. Under this bill the lien
will be valid and binding from the time the COPs are executed
and delivered or the revenue bonds are issued.
Additionally, this bill 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. This
bill is author-sponsored.
2)Author's statement . According to the author, "The interest
rate on those outstanding bonds is nearly 5% and 7.5%
respectively. With the statutory lien that this bill would
put in place it is estimated that the District will save over
$6.5 million on the interest payments over the life of the
existing bonds, because this will allow the District to
refinance its existing bonds at what is estimated to be a 4%
interest rate. It is important to point out that the change
in law made in the bill does not create a new tax or increase
existing taxes. This bill puts in place the necessary
assurances that lenders are requiring for the district to
refinance the existing bonds allowing the savings on interest
to go to paying for care instead of to Wall Street."
3)Palm Drive Healthcare District . The District was formed in
2000 to prevent the closure of the Palm Drive Hospital in
Sebastopol (Sonoma County). The District owns and operates
Palm Drive Hospital, which provided essential inpatient,
outpatient, and emergency services to residents in western
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Sonoma County. In November 2004, more than 69% of district
voters approved Measure W, allowing the District to impose a
parcel tax that generates nearly $4 million in annual
revenues. In 2005, the District 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. The District issued $11
million in COPs in 2010, allowing it to exit from bankruptcy.
On April 7, 2014, the District's governing board declared a
fiscal emergency and voted to close the Palm Drive Hospital on
April 28, 2014. According to information posted on Palm Drive
Hospital's website, "While the current operation at PDH is not
financially feasible, we are committed to looking at all
possible options for the future. This will include ways of
rethinking options to provide vital West County services. With
your help, we can reimagine our future. Our plan for the next
few months is to work with the community to develop a relevant
vision for the future - one that is in line with what the
community wants and needs, and what can be financially viable
on a long-term basis." Supporters argue despite the unclear
future of the District in terms of providing services, the
debt will continue to exist, therefore this bill is necessary
to refinance the existing debt. The parcel taxes passed by
the voters in 2004 to keep the Palm Drive Hospital open will
continue to be levied and used to pay off debt despite the
hospital's closure. Additionally, the District recently
requested financial assistance from Sonoma County to assist
with the orderly wind down of their operations.
4)Healthcare districts . Recent controversy surrounding several
healthcare districts has brought greater media and legislative
scrutiny on several issues including their fiscal management.
The Assembly Committee on Accountability and Administrative
Review conducted several hearings regarding healthcare
districts, and focused specifically on healthcare districts
that do not operate hospitals. Additionally, the LAO produced
a report entitled, "Overview of Health Care Districts", in
April 2012 in response to several healthcare districts that
have declared bankruptcy since 2000. Healthcare districts
point to several challenges which vary depending on the
economic profile of the community being served, but among some
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of the more common include physician, technical and
professional staff shortages (especially in rural areas),
state mandates (including seismic requirements), managed care,
and the general economic downturn.
5)Municipal bankruptcy under federal law . The list of
eligibility requirements for a "municipal debtor" in federal
law under Chapter 9 is contained in U.S.C. Section 109 (c).
First, an entity may be a debtor under Chapter 9 only if such
entity: (a) is a municipality; (b) is specifically
authorized, in its capacity as a municipality or by name, to
be a debtor under such chapter by state law, or by a
governmental officer or organization empowered by state law
to authorize such entity to be a debtor; (c) is insolvent; (d)
desires to effect a plan to adjust such debts; and, (e) has
obtained the agreement of creditors holding at least a
majority in the amount of the claims of each class that such
entity intends to impair under a plan, as specified. A
municipality or local public entity must meet all of these
conditions for the bankruptcy petition to be accepted by the
court.
According to the sponsor of the bill, the court has not
accepted the District's bankruptcy petition. Additionally,
the deadline for submitting objections related to the
District's eligibility for bankruptcy is at the end of May.
If objections are filed with the court, then a hearing on
eligibility may not occur until sometime later this summer.
However, if no objections are filed, supporters state that
eligibility should be found very quickly.
According to the U.S. Courts, "The purpose of Chapter 9 is to
provide a financially-distressed municipality protection from
its creditors while it develops and negotiates a plan for
adjusting its debts. Reorganization of the debts of a
municipality is typically accomplished either by extending
debt maturities, reducing the amount of principal or interest,
or refinancing the debt by obtaining a new loan."
According to a primer written by John Knox and Marc Levinson,
on behalf of Orrick, Herrington & Sutcliffe, LLP, entitled
Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times
of Fiscal Stress , "One of the most important and immediate
advantages of a bankruptcy filing is the protection against
actions that might be taken by creditors or others against the
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municipality, its officers, elected officials, employees and
even its inhabitants. Filing a bankruptcy petition invokes an
automatic stay - basically a federal court injunction -
against any action that could otherwise be taken against the
municipality or its officer or employees. The stay lasts
during the pendency of the Chapter 9 case, but the bankruptcy
judge retains the right to modify or terminate the stay for
cause shown."
"Bankruptcy gives the debtor breathing space in which to
function while it tries to work out its creditor and cash flow
problems. Raising new revenues, renegotiating contracts and
restructuring debt obligations takes time. If a municipality
is forced to breach contracts or face other legal claims
caused by fiscal stress outside of bankruptcy, it may have to
spend time fighting off creditors trying to seize assets or
collateral, or be forced into regulatory or other states to
answer for such actions and redress grievances before it is
able to fashion a workable solution for the benefit of all
creditors and residents. The bankruptcy case allows all of
these disputes to be addressed in one forum, and the automatic
stay provides the municipality the opportunity to focus on a
comprehensive solution rather than simultaneously fighting
multiple brushfires.
"Most people see the ability to adjust debts and other
obligations as the prime benefit of a bankruptcy filing. If a
plan of adjustment can be confirmed in a Chapter 9 case, it
may provide that unpaid claims of creditors be either reduced
and/or extended or restructured. There are limitations on how
these adjustments can be made, and it may be possible for
creditors to block a debtor from making the adjustments they
would like to make. Nevertheless, in situations where it is
not possible to fully repay all creditors absent some sort of
debt relief, the plan of adjustment can provide a fresh start
and the ability to achieve long-term financial stability for
the municipality by deferring and/or reducing past
obligations.
"Municipalities that seek bankruptcy relief (and even those
that seriously consider filing) should expect the immediate
suspension and/or downgrade of their credit ratings.
Particularly if bondholders are not fully repaid, this credit
stigma may last for many years."
Federal bankruptcy law defines a "lien" as a charge against or
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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.
The Committee may wish to weigh the benefit of allowing a
healthcare district that may no longer operate a hospital to
try to refinance at a lower rate versus state intervention for
a district that has filed for bankruptcy and legislation that
will provide some creditors with more security than others
prior to the bankruptcy process.
6)Previous legislation . This bill is substantially similar to
SB 644 (Hancock), Chapter 742, Statutes of 2011, which
required all COPs executed and delivered by the West Contra
Costa Healthcare District between June 8, 2004, and December
31, 2012, to be secured by a statutory lien on all the
revenues generated from a parcel tax passed by the District
voters in 2004. The West Contra Costa Healthcare District
continues to struggle to keep open the Doctors Medical Center
in San Pablo. In order to remedy some of the financial
issues, the District placed Measure C on the May 2014 ballot,
another parcel tax to try to keep the hospital open.
7)Policy considerations . The Committee may wish to consider the
following:
a) The Senate Governance and Finance Committee heard this
bill prior to the District declaring a fiscal emergency and
filing a bankruptcy petition. The Committee analysis dated
March 19, 2014, raises the following concern. "Next in
line? [This bill] 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 [this bill] 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
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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
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."
a) The Committee may wish to ask the author and sponsor to
explain the difference in treatment of a bondholder and the
priority of payment of obligations secured by a statutory
lien versus obligations secured by lien resulting from a
voluntary contractual agreement.
1)Arguments in support . Supporters argue that this bill will
allow the District to refinance its existing debt at a lower
interest rate which will lessen the District's current
financial burdens.
2)Arguments in opposition . None on file.
3)Urgency clause . This bill contains an urgency clause and
requires a two-thirds vote on the Assembly Floor.
REGISTERED SUPPORT / OPPOSITION :
Support
Palm Drive Healthcare District [SPONSOR]
Association of California Healthcare Districts
Opposition
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None on file
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958